As filed with the Securities and Exchange Commission on February 14, 2006
An Exhibit List can be found on page II-6.
Registration No.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
STRONGHOLD TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Nevada 4841 22-3762832
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
106 Allen Road
Basking Ridge, NJ 07920
(908) 903-1195
(Address and telephone number of principal executive offices
and principal place of business)
Christopher Carey, Chief Executive Officer
STRONGHOLD TECHNOLOGIES, INC.
106 Allen Road
Basking Ridge, NJ 07920
(908) 903-1195
(Name, address and telephone number of agent for service)
Copies to:
Gregory Sichenzia, Esq.
Stephen M. Fleming Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _________
CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------------------------------------
Title of each class of Amount to be Proposed Proposed Amount of
securities to be registered registered (1) maximum maximum registration fee
offering aggregate
price per offering price
share
-------------------------------------------------------------------------------------------------------------
Common stock, $.0001 par 4,160,000,000(2) $.009(3) $37,440,000.00 $4,406.69
value issuable upon
conversion of Callable
Secured Convertible Notes
-------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par 3,000,000 $.009(5) $27,000.00 $3.18
value issuable upon exercise
of common stock purchase
warrants at $0.57 per share
-------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par 830,000 $.009(5) $7,470.00 $0.88
value issuable upon exercise
of common stock purchase
warrants at $0.03 per share
-------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par 1,700,000 $.009(5) $15,300.00 $1.80
value issuable upon exercise
of common stock purchase
warrants at $0.07 per share
-------------------------------------------------------------------------------------------------------------
Total 4,165,530,000 $37,489,770.00 $4,412.55
-------------------------------------------------------------------------------------------------------------
(1) Includes shares of our common stock, par value $0.0001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of callable secured convertible notes and the exercise of
warrants held by the selling stockholders. In addition to the shares set forth
in the table, the amount to be registered includes an indeterminate number of
shares issuable upon conversion of the callable secured convertible notes and
exercise of the warrants, as such number may be adjusted as a result of stock
splits, stock dividends and similar transactions in accordance with Rule 416.
The number of shares of common stock registered hereunder represents a good
faith estimate by us of the number of shares of common stock issuable upon
conversion of the callable secured convertible notes and upon exercise of the
warrants. For purposes of estimating the number of shares of common stock to be
included in this registration statement, we calculated a good faith estimate of
the number of shares of our common stock that we believe will be issuable upon
conversion of the callable secured convertible notes and upon exercise of the
warrants to account for market fluctuations, and antidilution and price
protection adjustments, respectively. Should the conversion ratio result in our
having insufficient shares, we will not rely upon Rule 416, but will file a new
registration statement to cover the resale of such additional shares should that
become necessary. In addition, should a decrease in the exercise price as a
result of an issuance or sale of shares below the then current market price,
result in our having insufficient shares, we will not rely upon Rule 416, but
will file a new registration statement to cover the resale of such additional
shares should that become necessary.
(2) Includes a good faith estimate of the shares underlying the callable secured
convertible notes to account for market fluctuations.
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the average
of the high and low price as reported on the Over-The-Counter Bulletin Board on
February 10, 2006, which was $0.009 per share.
2
(4) Includes a good faith estimate of the shares underlying warrants exercisable
at $.57, $.03 and $.07 per share to account for antidilution and price
protection adjustments.
(5) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
3
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 14, 2006
STRONGHOLD TECHNOLOGIES, INC.
4,165,530,000 SHARES OF
COMMON STOCK
This prospectus relates to the resale by New Millennium Capital Partners II,
LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC (the
"Investors") of up to an aggregate of 4,165,530,000 shares of our common stock,
including the following:
o up to 4,160,000,000 shares of common stock underlying callable secured
convertible notes in a principal amount of $4,500,000;
o up to 3,000,000 issuable upon the exercise of common stock purchase warrants
exercisable at $0.57 per share;
o up to 830,000 issuable upon the exercise of common stock purchase warrants
exercisable at $0.03 per share; and
o up to 1,700,000 issuable upon the exercise of common stock purchase warrants
exercisable at $0.07 per share
The shares being registered represent 99.1% of our outstanding shares of common
stock assuming the full conversion of all callable secured convertible notes and
exercise of our common stock purchase warrants. The callable secured convertible
notes are convertible into our common stock at the lower of a fixed conversion
price ($0.70 with respect to the callable secured convertible notes issued
pursuant to the June 2004 Securities Purchase Agreement, $0.02 with respect to
the callable secured convertible notes issued pursuant to the March 2005
Securities Purchase Agreement, $0.07 with respect to the callable secured
convertible notes issued pursuant to the July 2005 Securities Purchase Agreement
and $0.05 with respect to the callable secured convertible notes issued pursuant
to the July 2005 Securities Purchase Agreement) or 25% of the average of the
three lowest intraday trading prices for the common stock on a principal market
for the 20 trading days before but not including the conversion date. The
selling stockholders may sell common stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions. The selling stockholders may be deemed underwriters of
the shares of common stock which they are offering. We will pay the expenses of
registering these shares.
Our common stock is registered under the Securities Exchange Act of 1934 and is
listed on the Over-The-Counter Bulletin Board under the symbol "SGHT". The last
reported sales price per share of our common stock as reported by the
Over-The-Counter Bulletin Board on February 10, 2006, was $0.009.
Investing in these securities involves significant risks. See "Risk Factors"
beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ______________, 2006.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by
Stronghold Technologies, Inc. with the Securities and Exchange Commission. The
selling stockholders may not sell these securities until the registration
statement becomes effective. This Prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the sale is not permitted.
4
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the secured convertible notes to
the financial statements.
STRONGHOLD TECHNOLOGIES, INC.
We are a Customer Relationship Management ("CRM") solutions provider for the
retail automotive industry. Our DealerAdvance(TM) Sales Solution is designed to
streamline dealership sales operations using software that integrates existing
technology systems.
For the nine months ended September 31, 2005, we generated $817,616 in revenue
and a net loss of $3,012,016. In addition, for the year ended December 31, 2004,
we generated revenue of $2,489,790 and a net loss of $3,089,614. As a result of
recurring losses from operations and a net deficit in both working capital and
stockholders' equity, our auditors, in their report dated March 31, 2005, have
expressed substantial doubt about our ability to continue as going concern.
Our principal offices are located at 106 Allen Road, Basking Ridge, NJ 07920,
and our telephone number is (908) 903-1195. We are a Nevada corporation.
The Offering
Common stock offered by selling stockholders.........Up to 4,165,530,000 shares,
including the following:
- up to 4,160,000,000
shares of common stock
underlying callable
secured convertible
notes in the principal
amount of $4,500,000
(includes a good faith
estimate of the shares
underlying the
callable secured
convertible notes to
account for market
fluctuations),
- up to 3,000,000 shares
of common stock
issuable upon the
exercise of common
stock purchase
warrants at an
exercise price of
$0.57 per share,
- up to 830,000 shares
of common stock
issuable upon the
exercise of common
stock purchase
warrants at an
exercise price of
$0.03 per share, and
- up to 1,700,000 shares
of common stock
issuable upon the
exercise of common
stock purchase
warrants at an
exercise price of
$0.07 per share,
This number represents
99% of our current
outstanding stock.
Common stock to be outstanding after the offering.. Up to 4,203,218,793 shares
5
Use of proceeds.......................................We will not receive any
proceeds from the sale
of the common stock.
However, we will receive
the sale price of any
common stock we sell to
the selling stockholder
upon exercise of the
warrants. We expect to use
the proceeds received from
the exercise of the
warrants, if any, for
general working capital
purposes. However, the
selling stockholders will
be entitled to exercise
the warrants on a cashless
basis if the shares of
common stock underlying
the warrants are not then
registered pursuant to an
effective registration
statement. In the event
that the selling
stockholder exercises the
warrants on a cashless
basis, then we will not
receive any proceeds. In
addition, we have received
gross proceeds $4,500,000
from the sale of the
callable secured
convertible notes
Over-The-Counter Bulletin Board Symbol................SGHT
The above information regarding common stock to be outstanding after the
offering is based on 37,688,793 shares of common stock outstanding as of
February 10, 2006 and assumes the subsequent conversion of our issued secured
convertible notes and exercise of warrants by our selling stockholders.
To obtain funding for our ongoing operations, we entered into three Securities
Purchase Agreements with New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC (the "Investors"). This
prospectus relates to the resale of the common stock underlying these callable
secured convertible notes and common stock purchase warrants issued in
connection with these agreements. The following is a description of each of
these financings.
June 18, 2004 Securities Purchase Agreement
On June 18, 2004, we entered into a Securities Purchase Agreement for the sale
of (i) $3,000,000 in callable secured convertible notes and (ii) common stock
purchase warrants to buy 3,000,0000 shares of our common stock.
The following closings have occurred pursuant to the June 2004 Securities
Purchase Agreement:
o on June 18, 2004, the Investors purchased $1,500,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,500,000 shares of our common stock;
o on July 27, 2004, the Investors purchased $500,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
500,000 shares of our common stock;
o on October 22, 2004, the Investors purchased $350,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
350,000 shares of our common stock; and
o On March 18, 2005, the Investors purchase $650,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
650,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the investors' option, at the lower of (i) $0.70 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
6
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.57 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.57 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
March 31, 2005 Securities Purchase Agreement
We entered into a second Securities Purchase Agreement with the Investors on
March 31, 2005 for the sale of $650,000 in callable secured convertible notes
and common stock purchase warrants to buy 650,000 shares of our common stock.
On March 31, 2005, the Investors purchased $350,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
350,000 shares of our common stock. On May 4, 2005, the Investor purchased the
remaining $300,000 in callable secured convertible notes and received common
stock purchase warrants to purchase 300,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the Investors' option, at the lower of (i) $0.02 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.03 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.03 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
July 15, 2005 Securities Purchase Agreement
We entered into a third Securities Purchase Agreement with the Investors on July
15, 2005 for the sale of (i) $850,000 in callable secured convertible notes and
(ii) common stock purchase warrants to buy 1,700,000 shares of our common stock.
On July 15, 2005, the Investors purchased $850,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,700,000 shares of our common stock, which has been entirely funded as of the
date hereof.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the Investors' option, at the lower of (i) $0.07 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.08 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.07 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
February 6, 2006 Securities Purchase Agreement
We entered into a fourth Securities Purchase Agreement with the Investors on
February 6,2 006 for the sale of $180,000 in callable secured convertible notes
and common stock purchase warrants to buy 180,000 shares of our common stock.
On February 6, 2006, the Investors purchased $180,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
180,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the Investors' option, at the lower of (i) $0.05 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.03 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.08 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
7
As of February 10, 2006, the average of the three lowest intraday trading prices
for our common stock during the preceding 20 trading days as reported on the
Over-The-Counter Bulletin Board was $.009 and, therefore, the conversion price
for the secured convertible notes was $.0023. Based on this conversion price,
the $4,680,000 callable secured convertible notes, excluding interest, were
convertible into 2,080,000,000 shares of our common stock.
The full principal amount of the callable secured convertible notes is due upon
default under the terms of callable secured convertible notes. In addition, we
have granted the investors a security interest in substantially all of our
assets and intellectual property as well as registration rights.
The investors have contractually agreed to restrict their ability to convert the
callable secured convertible notes and exercise the common stock purchase
warrants and receive shares of our common stock such that the number of shares
of our common stock held by them and their affiliates after such conversion or
exercise does not exceed 4.99% of our then issued and outstanding shares of our
common stock.
See the "Selling Stockholders" and "Risk Factors" sections for a complete
description of the secured convertible notes.
8
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Relating to Our Business:
We Have A History Of Incurring Net Losses; We Expect Our Net Losses To Continue
As A Result Of Planned Increases In Operating Expenses; And, Therefore, We May
Never Achieve Profitability Which May Cause Us To Seek Additional Financing Or
To Cease Operations.
We have a history of operating losses and have incurred significant net losses
in each fiscal quarter since our inception. We had a net loss of $3,089,614 and
$4,258,007 for the fiscal years ended December 31, 2004 and December 31, 2003,
respectively. Our net loss for the nine months ended September 30, 2005 was
$3,012,016. We have an accumulated deficit of approximately $18,158,520 for the
period from May 17, 2002 through September 31, 2005 to offset future taxable
income. Losses prior to May 17, 2002 were passed directly to the shareholders
and, therefore, are not included in the loss carry-forward. As a result of
recurring losses, substantial working capital and stockholders' deficit and
negative cash flows from operations our auditors in their report dated March 31,
2005 for the year ended December 31, 2004 expressed substantial doubt about our
ability to continue as a going concern. We expect to continue to incur net
losses and negative cash flows for the foreseeable future. We will need to
generate significant additional revenue to achieve profitability. Our ability to
generate and sustain significant additional revenues or achieve profitability
will depend upon numerous factors outside of our control, including:
o Competing products that are more effective or less costly than ours;
o Our ability to develop and commercialize our own products and technologies;
and
o Our ability to increase sales of our existing products and any new products.
It is possible that we may never achieve profitability and, even if we do
achieve profitability, we may not sustain or increase profitability in the
future. If we do not achieve sustained profitability, we may be unable to
continue our operations.
If we do not obtain financing when needed, our business will fail as we will not
have sufficient funds to produce and market the Dealeradvance Suite of Products
o Our current operating funds will allow us to continue our operations until
April 1, 2006. In order for us to successfully market our products, we will need
to obtain additional financing after April 1, 2006. As of September 30, 2005, we
had cash in the amount of $1,200 and our net loss for the nine months ended
September 30, 2005 was $3,012,016.
In the event that we are not able to raise additional funds beyond the
requirements for operation through December 2006, we may be insolvent and unable
to continue operations.
We will also require additional financing if our costs are greater than
anticipated. We will require additional financing to sustain our business
operations if we are not successful in generating additional revenues. We
currently do not have any arrangements for additional financing and we may not
be able to obtain financing when required. If we fail to obtain the required
financing and our business fails, you may be unable to sell your shares of
common stock.
We Have Entered An Installment Agreement with the United States Internal Revenue
Service and if we default under such Installment Agreement, the IRS could
attempt to seize our assets for payment of taxes owed.
9
On April 30, 2004, we entered into an installment agreement with the IRS to pay
withholding taxes due in the amount of $1,233,101.35, which includes interest
and penalties, under the terms of which we will pay $35,000 each month,
commencing June 28, 2004, until we have paid the withholding taxes due in full.
We estimate that at the rate of $35,000 per month, we will make 36 monthly
payments to the IRS. To date, we have made all payments under the installment
agreement. If we violate the installment agreement, the IRS could take
possession of our assets and we may be forced to cease operations and/or to file
for bankruptcy protection.
We Have A Limited Operating History, Therefore It Is Difficult To Evaluate Our
Financial Performance And Prospects.
We were formed in September 2000 to import and market truffle oil products. As
of May 16, 2002, our business purpose focus shifted to the development and
marketing of handheld wireless technology for the automotive dealer software
market. We entered the handheld wireless technology business through the
acquisition of an entity with a 22-month operating history. We are, therefore,
subject to all of the risks inherent in a new business enterprise. Our limited
operating history makes it difficult to evaluate our financial performance and
prospects. We cannot assure you that in the future we will operate profitably or
that we will have adequate working capital to meet our obligations as they
become due. Because of our limited financial history, we believe that
period-to-period comparisons of our results of operations will not be meaningful
in the short term and should not be relied upon as indicators of future
performance.
We May Fail To Gain Market Acceptance Of Our DealerAdvance(TM) suite of products
Which May Result in Our Business And Results Of Operations Being Negatively
Impacted.
We are still in the early marketing stages of our DealerAdvance(TM) suite of
products. Our first pilot system for DealerAdvance Sales Solution(TM) was
installed in April 2001 and our sixth and final pilot system was installed in
September 2001. We implemented a total of 33 additional sites in 2002. As of
September 30, 2004, a total of 82 Dealerships were using the DealerAdvance Sales
Solution(TM) in 13 states. We expect to introduce our DealerAdvance Service
Solution(TM) over the next two years. This solution is still in the development
stages and is not yet ready for testing. While we have received positive
feedback of DealerAdvance Sales Solution(TM) by the test sites, sixty-nine
systems is a small number and results in such sites may not be indicative of the
overall market acceptance and success of DealerAdvance Sales Solutions(TM) or
our entire DealerAdvance(TM) suite of products. The nature of our handheld
product and technology requires us to market almost exclusively to automobile
dealerships. Our prospects for success will depend on our ability to
successfully sell our products to key automobile dealerships that may be
inhibited from doing business with us because of their commitment to their own
technologies and products, or because of our relatively small size and lack of
sales and production history. A large number of automobile dealerships elect to
not utilize our product due to the fact that they have their own system, they
deem DealerAdvance(TM) suite of products to not be cost effective or other
reason, In the event that the DealerAdvance(TM) suite of products is not
generally accepted by automobile dealerships, then our revenue and results of
operations will be negatively impacted.
We Depend On Attracting And Retaining Key Personnel To Maintain Our Competitive
Advantage, Therefore The Loss Of Their Services May Significantly Delay Or
Prevent The Achievement Of Our Strategic Objectives.
We are highly dependent on the principal members of our management, research and
sales staff. The loss of their services might significantly delay or prevent the
achievement of our strategic objectives. Our success depends on our ability to
retain key employees and to attract additional qualified employees. Competition
for personnel is intense, and we cannot assure you that we will be able to
retain existing personnel or attract and retain additional highly qualified
employees in the future.
Our subsidiary, Stronghold, has an employment agreement in place with its
President and Chief Executive Officer, Christopher J. Carey, which provides for
vesting of options exercisable for shares of our common stock based on continued
employment and on the achievement of performance objectives defined by the board
of directors. Stronghold does not have similar retention provisions in its
employment agreements with other key personnel. If we are unable to hire and
retain personnel in key positions, our business could be significantly and
adversely affected unless qualified replacements can be found.
10
Our success is dependent on the vision, technological knowledge, business
relationships and abilities of our president, Mr. Carey. Any reduction of Mr.
Carey's role in our business would have a material adverse effect on us. Mr.
Carey's employment contract expired on December 31, 2004. He has not, however,
expressed any intention or desire to leave.
Risks Concerning Our Handheld Technology:
We Obtain Products And Services From Third Parties, Therefore An Interruption In
The Supply Of These Products And Services Could Cause A Decline In Sales Of Our
Products And Services.
We are dependant upon certain providers of software, including Microsoft
Corporation and their Pocket PC software, to provide the operating system for
our applications. If there are significant changes to this software, or if this
software stops being available or supported, we will experience a disruption to
our product and development efforts.
In designing, developing and supporting our wireless data services, we rely on
mobile device manufacturers, content providers, database providers and software
providers. These suppliers may experience difficulty in supplying us products or
services sufficient to meet our needs or they may terminate or fail to renew
contracts for supplying us these products or services on terms we find
acceptable. Any significant interruption in the supply of any of these products
or services could cause a decline in sales of our products and services, unless
and until we are able to replace the functionality provided by these products
and services. We also depend on third parties to deliver and support reliable
products, enhance their current products, develop new products on a timely and
cost-effective basis and respond to emerging industry standards and other
technological changes.
Competition In The Wireless Technology Industry Is Intense And Technology Is
Changing Rapidly, Therefore We May Be Unable To Compete Successfully Against Our
Current And Future Competitors In The Future.
Many wireless technology and software companies are engaged in research and
development activities relating to our range of products. The market for
handheld wireless technology is intensely competitive, rapidly changing and
undergoing consolidation. We may be unable to compete successfully against our
current and future competitors, which may result in price reductions, reduced
profit margins and the inability to achieve market acceptance for our products.
Our competitors in the field are major international car dealership service
companies, specialized technology companies, and, potentially, our joint venture
and strategic alliance partners. Many of our competitors have substantially
greater financial, marketing, sales, distribution and technical resources than
us and have more experience in research and development, sales, service,
manufacturing and marketing. We anticipate increased competition in the future
as new companies enter the market and new technologies become available. Our
technology may be rendered obsolete or uneconomical by technological advances
developed by one or more of our competitors.
We May Not Have Adequately Protected Our Intellectual Property Rights, Therefore
We May Not Be Successful In Protecting Our Intellectual Property Rights.
Our success depends on our ability to sell products and services for which we do
not currently have intellectual property rights. We currently do not have
patents on any of our intellectual property. We have filed for a patent which
protects a number of developments pertaining to the management of information
flow for automotive dealer-based software. We plan to file an additional patent
application which will address certain proprietary features pertaining to our
systems components, related equipment and software modules. We cannot assure you
we will be successful in protecting our intellectual property right through
patent law.
We rely primarily on trade secret laws, patent law, copyright law, unfair
competition law and confidentiality agreements to protect our intellectual
property. To the extent that these avenues do not adequately protect our
technology, other companies could develop and market similar products or
services, which could adversely affect our business.
11
We May Be Sued By Third Parties For Infringement Of Their Proprietary Rights,
Therefore We May Incur Defense Costs And Possibly Royalty Obligations Or Lose
The Right To Use Technology Important To Our Business.
The wireless technology and software industries are characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of participants in our market increases, the possibility
of an intellectual property claim against us could increase. Any intellectual
property claims, whether with or without merit, could be time consuming and
expensive to litigate or settle and could divert management attention from the
administration of our business. A third party asserting infringement claims
against us or our customers with respect to our current or future products may
adversely affect us.
Risks Relating to Our Current Financing Arrangement:
There Are a Large Number of Shares Underlying Our Callable Secured Convertible
Notes, and Warrants That May be Available for Future Sale and the Sale of These
Shares May Depress the Market Price of Our Common Stock.
As of February 10, 2006, we had 37,688,793 shares of common stock issued and
outstanding and callable secured convertible notes outstanding or an obligation
to issue callable secured convertible notes that may be converted into an
estimated 2,080,000,000 shares of common stock at current market prices, and
outstanding warrants or an obligation to issue warrants to purchase 5,530,000
shares of common stock. In addition, the number of shares of common stock
issuable upon conversion of the outstanding callable secured convertible notes
may increase if the market price of our stock declines. All of the shares,
including all of the shares issuable upon conversion of the notes and upon
exercise of our warrants, may be sold without restriction. The sale of these
shares may adversely affect the market price of our common stock. As the market
price declines, then the callable secured convertible notes will be convertible
into an increasing number of shares of common stock resulting in dilution to our
shareholders.
The Continuously Adjustable Conversion Price Feature of Our Callable Secured
Convertible Notes Could Require Us to Issue a Substantially Greater Number of
Shares, Which Will Cause Dilution to Our Existing Stockholders.
Our obligation to issue shares upon conversion of our callable secured
convertible notes is essentially limitless. The following is an example of the
amount of shares of our common stock that are issuable, upon conversion of the
Notes (excluding accrued interest), based on market prices 25%, 50% and 75%
below the average of the three lowest intraday trading prices for our common
stock during the previous 20 trading days as of February 10, 2006 of $0.009.
Number
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 75% Issuable Stock
------ ----- ------ -------- -----
25% $.0068 $.0017 2,773,333,333 98.66%
50% $.0045 $.0011 4,160,000,000 99.10%
75% $.0023 $.0006 8,320,000,000 99.55%
As illustrated, the number of shares of common stock issuable upon conversion of
our secured convertible notes will increase if the market price of our stock
declines, which will cause dilution to our existing stockholders.
The Continuously Adjustable Conversion Price feature of our Callable Secured
Convertible Notes May Encourage Investors to Make Short Sales in Our Common
Stock, Which Could Have a Depressive Effect on the Price of Our Common Stock.
12
The callable secured convertible notes are convertible into shares of our common
stock at a 75% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the common stock
as the selling stockholder converts and sells material amounts of common stock
could encourage short sales by investors. This could place further downward
pressure on the price of the common stock. The selling stockholder could sell
common stock into the market in anticipation of covering the short sale by
converting their securities, which could cause the further downward pressure on
the stock price. In addition, not only the sale of shares issued upon conversion
or exercise of notes, warrants and options, but also the mere perception that
these sales could occur, may adversely affect the market price of the common
stock.
The Issuance of Shares Upon Conversion of the Callable Secured Convertible Notes
and Exercise of Outstanding Warrants May Cause Immediate and Substantial
Dilution to Our Existing Stockholders.
The issuance of shares upon conversion of the callable secured convertible notes
and exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although the selling stockholders
may not convert their callable secured convertible notes and/or exercise their
warrants if such conversion or exercise would cause them to own more than 4.99%
of our outstanding common stock, this restriction does not prevent the selling
stockholders from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, the selling stockholders
could sell more than this limit while never holding more than this limit. There
is no upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
In The Event That Our Stock Price Declines, The Shares Of Common Stock Allocated
For Conversion Of The Callable Secured Convertible Notes and Registered Pursuant
To This Prospectus May Not Be Adequate And We May Be Required to File A
Subsequent Registration Statement Covering Additional Shares. If The Shares We
Have Allocated And Are Registering Herewith Are Not Adequate And We Are Required
To File An Additional Registration Statement, We May Incur Substantial Costs In
Connection Therewith.
Based on our current market price and the potential decrease in our market price
as a result of the issuance of shares upon conversion of the callable secured
convertible debentures, we have made a good faith estimate as to the amount of
shares of common stock that we are required to register and allocate for
conversion of the convertible debentures. As we do not currently have the
required amount of shares available, we may be required to file an additional
registration statement after we have increased our authorized common stock.
Accordingly, subject to obtaining an increase in our authorized shares of common
stock, we will allocate and register approximately 4,160,000,000 shares to cover
the conversion of the callable secured convertible debentures. In the event that
our stock price decreases, the shares of common stock we have allocated for
conversion of the callable secured convertible debentures and are registering
hereunder may not be adequate. If the shares we have allocated to the
registration statement are not adequate and we are required to file an
additional registration statement, we may incur substantial costs in connection
with the preparation and filing of such registration statement.
If We Are Required for any Reason to Repay Our Outstanding Callable Secured
Convertible Notes, We Would Be Required to Deplete Our Working Capital, If
Available, Or Raise Additional Funds. Our Failure to Repay the Callable Secured
Convertible Notes, If Required, Could Result in Legal Action Against Us, Which
Could Require the Sale of Substantial Assets.
We entered three Securities Purchase Agreements for the sale of an aggregate of
$4,680,000 principal amount of callable secured convertible notes. The callable
secured convertible notes are due and payable, with 12% interest, two years from
the date of issuance, unless sooner converted into shares of our common stock.
In addition, any event of default such as our failure to repay the principal or
interest when due, our failure to issue shares of common stock upon conversion
by the holder, our failure to timely file a registration statement or have such
registration statement declared effective, breach of any covenant,
representation or warranty in the Securities Purchase Agreement or related
convertible note, the assignment or appointment of a receiver to control a
substantial part of our property or business, the filing of a money judgment,
writ or similar process against our company in excess of $50,000, the
commencement of a bankruptcy, insolvency, reorganization or liquidation
proceeding against our company and the delisting of our common stock could
require the early repayment of the callable secured convertible notes, including
a default interest rate of 15% on the outstanding principal balance of the notes
if the default is not cured with the specified grace period. We anticipate that
the full amount of the callable secured convertible notes will be converted into
shares of our common stock, in accordance with the terms of the callable secured
convertible notes. If we are required to repay the callable secured convertible
notes, we would be required to use our limited working capital and raise
additional funds. If we were unable to repay the notes when required, the note
holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
13
Risks Relating to Our Common Stock:
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in penny
stocks; and
o the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to be
purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of the
person; and
o make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and experience
in financial matters to be capable of evaluating the risks of transactions in
penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability
determination; and o that the broker or dealer received a signed, written
agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
14
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholder upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes. However, the selling stockholders will be entitled to exercise the
warrants on a cashless basis if the shares of common stock underlying the
warrants are not then registered pursuant to an effective registration
statement. In the event that the selling stockholder exercises the warrants on a
cashless basis, then we will not receive any proceeds. The proceeds received
from the sale of the callable secured convertible notes have been used for
business development purposes, working capital needs, pre-payment of interest,
payment of consulting and legal fees and repayment of debt.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the OTC Bulletin Board, referred to herein as the
OTCBB, under the symbol "SGHT ". The following table sets forth the high and low
bid prices of our Common Stock, as reported by the OTCBB for each quarter since
January 1, 2002. The quotations set forth below reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not represent actual
transactions.
2003 High Low
---- ---- ---
January 1, 2003 - March 31, 2003 $1.70 $0.25
April 1, 2003 - June 30, 2003 $1.01 $0.59
July 1, 2003 - September 30, 2003 $0.98 $0.47
October 1, 2003 - December 31, 2003 $0.70 $0.30
2004 High Low
---- ---- ---
January 1, 2004 - March 31, 2004 $0.85 $0.45
April 1, 2004 - June 30, 2004 $0.60 $0.24
July 1, 2004 - September 30, 2004 $0.27 $0.11
October 1, 2004 - December 31, 2004 $0.40 $0.11
2005 High Low
---- ---- ---
January 1, 2005 - March 31, 2005 $0.25 $0.02
April 1, 2005 - June 30, 2005 $0.10 $0.01
July 1, 2005 - September 30, 2005 $0.10 $0.04
October 1, 2005 - December 31, 2005 $0.04 $0.02
2005 High Low
---- ---- ---
January 1, 2006 - March 31, 2006* $0.03 $0.007
* Through February 10, 2006
15
As of February 10, 2006, there were approximately 73 holders of record of our
common stock.
We have appointed Continental Stock Transfer & Trust Company, 17 Battery Place,
New York, New York 10004, as transfer agent for our shares of Common Stock.
Equity Compensation Plan Information
We currently do not have any equity compensation plans.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our financial
condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Risk Factors,"
"Business" and elsewhere in this prospectus. See "Risk Factors."
Our History
We were incorporated as a Nevada corporation on September 8, 2000, under the
name TDT Development, Inc. On May 16, 2002 we acquired Stronghold Technologies,
Inc., a New Jersey corporation referred to herein as our "Predecessor Entity",
pursuant to a merger of the Predecessor Entity into our wholly-owned subsidiary,
TDT Stronghold Acquisition Corp., referred to herein as "Acquisition Sub". As
consideration for the merger, we issued 7,000,000 shares of our common stock to
the stockholders of the Predecessor Entity in exchange for all of the issued and
outstanding shares of the Predecessor Entity. Following the merger, Acquisition
Sub, the survivor of the merger, changed its name to Stronghold Technologies,
Inc. (NJ) and remains our only wholly-owned subsidiary. On July 11, 2002, we
changed our name from TDT Development, Inc. to Stronghold Technologies, Inc. On
July 19, 2002, we exchanged all of the shares that we held in our two other
wholly-owned subsidiaries, Terre di Toscana, Inc. and Terres Toscanes, Inc.,
which conducted an import and distribution business specializing in
truffle-based food product, for 75,000 shares of our common stock held by Mr.
Pietro Bortolatti, our former president.
Overview of our Handheld Technology Business
On May 16, 2002, we entered the handheld wireless technology business via our
acquisition by merger of the Predecessor Entity. The Predecessor Entity was
founded on August 1, 2000 to develop proprietary handheld wireless technology
for the automotive dealer software market. Since the merger of the Predecessor
Entity into our subsidiary, we continue to conduct the Predecessor Entity's
handheld wireless technology business.
Our past results of operations and ensuing financial condition have resulted
from our allocating significant resources to the development of our wireless
technology business for use by the automobile dealership market that have been
traditionally slow to accept such products. We have achieved initial acceptance,
which has resulted in our generating limited revenue. The sales to date from our
inception through the second quarter of 2004 have been achieved through direct
selling efforts defined as employees of our company selling directly to dealers.
We believe the initial sales of our products have positioned our company to now
start selling through third party sellers that have established distribution
channels. We announced our first distribution agreement in the third quarter and
have realized the first sale pursuant to this distribution agreement.
In the event that our distribution efforts through third party sellers do not
increase our revenue to where we attain cash flow self sufficiency, then we
would have to raise additional capital beyond the final tranche of funding to be
provided with five days after the effective date of the registration statement.
Additionally, should there be a significant slow down in the purchase of
automobile vehicles in the USA domestic market; this could cause dealers to slow
down there buying decision of new technology which would negatively impact our
results of operations.
17
Our Revenues
Our revenues are primarily received from system installation, software licenses
and system maintenance. The approximate average selling package price of the
system and installation is $60,000. Additional revenues are derived from monthly
system maintenance agreements that have a monthly fee of $850 per month and a
total contract value of $30,600. The revenues derived from these categories are
summarized below:
o Software License Revenues: This represents the software license portion of the
Dealer Advance Service Solution purchased by customers of our company. The
software and intellectual property of Dealer Advance has been developed and is
owned by us.
o System Installation Revenues: This represents the installation and hardware
portion of the Dealer Advance Service Solution. All project management during
the installation is performed by us. The installation and hardware portions
include cable wiring subcontracting services and off the shelf hardware and
handheld computers ("PDA"s).
o Monthly Recurring Maintenance Revenue: This represents the maintenance and
support contract for the Dealer Advance Service Solution that the customer
executes with the system installation. The typical maintenance contract is for
36 months. In the three year operating history of the company, approximately 50%
of all the company's customers have prepaid the maintenance fees through a third
party leasing finance company. The third part leasing arrangements with dealers
are commitments by the dealer client directly to the financing company with no
recourse to our company. These prepaid maintenance fees have provided additional
cash flow to us and have generated a deferred revenue liability on or balance
sheet.
Cost of sales for software licensing with the installation are estimated at 10%
of revenue for reproduction, minor customer specific configurations and the
setup cost of interface with the customers' DMS. Cost of sales for the system
installation includes direct labor and travel, subcontractors and third party
hardware.
General and Administrative Operating Expenses
The general operating expenses of our company are primarily comprised of:
o Marketing and Selling;
o General and Administrative;
o Development & Operations;
Our marketing and selling expenses include all labor, sales commissions and
non-labor expenses of selling and marketing of our products and services. These
include the salaries of two Vice Presidents of Sales and the Business
Development Manager ("BDM") staff.
Our general and administrative expenses include expenses for all facilities,
insurance, benefits, telecommunications, legal and auditing expenses are
included as well as the executive management group wage expense.
Our development & operations expenses include the expenses for the Client
Consultant group which advises and supports the installations of our Dealer
Advance(TM) clients.
Bad debt expenses are also included under Selling, General and Administrative
Expenses. The policy for recognition of bad debt expenses established for the
year end December 31, 2003 is still in effect. This policy has been established
utilizing the amount of future returns estimated based on historical
calculations, technology obsolescence and return period. We have set the policy
for reserves for doubtful accounts at 20% of our accounts receivables to account
for estimated rights of returns and uncollectible accounts. This is based on a
historical return rate of 18% for 2003 and 16% in 2004. In the first full
operating year of 2002 the return rate was 25%. The estimate for total returns
in the life of our company as of September 30, 2005 is 24 returns on 119 sales
for a return rate of 20.16% for the life of operations. In recognizing revenue,
we consider the following factors:
o Our price to the buyer is substantially fixed or determinable at the date of
sale as evidenced by the contract signed for each sales and the terms and
conditions of each;
o The buyer has paid our company and the buyers obligation is not contingent on
resale of the product;
18
o The buyer's obligation to our company would not be changed in the event of
theft or physical destruction or damage of the product;
o The buyer acquiring the product for resale has economic substance apart from
that provided by our company;
o we do not have significant obligations for future performance to directly
bring about resale of the product by the buyer; and
o The amount of future returns can be reasonably estimated based on historical
calculations, technology obsolescence and return period.
THREE MONTHS ENDED SEPTEMBER 30, 2005 AND THREE MONTHS ENDED September 30, 2004.
Revenue
For the quarter ended September 30, 2005, we had revenue of $189,782 compared
with revenue of $475,969 for the quarter ended September 30, 2004. Revenue is
generated from software license and system installation, maintenance support and
service revenues. Revenues for the three months ended September 30, 2005 are
broken down as follows:
Three Months Three Months
Ended Sep 30, Ended Sep 30,
2005 2004 $ Change % Change
--------------- --------------- -------------- ---------------
Software License & System Installation $ 19,827 $ 328,667 $(308,840) -93.97%
Support Maintenance 155,030 133,802 21,228 15.87%
Services 14,925 13,500 1,425 10.56%
--------------- --------------- -------------- ---------------
Total Revenue $ 189,782 $ 475,969 $(286,187) -60.13%
This decrease in revenue of $285,354 or 60.06% is primarily attributed to the
steps we made to address our limited funding that included reductions of our
sales, marketing and client consultant staffs that resulted in fewer
installations.
Although we cannot provide guarantees, we do believe that our revenues will
stabilize and achieve prior period revenue levels. Additionally, we may increase
revenues in the future as we further develop our third party distributors and as
the market learns that the potential for a bank foreclosure has been removed. We
do not expect that we will incur additional expenses such as training and the
development of training manuals associated with the implementation of our third
party distributor sales strategy.
Cost of Sales
Cost of sales on a percentage basis increased to 36.03% of revenue for the three
months ended September 30, 2005 as compared to 37.13% of revenue for the three
months ended September 30, 2004 for a net decrease of 1.10%. The table below
shows the Cost of Sales and percentage by category and the comparison in dollars
and percentage for the three months ended September 30, 2005 and three months
ended September 30, 2004. The increase in Cost of Sales as a percentage of
revenue of 1.10% is primarily attributed to the centralization of all client
support functions to the Company's headquarters in New Jersey, the outsourcing
of in the field on site support instead of local Company employed Consultant
resources, and the continuing reduction of costs for hardware. We believe that
the future operations of the Company will be consistent with this Cost of Goods
Sold as a percentage of revenue.
19
Q3 2005 Q3 2004 Q3 2005 Q3 2004
Cost of Sales Dollars Dollars % of Revenue % of Revenue % Change
------------- ------- ------- ------------ ------------ --------
Hardware Components $ 12,553 $ 77,783 6.61% 16.34% -9.87%
Client Software & Licensing 5,975 23,131 3.15% 4.86% -1.72%
Distribution Fees 951 - 0.50% 0.50%
Subcontractors 5,916 4,387 3.12% 0.92% 2.19%
Misc Installation Costs 1,074 1,611 0.57% 0.34% 0.23%
Installations/Travel 3,025 30,000 1.59% 6.31% -4.72%
Repairs - 630 0.00% 0.13% -0.13%
Shipping 1,191 9,510 0.63% 2.00% -1.37%
Labor 37,696 28,812 19.86% 6.05% 13.80%
Total Cost of Sales $ 68,381 $175,863
------ ------ ----- ---- -----
Total Cost of Sales % of Revenue 36.03% 37.13% -1.10%
------ ------ ----- ---- -----
Gross Profits
We generated $121,401 in gross profits from sales for the quarter ended
September 30, 2005, which was a decrease of $107,482 from the quarter ended
September 30, 2004, when we generated $300,106 in gross profits. Our gross
profit margin percentage was essentially unchanged at 63.97% in the quarter
ended September 30, 2005 and 63.05% in the quarter ended September 30, 2004.
Selling, General and Administrative Expenses
Total Selling, General and Administrative expenses in the quarter ended
September 30, 2005 were $332,242, a decrease of 57.02% or $440,778 from the
quarter ended September 30, 2004 of $773,020. The reduction in expense is
primarily attributable to the reduction of staff from 22 in September 30, 2004
to 8 in the quarter ended September 30, 2005. The significant reduction in
staffing resulted in a reduction of payroll expenses of $254,971 which was the
largest portion of the $332,242 reduction.. Other significant expense reductions
within selling, general and administrative expenses for the quarter ended
September 30, 2005 and September 30, 2004 included the following:
o Marketing expense of $20,133
o Employee benefits of $18,279
o Legal expense of $11,172
o Accounting costs of $41,767 and
o Travel and automobile expenses reductions of $46,641
Our interest and penalty expense increased from $349,988 in the quarter ended
September 30, 2004 to $639,773 in the quarter ended September 30, 2005. This
increase of $289,785 is primarily due to the non-cash category of interest
expense resulting from the Beneficial Conversion Expense attributed to the AJW
Convertible Notes. This non-cash category expense is attributed to the Company's
adherence to EITF 98-5 "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios" and EITF 00-27
"Application of Issue No. 98-5 to Certain Convertible Instrument". The Company
recorded $494,007 of Beneficial Conversion Expense in the third quarter of 2005
as compared $229,166 in the third quarter of 2004. Additionally, the Company
also incurred additional interest charges of $119,371 attributable to the
convertible debt of $4,032,500 and an additional $17,643 for debt financing of
$875,000 provided by Stanford.
Operating Loss
Our operating losses decreased by $262,073 in comparing the quarter ended
September 30, 2005 to the quarter ended September 30, 2004, which were $210,841
and $472,914, respectively. This decrease in losses is primarily attributed to
the significant reduction in selling, general and administrative expenses of
$440,778 for the comparative periods.
20
Net Loss
We had a net loss of $1,056,287 for the quarter ended September 30, 2005
compared to $997,183 for the quarter ended September 30, 2004, resulting in an
increase in net losses of $59,104. This increase of net losses of 5.93 is
primarily attributable to the $289,785 increase in interest, offset by a
reduction in operating losses of $262,073.
Our loss per share was $.05 with a weighted average of 17,287,349 shares
outstanding in the quarter ended September 30, 2005 as compared to $0.07 loss
per share in the quarter ended September 30, 2004 with a weighted average of
16,991,761 shares outstanding.
We have never declared or paid any cash dividends on our common stock. We
anticipate that any earnings will be retained for development and expansion of
our business and we do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors, subject to any restrictions or
prohibitions that may be contained in our loan or preferred stock agreements,
has sole discretion to pay dividends based on our financial condition, results
of operations, capital requirements, contractual obligations and other relevant
factors.
Year ended December 31, 2004 Compared to the Year Ended December 31, 2003.
Revenue
For the year ended December 31, 2004 we had revenue of $2,476,851 compared with
revenue of $2,996,344 for the year ended December 31, 2003 for a decrease of
17%. Revenue is generated from software license and system installation,
maintenance support and service revenues. Revenues for the years ended December
31, 2004 and December 31, 2003 are broken down as follows:
2004 2003 $ Change $ Change
---------- ---------- --------- --------
Software License & System
Installation $1,925,373 $2,639,964 $(716,441) -27%
Support & Maintenance $ 527,037 $ 288,075 $ 227,874 79%
Services $ 37,380 $ 68,305 $ (30,925) -45%
---------- ---------- --------- --------
Total Revenue $2,489,790 $2,996,344 $(506,554) -17%
Software license and system installation revenue decreased $716,441 in 2004 to
$1,923,523 as compared to $2,369,964 in 2003 for a decrease of 27%. The company
installed 27 sites in 2004 with an average sales price of $58,000 as compared to
40 sites in 2003, with an average sales price of $60,000. The decrease in
revenue in software license and system installations is primarily attributable
to the following:
o the steps we made to address our limited funding that included reductions of
our sales, marketing and client consultant staffs,
o a strategic decision to allocate resources to establish our first sales
efforts through third party distributors; and
o a loss of momentum in the late part of the second quarter and the early part
of the third quarter resulting from concerns regarding closure of our pending
funding that was needed to maintain operations.
Support and maintenance revenues increased $227,874 in 2004 to $515,948 as
compared to $288,075 in 2003 for an increase of 79%. This increase was
attributable to an increase of 29 sites under maintenance contracts from 55 at
the end of 2003 to 84 at the end of 2004.
21
Services revenue consisting of training decreased $30,925 in 2004 to $37,380 as
compared to $68,305 in 2003 for a decrease of 45%.
Given that we have continued to generate losses and are reliant on raising
capital to support operations, the continued loss of momentum may cause our
revenues to continue to decrease.
Cost of Sales
Cost of sales on a percentage of revenue basis was reduced 7.5% to 33.51% of
revenue for the twelve months ended December 31, 2004 as compared to 41.06% of
revenue for the twelve months ended December 31, 2003. The table below shows the
Cost of Sales and percentage by category and the comparison in dollars and
percentage for the twelve months ended December 31, 2004 and twelve months ended
December 31, 2003. The decrease in Cost of Sales as a percentage of revenue of
7.54% is primarily attributed to corresponding percentage decreases in Hardware
Components, Software and Licensing, Subcontractors and Installations/Travel,
offset by percentage increases in Distribution Fees and Labor. Our cost of sales
as a percentage of revenue may increase in the future as we utilize additional
third party distributors.
2004 2003 2004 2003
% of % of
Cost of Sales Dollars Dollars Revenue Revenue % Change
---------------------------------- --------- ----------- ------- ------- --------
5100 - Hardware Components $ 341,245 $ 479,949 13.71% 16.02% -2.31%
5200 - Client Software & Licensing $ 97,537 $ 151,780 3.92% 5.07% -1.15%
5300 - Distribution Fees $ 11,810 $ -- 0.47% 0.00% 0.47%
5400 - Subcontractors $ 28,987 $ 79,456 1.16% 2.65% -1.49%
5500 - Misc Installation Costs $ 5,306 $ 17,527 0.21% 0.58% -0.37%
5600 - Installations/Travel $ 149,243 $ 254,173 5.99% 8.48% -2.49%
5700 - Shipping $ 41,677 $ 66,247 1.67% 2.21% -0.54%
5800 - Labor $ 158,545 $ 181,040 6.37% 6.04% 0.33%
TOTAL COST OF SALES $ 834,350 $ 1,230,174
-----------------------------------------------------------------------------------------
TOTAL COST OF SALES % OF REVENUE 33.51% 41.06% -7.54%
-----------------------------------------------------------------------------------------
Gross Profits
We generated $1,655,441 in gross profits from sales for the year ended December
31, 2004, which was a decrease of $110,729 from the year ended December 31,
2003, when we generated $1,766,170 in gross profits. Our gross profit margin
percentage increased by 7.54% from 58.94% in the year ended December 31, 2003 to
66.49% in the year ended December 31, 2004. The Company's ability to increase
its gross profit margin despite the reduction in revenue is due to the Company's
ability to maintain prices and eliminate excess labor capacity present in 2003.
Selling, General and Administrative Expenses
Total Selling, General and Administrative expenses in the year ended December
31, 2004 were $3,878,044, a decrease of 29.64% or $1,633,998 from the year ended
December 31, 2003 of $5,512,042. The significant reduction in expense is
primarily attributable to efficiencies gained through the reduction of staff
from 41 in December 31, 2003 to 21 in the year ended December 31, 2004. The
significant reduction in staffing resulted in a reduction of payroll expenses of
$1,051,700, which was the largest portion of the $1,633,998 reduction. Other
significant expense reductions within selling, general and administrative
expenses for the year ended December 31, 2004 and December 31, 2003 included
reductions as follows:
o legal expenses of $39,187,
o printing and reproduction expenses of $32,602
22
o travel and automobile expenses reductions of $155,127
o marketing expenses of $37,576.
o recruiting of $47,111
o consultant expenses of $154,835
Our interest and penalty expense increased from $512,135 in the year ended
December 31, 2003 to $867,010 in the year ended December 31 2004. This increase
of $354,875 is primarily due a new non-cash category of interest expense
resulting from the Beneficial Conversion Expense attributed to the AJW
Convertible Notes. This new non-cash category expense is attributed to the
Company's adherence to EITF 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and
EITF 00-27 "Application of Issue No. 98-5 to Certain Convertible Instrument". We
recorded $539,581 of Beneficial Conversion Expense in the year ended December
31, 2004 for the closing of the first three tranches of $2,350,000 of
convertible debt detailed in the notes to financials. The comparative increase
of $354,875 also included one time penalty charge in 2003 of $130,000 for IRS
penalties.
Operating Loss
Our operating losses decreased by $1,523,268 in comparing the year ended
December 31, 2004 to the year ended December 31, 2003, which were $2,222,604 and
$3,745,872, respectively. This improvement in operating loss despite the
significant reduction in revenues is attributable to the 7.54% increase of gross
profit margins and the significant reductions of selling, general and
administrative expenses of $1,633,998.
Net Loss
We had a net loss of $3,089,614 for the year ended December 31, 2004 compared to
$4,258,007 for the year ended December 31, 2003, a decrease in net losses of
$1,168,393. This reduction of net losses of 27.44% despite the decrease of
revenue and increased interest expense is also primarily attributable to the
7.54% increase of gross profit margins and the significant reductions of
selling, general and administrative expenses of $1,633,998.
Our loss per share also reduced to $.22 loss per share with a weighted average
of 14,081,263 shares outstanding in the year ended December 31, 2004 as compared
to $0.38 loss per share in the year ended December 31, 2003 with a weighted
average of 11,304,347 shares outstanding.
We have never declared or paid any cash dividends on our common stock. We
anticipate that any earnings will be retained for development and expansion of
our business and we do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors, subject to any restrictions or
prohibitions that may be contained in our loan or preferred stock agreements,
has sole discretion to pay dividends based on our financial condition, results
of operations, capital requirements, contractual obligations and other relevant
factors.
Liquidity and Capital Resources
Overview
As of September 30, 2005, our cash balance was $1,200. We had a net loss of
$1,056,287 for the quarter ended September 30, 2005. We had a net operating loss
of approximately $13,250,000 for the period from May 17, 2002 through September
30, 2005 to offset future taxable income. Losses incurred prior to May 17, 2002
were passed directly to the shareholders and, therefore, are not included in the
loss carry-forward. There can be no assurance, however, that we will be able to
take advantage of any or all tax loss carry-forwards, in future fiscal years.
Our accounts receivable as of September 30, 2005 was $117,766, less allowance
for doubtful accounts of $20,736, and $543,920 as of the quarter ended September
30, 2004, less allowances for doubtful accounts of $181,750. The reason for the
decrease in accounts receivable, less doubtful accounts was due to the decrease
in revenues. Accounts receivable balances represent amounts owed to us for new
installations and maintenance, service, training services, software
customization and additional systems components.
As of September 30, 2005, the Company had the following financing arrangements:
23
Debt Liability Summary Table
----------------------------
Current Debt liabilities
IRS Payment Plan 490,000
Interest payable, stockholders (founding shareholder) 462,711
Interest payable, other 250,244
Notes payable, stockholders, current portion (founding shareholder) 1,358,531
-------------
Total Debt current liabilities 3,067,386
-------------
Long-term Debt liabilities
Notes payable, stockholders, less current portion (founding shareholder and Stanford) 1,129,600
Note payable, convertible debt, net of debt issuance costs of $1,285,955 1,779,962
IRS Payment Plan (Long term portion) 150,000
-------------
Total long term Debt liabilities 3,059,562
-------------
With respect to liabilities for real property leases, the following table
summarizes these obligations:
Months Balance
Location Date Term Remaining on Lease
-------- ---- ---- --------- --------
NJ 8/1/2003 55 months 33 $ 186,216
VA 6/1/2004 24 months 11 $ 203,751
-----------
Grand Total $ 389,967
-----------
Financing Needs
To date, we have not generated revenues in excess of our operating expenses. We
have not been profitable since our inception; we expect to incur additional
operating losses in the future and will require additional financing to continue
the development and commercialization of our technology. We have incurred a net
loss of approximately $1,050,000 and have negative cash flows from operations of
approximately $1,070,000 for the nine months ended September 30, 2005, and have
a working capital deficit of approximately $4,128,000 and a stockholders'
deficit of approximately $6,128,000 as of September 30, 2005. These conditions
raise substantial doubt about our ability to continue as a going concern. During
2006, our management will rely on raising additional capital to fund its future
operations. If we are unable to generate sufficient revenues or raise sufficient
additional capital, there could be a material adverse effect on the consolidated
financial position, results of operations and we may be unable to continue our
operations.
We entered into a third Securities Purchase Agreement with the Investors on July
15, 2005 for the sale of (i) $850,000 in callable secured convertible notes and
(ii) common stock purchase warrants to buy 1,700,000 shares of our common stock.
On July 15, 2005, the Investors purchased $850,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,700,000 shares of our common stock. We received gross proceeds in cash in the
amount of $282,500 on July 18, 2005 and $567,500 was placed in escrow of which
$182,500 has been distributed through September 30, 2005. We received additional
proceeds in the amount of $210,000 on October 6, 2005 and $150,000 on November
9, 2005.
We entered into a fourth Securities Purchase Agreement with the Investors on
February 6, 2006 for the sale of (i) $180,000 in callable secured convertible
notes and (ii) common stock purchase warrants to buy 180,000 shares of our
common stock. On February 6, 2006, the Investors purchased $180,000 in callable
secured convertible notes and received common stock purchase warrants to
purchase 180,000 shares of our common stock. We received gross proceeds in cash
in the amount of $150,000.
We currently have enough cash on hand to support operations through the end of
the first quarter of 2006. Our monthly cash obligations are $100,000, which
includes the payment of $35,000 per month in connection with our installment
agreement entered with the Internal Revenue Service. We are currently seeking
funding with the investors that provided our convertible debenture funding.
However, at this time we do not have a commitment from any funding sources. In
order to continue in operation through the fourth quarter of 2006, we must raise
$1,000,000 in funding. Since we do not have further financing commitments and
may need to raise additional funds after the first quarter of 2006, this
condition raises doubt about our ability to continue as a going concern. If we
do not raise additional capital immediately we may be forced to cease operations
after the first quarter of 2006 and if we do not raise at least $1,000,000 by
the end of the fourth quarter of 2006 we may be forced to cease operations.
24
Financings
We have entered into the following financing transactions:
Loans from Christopher J. Carey, an Executive Officer, Director and Shareholder
of our company
On July 31, 2000, the Predecessor Entity entered into a line of credit with Mr.
Chris Carey, our President and Chief Executive Officer and the President and
Chief Executive Officer of Stronghold. The terms of the line of credit made
available $1,989,500, which the Predecessor Entity could borrow from time to
time, until August 1, 2001. The outstanding amounts accrued interest at the per
annum rate equal to the floating base rate, as defined therein, computed daily,
for the actual number of days elapsed as if each full calendar year consisted of
360 days. The first interest payment under the line of credit was due on August
1, 2001. On such date, the parties agreed to extend the line of credit for one
more year, until August 1, 2002.
On April 22, 2002, the Predecessor Entity issued 500,000 shares of its common
stock to Mr. Carey (which converted into 1,093,750 shares of our common stock
when we acquired the Predecessor Entity on May 16, 2002) in exchange for
cancellation of $1 million of outstanding indebtedness under the July 31, 2000
line of credit from Mr. Carey.
On May 16, 2002, the total amount outstanding under the July 31, 2000 line of
credit with Mr. Carey was $2.2 million. On such date, we issued 666,667 shares
of our common stock to Mr. Carey in exchange for the cancellation of $1 million
of the then outstanding amount under the line of credit. We agreed to pay Mr.
Carey the remaining $1.2 million according to the terms of a non-negotiable
promissory note, which was issued on May 16, 2002.
On September 30, 2002, we renegotiated the $1,200,000 promissory note with Mr.
Carey pursuant to a requirement contained in the promissory note with
UnitedTrust Bank. According to the new terms of the loan, Mr. Carey extended the
repayment of the principal amount until December 1, 2005. Until such time as the
principal is paid, we will pay an interest only fee of 12% per year. Mr. Carey's
promissory note is expressly subordinated in right of payment to the prior
payment in full of all of the Company's senior indebtedness. Subject to the
payment in full of all senior indebtedness, Mr. Carey is subrogated to the
rights of the holders of such senior indebtedness to receive principal payments
or distribution of assets. As of March 31, 2005, $359,600 was outstanding under
the promissory note issued to Mr. Carey.
On September 30, 2002, we entered into a loan agreement with CC Trust Fund to
borrow an amount up to $355,128. Christopher Carey Jr., Mr. Carey's son, is the
beneficiary of the trust, and Mary Carey, Mr. Carey's wife, is the trustee of
the trust. This bridge loan was for a period of twelve months, with all
principal due and payable on September 30, 2003. The 12.5% interest on the
outstanding principal is due each year. At the end of the loan period, the CC
Trust Fund will be entitled to exercise 25,000 warrants at $1.50 per share. On
September 30, 2003, the CC Trust Fund agreed to extend the term of their loan to
December 30, 2003. On December 30, 2003, the CC Trust Fund agreed to extend the
term of their loan to June 30, 2004. On March 30, 2004, the CC Trust Fund agreed
to extend the term of their loan to March 31, 2005. On May 1, 2005, the AC Trust
Fund agreed to extend the term of their loan to November 1, 2005. As of December
31, 2003, $355,128 was outstanding under the CC Trust Fund loan agreement.
On September 30, 2002, we entered into a loan agreement with AC Trust Fund to
borrow an amount up to $375,404. Amie Carey, Mr. Carey's daughter, is the
beneficiary of the trust, and Mary Carey, Mr. Carey's wife, is the trustee of
the trust. This bridge loan is for a period of twelve months, with all principal
due and payable on September 30, 2003. The 12.5% interest on the outstanding
principal is due each year. At the end of the loan period, the Fund will be
entitled to exercise 25,000 warrants at $1.50 per share. On September 30, 2002,
the AC Trust Fund agreed to extend the term of their loan to December 30, 2003.
On December 30, 2003, the AC Trust Fund agreed to extend the term of their loan
to June 30, 2004. On March 30, 2004, the AC Trust Fund agreed to extend the term
of their loan to March 31, 2005. On May 1, 2005, the AC Trust Fund agreed to
extend the term of their loan to November 1, 2005. As of December 31, 2003,
$375,404 was outstanding under the AC Trust Fund loan agreement.
25
On March 18, 2003, we entered into a bridge loan agreement with Christopher J.
Carey, for a total of $400,000. The agreement stipulates that the Company will
pay an 8% interest rate on a quarterly basis until the loan becomes due and
payable on June 30, 2004. We also issued to Mr. Carey 391,754 warrants
exercisable for common stock for 10 years at a price of $0.97 per share. On
December 30, 2003, Christopher J. Carey agreed to extend the term of the
promissory note to June 30, 2004. As of December 31, 2003, $360,000 was
outstanding under this bridge loan agreement. On May 1, 2004, Christopher J.
Carey agreed to extend the term of the loan to June 1, 2005.
On April 24, 2003, our President and Chief Executive Officer, Christopher J.
Carey, agreed to convert outstanding loans of $543,000 to 603,333 shares of our
common stock at a price of $.90 per share in conjunction with the Series B
Convertible Stock Financing detailed below.
Financings from PNC Bank (Formerly United Trust Bank)
On November 1, 2001, the Predecessor Entity entered into a line of credit with
UnitedTrust Bank (now PNC Bank) pursuant to which the Predecessor Entity
borrowed $1.5 million. This line of credit was due to expire by its terms, and
all outstanding amounts were due to be paid, on September 30, 2002. On September
30, 2002, the line of credit came due and the bank granted a three-month
extension. On September 30, 2002, we converted the outstanding line of credit
with UnitedTrust Bank into a $1,500,000 promissory note. Such promissory note is
to be paid in 36 monthly installments, which commenced in February 2003 and is
due to terminate on January 1, 2006. Interest accrues on the note at the prime
rate, adjusted annually, which is the highest New York City prime rate published
in The Wall Street Journal. The initial prime rate that applied to the
promissory note was 4.750%.
On August 7, 2003, we entered into a modification of the loan agreement with
UnitedTrust Bank, of which the principal balance was $1,291,666 at the time of
closing of the modification. Pursuant to the modification agreement, UnitedTrust
Bank agreed to subordinate its lien against our assets to a new lender and
reduce the monthly payments from $41,666 per month principal plus accrued
interest as follows: (a) from the date of closing through December 15, 2003,
$10,000 per month plus accrued interest (b) from January 15, 2004 through
December 15, 2004, $15,000 per month plus accrued interest, (c) from January 15,
2005 through December 15, 2005, $20,000 per month plus interest and (d) on the
maturity date of January 1, 2006, a balloon payment equal to all the outstanding
principal and accrued interest. We are current with our payment of $15,000 per
month.
On January 9, 2004, we were served with a notice of an event of default by
United Trust Bank, now PNC Bank, a successor by merger effective January 2004
with United Trust Bank, ("the Bank"), under its Loan Agreement. Pursuant to
section 6.01(d) of the Loan Agreement, an Event of Default exists due to the
Company's failure to pay Payroll Tax Obligations aggregating in the amount of
$1,089,897 as of December 31, 2003 (including estimated penalties and interest).
The Company continues to make timely scheduled payments pursuant to the terms of
the loan and is in forbearance negotiations with the Bank with respect to the
default. On April 1, 2004, the Company received a second Notice of Event of
Default stating that the Bank had accelerated the maturity of the Loan and
declared all principal, interest, and other outstanding amounts due and payable.
Because we were in default under the terms of the loan due primarily to our
payroll tax default, the Bank has instituted the default rate of interest which
is 5% above the "highest New York City prime rate" stated above. We have entered
into an installment agreement with the United States Internal Revenue Service to
pay the withholding taxes, under the terms of which we will pay $100,000 by May
31, 2004 and $35,000 each month, commencing June 28, 2004, until we have paid
the withholding taxes due in full.
On April 27, 2004, PNC Bank, N.A., as successor by merger to UnitedTrust Bank
filed a complaint in the Superior Court of New Jersey, Law Division, Union
County (Docket No. UNN-L_001522-04) against our company and Christopher J.
Carey, in his capacity as guarantor, to collect the sums outstanding under the
Loan Agreement, dated as of September 30, 2002.
On July 15, 2004, we entered into a fully executed forbearance agreement with
PNC Bank, N.A. We made an initial principal payment of $420,000 with the
execution of the forbearance. Additionally, we are required to make four
consecutive monthly installments of $50,000.00 on August 15, 2004, September 15,
2004, October 15, 2004 and November 15, 2004 followed by the remaining principal
on or before December 15, 2004. Failure to adhere to this schedule may cause the
suit to be reinstated and PNC Bank may resume collection of the sum under the
suit.
26
On November 12, 2004, the Company and PNC Bank agreed upon terms of an amendment
to the forbearance agreement whereby by the payment schedule will change to
include interest only payments on November 15, 2004, December 15, 2004 and
January 15, 2005 with the final principal payment being made on or before
January 31, 2005.
We failed to make the final principal payment on or before January 31, 2005 and
was subsequently put into default under the note. On March 31, 2005, we made the
final scheduled payment and was released from all potential claims by PNC Bank.
Financings by Stanford Venture Capital Holdings, Inc.
On May 15, 2002, we entered into a Securities Purchase Agreement with Stanford
Venture Capital Holdings, Inc., referred to herein as Stanford, in which we
issued to Stanford (i) such number of shares of our Series A $1.50 Convertible
Preferred Stock, referred to herein as Series A Preferred Stock, that would in
the aggregate equal 20% of the total issued and outstanding shares of our common
stock, and (ii) such number of warrants for shares of our common stock that
would equal the number of shares of Series A Preferred Stock issued to Stanford.
The total aggregate purchase price for the Series A Preferred Stock and warrants
paid by Stanford was $3,000,000. The issuance of the Series A Preferred Stock
and warrants took place on each of four separate closing dates from May 16, 2002
through and July 19, 2002, at which we issued an aggregate of 2,002,750 shares
of our Series A Preferred Stock and warrants for 2,002,750 shares of our common
stock to Stanford. The warrants issued in 2002 were valued at $294,893 using the
black-scholes model using the following assumptions and a stock price of $1.50:
o Conversion price $1.50;
o expected volatility of 0%;
o expected dividend yield rate of 0%;
o expected life of 5 years; and
o a risk-free interest rate of 4.91% for the period ended June 30, 2002.
In connection with our Series B financing, as partial consideration for the
funds received pursuant to the Series B financing, we agreed to decrease the
exercise price to $.25. With respect to the decrease in the exercise price and
the warrants being treated as a cost of the series B financing, the reduction of
series A warrants was written in to the Series B preferred stock agreements as
part of the negotiation. At the end of fiscal 2003, Stanford exercised the
warrants for 2,002,750 shares of our common stock.
On April 24, 2003, we entered into a Securities Purchase Agreement with Stanford
Venture Capital Holdings, Inc. for the issuance of 2,444,444 shares of our
Series B $0.90 Convertible Preferred Stock. The issuance of the Series B
Preferred Stock took place on six separate closing dates beginning on May 5,
2003 through September 15, 2003. In connection with the Securities Purchase
Agreement, we agreed to modify the previously issued five-year warrants to
purchase 2,002,750 shares of our common stock: (i) to reduce the exercise price
to $.25 per share; and (ii) to extend the expiration date through August 1,
2008. In addition, our President and Chief Executive Officer, Christopher J.
Carey, agreed to convert outstanding loans of $543,000 to 603,333 shares of our
common stock at a price of $.90 per share. In addition, the Company and Stanford
entered into a Registration Rights Agreement, dated April 30, 2003, in which the
Company agreed to register the shares of the Company's common stock issuable
upon conversion of the Series A and Series B Preferred Stock with the Securities
and Exchange Commission, no later than November 15, 2003. The Company and
Stanford agreed to extend the date of the filing requirements of the
Registration Rights Agreement to March 14, 2004. We have not yet filed a
registration statement, and are in negotiations with Stanford regarding an
extension of the registration filing date.
On March 3, 2004 and March 15, 2004 we received loans in the amount of $437,500
each from Stanford. We have agreed to pay Stanford an 8% annual dividend on the
funds invested and to redeem the securities not later than three years from the
date of funding. As of March 31, 2005 the accrued interest on the loan was
$74,411. On March 7, 2005, the Company and Stanford agreed to settle the accrued
interest through March 31, 2005 of $74,411 for 826,788 shares of restricted
common stock. The price per share on March 7, 2005 was $.09/share.
27
Additionally, on March 7, 2005, the Company issued Stanford 373,212 shares as
consideration for their consent to amending the agreement the Company entered
into on June 18, 2004 with respect to the Callable Secured Convertible Notes
Issuance (see the appropriate section below), changing the conversion price of
the convertible notes to the lower of (i) $0.70 or (ii) 25% of the average of
the three lowest intraday trading prices for our common stock during the 20
trading days before, but not including, the conversion date. The original
agreement had the conversion price as the lower of (i) $0.70 or (ii) 50% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
Private Placements with Accredited Private Investors
During August and September 2002, we entered into 9 subscription agreements with
accredited private investors, as defined in Rule 501 of the Securities Act,
pursuant to which we issued an aggregate of 179,333 shares of our common stock
at $1.50 per share. These private investments generated total proceeds to us of
$269,000.
In October 2003, the Company commenced offerings to accredited investors in
private placements of up to $3,000,000 of the Company's common stock. In the
period of October 2003 through January 9, 2004 the Company raised $225,000 under
the terms of these private placements. The shares offered in the private
placement are priced at the 5 trading day trailing average closing price of the
common stock on the OTCBB, less 20%. For each share purchased in the private
placements, purchasers received a warrant to purchase one half (0.5) share of
common stock at 130% of the purchase price. A minimum of $25,000 was required
per investor. The number shares issued under this placement total 509,559, at an
average price of $0.44/share.
Warrants
On June 16, 2004, in connection with the issuance of the 12% callable secured
convertible notes (the "AJW Notes")the Company issued to Stanford a warrant (the
"Stanford Warrants") to purchase 2,000,000 shares of Common Stock, expiring in
five years, at an exercise price of $.0001,in consideration i) agreeing to a
waiver of existing registration rights that included a lock up period for one
year after the effective date of a registration statement prohibiting the
registration and sale of Stanford's securities and ii) agreeing as holder of
Stronghold's Series A $1.50 Convertible Preferred Stock ("Series A Stock") and
Series B $.90 Convertible Preferred Stock ("Series B Stock"), to waive any
dilution issuances required by the Series A Stock and the Series B Stock as a
result of the conversion of the AJW Notes or exercise of the Stanford Warrants
into the Company's common stock. This issuance of the Stanford Warrants has been
accounted for as an adjustment of capital for the waiving of the dilution
protection for the Series A and Series B preferred stock. The Stanford Warrants
were valued at approximately $360,000 using the Black-Scholes option pricing
model including the following assumptions: exercise price of $0.0001, expected
volatility of 2.06%, expected dividend yield rate of 0%, expected life of 5
years, and a risk free interest rate of 4.73%.
To obtain funding for our ongoing operations, we entered into three Securities
Purchase Agreements with the Investors. This prospectus relates to the resale of
the common stock underlying these callable secured convertible notes and common
stock purchase warrants issued in connection with these agreements. The
following is a description of each of these financings.
June 18, 2004 Securities Purchase Agreement
On June 18, 2004, we entered into a Securities Purchase Agreement for the sale
of (i) $3,000,000 in callable secured convertible notes and (ii) common stock
purchase warrants to buy 3,000,0000 shares of our common stock.
The following closings have occurred pursuant to the June 2004 Securities
Purchase Agreement:
o on June 18, 2004, the Investors purchased $1,500,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,500,000 shares of our common stock;
o on July 27, 2004, the Investors purchased $500,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
500,000 shares of our common stock;
28
o on October 22, 2004, the Investors purchased $350,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
350,000 shares of our common stock; and
o On March 18, 2005, the Investors purchase $650,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
650,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the investors' option, at the lower of (i) $0.70 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.57 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.57 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
March 31, 2005 Securities Purchase Agreement
We entered into a second Securities Purchase Agreement with the Investors on
March 31, 2005 for the sale of $650,000 in callable secured convertible notes
and common stock purchase warrants to buy 650,000 shares of our common stock.
On March 31, 2005, the Investors purchased $350,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
350,000 shares of our common stock. On May 4, 2005, the Investor purchased the
remaining $300,000 in callable secured convertible notes and received common
stock purchase warrants to purchase 300,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the Investors' option, at the lower of (i) $0.02 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.03 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.03 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
July 15, 2005 Securities Purchase Agreement
We entered into a third Securities Purchase Agreement with the Investors on July
15, 2005 for the sale of (i) $850,000 in callable secured convertible notes and
(ii) common stock purchase warrants to buy 1,700,000 shares of our common stock.
On July 15, 2005, the Investors purchased $850,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,700,000 shares of our common stock. We received gross proceeds in cash in the
amount of $282,500 on July 18, 2005 and $567,500 was placed in escrow of which
$182,500 has been distributed through September 30, 2005. We received additional
proceeds in the amount of $210,000 on October 6, 2005 and $150,000 on November
9, 2005.
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The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the Investors' option, at the lower of (i) $0.07 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.08 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.10 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
February 6, 2006 Securities Purchase Agreement
We entered into a fourth Securities Purchase Agreement with the Investors on
February 6,2 006 for the sale of $180,000 in callable secured convertible notes
and common stock purchase warrants to buy 180,000 shares of our common stock.
On February 6, 2006, the Investors purchased $180,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
180,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the Investors' option, at the lower of (i) $0.05 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.03 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.08 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
As of February 10, 2006, the average of the three lowest intraday trading prices
for our common stock during the preceding 20 trading days as reported on the
Over-The-Counter Bulletin Board was $.009 and, therefore, the conversion price
for the secured convertible notes was $.0023. Based on this conversion price,
the $4,680,000 callable secured convertible notes, excluding interest, were
convertible into 2,080,000,000 shares of our common stock.
The full principal amount of the callable secured convertible notes is due upon
default under the terms of callable secured convertible notes. In addition, we
have granted the investors a security interest in substantially all of our
assets and intellectual property as well as registration rights.
The investors have contractually agreed to restrict their ability to convert the
callable secured convertible notes and exercise the common stock purchase
warrants and receive shares of our common stock such that the number of shares
of our common stock held by them and their affiliates after such conversion or
exercise does not exceed 4.99% of our then issued and outstanding shares of our
common stock.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Financial Reporting Release No. 60, recently released by the Securities and
Exchange Commission, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
The notes to the consolidated financial statements include a summary of
significant accounting policies and methods used in the preparation of our
Consolidated Financial Statements. In addition, Financial Reporting Release No.
61 was recently released by the SEC requires all companies to include a
discussion which addresses, among other things, liquidity, off-balance sheet
arrangements, contractual obligations and commercial commitments. The following
is a brief discussion of the more significant accounting policies and methods
used by us.
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of financial statements in accordance with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, including the recoverability of tangible and intangible assets,
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period.
On an on-going basis, we evaluate our estimates. The most significant estimates
relate to our recognition of revenue and the capitalization of our software
development.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
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Revenue Recognition Policy
Revenue is recognized under the guidelines of SFAS No. 48 "Revenue Recognition
When Right of Return Exists" and has a four step process that must be met prior
to the recording of revenue. The steps consist of the following: signing of
sales contract, installation of hardware, completion of the training period and
a signed contract from the customer stating they accept the product for the
sixty-day trial period. Payment is due upon the completion of the trial period.
The sales revenue and cost of sales reported in the consolidated statements of
operations is reduced to reflect estimated returns. Service revenue is
recognized when earned. We recognize revenue in accordance with the following
four step process in accordance with SFAS 48 that pertains to when a right of
return exists and authoritatively within the guidelines of SOP 97-2 as follows:
1) Persuasive evidence of an arrangement exists as evidenced by a signed
contract,
2) Delivery has occurred, please note that Stronghold does not recognize revenue
prior to delivery,
3) The price of Stronghold's system is fixed and determinable as evidence by the
contract, and
4) Collectability is highly probable.
Revenue related to the sale of products is comprised of one-time charges to
dealership customers for hardware (including server, wireless infrastructure,
desktop PCs, printers, interior/exterior access points/antennas and handheld
devices), software licensing fees and installation/training services. Stronghold
charges DealerAdvance Sales Solution(TM) dealers for all costs associated with
installation. The most significant variable in pricing is the number of handheld
devices purchased. Stronghold has not determined pricing forDealerAdvance
Service Solution(TM).
Once DealerAdvance Sales Solution(TM) is installed, Stronghold provides hardware
and software maintenance services for a yearly fee equal to approximately 10% of
the one-time implementation fees. All dealerships are required to purchase
maintenance with installations and pay maintenance fees on a monthly basis.
Stronghold provides our customers with services, including software and report
customization, business and operations consulting, and sales training services
on an as needed basis and typically are charged on a time and expenses basis. We
assume that the cost of providing maintenance and services are, on average,
constant throughout the service term. Therefore, we record revenue on the
service on a straight-line basis and in accordance with SOP 97 paragraphs 10 and
57.
Stronghold offers all new customers a sixty-day performance trial period during
which time performance targets are set. Stronghold installs the system and
agrees to remove the system at no charge if the performance targets are not met.
If performance is met, a large portion of the dealerships enter into a third
party lease generally with lessors introduced by us. We have entered into a
number of relationships with leasing companies in which the leasing company
finances the implementation fees for the dealership in a direct contractual
relationship with the dealership. The lease is based solely on the
creditworthiness of the dealership without recourse to us. The leasing company
receives an invoice from us, and remits funds upon acceptance by the dealership.
We receive all funds as invoiced, with interest costs passed to the dealership.
These leases typically run 36 months in duration, during which time we contract
for service and maintenance services. Stronghold charges separately for future
software customization after the initial installation, for additional training,
and for additions to the base system (e.g., more handheld devices for additional
sales people). Depending upon the dealership arrangement, the support and
maintenance contracts are either billed monthly and recorded as revenue monthly,
or are recorded up front to unearned maintenance fees at the present value of
the 36-month revenue stream and amortized monthly to revenue over the life of
the agreement.
Deferred Revenue
Deferred revenue is recorded as a liability when we receive the three year
maintenance contact in an a one-time advance payment. We then recognize the
revenue from the maintenance portion of the contract on a pro rata basis over 36
months as the service is delivered.
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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, 2005, we capitalized $65,955 of development costs in
developing enhanced functionality of our DealerAdvance(TM) products. This
compares with $134,326 for the quarter ended March 31, 2004. We capitalized a
total of $407,505 of development costs for the twelve month period ended
December 31, 2004.
32
BUSINESS
Our History
We were incorporated as a Nevada corporation on September 8, 2000, under the
name TDT Development, Inc. On May 16, 2002, we acquired Stronghold Technologies,
Inc., a New Jersey corporation, referred to herein as our "Predecessor Entity",
pursuant to a merger of Stronghold Technologies into our wholly-owned
subsidiary, TDT Stronghold Acquisition Corp., referred to herein as "Acquisition
Sub". Our company, formerly TDT Development, Inc., was a reporting entity at the
time. Its principals were Pietro Bortolatti, President, CEO and Chairman,
Tiziana DiRocco, Vice-President and Director of European Operations and David
Rector, Director. The merger was an arms length transactions and none of the
parties had a prior existing relationship. As consideration for the merger, we
issued 7,000,000 shares of our common stock valued at $.75 per share to the
stockholders of the Predecessor Entity in exchange for all of the issued and
outstanding shares of the Predecessor Entity. No fairness opinion was issued in
connection with this merger. Following the merger, Acquisition Sub, the survivor
of the merger, changed its name to Stronghold Technologies, Inc. (NJ) and
remains our only wholly-owned subsidiary. We approved the transaction as the
sole shareholder of the Acquisition Sub as did the shareholders of the
Predecessor Entity.
On July 11, 2002, we changed our name from TDT Development, Inc. to Stronghold
Technologies, Inc. (NV). On July 19, 2002, we exchanged all of the shares that
we held in our two other wholly-owned subsidiaries, Terre di Toscana, Inc. and
Terres Toscanes, Inc., which conducted an import and distribution business
specializing in truffle-based food product, for 75,000 shares of our common
stock held by Mr. Pietro Bortolatti, our former president.
Our principal executive offices are located at 106 Allen Road, Basking Ridge, NJ
07920. Our telephone number at that location is 908-903-1195 and our Internet
address is www.strongholdtech.com.
Overview of our Handheld Technology Business
On May 16, 2002, we entered the handheld wireless technology business via our
acquisition by merger of the Predecessor Entity. The Predecessor Entity was
founded on August 1, 2000 by Christopher J. Carey, our current Chief Executive
Officer and President, and Lenard J. Berger, our former Chief Technology Officer
and Salvatore F. D'Ambra, Vice President, Product Development, of our
wholly-owned subsidiary. This founding group has substantial expertise in
systems design, software development, wireless technologies and automotive
dealer software applications. The Predecessor Entity was founded to develop
proprietary handheld wireless technology for the automotive dealer software
market. Since the merger of the Predecessor Entity into our subsidiary, we
continue to conduct the Predecessor Entity's handheld wireless technology
business.
We are engaged in the business of selling, marketing and installing an Intel
based server that, together with wireless handheld PDA's, manages the auto
dealer-client relationship. Our DealerAdvance(TM) suite of Customer Relationship
Management ("CRM") software, has been designed to assist auto dealerships in
collecting cliental contact information, following up on sales prospects and
aiding dealership sales person in finalizing the sale of its automobiles. We are
in various stages of development of complimentary CRM systems for our handheld
devices, including the DealerAdvance Service Solution(TM), which is designed to
manage dealer service operations, customer information and vehicle inventory. We
are designing our products to be functionally equivalent to the devices used by
automobile rental agencies in which automobile return and checkout is automated
using scanning and other point of sale technology.
Description of Products
Most auto dealerships rely on a paper based process to capture its prospects and
track their progress to purchasing a vehicle. This paper process is difficult to
manage due to high turnover and skills of the typical sales force. Management
does not have the tools to determine how many opportunities have been generated
and if they are receiving follow up after leaving the dealership. DealerAdvance
prompts the salesperson to capture more information about each prospect and
advises them of the appropriate follow up. When a customer is ready to purchase
a vehicle, the system aids the dealership in completing the sales through
features such as forms printing. Management is able to view dealership traffic
in real-time, by salesperson, and can easily pinpoint deficiencies in the
capture and follow up process. The DealerAdvance Sales Solution(TM) has been
designed to allow sales associates of our customers to maintain on the handheld
units a personal calendar and instructions on follow-up tasks. Sales associates,
using the handheld units, collect customer contact information and other data
relevant to the customer's automotive needs.
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We install an Intel based server in a dealership site. The server holds all of
the customer data and connects to other services used by the dealership. These
services include the legacy IT system used by the dealer (known as the Dealer
Management System), Internet based services such as Internet Customer leads,
telephony management services, and customer address lookup services. We provide
an administrative workstation which includes a driver license scanning station,
a printer for negotiation and purchase forms, letters and reports, and wireless
handheld PDA's for each of the sales people. The company installs a wireless
antennae network (Wi-Fi) with communications coverage of the building and most
of the car lot. The DealerAdvance client application is installed, on the
handhelds, on the administrative workstation and on the existing workstations in
the sales department.
The DealerAdvance Sales Solution(TM) provides certain advantages to automobile
dealerships, including:
o convenient use associated with handheld mobile communications;
o access to competitive and proprietary industry information from a variety of
sources, such as convenient access to vehicle identification numbers, drivers
license numbers and reverse telephone number information which provides home and
business addresses;
o employee access to sales contracts as well as access to sales and performance
reports; and
o allows integration with existing automotive dealer accounting and business
systems such as ADP and Reynolds and Reynolds.
The DealerAdvance Sales Solution(TM) has been designed to be a comprehensive CRM
system implemented through the use of a wireless handheld device connected to a
server that distributes the functional applications to the units. Sales
associates can also maintain on the handheld units a personal calendar and
instructions on follow-up tasks. Sales associates, using the handheld units,
collect customer contact information and other data relevant to the customer's
automotive needs. The handheld, using the DealerAdvance Sales Solution
technology aids automobile dealerships in making sales transactions quicker and
more efficient.
The DealerAdvance Sales Solution(TM) offers features that aid in automobile
sales and service such as:
o enabling a high sales capture rate on walk-in customers;
o streamlining and simplifying sales and follow-up processes;
o providing current and comprehensive information and data for new and used car
inventory, including information regarding competing products, and customer
history with the dealership;
o providing performance data and analysis on each member of a sales team; and o
providing management with valuable and relevant transaction information on a
real-time basis.
A user can enter data via the DealerAdvance application running on any desktop
or handheld units. Data can be entered into the system typed by the user,
through drivers license scanning, or via a DealerAdvance Import tool. Data
entered by the user is transmitted to the server in real time.
The system contains a "rules" engine which is triggered at different points in
the sales process. The rules engine updates the activities scheduled for each
customer based on business rules defined by the dealer. For example, when a new
customer is entered by a user, the system will schedule a letter to be sent to
the customer and a follow up phone call for the next day. If that same customer
buys a vehicle, the system will remove the letter and follow up call and replace
it with activities appropriate for follow up.
Users also have the ability to manually schedule activities with a customer. All
activities are displayed on the user's workplan in chronological order. The user
may select any activity, view the details of the activity and customer
information and complete the activity.
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The system will prompt the user to schedule additional activities when
completing follow up with a customer. For example, if the user completes a
follow up call the system will prompt the user to set an appointment. The user
can enter a date and time for the appointment, schedule an additional follow up
call or indicate that no additional activities are required at this time.
The system offers a variety of reports to management to show the volume of
traffic at the dealership and if those prospects are receiving follow up in a
timely fashion.
The DealerAdvance Suite includes Master Server Software, which manages all
customer data and access to third party services. One copy of server software is
required for each dealership. DealerAdvance Desktop Application, which used to
access customer data, present workplans, reports and logs, scan drivers
licenses, and manage user access to the system. This application must be
installed on each desktop in the dealership. Dealership receives a license to
install an unlimited number of desktops associated with a particular
Dealeradvance Server. DealerAdvance Handheld Application, which is used to
access customer data, present workplans, product comparison, available
inventory. Each dealership must purchase a license of this application for each
handheld in use at the dealership.
The system has the following features:
o Prospect capture and profiling, which allows the user to input the required
information, reverse phone lookup, duplicate record checking, electronic guest
sheet and capture signatures electronically for credit card processing.
o The system tracks compliance with National Registry and Dealership specific
DNC list. Customers marked "DNC" have phone number hidden to avoid accidental
calling. In addition, the dealer can print a report to insure compliance.
o The system can scan and authenticate driver licenses.
o Provides a call management system for follow ups.
o Provides daily workplan and appointment scheduling which appointments and
calls for salespeople.
o Generate prospect reports, scoreboard, appointment calendar and activity
reports sorted by salesperson.
o Receive leads from all internet lead sources and manage follow up from DA.
Features include: route leads to a specific user based on lead source, auto
responders, templates, customers using multiple lead sources, lead protection.
DEALERADVANCE is compatible with and works with:
o Intel Based Server running Red Hat Linux
o Wireless Network Access Points (802.11 - WiFi). We supply a model made by
Vivato but any 802.11b compliant Access Point will work.
o Windows 98, 2000, XP.
o Magnetic Stripe Reader or 2D Bar Code Scanner.
We primarily use commercially available off the shelf products primarily
purchased from Dell and Compaq. All these products are typically available on
demand within reasonable ordering and receipt cycles that range from one to ten
days.
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We installed Version 1.0 of the DealerAdvance Sales Solution(TM) in six pilot
dealerships during 2001 in New Jersey, California and Connecticut. The initial
release contained the ability to capture and display information about a
prospective customer, search the dealership inventory, display competitive
product information, a financial calculator, and paging functionality from a
wireless handheld. Drivers license scanning, from a desktop station, was
introduced for the State of California. Stronghold introduced Version 2.0 of
DealerAdvance Sales Solution(TM) at all of its sites by the end of September
2001. Version 2.0 offered an electronic desk log, email and internet access from
the handheld, printing of correspondence (forms letters) , a reporting engine,
the printing of sales forms, and the ability to import prospect records from 3rd
party sources.
We introduced Version 3.0 of our software and installed another 3 dealership
sites in the quarter ended March 31, 2002, adding customers in New York. Version
3.0 introduced the CRM rules engine, which allowed the system to automatically
schedule and manage customer follow up activities for salespeople based on rules
established by the dealership management. Other features included DMS deal
creation (allowing a user to pass information from DealerAdvance to the DMS),
management reporting, and the expansion of drivers license scanning to include
39 states (through a partnership with Intellicheck).
In the quarter ended June 30, 2002, through our wholly owned subsidiary, we
installed another 7 sites, adding customers in Arizona, Southern California and
South Carolina and introduced Version 3.1 of its software to improve the
communication protocol between the handheld and the DealerAdvance Server. In the
quarter ended September 30, 2002, through our wholly owned subsidiary, we
implemented another 10 sites, adding customers in Virginia, Florida, South
Carolina and Central California. In the fourth quarter ending December 31, 2002,
through our wholly owned subsidiary, we installed an additional 13 dealerships,
adding customers in Texas, Indiana and Michigan. Overall, in 2002, through our
wholly owned subsidiary, we installed DealerAdvance Sales Solution(tm), in a
total of 33 dealerships sites representing Toyota, Honda, Ford, Chevrolet,
Nissan, Volkswagen, Buick, Pontiac, Cadillac, Chrysler, Dodge, Kia and Hyundai.
In the first quarter of 2003, we installed in 11 dealerships and released
Version 3.2. New features included reverse phone lookup (via partnership with
Axicom), searches for duplicate customer records, wireless PDA trade appraisal,
electronic buyers order, nightly download of sold customers from the DMS, and
customer search. Additional functionality was added to the rules engine, forms
printing, management functions were added to the PDA, 3rd party data imports,
and customer tracking. In the quarter ended June 30, 2003, we installed another
11 systems in 9 dealerships in California, Nevada, Indiana, Washington, Ohio,
and Michigan. We implemented our goal to expand our direct sales network and
operational support personnel for coverage of 14 major cities from nine at the
end of 2002. Additionally, in the second quarter we realigned our sales force
into geographic markets and hired several experienced industry veterans as
regional business development managers.
We plan to utilize our direct sales force to market the DealerAdvance Sales
Solution(tm) on a national basis. We have established a strong presence in most
regions of the United States, and are continuing to add business development and
operations offices pursuant to an organized growth plan. As of December 31,
2003, we had employees in Northern New Jersey, San Francisco, Washington, DC,
Atlanta, Los Angeles, Phoenix, Miami, Seattle, Cleveland, and Dallas.
Version 3.3, released in August 2003 introduced the concept of a work-plan,
which assists the user in prioritizing follow up for prospective customers. The
work-plan generates a simple daily "to-do" list for each salesperson, which can
be viewed and updated on the handheld. Version 3.3 also introduced the concept
of "prompted follow up" to guide the salesperson through best of breed follow up
processes. The salesperson is prompted to indicate the action taken to complete
an activity and to enter a next activity for the customer with the goal of
scheduling a next activity for a prospective customer until they either purchase
a vehicle or indicate they are no longer in the market.
As of December 31, 2003, a total of 70 dealers were using the DealerAdvance
Sales Solution(tm), of which approximately 40 had reached or exceeded the 60-day
performance period generally associated with installation. In January 2004 we
installed systems in 2 dealerships in Oregon.
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Version 3.4 released in January 2004 introduced integration with WhosCalling and
Call Bright, the two leading providers of phone call management services. The
dealer is assigned several toll free numbers to place in a specific advertising
outlet (newspaper, tv, radio, etc). When the customer dials the toll free
number, the call management service identifies the callers information (name,
address, demographics) and records the call. The call information and a link to
the call recording is passed by the call management service to DealerAdvance.
Version 3.4 introduced the ability to receive Internet leads in DealerAdvance.
An Internet Manager can view leads and follow up via email with prospective
customers that view the dealer's web site or are passed by 3rd party lead
providers. Through a subscription service, in Version 3.4, the dealer can
maintain their compliance with the National Do Not Call Regulations managed by
the FTC. DealerAdvance will automatically determine which customers are safe to
call based on the "established business relationship" rules defined in the
regulations. The system can produce the documentation required to demonstrate
compliance.
We generally grant a 60-day performance guarantee period for each new
installation. If performance goals are met, the contracts become noncancellable
for their terms, usually 36 months. As of December 30, 2003, a total of 69
dealers were using the DealerAdvance Sales Solution(TM), of which approximately
55 had reached or exceeded the 60-day performance period. In the year ended
December 31, 2003, approximately 7 dealers cancelled after the 60-day
performance guarantee period.
New Product Developments
We have identified five major prospect and customer sources within an auto
dealership that can be leveraged for revenue and profit:
o walk in showroom traffic,
o call-in prospects,
o internet based leads,
o the existing owner base of customers and
o service prospects.
The vision for DealerAdvance(TM) is to provide a single solution to attack all
of these groups to increase profitability and improve customer service in the
dealership. DealerAdvance(TM) provides information captured from prospects, and
provides automobile dealerships with the ability to manage prospects and
customers through a disciplined follow-up process.
The development plan includes the addition of the following applications and
functions:
o With Version 3.4 introduced in January 2004, we introduced a Call Management
application that is expected to allow dealerships to automatically capture and
track prospects that contact the dealership via phone. This new program allows
salespeople to retrieve customer information while talking to the customer and
to conduct a needs analysis for handling prospect phone calls. The Call
Management application automatically generates management logs and reports
designed to identify sales associates that need phone skills training. In
addition, we have partnered with the two leading Call Management Systems
providers, Call Bright and Who's Calling, who provide 800 number and web based
system forwarding functions to DealerAdvance(TM). We have created a software to
poll the web sites for incoming caller ID and provide prospect assignment, and
comparative analysis relating to follow up activities. This application is
expected to significantly increase the conversion of call-in prospects to
customers.
o In Version 3.4 we expanded our offerings to include an initial application for
Internet Lead Management. Most dealerships secure Internet leads through
multiple sources including their own web site, manufacturers' forwarded leads,
and subscription services including Autobytel and others. These lead sources are
received through DealerAdvance(TM), which processes a quick response via email,
and then passes qualified leads to sales associates for phone follow-up leading
to appointment setting. We plan several enhancements to this application.
o In January 2004, we also introduced an application that lessens potential
violations of the 2003 federal Do Not Call regulations. Our system automatically
and regularly compares the prospect and customers within the system to the Do
Not Call registry data base. The application also allows the dealership
personnel to log prospect and customer requests not to be contacted. The system
deletes from the database telephone numbers that match numbers in the Do Not
Call database.
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o In February 2004, we introduced Services Marketing. Services Marketing is
offered in partnership with Market One, LLC. Through Market One, we offer
services in database marketing, data warehousing, predictive modeling, marketing
consulting, campaign fulfillment, direct mail, telemarketing and surveys, and
Internet communications services. During 2004, we intend to combine the Services
Marketing application from Market One with follow-up and reporting capabilities
within DealerAdvance(TM), to provide activities reporting for increasing repeat
sales to dealership customers.
o In the third quarter of 2005, we plan to introduce online consumer credit
reporting to our customers through an ASP web hosted model integrated to
inquiries from DealerAdvance(TM). The service accesses credit reports from
Experian, Equifax and Transunion.
o DealerAdvance(TM) Service Solution, a handheld wireless tablet for service
advisors in a dealership is under development. This system is designed to
improve customer service and reduced vehicle check in time by allowing dealer
representatives to scan a vehicle identification number from the windshield or
door. DealerAdvance(TM) Service Solution also is designed to provide instant
client and vehicle history including warrantee and service advice, all to the
service technicians' wireless tablet. We expect this product will add
premium-pricing to increase repair order revenue and to add service marketing
through the DealerAdvance CRM application. We intend to complete the
DealerAdvance(TM) Service Solution through the acquisition of the required
technology to finalize this product. If we are unable to obtain this technology
at a reasonable cost, then we may not be able to complete the DealerAdvance(TM)
Service Solution. At the present time we are not in negotiations with any party
to acquire this technology.
Our Revenues
Our revenues are primarily received from system installation, software licenses
and system maintenance. The approximate average selling package price of the
system and installation also is $70,000. Additional revenues are derived from 36
month system maintenance agreements that have a monthly fee of $850 per month
and a total contract value of $30,600. The revenues derived from these
categories are summarized below:
o Software License Revenues: This represents the software license portion of the
Dealer Advance Service Solution purchased by our customers. The software and
intellectual property of Dealer Advance has been developed and is owned by us.
The average upfront license cost to the customer is approximately $35,000.
o System Installation Revenues: This represents the installation and hardware
portion of the Dealer Advance Service Solution. All project management during
the installation is performed by us. The installation and hardware portions
include cable wiring subcontracting services and off the shelf hardware and
handheld computers ("PDA"s). The average upfront installation cost to the
customer is approximately $35,000.
o Monthly Recurring Maintenance Revenue: This represents the maintenance and
support contract for the Dealer Advance Service Solution that the customer
executes with the system installation. The typical maintenance contract is for
36 months and is $850.00 per month. The average total 36 month maintenance
portion of the contact is $30,600. In our three year operating history,
approximately 50% of all our customers have prepaid the maintenance fees through
a third party leasing finance company. These prepaid maintenance fees have
provided additional cash flow to us and have generated a deferred revenue
liability on or balance sheet.
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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:
BDM per contract 3.5%
Regional VP 1.5%
Management Override 1.0%
-----
6.00%
Our general and administrative expenses include expenses for all facilities,
insurance, benefits, telecommunications, legal and auditing expenses are
included as well as the executive management group wage expense.
Our development & operations expenses include the expenses for the Client
Consultant group which advises and supports the installations of our Dealer
Advance(TM) clients.
39
Research and Development
Since our inception in September 2000, we have spent approximately $3,612,685 on
research and development activities. While we have been successful in meeting
planned goals in the development and introduction of DealerAdvance Sales
Solution(TM), there can be no assurance that our research and development
efforts will be successful with respect to additional products, or if
successful, that we will be able to successfully commercially exploit such
additional products.
Competition Related to Handheld Technology Business
We do not believe that we have direct competition for our handheld product.
However, we expect competitors in the wireless handheld solutions market in the
future. We compete with the traditional CRM providers and the emerging new CRM
providers in the retail automotive dealer software market.
Some of our potential competitors include:
o Automotive Directions, a division of ADP Dealer Services, and a provider of
PC-based customer relationship management systems as well as marketing research
and consulting services;
o Higher Gear, a provider of client server based front-end sales and customer
relationship management software which serves the retail automotive industry
exclusively;
o Autobase, a provider of PC based front-end software which serves the retail
automotive industry exclusively;
o Cowboy Corporation, recently acquired by Cobalt Corporation, and a provider of
ASP sales prospect management systems and customer relationship management
systems which services the retail automotive industry exclusively; and
o Autotown, a provider of PC and web-based front-end sales systems, which
services the retail automotive industry exclusively.
We believe that our proprietary technology is unique and, therefore, places us
at a competitive advantage in the industry. However, there can be no assurance
that our competitors will not develop a similar product with properties superior
to our own or at greater cost-effectiveness.
Marketing and Sales
We have identified a target market of approximately 12,000 automobile
dealerships in the United States that meet the base criteria for our system.
More specifically, we target a primary market of 6,500 dealerships that sell a
minimum of 75 new and used cars each month and do not currently have CRM
systems. Generally, our target market consists of midline dealerships, including
brands such as Chevrolet, Ford, Nissan, Volkswagen, Toyota, Honda, Buick,
Pontiac, GMC Trucks, Chrysler and Dodge. The reason for this is that midline
dealers typically have high prospect and customer traffic, which makes for large
untapped prospect opportunities that the client can leverage through the
follow-up process from DealerAdvance. In addition, these dealers often have not
made significant investments in sales automation and in Customer Relationship
Management systems.
We further qualify our market as dealerships with over $15 million in annual
revenue. Obviously, a larger dealership has more traffic, more customer
transactions, more sales people, and can more easily justify the investment.
Finally, we limit our market to dealerships in those parts of the country where
it has sales and support coverage.
We have both a direct and athird party distribution strategy. Our direct
distribution strategy consists of a four person direct sales force selling in
California, Oregon, Nevada, Washington, Georgia, North Carolina, South Carolina,
Virginia, Delaware, Maryland, New Jersey, and Florida. In connection with our
third party distribution strategy, we presently have distribution agreements
with various third parties with sales people covering Texas, Oklahoma,
Louisiana, Arkansas, New Mexico, Arizona, Illinois, Indiana, Michigan,
Wisconsin, Missouri, Minnesota, Kentucky, New York, Connecticut, Massachusetts,
and Rhode Island. We established our third party distribution system in order to
more effectively reach a larger portion of our market while eliminating expenses
associated with the expansion of a traditional internal sales team. Our third
party distribution system includes a network of 3 distributors which we have
engaged to sell our products to automobile dealerships. In order to establish
our third party distribution system, it was necessary to enter into agreements
with each of our agents as well as train them to utilize our products with hands
on education seminary and the provision of training guides.
40
With these partners in place, and in conjunction with our direct sales force, we
are covering 29 states.
Our Intellectual Property
We have a trademark for "DealerAdvance(TM)" and have one patent application
pending covering the system for management of information flow in automotive
dealerships using handheld technology. The patent application is currently being
reviewed by the United States Patent and Trademark Office. We may face
unexpected competition from various sources if our patent is denied however we
do not believe this will have a material impact on our business.
Summary of Discontinued Truffle Business Operations
From our inception on September 8, 2000, through July 19, 2002, we imported,
marketed and distributed specialized truffle-based food products, including
fresh truffles, truffle oils, truffle pates, truffle creams and truffle butter,
through our former wholly-owned subsidiaries, Terre di Toscana, Inc. and Terres
Toscanes, Inc. Our target market included retailers such as restaurants,
specialty food stores, delicatessens and supermarkets. We imported products
directly from Italian producers and marketed our products in the specialty food
industry primarily in Florida, South Carolina, North Carolina and California,
and also earned commissions on sales made in Belgium, Holland and Germany. On
July 19, 2002, we exchanged all of the shares that we held in our wholly-owned
subsidiaries for 75,000 shares of our Common Stock held by Mr. Pietro
Bortolatti, our former president. As a result of our transfer of our interest in
the truffle business to Mr. Bortolatti him, we are no longer involved in the
truffle business. The sale of these subsidiaries was part of our effort to focus
on the handheld technology business.
EMPLOYEES
As of February 10, 2006, we had a total of 8 full-time employees, of which 2 are
dedicated to marketing and sales and regional customer support. As of February
10, 2006, we had 1 employee in New Jersey, 1 in New York, 1 in Washington and 4
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 2,000 square foot
development facility in Gainsville, Virginia, which is staffed with 4
development and field support personnel. The lease for the Gainsville, Virginia
facility expires in November 2007. We also operate and lease business
development and operations offices in Basking Ridge, New Jersey. The lease for
the Basking Ridge, New Jersey facility expires on February 28, 2008. We carry
insurance for each of these properties. These facilities are suitable for our
current operations.
We are obligated under these leases through August 2007. In addition to the base
rent, one lease requires us to pay a proportionate share of operating costs and
other expenses.
41
Future aggregate minimum annual rent payments under these leases are
approximately as follows:
Year ended December 31,
2005 115,000
2006 96,000
2007 94,000
2008 12,000
-------
Total 317,000
=======
Rent expenses were approximately $182,000 for the year ended December 31, 2004.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. 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.
42
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors and their respective ages and positions as
of February 10, 2006 are as follows:
Name Age Position(s)
--------------------------------------------------------------------------------
Christopher J. Carey... 51 President, Chief Executive Officer and Director
The business address for each executive officer and director is 106 Allen Road,
Basking Ridge, NJ 07920.
Christopher J. Carey has served as our President and Chief Executive Officer
since May 2002. Mr. Carey is also the founder, President and Chief Executive
Officer of Stronghold, our wholly-owned subsidiary. Since founding Stronghold in
2000, Mr. Carey has set the strategic direction and corporate vision for
Stronghold, drawing on over 25 years of experience building technology-focused
businesses. From 1976 until 1996, Mr. Carey was President and Chief Executive
Officer of Datatec Industries, Inc., which specialized in the rapid deployment
of network and computing systems. After negotiating a merger with Glasgal
Communications in 1996, Mr. Carey became President of Datatec Systems, Inc., the
combined entity until May 2002. Mr. Carey is currently a member of Board of
Trustees of The Albert Dorman Honors College, New Jersey Institute of
Technology, and a past Chairman of the New Jersey Chapter of the Young
President's Organization.
Executive Officers
Christopher J. Carey had employment contracts with our company, which expired.
The remaining officers serve at the discretion of our board of directors and
holds office until his successor is elected and qualified or until his earlier
resignation or removal. There are no family relationships among any of our
directors or executive officers.
Board Committees
Christopher Carey, our sole director, also acts as the audit, compensation and
governance/nominating committee.
Code of Ethics
Because we are an early-development stage company with limited resources, we
have not yet adopted a "code of ethics", as defined by the SEC, that applies to
our Chief Executive Officer, Chief Financial Officer, principal accounting
officer or controller and persons performing similar functions. We are in the
process of drafting and adopting a Code of Ethics.
Director Compensation
We have granted an initial one-time option grant to purchase 40,000 shares of
common stock to each non-employee board member upon election to our board of
directors. This one-time grant was awarded to the current non-employee board
members on October 7, 2003. The options will vest 50% on each of the first and
second anniversaries of the date of grant. The option is exercisable at $.60 per
share. In addition, each non-employee director will be granted, on an annual
basis, an option to purchase 30,000 shares of our common stock, which will vest
50% on each of the first and second anniversaries of the date of grant. These
options were granted in November 2004 and have an exercise price of $.25. All
stock options granted to members of our board of directors will have exercise
prices equal to the fair market value of the Common Stock on the date of grant.
We also reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors and any meetings of its committees.
43
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth executive compensation for fiscal years ended
December 31, 2004, 2003 and 2002. We have not paid any salaries or bonuses to
any of our officers from our inception through the date hereof. All of our
executive officers also serve as officers of and are paid by our operating
subsidiary. The following table shows compensation paid during the fiscal years
ended December 31, 2002 by our wholly owned subsidiary to our former president
and other former executive officers. The table also provides information
regarding executive compensation for our wholly owned subsidiary's current
president and three other most highly compensated executive officers. We refer
to all of these officers collectively as our "named executive officers."
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
------------------------------------------ ---- -------- ------- ------------ ------------
Former Officers and Directors
------------------------------------------
Pietro Bortolatti 2003 -- -- -- --
President, Chief Executive Officer and
Chairman of the Board
2002 -- -- 20,500(1) --
Tiziana DiRocco 2003 -- -- -- --
Vice President Director of 2002 -- -- -- --
European Operations
Robert Nawy(8) 2004 182,250 -- -- 6,000
Chief Financial Officer 2003 82,967 -- -- 2,398
2002 -- -- -- --
Current Officers(3)
------------------------------------------
Christopher J. Carey(4) 2004 300,000 -- 9,600 --
President, Chief Executive Officer and 2003 300,000 -- 9,600 --
And chairman of the Board 2002 264,000 -- 9,601 --
Lenard Berger(5) 2004 175,000 -- 7,200 --
Vice President and Chief Technology 2003 175,000 29,963 7,200 --
Officer 2002 160,416 50,583 7,100 --
Salvatore D'Ambra(6) 2004 -- -- -- --
Vice President - Development 2003 134,375 27,135 5,912 --
2002 121,397 8,000 6,600 --
(1) Commissions of sales from Terre Di Toscana, Inc., and Terres Toscanas, Inc.
(2) Includes consulting service fees paid to the David Stephen Group, of which
David Rector, our former director, is a principal.
(3) On May 16, 2002, our wholly-owned subsidiary merged with a New Jersey
corporation, Stronghold Technologies, Inc. Our wholly-owned subsidiary survived
and changed its name to Stronghold Technologies, Inc.
(4) Christopher J. Carey became our President and Chief Executive Officer on May
16, 2002, following the merger. Mr. Carey also remains the President, Chief
Executive Officer and the sole Director of Stronghold. Mr. Carey's base salary
from May 15, 2002 until December 31, 2002 was $260,000, as set forth in his
Employment Agreement with Stronghold. The terms of Mr. Carey's Employment
Agreement are more fully set forth below. "Other Annual Compensation" consists
solely of the reimbursement of automobile expenses. All of Mr. Carey's salary
for 2002 has been deferred and accrued.
44
(5) Lenard Berger served as our Vice President and Chief Technology Officer from
the merger until August 2005 Mr. Berger's base salary for the period of July
2001 through July 2002 was $112,000, as set forth in his Employment Agreement.
As of July 2002, Mr. Berger's salary increased to $122,000. $36,000 of Mr.
Berger's salary and other annual compensation was deferred and accrued in 2004.
(6) Salvatore D'Ambra has been our Vice President - Development of our wholly
owned subsidiary from the merger until November 12, 2003. Mr. D'Ambra's base
salary for the period of August 2001 through August 2002 was $150,000, as set
forth in his Employment Agreement. As of August 2002, Mr. D'Ambra's salary
increased to $175,000. Mr. D'Ambra resigned from his position with our wholly
owned subsidiary in November 2003. "Other Annual Compensation" consists solely
of the reimbursement of automobile expenses.
(7) Robert Nawy joined Stronghold on July 22, 2003 as Assistant Chief Financial
Officer and became the Chief Financial Officer in November 2003. Mr.Nawy
resigned in June 2005. Mr. Nawy's base salary for the period of June 2003
through July 2004 is $180,000, as set out in his Employment Agreement. As of
August 1, 2004, Mr. Nawy's salary increased to $185,400. $15,300 of Mr. Nawy's
salary and other annual compensation was deferred and accrued in 2004. "Other
Annual Compensation" consists solely of the reimbursement of automobile
expenses.
Options Grants
The following table sets forth information concerning individual grants of stock
options under the 2002 Stock Incentive Plan during the fiscal year ended
December 31, 2003 to each of the named executive officers.
Option Grants in Fiscal Year ended December 31, 2004
The following table sets forth information concerning individual grants of stock
options under the 2002 Stock Incentive Plan during the fiscal year ended
December 31, 2004 to each of the named executive officers.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2004
% of Total Options Granted Exercise or
Number of Securities to Employees Base Expiration
Name Underlying Options in 2002 Price ($/Sh) Grant Date Date
----------------- -------------------- --------------- ------------ ---------- ----
Lenard Berger -- --% -- -- n/a
Robert Nawy -- --% -- -- n/a
Robert Nawy -- --% -- -- n/a
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES
SHARES ACQUIRED VALUE UNDERLYING OPTIONS VALUE OF IN-THE-MONEY OPTIONS
ON EXERCISE (#) REALIZED ($)(1) AT YEAR END (#) AT YEAR-END ($)(2)
--------------- --------------- --------------- ------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Christopher J. Carey -- -- -- 200,000 -- --
Lenard J. Berger -- -- 7,600 -- -- --
Robert Nawy -- -- 216,667 33,333 44,000 --
(1) Based on the difference between the option exercise price and the fair
market value of our common stock on the exercise date.
(2) Based on the difference between the option exercise price and the closing
sale price of $0.25 of our common stock as reported on the OTC Bulletin Board on
December 31, 2004, the last trading day of our 2004 fiscal year. None of these
options are currently in the money.
45
Employment Agreements with Executive Officers
Christopher J. Carey
On May 15, 2002, we assumed the employment agreement that was in place between
Christopher J. Carey and the Predecessor Entity. Under the terms of the
agreement, Mr. Carey's employment as Chairman of the Board, President and Chief
Executive Officer of will continue until December 31, 2004, unless terminated
sooner. The agreement may be renewed through mutual agreement of the parties. As
of the date hereof, Mr. Carey's employment agreement has not been renewed. Mr.
Carey has agreed to continue his employment with our company under the same
arrangmenet set forth in the employment agreement. Mr. Carey receives a base
salary of $260,000 per year. Such base salary was increased effective January 1,
2003, to the annualized rate of $300,000 and increased, effective January 1,
2004, to the annualized rate of $350,000. Such salary will be reviewed annually
and is subject to increase as determined by our board of directors or the
Compensation Committee in its sole discretion.
The employment agreement provides that each fiscal year after fiscal year 2002,
Mr. Carey will be eligible to receive an annual bonus based upon our meeting and
exceeding our annual budget, as same has been reviewed and approved by the board
of directors for earnings before interest, taxes, depreciation and amortization,
referred to as EBITDA. This bonus will be earned according to the following: (i)
if we achieve 90-100% of budgeted EBITDA, Mr. Carey will receive a bonus of 10%
of his then current annual base salary; (ii) if we achieve 101-110% of budgeted
EBITDA, Mr. Carey will receive a total bonus of 20% of his then current annual
base; and (iii) if we achieve 111-120% of budgeted EBITDA, Mr. Carey will
receive a total bonus of 30% of his then current annual base salary; (iv) if we
achieve 121-130% of budgeted EBITDA, Mr. Carey will receive a total bonus of 40%
of his then current annual base salary; (v) if we achieve 131-140% of budgeted
EBITDA, Mr. Carey will receive a total bonus of 50% of his then current annual
base salary; (vi) if we achieve 141-150% of budgeted EBITDA, Mr. Carey will
receive a total bonus of 55% of his then current annual base salary; and (vii)
if we achieve 151% or more of budgeted EBITDA, Mr. Carey will receive a total
bonus of 60% of his then current annual base salary. The bonus, if any, shall be
paid in one lump sum within sixty (60) days after the close of the fiscal year
for which it was earned. To date, Mr. Carey has not been awarded a bonus.
In accordance with the agreement, the Predecessor Entity granted to Mr. Carey
stock options under the 2000 Stock Option Plan for the purchase of an aggregate
of 200,000 shares of the Predecessor Entity's common stock at an option exercise
price equal of $1.50 per share, the fair market value of the underlying common
stock on the date of the grant. Such option converted into an option to purchase
437,500 shares of our Common Stock when we merged with the Predecessor Entity
and our wholly-owned subsidiary, Stronghold, assumed the 2000 Stock Option Plan.
While Mr. Carey is employed by our company, the option will become exercisable
on the earlier of: (i) the seventh anniversary of May 15, 2002; or (ii) the
achievement of the performance goals set forth above in the paragraph above.
Upon a change in control of our company, the unvested portion of the options
shall immediately vest and become exercisable by Mr. Carey. If we terminate Mr.
Carey's employment (i) after the expiration of the term of employment; or (ii)
with cause; or if Mr. Carey resigns for no good reason, he will receive all
accrued compensation and vested benefits. If we terminate his employment without
cause, Mr. Carey will receive all unpaid accrued compensation, vested benefits
and a severance benefit equal to his base salary until the earlier of the
balance of the term of his agreement, the renewal term or twelve months
following the date of termination.
Mr. Carey's agreement contains a confidentiality provision and further provides
that Mr. Carey may not work for, or hold 1% or more of the outstanding capital
stock of a publicly traded corporation, which is a competing business anywhere
in the world for one year after the conclusion of his employment. Mr. Carey has
not expressed a desire to leave.
46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 6, 2006, our company and Christopher Carey, our Chief Executive
Officer, entered into an Agreement of Settlement (the "Agreement") pursuant to
which Mr. Carey waived all rights to his accrued salary in the amount of
$931,369 and in consideration for the issuance of 21,428,571 shares of common
stock and 10,000 shares of Series C Preferred Stock (the "Series C Stock").
The Series C Stock has a stated value of $78.14 per share (the "Stated Value").
Each share of Series C Stock is convertible into shares of common stock
determined by dividing the Stated Value of such share by the closing bid price
on the day immediately before such conversion. The Series C Stock is convertible
at the option of the holder and will be automatically converted into common
stock upon receipt of financing (the "Financing") from New Millennium Capital
Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. or AJW
Partners, LLC (collectively, the "Investors"). Upon receipt of financing from
the Investors, the number of shares of Series C Stock multiplied by the Stated
Value equal to the gross proceeds of the Financing shall be automatically
converted into shares of common stock of the Company.
Stronghold Technologies, Inc., the Predecessor Entity, became our wholly-owned
subsidiary on May 16, 2002 pursuant to a merger with and into Acquisition Sub.
Pursuant to the merger, the Predecessor Entity's stockholders surrendered all of
their outstanding shares of the Predecessor Entity's common stock in exchange
for a total of 7,000,000 shares of our common stock. Of these shares,
Christopher J. Carey, our current President, and his wife received a total of
3,937,500 shares held jointly, and Mr. Carey received an additional 1,093,750
shares individually.
Pursuant to a Securities Purchase Agreement which we entered into on May 15,
2002, with Stanford, a major shareholder of our company, Pietro Bortolatti, a
former officer and director of our company, and Mr. Carey, we agreed to issue to
Stanford such number of shares of our Series A Preferred Stock that would in the
aggregate equal 20% of the total issued and outstanding shares of our common
stock, and a warrant to purchase an equal number of shares of our common stock.
The aggregate purchase price for the Series A Preferred Stock and warrants
purchased by Stanford was $3,000,000. The Series A Preferred Stock and warrant
purchase took place on four separate closing dates from May 16, 2002 through
July 19, 2002, in which we issued an aggregate of 2,002,750 shares of our Series
A Preferred Stock to Stanford and warrants for 2,002,750 shares of our common
stock. So long as any shares of Series A Preferred Stock are outstanding and
held by Stanford, Stanford had the right to maintain its percentage ownership
with respect to any additional securities we may issue, with certain exceptions
under the Series A Securities Purchase Agreement.
Pursuant to a Securities Purchase Agreement which we entered into on April 24,
2003, we agreed to issue to Stanford a total of 2,444,444 shares of our Series B
$0.90 Convertible Preferred Stock ("Series B Preferred Stock"). The issuance of
the Series B Preferred Stock occurred on six separate closing dates beginning on
April 24, 2003 and closing on September 15, 2003. In connection with the
Purchase Agreement, we modified the warrants issued in connection with the
Series A offering to reduce the exercise price to $0.25 per share and extend the
expiration date to August 1, 2008. Stanford was also granted the right to
maintain its percentage ownership with respect to any additional securities we
may issue, with certain exceptions under the Series B Securities Purchase
Agreement. In addition, we agreed to convert all outstanding loans and
unreimbursed expenses to certain stockholders of our company for 603,000 shares
of our common stock at a price of $0.90 per share. The value of the warrant
modification was treated as additional costs associated with raising capital and
was shown as a reduction of additional paid-in capital of approximately $557,000
(computed using the Black-Scholes model with the following assumptions: expected
volatility of 0%, expected dividend yield rate of 0%, expected life of 5 years,
and a risk-free interest rate of 4.91% for September 30, 2003).
In connection with the Series B Purchase Agreement, we entered into a
Registration Rights Agreement with Stanford, dated April 30, 2003, in which we
agreed to register the shares of common stock issuable upon conversion of the
Series B Preferred Stock, no later than November 15, 2003. Stanford has agreed
to extend the date to register the common stock issuable upon conversion of the
Series B Preferred Stock until March 15, 2004, which was further extended in
June 2004.
In connection with the Series B Purchase Agreement, we entered into a Consulting
Agreement with Stanford, pursuant to which Stanford has agreed to perform
certain financial consulting and advisory services, in exchange for which we
agreed to pay Stanford a fee of $50,000 per year for two years, payable
quarterly in equal installments of $12,500, with the first such installment due
on July 1, 2003. Pursuant to the terms of the Consulting Agreement, we may, at
our sole option, choose to issue shares of our common stock to Stanford in lieu
of such payments.
On November 11, 2003, we agreed with Stanford to modify the terms of the Series
A and Series B Preferred Stock to facilitate acquisitions and other company
actions. The basic terms of the modification are: (i) waiver Section 2(e)(iii)
of the Series A Certificate of Designation, which provides for anti-dilution
protection if we shall issue securities which are convertible into shares of our
common stock for an exercise price of less than $1.50; (ii) waiver of any rights
of Stanford to Default Warrants (as defined in the Series A Registration Rights
Agreement) due to our failure to register our shares of common stock; and (iii)
modification of the warrants previously issued to Stanford and its assigns to
purchase 2,002,750 shares of our common stock to reduce the initial exercise
price to $0.25 per share and to extend the expiration date to August 1, 2008.
47
Pursuant to the Amended and Restated Series A Certificate of Designation and
Series B Certificate of Designation, dated November 11, 2003, by and between our
company and Stanford and a Written Notice, Consent, and Waiver Among The Holders
Of Series A $1.50 Convertible Preferred Stock, Series B $.90 Convertible
Preferred Stock and Warrants, our company and Stanford agreed to certain
amendments and restatements including:
(a) the filing of an Amended and Restated Certificate of Designation for Series
A $1.50 Convertible Preferred Stock substantially in the form attached hereto
("Amended and Restated Series A Certificate of Designation") pursuant to which
Stanford will (x) waive dilution adjustments for certain issuances of Common
Stock and Common Stock equivalents, (y) reduce for an eighteen month period the
Stated Value and Conversion Price (each as defined therein) to $0.50 and to
$0.87 thereafter and (z) forego certain rights to approve acquisitions of fixed
assets, capital stock or capital expenditures, credit facilities and sales of
shares of our securities. The authorized shares of Series A Preferred Stock was
reduced from 2,017,200 to 2,002,750 shares.
(b) the filing of an Amended and Restated Certificate of Designation Series B
$0.90 Convertible Preferred Stock substantially in the form attached hereto
pursuant to which Stanford will (x) waive dilution adjustments for certain
issuances of Common Stock and Common Stock equivalents, (y) reduce for an
eighteen month period the Stated Value and Conversion Price (each as defined
therein) to $0.50 and to $0.87 thereafter and (z) forego certain rights to
approve acquisitions of fixed assets, capital stock or capital expenditures,
credit facilities and sales of shares of our securities.
In connection with the Series B Purchase Agreement, our company and Stanford
also entered into a Registration Rights Agreement, dated April 30, 2003, in
which we agreed to register the shares of our common stock issuable upon
conversion of the Series B Preferred Stock, no later than November 15, 2003.
Stanford has agreed to extend dare of the filing requirements of the
Registration Rights Agreement to March 14, 2004, which was subsequently
extended.
(c) In consideration of the Notice and the granting of the Consents and Waivers,
we reduced the exercise price of the Stanford Warrants from $0.25 per share to
$.001. On November 11, 2003, Stanford exercised in full the Stanford Warrant
purchasing 2,002,750 shares of common stock for the purchase price of $2,002.75.
Pursuant to a Stockholders' Agreement which we entered into on May 16, 2002 with
Stanford, Mr. Carey and his wife, if either Stanford or the Careys should ever
want to sell any shares of our Series A Preferred Stock or common stock, the
other party has a right of first refusal regarding such sale and, if such
non-selling party does not want to exercise its right of first refusal, we have
the right to purchase such shares, and a right of co-sale under the same terms
and for the same type of consideration. In the case of a material adverse event
related to our company, the Careys agreed to vote their shares as directed by
Stanford, including removing and replacing the members of the board with
designees nominated by Stanford. Finally, Stanford has the right to nominate one
member to our board of directors and the Carey's have agreed to vote for such
nominee.
Stanford is an affiliate of Stanford Financial Group, which is the majority
stockholder of TWS International, Inc. Luis Delahoz, one of our outside
directors, is the president and chief executive officer of TWS International,
Inc. and is Stanford's representative on our board of directors.
On July 31, 2000, the Predecessor Entity entered into a line of credit loan
arrangement with our President, Christopher Carey, who is also president of
Stronghold. Mr. Carey made available $1,989,500, which the Predecessor Entity
could borrow from time to time until August 1, 2001. Outstanding amounts accrued
interest at the rate of interest per annum equal to the floating Base Rate,
computed daily, for the actual number of days elapsed as if each full calendar
year consisted of 360 days. Overdue amounts accrued interest at an annual rate
of 2% greater than the base rate, which is 2% above the floating base rate
announced from time to time by Citibank, N.A. Under the agreement, the first
payment was due on August 1, 2001. On such date, the line of credit was extended
for one more year, until August 1, 2002. On April 22, 2002, the Predecessor
Entity issued 500,000 shares of its common stock (which converted into 1,093,750
shares of our common stock when we acquired the Predecessor Entity on May 16,
2002) in exchange for cancellation of $1 million of outstanding debt under such
line of credit. On May 16, 2002, the total amount outstanding under the line of
credit was $2.2 million. On such date, we issued 666,667 shares of our Common
Stock to Mr. Carey in exchange for cancellation of $1 million of the then
outstanding amount. We will pay Mr. Carey the remaining $1.2 million according
to the terms of a non-negotiable promissory note, which was issued on May 16,
2002, and amended and restated in September 2002. The terms of the amended and
restated note stipulate that the Company may not make principle payments to Mr.
Carey until the retirement of the United Trust Bank loan. Until such time as the
principal is paid, we will pay an interest only fee of 12% per year. Mr. Carey's
promissory note is expressly subordinated in right of payment to the prior
payment in full of all of our senior indebtedness.
48
On September 14, 2000, we issued 5,000,000 shares of our common stock to our
former president, Pietro Bortolatti, in exchange for the transfer from Mr.
Bortolatti of all of the outstanding shares of Terre di Toscana, Inc. to us. The
assets of Terre di Toscana, Inc. included rights in several customer agreements.
We valued the 5,000,000 shares issued to Mr. Bortolatti at par value, $.0001 per
share. As part of our merger with the Predecessor Entity and the exchange of
shares for our truffle business, Mr. Bortolatti has surrendered or exchanged all
of such shares.
In August 2002, one of our outside directors, Robert Cox, purchased 60,000
shares of our common stock at a purchase price of $1.50 per share for aggregate
proceeds to us of $90,000. Such purchase was pursuant to a Subscription
Agreement in which Mr. Cox made certain investment representations and
warranties. The price paid by Mr. Cox had been negotiated by third parties in an
arms-length transaction. The third parties who negotiated the transaction
purchased a number of shares concurrently with Mr. Cox.
In January 2004, our outside director, Robert Cox, purchased an additional
147,059 shares and a warrant to purchase 73,529 shares at $0.59/share. The price
of $0.59/share was based on 130% of the trailing five day closing price of our
common stock on the effective purchase date of January 9, 2004.
Lenard Berger, our former Chief Technology Officer and Vice President and James
Cummiskey, our Vice President of Sales and Marketing, received 200,000 shares of
common stock from the Predecessor Entity as founders of such entity, at a per
share price of $0.005. Such shares converted into 437,400 shares of our Common
Stock.
On September 30, 2002, we entered into a loan agreement with CC Trust Fund to
borrow an amount up to $355,128. This bridge loan was for a period of twelve
months, with all principal due and payable on September 30, 2003. The 12.5%
interest on the outstanding principal is due each year. At the end of the loan
period, the CC Trust Fund will be entitled to exercise 25,000 warrants at $1.50
per share. As of March 31, 2003, $355,128 was outstanding under the CC Trust
Fund loan agreement. On September 30, 2003, the CC Trust Fund agreed to extend
the term of their loan to December 30, 2003. On December 30, 2003, the CC Trust
Fund agreed to extend the term of their loan to March 31, 2004. On March 30,
2004, the CC Trust Fund agreed to extend the term of their loan to March 31,
2005. As of December 31, 2003, $355,128 was outstanding under the CC Trust Fund
loan agreement. Christopher Carey Jr., Mr. Carey's son, is the beneficiary of
the trust, and Mary Carey, Mr. Carey's wife, is the trustee of the trust.
On September 30, 2002, we entered into a loan agreement with AC Trust Fund to
borrow an amount up to $375,404. This bridge loan is for a period of twelve
months, with all principal due and payable on September 30, 2003. The 12.5%
interest on the outstanding principal is due each year. At the end of the loan
period, the AC Trust Fund will be entitled to exercise 25,000 warrants at $1.50
per share. On September 30, 2002, the AC Trust Fund agreed to extend the term of
their loan to December 30, 2003. On December 30, 2003, the AC Trust Fund agreed
to extend the term of their loan to March 31, 2004. On March 30, 2004, the AC
Trust Fund agreed to extend the term of their loan to March 31, 2005. As of
December 31, 2003, $375,404 was outstanding under the AC Trust Fund loan
agreement. Amie Carey, Mr. Carey's daughter, is the beneficiary of the trust,
and Mary Carey, Mr. Carey's wife, is the trustee of the trust.
In October 2002, in connection with a loan to our company in the amount of
$165,000, we issued a promissory note to Christopher J. Carey for $165,000. Such
promissory note was due on or before December 31, 2003. On March 30, 2004, Mr.
Carey agreed to extend the term of his loan to March 31, 2005. Until such time
as the principal is paid, interest on the note will accrue at the rate of 12.5%
per year.
We believe that the terms of all of the above transactions are commercially
reasonable and no less favorable to us than we could have obtained from an
unaffiliated third party on an arm's length basis. Our policy requires that all
related parties recuse themselves from negotiating and voting on behalf of our
company in connection with related party transactions.
49
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
our common stock as of February 10, 2006. 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 37,688,793 shares outstanding on February 10,
2006, 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 February 10, 2006.
Number of Shares Percentage
Name and Address of Beneficial Owner Beneficially Owned Outstanding
--------------------------------------- ------------------ -----------
5% Stockholders
---------------------------------------
Christopher J. Carey
450 Claremont Road
Bernardsville, NJ 07924 113,382,043(1) 75.05
Stanford Venture Capital Holdings, Inc.
6075 Poplar Avenue
Memphis, TN 38119 7,519,897(2) 19.95
----------- -----
Executive Officers and Directors as a Group
(1 person) 113,382,043 75.05
(1) Includes 86,822,222 shares of common stock issuable upon conversion of
10,000 shares of Series C Preferred Stock at current market prices. 3,937,500 of
these shares are owned by Christopher J. Carey and his wife, Mary Carey, as
Joint Tenants with Right of Survivorship.
(2) The total beneficial ownership of Stanford Venture Capital Holdings, Inc. is
7,519,897 shares which consists of: (i) 2,002,750 shares of Common Stock
issuable upon the conversion of 2,002,750 shares of our Series A Preferred
Stock; and (ii) 2,444,444 shares of Common Stock issuable upon the conversion of
2,444,444 shares of our Series B Preferred Stock and (iii) 3,072,703 shares of
Common Stock. James M. Davis has voting and investment control over the
securities held by Stanford Venture Capital Holdings, Inc., but he disclaims
beneficial ownership of such securities, except to the extent of any pecuniary
interest therein.
50
Equity Compensation in Fiscal 2004
The following table provides information about the securities authorized for
issuance under our equity compensation plans as of December 31, 2003.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about the securities authorized for
issuance under our equity compensation plans as of December 31, 2004.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance
exercise of outstanding options under equity compensation plans (2)
outstanding options (1)
-----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 1,225,408 $0.85 1,142,133
approved by security holders
Equity compensation plans not -- -- --
approved by security holders
Total 1,225,408 $0.85 1,142,133
(1) Issued pursuant to our 2002 Stock Incentive Plan, our 2002 California Stock
Incentive Plan, and our 2000 Stock Option Plan.
(2) 1,063,600 shares are available for future issuance pursuant to the 2002
Stock Incentive Plan and 78,533 shares are available for future issuance
pursuant to the 2002 California Stock Incentive Plan. We do not intend to issue
any additional options under our 2000 Stock Option Plan.
51
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK
We are authorized to issue up to 8,500,000,000 shares of common stock, par value
$.0001. As of February 10, 2006, there were 37,688,793 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have appointed Continental Stock Transfer & Trust Company, 17 Battery Place,
New York, New York 10004, as transfer agent for our shares of Common Stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act" or "Securities Act") may be permitted to directors, officers or
persons controlling us pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the broker-dealer
solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of any state
or the United States;
o broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
52
The selling stockholders may also engage in short sales against the box, puts
and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholders,
but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement with
a broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
53
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.
54
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.
------------------------------------------------------------------------------------------------------------------------------------
Name Total Total Shares of Beneficial Percentage Beneficial Percentage
Shares of Percentage Common Ownership of Common Ownership of Common
Common of Stock Stock Before Stock Before After the Stock Owned
Stock Assuming Included In Offering Offering** Offering(4) After
Issuable Full Prospectus Offering (4)
Upon Percentage (1)(2)
Conversion
of Notes
and/or
Warrants*
------------------------------------------------------------------------------------------------------------------------------------
AJW Partners, LLC(3) 362,737,504 90.59% 724,541,949(5) 1,979,445 4.99% -- --
--------------------------------------------------- --------------------------------------------------------------------------------
AJW Offshore Ltd.(3) 852,431,484 95.77% 1,702,515,929(6) 1,979,445 4.99% -- --
------------------------------------------------------------------------------------------------------------------------------------
AJW Qualified 803,842,556 95.52% 1,605,598,111(7) 1,979,445 4.99% -- --
Partners, LLC(3)
------------------------------------------------------------------------------------------------------------------------------------
New Millennium 66,518,456 63.83% 132,874,011(8) 1,979,445 4.99% -- --
Capital Partners II,
LLC(3)
------------------------------------------------------------------------------------------------------------------------------------
All four selling 2,085,530,000 98.22% 4,165,530,000 1,979,445 4.99% -- --
stockholders as a
group
------------------------------------------------------------------------------------------------------------------------------------
* This column represents an estimated number based on a conversion price as of a
recent date of February 10, 2006 of $.0023, divided into the principal amount.
** These columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 4.99% limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the secured convertible notes is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) Includes a good faith estimate of the shares issuable upon conversion of the
callable secured convertible notes and exercise of warrants, based on current
market prices. Because the number of shares of common stock issuable upon
conversion of the secured convertible notes is dependent in part upon the market
price of the common stock prior to a conversion, the actual number of shares of
common stock that will be issued upon conversion will fluctuate daily and cannot
be determined at this time. Under the terms of the secured convertible notes, if
the secured convertible notes had actually been converted on February 10, 2006,
the conversion price would have been $.0023.
55
(2) The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued or
issuable upon conversion of the secured convertible notes and exercise of the
related warrants by reason of any stock split, stock dividend or similar
transaction involving the common stock, in accordance with Rule 416 under the
Securities Act of 1933. However the selling stockholders have contractually
agreed to restrict their ability to convert their secured convertible notes or
exercise their warrants and receive shares of our common stock such that the
number of shares of common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of common
stock set forth in the table for the selling stockholders exceeds the number of
shares of common stock that the selling stockholders could own beneficially at
any given time through their ownership of the secured convertible notes and the
warrants. In that regard, the beneficial ownership of the common stock by the
selling stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
(3) The selling stockholders are affiliates of each other because they are under
common control. AJW Partners, LLC is a private investment fund that is owned by
its investors and managed by SMS Group, LLC. SMS Group, LLC, of which Mr. Corey
S. Ribotsky is the fund manager, has voting and investment control over the
shares listed above owned by AJW Partners, LLC. AJW Offshore, Ltd., formerly
known as AJW/New Millennium Offshore, Ltd., is a private investment fund that is
owned by its investors and managed by First Street Manager II, LLC. First Street
Manager II, LLC, of which Corey S. Ribotsky is the fund manager, has voting and
investment control over the shares owned by AJW Offshore, Ltd. AJW Qualified
Partners, LLC, formerly known as Pegasus Capital Partners, LLC, is a private
investment fund that is owned by its investors and managed by AJW Manager, LLC,
of which Corey S. Ribotsky and Lloyd A. Groveman are the fund managers, have
voting and investment control over the shares listed above owned by AJW
Qualified Partners, LLC. New Millennium Capital Partners II, LLC, is a private
investment fund that is owned by its investors and managed by First Street
Manager II, LLC. First Street Manager II, LLC, of which Corey S. Ribotsky is the
fund manager, has voting and investment control over the shares owned by New
Millennium Capital Partners II, LLC. The four selling stockholders are
considered to be a group as defined under the Securities Exchange Act of 1934.
The four selling stockholders are affiliated entities and may not own more then
4.99% of our common stock on an aggregate basis. We have been notified by the
selling stockholders that they are not broker-dealers or affiliates of
broker-dealers and that they believe they are not required to be broker-dealers.
(4) Assumes that all securities registered will be sold.
(5) Represents (i) 152,000,000 shares of common stock issuable upon conversion
of the callable secured convertible notes issued pursuant to the June 2004
Securities Purchase Agreement, (ii) 27,733,333 shares of common stock issuable
upon conversion of the callable secured convertible notes issued pursuant to the
March 2005 Securities Purchase Agreement, (iii) 31,733,333 shares of common
stock issuable upon conversion of the callable secured convertible notes issued
pursuant to the July 2005 Securities Purchase Agreement, (iv) 570,000 shares of
common stock issuable upon exercise of the common stock purchase warrants issued
pursuant to the June 2004 Securities Purchase Agreement, (v) 104,000 shares of
common stock issuable upon exercise of the common stock purchase warrants issued
pursuant to the March 2005 Securities Purchase Agreement, (vi) 238,000 shares of
common stock issuable upon exercise of the common stock purchase warrants issued
pursuant to the March 2005 Securities Purchase Agreement, (vii) 18,720,000
shares of common stock issuable upon conversion of the callable secured
convertible notes issued pursuant to the February 2006 Securities Purchase
Agreement and (viii) 21,060 shares of common stock issuable upon exercise of the
common stock purchase warrants issued pursuant to the February 2006 Securities
Purchase Agreement.
(6) Represents (i) 288,000,000 shares of common stock issuable upon conversion
of the callable secured convertible notes issued pursuant to the June 2004
Securities Purchase Agreement, (ii) 78,000,000 shares of common stock issuable
upon conversion of the callable secured convertible notes issued pursuant to the
March 2005 Securities Purchase Agreement, (iii) 115,826,667 shares of common
stock issuable upon conversion of the callable secured convertible notes issued
pursuant to the July 2005 Securities Purchase Agreement, Represents, (iv)
1,080,000 shares of common stock issuable upon exercise of the common stock
purchase warrants issued pursuant to the June 2004 Securities Purchase
Agreement, (v) 292,500 shares of common stock issuable upon exercise of the
common stock purchase warrants issued pursuant to the March 2005 Securities
Purchase Agreement, (vi) 868,700 shares of common stock issuable upon exercise
of the common stock purchase warrants issued pursuant to the March 2005
Securities Purchase Agreement, (vii) 94,80,000 shares of common stock issuable
upon conversion of the callable secured convertible notes issued pursuant to the
February 2006 Securities Purchase Agreement and (viii) 105,840 shares of common
stock issuable upon exercise of the common stock purchase warrants issued
pursuant to the February 2006 Securities Purchase Agreement..
56
(7) Represents (i) 328,000,000 shares of common stock issuable upon conversion
of the callable secured convertible notes issued pursuant to the June 2004
Securities Purchase Agreement, (ii) 64,133,333 shares of common stock issuable
upon conversion of the callable secured convertible notes issued pursuant to the
March 2005 Securities Purchase Agreement, (iii) 75,480,000 shares of common
stock issuable upon conversion of the callable secured convertible notes issued
pursuant to the July 2005 Securities Purchase Agreement, Represents, (iv)
1,230,000 shares of common stock issuable upon exercise of the common stock
purchase warrants issued pursuant to the June 2004 Securities Purchase
Agreement, (v) 240,500 shares of common stock issuable upon exercise of the
common stock purchase warrants issued pursuant to the March 2005 Securities
Purchase Agreement, (vi) 566,100 shares of common stock issuable upon exercise
of the common stock purchase warrants issued pursuant to the March 2005
Securities Purchase Agreement, (vii) 44,800,000 shares of common stock issuable
upon conversion of the callable secured convertible notes issued pursuant to the
February 2006 Securities Purchase Agreement and (viii) 50,400 shares of common
stock issuable upon exercise of the common stock purchase warrants issued
pursuant to the February 2006 Securities Purchase Agreement..
(8) Represents (i) 32,000,000 shares of common stock issuable upon conversion of
the callable secured convertible notes issued pursuant to the June 2004
Securities Purchase Agreement, (ii) 3,466,667 shares of common stock issuable
upon conversion of the callable secured convertible notes issued pursuant to the
March 2005 Securities Purchase Agreement, (iii) 3,626,667 shares of common stock
issuable upon conversion of the callable secured convertible notes issued
pursuant to the July 2005 Securities Purchase Agreement, (iv) 120,000 shares of
common stock issuable upon exercise of the common stock purchase warrants issued
pursuant to the June 2004 Securities Purchase Agreement, (v) 13,000 shares of
common stock issuable upon exercise of the common stock purchase warrants issued
pursuant to the March 2005 Securities Purchase Agreement, (vi) 27,200 shares of
common stock issuable upon exercise of the common stock purchase warrants issued
pursuant to the March 2005 Securities Purchase Agreement, (vii) 2,400,000 shares
of common stock issuable upon conversion of the callable secured convertible
notes issued pursuant to the February 2006 Securities Purchase Agreement and
(viii) 2,700 shares of common stock issuable upon exercise of the common stock
purchase warrants issued pursuant to the February 2006 Securities Purchase
Agreement..
TERMS OF SECURED CONVERTIBLE NOTES
To obtain funding for our ongoing operations, we entered into three Securities
Purchase Agreements with the Investors. This prospectus relates to the resale of
the common stock underlying these callable secured convertible notes and common
stock purchase warrants issued in connection with these agreements. The
following is a description of each of these financings.
June 18, 2004 Securities Purchase Agreement
On June 18, 2004, we entered into a Securities Purchase Agreement for the sale
of (i) $3,000,000 in callable secured convertible notes and (ii) common stock
purchase warrants to buy 3,000,0000 shares of our common stock.
The following closings have occurred pursuant to the June 2004 Securities
Purchase Agreement:
o on June 18, 2004, the Investors purchased $1,500,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,500,000 shares of our common stock;
o on July 27, 2004, the Investors purchased $500,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
500,000 shares of our common stock;
o on October 22, 2004, the Investors purchased $350,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
350,000 shares of our common stock; and
o On March 18, 2005, the Investors purchase $650,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
650,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the investors' option, at the lower of (i) $0.70 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.57 per share.
57
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.57 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
March 31, 2005 Securities Purchase Agreement
We entered into a second Securities Purchase Agreement with the Investors on
March 31, 2005 for the sale of $650,000 in callable secured convertible notes
and common stock purchase warrants to buy 650,000 shares of our common stock.
On March 31, 2005, the Investors purchased $350,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
350,000 shares of our common stock. On May 4, 2005, the Investor purchased the
remaining $300,000 in callable secured convertible notes and received common
stock purchase warrants to purchase 300,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the Investors' option, at the lower of (i) $0.02 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.03 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.03 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
July 15, 2005 Securities Purchase Agreement
We entered into a third Securities Purchase Agreement with the Investors on July
15, 2005 for the sale of (i) $850,000 in callable secured convertible notes and
(ii) common stock purchase warrants to buy 1,700,000 shares of our common stock.
On July 15, 2005, the Investors purchased $850,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,700,000 shares of our common stock. We received gross proceeds in cash in the
amount of $282,500 on July 18, 2005 and $567,500 was placed in escrow of which
$182,500 has been distributed through September 30, 2005. We received additional
proceeds in the amount of $210,000 on October 6, 2005 and $150,000 on November
9, 2005.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the Investors' option, at the lower of (i) $0.07 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.08 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.10 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
February 6, 2006 Securities Purchase Agreement
We entered into a fourth Securities Purchase Agreement with the Investors on
February 6,2 006 for the sale of $180,000 in callable secured convertible notes
and common stock purchase warrants to buy 180,000 shares of our common stock.
On February 6, 2006, the Investors purchased $180,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
180,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the Investors' option, at the lower of (i) $0.05 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.03 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.08 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market
As of February 10, 2006, the average of the three lowest intraday trading prices
for our common stock during the preceding 20 trading days as reported on the
Over-The-Counter Bulletin Board was $.009 and, therefore, the conversion price
for the secured convertible notes was $.0075. Based on this conversion price,
the $4,680,000 callable secured convertible notes, excluding interest, were
convertible into 2,080,000,000 shares of our common stock.
58
The full principal amount of the callable secured convertible notes is due upon
1efault under the terms of callable secured convertible notes. In addition, we
have granted the investors a security interest in substantially all of our
assets and intellectual property as well as registration rights.
The investors have contractually agreed to restrict their ability to convert the
callable secured convertible notes and exercise the common stock purchase
warrants and receive shares of our common stock such that the number of shares
of our common stock held by them and their affiliates after such conversion or
exercise does not exceed 4.99% of our then issued and outstanding shares of our
common stock.
Sample Conversion Calculation
The number of shares of common stock issuable upon conversion of the notes is
determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of $4,500,000 of notes on February 10, 2006, a conversion price of
$0.0075 per share, the number of shares issuable upon conversion would be:
$4,680,000/$.0023 = 2,080,000,000 shares
The conversion price is the 25% of the average of the three lowest intraday
trading prices for the common stock on a principal market for the 20 trading
days before but not including the conversion date. The average of the three
lowest intraday trading prices is $0.009, therefore, the conversion price is
calculated by multiplying $0.03 by 25%, which results in a conversion price of
$0.0023.
The following is an example of the amount of shares of our common stock that are
issuable, upon conversion of the Notes (excluding accrued interest), based on
prices 25%, 50% and 75% below the average of the three lowest intraday trading
prices for our common stock during the previous 20 trading days as of February
10, 2006 of $0.009.
Number
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 75% Issuable Stock
------ ----- ------ -------- ------
25% $.0068 $.0017 2,773,333,333 98.66%
50% $.0045 $.0011 4,160,000,000 99.10%
75% $.0023 $.0006 8,320,000,000 99.55%
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion
with respect to the validity of the shares of common stock being offered hereby.
EXPERTS
Rothstein Kass - Certified Public Accountants, have audited, as set forth in
their report thereon appearing elsewhere herein, our financial statements at
December 31, 2004 and 2003 and for the years then ended that appear in the
prospectus. The financial statements referred to above are included in this
prospectus with reliance upon the independent registered public accounting
firm's opinion based on their expertise in accounting and auditing.
59
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, 100 F Street N.E., Washington D.C. 20549. Copies
of such material can be obtained from the Public Reference Section of the SEC at
Judiciary Plaza, 100 F 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.
60
INDEX TO FINANCIAL STATEMENTS
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
September 30, 2005 and September 30, 2004
Consolidated Balance Sheets September 30, 2005 (Unaudited) F-1
Consolidated Statements of Operations for the three months ended
September 30, 2005 and 2004 (Unaudited) F-2
Consolidated Statements of Cash Flows For the three months
ended September 30, 2005 and 2004 (Unaudited) F-3
Notes to the Consolidated Financial Statements (Unaudited) F-4 to
F-7
For the Years Ended December 31, 2004 and December 31, 2003
Report of Independent Registered Public Accounting Firm F-8
Consolidated Balance Sheets F-9
Consolidated Statement of Operations F-10
Consolidated Statement of Stockholders' Deficit F-11
Consolidated Statement of Cash Flows F-12
Notes to Consolidated Financial Statements F-14 to
F-29
61
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2005
--------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 1,200
Accounts receivable, less allowance for returns and
doubtful accounts of $20,736 97,030
Inventories 40,797
Prepaid expenses 43,421
------------
Total current assets 182,448
------------
PROPERTY AND EQUIPMENT, NET 14,970
------------
OTHER ASSETS
Software development costs, net of amortization 604,903
Deferred charge, convertible debt loan acquisition costs, net of amortization 328,255
Other 112,642
------------
Total other assets 1,045,800
------------
$ 1,243,218
============
LIABILITIES AND STOCKHOLDERS' DEFICIT 0
CURRENT LIABILITIES
Accounts payable $ 514,675
Accrued expenses and other current liabilities 1,272,599
Interest payable, stockholders 462,711
Interest payable, convertible debt 250,244
Notes payable, stockholders, current portion 1,358,530
Notes payable, other 33,000
Deferred revenue 413,388
Obligations under capitalized leases, current portion 6,135
------------
Total current liabilities 4,311,282
------------
LONG-TERM LIABILITIES
Notes payable, stockholders, less current portion 1,129,600
Note payable, convertible debt of $4,032,500 net of debt discount of $4,032,500
and debt discount amortization of $2,252,538 1,779,962
Payroll taxes payable, long term 150,000
------------
Total long-term liabilities 3,059,562
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, Series A, $.0001 par value; authorized 5,000,000 shares,
2,002,750 issued and outstanding (aggregate liquidation preference
of $3,004,125) 201 Preferred stock, Series B, $.0001 par value; authorized
2,444,444 shares,
2,444,444 issued and outstanding (aggregate liquidation preference $2,200,000) 244
Common stock, $.0001 par value, authorized 8,500,000,000
shares, 37,688,793 issued and outstanding 1,729
Additional paid-in capital 12,031,720
Stock subscription receivable (3,000)
Accumulated deficit (18,158,520)
------------
Total stockholders' deficit (6,127,626)
------------
$ 1,243,218
============
F-1
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEP 30, 2005 SEP 30, 2004 SEP 30, 2005 SEP 30, 2004
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 189,782 $ 475,969 $ 817,616 $ 1,819,896
COST OF SALES 68,381 175,863 286,379 627,728
---------------------------- ----------------------------
GROSS PROFIT 121,401 300,106 531,237 1,192,168
SELLING, GENERAL AND
ADMINISTRATION 332,242 773,020 1,321,148 2,406,396
---------------------------- ----------------------------
LOSS FROM OPERATIONS (210,841) (472,914) (789,911) (1,214,228)
DEPRECIATION AND AMORTIZATION 205,674 174,281 589,677 379,056
INTEREST EXPENSE 639,773 349,988 1,632,428 475,493
---------------------------- ----------------------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (1,056,287) $ (997,183) $ (3,012,016) $ (2,068,179)
============================ ============================
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.05) $ (0.07) $ (0.18) $ (0.15)
============================ ============================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 17,287,349 14,024,528 16,991,761 13,603,903
============================ ============================
See accompanying notes to condensed consolidated financial statements
F-2
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2005 2004
--------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,012,016) $(2,068,179)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for returns and allowances (199,155) (8,128)
Depreciation and amortization 589,677 379,056
Amortization of convertible debt discount 1,240,381 260,416
Interest expense for issuance of warrants
Increase (decrease) in cash attributable to
changes in operating assets and liabilities:
Accounts receivable 405,924 232,746
Inventories 3,907 92,579
Prepaid expenses 47,063 (123,056)
Other receivables -- (29,485)
Other assets 5,139 (51,724)
Accounts payable (104,504) (48,312)
Accrued expenses and other current liabilities (180,298) (366,840)
Interest payable, stockholders 64,343 36,016
Interest payable, convertible debt 250,244
Deferred revenue (180,020) 126,335
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,069,317) (1,568,576)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchase of property and equipment (1,305) (3,749)
Payments for software development costs (65,455) (355,260)
Payments of security deposits (800) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (67,560) (359,009)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of financing costs 29,750
Proceeds from notes payable, stockholders 234,000 899,500
Principal repayments of notes payable, stockholders (21,000) (57,850)
Proceeds from notes payable, convertible debt 1,682,500 2,000,000
Payments made for debt issuance costs relating to notes payable, convertible debt (155,802) (333,983)
Proceeds from notes payable, other 33,000 --
Principal repayments of notes payable (606,667) (575,000)
Principal payments for obligations under capital leases (28,455) (32,198)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,137,576 1,930,219
----------- -----------
NET INCREASE IN CASH 700 2,634
CASH, BEGINNING OF PERIOD 500 8,161
----------- -----------
CASH, END OF PERIOD $ 1,200 $ 10,795
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
cash paid during the period for interest $ 1,392 $ 45,198
=========== ===========
See accompanying notes to condensed consolidated financial statements
F-3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). These statements are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments and
accruals) necessary to present fairly the results for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to applicable SEC
rules and regulations. Operating results for the three and nine-month periods
ended September 30, 2005 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2005. These financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report of Form 10-KSB for the fiscal
year ended December 31, 2004.
1. INVENTORIES
Inventories, which are comprised of hardware for resale, are stated at cost, on
an average cost basis, which does not exceed market value.
2. LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, "Earnings Per Share," which
requires dual presentation of basic and diluted earnings (loss) per share. Basic
earnings (loss) per share excludes dilutions and is computed by dividing net
loss applicable to common stockholders by the weighted average number of common
shares outstanding for the year. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Since
the effect of the outstanding options and warrants are anti-dilutive, they have
been excluded from the Company's computation of diluted loss per common share.
3. COMMON STOCK
On May 3, 2005 the stockholders voted to increase the amount of authorized
shares from 250,000,000 to 8,500,000,000.
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-based
Compensation (Revised)." SFAS No. 123(R) supersedes APB No. 25 and its related
implementation guidance. SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. SFAS No. 123(R) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award the requisite service period (usually
the vesting period). No compensation costs are recognized for equity instruments
for which employees do not render the requisite service. The grant-date fair
value of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those
instruments (unless observable market prices for the same or similar instruments
are available). If an equity award is modified after the grant-date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification. The Company has not completed its
evaluation of SFAS No. 123(R) but expects the adoption of this new standard will
have an impact on operating results due to the Company's use of options as
employee incentives. This pronouncement becomes effective as of the beginning of
the first interim or annual reporting period that begins after December 15,
2005.
5. STOCK-BASED COMPENSATION
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amended SFAS No. 123, "Accounting
for Stock-Based Compensation." This Statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation. It also amends the disclosure provisions to
require more prominent disclosure about the effects on reported net income
(loss) of an entity's accounting policy decisions with respect to stock-based
employee compensation. As permitted by the Statement, the Company does not plan
to adopt the fair value recognition provisions of SFAS No. 123 at this time.
However, the Company has adopted the disclosure provisions of the Statement.
The Company accounts for its stock-based employee compensation plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized in the accompanying consolidated statements of operations, as
all options granted under those plans had an exercise price equal to or in
excess of the market value of the underlying common stock at the date of grant.
Had compensation cost for these options been determined consistent with the fair
value method provided by SFAS No. 123, the Company's net loss and net loss per
common share would have been the following pro forma amounts for the three-month
periods ended September 30, 2005 and 2004.
F-4
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss applicable to common stockholders,
as reported (1,056,287) $ (997,183) (3,012,016) $(2,068,179)
Deduct
Total stock-based compensation expense
determined under fair value method for all awards,
net of related tax effect 1,526 11,131 7,151 34,832
Pro Forma (1,057,813) $(1,008,314) (3,019,167) $(2,103,011)
Basic and diluted EPS
As reported $ (0.06) $ (0.07) $ (0.18) $ (0.15)
Pro Forma $ (0.06) $ (0.07) $ (0.18) $ (0.15)
The fair value of issued stock options is estimated on the date of grant using
the Black-Scholes option-pricing model including the following assumptions:
expected volatility of approximately 15%, expected dividend yield rate of 0%,
expected life of 10 years, and a risk-free interest rate of 4.20% and 4.13% for
September 30, 2005 and 2004, 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 $3,012,016 and has negative
cash flows from operations of $1,069,316 for the nine months ended September 30,
2005, and has a working capital deficit of $4,128,834 and a stockholders'
deficit of $6,127,626 as of September 30, 2005. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
During 2005, management of the Company will rely on raising additional capital
to fund its future operations. If the Company is unable to generate sufficient
revenues or raise sufficient additional capital, there could be a material
adverse effect on the consolidated financial position, results of operations and
cash flows of the Company. The accompanying consolidated financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at
September 30, 2005
ACCRUED EXPENSES
Sales tax $ 103,582
Payroll taxes 490,292
Compensation 331,702
Commissions 121,168
Other accrued expenses 225,855
-----------
Total $ 1,272,599
===========
Payroll Tax Payment Agreement with IRS
On April 30, 2004, the Company entered into an installment agreement with the
United States Internal Revenue Service ("IRS") to pay overdue payroll taxes and
penalties of totaling $1,233,101 under the terms of which the Company will pay a
minimum of $35,000 each month, commencing June 28, 2004, until it has paid the
withholding taxes due in full, to be completed in thirty-six month period by
April 30, 2007. If the Company is unable to fulfill this agreement, the IRS
could take possession of the Company's assets. As of September 30, 2005, the
company has made all required payments to the IRS. The Company has recorded the
portion of the payroll taxes of $150,000 to be paid in the remaining monthly
periods of 28 through 36 within the agreed upon payment plan in the long term
liabilities section under the heading "Payroll taxes payable-long term" section
of the balance sheet.
F-5
8. NOTES PAYABLE, STOCKHOLDERS
The following table provides a reconciliation of these loans to the current and
long term sections of the balance sheet as well notes regarding the extension of
the loans from Mr. Carey:
------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2005
------------------------------------------------------------------------------------------------------------------------------------
Original Extended
Current Long Term Total Term/Due Date To
------------------------------------------------------------------------------------------------------------------------------------
Stockholder - Christopher J. Carey
------------------------------------------------------------------------------------------------------------------------------------
Stockholder Bridge Loan 60,000 60,000 3 mos due $20,000 principal payment
9/18/03 11/1/05 Dec 2004 $20,000 principal
payment in June 2003
------------------------------------------------------------------------------------------------------------------------------------
Stockholder Bridge Loan 300,000 300,000 3 mos due
9/18/03 11/1/05
------------------------------------------------------------------------------------------------------------------------------------
Stockholder Loan 268,000 254,600 522,600 18 mos du Principal balance reduced
by $543,000 debt to equity
conversion and reallocation
of accrued compensation and
travel and entertainement
originally included in
loan.
12/31/03 12/1/05
------------------------------------------------------------------------------------------------------------------------------------
Christopher J. Carey - AC Trust Fund 375,404 375,404 12 mos due
9/30/03 11/1/05
------------------------------------------------------------------------------------------------------------------------------------
Christopher J. Carey - CC Trust Fund 355,127 355,127 12 mos due
9/30/03 11/1/05
------------------------------------------------------------------------------------------------------------------------------------
Total-Stockholder - Christopher J, Carey 1,358,531 254,600 1,613,131
------------------------------------------------------------------------------------------------------------------------------------
Stanford 875,000 875,000 3 yrs due
3/2007
------------------------------------------------------------------------------------------------------------------------------------
Totals 1,358,531 1,129,600 2,488,131
------------------------------------------------------------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
Callable Secured Convertible Notes
On March 31, 2005, in order to obtain funding for its ongoing operations, the
Company entered into a new Securities Purchase Agreement (the "New Securities
Purchase Agreement") with New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC (collectively, the
"Investors") for the sale of (i) $650,000 in callable convertible secured notes
(the "Notes") and (ii) stock purchase warrants to buy 650,000 shares of the
Company's common stock (the "Warrants"). On March 31, 2005 the Investors
purchased $350,000 in Notes, and received Warrants to purchase an aggregate of
350,000 shares of the Company's stock. On May 4, 2005, the Investors purchased
$300,000 in Notes and received Warrants to purchase 300,000 shares of our common
stock.
The Notes bear interest at 12%, mature two years from the date of issuance, and
are convertible into our common stock, at the Investors' option, at the lower of
(i) $0.70 or (ii) 25% of the average of the three lowest intraday trading prices
for the Company's common stock during the 20 trading days before, but not
including, the conversion date. The Company may prepay the Notes in the event
that no event of default exists, there are a sufficient number of shares
available for conversion of the Notes and the market price is at or below $0.03
per share, the market price at the time of the closing. The full principal
amount of the Notes is due upon default under the terms of Notes. In addition,
the Company has granted the investors a security interest in substantially all
of its assets and intellectual property as well as registration rights.
The Investors have contractually agreed to restrict their ability to convert the
Notes and exercise the Warrants and receive shares of the Company's common stock
such that the number of shares of the Company's common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of the
then issued and outstanding shares of the Company's common stock.
On July 15, 2005, the Investors purchased $850,000 in Notes and received
Warrants to purchase 1,700,000 shares of our common stock. We received gross
proceeds in cash in the amount of $282,500 on July 18, 2005 and $567,500 was
placed in escrow of which $182,500 has been distributed through September 30,
2005.
9. RESTATEMENT OF CERTAIN TRANSACTIONS AS OF SEPTEMBER 30, 2004
F-6
For the period ended September 30, 2004 the Company has taken the position of
capitalizing the approximately $334,000 of debt issuance cost, relating to the
Callable Secured Convertible Notes described in footnote 8, as a deferred
charge. As a result, the Company has also recorded the beneficial conversion
feature in the full amount of the outstanding note of $2,000,000. Both items
will be amortized over the life of the loan of 3 years which is in accordance
with EITF 00-27. The effects of this restatement for the three and nine month
periods ended September 30, 2004 are listed below:
Three months Nine months
ended September ended September
30, 2004 30, 2004
--------------- ---------------
Net Loss ($10,904) ($47,258)
Basic and diluted loss per common share ($0.001) ($0.003)
10. SUBSEQUENT EVENTS
On July 15, 2005, the Investors purchased $850,000 in Notes. We received gross
proceeds in cash in the amount of $282,500 on July 18, 2005 and $567,500 was
placed in escrow of which of which $182,500 has been distributed through
September 30, 2005. Subsequent to the balance sheet date, we received additional
proceeds in the amount of $210,000 on October 6, 2005 and $150,000 on November
9, 2005.
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders Stronghold Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Stronghold
Technologies, Inc. and Subsidiary as of December 31, 2004, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the years in the two years period ended December 31, 2004. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stronghold
Technologies, Inc. and Subsidiary as of December 31, 2004, and the results of
their operations and their cash flows for each of the years in the two year
period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2, the
Company's ability to continue in the normal course of business is dependent upon
the success of future operations. The Company has recurring losses, substantial
working capital and stockholders' deficit and negative cash flows from
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding these matters are
also described in Note 2. These consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Roseland, New Jersey
March 31, 2005
F-8
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
====================================================================================
December 31, 2004
------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 500
Accounts receivable, less allowance for returns and
doubtful accounts of $219,891 303,798
Inventories 44,704
Prepaid expenses 90,484
------------
Total current assets 439,486
------------
PROPERTY AND EQUIPMENT, NET 79,185
------------
OTHER ASSETS
Software development costs, net of amortization 867,786
Deferred charge, convertible debt loan acquisition costs,
net of amortization 347,608
Other 137,645
------------
Total other assets 1,353,039
------------
$ 1,871,710
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 619,179
Accrued expenses and other current liabilities 1,172,897
Interest payable, stockholders 472,779
Notes payable, stockholders, current portion 1,145,530
Note payable 606,667
Deferred revenue 593,408
Obligations under capitalized leases, current portion 25,807
------------
Total current liabilities 4,636,267
------------
LONG-TERM LIABILITIES
Notes payable, stockholders, less current portion 1,129,600
Note payable, convertible debt of $2,350,000 net of debt
discount of $2,350,000 and debt discount amortization of $539,581 539,581
Obligations under capitalized leases, less current portion 8,783
Payroll taxes payable, long term 430,000
------------
Total long-term liabilities 2,107,964
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, Series A, $.0001 par value; authorized 5,000,000
shares, 2,002,750 issued and outstanding (aggregate liquidation
preference of $3,004,125) 201 Preferred stock, Series B, $.0001
par value; authorized 2,444,444 shares, 2,444,444 issued and
outstanding (aggregate liquidation preference $2,200,000) 244
Common stock, $.0001 par value, authorized 50,000,000
shares, 16,087,349 issued and outstanding 1,609
Additional paid-in capital 10,274,928
Stock subscription receivable (3,000)
Accumulated deficit (15,146,503)
------------
Total stockholders' deficit (4,872,521)
------------
$ 1,871,710
============
See accompanying notes to consolidated financial statements.
F-9
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
===============================================================================
YEARS ENDED DECEMBER 31, 2004 2003
------------------------------------------------------------------------------
NET SALES $ 2,489,790 $ 2,996,344
COST OF SALES 834,349 1,230,174
------------ ------------
GROSS PROFIT 1,655,441 1,766,170
SELLING, GENERAL AND
ADMINISTRATION 3,878,045 5,512,042
------------ ------------
LOSS FROM OPERATIONS (2,222,604) (3,745,872)
INTEREST EXPENSE 867,010 512,135
------------ ------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (3,089,614) $ (4,258,007)
============ ============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.22) $ (0.38)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 14,081,263 11,304,347
============ ============
See accompanying notes to consolidated financial statements.
F-10
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2004 and 2003
Preferred Preferred
Stock Stock
Series A Series B Common Stock
Shares Amount Shares Amount Shares Amount
------------- ------------- ------------- ------------- ------------- -------------
Balances, January 1, 2003 2,002,750 $ 201 $ -- 9,857,000 $ 986
Issuance of preferred stock,
net of costs 2,444,444 244
Warrants issued with debt
Issuance of common stock 362,500 36
Conversion of warrants
to common stock 2,002,750 201
Stock issued for services 465,635 46
Conversion of stockholder
loan to common stock 603,333 60
Net loss
Balances, December 31, 2003 2,002,750 201 2,444,444 244 13,291,218 1,329
Issuance of common stock 157,059 16
Conversion of warrants
to common stock 2,000,000 200
Benificial conversion feature
on debt treated as equity
Stock issued for services 639,072 64
Net loss
Balances, December 31, 2004 2,002,750 $ 201 2,444,444 $ 244 16,087,349 $ 1,609
============= ============= ============= ============= ============= =============
Additional Stock Total
Paid-in Subscription Accumulated Stockholders'
Capital Receivable Deficit Deficit
------------- ------------- ------------- -------------
Balances, January 1, 2003 $ 4,839,635 $ (3,000) $ (7,798,882) $ (2,961,060)
Issuance of preferred stock,
net of costs 1,897,649 1,897,893
Warrants issued with debt 95,000 95,000
Issuance of common stock 174,964 175,000
Conversion of warrants
to common stock 201
Stock issued for services 161,579 161,625
Conversion of stockholder
loan to common stock 542,940 543,000
Net loss (4,258,007) (4,258,007)
Balances, December 31, 2003 7,711,767 (3,000) (12,056,889) (4,346,348)
Issuance of common stock 49,984 50,000
Conversion of warrants
to common stock 1,800 2,000
Benificial conversion feature
on debt treated as equity 2,350,000 2,350,000
Stock issued for services 161,377 161,441
Net loss (3,089,614) (3,089,614)
Balances, December 31, 2004 $ 10,274,928 $ (3,000) $ (15,146,503) $ (4,872,521)
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
F-11
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================================================
Years ended December 31, 2004 2003
----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,089,614) $(4,258,007)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for returns and allowances 1,445 489,205
Depreciation and amortization 515,387 222,678
Amortization of convertible debt discount 539,581
Interest expense for issuance of warrants 95,000
Stock issued for services 161,441 161,625
Increase (decrease) in cash attributable to changes in operating assets and
liabilities:
Accounts receivable 281,545 116,458
Inventories 127,042 56,667
Prepaid expenses (78,843) 8,265
Other receivables (3,804)
Other assets 2,910
Accounts payable (62,144) (170,337)
Accrued expenses and other current liabilities (409,378) 1,170,558
Interest payable, stockholders 64,875 214,786
Deferred revenue 250,987 342,421
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,698,570) (1,550,681)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchase of property and equipment (3,737) (19,574)
Payments for software development costs (407,505) (683,052)
Payments of security deposits (47,132)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (411,242) (749,758)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net of financing costs 1,897,893
Proceeds from issuance of common stock, net of financing costs 52,000 175,201
Proceeds from notes payable, stockholders 920,000 712,968
Principal repayments of notes payable, stockholders (21,775) (209,000)
Proceeds from notes payable, convertible debt 2,350,000
Payments made for debt issuance cost relating to notes payable, convertible debt (445,413)
Payments made for loan acquisition cost relating to notes payable, stockholders (82,095)
Principal repayments of notes payable (625,000) (268,333)
Principal payments for obligations under capital leases (45,566) (13,513)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,102,151 2,295,216
----------- -----------
NET DECREASE IN CASH (7,661) (5,223)
CASH, BEGINNING OF PERIOD 8,161 13,384
----------- -----------
CASH, END OF PERIOD $ 500 $ 8,161
=========== ===========
See accompanying notes to consolidated financial statements.
F-12
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
================================================================================
YEARS ENDED DECEMBER 31, 2004 2003
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
cash paid during the period for interest $ 262,554 $ 202,349
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 2004, the Company reclassed $430,000 of
accrued expenses to payroll taxes payable, long term
During the year ended December 31, 2004, the Company recorded $2,350,000 of debt
discount relating to the beneficial conversion feature of the note payable,
convertible debt. The full amount was recorded as additional paid-in capital and
conversely as a contra-liability against the note payable, convertible debt.
During the year ended December 31, 2003, obligations under capital leases
aggregating $56,845 were incurred when the Company entered into various leases
for computer equipment.
During the year ended December 31, 2003, the Company entered into an agreement
to convert $543,000 of notes payable, stockholders into 603,333 shares of common
stock.
During the year ended December 31, 2003, the Company reclassed $329,812 of notes
payable, stockholder to accrued expenses.
See accompanying notes to consolidated financial statements.
F-13
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Stronghold Technologies, Inc. (the "Company") was incorporated in the state of
New Jersey on August 1, 2000. The Company is engaged principally as a developer
of wireless and internet-based systems for auto dealers in the United States.
2. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred a
net loss of approximately $3,090,000 and has negative cash flows from operations
of approximately $1,699,000 for the year ended December 31, 2004, and has a
working capital deficit of approximately $4,197,000 and a stockholders' deficit
of approximately $4,873,000 as of December 31, 2004. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
During 2005, management of the Company will rely on raising additional capital
to fund its future operations. If the Company is unable to generate sufficient
revenues or raise sufficient additional capital, there could be a material
adverse effect on the consolidated financial position, results of operations and
cash flows of the Company. The accompanying consolidated financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. The Company provides for depreciation and amortization as follows:
ESTIMATED
ASSET USEFUL LIFE PRINCIPAL METHOD
Computer equipment 5 Years Declining-balance
Computer software 3 Years Declining-balance
Furniture and fixtures 7 Years Declining-balance
Leasehold improvements 4 Years Straight-line
F-14
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a
history of past write-offs and collections and current credit conditions.
Accounts are written off as uncollectable at the discretion of management.
Inventories
Inventories, which are comprised of hardware for resale, are stated at cost, on
an average cost basis, which does not exceed market value.
Software Development Costs
Capitalized software development costs, including significant product
enhancements, incurred subsequent to establishing technological feasibility in
the process of software development and production, are capitalized according to
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Costs
incurred prior to the establishment of technological feasibility are charged to
research and development expenses. The capitalized software is amortized over a
three year period using the straight-line method
Fair Value of Financial Instruments
Financial instruments held by the Company include cash, accounts receivable,
notes payable and accounts payable. The book value of cash, accounts receivable
and accounts payable are considered to be representative of fair value because
of the short maturity of these instruments. The fair values of the notes payable
approximate book values primarily because the contractual interest rates
approximate prevailing market rates.
F-15
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets
The Company periodically assesses the recoverability of the carrying amounts of
long-lived assets, including intangible assets. A loss is recognized when
expected undiscounted future cash flows are less than the carrying amount of the
asset. The impairment loss is the difference by which the carrying amount of the
asset exceeds its fair value.
Retirement Plan
The Company has a retirement plan under Section 401(k) of the Internal Revenue
Code ("the Plan"), which covers all eligible employees. The Plan provides for
voluntary deduction of the employee's salary, subject to Internal Revenue Code
limitations. The Company can make a matching contribution to the Plan, which is
at the discretion of the Company and is determined annually. There were no
matching contributions for the years ended December 31, 2004 and 2003.
Income Taxes
The Company complies with SFAS No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts, based on
enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"
which amended SFAS No. 123, "Accounting for Stock-Based Compensation." This
Statement provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based compensation. It also
amends the disclosure provisions to require more prominent disclosure about the
effects on reported net loss of an entity's accounting policy decisions with
respect to stock-based employee compensation. As permitted by the Statement, the
Company does not plan to adopt the fair value recognition provisions of SFAS No.
123 at this time. However, the Company has adopted the disclosure provisions of
the Statement.
The Company accounts for its stock-based employee compensation plans under
Accounting Principles Board Opinion (APB) No. 25, under which no compensation
cost has been recognized in the accompanying consolidated statements of
operations, as all options granted under those plans had an exercise price equal
to or in excess of the market value of the underlying common stock at the date
of grant (Note 10).
F-16
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Had compensation cost for these options been determined consistent with the fair
value method provided by SFAS No. 123, the Company's net loss and net loss per
common share would have been the following pro forma amounts for the years ended
December 31, 2004 and 2003.
2004 2003
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS, as reported $(3,089,614) $(4,258,007)
DEDUCT
Total stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effect 47,793 55,857
----------- -----------
PRO FORMA $(3,137,407) $(4,313,864)
=========== ===========
BASIC AND DILUTED EPS
As reported $ (0.22) $ (0.38)
Pro forma $ (0.22) $ (0.38)
The fair value of issued stock options is estimated on the date of grant using
the Black-Scholes option-pricing model including the following assumptions:
expected volatility of approximately 15%, expected dividend yield rate of 0%,
expected life of 10 years, and a risk-free interest rate of 4.23% and 4.27% for
the years ended December 31, 2004 and 2003, respectively.
Stock Issued for Services
Fair Value for determining stock issued for services is done in accordance with
Emerging Issues Task Force (EITF) 96-18. The Company issued stock for services
to Mirador Consulting Group and Capital Growth, which are engaged in public and
investor relations, WJM Associates and Judith Firth for recruiting services,
Michael Carey for insurance brokerage services and Stanford Venture Capital
Holdings for consulting services. Fair Value was determined using the stock
price the day that the commitment was reached as referred to in EITF 96-18.
There were no potential future variability of the value since all terms were
known at the date of the commitment.
F-17
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Revenue is recognized under the guidelines of SFAS No. 48 "Revenue Recognition
When Right of Return Exists" and has a four step process that must be met prior
to the recording of revenue. The steps consist of the following: signing of
sales contract, installation of hardware, completion of the training period and
a signed contract from the customer stating they accept the product for the
sixty-day trial period. Payment is due upon the completion of the trial period.
The sales revenue and cost of sales reported in the consolidated statements of
operations is reduced to reflect estimated returns. Service revenue is
recognized when earned.
All sales agreements with clients do not require significant production,
modification, or customization of software, additionally all the functionality
of the product is made available upon delivery, therefore the Company recognizes
revenue in accordance with Paragraph 8 of Statement of Position (SOP) 97-2 when:
1) Persuasive evidence of an arrangement exists as evidenced by a signed
contract, 2) Delivery has occurred, please note that Stronghold does not
recognize revenue prior to delivery, 3) The price of Stronghold's system is
fixed and determinable as evidence by the contract, and 4) Collectability is
highly probable.
Deferred Revenue
Deferred revenue is recorded as a liability when the Company receives the three
year maintenance contact in an a one-time advance payment. The Company then
recognizes the revenue from the maintenance portion of the contract on a pro
rata basis over 36 months as the service is delivered.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-18
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loss Per Common Share
Loss per common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, "Earnings Per Share," which
requires dual presentation of basic and diluted loss per share. Basic loss per
share exclude dilutions and are computed by dividing net loss applicable to
common stockholders by the weighted average number of common shares outstanding
for the year. Diluted loss per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Since the effect of the outstanding
options and warrants are anti-dilutive, they have been excluded from the
Company's computation of loss per common share.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-based
Compensation (Revised)." SFAS No. 123(R) supersedes APB No. 25 and its related
implementation guidance. SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. SFAS No. 123(R) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award the requisite service period (usually
the vesting period). No compensation costs are recognized for equity instruments
for which employees do not render the requisite service. The grant-date fair
value of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those
instruments (unless observable market prices for the same or similar instruments
are available). If an equity award is modified after the grant-date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification. The Company has not completed its
evaluation of SFAS No. 123(R) but expects the adoption of this new standard will
have an impact on operating results due to the Company's use of options as
employee incentives. This pronouncement becomes effective as of the beginning of
the first interim or annual reporting period that begins after December 15,
2005.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an amendment of
Accounting Research Bulletin (ARB) No. 43, Chapter 4". SFAS No. 151 has been
issued to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage), which requires that
those items be recognized as current-period charges regardless of whether they
meet the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. Management of the Company does
not believe the effects of SFAS No. 151 have a material effect on the
consolidated financial statements, as the Company has not incurred any inventory
costs that meet the definition of "so abnormal." This Statement is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
F-19
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 consists of the following:
Computer equipment $ 191,460
Computer software 18,502
Furniture and fixtures 21,717
Computer equipment recorded under capital leases 113,491
Leasehold improvements 7,982
---------
353,152
Less accumulated depreciation
and amortization, including $28,709
relating to computer equipment recorded
under capital leases (273,967)
---------
$ 79,185
=========
5. SOFTWARE DEVELOPMENT COSTS
Software development costs consist of the following at December 31, 2004:
Carrying amount $1,313,782
Less accumulated amortization 445,996
----------
$ 867,786
==========
For the years ended December 31, 2004 and 2003, amortization of capitalized
software development costs charged to operations was $310,672 and $135,324,
respectively.
Estimated amortization expense for the three years subsequent to December 31,
2004 is approximately as follows:
YEARS ENDING DECEMBER 31,
2005 $ 438,000
2006 317,000
2007 113,000
F-20
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at
December 31, 2004:
Payroll taxes (federal, state and local),
including penalties and interest $ 559,217
Commissions 127,391
Compensation 150,988
Sales tax 95,742
Accrued officer's compensation 171,774
Other 67,785
----------
$1,172,897
==========
7. NOTES PAYABLE, STOCKHOLDERS
At December 31, 2004, notes payable, stockholders consists of the following:
Note payable, stockholder bearig interest at 8% per annum and due on March 17,
2007 $ 875,000
Note payable, stockholder bearing interest at 12.5% per annum, are currently due
on demand and are collateralized by the assets of the Company. Up to $375,404
can be borrowed by the Company 375,403
Note payable, stockholder bearing interest at 12.5% per annum, are currently due
on demand and are collateralized by the assets of the Company. Up to $355,128
can be borrowed by the Company 355,127
Note payable, stockholder bearing interest at 12.5% is subordinated to the note
payable of $1,500,000 (Note 8) and is due after the terms of that note in 2006
(except for $55,000 which is current) 309,600
Note payable, stockholder bearing interest at 8%
per annum and due on June 30, 2004. Up to
$300,000 can be borrowed by the Company. (Note 12) 300,000
Note payable, stockholder bearing interest at 8%
per annum and due on June 30, 2004. Up to
$100,000 can be borrowed by the Company. (Note 12) 60,000
----------
2,275,130
Less current portion 1,145,530
----------
$1,129,600
==========
Estimated principal payments for the years ending December 31, 2005, 2006 and
2007 are approximately $1,145,500, $255,000 and $875,000, respectively.
F-21
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. NOTE PAYABLE
At June 30, 2002, the Company converted its outstanding line of credit into a
note payable of $1,500,000. The note bears interest at a variable rate equal to
the prime rate (5.25% at December 31, 2004), and is due in variable monthly
installments plus interest to PNC (formerly known as "United Trust Bank"),
commencing in February 2003 through January 1, 2006. The principal payments are
due monthly in the following amounts; $15,000 a month plus accrued interest from
January 15, 2004 through December 15, 2004, $20,000 a month plus accrued
interest from January 15, 2005 through December 15, 2005, and a balloon payment
for the balance due on all outstanding principal and accrued interest on January
1, 2006. The note is collateralized by substantially all the assets of the
Company and is guaranteed by the majority stockholder of the Company. The note
payable, stockholder, of $254,600 is subordinated to this note. Interest expense
on the note payable for the year ended December 31, 2004 was approximately
$87,000. As of December 31, 2004 this note payable was in default of its
covenants and as a result, is classified as current. The note payable balance at
December 31, 2004 is $606,667.
(Note 13)
9. STOCK SUBSCRIPTION RECEIVABLE
The stock subscription receivable represents 1,312,500 shares of the Company's
common stock due from two key employees and one stockholder.
10. STOCK OPTION PLANS
The Company has adopted three stock option plans ("Plans") providing for
incentive stock options ("ISOs") and non-qualified stock options ("NQSOs"). The
Company has reserved 2,358,541 shares of common stock for issuance upon the
exercise of stock options granted under the Plans. The exercise price of an ISO
or NQSO will not be less than 100% of the fair market value of the Company's
common stock at the date of the grant. The exercise price of an ISO granted to
an employee owning greater than 10% of the Company's common stock will not be
less than 110% of the fair market value of the Company's common stock at the
date of the grant. The Plans further provide that the maximum period in which
stock options may be exercised will be determined by the board of directors,
except that they may not be exercisable after ten years from the date of grant.
All of the stock option plans vest over a three year period with each year
earning 1/3 of total options granted as long as the employee is in employment
with the Company upon the anniversary date.
F-22
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTION PLANS (CONTINUED)
The status of the Company's restated stock options per the Plans are summarized
below:
RESTATED WEIGHTED
PLAN PER SHARE AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
------- -------------- --------------
Outstanding at
January 1, 2003 1,364,847 $0.10-$2.25 $0.50
Granted in the year ended
December 31, 2003 1,426,600 $0.45-$0.88 $0.59
Terminated in the year ended
December 31, 2003 (882,138) $0.10-$2.25 $0.82
---------
OUTSTANDING AT
December 31, 2003 1,909,309 $0.10-$2.25 $0.86
Granted in the year ended
December 31, 2004 113,000 $0.11-$0.85 $0.26
Terminated in the year ended
December 31, 2004 (796,901) $0.15-$2.00 $0.72
---------
OUTSTANDING AT
December 31, 2004 1,225,408 $0.10-$2.25 $0.85
=========
The exercise price ranges for options outstanding and exercisable at December
31, 2004 were:
WEIGHTED
NUMBER OF SHARES NUMBER OF SHARES WEIGHTED AVERAGE
Exercise OUTSTANDING AS OF EXERCISABLE AT AVERAGE REMAINING
Price DECEMBER 31, DECEMBER 31, EXERCISE CONTRACTUAL
Range 2004 2004 PRICE LIFE
-------------------- -----------------------------------------------------------------------
$.10 through $.50 400,878 361,703 $0.29 8 Years
$.51 through $1.00 800,263 159,235 $0.65 9 Years
$1.01 through $1.50 16,850 16,850 $1.50 9 Years
$1.51 through $2.25 7,417 6,416 $1.60 9 Years
------------------------------------
1,225,408 544,204
====================================
F-23
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
Until May 15, 2002, the Company operated as an "S" corporation and, as a result,
the earnings and losses were included in the personal income tax returns of the
respective stockholders. From May 16, 2002 through December 31, 2002, the
Company operated as a "C" corporation and had net operating losses of
approximately $3,273,000. At December 31, 2004, the Company had net operating
losses of approximately $10,620,000 that will expire between 2009 and 2024.
The components of the Company's deferred tax asset at December 31, 2004 is
approximately as follows: The components of the Company's income tax benefit
consists of the following:
Net operating loss carryforwards $ 4,286,000
Allowance for doubtful accounts 89,000
Interest payable, stockholder 192,000
Accrued compensation 173,000
Deferred maintenance fees 241,000
-----------
4,981,000
Less valuation allowance (4,981,000)
-----------
Net deferred income tax asset $ --
===========
The components of the Company's income tax benefit consists of the following:
2004 2003
---- ----
DEFERRED
Federal $ 1,132,000 $ 1,738,000
State 197,000 302,000
----------- -----------
1,329,000 2,040,000
Change in valuation allowance (1,329,000) (2,040,000)
----------- -----------
$ -- $ --
=========== ===========
A reconciliation of the statutory federal income tax rate and the effective tax
rate follows:
2004 2003
---- ----
Federal statutory rate 34% 34%
State income taxes, net of federal effect 7 7
S-Corporation earnings passes to shareholders and other
Change in valuation allowance and other (41) (41)
------ ------
Effective income tax rate 0% 0%
====== ======
F-24
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
Securities Purchase Agreements
The Company and certain stockholders of the Company (together the "Parties"),
entered into a Securities Purchase Agreement (the "Series A Purchase Agreement")
dated and executed on May 15, 2002, with Stanford Venture Capital Holdings, Inc.
("Stanford"). Pursuant to the Series A Purchase Agreement, the Parties agreed to
issue to Stanford a total of 2,002,750 shares of the Company's Series A $1.50
Convertible Preferred Stock ("Series A $1.50 Preferred Stock"), plus five-year
warrants purchasing 2,002,750 shares of the Company's common stock at an
exercise price of $1.50 for the first 1,001,375 shares and $2.25 for the
remaining shares. The value of the warrants was treated as a dividend for
approximately $295,000 (computed using the Black-Scholes model with the
following assumptions: expected volatility of 0%, expected dividend yield rate
of 0%, expected life of 5 years, and a risk-free interest rate of 4.03% for
December 31, 2002) on May 15, 2002, the date of issuance. Pursuant to the Series
A Purchase Agreement, the issuance of the Series A Preferred Stock and Warrants
took place on four separate closing dates beginning on May 16, 2002 and closing
on July 19, 2002.
The Parties entered into an additional Securities Purchase Agreement (the
"Series B Purchase Agreement") dated and executed on April 30, 2003 with
Stanford. Pursuant to the Series B Purchase Agreement, the Parties agreed to
issue to Stanford a total of 2,444,444 shares of the Company's Series B $.90
Convertible Preferred Stock ("Series B Preferred Stock"). Pursuant to the Series
B Purchase Agreement, the issuance of the Series B Preferred Stock took place on
six separate closing dates beginning on April 30, 2003 and closing on September
15, 2003. In connection with the issuance of the Series B Preferred Stock, the
Series B Purchase Agreement also required the Company to lower the exercise
price of the 2,002,750 warrants that were issued with the Series A Purchase
Agreement. The conversion price for these warrants was reduced to $0.25 from the
original conversion prices of $1.50 and $2.25, and was accounted for as a cost
of issuance of the Series B Purchase Agreement.
In connection with both the Series A and Series B Purchase Agreements, certain
stockholders of the Company entered into a Lock-Up Agreement in which the
Parties agreed not to sell, assign, transfer, pledge, mortgage, encumber or
otherwise dispose of their shares of the Company's capital stock for a period of
two years, with certain exceptions, as defined in the Lock-Up Agreement.
In accordance with SFAS No. 129 Paragraph 4, the Company is providing the
following summary of the pertinent rights and privileges of these outstanding
securities:
Each Series A $1.50 preferred share and each Series B convertible $.90 Preferred
share is convertible into common shares at a predefined "conversion rate"
(described below). There are two ways to convert this Preferred stock:
Optional conversion: The holder may at any time convert the preferred shares at
the stated "conversion rate" rate into Common stock
Automatic conversion: The shares can be converted by: A) at the date of a vote
by at least two-thirds of the outstanding Preferred shares to convert or, B)
upon the closing of a qualified public offering where the stock is offered to
the public at a price equal to or exceeding $3.00 which generates net proceeds
to the company equal to or exceeding $15,000,000.
"Conversion rate" - each share of the Series A preferred stock and Series B
preferred stock is convertible into the number of shares of the common stock as
shall be calculated by dividing the stated value by $1.50 and $.90,
respectively.
F-25
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Warrants
On June 16, 2004, in consideration of and as an inducement to Stanford for the
Company to enter into the issuance of the 12% Callable Secured Convertible Notes
(the "NIR Notes") referenced below, Stanford has been issued a warrant (the
"Stanford Warrants") to purchase an additional 2,000,000 shares of Common Stock,
expiring in five years, at an exercise price of $.0001 in exchange for i)
agreeing to a waiver of existing registration rights that included a lock up
period for one year after the effective date of a registration statement
prohibiting the registration and sale of Stanford's securities and ii) agreeing
as holder of Stronghold's Series A $1.50 Convertible Preferred Stock ("Series A
Stock") and Series B $.90 Convertible Preferred Stock ("Series B Stock"), to
waive any dilution protection which would otherwise accrue to the Series A Stock
and the Series B Stock pursuant to the respective certificates of designation
filed with the Secretary of State of the State of Nevada, as amended, as a
result of the conversion of the NIR Notes or exercise of the Stanford Warrants
into the Company's common stock. This issuance of the Stanford Warrants has been
accounted for as an adjustment of capital for the waiving of the dilution
protection for the Series A and Series B preferred stock. The Stanford Warrants
were valued at approximately $360,000 using the Black-Scholes option pricing
model including the following assumptions: exercise price of $0.0001, expected
volatility of 2.06%, expected dividend yield rate of 0%, expected life of 5
years, and a risk free interest rate of 4.73%.
Notes Payable, Convertible Debt
To obtain funding for its ongoing operations, Stronghold Technologies, Inc. (the
"Company") entered into a Securities Purchase Agreement (the "Securities
Purchase Agreement") with New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC (collectively, the
"Investors") on June 18, 2004 for the sale of (i) $3,000,000 in callable
convertible secured notes (the "Notes") and (ii) stock purchase warrants to buy
3,000,000 shares of the Company's common stock (the "Warrants").
The Investors purchased $2,350,000 in Notes, and received Warrants to purchase
an aggregate of 2,350,000 shares of the companies stock, in three different
traunches dated June 18, 2004 for $1,500,000, July 21, 2004 for $500,000 and
October 22, 2004 for $350,000.
The Notes bear interest at 12%, mature two years from the date of issuance, and
are convertible into our common stock, at the Investors' option, at the lower of
(i) $0.70 or (ii) 25% of the average of the three lowest intraday trading prices
for the Company's common stock during the 20 trading days before, but not
including, the conversion date. The Company may prepay the Notes in the event
that no event of default exists, there are a sufficient number of shares
available for conversion of the Notes and the market price is at or below $0.57
per share. The full principal amount of the Notes is due upon default under the
terms of Notes. In addition, the Company has granted the investors a security
interest in substantially all of its assets and intellectual property as well as
registration rights.
F-26
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Note Payable, Convertible Debt is recorded at $2,350,000 and the Note
payable, convertible debt, debt discount of $1,810,000 are reported in
accordance with Emerging Issues Task Force "EITF" 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" and EITF 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instrument s". The Debt Discount is reported at 100% of the
net proceeds of the Convertible Debt Financing in accordance with paragraph 6 of
EITF 98-5 that specifies that the beneficial conversion expense may not exceed
the net proceeds. Additionally, the debt discount is net of amortization charged
to interest expense of approximately $540,000 recorded for the year ended
December 31, 2004.
The Warrants are exercisable until five years from the date of issuance at a
purchase price of $0.57 per share. In addition, the exercise price of the
Warrants is adjusted in the event the Company issues common stock at a price
below market. Since the Company does not intend to issue common stock at below
market price the warrants were valued at $NIL using the Black-Scholes option
pricing model including the following assumptions: exercise price of $0.57,
expected volatility of approximately 15%, expected dividend yield rate of 0%,
expected life of 5 years, and a risk free interest rate of 4.23% for December
31, 2004.
The Investors have contractually agreed to restrict their ability to convert the
Notes and exercise the Warrants and receive shares of the Company's common stock
such that the number of shares of the Company's common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of the
then issued and outstanding shares of the Company's common stock.
All shares of the Company's common stock associated with this private placement
are restricted securities in accordance with Rule 144 as promulgated under the
of the Securities Act of 1933.
On April 30, 2004, the Company entered into an installment agreement with the
IRS to pay withholding taxes due in the amount of approximately $1,233,000,
which include interest and penalties. Under the terms of this agreement, the
Company will pay $35,000 each month, Commencing June 28, 2004, until the total
balance is paid in full. If the Company is unable to fulfill this agreement, the
IRS could take possession of the Company's assets. As of December 31, 2004, the
Company has made all required payments to the IRS. The outstanding balance of
approximately $745,000 is currently recorded in Payroll taxes payable, long term
for $430,000 and in accrued expenses and other current liabilities for
approximately $315,000.
F-27
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases
The Company rents facilities under leases in New Jersey, Virginia and
California. The Company is obligated under these leases through January 2008. In
addition to the base rent, one lease provides for the Company to pay a
proportionate share of operating costs and other expenses. Future aggregate
minimum annual rent payments under these leases are approximately as follows:
YEAR ENDING DECEMBER 31,
2005 $115,000
2006 90,000
2007 81,000
2008 14,000
--------
$300,000
========
Rent expense was approximately $107,000 and $87,000 for the years ended December
31, 2004 and 2003, respectively.
Obligations Under Capital Leases
At December 31, 2004, the Company has computer equipment recorded under capital
leases expiring at various dates through 2006. The assets and liabilities under
capital leases are recorded at the lower of the present values of the minimum
lease payments or the fair values of the assets. The assets are included in
property and equipment and are depreciated over their estimated useful lives.
As of December 31, 2004, minimum future lease payments are approximately as
follows:
YEARS ENDING DECEMBER 31,
2005 $38,000
2006 10,000
-------
Total minimum lease payments 48,000
Less amounts representing interest 13,410
-------
Present value of net minimum lease payments 34,590
Less current portion 25,807
-------
Long-term portion $ 8,783
=======
F-28
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS
Callable Secured Convertible Notes
On March, 18 2005, the Investors purchased $650,000 in Notes and received
Warrants to purchase 650,000 shares of our common stock, completing the sale of
(i) $3,000,000 in callable secured convertible notes (the "Notes") and (ii)
stock purchase warrants (the "Warrants") to buy 3,000,0000 shares of our common
stock that was agreed upon on June 18, 2004.
The agreement entered into on June 18, 2004 was amended on March 4, 2005,
changing the conversion price of the convertible notes to the lower of (i) $0.70
or (ii) 25% of the average of the three lowest intraday trading prices for our
common stock during the 20 trading days before, but not including, the
conversion date. The original agreement had the conversion price as the lower of
(i) $0.70 or (ii) 50% of the average of the three lowest intraday trading prices
for our common stock during the 20 trading days before, but not including, the
conversion date.
New Callable Secured Convertible Notes Issuance
On March 31, 2005, in order to obtain funding for its ongoing operations, the
Company entered into a new Securities Purchase Agreement (the "New Securities
Purchase Agreement") with New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC (collectively, the
"Investors") for the sale of (i) $650,00 in callable convertible secured notes
(the "Notes") and (ii) stock purchase warrants to buy 650,000 shares of the
Company's common stock (the "Warrants"). On March 31, 2005 the Investors
purchased $350,000 in Notes, and received Warrants to purchase an aggregate of
350,000 shares of the companies stock. The remaining $300,000 of convertible
secured notes will be purchased within five business days of the effectiveness
of the registration statement.
The Notes bear interest at 12%, mature two years from the date of issuance, and
are convertible into our common stock, at the Investors' option, at the lower of
(i) $0.70 or (ii) 25% of the average of the three lowest intraday trading prices
for the Company's common stock during the 20 trading days before, but not
including, the conversion date. The Company may prepay the Notes in the event
that no event of default exists, there are a sufficient number of shares
available for conversion of the Notes and the market price is at or below $0.03
per share, the market price at the time of the closing. The full principal
amount of the Notes is due upon default under the terms of Notes. In addition,
the Company has granted the investors a security interest in substantially all
of its assets and intellectual property as well as registration rights.
The Investors have contractually agreed to restrict their ability to convert the
Notes and exercise the Warrants and receive shares of the Company's common stock
such that the number of shares of the Company's common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of the
then issued and outstanding shares of the Company's common stock.
PNC Bank Note Payoff
On March 31, 2005, the Company paid off and satisfied the note due to PNC bank
in the principal amount of $606,667. All accrued interest in the amount of
$16,830 was all paid off.
F-29
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from the
information contained in this prospectus. This document may only be used where
it is legal to sell the securities. The information in this document may only be
accurate on the date of this document.
TABLE OF CONTENTS
Page
Prospectus Summary 5
Risk Factors 9
Use Of Proceeds 15
Market For Common Equity And Related Stockholder 15
Matters
Management's Discussion And Analysis Or Plan Of 17
Operation
Business 33
Management 43
Certain Relationships And Related Transactions 47
Security Ownership Of Certain Beneficial Owners 50
And Management
Description Of Securities 52
Plan Of Distribution 52
Selling Stockholders 55
Legal Matters 59
Experts 59
Available Information 60
Index To Financial Statements 61
4,165,530,000 SHARES
OF OUR
OF COMMON STOCK
Stronghold Technologies, Inc.
PROSPECTUS
______________, 2006
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 $ 4,274.98
Accounting fees and expenses 10,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 5,000.00
-----------
TOTAL $ 54,274.98*
===========
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
OPTIONS
From the Company's inception through May 16, 2002, the Company did not grant any
stock options. In connection with the Company's acquisition of the Predecessor
Entity on May 16, 2002, the Company assumed the Predecessor Entity's 2000 Stock
Option Plan so that all of its issued and outstanding options would remain
intact. No further options will be issued under the assumed Predecessor Entity's
plan. Each outstanding option was automatically converted into an option to
acquire, on the same terms and conditions as were applicable under the original
option, such number of shares of the Company's common stock as was equal to the
number of options outstanding multiplied by 2.1875. The exercise price was also
adjusted to the exercise price that was equal to the existing exercise price
divided by 2.1875. The total number of the Predecessor Entity's options that the
Company assumed was 543,500 (after cancellations) at a weighted average exercise
price per share of $.78, which converted into options to purchase 1,188,907
shares of the Company's common stock at a weighted average exercise price of
$.36. 253,750 of the assumed outstanding options vest according to a three-year
vesting schedule, 913,281 vest according to the achievement of certain
performance goals, and the remaining 21,875 options were fully vested upon
grant.
In addition to the above employee options of the Predecessor Entity, the Company
assumed certain outstanding options that were granted, or committed to be
granted, by the Predecessor Entity to automobile dealerships. On May 16, 2002,
the Company assumed a total of 77,500 options, which the Predecessor Entity
granted, or committed to grant, to three automobile dealerships for services
rendered, including providing the Predecessor Entity with consulting services.
These options converted into options for a total of 169,531 shares of the
Company's common stock. Certain of the options vest upon the achievement of
certain performance goals. Each of the dealerships is an accredited investor.
On July 17, 2002 the Company's board of directors adopted, and on July 31, 2002
the Company's approved, the adoption of the 2002 Stock Incentive Plan. Under
such plan the Company has granted 141,550 options to certain employees at a
weighted average exercise price of $1.50. Of the employee options, 10,550 were
fully vested upon grant, 61,000 vest according to a three-year vesting schedule,
and 70,000 vest according to the achievement of certain performance goals.
On August 20, 2002, the Company's board of directors and stockholders approved
the adoption of the 2002 California Stock Incentive Plan. Under such plan the
Company has granted 69,600 options to certain employees at a weighted average
exercise price of $1.50. 15,600 of such options were fully vested upon grant,
34,000 vest according to a three-year vesting schedule, and 20,000 vest
according to the achievement of certain performance goals.
COMMON STOCK
In September 2000, the Company issued 5,000,000 shares of its common stock to
its founder and former president, Pietro Bortolatti, in exchange for all of the
outstanding shares of Terre di Toscana, Inc.
From November 2000 to January 2001, the Company issued 3,351,000 shares of its
common stock at $.10 per share. This sale was part of its private placement
offering. In October 2000, the Company issued 30,000 shares of its common stock
to KGL Investments, Ltd, the beneficial owner of which is Kaplan Gottbetter &
Levenson, LLP, counsel to the Company, in exchange for legal services rendered.
These shares were valued at $.10 per share. All purchasers represented in
writing that they acquired the securities for their own accounts.
On May 16, 2002, the Company issued 7,000,000 shares of its common stock to the
stockholders of Stronghold Technologies, Inc., a New Jersey corporation, in
exchange for all of the issued and outstanding shares of such entity. All of the
recipients were either accredited investors or had alone, or together with a
purchaser representative, such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of an
investment in securities in general and of an investment in the Company in
particular. Each recipient had sufficient access to information about the
Company necessary to make an informed investment decision.
II-2
On May 16, 2002, the Company issued 666,667 shares of its common stock to
Christopher J. Carey, President of the Company, in exchange for the cancellation
in full of $1 million owed to Mr. Carey by the Company's wholly-owned
subsidiary, Stronghold Technologies, Inc. Mr. Carey is an accredited investor.
During August and September 2002, the Company entered into nine subscription
agreements with accredited and/or sophisticated investors, pursuant to which the
Company issued an aggregate of 344,333 shares of its common stock at $1.50 per
share. These private investments generated total proceeds to the Company of
$513,500.
During the first quarter of 2003, the Company and Mr. Carey agreed to convert
$543,000 of the outstanding debt owed to Christopher J. Carey by the Company
into 603,333 shares of Common Stock of the Company at a price of $0.90 per
share.
In October 2003, the Company commenced offerings to accredited investors in
private placements of up to $3,000,000 of the Company's common stock. In the
period of October 2003 through January 9, 2004 the Company raised $225,000 under
the terms of these private placements. The shares offered in the private
placement are priced at the 5 trading day trailing average closing price of the
common stock on the OTCBB, less 20%. For each share purchased in the private
placements, purchasers received a warrant to purchase one half (0.5) share of
common stock at 130% of the purchase price. A minimum of $25,000 was required
per investor. The number shares issued under this placement total 509,559, at an
average price of $0.44/share.
PREFERRED STOCK AND WARRANTS
On each of May 16, July 3, July 11, and July 19, 2002, the Company issued
(i) 500,000, 500,000, 500,000 and 502,750 shares, respectively, of its Series A
$1.50 Convertible Preferred Stock and (ii) warrants to purchase 500,000,
500,000, 500,000 and 502,750 shares, respectively, of its common stock, to
Stanford Venture Capital Holdings, Inc. for an aggregate purchase price of $3
million. Stanford subsequently assigned warrants for a total of 1,001,376 shares
of common stock to four of its affiliates. Stanford is an accredited investor.
Pursuant to a Securities Purchase Agreement, referred to herein as the Series B
Purchase Agreement, dated as of April 30, 2003, by and between the Company and
Stanford Venture Capital Holdings, Inc., the Company agreed to issue to Stanford
2,444,444 shares of our Series B $0.90 Convertible Preferred Stock, $.0001 par
value per share. The aggregate purchase price for the Series B Preferred Stock
will be $2,200,000.
According to the terms of the Series B Purchase Agreement, the issuance of the
aforementioned Series B Preferred Stock shall take place on each of six separate
closing dates. At the first closing, which occurred on May 5, 2003, the Company
received $500,000 from Stanford and issued to Stanford 555,556 shares of Series
B Preferred Stock. At each of the second and third closings, which are scheduled
for May 15, 2003 and June 13, 2003, the Company will issue 555,556 shares of
Series B Preferred Stock, and Stanford will pay $500,000 upon each closing for
same. On the fourth closing date, which was on July 15, 2003, the Company issued
333,332 shares of Series B Preferred Stock, and Stanford paid $300,000. At each
of the fifth and sixth closings, which were on for August 15, 2003 and September
15, 2003, the Company issued 222,222 shares of Series B Preferred Stock, and
Stanford will pay $200,000 upon each closing. For so long as any shares of the
Series B Preferred Stock are outstanding and held by Stanford, if the Company
issues additional shares of the Company's Common Stock, or common stock
equivalents, Stanford has the right to participate in the issuance such that
immediately after the subsequent issuance, Stanford's ownership of the total
number of outstanding shares of the Company's Common Stock (assuming the
conversion of all common stock equivalents into the Company's Common Stock)
equals the same percentage of the total shares of the Company's Common Stock
(assuming conversion of all common stock equivalents into the Company's Common
Stock) as Stanford held immediately prior to the subsequent issuance.
In connection with the Series B Purchase Agreement, the Company and Stanford
also entered into a Registration Rights Agreement, dated April 30, 2003, in
which the Company agreed to register the shares of the Company's Common Stock
issuable upon conversion of the Series B Preferred Stock with the Securities and
Exchange Commission, not later than November 15, 2003.
II-3
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.
To obtain funding for our ongoing operations, we entered into three Securities
Purchase Agreements with the Investors. This prospectus relates to the resale of
the common stock underlying these callable secured convertible notes and common
stock purchase warrants issued in connection with these agreements. The
following is a description of each of these financings.
June 18, 2004 Securities Purchase Agreement
On June 18, 2004, we entered into a Securities Purchase Agreement for the sale
of (i) $3,000,000 in callable secured convertible notes and (ii) common stock
purchase warrants to buy 3,000,0000 shares of our common stock.
The following closings have occurred pursuant to the June 2004 Securities
Purchase Agreement:
o on June 18, 2004, the Investors purchased $1,500,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,500,000 shares of our common stock;
o on July 27, 2004, the Investors purchased $500,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
500,000 shares of our common stock;
o on October 22, 2004, the Investors purchased $350,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
350,000 shares of our common stock; and
o On March 18, 2005, the Investors purchase $650,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
650,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the investors' option, at the lower of (i) $0.70 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.57 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.57 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
II-4
March 31, 2005 Securities Purchase Agreement
We entered into a second Securities Purchase Agreement with the Investors on
March 31, 2005 for the sale of $650,000 in callable secured convertible notes
and common stock purchase warrants to buy 650,000 shares of our common stock.
On March 31, 2005, the Investors purchased $350,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
350,000 shares of our common stock. On May 4, 2005, the Investor purchased the
remaining $300,000 in callable secured convertible notes and received common
stock purchase warrants to purchase 300,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the Investors' option, at the lower of (i) $0.02 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.03 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.03 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
July 15, 2005 Securities Purchase Agreement
We entered into a third Securities Purchase Agreement with the Investors on July
15, 2005 for the sale of (i) $850,000 in callable secured convertible notes and
(ii) common stock purchase warrants to buy 1,700,000 shares of our common stock.
On July 15, 2005, the Investors purchased $850,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
1,700,000 shares of our common stock. We received gross proceeds in cash in the
amount of $282,500 on July 18, 2005 and $567,500 was placed in escrow of which
$182,500 has been distributed through September 30, 2005. We received additional
proceeds in the amount of $210,000 on October 6, 2005 and $150,000 on November
9, 2005.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the Investors' option, at the lower of (i) $0.07 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.08 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.10 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market.
February 6, 2006 Securities Purchase Agreement
We entered into a fourth Securities Purchase Agreement with the Investors on
February 6,2 006 for the sale of $180,000 in callable secured convertible notes
and common stock purchase warrants to buy 180,000 shares of our common stock.
On February 6, 2006, the Investors purchased $180,000 in callable secured
convertible notes and received common stock purchase warrants to purchase
180,000 shares of our common stock.
The callable secured convertible notes bear interest at 12%, mature two years
from the date of issuance, and are convertible, as amended, into our common
stock, at the Investors' option, at the lower of (i) $0.05 or (ii) 25% of the
average of the three lowest intraday trading prices for our common stock during
the 20 trading days before, but not including, the conversion date.
We may prepay the callable secured convertible notes in the event that no event
of default exists, there are a sufficient number of shares available for
conversion of the callable secured convertible notes and the market price is at
or below $.03 per share.
The common stock purchase warrants are exercisable until five years from the
date of issuance at a purchase price of $0.08 per share. In addition, the
exercise price of the common stock purchase warrants is adjusted in the event we
issue common stock at a price below market
As of February 10, 2006, the average of the three lowest intraday trading prices
for our common stock during the preceding 20 trading days as reported on the
Over-The-Counter Bulletin Board was $.009 and, therefore, the conversion price
for the secured convertible notes was $.0023. Based on this conversion price,
the $4,680,000 callable secured convertible notes, excluding interest, were
convertible into 2,080,000,000 shares of our common stock.
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The full principal amount of the callable secured convertible notes is due upon
default under the terms of callable secured convertible notes. In addition, we
have granted the investors a security interest in substantially all of our
assets and intellectual property as well as registration rights.
The investors have contractually agreed to restrict their ability to convert the
callable secured convertible notes and exercise the common stock purchase
warrants and receive shares of our common stock such that the number of shares
of our common stock held by them and their affiliates after such conversion or
exercise does not exceed 4.99% of our then issued and outstanding shares of our
common stock.
* All of the above offerings and sales were deemed to be exempt under rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of our company or executive officers
of our company, and transfer was restricted by our company in accordance with
the requirements of the Securities Act of 1933. In addition to representations
by the above-referenced persons, we have made independent determinations that
all of the above-referenced persons were accredited or sophisticated investors,
and that they were capable of analyzing the merits and risks of their
investment, and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to whom we
issued securities as indicated in this section of the registration statement are
unaffiliated with us.
II-6
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References to
"the Company" in this Exhibit List mean Stronghold Technologies, Inc., a Nevada
corporation.
Exhibit
Number Description
------ -----------
2.1 (1)(4) Merger Agreement and Plan of Merger, dated May 15, 2002, by
and among TDT Development, Inc., Stronghold Technologies,
Inc., TDT Stronghold Acquisition Corp., Terre Di Toscana,
Inc., Terres Toscanes, Inc., certain stockholders of TDT
Development, Inc. and Christopher J. Carey.
2.2 (5) Stock Purchase Agreement, dated July 19, 2002, by and between
TDT Development, Inc. and Mr. Pietro Bortolatti.
3.1 (2) Articles of Incorporation, as amended on July 11, 2002.
3.2 (3) By-Laws.
3.3 (20) Certificate of Amendment to the Company's Certificate of
Incorporation.
3.4 (21) Certificate of Designation of Series C Preferred Stock.
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
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4.14 (11) Stock Purchase Warrant in the name of AJW Qualified Partners,
LLC dated June 18, 2004
4.15 (11) Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated
June 18, 2004
4.16 (11) Stock Purchase Warrant in the name of AJW Partners, LLC dated
June 18, 2004
4.17 (11) Registration Rights Agreement dated June 18, 2004 between the
Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
4.18 (11) Security Agreement dated June 18, 2004 between the Company and
New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC
4.19 (11) Intellectual Property Security Agreement dated June 18, 2004
between the Company and New Millennium Capital Partners II,
LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW
Partners, LLC
4.20 (16) Callable Secured Convertible Note in the name of New
Millennium Capital Partners II, LLC dated July 27, 2004
4.21 (16) Callable Secured Convertible Note in the name of AJW Qualified
Partners, LLC dated July 27, 2004
4.22 (16) Callable Secured Convertible Note in the name of AJW Offshore,
Ltd. dated July 27, 2004
4.23 (16) Callable Secured Convertible Note in the name of AJW Partners,
LLC dated July 27, 2004(16)
4.24 (16) Stock Purchase Warrant in the name of New Millennium Capital
Partners II, LLC dated July 27, 2004
4.25 (16) Stock Purchase Warrant in the name of AJW Qualified Partners,
LLC dated July 27, 2004(16)
4.26 (16) Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated
July 27, 2004(16)
4.27 (16) Stock Purchase Warrant in the name of AJW Partners, LLC dated
July 27, 2004
4.28 (16) Callable Secured Convertible Note in the name of New
Millennium Capital Partners II, LLC dated October 22, 2004
4.29 (16) Callable Secured Convertible Note in the name of AJW Qualified
Partners, LLC dated October 22, 2004
4.30 (16) Callable Secured Convertible Note in the name of AJW Offshore,
Ltd. dated October 22, 2004
4.31 (16) Callable Secured Convertible Note in the name of AJW Partners,
LLC dated October 22, 2004
4.32 (16) Stock Purchase Warrant in the name of New Millennium Capital
Partners II, LLC dated October 22, 2004
4.33 (16) Stock Purchase Warrant in the name of AJW Qualified Partners,
LLC dated October 22, 2004
4.34 (16) Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated
October 22, 2004
4.35 (16) Stock Purchase Warrant in the name of AJW Partners, LLC dated
October 22, 2004
4.36 (16) Callable Secured Convertible Note in the name of New
Millennium Capital Partners II, LLC dated March 18, 2005
II-8
4.37 (16) Callable Secured Convertible Note in the name of AJW Qualified
Partners, LLC dated March 18, 2005
4.38 (16) Callable Secured Convertible Note in the name of AJW Offshore,
Ltd. dated March 18, 2005
4.39 (16) Callable Secured Convertible Note in the name of AJW Partners,
LLC dated March 18, 2005
4.40 (16) Stock Purchase Warrant in the name of New Millennium Capital
Partners II, LLC dated March 18, 2005
4.41 (16) Stock Purchase Warrant in the name of AJW Qualified Partners,
LLC dated March 18, 2005
4.42 (16) Stock Purchase Warrant in the name of AJW Offshore, Ltd. dated
March 18, 2005
4.43 (16) Stock Purchase Warrant in the name of AJW Partners, LLC dated
March 18, 2005
4.44 (16) Amendment No. 2 to the Securities Purchase Agreement dated
March 4, 2005 by and among the Company and New Millennium
Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd. and AJW Partners, LLC
4.45 (16) Letter Agreement dated March 4, 2005 by and among the Company
and New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC
4.46 (16) Amendment No. 1 to the Securities Purchase Agreement dated
October 22, 2004 by and among the Company and New Millennium
Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd. and AJW Partners, LLC
4.47 (17) Securities Purchase Agreement dated March 31, 2005 by and
among the Company and New Millennium Capital Partners II, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW
Partners, LLC
4.48 (17) Form of Callable Secured Convertible dated March 31, 2005
4.49 (17) Form of Stock Purchase Warrant dated March 31, 2005(17)
4.50 (17) Registration Rights Agreement dated March 31, 2005 by and
among the Company and New Millennium Capital Partners II, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW
Partners, LLC
4.51 (17) Security Agreement dated March 31, 2005 by and among the
Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
4.52 (17) Intellectual Property Security Agreement dated March 31, 2005
by and among the Company and New Millennium Capital Partners
II, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and
AJW Partners, LLC
4.53 (18) Securities Purchase Agreement dated July 15, 2005 by and among
the Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
4.54 (18) Form of Callable Secured Convertible dated July 15, 2005
II-9
4.55 (18) Form of Stock Purchase Warrant dated July 15, 2005
4.56 (18) Registration Rights Agreement dated July 15, 2005 by and among
the Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
4.57 (18) Security Agreement dated July 15, 2005 by and among the
Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
4.58 (18) Intellectual Property Security Agreement dated July 15, 2005
by and among the Company and New Millennium Capital Partners
II, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and
AJW Partners, LLC
4.59 (18) Escrow Agreement dated July 15, 2005 by and among the Company
and New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC and
the Escrow Agent
4.60 (20) Securities Purchase Agreement dated February 6, 2006 by and
among the Company and New Millennium Capital Partners II, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW
Partners, LLC
4.61 (20) Form of Callable Secured Convertible dated February 6, 2006
4.62 (20) Form of Stock Purchase Warrant dated February 6, 2006
4.63 (20) Registration Rights Agreement dated February 6, 2006 by and
among the Company and New Millennium Capital Partners II, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW
Partners, LLC
4.64 (20) Security Agreement dated February 6, 2006 by and among the
Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
4.65 (20) Intellectual Property Security Agreement dated February 6,
2006 by and among 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
10.1 (2) 2002 Stock Incentive Plan.
10.2 (2) Form of Incentive Stock Option Agreement to be issued under
the 2002 Stock Incentive Plan.
10.3 (2) Form of Nonstatutory Stock Option Agreement to be issued under
the 2002 Stock Incentive Plan.
10.4 (5) California 2002 Stock Incentive Plan.
10.5 (5) Form of Incentive Stock Option Agreement to be issued under
the California 2002 Stock Incentive Plan.
10.6 (5) Form of Nonstatutory Stock Option Agreement to be issued under
the California 2002 Stock Incentive Plan.
10.7 (2) Executive Employment Agreement by and between Stronghold
Technologies, Inc. and Christopher J. Carey, dated May 15,
2002.
10.8 (2) Employment and Non-Competition Agreement by and between
Stronghold Technologies, Inc. and Lenard Berger, dated August
1, 2000.
10.9 (2) Employment and Non-Competition Agreement by and between
Stronghold Technologies, Inc. and Salvatore D'Ambra, dated
July 10, 2000.
10.10 (2) Employment and Non-Competition Agreement by and between
Stronghold Technologies, Inc. and James J. Cummiskey, dated
August 14, 2000.
10.11 (2) Business Loan Agreement by and between Stronghold
Technologies, Inc. and UnitedTrust Bank, dated June 30, 2002.
10.12 (2) Promissory Note issued by Stronghold Technologies, Inc. made
payable to UnitedTrust Bank, Dated June 30, 2002.
10.13 (2) Commercial Security Agreement by and between Stronghold
Technologies, Inc. and UnitedTrust Bank, dated June 30, 2002.
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10.14 (2) Promissory Note issued by Stronghold Technologies, Inc. made
payable to Christopher J. Carey, dated May 16, 2002.
10.15 (4) Securities Purchase Agreement, dated May 15, 2002, by and
among TDT Development, Inc., Stanford Venture Capital
Holdings, Inc., Pietro Bortolatti, Stronghold Technologies,
Inc. and Christopher J. Carey.
10.16 (4) Registration Rights Agreement, dated May 16, 2002, by and
among TDT Development, Inc. and Stanford Venture Capital
Holdings, Inc.
10.17 (4) Lock-Up Agreement, dated May 16, 2002, by and among TDT
Development, Inc.
10.18 (4) Stockholders' Agreement, dated May 16, 2002, by and among TDT
Development, Inc., Christopher J. Carey, Mary Carey and
Stanford Venture Capital Holdings, Inc.
10.19 (4) Form of Warrant to be issued pursuant to the Securities
Purchase Agreement (Exhibit 10.11).
10.20 (6) Loan Agreement by and among Stronghold Technologies, Inc., its
subsidiary and UnitedTrust Bank, dated September 30, 2002.
10.21 (6) Commercial Loan Note issued by Stronghold Technologies, Inc.
and its subsidiary made payable to UnitedTrust Bank, dated
September 30,2002
10.22 (6) Security Agreement by and between Stronghold Technologies,
Inc. and UnitedTrust Bank, dated September 30, 2002.
10.23 (6) Security Agreement by and between Stronghold's subsidiary and
UnitedTrust Bank, dated September 30, 2002.
10.24 (6) Subordination Agreement by and among Christopher J. Carey,
Stronghold Technologies, Inc. and UnitedTrust Bank, dated
September 30, 2002.
10.25 (6) Subordination Agreement by and among Christopher J. Carey,
Stronghold's subsidiary and UnitedTrust Bank, dated September
30, 2002.
10.26 (6) Guaranty by Christopher J. Carey in favor UnitedTrust Bank,
dated September 30, 2002.
10.27 (6) Loan Agreement by and among Stronghold Technologies, Inc., its
subsidiary and AC Trust Fund, dated September 30, 2002.
10.28 (6) Loan Agreement by and among Stronghold Technologies, Inc., its
subsidiary and CC Trust Fund, dated September 30, 2002.
10.29 (6) Form of Subscription Agreement by and between Stronghold
Technologies, Inc. and each of the parties listed on the
schedule of purchasers attached thereto.
10.30 (6) Promissory Note issued by Stronghold Technologies, Inc. made
payable to Christopher J. Carey, dated September 30. 2002.
II-11
10.31 (7) Securities Purchase Agreement, dated April 30, 2003, by and
between Stronghold Technologies, Inc. and Stanford Venture
Capital Holdings, Inc.
10.32 (7) Registration Rights Agreement, dated April 30, 2003, by and
between Stronghold Technologies, Inc. and Stanford Venture
Capital Holdings, Inc.
10.33 (7) Consulting Agreement, dated April 30, 2003, by and between
Stronghold Technologies, Inc. and Stanford Venture Capital
Holdings, Inc.
10.34 (9) First Modification to Loan Agreement and Note among Stronghold
Technologies, Inc., Christopher J. Carey and UnitedTrust Bank,
dated July 31, 2003.
10.35 (13) Lease Agreement entered between the Company and APA Properties
No. 2, LP
10.36 (13) Sublease Agreement between Clark/Bardes Consulting, Inc. and
the Company
10.37 (14) Forbearance Agreement entered by and between the Company and
PNC Bank
10.38 (14) Amendment No. 1 to the Forbearance Agreement entered by and
between the Company and PNC Bank
10.39 (21) Agreement of Settlement dated February 6, 2006 by and between
Christopher Carey and Stronghold Technologies, inc.
21 (5) Subsidiaries of the Registrant.
23.1 Consent of Rothstein Kass - Certified Public Accountants
(filed herewith).
(1) The exhibits and schedules to the Merger Agreement have been omitted from
this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will
furnish copies of any of the exhibits and schedules to the U.S. Securities and
Exchange Commission upon request
(2) Incorporated herein by reference to the exhibits to Registrant's Quarterly
Report on Form 10-QSB for the fiscal quarter ended June 30, 2002.
(3) Incorporated herein by reference to the exhibits to the Registrant's
Registration Statement on Form SB-2 as filed with the Securities and Exchange
Commission on February 1, 2001 (No. 333-54822).
(4) Incorporated herein by reference to the exhibits to the Registrant's Current
Report on Form 8-K dated May 16, 2002.
(5) Incorporated herein by reference to the exhibits to the Registrant's
Registration Statement on Form SB-2 as filed with the Securities and Exchange
Commission on September 24, 2002.
(6) Incorporated herein by reference to the exhibits to Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2002.
(7) Incorporated by reference to Exhibit 99.3 to the Company's Form 8-K as filed
with the Securities and Exchange Commission on May 8, 2003.)
(8) Incorporated by reference to the exhibits to Registrants Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 2003.
(9) Incorporated by reference to the exhibits to Registrants Quarterly Report on
Form 10-QSB for the quarterly period ended June 30, 2003.
II-12
(10) Incorporated by reference to the exhibits to Registrants Form 10-KSB for
the year ended December 31, 2003.
(11) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed June 28, 2004.
(12) Incorporated by reference to the exhibits to Registrants Form SB-2
Registration Statement filed July 21, 2004.
(13) Incorporated by reference to the exhibits to Registrants Quarterly Report
on Form 10-QSB for the quarterly period ended September 30, 2004.
(14) Incorporated by reference to the exhibits to Registrants Form SB-2
Registration Statement filed February 11, 2005.
(15) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed June 28, 2004.
(16) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed March 25, 2005.
(17) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed April 11, 2005.
(18) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed July 20, 2005.
(19) Incorporated by reference to the exhibits to Registrants Form SB-2
Registration Statement filed August 2, 2005.
(20) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed February 9, 2006.
(21) Incorporated by reference to the exhibits to Registrants Form 8-K Current
Report filed February 14, 2006.
ITEM 28. UNDERTAKINGS.
The undersigned registrant 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 a 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 determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned undertakes that in a primary offering of securities
of the undersigned small business issuer pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned small business issuer
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned small business issuer relating to the offering required to be filed
pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned small business issuer or used or
referred to by the undersigned small business issuer;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about the undersigned
small business issuer or its securities provided by or on behalf of the
undersigned small business issuer; and
(iv) Any other communication that is an offer in the offering
made by the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
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 registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant 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
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorizes this registration statement
to be signed on its behalf by the undersigned, in the City of Basking Ridge,
State of New Jersey, on February 14, 2006.
STRONGHOLD TECHNOLOGIES, INC.
By: /s/Christopher Carey
------------------------------------------------------
Christopher Carey, President, Chief Executive Officer,
Principal Executive Office, Principal Accounting/
Financial Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ Christopher Carey Chief Executive Officer, February 14, 2006
----------------------- Principal Financial/Accounting
Christopher Carey Officer and Director
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