As filed with the Securities and Exchange Commission on August 2, 2005
An Exhibit List can be found on page II-6.
Registration No. 333-____________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
STRONGHOLD TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Nevada 4841 22-3762832
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
106 Allen Road
Basking Ridge, NJ 07920
(908) 903-1195
(Address and telephone number of principal executive offices
and principal place of business)
Christopher Carey, Chief Executive Officer
STRONGHOLD TECHNOLOGIES, INC.
106 Allen Road
Basking Ridge, NJ 07920
(908) 903-1195
(Name, address and telephone number of agent for service)
Copies to:
Gregory Sichenzia, Esq.
Stephen M. Fleming Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _________
2
CALCULATION OF REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------------------
Proposed maximum Proposed maximum
Title of each class of Amount to be offering price per aggregate Amount of
securities to be registered registered (1) share offering price registration fee
---------------------------------------------------------------------------------------------------------------------------
Common stock, $.0001 par 216,000,000(2) $.10(3) $21,600,000.00 $2,542.32
value issuable upon
conversion of Callable
Secured Convertible Notes
---------------------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par 3,000,000 $.10(5) $300,000.00 $35.31
value issuable upon exercise
of common stock purchase
warrants at $0.57 per share
---------------------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par 650,000 $.10(5) $65,000.00 $7.65
value issuable upon exercise
of common stock purchase
warrants at $0.03 per share
---------------------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par 1,700,000 $.10(5) $170,000.00 $20.01
value issuable upon exercise
of common stock purchase
warrants at $0.07 per share
---------------------------------------------------------------------------------------------------------------------------
Total 221,350,000 $22,135,000.00 $2,605.29
---------------------------------------------------------------------------------------------------------------------------
(1) Includes shares of our common stock, par value $0.0001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of callable secured convertible notes and the exercise of
warrants held by the selling stockholders. In addition to the shares set forth
in the table, the amount to be registered includes an indeterminate number of
shares issuable upon conversion of the callable secured convertible notes and
exercise of the warrants, as such number may be adjusted as a result of stock
splits, stock dividends and similar transactions in accordance with Rule 416.
The number of shares of common stock registered hereunder represents a good
faith estimate by us of the number of shares of common stock issuable upon
conversion of the callable secured convertible notes and upon exercise of the
warrants. For purposes of estimating the number of shares of common stock to be
included in this registration statement, we calculated a good faith estimate of
the number of shares of our common stock that we believe will be issuable upon
conversion of the callable secured convertible notes and upon exercise of the
warrants to account for market fluctuations, and antidilution and price
protection adjustments, respectively. Should the conversion ratio result in our
having insufficient shares, we will not rely upon Rule 416, but will file a new
registration statement to cover the resale of such additional shares should that
become necessary. In addition, should a decrease in the exercise price as a
result of an issuance or sale of shares below the then current market price,
result in our having insufficient shares, we will not rely upon Rule 416, but
will file a new registration statement to cover the resale of such additional
shares should that become necessary.
(2) Includes a good faith estimate of the shares underlying the callable secured
convertible notes to account for market fluctuations.
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the average
of the high and low price as reported on the Over-The-Counter Bulletin Board on
July 27, 2005, which was $0.10 per share.
(4) Includes a good faith estimate of the shares underlying warrants exercisable
at $.57 per share to account for antidilution and price protection adjustments.
3
(5) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
4
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 2, 2005
STRONGHOLD TECHNOLOGIES, INC.
221,350,000 SHARES OF
COMMON STOCK
This prospectus relates to the resale by New Millennium Capital Partners
II, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC
(the "Investors") of up to an aggregate of 221,350,000 shares of our common
stock, including the following:
o up to 216,000,000 shares of common stock underlying callable
secured convertible notes in a principal amount of $4,500,000;
o up to 3,000,000 issuable upon the exercise of common stock
purchase warrants exercisable at $0.57 per share;
o up to 650,000 issuable upon the exercise of common stock
purchase warrants exercisable at $0.03 per share; and
o up to 1,700,000 issuable upon the exercise of common stock
purchase warrants exercisable at $0.07 per share
The shares being registered represent 92.7% of our outstanding shares of
common stock assuming the full conversion of all callable secured convertible
notes and exercise of our common stock purchase warrants. The callable secured
convertible notes are convertible into our common stock at the lower of a fixed
conversion price ($0.70 with respect to the callable secured convertible notes
issued pursuant to the June 2004 Securities Purchase Agreement, $0.02 with
respect to the callable secured convertible notes issued pursuant to the March
2005 Securities Purchase Agreement and $0.07 with respect to the callable
secured convertible notes issued pursuant to the July 2005 Securities Purchase
Agreement) or 25% of the average of the three lowest intraday trading prices for
the common stock on a principal market for the 20 trading days before but not
including the conversion date. The selling stockholders may sell common stock
from time to time in the principal market on which the stock is traded at the
prevailing market price or in negotiated transactions. The selling stockholders
may be deemed underwriters of the shares of common stock which they are
offering. We will pay the expenses of registering these shares.
Our common stock is registered under the Securities Exchange Act of 1934
and is listed on the Over-The-Counter Bulletin Board under the symbol "SGHT".
The last reported sales price per share of our common stock as reported by the
Over-The-Counter Bulletin Board on July 27, 2005, was $0.10.
Investing in these securities involves significant risks. See "Risk
Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ______________, 2005.
The information in this Prospectus is not complete and may be changed.
This Prospectus is included in the Registration Statement that was filed by
Stronghold Technologies, Inc. with the Securities and Exchange Commission. The
selling stockholders may not sell these securities until the registration
statement becomes effective. This Prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the sale is not permitted.
5
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the secured convertible notes to
the financial statements.
STRONGHOLD TECHNOLOGIES, INC.
We are a Customer Relationship Management ("CRM") solutions provider for
the retail automotive industry. Our DealerAdvance(TM) Sales Solution is designed
to streamline dealership sales operations using software that integrates
existing technology systems.
For the three months ended March 31, 2005, we generated $261,652 in
revenue and a net loss of $1,072,910. In addition, for the year ended December
31, 2004, we generated revenue of $2,489,790 and a net loss of $3,089,614. As a
result of recurring losses from operations and a net deficit in both working
capital and stockholders' equity, our auditors, in their report dated March 31,
2005, have expressed substantial doubt about our ability to continue as going
concern.
Our principal offices are located at 106 Allen Road, Basking Ridge, NJ
07920, and our telephone number is (908) 903-1195. We are a Nevada corporation.
The Offering
Common stock offered by selling stockholders ...... Up to 221,350,000 shares,
including the following:
- up to 216,000,000
shares of common
stock underlying
callable secured
convertible notes in
the principal amount
of $4,500,000
(includes a good
faith estimate of
the shares
underlying the
callable secured
convertible notes to
account for market
fluctuations),
- up to 3,000,000
shares of common
stock issuable upon
the exercise of
common stock
purchase warrants at
an exercise price of
$0.57 per share,
- up to 650,000 shares
of common stock
issuable upon the
exercise of common
stock purchase
warrants at an
exercise price of
$0.03 per share, and
- up to 1,700,000
shares of common
stock issuable upon
the exercise of
common stock
purchase warrants at
an exercise price of
$0.07 per share,
This number
represents 92.7% of
our current
outstanding stock.
Common stock to be outstanding after the offering.. Up to 238,637,349 shares
6
Use of proceeds.................................... We will not receive any
proceeds from the sale of
the common stock. However,
we will receive the sale
price of any common stock
we sell to the selling
stockholder upon exercise
of the warrants. We expect
to use the proceeds
received from the exercise
of the warrants, if any,
for general working
capital purposes. However,
the selling stockholders
will be entitled to
exercise the warrants on a
cashless basis if the
shares of common stock
underlying the warrants
are not then registered
pursuant to an effective
registration statement. In
the event that the selling
stockholder exercises the
warrants on a cashless
basis, then we will not
receive any proceeds. In
addition, we have received
gross proceeds $4,500,000
from the sale of the
callable secured
convertible notes
Over-The-Counter Bulletin Board Symbol ............ SGHT
EXPLANATORY NOTE: IN JUNE 2004, MARCH 2005 AND JULY 2005, WE ENTERED INTO
SECURITIES PURCHASE AGREEMENTS WITH NEW MILLENNIUM CAPITAL PARTNERS II, LLC, AJW
QUALIFIED PARTNERS, LLC, AJW OFFSHORE, LTD. AND AJW PARTNERS, LLC. CERTAIN
ISSUANCES OF SHARES OF COMMON STOCK PURSUANT TO THESE AGREEMENTS WOULD REQUIRE
US TO ISSUE SHARES OF COMMON STOCK IN EXCESS OF OUR AUTHORIZED CAPITAL. WE
INTEND TO FILE A PROXY STATEMENT OR INFORMATION STATEMENT WITH THE SECURITIES
AND EXCHANGE COMMISSION, SEEKING TO INCREASE OUR AUTHORIZED COMMON STOCK FROM
250,000,000 TO 8,500,000,000. WE INTEND ON FILING THE CERTIFICATE OF AMENDMENT
TO OUR CERTIFICATE OF INCORPORATION AFTER SUCH INCREASE HAS BEEN APPROVED AT OUR
STOCKHOLDERS' MEETING OR WITHIN 20 DAYS OF MAILING A DEFINITIVE INFORMATION
STATEMENT. WE ARE REGISTERING 221,350,000 SHARES OF COMMON STOCK PURSUANT TO
THIS PROSPECTUS THAT ARE UNDERLYING THE CALLABLE SECURED NOTES AND COMMON STOCK
PURCHASE WARRANTS ISSUED IN CONNECTION WITH THE SECURITIES PURCHASE AGREEMENTS.
UPON FILING THE CERTIFICATE OF AMENDMENT, WE WILL AMEND THIS PROSPECTUS TO
INCLUDE ADDITIONAL SHARES OF COMMON STOCK THAT ARE ISSUABLE PURSUANT TO THESE
AGREEMENTS.
The above information regarding common stock to be outstanding after the
offering is based on 17,287,349 shares of common stock outstanding as of January
31, 2005 and assumes the subsequent conversion of our issued secured convertible
notes and exercise of warrants by our selling stockholders.
To obtain funding for our ongoing operations, we entered into three
Securities Purchase Agreements with New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC (the
"Investors"). This prospectus relates to the resale of the common stock
underlying these callable secured convertible notes and common stock purchase
warrants issued in connection with these agreements. The following is a
description of each of these financings.
June 18, 2004 Securities Purchase Agreement
On June 18, 2004, we entered into a Securities Purchase Agreement for the
sale of (i) $3,000,000 in callable secured convertible notes and (ii) common
stock purchase warrants to buy 3,000,0000 shares of our common stock.
The following closings have occurred pursuant to the June 2004 Securities
Purchase Agreement:
o on June 18, 2004, the Investors purchased $1,500,000 in
callable secured convertible notes and received common stock
purchase warrants to purchase 1,500,000 shares of our common
stock;
7
o on July 27, 2004, the Investors purchased $500,000 in callable
secured convertible notes and received common stock purchase
warrants to purchase 500,000 shares of our common stock;
o on October 22, 2004, the Investors purchased $350,000 in
callable secured convertible notes and received common stock
purchase warrants to purchase 350,000 shares of our common
stock; and
o On March 18, 2005, the Investors purchase $650,000 in callable
secured convertible notes and received common stock purchase
warrants to purchase 650,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible, as amended, 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 our common stock
during the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no
event of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.57 per share.
The common stock purchase 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 common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
March 31, 2005 Securities Purchase Agreement
We entered into a second Securities Purchase Agreement with the Investors
on March 31, 2005 for the sale of $650,000 in callable secured convertible notes
and common stock purchase warrants to buy 650,000 shares of our common stock.
On March 31, 2005, the Investors purchased $350,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
350,000 shares of our common stock. On May 4, 2005, the Investor purchased the
remaining $300,000 in callable secured convertible notes and received common
stock purchase warrants to purchase 300,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible, as amended, into our
common stock, at the Investors' option, at the lower of (i) $0.02 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 callable secured convertible notes in the event that no
event of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.03 per share.
The common stock purchase warrants are exercisable until five years from
the date of issuance at a purchase price of $0.03 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
July 15, 2005 Securities Purchase Agreement
We entered into a third Securities Purchase Agreement with the Investors
on July 15, 2005 for the sale of (i) $850,000 in callable secured convertible
notes and (ii) common stock purchase warrants to buy 1,700,000 shares of our
common stock.
8
On July 15, 2005, the Investors purchased $850,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,700,000 shares of our common stock. We received net proceeds in cash in the
amount of $200,000 on July 15, 2005 and $567,500 was placed in escrow of which
$100,000 shall be distributed on the 1st business day of each month.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible, as amended, into our
common stock, at the Investors' option, at the lower of (i) $0.07 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 callable secured convertible notes in the event that no
event of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.08 per share.
The common stock purchase warrants are exercisable until five years from
the date of issuance at a purchase price of $0.10 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
As of July 27, 2005, the average of the three lowest intraday trading
prices for our common stock during the preceding 20 trading days as reported on
the Over-The-Counter Bulletin Board was $.05 and, therefore, the conversion
price for the secured convertible notes was $.0125. Based on this conversion
price, the $4,500,000 callable secured convertible notes, excluding interest,
were convertible into 360,000,000 shares of our common stock.
The full principal amount of the callable secured convertible notes is due
upon default under the terms of callable secured convertible notes. In addition,
we have granted the investors a security interest in substantially all of our
assets and intellectual property as well as registration rights.
The investors have contractually agreed to restrict their ability to
convert the callable secured convertible notes and exercise the common stock
purchase warrants and receive shares of our common stock such that the number of
shares of our common stock held by them and their affiliates after such
conversion or exercise does not exceed 4.99% of our then issued and outstanding
shares of our common stock.
See the "Selling Stockholders" and "Risk Factors" sections for a complete
description of the secured convertible notes.
9
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Relating to Our Business:
We Have A History Of Incurring Net Losses; We Expect Our Net Losses To Continue
As A Result Of Planned Increases In Operating Expenses; And, Therefore, We May
Never Achieve Profitability Which May Cause Us To Seek Additional Financing Or
To Cease Operations.
We have a history of operating losses and have incurred significant net losses
in each fiscal quarter since our inception. We had a net loss of $3,089,614 and
$4,258,007 for the fiscal years ended December 31, 2004 and December 31, 2003,
respectively. Our net loss for the three months ended March 31, 2005 was
$1,072,910. We have an accumulated deficit of approximately $16,219,413 for the
period from May 17, 2002 through March 31, 2005 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. 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 31, 2005 for the
year ended December 31, 2004 expressed substantial doubt about our ability to
continue as a going concern. We expect to continue to incur net losses and
negative cash flows for the foreseeable future. We will need to generate
significant additional revenue to achieve profitability. Our ability to generate
and sustain significant additional revenues or achieve profitability will depend
upon numerous factors outside of our control, including:
o Competing products that are more effective or less costly than ours;
o Our ability to develop and commercialize our own products and
technologies; and
o Our ability to increase sales of our existing products and any new
products.
It is possible that we may never achieve profitability and, even if we do
achieve profitability, we may not sustain or increase profitability in the
future. If we do not achieve sustained profitability, we may be unable to
continue our operations.
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 approximately $500,000 to be
received out of escrow on a montly basis of $100,000 per month pursuant to the
July 2005 Securities Purchase Agreement will allow us to continue our operations
until December 2005. In order for us to successfully market our products, we
will need to obtain additional financing after December 2005. As of March 31,
2005, we had cash in the amount of $38,124 and our net loss for the three months
ended March 31, 2005 was $1,072,910. 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 December 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.
10
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 22-month operating history. We are,
therefore, subject to all of the risks inherent in a new business enterprise.
Our limited operating history makes it difficult to evaluate our financial
performance and prospects. We cannot assure you that in the future we will
operate profitably or that we will have adequate working capital to meet our
obligations as they become due. Because of our limited financial history, we
believe that period-to-period comparisons of our results of operations will not
be meaningful in the short term and should not be relied upon as indicators of
future performance.
We May Fail To Gain Market Acceptance Of Our DealerAdvance(TM) suite of products
Which May Result in Our Business And Results Of Operations Being Negatively
Impacted.
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
September 30, 2004, a total of 82 Dealerships were using the DealerAdvance Sales
Solution(TM) in 13 states. We expect to introduce our DealerAdvance Service
Solution(TM) over the next two years. This solution is still in the development
stages and is not yet ready for testing. While we have received positive
feedback of DealerAdvance Sales Solution(TM) by the test sites, sixty-nine
systems is a small number and results in such sites may not be indicative of the
overall market acceptance and success of DealerAdvance Sales Solutions(TM) or
our entire DealerAdvance(TM) suite of products. The nature of our handheld
product and technology requires us to market almost exclusively to automobile
dealerships. 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. A large number of automobile dealerships elect to
not utilize our product due to the fact that they have their own system, they
deem DealerAdvance(TM) suite of products to not be cost effective or other
reason, In the event that the DealerAdvance(TM) suite of products is not
generally accepted by automobile dealerships, then our revenue and results of
operations will be negatively impacted
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.
11
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.
Risks Concerning Our Handheld Technology:
We Obtain Products And Services From Third Parties, Therefore An Interruption In
The Supply Of These Products And Services Could Cause A Decline In Sales Of Our
Products And Services.
We are dependant upon certain providers of software, including Microsoft
Corporation and their Pocket PC software, to provide the operating system for
our applications. If there are significant changes to this software, or if this
software stops being available or supported, we will experience a disruption to
our product and development efforts.
In designing, developing and supporting our wireless data services, we
rely on mobile device manufacturers, content providers, database providers and
software providers. These suppliers may experience difficulty in supplying us
products or services sufficient to meet our needs or they may terminate or fail
to renew contracts for supplying us these products or services on terms we find
acceptable. Any significant interruption in the supply of any of these products
or services could cause a decline in sales of our products and services, unless
and until we are able to replace the functionality provided by these products
and services. We also depend on third parties to deliver and support reliable
products, enhance their current products, develop new products on a timely and
cost-effective basis and respond to emerging industry standards and other
technological changes.
Competition In The Wireless Technology Industry Is Intense And Technology Is
Changing Rapidly, Therefore We May Be Unable To Compete Successfully Against Our
Current And Future Competitors In The Future.
Many wireless technology and software companies are engaged in research
and development activities relating to our range of products. The market for
handheld wireless technology is intensely competitive, rapidly changing and
undergoing consolidation. We may be unable to compete successfully against our
current and future competitors, which may result in price reductions, reduced
profit margins and the inability to achieve market acceptance for our products.
Our competitors in the field are major international car dealership service
companies, specialized technology companies, and, potentially, our joint venture
and strategic alliance partners. Many of our competitors have substantially
greater financial, marketing, sales, distribution and technical resources than
us and have more experience in research and development, sales, service,
manufacturing and marketing. We anticipate increased competition in the future
as new companies enter the market and new technologies become available. Our
technology may be rendered obsolete or uneconomical by technological advances
developed by one or more of our competitors.
We May Not Have Adequately Protected Our Intellectual Property Rights, Therefore
We May Not Be Successful In Protecting Our Intellectual Property Rights.
Our success depends on our ability to sell products and services for which
we do not currently have intellectual property rights. We currently do not 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.
12
We rely primarily on trade secret laws, patent law, copyright law, unfair
competition law and confidentiality agreements to protect our intellectual
property. To the extent that these avenues do not adequately protect our
technology, other companies could develop and market similar products or
services, which could adversely affect our business.
We May Be Sued By Third Parties For Infringement Of Their Proprietary Rights,
Therefore We May Incur Defense Costs And Possibly Royalty Obligations Or Lose
The Right To Use Technology Important To Our Business.
The wireless technology and software industries are characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of participants in our market increases, the possibility
of an intellectual property claim against us could increase. Any intellectual
property claims, whether with or without merit, could be time consuming and
expensive to litigate or settle and could divert management attention from the
administration of our business. A third party asserting infringement claims
against us or our customers with respect to our current or future products may
adversely affect us.
Risks Relating to Our Current Financing Arrangement:
There Are a Large Number of Shares Underlying Our Callable Secured Convertible
Notes, and Warrants That May be Available for Future Sale and the Sale of These
Shares May Depress the Market Price of Our Common Stock.
As of July 27, 2005, we had 17,287,349 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 360,000,000 shares of common stock at current market prices, and
outstanding warrants or an obligation to issue warrants to purchase 5,350,000
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 July 27, 2005 of $0.05.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 75% Issuable Stock
------ ----- ------ -------- ------
25% $.0375 $.0094 480,000,000 96.52%
50% $.0250 $.0063 720,000,000 97.66%
75% $.0125 $.0031 1,440,000,000 98.81%
13
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.
In The Event That Our Stock Price Declines, The Shares Of Common Stock Allocated
For Conversion Of The Callable Secured Convertible Notes and Registered Pursuant
To This Prospectus May Not Be Adequate And We May Be Required to File A
Subsequent Registration Statement Covering Additional Shares. If The Shares We
Have Allocated And Are Registering Herewith Are Not Adequate And We Are Required
To File An Additional Registration Statement, We May Incur Substantial Costs In
Connection Therewith.
Based on our current market price and the potential decrease in our market
price as a result of the issuance of shares upon conversion of the callable
secured convertible debentures, we have made a good faith estimate as to the
amount of shares of common stock that we are required to register and allocate
for conversion of the convertible debentures. As we do not currently have the
required amount of shares available, we may be required to file an additional
registration statement after we have increased our authorized common stock.
Accordingly, subject to obtaining an increase in our authorized shares of common
stock, we will allocate and register approximately 216,000,000 shares to cover
the conversion of the callable secured convertible debentures. In the event that
our stock price decreases, the shares of common stock we have allocated for
conversion of the callable secured convertible debentures and are registering
hereunder may not be adequate. If the shares we have allocated to the
registration statement are not adequate and we are required to file an
additional registration statement, we may incur substantial costs in connection
with the preparation and filing of such registration statement.
If We Fail To Obtain Stockholder Approval to Increase our Authorized Shares of
Common Stock, We May Be Required to Repay the Callable Secured Convertible
Debenture As Well As Various Penalties.
We presently do not have an adequate amount of authorized and unissued
shares of common stock to issue in connection with the financings entered into
with the selling stockholders in June 2004, March 2005 and July 2005. In the
near future we intend to hold a meeting for the purpose of obtaining stockholder
approval to increase our authorized shares of common stock of which we can
provide no assurance that we will be able to obtain. In the event that we are
unable to obtain an increase in our authorized common stock, we will be required
to repay the callable secured convertible debenture and we will be subject to
prepayment penalties.
14
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.
We entered three Securities Purchase Agreements for the sale of an
aggregate of $4,500,000 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. In addition, any event of default such as our failure to repay the
principal or interest when due, our failure to issue shares of common stock upon
conversion by the holder, our failure to timely file a registration statement or
have such registration statement declared effective, breach of any covenant,
representation or warranty in the Securities Purchase Agreement or related
convertible note, the assignment or appointment of a receiver to control a
substantial part of our property or business, the filing of a money judgment,
writ or similar process against our company in excess of $50,000, the
commencement of a bankruptcy, insolvency, reorganization or liquidation
proceeding against our company and the delisting of our common stock could
require the early repayment of the callable secured convertible notes, including
a default interest rate of 15% on the outstanding principal balance of the notes
if the default is not cured with the specified grace period. We anticipate that
the full amount of the callable secured convertible notes will be converted into
shares of our common stock, in accordance with the terms of the callable secured
convertible notes. If we are required to repay the callable secured convertible
notes, we would be required to use our limited working capital and raise
additional funds. If we were unable to repay the notes when required, the note
holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
Risks Relating to Our Common Stock:
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
15
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.
16
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholder upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes. However, the selling stockholders will be entitled to exercise the
warrants on a cashless basis if the shares of common stock underlying the
warrants are not then registered pursuant to an effective registration
statement. In the event that the selling stockholder exercises the warrants on a
cashless basis, then we will not receive any proceeds. The proceeds received
from the sale of the callable secured convertible notes have been used for
business development purposes, working capital needs, pre-payment of interest,
payment of consulting and legal fees and repayment of debt.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the OTC Bulletin Board, referred to herein
as the OTCBB, under the symbol "SGHT ". The following table sets forth the high
and low bid prices of our Common Stock, as reported by the OTCBB for each
quarter since January 1, 2002. The quotations set forth below reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.
2003 High Low
---- ---- ---
January 1, 2003 - March 31, 2003 $1.70 $0.25
April 1, 2003 - June 30, 2003 $1.01 $0.59
July 1, 2003 - September 30, 2003 $0.98 $0.47
October 1, 2003 - December 31, 2003 $0.70 $0.30
2004 High Low
---- ---- ---
January 1, 2004 - March 31, 2004 $1.15 $0.45
April 1, 2004 - June 30, 2004 $0.70 $0.24
July 1, 2004 - September 30, 2004 $0.25 $0.11
October 1, 2004 - December 31, 2004 $0.40 $0.11
2005 High Low
---- ---- ---
January 1, 2005 - March 31, 2005 $0.25 $0.02
April 1, 2005 - June 30, 2005 $0.10 $0.01
As of July 27, 2005, there were approximately 73 holders of record of our
common stock.
We have appointed Continental Stock Transfer & Trust Company, 17 Battery
Place, New York, New York 10004, as transfer agent for our shares of Common
Stock.
17
Equity Compensation Plan Information
We currently do not have any equity compensation plans.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there
may be events in the future that we are not able to accurately predict or over
which we have no control. Our actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
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.
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.
19
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 $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 our company. The software and intellectual property of
Dealer Advance has been developed and is owned by us.
o System Installation Revenues: This represents the installation and
hardware portion of the Dealer Advance Service Solution. All project
management during the installation is performed by us. The
installation and hardware portions include cable wiring
subcontracting services and off the shelf hardware and handheld
computers ("PDA"s).
o Monthly Recurring Maintenance Revenue: This represents the
maintenance and support contract for the Dealer Advance Service
Solution that the customer executes with the system installation.
The typical maintenance contract is for 36 months. In 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 our company.
These prepaid maintenance fees have provided additional cash flow to
us and have generated a deferred revenue liability on or balance
sheet.
Cost of sales for software licensing with the installation are estimated at 10%
of revenue for reproduction, minor customer specific configurations and the
setup cost of interface with the customers' DMS. Cost of sales for the system
installation includes direct labor and travel, subcontractors and third party
hardware.
General and Administrative Operating Expenses
The general operating expenses of our 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;
20
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
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.
Given that we have continued to generate losses and are reliant on raising
capital to support operations, the continued loss of momentum may cause our
revenues to continue to decrease.
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.
-----------------------------------------------------------------------------------------------------------
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%
-----------------------------------------------------------------------------------------------------------
21
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". We 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.
Operating Loss
Our 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.
22
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.
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,
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 we have continued to generate losses and are reliant on raising
capital to support operations, the continued loss of momentum may cause our
revenues to continue to decrease.
23
Cost of Sales
t 0 0 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:
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.
24
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 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, we had the following financing arrangements:
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
---------
25
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.
We entered into a third Securities Purchase Agreement with the Investors on July
15, 2005 for the sale of (i) $850,000 in callable secured convertible notes and
(ii) common stock purchase warrants to buy 1,700,000 shares of our common stock.
On July 15, 2005, the Investors purchased $850,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,700,000 shares of our common stock. We received net proceeds in cash in the
amount of $200,000 on July 15, 2005 and $567,500 was placed in escrow of which
$100,000 shall be distributed on the 1st business day of each month. Except for
the $100,000 per month we are to receive pursuant to the escrow account
establish in connection with the July 2005 Securities Purchase Agreement, we
currently has no further commitments for additional financing.
We expect that the funds raised in connection with the July 2005 Securities
Purchase Agreement, 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 our ability to continue as a
going concern.
26
Financings
We have entered into the following financing transactions:
Loans from Christopher J. Carey, an Executive Officer, 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 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.
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.
27
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.
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.
28
We 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, we made the
final scheduled payment and was released from all potential claims by PNC Bank.
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.
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.
29
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%.
To obtain funding for our ongoing operations, we entered into three
Securities Purchase Agreements with the Investors. This prospectus relates to
the resale of the common stock underlying these callable secured convertible
notes and common stock purchase warrants issued in connection with these
agreements. The following is a description of each of these financings.
June 18, 2004 Securities Purchase Agreement
On June 18, 2004, we entered into a Securities Purchase Agreement for the
sale of (i) $3,000,000 in callable secured convertible notes and (ii) common
stock purchase warrants to buy 3,000,0000 shares of our common stock.
The following closings have occurred pursuant to the June 2004 Securities
Purchase Agreement:
o on June 18, 2004, the Investors purchased $1,500,000 in callable
secured convertible notes and received common stock purchase
warrants to purchase 1,500,000 shares of our common stock;
o on July 27, 2004, the Investors purchased $500,000 in callable
secured convertible notes and received common stock purchase
warrants to purchase 500,000 shares of our common stock;
o on October 22, 2004, the Investors purchased $350,000 in callable
secured convertible notes and received common stock purchase
warrants to purchase 350,000 shares of our common stock; and
30
o On March 18, 2005, the Investors purchase $650,000 in callable
secured convertible notes and received common stock purchase
warrants to purchase 650,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible, as amended, 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 our common stock
during the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no
event of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.57 per share.
The common stock purchase 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 common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
March 31, 2005 Securities Purchase Agreement
We entered into a second Securities Purchase Agreement with the Investors
on March 31, 2005 for the sale of $650,000 in callable secured convertible notes
and common stock purchase warrants to buy 650,000 shares of our common stock.
On March 31, 2005, the Investors purchased $350,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
350,000 shares of our common stock. On May 4, 2005, the Investor purchased the
remaining $300,000 in callable secured convertible notes and received common
stock purchase warrants to purchase 300,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible, as amended, into our
common stock, at the Investors' option, at the lower of (i) $0.02 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 callable secured convertible notes in the event that no
event of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.03 per share.
The common stock purchase warrants are exercisable until five years from
the date of issuance at a purchase price of $0.03 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
July 15, 2005 Securities Purchase Agreement
We entered into a third Securities Purchase Agreement with the Investors
on July 15, 2005 for the sale of (i) $850,000 in callable secured convertible
notes and (ii) common stock purchase warrants to buy 1,700,000 shares of our
common stock.
On July 15, 2005, the Investors purchased $850,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,700,000 shares of our common stock. We received net proceeds in cash in the
amount of $200,000 on July 15, 2005 and $567,500 was placed in escrow of which
$100,000 shall be distributed on the 1st business day of each month.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible, as amended, into our
common stock, at the Investors' option, at the lower of (i) $0.07 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.
31
We may prepay the callable secured convertible notes in the event that no
event of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.08 per share.
The common stock purchase warrants are exercisable until five years from
the date of issuance at a purchase price of $0.10 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
As of July 27, 2005, the average of the three lowest intraday trading
prices for our common stock during the preceding 20 trading days as reported on
the Over-The-Counter Bulletin Board was $.05 and, therefore, the conversion
price for the secured convertible notes was $.0125. Based on this conversion
price, the $4,500,000 callable secured convertible notes, excluding interest,
were convertible into 360,000,000 shares of our common stock.
The full principal amount of the callable secured convertible notes is due
upon default under the terms of callable secured convertible notes. In addition,
we have granted the investors a security interest in substantially all of our
assets and intellectual property as well as registration rights.
The investors have contractually agreed to restrict their ability to convert the
callable secured convertible notes and exercise the common stock purchase
warrants and receive shares of our common stock such that the number of shares
of our common stock held by them and their affiliates after such conversion or
exercise does not exceed 4.99% of our then issued and outstanding shares of our
common stock.
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:
32
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.
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.
33
BUSINESS
Our History
We were incorporated as a Nevada corporation on September 8, 2000, under
the name TDT Development, Inc. On May 16, 2002, we acquired Stronghold
Technologies, Inc., a New Jersey corporation, referred to herein as our
"Predecessor Entity", pursuant to a merger of Stronghold Technologies into our
wholly-owned subsidiary, TDT Stronghold Acquisition Corp., referred to herein as
"Acquisition Sub". Our company, formerly TDT Development, Inc., was a reporting
entity at the time. Its principals were Pietro Bortolatti, President, CEO and
Chairman, Tiziana DiRocco, Vice-President and Director of European Operations
and David Rector, Director. The merger was an arms length transactions and none
of the parties had a prior existing relationship. As consideration for the
merger, we issued 7,000,000 shares of our common stock valued at $.75 per share
to the stockholders of the Predecessor Entity in exchange for all of the issued
and outstanding shares of the Predecessor Entity. No fairness opinion was issued
in connection with this merger. Following the merger, Acquisition Sub, the
survivor of the merger, changed its name to Stronghold Technologies, Inc. (NJ)
and remains our only wholly-owned subsidiary. We approved the transaction as the
sole shareholder of the Acquisition Sub as did the shareholders of the
Predecessor Entity.
On July 11, 2002, we changed our name from TDT Development, Inc. to
Stronghold Technologies, Inc. (NV). On July 19, 2002, we exchanged all of the
shares that we held in our two other wholly-owned subsidiaries, Terre di
Toscana, Inc. and Terres Toscanes, Inc., which conducted an import and
distribution business specializing in truffle-based food product, for 75,000
shares of our common stock held by Mr. Pietro Bortolatti, our former president.
Our principal executive offices are located at 106 Allen Road, Basking
Ridge, NJ 07920. Our telephone number at that location is 908-903-1195 and our
Internet address is www.strongholdtech.com.
Overview of our Handheld Technology Business
On May 16, 2002, we entered the handheld wireless technology business via
our acquisition by merger of the Predecessor Entity. The Predecessor Entity was
founded on August 1, 2000 by Christopher J. Carey, our current Chief Executive
Officer and President, and Lenard J. Berger, Chief Technology Officer and
Salvatore F. D'Ambra, Vice President, Product Development, of our wholly-owned
subsidiary. This founding group has substantial expertise in systems design,
software development, wireless technologies and automotive dealer software
applications. The Predecessor Entity was founded to develop proprietary handheld
wireless technology for the automotive dealer software market. Since the merger
of the Predecessor Entity into our subsidiary, we continue to conduct the
Predecessor Entity's handheld wireless technology business.
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.
34
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.
35
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.
36
We installed Version 1.0 of the DealerAdvance Sales Solution(TM) in six
pilot dealerships during 2001 in New Jersey, California and Connecticut. The
initial release contained the ability to capture and display information about a
prospective customer, search the dealership inventory, display competitive
product information, a financial calculator, and paging functionality from a
wireless handheld. Drivers license scanning, from a desktop station, was
introduced for the State of California. Stronghold introduced Version 2.0 of
DealerAdvance Sales Solution(TM) at all of its sites by the end of September
2001. Version 2.0 offered an electronic desk log, email and internet access from
the handheld, printing of correspondence (forms letters) , a reporting engine,
the printing of sales forms, and the ability to import prospect records from 3rd
party sources.
We introduced Version 3.0 of our software and installed another 3
dealership sites in the quarter ended March 31, 2002, adding customers in New
York. Version 3.0 introduced the CRM rules engine, which allowed the system to
automatically schedule and manage customer follow up activities for salespeople
based on rules established by the dealership management. Other features included
DMS deal creation (allowing a user to pass information from DealerAdvance to the
DMS), management reporting, and the expansion of drivers license scanning to
include 39 states (through a partnership with Intellicheck).
In the quarter ended June 30, 2002, through our wholly owned subsidiary,
we installed another 7 sites, adding customers in Arizona, Southern California
and South Carolina and introduced Version 3.1 of its software to improve the
communication protocol between the handheld and the DealerAdvance Server. In the
quarter ended September 30, 2002, through our wholly owned subsidiary, we
implemented another 10 sites, adding customers in Virginia, Florida, South
Carolina and Central California. In the fourth quarter ending December 31, 2002,
through our wholly owned subsidiary, we installed an additional 13 dealerships,
adding customers in Texas, Indiana and Michigan. Overall, in 2002, through our
wholly owned subsidiary, we installed DealerAdvance Sales Solution(tm), in a
total of 33 dealerships sites representing Toyota, Honda, Ford, Chevrolet,
Nissan, Volkswagen, Buick, Pontiac, Cadillac, Chrysler, Dodge, Kia and Hyundai.
In the first quarter of 2003, we installed in 11 dealerships and released
Version 3.2. New features included reverse phone lookup (via partnership with
Axicom), searches for duplicate customer records, wireless PDA trade appraisal,
electronic buyers order, nightly download of sold customers from the DMS, and
customer search. Additional functionality was added to the rules engine, forms
printing, management functions were added to the PDA, 3rd party data imports,
and customer tracking. In the quarter ended June 30, 2003, we installed another
11 systems in 9 dealerships in California, Nevada, Indiana, Washington, Ohio,
and Michigan. We implemented our goal to expand our direct sales network and
operational support personnel for coverage of 14 major cities from nine at the
end of 2002. Additionally, in the second quarter we realigned our sales force
into geographic markets and hired several experienced industry veterans as
regional business development managers.
We plan to utilize our direct sales force to market the DealerAdvance
Sales Solution(tm) on a national basis. We have established a strong presence in
most regions of the United States, and are continuing to add business
development and operations offices pursuant to an organized growth plan. As of
December 31, 2003, we had employees in Northern New Jersey, San Francisco,
Washington, DC, Atlanta, Los Angeles, Phoenix, Miami, Seattle, Cleveland, and
Dallas.
Version 3.3, released in August 2003 introduced the concept of a
work-plan, which assists the user in prioritizing follow up for prospective
customers. The work-plan generates a simple daily "to-do" list for each
salesperson, which can be viewed and updated on the handheld. Version 3.3 also
introduced the concept of "prompted follow up" to guide the salesperson through
best of breed follow up processes. The salesperson is prompted to indicate the
action taken to complete an activity and to enter a next activity for the
customer with the goal of scheduling a next activity for a prospective customer
until they either purchase a vehicle or indicate they are no longer in the
market.
As of December 31, 2003, a total of 70 dealers were using the
DealerAdvance Sales Solution(tm), of which approximately 40 had reached or
exceeded the 60-day performance period generally associated with installation.
In January 2004 we installed systems in 2 dealerships in Oregon.
37
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.
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:
o walk in showroom traffic,
o call-in prospects,
o internet based leads,
o the existing owner base of customers and
o 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.
38
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.
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. At the present time we are not in negotiations with any
party to acquire this technology.
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:
39
Average Gross Profit per Installation
Software License Revenue $35,000
System Installation Revenue $35,000
--------------------------- -------
Gross Revenue per Installation: $70,000
Gross Profit GP $ GP %
---- ----
Software License Revenue $31,500 90%
System Installation Revenue $12,600 36%
---------------------------
Gross Revenue per Installation: $44,100 63%
Cost of Sales
Software License Revenue $3,500 10%
System Installation Revenue $22,400 64%
---------------------------
Gross Revenue per Installation: $25,900 37%
Cost of sales for software licensing with the installation are minimal and
are estimated at 10% of revenue for reproduction, minor customer specific
configurations and the setup cost of interface with the customers' DMS. Cost of
sales for the system installation includes direct labor and travel,
subcontractors and third party hardware. The average gross profit and cost of
sales for the revenues from recurring maintenance of software is approximately
$850.00 per system which includes Auto Research (approximately $27.5), Driver
License data (approximately $12.50), Legacy System Interface (approximately
$161.00), CDI integration (approximately $ 54.00), with total cost of sales of
$255.00, gross profit of $595.00 or 70%.
General and Administrative Operating Expenses
Our general operating expenses are primarily comprised of:
o Marketing and Selling;
o General and Administrative; and
o Development & Operations.
Our marketing and selling expenses include all labor, sales commissions
and non-labor expenses of selling and marketing of our products and services.
These include the salaries of two Vice Presidents of Sales and the Business
Development Manager ("BDM") staff. The sales commission plan compensates the
sales force at the rate of 6% and is broken down in the following table:
BDM per contract 3.5%
Regional VP 1.5%
Management Override 1.0%
-----
6.00%
Our general and administrative expenses include expenses for all
facilities, insurance, benefits, telecommunications, legal and auditing expenses
are included as well as the executive management group wage expense.
Our development & operations expenses include the expenses for the Client
Consultant group which advises and supports the installations of our Dealer
Advance(TM) clients.
40
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;
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 athird party distribution strategy. Our direct
distribution strategy consists of a four person direct sales force selling in
California, Oregon, Nevada, Washington, Georgia, North Carolina, South Carolina,
Virginia, Delaware, Maryland, New Jersey, and Florida. In connection with our
third party distribution strategy, we presently have distribution agreements
with various third parties with sales people covering Texas, Oklahoma,
Louisiana, Arkansas, New Mexico, Arizona, Illinois, Indiana, Michigan,
Wisconsin, Missouri, Minnesota, Kentucky, New York, Connecticut, Massachusetts,
and Rhode Island. 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.
41
With these partners in place, and in conjunction with our direct sales
force, we are covering 29 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.
EMPLOYEES
As of July 27, 2005, 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.
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.
42
Future aggregate minimum annual rent payments under these leases are
approximately as follows:
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.
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.
43
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors and their respective ages and positions as
of December 31, 2003 are as follows:
Name Age Position(s)
--------------------------------------------------------------------------------
Christopher J. Carey... 51 President, Chief Executive Officer and Director
Lenard Berger.......... 34 Chief Technology Officer and Vice President
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.
Executive Officers
Christopher J. Carey had employment contracts with our company, which expired.
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
Christopher Carey, our sole director, also acts as the audit, compensation
and governance/nominating committee.
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.
44
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.
45
EXECUTIVE COMPENSATION
The following table sets forth executive compensation for fiscal years
ended December 31, 2003, 2002 and 2001. We have not paid any salaries or bonuses
to any of our officers from our inception through the date hereof. All of our
executive officers also serve as officers of and are paid by our operating
subsidiary. The following table shows compensation paid during the fiscal years
ended December 31, 2002 and 2001 by our wholly owned subsidiary to our former
president and other former executive officers. The table also provides
information regarding executive compensation for our wholly owned subsidiary's
current president and three other most highly compensated executive officers. We
refer to all of these officers collectively as our "named executive officers."
Summary Compensation Table
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
Robert Nawy(8) 2004 182,250 -- -- 6,000
Chief Financial Officer 2003 82,967 -- -- 2,398
2002 -- -- -- --
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 --
(1) Commissions of sales from Terre Di Toscana, Inc., and Terres Toscanas, Inc.
(2) Includes consulting service fees paid to the David Stephen Group, of which
David Rector, our former director, is a principal.
(3) On May 16, 2002, our wholly-owned subsidiary merged with a New Jersey
corporation, Stronghold Technologies, Inc. Our wholly-owned subsidiary survived
and changed its name to Stronghold Technologies, Inc.
46
(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
resigned in June 2005. 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. $15,300 of Mr. Nawy's
salary and other annual compensation was deferred and accrued in 2004. "Other
Annual Compensation" consists solely of the reimbursement of automobile
expenses.
Options Grants
The following table sets forth information concerning individual grants of stock
options under the 2002 Stock Incentive Plan during the fiscal year ended
December 31, 2003 to each of the named executive officers.
Option Grants in Fiscal Year ended December 31, 2004
The following table sets forth information concerning individual grants of stock
options under the 2002 Stock Incentive Plan during the fiscal year ended
December 31, 2004 to each of the named executive officers.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2004
% of Total Options Granted Exercise or
Number of Securities to Employees Base Expiration
Name Underlying Options in 2002 Price ($/Sh) Grant Date Date
----------------- --------------------- ------------------------ ------------- -------------- -----------
Lenard Berger -- --% -- -- n/a
Robert Nawy -- --% -- -- n/a
Robert Nawy -- --% -- -- n/a
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 --
47
(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. As
of the date hereof, Mr. Carey's employment agreement has not been renewed. Mr.
Carey has agreed to continue his employment with our company under the same
arrangmenet set forth in the employment agreement. 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.
48
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.
t 6 0 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.
49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stronghold Technologies, Inc., the Predecessor Entity, became our
wholly-owned subsidiary on May 16, 2002 pursuant to a merger with and into
Acquisition Sub. Pursuant to the merger, the Predecessor Entity's stockholders
surrendered all of their outstanding shares of the Predecessor Entity's common
stock in exchange for a total of 7,000,000 shares of our common stock. Of these
shares, Christopher J. Carey, our current President, and his wife received a
total of 3,937,500 shares held jointly, and Mr. Carey received an additional
1,093,750 shares individually.
Pursuant to a Securities Purchase Agreement which we entered into on May
15, 2002, with Stanford, a major shareholder of our company, Pietro Bortolatti,
a former officer and director of our company, and Mr. Carey, we agreed to issue
to Stanford such number of shares of our Series A Preferred Stock that would in
the aggregate equal 20% of the total issued and outstanding shares of our common
stock, and a warrant to purchase an equal number of shares of our common stock.
The aggregate purchase price for the Series A Preferred Stock and warrants
purchased by Stanford was $3,000,000. The Series A Preferred Stock and warrant
purchase took place on four separate closing dates from May 16, 2002 through
July 19, 2002, in which we issued an aggregate of 2,002,750 shares of our Series
A Preferred Stock to Stanford and warrants for 2,002,750 shares of our common
stock. So long as any shares of Series A Preferred Stock are outstanding and
held by Stanford, Stanford had the right to maintain its percentage ownership
with respect to any additional securities we may issue, with certain exceptions
under the Series A Securities Purchase Agreement.
Pursuant to a Securities Purchase Agreement which we entered into on April
24, 2003, we agreed to issue to Stanford a total of 2,444,444 shares of our
Series B $0.90 Convertible Preferred Stock ("Series B Preferred Stock"). The
issuance of the Series B Preferred Stock occurred on six separate closing dates
beginning on April 24, 2003 and closing on September 15, 2003. In connection
with the Purchase Agreement, we modified the warrants issued in connection with
the Series A offering to reduce the exercise price to $0.25 per share and extend
the expiration date to August 1, 2008. Stanford was also granted the right to
maintain its percentage ownership with respect to any additional securities we
may issue, with certain exceptions under the Series B Securities Purchase
Agreement. In addition, we agreed to convert all outstanding loans and
unreimbursed expenses to certain stockholders of our company for 603,000 shares
of our common stock at a price of $0.90 per share. The value of the warrant
modification was treated as additional costs associated with raising capital and
was shown as a reduction of additional paid-in capital of approximately $557,000
(computed using the Black-Scholes model with the following assumptions: expected
volatility of 0%, expected dividend yield rate of 0%, expected life of 5 years,
and a risk-free interest rate of 4.91% for September 30, 2003).
In connection with the Series B Purchase Agreement, we entered into a
Registration Rights Agreement with Stanford, dated April 30, 2003, in which we
agreed to register the shares of common stock issuable upon conversion of the
Series B Preferred Stock, no later than November 15, 2003. Stanford has agreed
to extend the date to register the common stock issuable upon conversion of the
Series B Preferred Stock until March 15, 2004, which was further extended in
June 2004.
In connection with the Series B Purchase Agreement, we entered into a
Consulting Agreement with Stanford, pursuant to which Stanford has agreed to
perform certain financial consulting and advisory services, in exchange for
which we agreed to pay Stanford a fee of $50,000 per year for two years, payable
quarterly in equal installments of $12,500, with the first such installment due
on July 1, 2003. Pursuant to the terms of the Consulting Agreement, we may, at
our sole option, choose to issue shares of our common stock to Stanford in lieu
of such payments.
On November 11, 2003, we agreed with Stanford to modify the terms of the
Series A and Series B Preferred Stock to facilitate acquisitions and other
company actions. The basic terms of the modification are: (i) waiver Section
2(e)(iii) of the Series A Certificate of Designation, which provides for
anti-dilution protection if we shall issue securities which are convertible into
shares of our common stock for an exercise price of less than $1.50; (ii) waiver
of any rights of Stanford to Default Warrants (as defined in the Series A
Registration Rights Agreement) due to our failure to register our shares of
common stock; and (iii) modification of the warrants previously issued to
Stanford and its assigns to purchase 2,002,750 shares of our common stock to
reduce the initial exercise price to $0.25 per share and to extend the
expiration date to August 1, 2008.
50
Pursuant to the Amended and Restated Series A Certificate of Designation
and Series B Certificate of Designation, dated November 11, 2003, by and between
our company and Stanford and a Written Notice, Consent, and Waiver Among The
Holders Of Series A $1.50 Convertible Preferred Stock, Series B $.90 Convertible
Preferred Stock and Warrants, our company and Stanford agreed to certain
amendments and restatements including:
(a) the filing of an Amended and Restated Certificate of Designation for Series
A $1.50 Convertible Preferred Stock substantially in the form attached hereto
("Amended and Restated Series A Certificate of Designation") pursuant to which
Stanford will (x) waive dilution adjustments for certain issuances of Common
Stock and Common Stock equivalents, (y) reduce for an eighteen month period the
Stated Value and Conversion Price (each as defined therein) to $0.50 and to
$0.87 thereafter and (z) forego certain rights to approve acquisitions of fixed
assets, capital stock or capital expenditures, credit facilities and sales of
shares of our securities. The authorized shares of Series A Preferred Stock was
reduced from 2,017,200 to 2,002,750 shares.
(b) the filing of an Amended and Restated Certificate of Designation Series B
$0.90 Convertible Preferred Stock substantially in the form attached hereto
pursuant to which Stanford will (x) waive dilution adjustments for certain
issuances of Common Stock and Common Stock equivalents, (y) reduce for an
eighteen month period the Stated Value and Conversion Price (each as defined
therein) to $0.50 and to $0.87 thereafter and (z) forego certain rights to
approve acquisitions of fixed assets, capital stock or capital expenditures,
credit facilities and sales of shares of our securities.
In connection with the Series B Purchase Agreement, our company and Stanford
also entered into a Registration Rights Agreement, dated April 30, 2003, in
which we agreed to register the shares of our common stock issuable upon
conversion of the Series B Preferred Stock, no later than November 15, 2003.
Stanford has agreed to extend dare of the filing requirements of the
Registration Rights Agreement to March 14, 2004, which was subsequently
extended.
(c) In consideration of the Notice and the granting of the Consents and Waivers,
we reduced the exercise price of the Stanford Warrants from $0.25 per share to
$.001. On November 11, 2003, Stanford exercised in full the Stanford Warrant
purchasing 2,002,750 shares of common stock for the purchase price of $2,002.75.
Pursuant to a Stockholders' Agreement which we entered into on May 16,
2002 with Stanford, Mr. Carey and his wife, if either Stanford or the Careys
should ever want to sell any shares of our Series A Preferred Stock or common
stock, the other party has a right of first refusal regarding such sale and, if
such non-selling party does not want to exercise its right of first refusal, we
have the right to purchase such shares, and a right of co-sale under the same
terms and for the same type of consideration. In the case of a material adverse
event related to our company, the Careys agreed to vote their shares as directed
by Stanford, including removing and replacing the members of the board with
designees nominated by Stanford. Finally, Stanford has the right to nominate one
member to our board of directors and the Carey's have agreed to vote for such
nominee.
Stanford is an affiliate of Stanford Financial Group, which is the
majority stockholder of TWS International, Inc. Luis Delahoz, one of our outside
directors, is the president and chief executive officer of TWS International,
Inc. and is Stanford's representative on our board of directors.
On July 31, 2000, the Predecessor Entity entered into a line of credit
loan arrangement with our President, Christopher Carey, who is also president of
Stronghold. Mr. Carey made available $1,989,500, which the Predecessor Entity
could borrow from time to time until August 1, 2001. Outstanding amounts accrued
interest at the rate of interest per annum equal to the floating Base Rate,
computed daily, for the actual number of days elapsed as if each full calendar
year consisted of 360 days. Overdue amounts accrued interest at an annual rate
of 2% greater than the base rate, which is 2% above the floating base rate
announced from time to time by Citibank, N.A. Under the agreement, the first
payment was due on August 1, 2001. On such date, the line of credit was extended
for one more year, until August 1, 2002. On April 22, 2002, the Predecessor
Entity issued 500,000 shares of its common stock (which converted into 1,093,750
shares of our common stock when we acquired the Predecessor Entity on May 16,
2002) in exchange for cancellation of $1 million of outstanding debt under such
line of credit. On May 16, 2002, the total amount outstanding under the line of
credit was $2.2 million. On such date, we issued 666,667 shares of our Common
Stock to Mr. Carey in exchange for cancellation of $1 million of the then
outstanding amount. We will pay Mr. Carey the remaining $1.2 million according
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.
51
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.
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.
52
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.
53
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of July 27, 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 15,936,655 shares outstanding on January 31,
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 January 31, 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) 29.68
Stanford Venture Capital Holdings, Inc.
6075 Poplar Avenue
Memphis, TN 38119 7,519,897(2) 43.49
---------------- --------
Executive Officers and Directors as a Group
(1 person) 5,331,250 29.68
(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.
54
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
The following table provides information about the securities authorized for
issuance under our equity compensation plans as of December 31, 2004.
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.
55
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK
We are authorized to issue up to 250,000,000 shares of common stock, par
value $.0001. As of July 27, 2005, there were 17,287,349 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have appointed Continental Stock Transfer & Trust Company, 17 Battery
Place, New York, New York 10004, as transfer agent for our shares of Common
Stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
t 6 0 Our Articles of Incorporation, as amended, provide to the fullest
extent permitted by Nevada law, our directors or officers shall not be
personally liable to us or our shareholders for damages for breach of such
director's or officer's fiduciary duty. The effect of this provision of our
Articles of Incorporation, as amended, is to eliminate our rights and our
shareholders (through shareholders' derivative suits on behalf of our company)
to recover damages against a director or officer for breach of the fiduciary
duty of care as a director or officer (including breaches resulting from
negligent or grossly negligent behavior), except under certain situations
defined by statute. We believe that the indemnification provisions in our
Articles of Incorporation, as amended, are necessary to attract and retain
qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act" or "Securities Act") may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of
any state or the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
56
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
57
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
58
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants unless the selling stockholders
exercise the warrants on a cashless basis. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
t 6 0 The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
---------------------------------------------------------------------------------------------------------------------------------
Name Total Shares Total Shares of Beneficial Percentage Beneficial Percentage
of Common Percentage Common Stock Ownership of Common Ownership of Common
Stock of Stock Included In Before Stock Before After the Stock Owned
Issuable Upon Assuming Prospectus Offering Offering** Offering(4) After
Conversion of Full (1)(2) Offering (4)
Notes and/or Percentage
Warrants
---------------------------------------------------------------------------------------------------------------------------------
AJW Partners, 64,352,000 78.82% 38,976,000(5) 907,945 4.99% -- --
LLC(3)
---------------------------------------------------------------------------------------------------------------------------------
AJW Offshore 146,789,200 89.46% 88,970,000(6) 907,945 4.99% -- --
Ltd.(3)
---------------------------------------------------------------------------------------------------------------------------------
AJW Qualified 142,320,600 89.17% 86,207,000(7) 907,945 4.99% -- --
Partners, LLC(3)
---------------------------------------------------------------------------------------------------------------------------------
New Millennium 11,888,200 40.75% 7,197,000(8) 907,945 4.99% -- --
Capital Partners
II, LLC(3)
---------------------------------------------------------------------------------------------------------------------------------
All four selling 365,350,000 95.48% 221,350,000 907,945 4.99% -- --
stockholders as
a group
---------------------------------------------------------------------------------------------------------------------------------
* This column represents an estimated number based on a conversion price as of a
recent date of July 27, 2005 of $.0125, divided into the principal amount.
** These columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 4.99% limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the secured convertible notes is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) Includes a good faith estimate of the shares issuable upon conversion of the
callable secured convertible notes and exercise of warrants, based on current
market prices. Because the number of shares of common stock issuable upon
conversion of the secured convertible notes is dependent in part upon the market
price of the common stock prior to a conversion, the actual number of shares of
common stock that will be issued upon conversion will fluctuate daily and cannot
be determined at this time. Under the terms of the secured convertible notes, if
the secured convertible notes had actually been converted on July 27, 2005, the
conversion price would have been $.0125.
59
(2) The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued or
issuable upon conversion of the secured convertible notes and exercise of the
related warrants by reason of any stock split, stock dividend or similar
transaction involving the common stock, in accordance with Rule 416 under the
Securities Act of 1933. However the selling stockholders have contractually
agreed to restrict their ability to convert their secured convertible notes or
exercise their warrants and receive shares of our common stock such that the
number of shares of common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of common
stock set forth in the table for the selling stockholders exceeds the number of
shares of common stock that the selling stockholders could own beneficially at
any given time through their ownership of the secured convertible notes and the
warrants. In that regard, the beneficial ownership of the common stock by the
selling stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
(3) The selling stockholders are affiliates of each other because they are under
common control. AJW Partners, LLC is a private investment fund that is owned by
its investors and managed by SMS Group, LLC. SMS Group, LLC, of which Mr. Corey
S. Ribotsky is the fund manager, has voting and investment control over the
shares listed above owned by AJW Partners, LLC. AJW Offshore, Ltd., formerly
known as AJW/New Millennium Offshore, Ltd., is a private investment fund that is
owned by its investors and managed by First Street Manager II, LLC. First Street
Manager II, LLC, of which Corey S. Ribotsky is the fund manager, has voting and
investment control over the shares owned by AJW Offshore, Ltd. AJW Qualified
Partners, LLC, formerly known as Pegasus Capital Partners, LLC, is a private
investment fund that is owned by its investors and managed by AJW Manager, LLC,
of which Corey S. Ribotsky and Lloyd A. Groveman are the fund managers, have
voting and investment control over the shares listed above owned by AJW
Qualified Partners, LLC. New Millennium Capital Partners II, LLC, is a private
investment fund that is owned by its investors and managed by First Street
Manager II, LLC. First Street Manager II, LLC, of which Corey S. Ribotsky is the
fund manager, has voting and investment control over the shares owned by New
Millennium Capital Partners II, LLC. The four selling stockholders are
considered to be a group as defined under the Securities Exchange Act of 1934.
The four selling stockholders are affiliated entities and may not own more then
4.99% of our common stock on an aggregate basis. We have been notified by the
selling stockholders that they are not broker-dealers or affiliates of
broker-dealers and that they believe they are not required to be broker-dealers.
t 0 0 (4) Assumes that all securities registered will be sold.
(5) Represents (i) 27,360,000 shares of common stock issuable upon conversion of
the callable secured convertible notes issued pursuant to the June 2004
Securities Purchase Agreement, (ii) 4,992,000 shares of common stock issuable
upon conversion of the callable secured convertible notes issued pursuant to the
March 2005 Securities Purchase Agreement, (iii) 5,712,000 shares of common stock
issuable upon conversion of the callable secured convertible notes issued
pursuant to the July 2005 Securities Purchase Agreement, Represents, (iv)
570,000 shares of common stock issuable upon exercise of the common stock
purchase warrants issued pursuant to the June 2004 Securities Purchase
Agreement, (v) 104,000 shares of common stock issuable upon exercise of the
common stock purchase warrants issued pursuant to the March 2005 Securities
Purchase Agreement, and (vi) 238,000 shares of common stock issuable upon
exercise of the common stock purchase warrants issued pursuant to the March 2005
Securities Purchase Agreement.
(6) Represents (i) 51,840,000 shares of common stock issuable upon conversion of
the callable secured convertible notes issued pursuant to the June 2004
Securities Purchase Agreement, (ii) 14,040,000 shares of common stock issuable
upon conversion of the callable secured convertible notes issued pursuant to the
March 2005 Securities Purchase Agreement, (iii) 20,848,000 shares of common
stock issuable upon conversion of the callable secured convertible notes issued
pursuant to the July 2005 Securities Purchase Agreement, Represents, (iv)
1,080,000 shares of common stock issuable upon exercise of the common stock
purchase warrants issued pursuant to the June 2004 Securities Purchase
Agreement, (v) 292,500 shares of common stock issuable upon exercise of the
common stock purchase warrants issued pursuant to the March 2005 Securities
Purchase Agreement, and (vi) 868,700 shares of common stock issuable upon
exercise of the common stock purchase warrants issued pursuant to the March 2005
Securities Purchase Agreement.
60
(7) Represents (i) 59,040,000 shares of common stock issuable upon conversion of
the callable secured convertible notes issued pursuant to the June 2004
Securities Purchase Agreement, (ii) 11,544,000 shares of common stock issuable
upon conversion of the callable secured convertible notes issued pursuant to the
March 2005 Securities Purchase Agreement, (iii) 13,586,400 shares of common
stock issuable upon conversion of the callable secured convertible notes issued
pursuant to the July 2005 Securities Purchase Agreement, Represents, (iv)
1,230,000 shares of common stock issuable upon exercise of the common stock
purchase warrants issued pursuant to the June 2004 Securities Purchase
Agreement, (v) 240,500 shares of common stock issuable upon exercise of the
common stock purchase warrants issued pursuant to the March 2005 Securities
Purchase Agreement, and (vi) 566,100 shares of common stock issuable upon
exercise of the common stock purchase warrants issued pursuant to the March 2005
Securities Purchase Agreement.
(8) Represents (i) 5,760,000 shares of common stock issuable upon conversion of
the callable secured convertible notes issued pursuant to the June 2004
Securities Purchase Agreement, (ii) 624,000 shares of common stock issuable upon
conversion of the callable secured convertible notes issued pursuant to the
March 2005 Securities Purchase Agreement, (iii) 652,800 shares of common stock
issuable upon conversion of the callable secured convertible notes issued
pursuant to the July 2005 Securities Purchase Agreement, Represents, (iv)
120,000 shares of common stock issuable upon exercise of the common stock
purchase warrants issued pursuant to the June 2004 Securities Purchase
Agreement, (v) 13,000 shares of common stock issuable upon exercise of the
common stock purchase warrants issued pursuant to the March 2005 Securities
Purchase Agreement, and (vi) 27,200 shares of common stock issuable upon
exercise of the common stock purchase warrants issued pursuant to the March 2005
Securities Purchase Agreement.
TERMS OF SECURED CONVERTIBLE NOTES
To obtain funding for our ongoing operations, we entered into three
Securities Purchase Agreements with the Investors. This prospectus relates to
the resale of the common stock underlying these callable secured convertible
notes and common stock purchase warrants issued in connection with these
agreements. The following is a description of each of these financings.
June 18, 2004 Securities Purchase Agreement
On June 18, 2004, we entered into a Securities Purchase Agreement for the
sale of (i) $3,000,000 in callable secured convertible notes and (ii) common
stock purchase warrants to buy 3,000,0000 shares of our common stock.
The following closings have occurred pursuant to the June 2004 Securities
Purchase Agreement:
o on June 18, 2004, the Investors purchased $1,500,000 in
callable secured convertible notes and received common stock
purchase warrants to purchase 1,500,000 shares of our common
stock;
o on July 27, 2004, the Investors purchased $500,000 in callable
secured convertible notes and received common stock purchase
warrants to purchase 500,000 shares of our common stock;
o on October 22, 2004, the Investors purchased $350,000 in
callable secured convertible notes and received common stock
purchase warrants to purchase 350,000 shares of our common
stock; and
o On March 18, 2005, the Investors purchase $650,000 in callable
secured convertible notes and received common stock purchase
warrants to purchase 650,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible, as amended, 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 our common stock
during the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no
event of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.57 per share.
61
The common stock purchase 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 common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
March 31, 2005 Securities Purchase Agreement
We entered into a second Securities Purchase Agreement with the Investors
on March 31, 2005 for the sale of $650,000 in callable secured convertible notes
and common stock purchase warrants to buy 650,000 shares of our common stock.
t 6 0 On March 31, 2005, the Investors purchased $350,000 in callable
secured convertible notes and received common stock purchase warrants to
purchase 350,000 shares of our common stock. On May 4, 2005, the Investor
purchased the remaining $300,000 in callable secured convertible notes and
received common stock purchase warrants to purchase 300,000 shares of our common
stock.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible, as amended, into our
common stock, at the Investors' option, at the lower of (i) $0.02 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 callable secured convertible notes in the event that no
event of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.03 per share.
The common stock purchase warrants are exercisable until five years from
the date of issuance at a purchase price of $0.03 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
July 15, 2005 Securities Purchase Agreement
t 6 0 We entered into a third Securities Purchase Agreement with the Investors
on July 15, 2005 for the sale of (i) $850,000 in callable secured convertible
notes and (ii) common stock purchase warrants to buy 1,700,000 shares of our
common stock.
On July 15, 2005, the Investors purchased $850,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,700,000 shares of our common stock. We received net proceeds in cash in the
amount of $200,000 on July 15, 2005 and $567,500 was placed in escrow of which
$100,000 shall be distributed on the 1st business day of each month.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible, as amended, into our
common stock, at the Investors' option, at the lower of (i) $0.07 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 callable secured convertible notes in the event that no
event of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.08 per share.
The common stock purchase warrants are exercisable until five years from
the date of issuance at a purchase price of $0.10 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
As of July 27, 2005, the average of the three lowest intraday trading
prices for our common stock during the preceding 20 trading days as reported on
the Over-The-Counter Bulletin Board was $.05 and, therefore, the conversion
price for the secured convertible notes was $.0125. Based on this conversion
price, the $4,500,000 callable secured convertible notes, excluding interest,
were convertible into 360,000,000 shares of our common stock.
62
The full principal amount of the callable secured convertible notes is due
upon default under the terms of callable secured convertible notes. In addition,
we have granted the investors a security interest in substantially all of our
assets and intellectual property as well as registration rights.
The investors have contractually agreed to restrict their ability to
convert the callable secured convertible notes and exercise the common stock
purchase warrants and receive shares of our common stock such that the number of
shares of our common stock held by them and their affiliates after such
conversion or exercise does not exceed 4.99% of our then issued and outstanding
shares of our common stock.
Sample Conversion Calculation
The number of shares of common stock issuable upon conversion of the notes
is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of $4,500,000 of notes on July 27, 2005, a conversion price of
$0.0125 per share, the number of shares issuable upon conversion would be:
$4,500,000/$.0125 = 360,000,000 shares
The conversion price is the 25% of the average of the three lowest
intraday trading prices for the common stock on a principal market for the 20
trading days before but not including the conversion date. The average of the
three lowest intraday trading prices is $0.05, therefore, the conversion price
is calculated by multiplying $0.05 by 25%, which results in a conversion price
of $0.0125.
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 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
July 27, 2005 of $0.11.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 75% Issuable Stock
------- --------- ------------- --------- -----------
25% $.0375 $.0094 480,000,000 96.52%
50% $.0250 $.0063 720,000,000 97.66%
75% $.0125 $.0031 1,440,000,000 98.81%
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Rothstein Kass - Certified Public Accountants, have audited, as set forth
in their report thereon appearing elsewhere herein, our financial statements at
December 31, 2004 and 2003 and for the years then ended that appear in the
prospectus. The financial statements referred to above are included in this
prospectus with reliance upon the independent registered public accounting
firm's opinion based on their expertise in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Stronghold Technologies, Inc., filed as
part of the registration statement, and it does not contain all information in
the registration statement, as certain portions have been omitted in accordance
with the rules and regulations of the Securities and Exchange Commission.
63
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C.
20549. Copies of such material can be obtained from the Public Reference Section
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
64
INDEX TO FINANCIAL STATEMENTS
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
March 31, 2005 and March 31, 2004
Consolidated Balance Sheets March 31, 2005 (Unaudited) F-1
Consolidated Statements of Operations for the three months ended
March 31, 2005 and 2004 (Unaudited) F-2
Consolidated Statements of Cash Flows For the three months
ended March 31, 2005 and 2004 (Unaudited) F-3
Notes to the Consolidated Financial Statements (Unaudited) F-4 to F-8
For the Years Ended December 31, 2004 and December 31, 2003
Report of Independent Registered Public Accounting Firm F-9
Consolidated Balance Sheets F-10
Consolidated Statement of Operations F-12
Consolidated Statement of Stockholders' Deficit F-13
Consolidated Statement of Cash Flows F-15
Notes to Consolidated Financial Statements F-17 to F-29
65
Stronghold Technologies, Inc. and Subsidiary
Condensed Consolidated Balance Sheet
March 31, 2005
--------------------------------------------------------------------------------
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
------------
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
------------
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
------------
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
------------
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
F-1
Stronghold Technologies, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
Three Months Ended March 31,
--------------------------------------------------------------------------------
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
F-2
Stronghold Technologies, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2005 2004
------------------------------------------------------------------------------------------------
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
----------- -----------
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
F-3
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.
F-4
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.
t 0 0 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.
F-5
------------------------------------------------------------------------------
Three months ended
March 31,
------------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------------
Net loss applicable to common
stockholders, as reported (1,072,910) $ (583,728)
------------------------------------------------------------------------------
Deduct
------------------------------------------------------------------------------
Total stock-based compensation expense
determined under fair value method for
all awards, net of related tax effect 3,162 12,819
------------------------------------------------------------------------------
Pro Forma (1,076,072) $ (12,819)
------------------------------------------------------------------------------
Basic and diluted EPS
------------------------------------------------------------------------------
As reported $ (0.07) $ (0.04)
------------------------------------------------------------------------------
Pro forma $ (0.07) $ (0.04)
------------------------------------------------------------------------------
March 31, 2005 and 2004
------------------------------------------------------------------------------
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.
F-6
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
----------
Total $1,337,471
----------
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:
F-7
----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2005
----------------------------------------------------------------------------------------------------------------------------------
Original
Term/Due Extended
Current Long Term Total Date To
----------------------------------------------------------------------------------------------------------------------------------
Stockholder - Christopher J. Carey
----------------------------------------------------------------------------------------------------------------------------------
$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
----------------------------------------------------------------------------------------------------------------------------------
3 mos
Stockholder Bridge Loan 300,000 300,000 due 9/18/03 11/1/05
----------------------------------------------------------------------------------------------------------------------------------
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.
----------------------------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------------------------
Total-Stockholder - Christopher J, Carey 1,195,530 254,600 1,450,130
----------------------------------------------------------------------------------------------------------------------------------
Stanford 875,000 875,000 3 yrs
due 3/2007
----------------------------------------------------------------------------------------------------------------------------------
Totals 1,195,530 1,129,600 2,325,130
----------------------------------------------------------------------------------------------------------------------------------
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.
F-8
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.
t 0 0 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.
F-9
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)
F-10
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.
F-11
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
F-12
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.
F-13
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.
F-14
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.
F-15
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.
F-16
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.
F-17
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
F-18
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.
F-19
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).
F-20
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.
F-21
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.
F-22
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.
F-23
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
F-24
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.
F-25
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.
F-26
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
====================================
F-27
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%
=== ===
F-28
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.
F-29
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.
F-30
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.
F-31
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
==========
F-32
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.
F-33
You should rely only on the information contained in
this prospectus. We have not authorized anyone to
provide you with information different from the
information contained in this prospectus. This document
may only be used where it is legal to sell the
securities. The information in this document may only
be accurate on the date of this document.
TABLE OF CONTENTS
Page
Prospectus Summary 5
Risk Factors 8
Use Of Proceeds 15
Market For Common Equity And Related Stockholder 15
Matters
Management's Discussion And Analysis Or Plan Of 17
Operation
Business 38
Management 48
Certain Relationships And Related Transactions 56
Security Ownership Of Certain Beneficial Owners 60
And Management
Description Of Securities 63
Plan Of Distribution 63
Selling Stockholders 66
Legal Matters 69
Experts 69
Available Information 69
Index To Financial Statements 71
221,350,000 SHARES
OF OUR
OF COMMON STOCK
Stronghold Technologies, Inc.
----------
PROSPECTUS
----------
______________, 2004
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our right and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in its Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 2,605.29
Accounting fees and expenses 10,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 5,000.00
----------
TOTAL $52,605.29*
==========
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
OPTIONS
From the Company's inception through May 16, 2002, the Company did not
grant any stock options. In connection with the Company's acquisition of the
Predecessor Entity on May 16, 2002, the Company assumed the Predecessor Entity's
2000 Stock Option Plan so that all of its issued and outstanding options would
remain intact. No further options will be issued under the assumed Predecessor
Entity's plan. Each outstanding option was automatically converted into an
option to acquire, on the same terms and conditions as were applicable under the
original option, such number of shares of the Company's common stock as was
equal to the number of options outstanding multiplied by 2.1875. The exercise
price was also adjusted to the exercise price that was equal to the existing
exercise price divided by 2.1875. The total number of the Predecessor Entity's
options that the Company assumed was 543,500 (after cancellations) at a weighted
average exercise price per share of $.78, which converted into options to
purchase 1,188,907 shares of the Company's common stock at a weighted average
exercise price of $.36. 253,750 of the assumed outstanding options vest
according to a three-year vesting schedule, 913,281 vest according to the
achievement of certain performance goals, and the remaining 21,875 options were
fully vested upon grant.
In addition to the above employee options of the Predecessor Entity, the
Company assumed certain outstanding options that were granted, or committed to
be granted, by the Predecessor Entity to automobile dealerships. On May 16,
2002, the Company assumed a total of 77,500 options, which the Predecessor
Entity granted, or committed to grant, to three automobile dealerships for
services rendered, including providing the Predecessor Entity with consulting
services. These options converted into options for a total of 169,531 shares of
the Company's common stock. Certain of the options vest upon the achievement of
certain performance goals. Each of the dealerships is an accredited investor.
On July 17, 2002 the Company's board of directors adopted, and on July 31,
2002 the Company's approved, the adoption of the 2002 Stock Incentive Plan.
Under such plan the Company has granted 141,550 options to certain employees at
a weighted average exercise price of $1.50. Of the employee options, 10,550 were
fully vested upon grant, 61,000 vest according to a three-year vesting schedule,
and 70,000 vest according to the achievement of certain performance goals.
On August 20, 2002, the Company's board of directors and stockholders
approved the adoption of the 2002 California Stock Incentive Plan. Under such
plan the Company has granted 69,600 options to certain employees at a weighted
average exercise price of $1.50. 15,600 of such options were fully vested upon
grant, 34,000 vest according to a three-year vesting schedule, and 20,000 vest
according to the achievement of certain performance goals.
COMMON STOCK
In September 2000, the Company issued 5,000,000 shares of its common stock
to its founder and former president, Pietro Bortolatti, in exchange for all of
the outstanding shares of Terre di Toscana, Inc.
From November 2000 to January 2001, the Company issued 3,351,000 shares of
its common stock at $.10 per share. This sale was part of its private placement
offering. In October 2000, the Company issued 30,000 shares of its common stock
to KGL Investments, Ltd, the beneficial owner of which is Kaplan Gottbetter &
Levenson, LLP, counsel to the Company, in exchange for legal services rendered.
These shares were valued at $.10 per share. All purchasers represented in
writing that they acquired the securities for their own accounts.
On May 16, 2002, the Company issued 7,000,000 shares of its common stock
to the stockholders of Stronghold Technologies, Inc., a New Jersey corporation,
in exchange for all of the issued and outstanding shares of such entity. All of
the recipients were either accredited investors or had alone, or together with a
purchaser representative, such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of an
investment in securities in general and of an investment in the Company in
particular. Each recipient had sufficient access to information about the
Company necessary to make an informed investment decision.
II-2
On May 16, 2002, the Company issued 666,667 shares of its common stock to
Christopher J. Carey, President of the Company, in exchange for the cancellation
in full of $1 million owed to Mr. Carey by the Company's wholly-owned
subsidiary, Stronghold Technologies, Inc. Mr. Carey is an accredited investor.
During August and September 2002, the Company entered into nine
subscription agreements with accredited and/or sophisticated investors, pursuant
to which the Company issued an aggregate of 344,333 shares of its common stock
at $1.50 per share. These private investments generated total proceeds to the
Company of $513,500.
During the first quarter of 2003, the Company and Mr. Carey agreed to
convert $543,000 of the outstanding debt owed to Christopher J. Carey by the
Company into 603,333 shares of Common Stock of the Company at a price of $0.90
per share.
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.
PREFERRED STOCK AND WARRANTS
On each of May 16, July 3, July 11, and July 19, 2002, the Company issued
(i) 500,000, 500,000, 500,000 and 502,750 shares, respectively, of its Series A
$1.50 Convertible Preferred Stock and (ii) warrants to purchase 500,000,
500,000, 500,000 and 502,750 shares, respectively, of its common stock, to
Stanford Venture Capital Holdings, Inc. for an aggregate purchase price of $3
million. Stanford subsequently assigned warrants for a total of 1,001,376 shares
of common stock to four of its affiliates. Stanford is an accredited investor.
Pursuant to a Securities Purchase Agreement, referred to herein as the
Series B Purchase Agreement, dated as of April 30, 2003, by and between the
Company and Stanford Venture Capital Holdings, Inc., the Company agreed to issue
to Stanford 2,444,444 shares of our Series B $0.90 Convertible Preferred Stock,
$.0001 par value per share. The aggregate purchase price for the Series B
Preferred Stock will be $2,200,000.
According to the terms of the Series B Purchase Agreement, the issuance of
the aforementioned Series B Preferred Stock shall take place on each of six
separate closing dates. At the first closing, which occurred on May 5, 2003, the
Company received $500,000 from Stanford and issued to Stanford 555,556 shares of
Series B Preferred Stock. At each of the second and third closings, which are
scheduled for May 15, 2003 and June 13, 2003, the Company will issue 555,556
shares of Series B Preferred Stock, and Stanford will pay $500,000 upon each
closing for same. On the fourth closing date, which was on July 15, 2003, the
Company issued 333,332 shares of Series B Preferred Stock, and Stanford paid
$300,000. At each of the fifth and sixth closings, which were on for August 15,
2003 and September 15, 2003, the Company issued 222,222 shares of Series B
Preferred Stock, and Stanford will pay $200,000 upon each closing. For so long
as any shares of the Series B Preferred Stock are outstanding and held by
Stanford, if the Company issues additional shares of the Company's Common Stock,
or common stock equivalents, Stanford has the right to participate in the
issuance such that immediately after the subsequent issuance, Stanford's
ownership of the total number of outstanding shares of the Company's Common
Stock (assuming the conversion of all common stock equivalents into the
Company's Common Stock) equals the same percentage of the total shares of the
Company's Common Stock (assuming conversion of all common stock equivalents into
the Company's Common Stock) as Stanford held immediately prior to the subsequent
issuance.
In connection with the Series B Purchase Agreement, the Company and
Stanford also entered into a Registration Rights Agreement, dated April 30,
2003, in which the Company agreed to register the shares of the Company's Common
Stock issuable upon conversion of the Series B Preferred Stock with the
Securities and Exchange Commission, not later than November 15, 2003.
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In connection with the Series B Purchase Agreement, the Company and
Stanford entered into a Consulting Agreement, pursuant to which Stanford has
agreed to perform certain financial consulting and advisory services, in
exchange for which the Company has agreed to pay Stanford a fee of $50,000 per
year for two years.
t 6 0 In addition, in connection with the Series B Purchase Agreement, the
Company and Stanford have: (i) waived Section 2(e)(iii) of the Series A
Certificate of Designation, which provides for anti-dilution protection if the
Company shall issue securities which are convertible into shares of the
Company's Common Stock for an exercise price of less than $1.50; (ii) waived any
rights of Stanford to Default Warrants (as defined in the Series A Registration
Rights Agreement) due to the Company's failure to register its shares of Common
Stock; and (iii) modified the warrants previously issued to Stanford and its
assigns to purchase 2,002,750 shares of the Company's Common Stock to reduce the
initial exercise price to $0.25 per share and to extend the expiration date to
August 1, 2008.
To obtain funding for our ongoing operations, we entered into three
Securities Purchase Agreements with the Investors. This prospectus relates to
the resale of the common stock underlying these callable secured convertible
notes and common stock purchase warrants issued in connection with these
agreements. The following is a description of each of these financings.
June 18, 2004 Securities Purchase Agreement
On June 18, 2004, we entered into a Securities Purchase Agreement for the
sale of (i) $3,000,000 in callable secured convertible notes and (ii) common
stock purchase warrants to buy 3,000,0000 shares of our common stock.
The following closings have occurred pursuant to the June 2004 Securities
Purchase Agreement:
o on June 18, 2004, the Investors purchased $1,500,000 in
callable secured convertible notes and received common stock
purchase warrants to purchase 1,500,000 shares of our common
stock;
o on July 27, 2004, the Investors purchased $500,000 in callable
secured convertible notes and received common stock purchase
warrants to purchase 500,000 shares of our common stock;
o on October 22, 2004, the Investors purchased $350,000 in
callable secured convertible notes and received common stock
purchase warrants to purchase 350,000 shares of our common
stock; and
o On March 18, 2005, the Investors purchase $650,000 in callable
secured convertible notes and received common stock purchase
warrants to purchase 650,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible, as amended, 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 our common stock
during the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no
event of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.57 per share.
The common stock purchase 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 common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
II-4
March 31, 2005 Securities Purchase Agreement
We entered into a second Securities Purchase Agreement with the Investors
on March 31, 2005 for the sale of $650,000 in callable secured convertible notes
and common stock purchase warrants to buy 650,000 shares of our common stock.
On March 31, 2005, the Investors purchased $350,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
350,000 shares of our common stock. On May 4, 2005, the Investor purchased the
remaining $300,000 in callable secured convertible notes and received common
stock purchase warrants to purchase 300,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible, as amended, into our
common stock, at the Investors' option, at the lower of (i) $0.02 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 callable secured convertible notes in the event that no
event of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.03 per share.
The common stock purchase warrants are exercisable until five years from
the date of issuance at a purchase price of $0.03 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
July 15, 2005 Securities Purchase Agreement
We entered into a third Securities Purchase Agreement with the Investors
on July 15, 2005 for the sale of (i) $850,000 in callable secured convertible
notes and (ii) common stock purchase warrants to buy 1,700,000 shares of our
common stock.
On July 15, 2005, the Investors purchased $850,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,700,000 shares of our common stock. We received net proceeds in cash in the
amount of $200,000 on July 15, 2005 and $567,500 was placed in escrow of which
$100,000 shall be distributed on the 1st business day of each month.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible, as amended, into our
common stock, at the Investors' option, at the lower of (i) $0.07 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 callable secured convertible notes in the event that no
event of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.08 per share.
The common stock purchase warrants are exercisable until five years from
the date of issuance at a purchase price of $0.10 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
As of July 27, 2005, the average of the three lowest intraday trading
prices for our common stock during the preceding 20 trading days as reported on
the Over-The-Counter Bulletin Board was $.05 and, therefore, the conversion
price for the secured convertible notes was $.0125. Based on this conversion
price, the $4,500,000 callable secured convertible notes, excluding interest,
were convertible into 360,000,000 shares of our common stock.
The full principal amount of the callable secured convertible notes is due
upon default under the terms of callable secured convertible notes. In addition,
we have granted the investors a security interest in substantially all of our
assets and intellectual property as well as registration rights.
II-5
The investors have contractually agreed to restrict their ability to
convert the callable secured convertible notes and exercise the common stock
purchase warrants and receive shares of our common stock such that the number of
shares of our common stock held by them and their affiliates after such
conversion or exercise does not exceed 4.99% of our then issued and outstanding
shares of our common stock.
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of our company or executive
officers of our company, and transfer was restricted by our company in
accordance with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
II-6
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References
to "the Company" in this Exhibit List mean Stronghold Technologies, Inc., a
Nevada corporation.
Exhibit
Number Description
------ -----------
2.1 (1)(4) Merger Agreement and Plan of Merger, dated May 15, 2002, by
and among TDT Development, Inc., Stronghold Technologies,
Inc., TDT Stronghold Acquisition Corp., Terre Di Toscana,
Inc., Terres Toscanes, Inc., certain stockholders of TDT
Development, Inc. and Christopher J. Carey.
2.2 (5) Stock Purchase Agreement, dated July 19, 2002, by and between
TDT Development, Inc. and Mr. Pietro Bortolatti.
3.1 (2) Articles of Incorporation, as amended on July 11, 2002.
3.2 (3) By-Laws.
4.1 (2) Certificate of Designations filed on May 16, 2002.
4.2 (5) Specimen Certificate of Common Stock.
4.3 (8) Promissory Note for $300,000, dated March 18, 2003, made by
Stronghold Technologies, Inc. in favor of Christopher J.
Carey.
4.4 (8) Promissory Note for $100,000, dated March 18, 2003, made by
Stronghold Technologies, Inc. in favor of Christopher J.
Carey.
4.5 (8) Form of Warrant with Christopher J. Carey.
4.6 (10) Amended and Restated Certificate of Designation of Series A
$1.50 Convertible Preferred Stock of Stronghold Technologies,
Inc.
4.7 (10) Amended and Restated Certificate of Designation of Series B
$0.90 Convertible Preferred Stock of Stronghold Technologies,
Inc.
4.8 (11) Securities Purchase Agreement dated June 18, 2004 between the
Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
4.9 (11) Callable Secured Convertible Note in the name of New
Millennium Capital Partners II, LLC dated June 18, 2004
4.10 (11) Callable Secured Convertible Note in the name of AJW Qualified
Partners, LLC dated June 18, 2004
4.11 (11) Callable Secured Convertible Note in the name of AJW Offshore,
Ltd. dated June 18, 2004
4.12 (11) Callable Secured Convertible Note in the name of AJW Partners,
LLC dated June 18, 2004
4.13 (11) Stock Purchase Warrant in the name of New Millennium Capital
Partners II, LLC dated June 18, 2004
II-7
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 (16) Callable Secured Convertible Note in the name of New
Millennium Capital Partners II, LLC dated July 27, 2004
4.21(16) Callable Secured Convertible Note in the name of AJW Qualified
Partners, LLC dated July 27, 2004
4.22(16) Callable Secured Convertible Note in the name of AJW Offshore,
Ltd. dated July 27, 2004
4.23 (16) Callable Secured Convertible Note in the name of AJW Partners,
LLC dated July 27, 2004(16)
4.24 (16) Stock Purchase Warrant in the name of New Millennium Capital
Partners II, LLC dated July 27, 2004
4.25(16) Stock Purchase Warrant in the name of AJW Qualified Partners,
LLC dated July 27, 2004(16)
4.26 (16) Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated
July 27, 2004(16)
4.27 (16) Stock Purchase Warrant in the name of AJW Partners, LLC dated
July 27, 2004
4.28 (16) Callable Secured Convertible Note in the name of New
Millennium Capital Partners II, LLC dated October 22, 2004
4.29 (16) Callable Secured Convertible Note in the name of AJW Qualified
Partners, LLC dated October 22, 2004
4.30 (16) Callable Secured Convertible Note in the name of AJW Offshore,
Ltd. dated October 22, 2004
4.31 (16) Callable Secured Convertible Note in the name of AJW Partners,
LLC dated October 22, 2004
4.32 (16) Stock Purchase Warrant in the name of New Millennium Capital
Partners II, LLC dated October 22, 2004
4.33 (16) Stock Purchase Warrant in the name of AJW Qualified Partners,
LLC dated October 22, 2004
4.34 (16) Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated
October 22, 2004
4.35 (16) Stock Purchase Warrant in the name of AJW Partners, LLC dated
October 22, 2004
4.36 (16) Callable Secured Convertible Note in the name of New
Millennium Capital Partners II, LLC dated March 18, 2005
II-8
4.37(16) Callable Secured Convertible Note in the name of AJW Qualified
Partners, LLC dated March 18, 2005
4.38(16) Callable Secured Convertible Note in the name of AJW Offshore,
Ltd. dated March 18, 2005
4.39(16) Callable Secured Convertible Note in the name of AJW Partners,
LLC dated March 18, 2005
4.40 (16) Stock Purchase Warrant in the name of New Millennium Capital
Partners II, LLC dated March 18, 2005
4.41(16) Stock Purchase Warrant in the name of AJW Qualified Partners,
LLC dated March 18, 2005
4.42(16) Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated
March 18, 2005
4.43(16) Stock Purchase Warrant in the name of AJW Partners, LLC dated
March 18, 2005
4.44 (16) 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
4.45 (16) Letter 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
4.46(16) 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
4.47 (17) 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
4.48 (17) Form of Callable Secured Convertible dated March 31, 2005
4.49(17) Form of Stock Purchase Warrant dated March 31, 2005(17)
4.50 (17) 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
4.51 (17) 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
4.52 (17) 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
4.53 (18) Securities Purchase Agreement dated July 15, 2005 by and among
the Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
4.54 (18) Form of Callable Secured Convertible dated July 15, 2005
II-9
4.55 (18) Form of Stock Purchase Warrant dated July 15, 2005
4.56 (18) Registration Rights Agreement dated July 15, 2005 by and among
the Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
4.57 (18) Security Agreement dated July 15, 2005 by and among the
Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
4.58 (18) Intellectual Property Security Agreement dated July 15, 2005
by and among the Company and New Millennium Capital Partners
II, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and
AJW Partners, LLC
4.59 (18) Escrow Agreement dated July 15, 2005 by and among the Company
and New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC and
the Escrow Agent
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent
10.1 (2) 2002 Stock Incentive Plan.
10.2 (2) Form of Incentive Stock Option Agreement to be issued under
the 2002 Stock Incentive Plan.
10.3 (2) Form of Nonstatutory Stock Option Agreement to be issued under
the 2002 Stock Incentive Plan.
10.4 (5) California 2002 Stock Incentive Plan.
10.5 (5) Form of Incentive Stock Option Agreement to be issued under
the California 2002 Stock Incentive Plan.
10.6 (5) Form of Nonstatutory Stock Option Agreement to be issued under
the California 2002 Stock Incentive Plan.
10.7 (2) Executive Employment Agreement by and between Stronghold
Technologies, Inc. and Christopher J. Carey, dated May 15,
2002.
10.8 (2) Employment and Non-Competition Agreement by and between
Stronghold Technologies, Inc. and Lenard Berger, dated August
1, 2000.
10.9 (2) Employment and Non-Competition Agreement by and between
Stronghold Technologies, Inc. and Salvatore D'Ambra, dated
July 10, 2000.
10.10 (2) Employment and Non-Competition Agreement by and between
Stronghold Technologies, Inc. and James J. Cummiskey, dated
August 14, 2000.
10.11 (2) Business Loan Agreement by and between Stronghold
Technologies, Inc. and UnitedTrust Bank, dated June 30, 2002.
10.12 (2) Promissory Note issued by Stronghold Technologies, Inc. made
payable to UnitedTrust Bank, Dated June 30, 2002.
10.13 (2) Commercial Security Agreement by and between Stronghold
Technologies, Inc. and UnitedTrust Bank, dated June 30, 2002.
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10.14 (2) Promissory Note issued by Stronghold Technologies, Inc. made
payable to Christopher J. Carey, dated May 16, 2002.
10.15 (4) Securities Purchase Agreement, dated May 15, 2002, by and
among TDT Development, Inc., Stanford Venture Capital
Holdings, Inc., Pietro Bortolatti, Stronghold Technologies,
Inc. and Christopher J. Carey.
10.16 (4) Registration Rights Agreement, dated May 16, 2002, by and
among TDT Development, Inc. and Stanford Venture Capital
Holdings, Inc.
10.17 (4) Lock-Up Agreement, dated May 16, 2002, by and among TDT
Development, Inc.
10.18 (4) Stockholders' Agreement, dated May 16, 2002, by and among TDT
Development, Inc., Christopher J. Carey, Mary Carey and
Stanford Venture Capital Holdings, Inc.
10.19 (4) Form of Warrant to be issued pursuant to the Securities
Purchase Agreement (Exhibit 10.11).
10.20 (6) Loan Agreement by and among Stronghold Technologies, Inc., its
subsidiary and UnitedTrust Bank, dated September 30, 2002.
10.21 (6) Commercial Loan Note issued by Stronghold Technologies, Inc.
and its subsidiary made payable to UnitedTrust Bank, dated
September 30,2002
10.22 (6) Security Agreement by and between Stronghold Technologies,
Inc. and UnitedTrust Bank, dated September 30, 2002.
10.23 (6) Security Agreement by and between Stronghold's subsidiary and
UnitedTrust Bank, dated September 30, 2002.
10.24 (6) Subordination Agreement by and among Christopher J. Carey,
Stronghold Technologies, Inc. and UnitedTrust Bank, dated
September 30, 2002.
10.25 (6) Subordination Agreement by and among Christopher J. Carey,
Stronghold's subsidiary and UnitedTrust Bank, dated September
30, 2002.
10.26 (6) Guaranty by Christopher J. Carey in favor UnitedTrust Bank,
dated September 30, 2002.
10.27 (6) Loan Agreement by and among Stronghold Technologies, Inc., its
subsidiary and AC Trust Fund, dated September 30, 2002.
10.28 (6) Loan Agreement by and among Stronghold Technologies, Inc., its
subsidiary and CC Trust Fund, dated September 30, 2002.
10.29 (6) Form of Subscription Agreement by and between Stronghold
Technologies, Inc. and each of the parties listed on the
schedule of purchasers attached thereto.
10.30 (6) Promissory Note issued by Stronghold Technologies, Inc. made
payable to Christopher J. Carey, dated September 30. 2002.
II-11
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.
23.1 Consent of Rothstein Kass - Certified Public Accountants
(filed herewith).
--------------------------------------------------------------------------------
(1) The exhibits and schedules to the Merger Agreement have been omitted from
this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will
furnish copies of any of the exhibits and schedules to the U.S. Securities and
Exchange Commission upon request
(2) Incorporated herein by reference to the exhibits to Registrant's Quarterly
Report on Form 10-QSB for the fiscal quarter ended June 30, 2002.
(3) Incorporated herein by reference to the exhibits to the Registrant's
Registration Statement on Form SB-2 as filed with the Securities and Exchange
Commission on February 1, 2001 (No. 333-54822).
(4) Incorporated herein by reference to the exhibits to the Registrant's Current
Report on Form 8-K dated May 16, 2002.
(5) Incorporated herein by reference to the exhibits to the Registrant's
Registration Statement on Form SB-2 as filed with the Securities and Exchange
Commission on September 24, 2002.
(6) Incorporated herein by reference to the exhibits to Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2002.
(7) Incorporated by reference to Exhibit 99.3 to the Company's Form 8-K as filed
with the Securities and Exchange Commission on May 8, 2003.)
(8) Incorporated by reference to the exhibits to Registrants Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 2003.
(9) Incorporated by reference to the exhibits to Registrants Quarterly Report on
Form 10-QSB for the quarterly period ended June 30, 2003.
II-12
(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.
(18) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed July 20, 2005.
ITEM 28. UNDERTAKINGS.
The undersigned Company hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
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Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Basking
Ridge, State of New Jersey, on August 2, 2005.
STRONGHOLD TECHNOLOGIES, INC.
By: /s/Christopher Carey
---------------------------------------
Christopher Carey, President, Chief Executive Officer,
Principal Executive Office, Principal Accounting/Financial
Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ Christopher Carey Chief Executive Officer, August 2, 2005
------------------------- Principal Financial/Accounting
Christopher Carey Officer and Director
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