As of March 31, 2004, our cash balance was $52,955. We had a net loss
of $583,728 for the quarter ended March 31, 2004. We had a net operating loss of
$4,258,007 for the fiscal year ended December 31, 2003, and a net operating loss
of approximately $8,114,728 for the period from May 17, 2002 through March 31,
2004 to offset future taxable income. Losses incurred prior to May 17, 2002 were
passed directly to the shareholders and, therefore, are not included in the loss
carry-forward. There can be no assurance, however, that we will be able to take
advantage of any or all tax loss carry-forwards, in future fiscal years. Our
accounts receivable as of March 31, 2004 was $887,102 (less allowances for
doubtful accounts of $184,067), and $1,361,234 (less allowances for doubtful
accounts of $200,000) for the quarter ended March 31, 2003. Accounts receivable
balances represent amounts owed to Stronghold for new installations and
maintenance, service, training services, software customization and additional
systems components.
FINANCING NEEDS
To date, we have not generated revenues in excess of our operating
expenses. We have not been profitable since our inception, we expect to incur
additional operating losses in the future and will require additional financing
to continue the development and commercialization of our technology. We have
incurred a net loss of approximately $583,728 and has negative cash flows from
operations of approximately $679,889 for the quarter year ended March 31, 2004,
and has a working capital deficit of approximately $4,128,398 and a
stockholders' deficit of approximately $4,888,000 as of March 31, 2004. These
conditions raise substantial doubt about our ability to continue as a going
concern. During 2004, our management will rely on raising additional capital to
fund its future operations. If we are unable to generate sufficient revenues or
raise sufficient additional capital, there could be a material adverse effect on
the consolidated financial position, results of operations and we may be unable
to continue our operations.
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We expect our capital requirements to increase significantly over the
next several years as we continue to develop and market the DealerAdvance(TM)
suite and as we increase marketing and administration infrastructure and develop
capabilities and facilities. Our future liquidity and capital funding
requirements will depend on numerous factors, including, but not limited to, the
levels and costs of our research and development initiatives, the cost of hiring
and training additional sales and marketing personnel and the cost and timing of
the expansion of our marketing efforts.
FINANCINGS
On July 31, 2000, the Predecessor Entity entered into a line of
credit with Mr. Chris Carey, our President and Chief Executive Officer and the
President and Chief Executive Officer of Stronghold. The terms of the line of
credit made available $1,989,500, which the Predecessor Entity could borrow from
time to time, until August 1, 2001. The outstanding amounts accrued interest at
the per annum rate equal to the floating base rate, as defined therein, computed
daily, for the actual number of days elapsed as if each full calendar year
consisted of 360 days. The first interest payment under the line of credit was
due on August 1, 2001. On such date, the parties agreed to extend the line of
credit for one more year, until August 1, 2002.
On November 1, 2001, the Predecessor Entity entered into a line of
credit with UnitedTrust Bank (now PNC Bank) pursuant to which the Predecessor
Entity borrowed $1.5 million. This line of credit was due to expire by its
terms, and all outstanding amounts were due to be paid, on June 30, 2002. On
June 30, 2002, the line of credit came due and the bank granted a three-month
extension. On September 30, 2002, we converted the outstanding line of credit
with UnitedTrust Bank into a $1,500,000 promissory note. Such promissory note is
to be paid in 36 monthly installments, which commenced in February 2003 and is
due to terminate on January 1, 2006. Interest accrues on the note at the prime
rate, adjusted annually, which is the highest New York City prime rate published
in The Wall Street Journal. The initial prime rate that applied to the
promissory note was 4.750%.
On August 7, 2003, we entered into a modification of the loan
agreement with UnitedTrust Bank, of which the principal balance was $1,291,666
at the time of closing of the modification. Pursuant to the modification
agreement, UnitedTrust Bank agreed to subordinate its lien against our assets to
a new lender and reduce the monthly payments from $41,666 per month principal
plus accrued interest as follows: (a) from the date of closing through December
15, 2003, $10,000 per month plus accrued interest (b) from January 15, 2004
through December 15, 2004, $15,000 per month plus accrued interest, (c) from
January 15, 2005 through December 15, 2005, $20,000 per month plus interest and
(d) on the maturity date of January 1, 2006, a balloon payment equal to all the
outstanding principal and accrued interest. We are current with our payment of
$15,000 per month.
On January 9, 2004, we were served with a notice of an event of
default by United Trust Bank, now PNC Bank, a successor by merger effective
January 2004 with United Trust Bank, ("the Bank"), under its Loan Agreement.
Pursuant to section 6.01(d) of the Loan Agreement, an Event of Default exists
due to our failure to pay Payroll Tax Obligations aggregating in the amount of
$1,089,897 as of December 31, 2003 (including estimated penalties and interest).
We continue to make timely scheduled payments pursuant to the terms of the loan
and is in forbearance negotiations with the Bank with respect to the default. On
April 1, 2004, we received a second Notice of Event of Default stating that the
Bank had accelerated the maturity of the Loan and declared all principal,
interest, and other outstanding amounts due and payable. However, if we are
unable to reach a forbearance agreement with the Bank, we may be required to pay
off the amounts outstanding under the loan, and if we are unable to pay off the
amounts outstanding, the Bank could seize the assets we pledged as security for
the Loan. If either of these actions occur, we may be unable to continue our
operations.
Because we are in default under the terms of the loan due primarily
to our payroll tax default, the Bank has instituted the default rate of interest
which is 5% above the "highest New York City prime rate" stated above. We have
entered into an installment agreement with the United States Internal Revenue
Service to pay the withholding taxes, under the terms of which we will pay
$100,000 by May 31, 2004 and $35,000 each month, commencing June 28, 2004, until
we have paid the withholding taxes due in full.
On April 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
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15, 2004, we entered into a fully executed forbearance agreement with PNC Bank,
N.A. We made an initial principal payment of $420,000 with the execution of the
forbearance. Additionally, we are required to make four consecutive monthly
installments of $50,000.00 on August 15, 2004, September 15, 2004, October 15,
2004 and November 15, 2004 followed by the remaining principal on or before
December 15, 2004. Failure to adhere to this schedule will cause the suit to be
reinstated and PNC Bank will resume collection of the sum under the suit.
On April 22, 2002, the Predecessor Entity issued 500,000 shares of
its common stock to Mr. Carey (which converted into 1,093,750 shares of our
common stock when we acquired the Predecessor Entity on May 16, 2002) in
exchange for cancellation of $1 million of outstanding indebtedness under the
July 31, 2000 line of credit from Mr. Carey.
On May 16, 2002, the total amount outstanding under the July 31, 2000
line of credit with Mr. Carey was $2.2 million. On such date, we issued 666,667
shares of our common stock to Mr. Carey in exchange for the cancellation of $1
million of the then outstanding amount under the line of credit. We agreed to
pay Mr. Carey the remaining $1.2 million according to the terms of a
non-negotiable promissory note, which was issued on May 16, 2002.
On May 15, 2002, we entered into a Securities Purchase Agreement with
Stanford Venture Capital Holdings, Inc., referred to herein as Stanford, in
which we issued to Stanford (i) such number of shares of our Series A $1.50
Convertible Preferred Stock, referred to herein as Series A Preferred Stock,
that would in the aggregate equal 20% of the total issued and outstanding shares
of our common stock, and (ii) such number of warrants for shares of our common
stock that would equal the number of shares of Series A Preferred Stock issued
to Stanford. The total aggregate purchase price for the Series A Preferred Stock
and warrants paid by Stanford was $3,000,000. The issuance of the Series A
Preferred Stock and warrants took place on each of four separate closing dates
from May 16, 2002 through and July 19, 2002, at which we issued an aggregate of
2,002,750 shares of our Series A Preferred Stock and warrants for 2,002,750
shares of our common stock to Stanford.
On April 24, 2003, we entered into a Securities Purchase Agreement
with Stanford Venture Capital Holdings, Inc. for the issuance of 2,444,444
shares of our Series B $0.90 Convertible Preferred Stock. The issuance of the
Series B Preferred Stock took place on six separate closing dates beginning on
May 5, 2003 through September 15, 2003. In connection with the Securities
Purchase Agreement, we agreed to modify the previously issued five-year warrants
to purchase 2,002,750 shares of our common stock: (i) to reduce the exercise
price to $.25 per share; and (ii) to extend the expiration date through August
1, 2008. In addition, our President and Chief Executive Officer, Christopher J.
Carey, agreed to convert outstanding loans of $543,000 to 603,333 shares of our
common stock at a price of $.90 per share. In addition, we entered into a
Registration Rights Agreement with Stanford, dated April 30, 2003, in which we
agreed to register the shares of our 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. Stanford agreed to extend the date
of the filing requirements of the Registration Rights Agreement to March 14,
2004. We have not yet filed a registration statement, and are in negotiations
with Stanford regarding an extension of the registration filing date.
During August and September 2002, we entered into 9 subscription
agreements with accredited private investors, as defined in Rule 501 of the
Securities Act, pursuant to which we issued an aggregate of 179,333 shares of
our common stock at $1.50 per share. These private investments generated total
proceeds to us of $269,000.
On September 30, 2002, we renegotiated the $1,200,000 promissory note
with Mr. Carey pursuant to a requirement contained in the promissory note with
UnitedTrust Bank. According to the new terms of the loan, Mr. Carey extended the
repayment of the principal amount until December 1, 2005. Until such time as the
principal is paid, we will pay an interest only fee of 12% per year. Mr. Carey's
promissory note is expressly subordinated in right of payment to the prior
payment in full of all of our senior indebtedness. Subject to the payment in
full of all senior indebtedness, Mr. Carey is subrogated to the rights of the
holders of such senior indebtedness to receive principal payments or
distribution of assets. As of December 31, 2002, $970,749 was outstanding under
the promissory note issued to Mr. Carey.
On September 30, 2002, we entered into a loan agreement with CC Trust
Fund to borrow an amount up to $355,128. This bridge loan was for a period of
25
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 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 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 us in the amount of
$165,000, we issued a promissory note to Christopher J. Carey for $165,000. Such
promissory note was due on or before December 31, 2003. On December 30, 2003,
Mr. Carey agreed to extend the term of his loan to March 31, 2004. On March 30,
2004, Mr. Carey agreed to extend the term of his loan to March 31, 2005. As of
December 31, 2003, the amount outstanding on this promissory note was $10,000.
Until such time as the principal is paid, interest on the note will accrue at
the rate of 12.5% per year.
On March 18, 2003, we entered into a bridge loan agreement with
Christopher J. Carey, for a total of $380,000. The agreement stipulates that we
will pay an 8% interest rate on a quarterly basis until the loan becomes due and
payable on June 30, 2004. We also issued to Mr. Carey 391,754 warrants
exercisable for common stock for 10 years at a price of $0.97 per share. On
December 30, 2003, Christopher J. Carey agreed to extend the term of the
promissory note to June 30, 2004. As of December 31, 2003, $380,000 was
outstanding under this bridge loan agreement.
In October 2003, we commenced offerings to accredited investors in
private placements of up to $3,000,000 of our common stock. In the period of
October 2003 through January 9, 2004 we raised $225,000 under the terms of these
private placements. The shares offered in the private placement are priced at
the 5 trading day trailing average closing price of the common stock on the
OTCBB, less 20%. For each share purchased in the private placements, purchasers
received a warrant to purchase one half (0.5) share of common stock at 130% of
the purchase price. A minimum of $25,000 was required per investor. The number
shares issued under this placement total 509,559, at an average price of
$0.44/share.
On March 3, 2004 and March 15, 2004 we received loans in the amount
of $437,500 each from Stanford. The final terms of the investment are to be
determined but we expect to pay Stanford an 8% annual dividend on the funds
invested and to redeem the securities not later than three years from the date
of funding.
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on June 18, 2004
for the sale of (i) $3,000,000 in callable secured convertible notes and (ii)
warrants to buy 3,000,000 shares of our common stock. This prospectus relates to
the resale of the common stock underlying these secured convertible notes and
warrants. Provided that the terms and conditions of the Securities Purchase
Agreement are satisfied, the investors are obligated to provide us with an
aggregate of $3,000,000 as follows:
o $1,500,000 was disbursed on June 18, 2004;
o $500,000 will be disbursed within five days of the filing of
this registration statement; and
26
o $1,000,000 will be disbursed within five days of this
prospectus being declared effective.
Accordingly, we have received a total of $1,500,000 pursuant to the
Securities Purchase Agreement. The funds from the sale of the callable secured
convertible notes will be used for business development purposes, business
acquisitions, working capital needs, pre-payment of interest, payment of
consulting and legal fees and borrowing repayment.
The callable secured convertible notes bear interest at 12%, mature
two years from the date of issuance, and are convertible into our common stock,
at the investors' option, at the lower of (i) $0.70 or (ii) 50% of the average
of the three lowest intraday trading prices for the common stock on a principal
market for the 20 trading days before but not including the conversion date. The
full principal amount of the callable secured convertible notes is due upon
default under the terms of secured convertible notes. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.57 per share. In addition, the conversion price of the secured convertible
notes and the exercise price of the warrants will be adjusted in the event that
we issue common stock at a price below the fixed conversion price, below market
price, with the exception of any securities issued in connection with the
Securities Purchase Agreement. The conversion price of the callable secured
convertible notes and the exercise price of the warrants may be adjusted in
certain circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution of the selling
stockholder's position. The selling stockholders have contractually agreed to
restrict their ability to convert or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock held by them
and their affiliates after such conversion or exercise does not exceed 4.99% of
the then issued and outstanding shares of common stock. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights.
Since the conversion price will be less than the market price of the
common stock at the time the secured convertible notes are issued, we anticipate
recognizing a charge relating to the beneficial conversion feature of the
callable secured convertible notes during the quarter in which they are issued,
including the second quarter of fiscal 2004 when $1,500,000 of secured
convertible notes were issued.
We will still need additional investments in order to continue
operations to cash flow break even. Additional investments are being sought, but
we cannot guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations
again.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Financial Reporting Release No. 60, recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The notes to the consolidated financial statements include
a summary of significant accounting policies and methods used in the preparation
of our Consolidated Financial Statements. In addition, Financial Reporting
Release No. 61 was recently released by the SEC requires all companies to
include a discussion which addresses, among other things, liquidity, off-balance
sheet arrangements, contractual obligations and commercial commitments. The
following is a brief discussion of the more significant accounting policies and
methods used by us.
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of financial statements in accordance with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
27
assets and liabilities, including the recoverability of tangible and intangible
assets, disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses during
the reported period.
On an on-going basis, we evaluate our estimates. The most significant
estimates relate to our recognition of revenue and the capitalization of our
software development.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
REVENUE RECOGNITION POLICY
Revenue related to the sale of products is comprised of one-time
charges to dealership customers for hardware (including server, wireless
infrastructure, desktop PCs, printers, interior/exterior access points/antennas
and handheld devices), software licensing fees and installation/training
services. Stronghold charges DealerAdvance Sales Solution(TM) dealers for all
costs associated with installation. The most significant variable in pricing is
the number of handheld devices purchased. Stronghold has not determined pricing
for DealerAdvance Service Solution(TM).
Once DealerAdvance Sales Solution(TM) is installed, we 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. We provide 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.
We offer all new customers a sixty-day performance trial period
during which time performance targets are set. We install the system and agree
to remove the system at no charge if the performance targets are not met. If
performance is met, a large portion of the dealerships enter into a third party
lease generally with lessors introduced by us. We have entered into a number of
relationships with leasing companies in which the leasing company finances the
implementation fees for the dealership in a direct contractual relationship with
the dealership. The lease is based solely on the creditworthiness of the
dealership without recourse to us. The leasing company receives an invoice from
us, and remits funds upon acceptance by the dealership. We receive all funds as
invoiced, with interest costs passed to the dealership. These leases typically
run 36 months in duration, during which time we contract for service and
maintenance services. Stronghold charges separately for future software
customization after the initial installation, for additional training, and for
additions to the base system (e.g., more handheld devices for additional sales
people). Depending upon the dealership arrangement, the support and maintenance
contracts are either billed monthly and recorded as revenue monthly, or are
recorded up front to unearned maintenance fees at the present value of the
36-month revenue stream and amortized monthly to revenue over the life of the
agreement.
REVENUE RESTATEMENT
On December 26, 2002, we reclassified our consolidated financial
statements for the first three quarters of 2002. This step was taken on the
advice of Rothstein, Kass & Company, P.C., our accounting firm, to reflect
accounting changes in accordance with revenue recognition guidelines released by
the SEC.
Accordingly, our revenue was reclassified such that it may be
recognized in future quarters. For the nine months ended September 30, 2002,
revenue was reclassified from $2,952,076 to $1,898,884 with the difference
treated as deferred revenue.
Historically, we recorded revenue as a three-stage process: at the
time the equipment and software were delivered, installed and the personnel
trained. We will now recognize each sale with an additional stage as outlined in
the analysis provided by our accounting firm, which includes a fourth stage
defined as, "the system is handed over to the customer to run on their own."
This four-stage delivery process results in current sales revenues being carried
into future quarters. We estimate that this change delays our recognition of
revenue by approximately 20-50 days.
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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, 2004, we capitalized
$134,326 of development costs in developing enhanced functionality of our
DealerAdvance(TM) products.
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BUSINESS
OUR HISTORY
We were incorporated as a Nevada corporation on September 8, 2000,
under the name TDT Development, Inc. On May 16, 2002, we acquired Stronghold
Technologies, Inc., a New Jersey corporation, referred to herein as our
"Predecessor Entity", pursuant to a merger of Stronghold Technologies into our
wholly-owned subsidiary, TDT Stronghold Acquisition Corp., referred to herein as
"Acquisition Sub". 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. (NV). On July 19, 2002, we exchanged all of the
shares that we held in our two other wholly-owned subsidiaries, Terre di
Toscana, Inc. and Terres Toscanes, Inc., which conducted an import and
distribution business specializing in truffle-based food product, for 75,000
shares of our common stock held by Mr. Pietro Bortolatti, our former president.
Our principal executive offices are located at 106 Allen Road,
Basking Ridge, NJ 07920. Our telephone number at that location is 908-903-1195
and our Internet address is www.strongholdtech.com.
OVERVIEW OF OUR HANDHELD TECHNOLOGY BUSINESS
On May 16, 2002, we entered the handheld wireless technology business
via our acquisition by merger of the Predecessor Entity. The Predecessor Entity
was founded on August 1, 2000 by Christopher J. Carey, our current Chief
Executive Officer and President, and Lenard J. Berger, Chief Technology Officer
and Salvatore F. D'Ambra, Vice President, Product Development, of our
wholly-owned subsidiary. This founding group has substantial expertise in
systems design, software development, wireless technologies and automotive
dealer software applications. The Predecessor Entity was founded to develop
proprietary handheld wireless technology for the automotive dealer software
market. Since the merger of the Predecessor Entity into our subsidiary, we
continue to conduct the Predecessor Entity's handheld wireless technology
business.
Our DealerAdvance(TM) suite of Customer Relationship Management
("CRM") software, has been designed to maximize revenues and reduce operating
expenses of automobile dealerships. We completed the development of our
DealerAdvance Sales Solution(TM), a software suite designed to increase sales by
effectively capturing a greater percentage of unsold customer prospects and
maximizing customer "be-back" rates. We are in various stages of development of
complimentary CRM systems for our handheld devices, including the DealerAdvance
Service Solution(TM), which is designed to further increase our clients'
revenues and profits by managing dealer service operations, customer information
and vehicle inventory. We are designing our products to be functionally
equivalent to the devices used by automobile rental agencies in which automobile
return and checkout is automated using scanning and other point of sale
technology.
DESCRIPTION OF PRODUCTS
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
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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: enabling a high sales capture rate on
walk-in customers; streamlining and simplifying sales and follow-up processes;
providing current and comprehensive information and data for new and used car
inventory, including information regarding competing products, and customer
history with the dealership; providing performance data and analysis on each
member of a sales team; and providing management with valuable and relevant
transaction information on a real-time basis.
The DealerAdvance Sales Solution(TM) is intended to provide
information about a customer's preferences and automotive needs, name and
address information; reverse phone look-up in order to contact prospective
buyers, authorization to obtain a buyer's credit information, dealer vehicle
information and competitive product comparisons, vehicle inventory status,
integrated purchase forms completion and printing, information regarding used
car appraisals; management reports; and E-mail and Internet access.
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,
31
Washington, DC, Atlanta, Los Angeles, Phoenix, Miami, Seattle, Cleveland, and
Dallas.
Version 3.3, released in August 2003 introduced the concept of a
work-plan, which assists the user in prioritizing follow up for prospective
customers. The work-plan generates a simple daily "to-do" list for each
salesperson, which can be viewed and updated on the handheld. Version 3.3 also
introduced the concept of "prompted follow up" to guide the salesperson through
best of breed follow up processes. The salesperson is prompted to indicate the
action taken to complete an activity and to enter a next activity for the
customer with the goal of scheduling a next activity for a prospective customer
until they either purchase a vehicle or indicate they are no longer in the
market.
As of December 31, 2003, a total of 70 dealers were using the
DealerAdvance Sales Solution(tm), of which approximately 40 had reached or
exceeded the 60-day performance period generally associated with installation.
In January 2004 we installed systems in 2 dealerships in Oregon.
Version 3.4 released in January 2004 introduced integration with
WhosCalling and Call Bright, the two leading providers of phone call management
services. The dealer is assigned several toll free numbers to place in a
specific advertising outlet (newspaper, tv, radio, etc). When the customer dials
the toll free number, the call management service identifies the callers
information (name, address, demographics) and records the call. The call
information and a link to the call recording is passed by the call management
service to DealerAdvance. Version 3.4 introduced the ability to receive Internet
leads in DealerAdvance. An Internet Manager can view leads and follow up via
email with prospective customers that view the dealer's web site or are passed
by 3rd party lead providers. Through a subscription service, in Version 3.4, the
dealer can maintain their compliance with the National Do Not Call Regulations
managed by the FTC. DealerAdvance will automatically determine which customers
are safe to call based on the "established business relationship" rules defined
in the regulations. The system can produce the documentation required to
demonstrate compliance.
We generally grant a 60-day performance guarantee period for each new
installation. If performance goals are met, the contracts become noncancellable
for their terms, usually 36 months. As of December 30, 2003, a total of 69
dealers were using the DealerAdvance Sales Solution(TM), of which approximately
55 had reached or exceeded the 60-day performance period. In the year ended
December 31, 2003, approximately 7 dealers cancelled after the 60-day
performance guarantee period.
NEW PRODUCT DEVELOPMENTS
We have identified five major prospect and customer sources within an
auto dealership that can be leveraged for revenue and profit: walk in showroom
traffic, call-in prospects, internet based leads, the existing owner base of
customers and service prospects. The vision for
DealerAdvance(TM) is to provide a single solution to attack all of
these groups to increase profitability and improve customer service in the
dealership. DealerAdvance(TM) provides information captured from prospects, and
provides automobile dealerships with the ability to manage prospects and
customers through a disciplined follow-up process.
The development plan includes the addition of the following
applications and functions:
o With Version 3.4 introduced in January 2004, we introduced a
Call Management application that is expected to allow
dealerships to automatically capture and track prospects that
contact the dealership via phone. This new program allows
salespeople to retrieve customer information while talking to
the customer and to conduct a needs analysis for handling
prospect phone calls. The Call Management application
automatically generates management logs and reports designed
to identify sales associates that need phone skills training.
In addition, we have partnered with the two leading Call
Management Systems providers, Call Bright and Who's Calling,
who provide 800 number and web based system forwarding
functions to DealerAdvance(TM). We have created a software to
poll the web sites for incoming caller ID and provide prospect
assignment, and comparative analysis relating to follow up
activities. This application is expected to significantly
increase the conversion of call-in prospects to customers.
32
o In Version 3.4 we expanded our offerings to include an initial
application for Internet Lead Management. Most dealerships
secure Internet leads through multiple sources including their
own web site, manufacturers' forwarded leads, and subscription
services including Autobytel and others. These lead sources
are received through DealerAdvance(TM), which processes a
quick response via email, and then passes qualified leads to
sales associates for phone follow-up leading to appointment
setting. We plan several enhancements to this application.
o In January 2004, we also introduced an application that
lessens potential violations of the 2003 federal Do Not Call
regulations. Our system automatically and regularly compares
the prospect and customers within the system to the Do Not
Call registry data base. The application also allows the
dealership personnel to log prospect and customer requests not
to be contacted. The system deletes from the database
telephone numbers that match numbers in the Do Not Call
database.
o In February 2004, we introduced Services Marketing. Services
Marketing is offered in partnership with Market One, LLC.
Through Market One, we offer services in database marketing,
data warehousing, predictive modeling, marketing consulting,
campaign fulfillment, direct mail, telemarketing and surveys,
and Internet communications services. During 2004, we intend
to combine the Services Marketing application from Market One
with follow-up and reporting capabilities within
DealerAdvance(TM), to provide activities reporting for
increasing repeat sales to dealership customers.
o In the third quarter of 2004 we plan to introduce online
consumer credit reporting to our customers through an ASP web
hosted model integrated to inquiries from DealerAdvance(TM).
The service accesses credit reports from Experian, Equifax and
Transunion.
o DealerAdvance(TM) Service Solution, a handheld wireless tablet
for Service Advisors in a dealership is under development.
This system is designed to improve customer service and
reduced vehicle check in time by allowing dealer
representatives to scan a vehicle identification number from
the windshield or door. DealerAdvance(TM) Service Solution
also is designed to provide instant client and vehicle history
including warrantee and service advice, all to the service
technicians' wireless tablet. We expect this product will add
premium-pricing to increase repair order revenue and to add
service marketing through the DealerAdvance CRM application.
OUR REVENUES
Our revenues are primarily received from system installation,
software licenses and system maintenance. The approximate average selling
package price of the system and installation also is $70,000. Additional
revenues are derived from 36 month system maintenance agreements that have a
monthly fee of $850 per month and a total contract value of $30,600. The
revenues derived from these categories are summarized below:
o Software License Revenues: This represents the software
license portion of the Dealer Advance Service Solution
purchased by our customers. The software and intellectual
property of Dealer Advance has been developed and is owned by
us. The average upfront license cost to the customer is
approximately $35,000.
o System Installation Revenues: This represents the installation
and hardware portion of the Dealer Advance Service Solution.
All project management during the installation is performed by
us. The installation and hardware portions include cable
wiring subcontracting services and off the shelf hardware and
handheld computers ("PDA"s). The average upfront installation
cost to the customer is approximately $35,000.
o Monthly Recurring Maintenance Revenue: This represents the
maintenance and support contract for the Dealer Advance
Service Solution that the customer executes with the system
installation. The typical maintenance contract is for 36
months and is $850.00 per month. The average total 36 month
maintenance portion of the contact is $30,600. In our three
year operating history, approximately 50% of all our customers
have prepaid the maintenance fees through a third party
leasing finance company. These prepaid maintenance fees have
provided additional cash flow to us and have generated a
deferred revenue liability on or balance sheet.
33
The average gross profit and cost of sales for the revenues
associated with software licenses and systems installation are summarized in the
following table:
Average Gross Profit per Installation
Software License Revenue $35,000
System Installation Revenue $35,000
--------------------------- -------
Gross Revenue per Installation: $70,000
Gross Profit GP $ GP %
---- ----
Software License Revenue $31,500 90%
System Installation Revenue $12,600 36%
---------------------------
Gross Revenue per Installation: $44,100 63%
Cost of Sales
Software License Revenue $3,500 10%
System Installation Revenue $22,400 64%
---------------------------
Gross Revenue per Installation: $25,900 37%
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:
Our general and administrative expenses include expenses for all
facilities, insurance, benefits, telecommunications, legal and auditing expenses
are included as well as the executive management group wage expense.
Our development & operations expenses include the expenses for the
Client Consultant group which advises and supports the installations of our
Dealer Advance(TM) clients.
RESEARCH AND DEVELOPMENT
Since our inception in September 2000, we have spent approximately
$3,612,685 on research and development activities. While we have been successful
in meeting planned goals in the development and introduction of DealerAdvance
Sales Solution(TM), there can be no assurance that our research and development
efforts will be successful with respect to additional products, or if
successful, that we will be able to successfully commercially exploit such
additional products.
COMPETITION RELATED TO HANDHELD TECHNOLOGY BUSINESS
We do not believe that we have direct competition for our handheld
product. However, we expect competitors in the wireless handheld solutions
market in the future. We compete with the traditional CRM providers and the
emerging new CRM providers in the retail automotive dealer software market.
Some of our potential competitors include:
o Automotive Directions, a division of ADP Dealer Services, and a
provider of PC-based customer relationship management systems as
well as marketing research and consulting services;
o Higher Gear, a provider of client server based front-end sales and
customer relationship management software which serves the retail
automotive industry exclusively;
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.
We have an in-house sales force that distributes its DealerAdvance
Sales Solution(TM) and we continue to grow our Sales and Marketing team, adding
geographically defined territories.
35
OUR INTELLECTUAL PROPERTY
We have a trademark for "DealerAdvance(TM)" and have patent
applications pending to protect a number of information management software
programs. We also plan to file to protect certain proprietary processes
pertaining to systems components, related equipment and software modules.
SUMMARY OF DISCONTINUED TRUFFLE BUSINESS OPERATIONS
From our inception on September 8, 2000, through July 19, 2002, we
imported, marketed and distributed specialized truffle-based food products,
including fresh truffles, truffle oils, truffle pates, truffle creams and
truffle butter, through our former wholly-owned subsidiaries, Terre di Toscana,
Inc. and Terres Toscanes, Inc. Our target market included retailers such as
restaurants, specialty food stores, delicatessens and supermarkets. We imported
products directly from Italian producers and marketed our products in the
specialty food industry primarily in Florida, South Carolina, North Carolina and
California, and also earned commissions on sales made in Belgium, Holland and
Germany. On July 19, 2002, we exchanged all of the shares that we held in our
wholly-owned subsidiaries for 75,000 shares of our Common Stock held by Mr.
Pietro Bortolatti, our former president. As a result of our transfer of our
interest in the truffle business to Mr. Bortolatti him, we are no longer
involved in the truffle business. The sale of these subsidiaries was part of our
effort to focus on the handheld technology business.
EMPLOYEES
As of March 31, 2004, we had a total of 29 full-time employees, of
which 20 are dedicated to marketing and sales and regional customer support. As
of March 31, 2004, we had 1 employee in Arizona, 8 in California, 1 in Florida,
1 in Georgia, 2 in North Carolina, 6 in New Jersey, 1 in Texas, and 9 in
Virginia.
We have no collective bargaining arrangements with our employees. We
believe that our relationship with our employees is good.
DESCRIPTION OF PROPERTIES
We do not currently own any real property. We lease a 6,000 square
foot development facility in Sterling, Virginia, which is staffed with 11
development and field support personnel. We also operate and lease business
development and operations offices in Basking Ridge, New Jersey, and Lafayette,
California. We carry insurance for each of these properties.
We are obligated under these leases through August 2007. In addition
to the base rent, one lease requires us to pay a proportionate share of
operating costs and other expenses.
Future aggregate minimum annual rent payments under these leases are
approximately as follows:
Year ended December 31,
2004 $186,000
2005 $192,000
2006 $100,000
2007 $95,000
2008 $34,000
TOTAL $607,000
Rent expenses were approximately $165,000 for the year ended December
31, 2003.
36
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and
legal proceedings which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these
or other matters may arise from time to time that may harm our business. Except
as disclosed below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
On April 27, 2004, PNC Bank, N.A., as successor by merger to
UnitedTrust Bank filed a complaint in the Superior Court of New Jersey, Law
Division, Union County (Docket No. UNN-L_001522-04) against our company and
Christopher J. Carey, in his capacity as guarantor, to collect the sums
outstanding under the Loan Agreement, dated as of September 30, 2002. On July
15, 2004, we entered into a fully executed forbearance agreement with PNC Bank,
N.A. We made an initial principal payment of $420,000 with the execution of the
forbearance. Additionally, we are required to make four consecutive monthly
installments of $50,000.00 on August 15, 2004, September 15, 2004, October 15,
2004 and November 15, 2004 followed by the remaining principal on or before
December 15, 2004. Failure to adhere to this schedule will cause the suit to be
reinstated and PNC Bank will resume collection of the sum under the suit.
37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors and their respective ages and positions as
of December 31, 2003 are as follows:
Name Age Position(s)
----------------------------------------------------------------------------------------------
Christopher J. Carey............ 51 President, Chief Executive Officer and Director
Lenard Berger................... 34 Chief Technology Officer and Vice President
Robert Nawy..................... 43 Chief Financial Officer
Robert J. Corliss*.............. 50 Director
Robert Cox*..................... 62 Director
William Lenahan*................ 52 Director
Luis Delahoz*................... 43 Director
* Member of audit, compensation and governance/nominating committees.
The business address for each executive officer and director is 106 Allen Road,
Basking Ridge, NJ 07920.
Christopher J. Carey has served as our President and Chief Executive Officer
since May 2002. Mr. Carey is also the founder, President and Chief Executive
Officer of Stronghold, our wholly-owned subsidiary. Since founding Stronghold in
2000, Mr. Carey has set the strategic direction and corporate vision for
Stronghold, drawing on over 25 years of experience building technology-focused
businesses. From 1976 until 1996, Mr. Carey was President and Chief Executive
Officer of Datatec Industries, Inc., which became North America's largest
specialist in the rapid deployment of network and computing systems. After
negotiating a merger with Glasgal Communications in 1996, Mr. Carey became
President of Datatec Systems, Inc., the combined entity until May 2002. Mr.
Carey is currently a member of Board of Trustees of The Albert Dorman Honors
College, New Jersey Institute of Technology, and a past Chairman of the New
Jersey Chapter of the Young President's Organization.
Lenard Berger has served as our Chief Technology Officer and Vice President
since May 2002. Mr. Berger is also the Chief Technology Officer and Vice
President of our company. Prior to the founding of our predecessor entity in
2000, Mr. Berger was the President of eBNetworks, a division of Computer
Horizons, Inc. From 1990 until 1999, Mr. Berger was the Vice President of RPM
Consulting, Inc.
Robert Nawy joined Stronghold on July 22, 2003 and is responsible for financial
management, with emphasis on strategic planning and day-to-day financial
operations of the business. Mr. Nawy became the Chief Financial Officer in the
fourth quarter of 2003. Nawy is a CPA, holds an MBA and is financial management
veteran in the information technology industry, with over 19 years of experience
in both public and privately held companies. Prior to joining us, Mr. Nawy
served as CFO of Exenet Technologies, Inc. from 2001 through 2003 Prior to
Exenet, Mr. Nawy served as CFO for Maden Technologies, Inc. 1998 to 2001.
Robert J. Corliss has been a director since May 2002. Mr. Corliss has been,
since 1998, the President and Chief Executive Officer of the Athlete's Foot
Group, Inc., a privately owned, 800-store retail chain with operations in 50
countries. Since 1999, Mr. Corliss has been a member of the board of Kahala
Corporation, a publicly traded franchising corporation dedicated to the design,
development and marketing of quick service restaurants serving nutritious
38
products. From 1996 until 1998, Mr. Corliss was the President and Chief
Executive Officer of Infinity Sports, Inc., a manufacturer, distributor and
licensor of athletic products primarily under the brand Bike Athletic. Prior to
founding Infinity Sports, Inc., Mr. Corliss was the Chief Executive Officer and
President of Hermann's Sporting Goods retail chain. Mr. Corliss serves on the
Advisory Council for the Sporting Goods Manufacturers Association's recently
announced Physical Education for Progress (P.E.P.) initiative. Additionally, Mr.
Corliss serves as a Director and Executive Committee member of the National
Retail Federation and the National Retail Foundation and serves on the board of
directors for The World Federation of the Sporting Goods Industry and serves on
the board of directors of The Athlete's Foot Group, Inc. He is also an Advisor
for Emory University's Goizueta Business School.
Robert Cox has been a director since May 2002. Mr. Cox is a retired business
executive. From 1996 until 2000, Mr. Cox served as President and a Director of
Summit Bancorp, a $39 billion NJ bank holding company. Mr. Cox was the Chief
Executive Officer of The Summit Bancorporation from 1994 until 1996, when Summit
Bancorporation merged into UJB Financial. Mr. Cox is currently a member the
Board of Trustees of NJ SEEDS, a statewide educational not-for-profit. Mr. Cox
also sits on the board of directors of the Bay View Bank and the Bay View
Capital Corporation in San Mateo, CA. Mr. Cox is a former Chairman of the New
Jersey Bankers Association and is an honorary chairman of its board of
directors.
William Lenahan has been a director since May 2002. Mr. Lenahan has been the
Chief Executive Officer of KMC Telecom Holdings, Inc. since 2000. KMC is a $500
million nationwide provider of next generation telecommunications, including
outsourcing services, consulting and financing for metro access and advanced
voice, data and Internet services to business customers. Mr. Lenahan was the
President and CEO of BellSouth Wireless Data (currently Cingular Wireless) from
1984 to 2000 and was responsible for financial performance and nationwide
wireless data strategy for this division of BellSouth Corporation. Mr. Lenahan
has served nearly 30 years in the information technology, telecommunications and
data industries. He presently serves on the board of directors of Broadbeam
Corporation.
Luis Delahoz has been a director since May 2002. Mr. Delahoz is the current
President and Chief Executive Officer of TWS International, Inc., a leading
provider of professional technical consulting services to the rapidly growing
telecommunications industry. From 1998 until 2001, Mr. Delahoz was the Executive
Vice President of Client Soft, Inc., a provider of e-business solutions. In
1996, Mr. Delahoz co-founded TOC Global Communications, Inc., where he served as
Vice President until 1998. Currently, Mr. Delahoz is a member of the board of
directors of TWS, Inc. and TWS International, Inc.
EXECUTIVE OFFICERS
Christopher J. Carey, Lenard Berger and Robert Nawy each have employment
contracts with our company. The remaining officers serve at the discretion of
our board of directors and holds office until his successor is elected and
qualified or until his earlier resignation or removal. There are no family
relationships among any of our directors or executive officers.
BOARD COMMITTEES
Our board of directors has an audit committee, compensation committee
and governance/nominating committee. The audit committee reviews the results and
scope of the audit and other services provided by our independent public
accountant. The audit committee does not currently have an "audit committee
financial expert", as defined by the SEC, due to our status as an
early-development stage company. We are in the process of identifying an audit
committee financial expert to join its board of directors and audit committee.
The compensation committee establishes the compensation policies
applicable to our executive officers and administers and grants stock options
pursuant to our stock plans. The governance/nominating committee oversees board
procedures and nominates prospective members of the board should a vacancy
arise. The current members of each of the audit, compensation and
governance/nominating committees are Messrs. Corliss, Cox, Lenahan and Delahoz.
39
CODE OF ETHICS
Because we are an early-development stage company with limited
resources, we have not yet adopted a "code of ethics", as defined by the SEC,
that applies to our Chief Executive Officer, Chief Financial Officer, principal
accounting officer or controller and persons performing similar functions. We
are in the process of drafting and adopting a Code of Ethics.
DIRECTOR COMPENSATION
We have granted an initial one-time option grant to purchase 40,000
shares of common stock to each non-employee board member upon election to our
board of directors. This one-time grant was awarded to the current non-employee
board members on October 7, 2003. The options will vest 50% on each of the first
and second anniversaries of the date of grant. In addition, each non-employee
director will be granted, on an annual basis, an option to purchase 30,000
shares of our common stock, which will vest 50% on each of the first and second
anniversaries of the date of grant. We have not yet granted the annual option
grants to our board of directors, but intend to do so as soon as reasonably
practicable after the filing of this Form 10-KSB. All stock options granted to
members of our board of directors will have exercise prices equal to the fair
market value of the Common Stock on the date of grant. We also reimburse
directors for reasonable out-of-pocket expenses incurred in attending meetings
of the board of directors and any meetings of its committees.
40
EXECUTIVE COMPENSATION
The following table sets forth executive compensation for fiscal
years ended December 31, 2003, 2002 and 2001. We have not paid any salaries or
bonuses to any of our officers from our inception through the date hereof. All
of our executive officers also serve as officers of and are paid by our
operating subsidiary. The following table shows compensation paid during the
fiscal years ended December 31, 2002 and 2001 by our wholly owned subsidiary to
our former president and other former executive officers. The table also
provides information regarding executive compensation for our wholly owned
subsidiary's current president and three other most highly compensated executive
officers. We refer to all of these officers collectively as our "named executive
officers."
SUMMARY COMPENSATION TABLE
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
------------------------------------------ ---- -------- ------- ------------ ------------
Former Officers and Directors
------------------------------------------
Pietro Bortolatti 2003 -- -- -- --
President, Chief Executive Officer and
Chairman of the Board
2002 -- -- 20,500(1) --
2001 -- -- -- --
Tiziana DiRocco 2003 -- -- -- --
Vice President Director of 2002 -- -- -- --
European Operations 2001 -- -- 15,370(1) --
David Rector 2003 -- -- -- --
Director 2002 -- -- -- --
2001 -- -- -- 16,244(2)
Current Officers(3)
------------------------------------------
Christopher J. Carey(4) 2003 300,000 9,600
President, Chief Executive Officer and 2002 264,000 -- -- 9,601
And Chairman of the Board 2001 165,000 -- -- 9,602
Lenard Berger(5) 2003 175,000 -- 29,963 7,200
Vice President and Chief Technology 2002 160,416 22,558 28,025 7,100
Officer 2001 150,000 -- 2,804 7,150
Salvatore D'Ambra(6) 2003 134,375 -- 27,135 5,912
Vice President - Development 2002 121,397 -- 8,000 6,600
2001 106,782 -- 2,818 6,600
Robert Nawy(8) 2003 82,967 -- -- 2,398
Chief Financial Officer 2002 -- -- -- --
2001 -- -- -- --
1 Commissions of sales from Terre Di Toscana, Inc., and Terres Toscanas, Inc.
2 Includes consulting service fees paid to the David Stephen Group, of which
David Rector, our former director, is a principal.
3 On May 16, 2002, our wholly-owned subsidiary merged with a New Jersey
corporation, Stronghold Technologies, Inc. Our wholly-owned subsidiary survived
and changed its name to Stronghold Technologies, Inc. ("Stronghold").
4 Christopher J. Carey became our President and Chief Executive Officer on May
16, 2002, following the merger. Mr. Carey also remains the President, Chief
Executive Officer and the sole Director of Stronghold. Mr. Carey's base salary
from May 15, 2002 until December 31, 2002 was $260,000, as set forth in his
Employment Agreement with Stronghold. The terms of Mr. Carey's Employment
41
Agreement are more fully set forth below. "All Other Compensation" consists
solely of the reimbursement of automobile expenses. All of Mr. Carey's salary
for 2002 has been deferred and accrued.
5 Lenard Berger has been our Vice President and Chief Technology Officer since
the merger, and holds the same positions with our wholly owned subsidiary. Mr.
Berger's base salary for the period of July 2001 through July 2002 was $112,000,
as set forth in his Employment Agreement. As of July 2002, Mr. Berger's salary
increased to $122,000. The terms of Mr. Berger's Employment Agreement are more
fully set forth below. "Other Annual Compensation" consists solely of sales
commissions. "All Other Compensation" consists solely of the reimbursement of
automobile expenses.
6 Salvatore D'Ambra has been our Vice President - Development of our wholly
owned subsidiary from the merger until November 12, 2003. Mr. D'Ambra's base
salary for the period of August 2001 through August 2002 was $150,000, as set
forth in his Employment Agreement. As of August 2002, Mr. D'Ambra's salary
increased to $175,000. Mr. D'Ambra resigned from his position with our wholly
owned subsidiary in November 2003.
7 James J. Cummiskey has been our Vice President - Sales of our wholly owned
subsidiary from the merger until January 27, 2003. Mr. Cummiskey's base salary
for the period of August 2001 through August 2002 was $192,000, as set out in
his Employment Agreement. As of August 2002, Mr. Cummiskey's salary increased to
$195,763. Mr. Cummiskey resigned from Stronghold on January 27, 2003.
8 Robert Nawy joined Stronghold on July 22, 2003 as Assistant Chief Financial
Officer and became the Chief Financial Officer in November 2003. Mr. Nawy's base
salary for the period of June 2003 through July 2004 is $180,000, as set out in
his Employment Agreement.
OPTIONS GRANTS
The following table sets forth information concerning individual grants of stock
options under the 2002 Stock Incentive Plan during the fiscal year ended
December 31, 2003 to each of the named executive officers.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2003
% of Total Options
Granted Exercise or
Number of Securities to Employees Base
Name Underlying Options in 2002 Price ($/Sh) Grant Date
-------------------------------- --------------------- --------------------------- ------------- -----------
Lenard Berger 153,100 10.7% $0.60 7/22/03
Robert Nawy 50,000 3.5% $0.60 7/22/03
Robert Nawy 200,000 14% $0.03 12/19/03
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
CHRISTOPHER J. CAREY
On May 15, 2002, we assumed the employment agreement that was in
place between Christopher J. Carey and the Predecessor Entity. Under the terms
of the agreement, Mr. Carey's employment as Chairman of the Board, President and
Chief Executive Officer of will continue until December 31, 2004, unless
terminated sooner. The agreement may be renewed through mutual agreement of the
parties. Mr. Carey receives a base salary of $260,000 per year. Such base salary
was increased effective January 1, 2003, to the annualized rate of $300,000 and
increased, effective January 1, 2004, to the annualized rate of $350,000. Such
salary will be reviewed annually and is subject to increase as determined by our
board of directors or the Compensation Committee in its sole discretion.
The employment agreement provides that each fiscal year after fiscal
year 2002, Mr. Carey will be eligible to receive an annual bonus based upon our
meeting and exceeding our annual budget, as same has been reviewed and approved
by the board of directors for earnings before interest, taxes, depreciation and
amortization, referred to as EBITDA. This bonus will be earned according to the
42
following: (i) if we achieve 90-100% of budgeted EBITDA, Mr. Carey will receive
a bonus of 10% of his then current annual base salary; (ii) if we achieve
101-110% of budgeted EBITDA, Mr. Carey will receive a total bonus of 20% of his
then current annual base; and (iii) if we achieve 111-120% of budgeted EBITDA,
Mr. Carey will receive a total bonus of 30% of his then current annual base
salary; (iv) if we achieve 121-130% of budgeted EBITDA, Mr. Carey will receive a
total bonus of 40% of his then current annual base salary; (v) if we achieve
131-140% of budgeted EBITDA, Mr. Carey will receive a total bonus of 50% of his
then current annual base salary; (vi) if we achieve 141-150% of budgeted EBITDA,
Mr. Carey will receive a total bonus of 55% of his then current annual base
salary; and (vii) if we achieve 151% or more of budgeted EBITDA, Mr. Carey will
receive a total bonus of 60% of his then current annual base salary. The bonus,
if any, shall be paid in one lump sum within sixty (60) days after the close of
the fiscal year for which it was earned. To date, Mr. Carey has not been awarded
a bonus.
In accordance with the agreement, the Predecessor Entity granted to
Mr. Carey stock options under the 2000 Stock Option Plan for the purchase of an
aggregate of 200,000 shares of the Predecessor Entity's common stock at an
option exercise price equal of $1.50 per share, the fair market value of the
underlying common stock on the date of the grant. Such option converted into an
option to purchase 437,500 shares of our Common Stock when we merged with the
Predecessor Entity and our wholly-owned subsidiary, Stronghold, assumed the 2000
Stock Option Plan. While Mr. Carey is employed by our comapny, the option will
become exercisable on the earlier of: (i) the seventh anniversary of May 15,
2002; or (ii) the achievement of the performance goals set forth above in the
paragraph above.
Upon a change in control of our company, the unvested portion of the
options shall immediately vest and become exercisable by Mr. Carey. If we
terminate Mr. Carey's employment (i) after the expiration of the term of
employment; or (ii) with cause; or if Mr. Carey resigns for no good reason, he
will receive all accrued compensation and vested benefits. If we terminate his
employment without cause, Mr. Carey will receive all unpaid accrued
compensation, vested benefits and a severance benefit equal to his base salary
until the earlier of the balance of the term of his agreement, the renewal term
or twelve months following the date of termination.
Mr. Carey's agreement contains a confidentiality provision and
further provides that Mr. Carey may not work for, or hold 1% or more of the
outstanding capital stock of a publicly traded corporation, which is a competing
business anywhere in the world for one year after the conclusion of his
employment. Mr. Carey has not expressed a desire to leave.
LENARD BERGER
On August 1, 2000, the Predecessor Entity entered into an employment
agreement with Lenard Berger, which we assumed. Under the terms of the
agreement, Mr. Berger's employment as Vice President, Chief Technology Officer
will continue until July 31, 2005 unless sooner terminated. The agreement may be
renewed through mutual agreement of the parties. Mr. Berger received a base
salary of $10,500 per month during the first six months of the term of the
agreement and $12,500 per month commencing February 1, 2001. During the second
year of the term of the agreement, Mr. Berger's base salary will be $150,000,
but may increase to $175,000 if the our Net Sales achieved in the first year of
the term of the agreement equal or exceed $2,000,000. During the third year of
the term of the agreement, Mr. Berger's base salary will be $175,000, but may
increase to $200,000 if our Net Sales achieved in the second year of the term of
the agreement equal or exceed $10,000,000. During the fourth and fifth years of
the term of his agreement, Mr. Berger's base salary will be increased annually
by a percentage determined by the Consumers Price Index. Beginning his second
year of employment, Mr. Berger is eligible for a commission not to exceed
$50,000 for any year during the balance of the term of the agreement. The
commission is equal to 1% of net sales, which is determined by subtracting
certain costs from the gross sales of products and services. To date, Mr. Berger
has not been awarded a commission. Mr. Berger is also eligible to receive extra
compensation at the discretion of our board of directors, a car allowance and
any insurance and 401(k) plans provided by the employer.
Pursuant to his employment agreement, Mr. Berger received an option
grant to purchase 100,000 shares of the Predecessor Entity's common stock. Such
option converted into an option to purchase 218,750 shares of our common stock
when we merged with the Predecessor Entity. The vesting schedule for such grant
is set forth above under the section entitled "Option Grants". Upon a change of
control of our company, 50% of any unvested options shall become vested and
exercisable immediately. If we register shares of common stock in an initial
public offering, Mr. Berger has the right to include any shares of common stock
that he owns in the registration.
43
If we terminate Mr. Berger's employment without cause, he will
receive payment of his base salary in effect at the time of his termination for
a period of one month. If Mr. Berger resigns for good reason after the first
full year of employment, Mr. Berger shall receive as his severance pay the
lesser of (x) base salary payable for the balance of the then existing term of
the agreement or (y) two months' base salary, plus one week's base salary for
each full or part year worked after the first year of employment.
Mr. Berger's agreement provides that all rights to discoveries,
inventions, improvements, and innovations related to our business that
originates during the term of Mr. Berger's employment will be the exclusive
property of our company. Mr. Berger's agreement also contains a confidentiality
provision and further provides that Mr. Berger may not work for or hold 5% or
more of the outstanding capital stock of a publicly traded corporation, which is
a competing business anywhere in the world for one year after the conclusion of
his employment. Mr. Berger has not expressed a desire to leave our company.
ROBERT NAWY
On June 23, 2003, we entered into an employment agreement with Robert
Nawy. Under the terms of the agreement, Mr. Nawy's employment as Chief Financial
Officer will continue until July 31, 2006, unless terminated sooner. The
agreement may be renewed through mutual agreement of the parties. Mr. Nawy
receives a base salary at an annualized rate of $180,000 from July 28, 2003
until July 31, 2004. From August 1, 2004 to July 31, 2006, Mr. Nawy's salary
will be increased annually by a percentage determined by the Consumers Price
Index. Such salary will be reviewed annually and is subject to increase as
determined by the board of directors or the Compensation Committee in its sole
discretion.
The employment agreement provides that each fiscal year after fiscal
year 2003, Mr. Nawy will be eligible to receive an annual bonus based upon our
meeting and exceeding its annual budget, as same has been reviewed and approved
by the board of directors for earnings before interest, taxes, depreciation and
amortization, referred to as EBITDA. This bonus will be earned according to the
following: (i) if we achieve 65-99% of budgeted EBITDA, Mr. Nawy will receive a
bonus of 10% of his then current annual base salary; (ii) if we achieve 100-124%
of budgeted EBITDA, Mr. Nawy will receive a total bonus of 20% of his then
current annual base; and (iii) if we achieve 125% or more of budgeted EBITDA,
Mr. Nawy will receive a total bonus of 30% of his then current annual base
salary The bonus, if any, shall be paid in one lump sum within sixty (60) days
after the close of the fiscal year for which it was earned. To date, Mr. Nawy
has not been awarded a bonus.
In accordance with the agreement, we granted to Mr. Nawy stock
options under the 2002 Stock Option Plan for the purchase of an aggregate of
200,000 shares of our common stock at an option exercise price equal to $0.80
per share, the fair market value of the underlying common stock on the date of
the grant. While Mr. Nawy is employed by us, the options will become exercisable
at the rate of 25,000 options on July 28, 2003, 60,000 options on July 31, 2004,
60,000 options on July 31, 2005 and 55,000 options on July 31, 2006.
Upon a change in control of our company, an additional 50% of the
unvested portion of the options shall immediately vest and become exercisable by
Mr. Nawy.
If we terminate Mr. Nawy's employment without cause within one year
following a change of control, or Mr. Nawy resigns after one year following a
change of control, he will receive all accrued compensation and vested benefits.
If we terminate his employment without cause, Mr. Nawy will receive a severance
benefit equal to: one month salary if termination occurs within the first six
months of employment; two months salary if termination occurs within the second
six months of employment; and the lesser of the balance of the term of the
agreement and three months if termination occurs after completion of one full
year of employment.
Mr. Nawy's agreement contains a confidentiality provision and further
provides that Mr. Nawy may not work for, or hold 1% or more of the outstanding
capital stock of a publicly traded corporation, which is a competing business
anywhere in the world for one year after the conclusion of his employment. Mr.
Nawy has not expressed a desire to leave.
44
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 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, Pietro Bortolatti 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.
45
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.
46
Under the promissory note, the principal amount and accrued interest is
due and payable in six equal consecutive quarterly installments commencing on
the date which is two business days after April 15, 2003. Each subsequent
quarterly installment will be paid two days after we file each subsequent Form
10-QSB or Form 10-KSB. Interest accrues under the promissory note at an annual
rate of 10%. If our net income does not meet certain benchmarks, then either the
principal balance and accrued interest due for the quarter will be deferred and
the repayment will be amortized during the remaining quarters or, depending upon
the net income amount achieved, the principal balance and accrued interest due
will be automatically converted into shares of our Common Stock, at a conversion
price equal to the average closing price of our common stock for the twenty (20)
trading days immediately preceding the date of conversion. The promissory note
is expressly subordinated in right of payment to the prior payment in full of
all of our senior indebtedness.
On September 14, 2002, we issued 5,000,000 shares of our common stock to
our former president, Pietro Bortolatti, in exchange for the transfer from Mr.
Bortolatti of all of the outstanding shares of Terre di Toscana, Inc. to us. The
assets of Terre di Toscana, Inc. included rights in several customer agreements.
We valued the 5,000,000 shares issued to Mr. Bortolatti at par value, $.0001 per
share. As part of our merger with the Predecessor Entity and the exchange of
shares for our truffle business, Mr. Bortolatti has surrendered or exchanged all
of such shares.
In August 2002, one of our outside directors, Robert Cox, purchased 60,000
shares of our common stock at a purchase price of $1.50 per share for aggregate
proceeds to us of $90,000. Such purchase was pursuant to a Subscription
Agreement in which Mr. Cox made certain investment representations and
warranties. The price paid by Mr. Cox had been negotiated by third parties in an
arms-length transaction. The third parties who negotiated the transaction
purchased a number of shares concurrently with Mr. Cox.
In January 2004, our outside director, Robert Cox, purchased an additional
147,059 shares and a warrant to purchase 73,529 shares at $0.59/share. The price
of $0.59/share was based on 130% of the trailing five day closing price of our
common stock on the effective purchase date of January 9, 2004.
Lenard Berger, our Chief Technology Officer and Vice President and James
Cummiskey, our Vice President of Sales and Marketing, received 200,000 shares of
common stock from the Predecessor Entity as founders of such entity, at a per
share price of $0.005. Such shares converted into 437,400 shares of our Common
Stock.
On September 30, 2002, we entered into a loan agreement with CC Trust Fund
to borrow an amount up to $355,128. This bridge loan was for a period of twelve
months, with all principal due and payable on September 30, 2003. The 12.5%
interest on the outstanding principal is due each year. At the end of the loan
period, the CC Trust Fund will be entitled to exercise 25,000 warrants at $1.50
per share. As of March 31, 2003, $355,128 was outstanding under the CC Trust
Fund loan agreement. On September 30, 2003, the CC Trust Fund agreed to extend
the term of their loan to December 30, 2003. On December 30, 2003, the CC Trust
Fund agreed to extend the term of their loan to March 31, 2004. On March 30,
2004, the CC Trust Fund agreed to extend the term of their loan to March 31,
2005. As of December 31, 2003, $355,128 was outstanding under the CC Trust Fund
loan agreement. Christopher Carey Jr., Mr. Carey's son, is the beneficiary of
the trust, and Mary Carey, Mr. Carey's wife, is the trustee of the trust.
On September 30, 2002, we entered into a loan agreement with AC Trust Fund
to borrow an amount up to $375,404. This bridge loan is for a period of twelve
months, with all principal due and payable on September 30, 2003. The 12.5%
interest on the outstanding principal is due each year. At the end of the loan
period, the AC Trust Fund will be entitled to exercise 25,000 warrants at $1.50
per share. On September 30, 2002, the AC Trust Fund agreed to extend the term of
their loan to December 30, 2003. On December 30, 2003, the AC Trust Fund agreed
to extend the term of their loan to March 31, 2004. On March 30, 2004, the AC
Trust Fund agreed to extend the term of their loan to March 31, 2005. As of
December 31, 2003, $375,404 was outstanding under the AC Trust Fund loan
agreement. Amie Carey, Mr. Carey's daughter, is the beneficiary of the trust,
and Mary Carey, Mr. Carey's wife, is the trustee of the trust.
In October 2002, in connection with a loan to our company in the amount of
$165,000, we issued a promissory note to Christopher J. Carey for $165,000. Such
promissory note was due on or before December 31, 2003. On March 30, 2004, Mr.
Carey agreed to extend the term of his loan to March 31, 2005. Until such time
as the principal is paid, interest on the note will accrue at the rate of 12.5%
per year.
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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.
48
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 14, 2004. The information in this table
provides the ownership information for:
o each person known by us to be the beneficial owner of more than 5%
of our Common Stock;
o each of our directors;
o each of our executive officers; and
o our executive officers and directors as a group.
Beneficial ownership has been determined in accordance with the rules and
regulations of the SEC and includes voting or investment power with respect to
the shares. Unless otherwise indicated, the persons named in the table below
have sole voting and investment power with respect to the number of shares
indicated as beneficially owned by them. Common Stock beneficially owned and
percentage ownership is based on 13,438,277 shares outstanding on July 14, 2004,
and assuming the exercise of any options or warrants or conversion of any
convertible securities held by such person, which are presently exercisable or
will become exercisable within 60 days after July 14, 2004.
Number of Shares Percentage
Name and Address of Beneficial Owner Beneficially Owned Outstanding
------------------------------------ ------------------ -----------
5% Stockholders
------------------------------------
Christopher J. Carey
450 Claremont Road
Bernardsville, NJ 07924 5,131,250(1) 25.80
Stanford Venture Capital Holdings, Inc.
6075 Poplar Avenue
Memphis, TN 38119 7,447.194(2) 37.45
Other Executive Officers and Directors
------------------------------------
Lenard Berger 437,600 2.2
Robert J. Corliss -- --
Robert Cox 207,059 1.0
William Lenahan -- --
Luis Delahoz -- --
Robert Nawy 200,000(3) 1.0
----------- -----
Executive Officers and Directors as a Group
(7 people) 5,975,909 30.05
(1) 3,937,500 of these shares are owned by Christopher J. Carey and his wife,
Mary Carey, as Joint Tenants with Right of Survivorship.
(2) The total beneficial ownership of Stanford Venture Capital Holdings, Inc. is
7,447,194 shares which consists of: (i) 2,002,750 shares of Common Stock
issuable upon the conversion of 2,002,750 shares of our Series A Preferred
Stock; and (ii) 2,444,444 shares of Common Stock issuable upon the conversion of
2,444,444 shares of our Series B Preferred Stock, (iii) 1,000,000 shares of
Common Stock issued upon exercise of warrants, (iv) 875,000 of Common Stock and
49
(v) 2,000,000 shares of Common Stock issuable upon the exercise of warrants.
James M. Davis has voting and investment control over the securities held by
Stanford Venture Capital Holdings, Inc., but he disclaims beneficial ownership
of such securities, except to the extent of any pecuniary interest therein.
(3) Includes an option grant to purchase 200,000 shares of Common Stock which
was immediately exercisable on the date of grant.
EQUITY COMPENSATION IN FISCAL 2003
The following table provides information about the securities authorized
for issuance under our equity compensation plans as of December 31, 2003.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance
exercise of outstanding options under equity compensation plans (2)
outstanding options (1)
------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 1,909,309 $ 0.86 638,450
approved by security holders
Equity compensation plans not -- -- --
approved by security holders
Total 1,909,309 $ 0.86 638,450
(1) Issued pursuant to our 2002 Stock Incentive Plan, our 2002 California Stock
Incentive Plan, and our 2000 Stock Option Plan.
(2) 625,950 shares are available for future issuance pursuant to the 2002 Stock
Incentive Plan and 12,500 shares are available for future issuance pursuant to
the 2002 California Stock Incentive Plan. We do not intend to issue any
additional options under our 2000 Stock Option Plan.
50
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK
We are authorized to issue up to 50,000,000 shares of common stock, par
value $.0001. As of July 14, 2004, there were 13,438,277 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.
On June 15, 2004, the stockholders of our company holding a majority of
the outstanding shares of common stock approved an amendment to our Articles of
Incorporation to increase the number of authorized shares of common stock from
50,000,000 to 250,000,000. On July 25, 2004, we filed a preliminary information
statement disclosing the increase with the Securities and Exchange Commission.
We will amend our Articles of Incorporation to increase the authorized common
stock 20 days after the mailing of the definitive information statement to
stockholders.
We have appointed Continental Stock Transfer & Trust Company, 17 Battery
Place, New York, New York 10004, as transfer agent for our shares of Common
Stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act" or "Securities Act") may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
51
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.
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.
52
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.
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.
53
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants unless the selling stockholders
exercise the warrants on a cashless basis. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
-----------------------------------------------------------------------------------------------------------------------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Notes Full Prospectus Before the Owned Before Offering Offering
and/or Warrants* Conversion (1) Offering** Offering** (4) (4)
-----------------------------------------------------------------------------------------------------------------------------
AJW Offshore, Ltd. 11,880,000 60.28% Up to 705,789 (2) 4.99% -- --
(3) 10,098,000
shares of
common stock
-----------------------------------------------------------------------------------------------------------------------------
AJW Qualified 13,530,000 50.17% Up to 705,789 (2) 4.99% -- --
Partners, LLC (3) 11,500,500
shares of
common stock
-----------------------------------------------------------------------------------------------------------------------------
AJW Partners, LLC 6,270,000 31.81% Up to 705,789 (2) 4.99% -- --
(3) 5,329,000
shares of
common stock
-----------------------------------------------------------------------------------------------------------------------------
New Millennium 1,320,000 4.49% Up to 705,789 (2) 4.99% -- --
Capital Partners 1,122,000
II, LLC (3) shares of
common stock
-----------------------------------------------------------------------------------------------------------------------------
* This column represents an estimated number based on a conversion price as of a
recent date of July 16, 2004 of $.092, 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.
54
(1) Includes a good faith estimate of the shares issuable upon conversion of the
secured convertible notes and exercise of warrants, based on current market
prices. Because the number of shares of common stock issuable upon conversion of
the secured convertible notes is dependent in part upon the market price of the
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 14, 2004, the
conversion price would have been $.10.
(2) The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued or
issuable upon conversion of the secured convertible notes and exercise of the
related warrants by reason of any stock split, stock dividend or similar
transaction involving the common stock, in accordance with Rule 416 under the
Securities Act of 1933. However the selling stockholders have contractually
agreed to restrict their ability to convert their secured convertible notes or
exercise their warrants and receive shares of our common stock such that the
number of shares of common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of common
stock set forth in the table for the selling stockholders exceeds the number of
shares of common stock that the selling stockholders could own beneficially at
any given time through their ownership of the secured convertible notes and the
warrants. In that regard, the beneficial ownership of the common stock by the
selling stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
(3) The selling stockholders are affiliates of each other because they are under
common control. AJW Partners, LLC is a private investment fund that is owned by
its investors and managed by SMS Group, LLC. SMS Group, LLC, of which Mr. Corey
S. Ribotsky is the fund manager, has voting and investment control over the
shares listed below owned by AJW Partners, LLC. AJW Offshore, Ltd., formerly
known as AJW/New Millennium Offshore, Ltd., is a private investment fund that is
owned by its investors and managed by First Street Manager II, LLC. First Street
Manager II, LLC, of which Corey S. Ribotsky is the fund manager, has voting and
investment control over the shares owned by AJW Offshore, Ltd. AJW Qualified
Partners, LLC, formerly known as Pegasus Capital Partners, LLC, is a private
investment fund that is owned by its investors and managed by AJW Manager, LLC,
of which Corey S. Ribotsky and Lloyd A. Groveman are the fund managers, have
voting and investment control over the shares listed below owned by AJW
Qualified Partners, LLC. New Millennium Capital Partners II, LLC, is a private
investment fund that is owned by its investors and managed by First Street
Manager II, LLC. First Street Manager II, LLC, of which Corey S. Ribotsky is the
fund manager, has voting and investment control over the shares owned by New
Millennium Capital Partners II, LLC. We have been notified by the selling
stockholders that they are not broker-dealers or affiliates of broker-dealers
and that they believe they are not required to be broker-dealers.
(4) Assumes that all securities registered will be sold.
TERMS OF SECURED CONVERTIBLE NOTES
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on June 18, 2004 for the sale
of (i) $3,000,000 in callable secured convertible notes and (ii) warrants to buy
3,000,000 shares of our common stock. This prospectus relates to the resale of
the common stock underlying these secured convertible notes and warrants. The
investors are obligated to provide us with an aggregate of $3,000,000 as
follows:
o $1,500,000 was disbursed on June 18, 2004;
o $500,000 will be disbursed within five days of the filing of this
registration statement; and
o $1,000,000 will be disbursed within five days of this prospectus
being declared effective.
Accordingly, we have received a total of $1,500,000 pursuant to the
Securities Purchase Agreement. The funds from the sale of the callable secured
convertible notes will be used for business development purposes, business
acquisitions, working capital needs, pre-payment of interest, payment of
consulting and legal fees and borrowing repayment.
55
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible into our common stock, at
the investors' option, at the lower of (i) $0.70 or (ii) 50% of the average of
the three lowest intraday trading prices for the common stock on a principal
market for the 20 trading days before but not including the conversion date. The
full principal amount of the callable secured convertible notes is due upon
default under the terms of secured convertible notes. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.57 per share. In addition, the conversion price of the secured convertible
notes and the exercise price of the warrants will be adjusted in the event that
we issue common stock at a price below the fixed conversion price, below market
price, with the exception of any securities issued in connection with the
Securities Purchase Agreement. The conversion price of the callable secured
convertible notes and the exercise price of the warrants may be adjusted in
certain circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution of the selling
stockholder's position. The selling stockholders have contractually agreed to
restrict their ability to convert or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock held by them
and their affiliates after such conversion or exercise does not exceed 4.99% of
the then issued and outstanding shares of common stock. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights.
The warrants are exercisable until five years from the date of issuance at
a purchase price of $0.57 per share. The selling stockholders will be entitled
to exercise the warrants on a cashless basis if the shares of common stock
underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the callable
secured convertible notes issued pursuant to the Securities Purchase Agreement,
dated June 18, 2004.
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholder's position.
The selling stockholders have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them in the aggregate and their affiliates after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreement and related documents
are filed with the SEC as exhibits to our Form SB-2 relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the notes
is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of $3,000,000 of notes on July 14, 2004, a conversion price of $0.10
per share, the number of shares issuable upon conversion would be:
$3,000,000/$.092 = 32,608,696 shares
56
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the Notes (excluding accrued interest),
based on market prices 25%, 50% and 75% below the current conversion price, as
of July 16, 2004 of $0.183.
Number %of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
25% $ .1373 $ .0686 43,715,847 76.49%
50% $ .0915 $ .0458 65,573,770 82.99%
75% $ .0458 $ .0229 131,147,541 90.71%
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Rothstein Kass - Certified Public Accountants, have audited, as set forth
in their report thereon appearing elsewhere herein, our financial statements at
December 31, 2003 and 2002 and for the years then ended that appear in the
prospectus. The financial statements referred to above are included in this
prospectus with reliance upon the independent registered public accounting
firm's opinion based on their expertise in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Stronghold Technologies, Inc., filed as
part of the registration statement, and it does not contain all information in
the registration statement, as certain portions have been omitted in accordance
with the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C.
20549. Copies of such material can be obtained from the Public Reference Section
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
57
INDEX TO FINANCIAL STATEMENTS
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2004 and March 31, 2003
Consolidated Balance Sheets March 31, 2004 (Unaudited)
and December 31, 2003 F-1
Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003 (Unaudited) F-2
Consolidated Statements of Cash Flows For the three months
ended March 31, 2004 and 2003 (Unaudited) F-3
Notes to the Consolidated Financial Statements (Unaudited) F-4 to
F-9
For the Years Ended December 31, 2003 and December 31, 2002
Report of Independent Registered Public Accounting Firm F-10
Consolidated Balance Sheets F-11
Consolidated Statement of Operations F-13
Consolidated Statement of Deficiency in Stockholders Equity F-14
Consolidated Statement of Cash Flows F-16
Notes to Consolidated Financial Statements F-18 to
F-30
58
Stronghold Technologies, Inc. and Subsidiary Consolidated Balance Sheet March
31, 2004 (Unaudited)
MARCH 31, 2004
ASSETS
Current assets
Cash $ 52,955
Accounts receivable, less allowance for returns and
doubtful accounts of $184,067 703,035
Inventories 119,025
Prepaid expenses 31,328
---------------
Total current assets 906,343
---------------
Property and equipment, net 142,959
---------------
Other assets
Software development costs, net of amortization 830,170
Other 152,438
---------------
Total other assets 982,608
---------------
$ 2,031,910
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 697,300
Accrued expenses and other current liabilities 2,294,947
Interest payable, stockholders 420,000
Notes payable, stockholders, current portion 390,000
Note payable 1,186,667
Obligations under capital leases, current portion 45,827
---------------
Total current liabilities 5,034,741
---------------
Long-term liabilities
Notes payable, stockholders, less current portion 1,861,906
Obligations under capital leases, less current portion 23,287
---------------
Total long term liabilities 1,885,193
---------------
Commitments and contingencies
Stockholders' deficit
Preferred stock, Series A, $.0001 par value; authorized
5,000,000 shares, 2,002,750 issued and outstanding
(aggregate liquidation preference of $3,004,125) 201
Preferred stock, Series B, $.0001 par value; authorized
2,444,444 shares, 2,444,444 issued and outstanding
(aggregate liquidation preference of $2,200,000) 244
Common stock, $.0001 par value, authorized 50,000,000
shares, 13,438,277 issued and outstanding 1,344
Additional paid-in capital 7,753,804
Stock subscription receivable (3,000)
Accumulated deficit (12,640,617)
---------------
Total stockholders' deficit (4,888,024)
---------------
$ 2,031,910
===============
F-1
Stronghold Technologies, Inc. and Subsidiary Consolidated Statements of
Operations
Three months ended March 31,
2004 2003
(Unaudited) (Unaudited)
--------------- ---------------
Sales $ 643,678 $ 919,010
Cost of sales 236,508 323,704
--------------- ---------------
Gross profit 407,170 595,306
Selling, general and
administrative 964,002 1,108,814
--------------- ---------------
Loss from operations (556,832) (513,508)
Interest expense 26,897 107,646
--------------- ---------------
Net loss applicable to common
stockholders $ (583,728) $ (621,154)
=============== ===============
Basic and diluted loss per
common share $ (0.04) $ (0.06)
=============== ===============
Weighted average number of
common shares outstanding $ 13,341,930 $ 9,857,000
=============== ===============
F-2
Stronghold Technologies, Inc. and Subsidiary Consolidated Statements of Cash
Flows
Three months ended March 31, 2004 2003
------------------------------------------------------------------------------------------------------------
(Unaudited) (Unudited)
Cash flows from operating activities
Net loss $ (583,728) $ (621,154)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for returns and allowances 14,000
Depreciation and amortization 96,948 15,000
Interest payable, stockholders 12,095 61,624
Non-cash interest expense for issuance of warrants 23,750
Changes in operating assets and liabilities:
Accounts receivable (130,247) 31,217
Inventories 52,721 47,000
Prepaid expenses (19,686) (8,977)
Other assets (78,231) (3,585)
Accounts payable 15,978 (157,620)
Accrued expenses and other current liabilities (59,749) 283,444
------------- -------------
Net cash used in operating activities (679,899) (329,301)
------------- -------------
Cash flows from investing activities
Payments for purchase of property and equipment (1,991) (3,325)
Payments for software development costs (134,326) (174,085)
------------- -------------
Net cash used in investing activities (136,317) (177,410)
------------- -------------
Cash flows from financing activities
Proceeds from issuance of common stock 42,052
Proceeds from notes payable, stockholders 895,000 606,200
Principal repayments of notes payable, stockholders (20,000) (20,000)
Principal repayments of notes payable (45,000) (83,333)
Principal payments for obligations under capital leases (11,042) (3,859)
------------- -------------
Net cash provided by financing activities 861,010 499,008
------------- -------------
Net increase (decrease) in cash 44,794 (7,703)
Cash, beginning of period 8,161 13,384
------------- -------------
Cash, end of period $ 52,955 $ 5,681
============= =============
Supplemental disclosure of cash flow information
cash paid during the period for interest $ 14,801 $ 22,272
============= =============
Supplementary schedule of non-cash investing and financing acrivities
warrants issued in connection with debt $ -- $ 95,000
============= =============
F-3
DEFINITIONS
All references to "we," "us," "our," the "Company" or similar terms used herein
refer to Stronghold Technologies, Inc., a Nevada corporation, formerly known as
TDT Development, Inc. and its wholly-owned subsidiary, Stronghold Technologies,
Inc., a New Jersey corporation. All references to "Stronghold" used herein refer
to just our wholly-owned subsidiary, Stronghold Technologies, Inc., a New Jersey
corporation. All references to the "Predecessor Entity" refer to the New Jersey
corporation we acquired on May 16, 2002, Stronghold Technologies, Inc., which
was merged with and into Stronghold.
F-4
Stronghold Technologies, Inc. and Subsidiary Notes to Consolidated Financial
Statements
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). These statements are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments and
accruals) necessary to present fairly the results for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to applicable SEC
rules and regulations. Operating results for the three-month period ended March
31, 2004 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2004. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report of Form 10-KSB for the fiscal year ended December 31,
2003.
2. INVENTORIES
Inventories, which are comprised of hardware for resale, are stated at cost, on
an average cost basis, which does not exceed market value.
3. LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, "Earnings Per Share," which
requires dual presentation of basic and diluted earnings (loss) per share. Basic
earnings (loss) per share excludes dilutions and is computed by dividing net
loss applicable to common stockholders by the weighted average number of common
shares outstanding for the year. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Since
the effect of the outstanding options and warrants are anti-dilutive, they have
been excluded from the Company's computation of diluted loss per common share.
4. NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133. The Statement is
generally effective for contracts entered into or modified after September 30,
2003 and for hedging relationships designated after September 30, 2003 and
should be applied prospectively. The implementation of this standard is not
expected to have a material impact on the Company's financial position or
results of operations.
F-5
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
requires certain freestanding financial instruments, such as mandatory
redeemable preferred stock, to be measured at fair value and classified as
liabilities. The provisions of SFAS No. 150 are effective for beginning July 1,
2003. The implementation of this standard is not expected to have a material
impact on the Company's financial position or results of operations.
5. STOCK-BASED COMPENSATION
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amended SFAS No. 123, "Accounting
for Stock-Based Compensation." This Statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation. It also amends the disclosure provisions to
require more prominent disclosure about the effects on reported net income
(loss) of an entity's accounting policy decisions with respect to stock-based
employee compensation. As permitted by the Statement, the Company does not plan
to adopt the fair value recognition provisions of SFAS No. 123 at this time.
However, the Company has adopted the disclosure provisions of the Statement.
The Company accounts for its stock-based employee compensation plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized in the accompanying consolidated statements of operations, as
all options granted under those plans had an exercise price equal to or in
excess of the market value of the underlying common stock at the date of grant.
Had compensation cost for these options been determined consistent with the fair
value method provided by SFAS No. 123, the Company's net loss and net loss per
common share would have been the following pro forma amounts for the three-month
and periods ended March 31, 2004 and 2003.
F-6
Three months ended
March 31,
-----------------------
2004 2003
--------- ---------
Net loss applicable to common
stockholders, as reported $(583,728) $(621,154)
Deduct
Total stock-based
compensation expense
determined under fair value
method for all awards, net
of related tax effect 12,819 19,031
--------- ---------
Pro Forma $(596,548) $(640,185)
========= =========
Basic and diluted EPS
As reported $ (0.04) $ (0.06)
Pro forma $ (0.04) $ (0.06)
March 31, 2004 and 2003
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 0%, expected dividend yield rate of 0%, expected life of
10 years, and a risk-free interest rate of 3.83% and 3.81% for March 31, 2004
and 2003, respectively.
6. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. Since the beginning of the
fiscal year, the Company has incurred a net loss of approximately $584,000 and
has negative cash flows from operations of approximately $680,000 for the three
months ended March 31, 2004, and has a working capital deficit of approximately
$4,128,000 and a stockholders' deficit of approximately $4,888,000 as of March
31, 2004. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. During 2004, management of the Company will rely
on raising additional capital to fund its future operations. If the Company is
unable to generate sufficient revenues or raise sufficient additional capital,
there could be a material adverse effect on the consolidated financial position,
results of operations and cash flows of the Company. The accompanying
consolidated financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
F-7
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at March
31, 2004:
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 Company 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 Preferred Stock") and a five-year warrant
to purchase 2,002,750 shares of the Company's common stock (1,001,375 shares
exercisable at $1.50 per share and 1,001,375 shares exercisable at $2.25 per
share). The value of the warrant 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% 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 Company entered into a second 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 Company 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 terms of the
Series B Purchase Agreement, the issuance of the Series B Preferred Stock took
place on six separate closing dates between April 30, 2003 and 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
F-8
Company's capital stock for a period of two years, with certain exceptions, as
defined in the Lock-Up Agreement.
WARRANT
The warrant to purchase 2,002,750 shares of common stock in connection with the
Series A Purchase Agreement (and as modified pursuant to the Series B Purchase
Agreement) was modified again on December 15, 2003 in exchange for Stanford's
waiver of certain rights, including rights of participation and anti-dilution
protection, associated with the Series A Purchase Agreement and Series B
Purchase Agreement. The exercise price of the warrants was reduced from $0.25 to
$.0001 and were exercised on December 15, 2003 for 2,002,750 shares of common
stock. The modification of warrants were accounted for as a cost of issuance of
the common shares. There are no additional outstanding warrants with Stanford.
9. SUBSEQUENT EVENTS
On April 30, 2004, we entered into an installment agreement with the United
States Internal Revenue Service ("IRS") to pay withholding taxes due in the
amount of $1,233,101.35, under the terms of which we will pay $35,000 each
month, commencing June 28, 2004, until we have paid the withholding taxes due in
full. We estimate that at the rate of $35,000 per month, we will make 36 monthly
payments to the IRS.
F-9
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders Stronghold Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Stronghold
Technologies, Inc. and Subsidiary as of December 31, 2003, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the years ended December 31, 2003 and 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stronghold
Technologies, Inc. and Subsidiary as of December 31, 2003, and the results of
their operations and their cash flows for the years ended December 31, 2003 and
2002, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company's
ability to continue in the normal course of business is dependent upon the
success of future operations. The Company has recurring losses, substantial
working capital and stockholders' deficit and negative cash flows from
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding these matters are
also described in NOTE 2. THESE CONSOLIDATED FINANCIAL STATEMENTS DO NOT INCLUDE
ANY ADJUSTMENTS that might result from the outcome of this uncertainty.
Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 17, 2004
F-10
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 2003
ASSETS
Current assets
Cash $ 8,161
Accounts receivable, less allowance for doubtful
accounts of $218,446 586,788
Inventories 171,746
Prepaid expenses 11,641
----------------
Total current assets 778,336
----------------
Property and equipment, net 162,808
----------------
Other assets
Software development costs 770,952
Other 74,207
----------------
Total other assets 845,159
----------------
$ 1,786,303
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 681,323
Accrued expenses and other current liabilities 2,354,696
Interest payable, stockholders 407,904
Notes payable, stockholders, current portion 390,000
Note payable, current portion 1,231,667
Obligations under capital leases, current portion 45,827
----------------
Total current liabilities 5,111,417
----------------
Long-term liabilities
Notes payable, stockholders, less current portion 986,905
Obligations under capital leases, less current portion 34,329
----------------
Total long-term liabilities 1,021,234
----------------
See accompanying notes to consolidated financial statements.
F-11
Commitments and contingencies
Stockholders' deficit
Preferred stock, series A, $.0001 par value;
authorized 5,000,000 shares,
2,002,750 issued and outstanding
(aggregate liquidation preference of $3,004,125) 201
Preferred stock, series B, $.0001 par value;
authorized 2,444,444 shares, 2,444,444 issued and
outstanding (aggregate liquidation preference of
$2,200,000) 244
Common stock, $.0001 par value, authorized
50,000,000 shares, 13,291,218 issued and outstanding 1,329
Additional paid-in capital 7,711,767
Stock subscription receivable (3,000)
Accumulated deficit (12,056,889)
----------------
Total stockholders' deficit (4,346,348)
----------------
$ 1,786,303
================
See accompanying notes to consolidated financial statements.
F-12
CONSOLIDATED STATEMENTS OF OPERATION
Years Ended December 31, 2003 2002
------------------------------------------ ------------ ------------
Sales $ 2,996,344 $ 2,802,483
Cost of sales 1,230,174 1,627,420
------------ ------------
Gross profit 1,766,170 1,175,063
Selling, general and administrative 5,512,042 5,490,419
------------ ------------
Loss from operations (3,745,872) (4,315,356)
Interest expense 512,135 213,447
------------ ------------
Net loss (4,258,007) (4,528,803)
Dividends (294,843)
------------ ------------
Net loss applicable to common stockholders $ (4,258,007) $(4,823,646)
============ ============
Basic and diluted loss per
common share $ (0.38) $ (0.55)
============ ============
Weighted average number of
common shares outstanding 11,304,347 8,834,730
============ ============
See accompanying notes to consolidated financial statements.
F-13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2003 AND 2002
Preferred Stock Preferred Stock
Series A Series B Common Stock Additional
------------------- ------------------ -------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
-------------------------------- --------- --------- --------- --------- ---------- ---------- -----------
Balances, December 31, 2001 $ -- $ -- 5,906,250 $ 591 $ 12,909
Issuance of preferred stock, net
of costs 2,002,750 201 2,264,778
Warrants issued as dividends 294,843
Issuance of common stock 2,190,333 219 267,281
Conversion of stockholder loan
to common stock 1,760,417 176 1,999,824
Net loss
--------- --------- --------- --------- ---------- ---------- -----------
Balances, December 31, 2002 2,002,750 201 -- 9,857,000 986 4,839,635
Stock Total
Subscription Accumulated Stockholders'
Receivable Deficit Deficit
-------------------------------- ------------- ------------- -------------
Balances, December 31, 2001 $ (3,000) $ (2,975,236) $(2,964,736)
Issuance of preferred stock, net
of costs 2,264,778
Warrants issued as dividends (294,843) -
Issuance of common stock 267,500
Conversion of stockholder loan
to common stock 2,000,000
Net loss (4,528,803) (4,528,803)
------------- ------------- -------------
Balances, December 31, 2002 (3,000) (7,798,882) (2,961,060)
See accompanying notes to consolidated financial statements.
F-14
YEARS ENDED DECEMBER 31, 2003 AND 2002
Preferred Stock Preferred Stock
Series A Series B Common Stock Additional
------------------- ------------------ -------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
-------------------------------- --------- --------- --------- --------- ---------- ---------- -----------
Issuance of preferred stock,
net of costs 2,444,444 244 1,897,649
Warrants issued with debt 95,000
Issuance of common stock 362,500 36 174,964
Conversion of warrants to common
stock 2,002,750 201
Stock issued for services 465,635 46 161,579
Conversion of stockholder loan
to common stock 603,333 60 542,940
Net loss
--------- --------- --------- --------- ---------- ---------- -----------
Balances, December 31, 2003 2,002,750 $ 201 2,444,444 $ 244 13,291,218 $ 1,329 $ 7,711,767
Stock Total
Subscription Accumulated Stockholders'
Receivable Deficit Deficit
-------------------------------- ------------- ------------- -------------
Issuance of preferred stock,
net of costs 1,897,893
Warrants issued with debt 95,000
Issuance of common stock 175,000
Conversion of warrants to common
stock 201
Stock issued for services 161,625
Conversion of stockholder loan
to common stock 543,000
Net loss (4,258,007) (4,258,007)
------------- ------------- -------------
Balances, December 31, 2003 $ (3,000) $(12,056,889) $(4,346,348)
See accompanying notes to consolidated financial statements.
F-15
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003 2002
------------------------------------------------------------------------------ ---------------- ----------------
Cash flows from operating activities
Net loss $ (4,258,007) $ (4,528,803)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for doubtful accounts 489,205 200,000
Depreciation and amortization 222,678 61,905
Warrants issued with debt 95,000
Stock issued for services 161,625
Increase (decrease) in cash attributable to changes in operating assets and
liabilities:
Accounts receivable 116,458 (1,110,091)
Inventories 56,667 (147,065)
Prepaid expenses 8,265 (15,021)
Other receivables 250,139
Accounts payable (170,337) 794,019
Accrued expenses and other current liabilities 1,512,979 645,923
Interest payable, stockholders 214,786 58,715
---------------- ----------------
Net cash used in operating activities (1,550,681) (3,790,279)
---------------- ----------------
Cash flows from investing activities
Payments for purchase of property and equipment (19,574) (94,585)
Payments for software development costs (683,052) (223,224)
Payments of security deposits (47,132)
---------------- ----------------
Net cash used in investing activities (749,758) (317,809)
---------------- ----------------
Cash flows from financing activities
Proceeds from notes payable, stockholders 712,968 1,781,000
Principal repayments of notes payable, stockholders (209,000) (222,000)
Principal repayments of notes payable (268,333)
Proceeds from issuance of preferred stock, net of financing costs 1,897,893 2,264,979
Proceeds from issuance of common stock 175,201 267,500
Principal payments for obligations under capital leases (13,513) (8,274)
---------------- ----------------
Net cash provided by financing activities 2,295,216 4,083,205
---------------- ----------------
See accompanying notes to consolidated financial statements.
F-16
Years Ended December 31, 2003 2002
------------------------------------------------------------------------------ ---------------- ----------------
Cash flows from operating activities
Net decrease in cash (5,223) (24,883)
Cash, beginning of year 13,384 38,267
---------------- ----------------
Cash, end of year $ 8,161 $ 13,384
================ ================
Supplemental disclosure of cash flow information,
cash paid during the period for interest $ 202,349 $ 154,732
================ ================
Supplemental disclosures of noncash investing and financing activities
During the year ended December 31, 2002, the Company entered into two separate
agreements to convert $2,000,000 of notes payable, stockholders into 1,760,417
shares of common stock.
On May 15, 2002, the Company consolidated the outstanding amounts due to the
majority stockholder into a promissory note of approximately $1,200,000
classified as a note payable, stockholder. Approximately $262,000 of accrued
expenses has been classified to notes payable, stockholders.
On June 30, 2002, the Company converted their outstanding line of credit with a
non-affiliated bank into a note payable of $1,500,000.
During the year ended December 31, 2002, obligations under capital leases
aggregating $45,099 were incurred when the Company entered into various leases
for computer equipment.
During the year ended December 31, 2003, obligations under capital leases
aggregating $56,845 were incurred when the Company entered into various leases
for computer equipment.
During the year ended December 31, 2003, the Company entered into an agreement
to convert $543,000 of notes payable, stockholders into 603,333 shares of common
stock.
See accompanying notes to consolidated financial statements.
During the year ended December 31, 2003, the Company reclassed $329,812 of notes
payable, stockholder to accrued expenses.
See accompanying notes to consolidated financial statements.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of operations
Stronghold Technologies, Inc. (the "Company") was incorporated in the state of
New Jersey on August 1, 2000. The Company is engaged principally as a developer
of wireless and internet-based systems for auto dealers in the United States.
On May 15, 2002, the Company entered into a Merger Agreement (the "Merger
Agreement") with Stronghold Technologies, Inc. a Nevada corporation (formally
known as TDT Development, Inc. ("Parent")) whereby Parent issued 7,000,000
shares of its common stock in exchange for all of the Company's outstanding
shares in a transaction accounted for as a reverse purchase acquisition. As a
result, the Company is considered for accounting purposes, to be the acquiring
company since the stockholders of the Company acquired more than 50% of the
issued and outstanding stock of Parent. Pursuant to this Merger Agreement, the
outstanding options of the Company were also converted into options to purchase
Parent common stock based on a conversion rate of 2.1875 as defined in the
Merger Agreement. Prior to the merger, Parent's operations were comprised solely
of a business that sold truffles imported from Italy through its wholly owned
subsidiaries, Terre di Toscana, Inc. and Terres Toscanes, Inc. (the
"Subsidiaries"). The Subsidiaries were sold on July 19, 2002 and had virtually
no material operations for the period of May 16, 2002 through July 19, 2002.
Since this transaction resulted in a change in reporting entity, the historical
financial statements prior to May 16, 2002 are those of the Company. The
stockholders' deficit of the Company has been retroactively restated.
2. Going concern
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred a
net loss of approximately $4,258,000 and has negative cash flows from operations
of approximately $1,551,000 for the year ended December 31, 2003, and has a
working capital deficit of approximately $4,333,000 and a stockholders' deficit
of approximately $4,346,000 as of December 31, 2003. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
During 2004, management of the Company will rely on raising additional capital
to fund its future operations. If the Company is unable to generate sufficient
revenues or raise sufficient additional capital, there could be a material
adverse effect on the consolidated financial position, results of operations and
cash flows of the Company. The accompanying consolidated financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
F-18
3. Summary of significant accounting policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. The Company provides for depreciation and amortization as follows:
Estimated
Asset Useful Life Principal Method
----------------------------------- ----------------- ------------------------
Computer equipment 5 Years Declining-balance
Computer software 3 Years Declining-balance
Furniture and fixtures 7 Years Declining-balance
Leasehold improvements 4 Years Straight-line
ACCOUNTS RECEIVABLE
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a
history of past write-offs and collections and current credit conditions.
Accounts are written off as uncollectable at the discretion of management.
INVENTORIES
Inventories, which are comprised of hardware for resale, are stated at cost, on
an average cost basis, which does not exceed market value.
SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs, including significant product
enhancements, incurred subsequent to establishing technological feasibility in
the process of software development and production, are capitalized according to
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Costs
incurred prior to the establishment of technological feasibility are charged to
research and development expenses. The capitalized software is amortized over a
three year period using the straight-line method. For the years ended December
31, 2003 and 2002 the amount of software development costs incurred that were
not capitalized were approximately $nil and $1,322,000, respectively.
F-19
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments held by the Company include cash, accounts receivable,
notes payable and accounts payable. The book value of cash, accounts receivable
and accounts payable are considered to be representative of fair value because
of the short maturity of these instruments. The fair values of the notes payable
approximate book values primarily because the contractual interest rates
approximate prevailing market rates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the recoverability of the carrying amounts of
long-lived assets, including intangible assets. A loss is recognized when
expected undiscounted future cash flows are less than the carrying amount of the
asset. The impairment loss is the difference by which the carrying amount of the
asset exceeds its fair value.
RETIREMENT PLAN
The Company has a retirement plan under Section 401(k) of the Internal Revenue
Code ("the Plan"), which covers all eligible employees. The Plan provides for
voluntary deduction of the employee's salary, subject to Internal Revenue Code
limitations. The Company can make a matching contribution to the Plan, which is
at the discretion of the Company and is determined annually. There were no
matching contributions for the years ended December 31, 2003 and 2002.
INCOME TAXES
The Company complies with SFAS No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts, based on
enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"
which amended SFAS No. 123, "Accounting for Stock-Based Compensation." This
Statement provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based compensation. It also
amends the disclosure provisions to require more prominent disclosure about the
effects on reported net income (loss) of an entity's accounting policy decisions
with respect to stock-based employee compensation. As permitted by the
Statement, the Company does not plan to adopt the fair value recognition
provisions of SFAS No. 123 at this time. However, the Company has adopted the
disclosure provisions of the Statement.
The Company accounts for its stock-based employee compensation plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
F-20
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
(see Note 10).
Had compensation cost for these options been determined consistent with the fair
value method provided by SFAS No. 123, the Company's net loss and net loss per
common share would have been the following pro forma amounts for the years ended
December 31, 2003 and 2002.
2003 2002
------------------------------------ ------------------- --------------------
Net loss applicable to common
shareholders, as reported $ (4,258,007) $ (4,823,646)
Deduct
Total Stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effect 55,857 73,329
------------------- --------------------
Pro Forma $ (4,313,864) $ (4,896,975)
=================== ====================
Basic and diluted EPS
As reported $ (0.38) $ (0.55)
Pro Forma $ (0.38) $ (0.55)
The fair value of issued stock options is estimated on the date of grant using
the Black-Scholes option-pricing model including the following assumptions:
expected volatility of 2.06%, expected dividend yield rate of 0%, expected life
of 10 years, and a risk-free interest rate of 4.27% and 4.03% for the years
ended December 31, 2003 and 2002, respectively.
REVENUE RECOGNITION
Revenue is recognized under the guidelines of SFAS No. 48 "Revenue Recognition
When Right of Return Exists" and has a four step process that must be met prior
to the recording of revenue. The steps consist of the following: signing of
sales contract, installation of hardware, completion of the training period and
a signed contract from the customer stating they accept the product for the
sixty-day trial period. Payment is due upon the completion of the trial period.
The sales revenue and cost of sales reported in the consolidated statements of
operations is reduced to reflect estimated returns. Service revenue is
recognized when earned.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
F-21
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.
LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, "Earnings Per Share," which
requires dual presentation of basic and diluted earnings (loss) per share. Basic
earnings (loss) per share exclude dilutions and are computed by dividing net
loss applicable to common stockholders by the weighted average number of common
shares outstanding for the year. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Since
the effect of the outstanding options and warrants are anti-dilutive, they have
been excluded from the Company's computation of loss per common share.
NEW ACCOUNTING PRONOUNCEMENTS
During 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging
Activities" and No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. SFAS No. 150 requires certain
freestanding financial instruments, such as mandatory redeemable preferred
stock, to be measured at fair value and classified as liabilities. The
implementation of SFAS Nos. 149 and 150 did not have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
4. Property and equipment
Property and equipment at December 31, 2003 consists of the following:
Computer equipment $ 187,732
Computer software 18,493
Furniture and fixtures 21,717
Computer equipment recorded under capital leases 113,491
Leasehold improvements 7,982
----------------
349,415
Less accumulated depreciation and amortization,
including $28,709 relating to computer equipment
recorded under capital leases (186,607)
----------------
$ 162,808
================
F-22
5. Software development costs
Software development costs consist of the following at December 31, 2003:
Carrying amount $906,276
Less accumulated amortization 135,324
------------
$770,952
============
For the years ended December 31, 2003 and 2002, amortization of capitalized
software development costs charged to operations was $135,324 and nil,
respectively.
Estimated amortization expense for the five years subsequent to December 31,
2003 is approximately as follows:
Year ending December 31,
---------------------------------------------------------
2004 $ 292,000
2005 302,000
2006 177,000
6. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following at
December 31, 2003:
At December 31, 2003, notes payable, stockholders consists of the following:
Note payable, stockholder bearing interest at 12.5% per annum and due on March
31, 2005, collateralized by the assets of the Company. Up to $375,404 can be
borrowed by the Company. $ 375,403
Note payable, stockholder bearing interest at 12.5% per annum and due on March
31, 2005, collateralized by the assets of the Company. Up to $355,128 can be
borrowed by the Company. 355,127
Note payable, stockholder bearing interest at 12.5% is subordinated to the note
payable of $1,500,000 (Note 8) and is due after the terms of that note in 2006
(except
for $10,000 which is current). 266,375
Note payable, stockholder bearing interest at 8% per
annum and due on June 30, 2004. Up to $300,000 can
be borrowed by the Company. (Note 12) 300,000
Note payable, stockholder bearing interest at 8% per
annum and due on June 30, 2004. Up to $100,000 can
be borrowed by the Company. (Note 12) 80,000
-------------
1,376,905
Less current portion 390,000
-------------
$ 986,905
=============
8. Note payable
At June 30, 2002, the Company converted its outstanding line of credit into a
note payable of $1,500,000. The note bears interest at a variable rate equal to
the prime rate (4.00% at December 31, 2003), and is due in variable monthly
installments plus interest to PNC Bank (formerly known as "United Trust Bank"),
commencing in February 2003 through January 1, 2006. The principal payments are
due monthly in the following amounts; $15,000 a month plus accrued interest from
January 15, 2004 through December 15, 2004, $20,000 a month plus accrued
interest from January 15, 2005 through December 15, 2005, and a balloon payment
for the balance due on all outstanding principal and accrued interest on January
1, 2006. The note is collateralized by substantially all the assets of the
Company and is guaranteed by the majority stockholder of the Company. The note
F-24
payable, stockholder, of $266,375 is subordinated to this note. Interest expense
on the note payable for the year ended December 31, 2003 was approximately
$215,000. As of December 31, 2003 this note payable was in default of its
covenants and as a result, is classified as current.
9. Stock subscription receivable
The stock subscription receivable represents 600,000 shares of the Company's
original common stock (restated to 1,312,500 as defined in the Agreement) due
from two key employees and one stockholder.
10. Stock option plans
The Company has adopted three stock option plans ("Plans") providing for
incentive stock options ("ISOs") and non-qualified stock options ("NQSOs"). The
Company has reserved 1,985,938 shares of common stock for issuance upon the
exercise of stock options granted under the Plans. The exercise price of an ISO
or NQSO will not be less than 100% of the fair market value of the Company's
common stock at the date of the grant. The exercise price of an ISO granted to
an employee owning greater than 10% of the Company's common stock will not be
less than 110% of the fair market value of the Company's common stock at the
date of the grant. The Plans further provide that the maximum period in which
stock options may be exercised will be determined by the board of directors,
except that they may not be exercisable after ten years from the date of grant.
All of the stock option plans vest over a three year period with each year
earning 1/3 of total options granted as long as the employee is in employment
with the Company upon the anniversary date.
F-25
The status of the Company's restated stock options per the Plans are summarized
below:
Restated Per
Share Exercise Weighted Average
Plan Options Price Exercise Price
------------------------------------------- -------------- ------------------ -------------------
Outstanding at
January 1, 2002 562,187 $0.10-$0.69 $0.11
Granted in the year ended
December 31, 2002 1,090,900 $0.25-$2.25 $1.53
Terminated in the year ended
December 31, 2002 (288,240) $0.10-$2.00 $0.69
--------------
Outstanding at
December 31, 2002 1,364,847 $0.10-$2.25 $0.50
Granted in the year ended
December 31, 2003 1,426,600 $0.45-$0.88 $0.59
Terminated in the year ended
December 31, 2003 (882,138) $0.10-$2.25 $0.82
--------------
Outstanding at
December 31, 2003 1,909,309 $0.10-$2.25 $0.86
==============
The exercise price ranges for options outstanding and exercisable at December
31, 2003 were:
Number of Shares Number of Shares
Outstanding as of Exercisable at Weighted Weighted Average
December 31, December 31, Average Remaining
Exercise Price Range 2003 2003 Exercise Price Contractual Life
--------------------------- ------------------------ ------------------------ ----------------- --------------------
$.10 through $.50 355,850 240,682 $0.36 9 Years
$.51 through $1.50 1,531,459 69,532 $0.98 10 Years
$1.51 through $2.25 22,000 8,000 $1.67 10 Years
------------------------ ------------------------
1,909,309 318,214
======================== ========================
11. Income taxes
Until May 15, 2002, the date of the Merger Agreement, the Company operated as an
"S" corporation and, as a result, the earnings and losses were included in the
personal income tax returns of the respective stockholders. From the date of the
Merger Agreement through December 31, 2002, the Company operated as a "C"
corporation and had net operating losses of approximately $3,273,000. At
December 31, 2003, the Company had net operating losses of approximately
$7,483,000 that will expire between 2009 and 2023.
F-26
The components of the Company's deferred tax asset at December 31, 2003 is
approximately as follows:
Net operating loss carry forwards $ 3,033,000
Allowance for doubtful accounts 89,000
Interest payable, stockholder 165,000
Accrued compensation 226,000
Deferred maintenance fees 139,000
-----------------
3,652,000
Less valuation allowance (3,652,000)
-----------------
Net deferred income tax asset $ -
=================
The components of the Company's income tax benefit for the year ended December
31, 2003 are approximately as follows:
A reconciliation of the statutory federal income tax rate and the effective tax
rate follows:
2003 2002
------ ------
Federal statutory rate 34% 34%
State income taxes, net of federal effect 7 7
S-Corporation earnings passes to shareholders and other ` (4)
Change in valuation allowance and other (41) (37)
------ ------
Effective income tax rate 0% 0%
12. Commitments and contingencies
SECURITIES PURCHASE AGREEMENTS
The Company, along with Parent, and certain stockholders of the Company
(together the "Parties"), entered into a Securities Purchase Agreement (the
"Series A Purchase Agreement") dated and executed on May 15, 2002, with Stanford
Venture Capital Holdings, Inc. ("Stanford"). Pursuant to the Series A Purchase
Agreement, the Parties agreed to issue to Stanford a total of 2,002,750 shares
of the Company's Series A $1.50 Convertible Preferred Stock ("Series A
F-27
Preferred Stock"), plus five-year warrants purchasing 2,002,750 shares of the
Company's common stock at an exercise price of $1.50 for the first 1,001,375
shares and $2.25 for the remaining shares. The value of the warrants was treated
as a dividend for approximately $295,000 (computed using the Black-Scholes model
with the following assumptions: expected volatility of 0%, expected dividend
yield rate of 0%, expected life of 5 years, and a risk-free interest rate of
4.03% for December 31, 2002) on May 15, 2002, the date of issuance. Pursuant to
the Series A Purchase Agreement, the issuance of the Series A Preferred Stock
and Warrants took place on four separate closing dates beginning on May 16, 2002
and closing on July 19, 2002.
The Parties entered into an additional Securities Purchase Agreement (the
"Series B Purchase Agreement") dated and executed on April 30, 2003 with
Stanford. Pursuant to the Series B Purchase Agreement, the Parties agreed to
issue to Stanford a total of 2,444,444 shares of the Company's Series B $.90
Convertible Preferred Stock ("Series B Preferred Stock"). Pursuant to the Series
B Purchase Agreement, the issuance of the Series B Preferred Stock took place on
six separate closing dates beginning on April 30, 2003 and closing on September
15, 2003. In connection with the issuance of the Series B Preferred Stock, the
Series B Purchase Agreement also required the Company to lower the exercise
price of the 2,002,750 warrants that were issued with the Series A Purchase
Agreement. The conversion price for these warrants was reduced to $0.25 from the
original conversion prices of $1.50 and $2.25, and was accounted for as a cost
of issuance of the Series B Purchase Agreement.
In connection with both the Series A and Series B Purchase Agreements, certain
stockholders of the Company entered into a Lock-Up Agreement in which the
Parties agreed not to sell, assign, transfer, pledge, mortgage, encumber or
otherwise dispose of their shares of the Company's capital stock for a period of
two years, with certain exceptions, as defined in the Lock-Up Agreement.
WARRANTS
The 2,002,750 warrants issued to Stanford were modified again on December 15,
2003 for the waiver of Stanford's anti-dilution rights that were associated with
the Series A Purchase Agreement. The conversion price of the warrants were
reduced from the modified $0.25 to $.0001 and were exercised on December 15,
2003 for 2,002,750 shares of common stock. The modification of warrants were
accounted for as a cost of issuance of the common shares. There are no
additional outstanding warrants with Stanford.
During the year ended December 31, 2003, an aggregate of 391,753 warrants were
issued in conjunction with the stockholder notes payable of $300,000 and $80,000
(Note 7). The fair value of the warrants issued in connection with the debt was
$95,000 and it was fully expensed as additional interest. The warrants have an
exercise price of $0.97 and expire on March 18, 2013. All 391,753 warrants have
been assigned from the Stockholder to unrelated third parties as of March 2003.
F-28
LEASES
The Company rents facilities under leases in New Jersey, Virginia and
California. The Company is obligated under these leases through January 2008. In
addition to the base rent, one lease provides for the Company to pay a
proportionate share of operating costs and other expenses. Future aggregate
minimum annual rent payments under these leases are approximately as follows:
Rent expense was approximately $165,000 and $128,000 for the years ended
December 31, 2003 and 2002, respectively.
OBLIGATIONS UNDER CAPITAL LEASES
At December 31, 2003, the Company has computer equipment recorded under capital
leases expiring at various dates through 2006. The assets and liabilities under
capital leases are recorded at the lower of the present values of the minimum
lease payments or the fair values of the assets. The assets are included in
property and equipment and are depreciated over their estimated useful lives.
As of December 31, 2003, minimum future lease payments are approximately as
follows:
Years ending December 31,
2004 $ 56,000
2005 38,000
2006 4,000
-----------------
Total minimum lease payments 98,000
Less amounts representing interest 18,000
-----------------
Present value of net minimum lease payments 80,000
Less current portion 46,000
-----------------
Long-term portion $ 34,000
=================
13. Stockholders' deficit
On April 22, 2002 and May 16, 2002, the majority stockholder converted and
exchanged an aggregate of $2,000,000 of borrowings that were outstanding under a
line of credit agreement for an aggregate of 1,093,750 and 666,667 shares of the
F-29
Company's common stock, at a conversion price of $0.914 and $1.50, respectively.
The remaining amounts outstanding under the line of credit, plus accrued
interest, accrued officer compensation and un-reimbursed expenses were converted
into a promissory note for approximately $1,200,000 on May 15, 2002 (Note 7). On
April 30, 2003, the same stockholder converted $543,000 of note payable,
stockholder into 603,333 shares of common stock at a conversion price of $0.90.
14. Subsequent events
During the period of January 1, 2004 through March 15, 2004 the Company received
two separate loans from Stanford in the aggregated amount of $875,000. The final
terms of the loans are to be determined but the Company expects to pay Stanford
an 8% annual coupon on the funds and to redeem the loan no later than three
years from the date of funding.
During January 2004 the Company sold approximately 150,000 shares of common
stock for $50,000 to a related party.
F-30
II-11
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 $ 830.33
Accounting fees and expenses 10,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 5,000.00
----------
TOTAL $50,830.33*
==========
----------
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
OPTIONS
From the Company's inception through May 16, 2002, the Company did not
grant any stock options. In connection with the Company's acquisition of the
Predecessor Entity on May 16, 2002, the Company assumed the Predecessor Entity's
2000 Stock Option Plan so that all of its issued and outstanding options would
remain intact. No further options will be issued under the assumed Predecessor
Entity's plan. Each outstanding option was automatically converted into an
option to acquire, on the same terms and conditions as were applicable under the
original option, such number of shares of the Company's common stock as was
equal to the number of options outstanding multiplied by 2.1875. The exercise
price was also adjusted to the exercise price that was equal to the existing
exercise price divided by 2.1875. The total number of the Predecessor Entity's
options that the Company assumed was 543,500 (after cancellations) at a weighted
average exercise price per share of $.78, which converted into options to
purchase 1,188,907 shares of the Company's common stock at a weighted average
exercise price of $.36. 253,750 of the assumed outstanding options vest
according to a three-year vesting schedule, 913,281 vest according to the
achievement of certain performance goals, and the remaining 21,875 options were
fully vested upon grant.
In addition to the above employee options of the Predecessor Entity, the
Company assumed certain outstanding options that were granted, or committed to
be granted, by the Predecessor Entity to automobile dealerships. On May 16,
2002, the Company assumed a total of 77,500 options, which the Predecessor
Entity granted, or committed to grant, to three automobile dealerships for
services rendered, including providing the Predecessor Entity with consulting
services. These options converted into options for a total of 169,531 shares of
the Company's common stock. Certain of the options vest upon the achievement of
certain performance goals. Each of the dealerships is an accredited investor.
On July 17, 2002 the Company's board of directors adopted, and on July 31,
2002 the Company's approved, the adoption of the 2002 Stock Incentive Plan.
Under such plan the Company has granted 141,550 options to certain employees at
a weighted average exercise price of $1.50. Of the employee options, 10,550 were
fully vested upon grant, 61,000 vest according to a three-year vesting schedule,
and 70,000 vest according to the achievement of certain performance goals.
On August 20, 2002, the Company's board of directors and stockholders
approved the adoption of the 2002 California Stock Incentive Plan. Under such
plan the Company has granted 69,600 options to certain employees at a weighted
average exercise price of $1.50. 15,600 of such options were fully vested upon
grant, 34,000 vest according to a three-year vesting schedule, and 20,000 vest
according to the achievement of certain performance goals.
COMMON STOCK
In September 2000, the Company issued 5,000,000 shares of its common stock
to its founder and former president, Pietro Bortolatti, in exchange for all of
the outstanding shares of Terre di Toscana, Inc.
From November 2000 to January 2001, the Company issued 3,351,000 shares of
its common stock at $.10 per share. This sale was part of its private placement
offering. In October 2000, the Company issued 30,000 shares of its common stock
to KGL Investments, Ltd, the beneficial owner of which is Kaplan Gottbetter &
Levenson, LLP, counsel to the Company, in exchange for legal services rendered.
These shares were valued at $.10 per share. All purchasers represented in
writing that they acquired the securities for their own accounts.
On May 16, 2002, the Company issued 7,000,000 shares of its common stock
to the stockholders of Stronghold Technologies, Inc., a New Jersey corporation,
in exchange for all of the issued and outstanding shares of such entity. All of
the recipients were either accredited investors or had alone, or together with a
purchaser representative, such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of an
investment in securities in general and of an investment in the Company in
particular. Each recipient had sufficient access to information about the
Company necessary to make an informed investment decision.
II-2
On May 16, 2002, the Company issued 666,667 shares of its common stock to
Christopher J. Carey, President of the Company, in exchange for the cancellation
in full of $1 million owed to Mr. Carey by the Company's wholly-owned
subsidiary, Stronghold Technologies, Inc. Mr. Carey is an accredited investor.
During August and September 2002, the Company entered into eight
subscription agreements with private investors, pursuant to which the Company
issued an aggregate of 344,333 shares of its common stock at $1.50 per share.
These private investments generated total proceeds to the Company of $513,500.
During the first quarter of 2003, the Company and Mr. Carey agreed to
convert $543,000 of the outstanding debt owed to Christopher J. Carey by the
Company into 603,333 shares of Common Stock of the Company at a price of $0.90
per share.
PREFERRED STOCK AND WARRANTS
On each of May 16, July 3, July 11, and July 19, 2002, the Company issued
(i) 500,000, 500,000, 500,000 and 502,750 shares, respectively, of its Series A
$1.50 Convertible Preferred Stock and (ii) warrants to purchase 500,000,
500,000, 500,000 and 502,750 shares, respectively, of its common stock, to
Stanford Venture Capital Holdings, Inc. for an aggregate purchase price of $3
million. Stanford subsequently assigned warrants for a total of 1,001,376 shares
of common stock to four of its affiliates. Stanford is an accredited investor.
Pursuant to a Securities Purchase Agreement, referred to herein as the
Series B Purchase Agreement, dated as of April 30, 2003, by and between the
Company and Stanford Venture Capital Holdings, Inc., the Company agreed to issue
to Stanford 2,444,444 shares of our Series B $0.90 Convertible Preferred Stock,
$.0001 par value per share. The aggregate purchase price for the Series B
Preferred Stock will be $2,200,000.
According to the terms of the Series B Purchase Agreement, the issuance of
the aforementioned Series B Preferred Stock shall take place on each of six
separate closing dates. At the first closing, which occurred on May 5, 2003, the
Company received $500,000 from Stanford and issued to Stanford 555,556 shares of
Series B Preferred Stock. At each of the second and third closings, which are
scheduled for May 15, 2003 and June 13, 2003, the Company will issue 555,556
shares of Series B Preferred Stock, and Stanford will pay $500,000 upon each
closing for same. On the fourth closing date, which is scheduled for July 15,
2003, the Company will issue 333,332 shares of Series B Preferred Stock, and
Stanford will pay $300,000. At each of the fifth and sixth closings, which are
scheduled for August 15, 2003 and September 15, 2003, the Company will issue
222,222 shares of Series B Preferred Stock, and Stanford will pay $200,000 upon
each closing. For so long as any shares of the Series B Preferred Stock are
outstanding and held by Stanford, if the Company issues additional shares of the
Company's Common Stock, or common stock equivalents, Stanford has the right to
participate in the issuance such that immediately after the subsequent issuance,
Stanford's ownership of the total number of outstanding shares of the Company's
Common Stock (assuming the conversion of all common stock equivalents into the
Company's Common Stock) equals the same percentage of the total shares of the
Company's Common Stock (assuming conversion of all common stock equivalents into
the Company's Common Stock) as Stanford held immediately prior to the subsequent
issuance.
In connection with the Series B Purchase Agreement, the Company and
Stanford also entered into a Registration Rights Agreement, dated April 30,
2003, in which the Company agreed to register the shares of the Company's Common
Stock issuable upon conversion of the Series B Preferred Stock with the
Securities and Exchange Commission, not later than November 15, 2003.
In connection with the Series B Purchase Agreement, the Company and
Stanford entered into a Consulting Agreement, pursuant to which Stanford has
agreed to perform certain financial consulting and advisory services, in
exchange for which the Company has agreed to pay Stanford a fee of $50,000 per
year for two years.
In addition, in connection with the Series B Purchase Agreement, the
Company and Stanford have: (i) waived Section 2(e)(iii) of the Series A
Certificate of Designation, which provides for anti-dilution protection if the
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.
II-3
JUNE 2004 CONVERTIBLE DEBENTURE FINANCING
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on June 18, 2004 for the sale
of (i) $3,000,000 in callable secured convertible notes and (ii) warrants to buy
3,000,000 shares of our common stock. This prospectus relates to the resale of
the common stock underlying these secured convertible notes and warrants. The
investors are obligated to provide us with an aggregate of $3,000,000 as
follows:
o $1,500,000 was disbursed on June 18, 2004;
o $500,000 will be disbursed within five days of the filing of this
registration statement; and
o $1,000,000 will be disbursed within five days of this prospectus
being declared effective.
Accordingly, we have received a total of $1,500,000 pursuant to the
Securities Purchase Agreement. The funds from the sale of the callable secured
convertible notes will be used for business development purposes, business
acquisitions, working capital needs, pre-payment of interest, payment of
consulting and legal fees and borrowing repayment.
The callable secured convertible notes bear interest at 12%, mature two
years from the date of issuance, and are convertible into our common stock, at
the investors' option, at the lower of (i) $0.70 or (ii) 50% of the average of
the three lowest intraday trading prices for the common stock on a principal
market for the 20 trading days before but not including the conversion date. The
full principal amount of the callable secured convertible notes is due upon
default under the terms of secured convertible notes. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.57 per share. In addition, the conversion price of the secured convertible
notes and the exercise price of the warrants will be adjusted in the event that
we issue common stock at a price below the fixed conversion price, below market
price, with the exception of any securities issued in connection with the
Securities Purchase Agreement. The conversion price of the callable secured
convertible notes and the exercise price of the warrants may be adjusted in
certain circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution of the selling
stockholder's position. The selling stockholders have contractually agreed to
restrict their ability to convert or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock held by them
and their affiliates after such conversion or exercise does not exceed 4.99% of
the then issued and outstanding shares of common stock. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights.
The warrants are exercisable until five years from the date of issuance at
a purchase price of $0.57 per share. The selling stockholders will be entitled
to exercise the warrants on a cashless basis if the shares of common stock
underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the callable
secured convertible notes issued pursuant to the Securities Purchase Agreement,
dated June 18, 2004.
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of our company or executive
officers of our company, and transfer was restricted by our company in
accordance with the requirements of the Securities Act of 1933. In addition to
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-4
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-5
4.14 (11) Stock Purchase Warrant in the name of AJW Qualified Partners,
LLC dated June 18, 2004
4.15 (11) Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated
June 18, 2004
4.16 (11) Stock Purchase Warrant in the name of AJW Partners, LLC dated
June 18, 2004
4.17 (11) Registration Rights Agreement dated June 18, 2004 between the
Company and New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC
4.18(11) Security Agreement dated June 18, 2004 between the Company and New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
AJW Offshore, Ltd. and AJW Partners, LLC
4.19(11) Intellectual Property Security Agreement dated June 18, 2004
between the Company and New Millennium Capital Partners II, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW
Partners, LLC
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent
(filed herewith)
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.
II-6
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.
II-7
10.30 (6) Promissory Note issued by Stronghold Technologies, Inc. made payable
to Christopher J. Carey, dated September 30. 2002.
10.31 (7) Securities Purchase Agreement, dated April 30, 2003, by and between
Stronghold Technologies, Inc. and Stanford Venture Capital Holdings,
Inc.
10.32 (7) Registration Rights Agreement, dated April 30, 2003, by and between
Stronghold Technologies, Inc. and Stanford Venture Capital Holdings,
Inc.
10.33 (7) Consulting Agreement, dated April 30, 2003, by and between
Stronghold Technologies, Inc. and Stanford Venture Capital Holdings,
Inc.
10.34 (9) First Modification to Loan Agreement and Note among Stronghold
Technologies, Inc., Christopher J. Carey and UnitedTrust Bank, dated
July 31, 2003.
21 (5) Subsidiaries of the Registrant.
23.1 Consent of Rothstein Kass - Certified Public Accountants
(filed herewith).
(1) The exhibits and schedules to the Merger Agreement have been omitted from
this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will
furnish copies of any of the exhibits and schedules to the U.S. Securities and
Exchange Commission upon request
(2) Incorporated herein by reference to the exhibits to Registrant's Quarterly
Report on Form 10-QSB for the fiscal quarter ended June 30, 2002.
(3) Incorporated herein by reference to the exhibits to the Registrant's
Registration Statement on Form SB-2 as filed with the Securities and Exchange
Commission on February 1, 2001 (No. 333-54822).
(4) Incorporated herein by reference to the exhibits to the Registrant's Current
Report on Form 8-K dated May 16, 2002.
(5) Incorporated herein by reference to the exhibits to the Registrant's
Registration Statement on Form SB-2 as filed with the Securities and Exchange
Commission on September 24, 2002.
(6) Incorporated herein by reference to the exhibits to Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2002.
(7) Incorporated by reference to Exhibit 99.3 to the Company's Form 8-K as filed
with the Securities and Exchange Commission on May 8, 2003.)
(8) Incorporated by reference to the exhibits to Registrants Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 2003.
(9) Incorporated by reference to the exhibits to Registrants Quarterly Report on
Form 10-QSB for the quarterly period ended June 30, 2003.
(10) Incorporated by reference to the exhibits to Registrants Form 10-KSB for
the year ended December 31, 2003.
(11) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed June 28, 2004.
II-8
ITEM 28. UNDERTAKINGS.
The undersigned Company hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-9
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 July 19, 2004.
STRONGHOLD TECHNOLOGIES, INC.
By: /s/Christopher Carey
------------------------------------
Christopher Carey, President, Chief
Executive Officer, Principal
Executive Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ Robert Nawy Chief Financial Officer, and July 19, 2004
------------------------ Principal Financial/Accounting
Robert Nawy Officer
/s/ Robert J. Corliss Director July 19, 2004
------------------------
Robert J. Corliss
/s/ Robert Cox Director July 19, 2004
------------------------
Robert Cox
Director July 19, 2004
------------------------
William Lenahan
Director July 19, 2004
------------------------
Luis Delahoz
II-10
EXHIBIT 5.1
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 Avenue of the Americas, 21st Flr.
New York, NY 10018
Telephone: (212) 930-9700
Facsimile: (212) 930-9725
July 20, 2004
VIA ELECTRONIC TRANSMISSION
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
RE: STRONGHOLD TECHNOLOGIES, INC.
FORM SB-2 REGISTRATION STATEMENT (FILE NO. 333-____________)
Ladies and Gentlemen:
We refer to the above-captioned registration statement on Form SB-2
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Act"), filed by Stronghold Technologies, Inc., a Nevada corporation (the
"Company"), with the Securities and Exchange Commission.
We have examined the originals, photocopies, certified copies or
other evidence of such records of the Company, certificates of officers of the
Company and public officials, and other documents as we have deemed relevant and
necessary as a basis for the opinion hereinafter expressed. In such examination,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as certified copies or photocopies and the
authenticity of the originals of such latter documents.
Based on our examination mentioned above, we are of the opinion that
the securities being sold pursuant to the Registration Statement are duly
authorized and will be, when issued in the manner described in the Registration
Statement, legally and validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to
the Registration Statement and to the reference to our firm under "Legal
Matters" in the related Prospectus. In giving the foregoing consent, we do not
hereby admit that we are in the category of persons whose consent is required
under Section 7 of the Act, or the rules and regulations of the Securities and
Exchange Commission.
We consent to the use in this Registration Statement on Form SB-2 of our report
dated March 17, 2004, relating to the consolidated financial statements of
Stronghold Technologies, Inc. and Subsidiary, and to the reference to our Firm
under the caption "Experts" in the Prospectus.
/s/ ROTHSTEIN KASS & COMPANY, P.C.
Roseland, New Jersey
July 19, 2004
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