UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
Commission File No. 333-54822
STRONGHOLD TECHNOLOGIES, INC.
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(Exact Name of Issuer as Specified in Its Charter)
Nevada 22-376235
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
106 Allen Road, Basking Ridge, NJ 07920
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(Address of Principal Executive Offices) (Zip Code)
(908) 630-9696
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(Registrant's Telephone Number,
Including Area Code)
Indicate the number of shares outstanding of each of the Issuer's classes
of common stock, as of June 30, 2003:
Class Number of Shares
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Common Stock, $0.0001 par value 10,460,333
Transitional Small Business Disclosure Format
Yes: No: X
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TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements....................................................... 1
CONSOLIDATED BALANCE SHEET
as of June 30, 2003 (unaudited).................................................. 1
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30, 2003 and 2002 and the
Six Months Ended June 30, 2003 and 2003
(unaudited)...................................................................... 2
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended
June 30, 2003 and 2002
(unaudited)...................................................................... 3
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)........................................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 8
Liquidity and Capital Resources.................................................. 21
Results of Operations............................................................ 23
Changes to Critical Accounting Policies and Estimates ........................... 24
Item 3. Controls and Procedures.................................................... 28
PART II. OTHER INFORMATION.
Item 2. Changes in Securities and Use of Proceeds.................................. 29
Item 4. Submission of Matters to a Vote of Security Holders........................ 30
Item 6. Exhibits and Reports on Form 8-K........................................... 33
SIGNATURES AND CERTIFICATIONS.................................................................... 35
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 2003 (Unaudited)
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ASSETS
Current assets
Cash $ 34,583
Accounts receivable, less allowance for returns and
doubtful accounts of $196,284 1,323,504
Other receivables 67,048
Inventories 55,236
Prepaid expenses 17,547
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Total current assets 1,497,918
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Property and equipment, net 160,870
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Other assets
Software development costs, net 521,179
Other 27,952
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Total other assets 549,131
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$ 2,207,919
===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 381,368
Accrued expenses and other current liabilities 1,158,253
Interest payable, stockholders 305,675
Notes payable, stockholders, current portion 1,083,030
Note payable, current portion 500,000
Obligations under capital leases, current portion 18,504
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Total current liabilities 3,446,830
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Long-term liabilities
Notes payable, stockholders, less current portion 586,330
Note payable, less current portion 791,667
Obligations under capital leases, less current portion 18,999
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Total long-term liabilities 1,396,996
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Commitments and contingencies
Stockholders' deficit
Preferred stock, $.0001 par value; authorized 5,000,000 shares;
Series A, 2,002,750 issued and outstanding (aggregate liquidation preference of $3,004,125) 201
Series B, 2,444,444 shares, issued and outstanding 244
Common stock, $.0001 par value, authorized 50,000,000
shares, 10,460,333 issued and outstanding 1,046
Additional paid-in capital 7,420,299
Stock subscription receivable (703,000)
Accumulated deficit (9,354,697)
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Total stockholders' deficit (2,635,907)
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$ 2,207,919
===================
See accompanying notes to consolidated financial statements.
1
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sales $ 626,779 $ 773,194 $ 1,545,789 $ 1,091,115
Cost of sales 277,184 359,064 600,888 519,449
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Gross profit 349,595 414,130 944,901 571,666
Selling, general and
administrative 1,194,040 1,045,778 2,302,854 2,060,068
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Loss from operations (844,445) (631,648) (1,357,953) (1,488,402)
Interest expense 90,220 53,672 197,866 109,712
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Net loss $ (934,665) $ (685,320) $ (1,555,819) $ (1,598,114)
========================================= =========================================
Basic and diluted loss per
common share $ (0.09) $ (0.09) $ (0.15) $ (0.23)
========================================= =========================================
Weighted average number of
common shares outstanding 10,301,212 7,829,459 10,080,333 6,867,854
========================================= =========================================
.
See accompanying notes to consolidated financial statements.
2
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2003 2002
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(Unaudited) (Unaudited)
Cash flows from operating activities
Net loss $ (1,555,819) $ (1,598,114)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for returns and allowances 41,259 69,499
Depreciation and amortization 60,108 27,380
Non-cash interest expense for issuance of warrants 47,500
Changes in operating assets and liabilities:
Accounts receivable (172,312) (765,679)
Other receivables (67,048) 114,080
Inventories 173,176 (170,233)
Prepaid expenses 2,359 (2,407)
Accounts payable (470,292) 614,449
Accrued expenses and other current liabilities 646,347 334,560
Interest payable, stockholders 112,557
Other (877)
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Net cash used in operating activities (1,183,042) (1,376,465)
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Cash flows from investing activities,
Payments for purchase of property and equipment (6,707) (71,746)
Payments for software development costs (328,063)
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Net cash used in investing activities (334,770) (71,746)
Cash flows from financing activities
Proceeds from issuance of preferred stock, net of financing costs 1,242,969
Proceeds from notes payable, stockholders 606,200 505,119
Principal repayments of notes payable, stockholders (92,089) (863)
Principal repayments of note payable (208,333) 906,000
Principal payments for obligations under capital leases (9,736)
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Net cash provided by financing activities 1,539,011 1,410,256
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Net increase (decrease) in cash 21,199 (37,955)
Cash, beginning of period 13,384 38,267
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Cash, end of period $ 34,583 $ 312
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Supplemental disclosure of cash flow information,
cash paid during the period for interest $ 99,433 $ 114,859
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Supplementary schedule of non-cash investing and financing activities,
During the six months ended June 30, 2003, the Company issued $95,000 of
warrants in connection with debt.
During the six months ended June 30, 2003, the Company entered into an
agreement to convert $543,000 of notes payable, stockholders into 603,333
shares of common stock.
During the six months ended June 30, 2003, obligations under capital leases
aggregating $10,420 were incurred when the Company entered into a lease for
computer equipment.
See accompanying notes to consolidated financial statements.
3
1. Basis of presentation
The accompanying consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). These statements are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments and
accruals) necessary to present fairly the results for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to applicable SEC
rules and regulations. Operating results for the three-month and six-month
periods ended June 30, 2003 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2003. 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, 2002.
On December 26, 2002, the Company restated its consolidated financial statements
for the first three quarters of the year ended December 31, 2002. The
restatement resulted from revision of the Company's revenue recognition policy
under Statements of Financial Accounting Standards ("SFAS") No. 48, "Recognizing
Revenue with a Right of Return". The revenue restatement was included in the
Company's December 31, 2002 year-end audited financial statements and included
in the Company's December 31, 2002 10-KSB filing. The corresponding restated
June 30, 2002 results were not separately filed in an amended 10-QSB. The
six-month and three-month ended June 30, 2003 financial statements included
herein, are compared to the corresponding restated June 30, 2002 financial
statements.
2. Inventories
Inventories, which are comprised of hardware for resale, are stated at cost, on
an average cost basis, which does not exceed market value.
3. Loss per common share
Loss per common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, "Earnings Per Share," which
requires dual presentation of basic and diluted earnings (loss) per share. Basic
earnings (loss) per share excludes dilutions and is computed by dividing net
loss applicable to common stockholders by the weighted average number of common
shares outstanding for the year. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Since
the effect of the outstanding options and warrants are anti-dilutive, they have
been excluded from the Company's computation of diluted loss per common share.
4. New accounting pronouncements
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, SFAS No. 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133. The Statement is
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generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003 and should be
applied prospectively. The implementation of this standard is not expected to
have a material impact on the Company's financial position, results of
operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
requires certain freestanding financial instruments, such as mandatory
redeemable preferred stock, to be measured at fair value and classified as
liabilities. The provisions of SFAS No. 150 are effective at the beginning of
the first interim period beginning after June 15, 2003. The implementation of
this standard is not expected to have a material impact on the Company's
financial position, results of operations or cash flows.
5. Stock-based compensation
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amended SFAS No. 123, "Accounting
for Stock-Based Compensation." This Statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation. It also amends the disclosure provisions to
require more prominent disclosure about the effects on reported net income
(loss) of an entity's accounting policy decisions with respect to stock-based
employee compensation. As permitted by the Statement, the Company does not plan
to adopt the fair value recognition provisions of SFAS No. 123 at this time.
However, the Company has adopted the disclosure provisions of the Statement.
The Company accounts for its stock-based employee compensation plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized in the accompanying consolidated statements of operations, as
all options granted under those plans had an exercise price equal to or in
excess of the market value of the underlying common stock at the date of grant.
Had compensation cost for these options been determined consistent with the fair
value method provided by SFAS No. 123, the Company's net loss and net loss per
common share would have been the following pro forma amounts for the three-month
and six-month periods ended June 30, 2003 and 2002.
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
Net loss, as reported $ (934,665) $ (685,320) $ (1,555,819) $ (1,598,114)
Deduct
Total stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effect 20,572 2,015 39,603 14,125
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Pro forma net loss $ (955,237) $ (687,335) $ (1,595,422) $ (1,612,239)
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Basic and diluted EPS
As reported $ (0.09) $ (0.09) $ (0.15) $ (0.23)
Pro forma $ (0.09) $ (0.09) $ (0.16) $ (0.23)
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6. 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 $1,556,000 and has negative cash flow from operations
of approximately $1,183,000 for the six-month period ended June 30, 2003, and
has a working capital deficit of approximately $1,949,000 and a stockholders'
deficit of approximately $2,636,000 as of June 30, 2003. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
During 2003, 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 June
30, 2003:
Deferred maintenance fees $ 289,936
Commissions 173,154
Compensation 31,691
Payroll taxes 563,472
Deferred financing costs 100,000
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$ 1,158,253
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8. Commitments and contingencies
Securities Purchase Agreement
The Company, and certain stockholders of the Company (together the "Parties"),
entered into a Securities Purchase Agreement (the "Purchase Agreement") dated
and executed on April 24, 2003, with Stanford Venture Capital Holdings, Inc.
("Stanford"). Pursuant to the Purchase Agreement, the Parties agreed to issue to
Stanford a total of 2,444,444 shares of the Company's Series B $0.90 Convertible
Preferred Stock ("Series B Preferred Stock"). The issuance of the Series B
Preferred Stock will take place on six separate closing dates beginning on April
24, 2003 and closing on September 15, 2003.In connection with the Purchase
Agreement, the Company modified the previously issued five-year warrants
assigned to Stanford to purchase 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, to reduce the exercise price to $0.25 per share and extend the
expiration date to August 1, 2008. In addition, the Company agreed to convert
all outstanding loans and unreimbursed expenses to certain stockholders of the
Company for 603,333 shares of the Company's common stock at a price of $0.90 per
share. The value of the warrant modification was approximately $557,000 and
treated as additional costs of issuing the Series B preferred stock.
9. Subsequent event
On August 7, 2003, the Company entered into a modification of the loan agreement
with United Trust Bank, of which the principal balance was $1,291,666 at the
time of closing of the modification. In the modification agreement, United Trust
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Bank agreed to subordinate its lien against the Company's assets to a new lender
and reduce the monthly payments from $41,667 per month as follows: (a) from the
date of closing through December 15, 2003, $10,000 per month principal 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 accrued interest and (d) on the maturity date of
January 1, 2006, a balloon payment equal to all the outstanding principal and
accrued interest. The personal assets of one of the Company's majority
stockholders will be collateralized by the modified loan.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The following discussion should be read in conjunction with our
financial statements and the accompanying notes appearing subsequently under the
caption "Financial Statements", along with other financial and operating
information included elsewhere in this quarterly report. Certain statements
under this caption "Management's Discussion and Analysis and Results of
Operation" constitute "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. See "Risk Factors-Cautionary Note Regarding
Forward Looking Statements".
Our History
We were incorporated on September 8, 2000 in the State of Nevada, under
the name TDT Development, Inc. On May 16, 2002, we acquired Stronghold
Technologies, Inc., a New Jersey corporation, referred to herein as the
"Predecessor Entity", pursuant to a merger of such entity into our wholly-owned
subsidiary, TDT Stronghold Acquisition Corp., referred to herein as "Acquisition
Sub". As consideration for the merger, we issued 7,000,000 shares of our Common
Stock, par value $0.0001 per share, to the stockholders of the Predecessor
Entity in exchange for all of the issued and outstanding shares of the
Predecessor Entity. After the closing of the merger, Acquisition Sub, the
survivor of the merger, changed its name to Stronghold Technologies, Inc. and
remains our wholly owned subsidiary. On July 11, 2002, we changed our name from
TDT Development, Inc. to Stronghold Technologies, Inc. Finally, 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., for 75,000
shares of our Common Stock held by Mr. Pietro Bortolatti, our former president.
These subsidiaries conducted an import and distribution business specializing in
truffle-based food products.
All references to "we," "us," "our," or similar terms used herein refer
to Stronghold Technologies, Inc., a Nevada corporation, formerly known as TDT
Development, Inc. or its wholly-owned subsidiary, Stronghold Technologies, Inc.
a New Jersey entity. All references to "Stronghold" used herein refer only to
our wholly owned subsidiary, Stronghold Technologies, Inc., a New Jersey
corporation. All references to the "Predecessor Entity" refer to the New Jersey
corporation we acquired on May 16, 2002, Stronghold Technologies, Inc., which
was merged with and into Stronghold.
Our 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. The information contained on our
website is not incorporated by reference herein.
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
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specialty food industry. We marketed our products primarily in Florida, South
Carolina, North Carolina and California, and also earned commissions on sales
made in Belgium, Holland and Germany.
As a result of our receiving 75,000 shares of Common Stock from Mr.
Bortolatti and the concurrent transfer of our interest in the truffle business
to 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.
Overview of 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 two other executive officers of Stronghold:
Lenard J. Berger, Chief Technology Officer and Salvatore F. D'Ambra, Vice
President, Product Development. 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, now
Stronghold, Stronghold continues to conduct the Predecessor Entity's handheld
wireless technology business.
Stronghold's DealerAdvance Sales Solution(TM), an enterprise software
system leveraging wireless technologies, includes a Customer Relationship
Management software application, referred to herein as CRM, and has been
designed to maximize the revenues and reduce the operating expenses of
automobile dealerships. Stronghold has completed the development of
DealerAdvance Sales Solution(TM), which is a software suite designed to increase
sales by effectively capturing a greater percentage of unsold customer prospects
and maximizing customer "be-back" (return) and closure rates. We plan to
introduce a full range of enterprise applications for auto dealerships,
including the DealerAdvance Service Solution(TM) and the DealerAdvance Inventory
Management Solution(TM), products designed to increase revenues and maximize
profitability by effectively managing dealer service operations, customer
information and vehicle inventory. These products are similar to the handheld
and wireless systems used in the auto rental industry. Consumers are now
accustomed to a swift car return process wherein the attendant scans the car,
brings up the rental terms, completes the sale and prints out a receipt, all
without having to step over to a counter.
Description of Products
The DealerAdvance Sales Solution(TM) provides automobile dealerships
the following advantages:
o Ease of use associated with handheld mobile communications;
o The handheld unit is both an input and display device;
o The handheld unit is programmed to access competitive and proprietary
industry information from a variety of sources;
o The system provides the capability for immediate management involvement in
the selling process;
o Provides for effective monitoring of sales performance and follow-up by
sales personnel; and
o Enables integration with existing automotive dealer accounting and business
systems.
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The DealerAdvance Sales Solution(TM) is a comprehensive CRM system,
providing customer history and contact information, as well as a personal
calendar and instructions on follow-up tasks directly to the handheld, creating
a highly effective communications tool for business development.
The DealerAdvance Sales Solution(TM) offers the following unique
features:
o Enables a high capture rate on walk-in traffic;
o Streamlines all sales and other follow-on processes;
o Provides current and comprehensive information and data for new and
used car inventory (on a real-time basis), all competing products, and
customer history with dealership;
o Provides performance data and analysis on each member of a sales team;
and
o Provides management with valuable and relevant transaction data on a
real-time basis.
The DealerAdvance Sales Solution(TM) offers the following services:
o Customer profiling;
o Drivers license scanning;
o Reverse phone look-up;
o Electronic signature capture;
o Dealer vehicle information and competitive product comparisons;
o Vehicle inventory status;
o Integrated purchase forms completion and printing;
o Used car appraisal;
o Management reports;
o Customer relationship management system functions;
o DMS integration capability; and
o E-mail and Internet access.
Stronghold installed Version 1.0 of the DealerAdvance Sales
Solution(TM) in six pilot dealerships during 2001. These dealerships were spread
through New Jersey, California and Connecticut. Stronghold introduced Version
2.0 of DealerAdvance Sales Solution(TM) at all of its sites by the end of
September 2001.
Stronghold introduced Version 3.0 of its software and installed another
3 dealership sites in the first quarter ending March 31, 2002, adding customers
in New York. In the second quarter ending June 30, 2002, Stronghold installed
another 7 sites, adding customers in Arizona, Southern California and South
Carolina. In the third quarter ending September 30, 2002, Stronghold implemented
another 10 sites, adding customers in Virginia, Florida, South Carolina and
Central California, and introduced Version 3.1 of its software. In the fourth
quarter ending December 31, 2002, Stronghold installed an additional 13
dealerships, adding customers in Texas, Indiana and Michigan. Overall, in 2002,
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Stronghold 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 ended March 31, 2003, the Company installed in 11
dealerships. In the quarter ended June 30, 2003, the Company installed another
11 systems in 9 dealerships in California, Nevada, Indiana, Washington, Ohio,
and Michigan. The impact of the war with Iraq on the overall economy early in
the second quarter and efforts to strengthen our sales force during the first
half of 2003 impacted revenue and the signing of new dealership customer
contracts in the second quarter. 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 segmented
our sales force into geographic markets and replaced several under-performing
business development managers with experienced industry veterans.
Stronghold plans to utilize its direct sales force to market the
DealerAdvance Sales Solution(TM) on a national basis. Stronghold has established
a strong presence in most regions of the United States, and is continuing to add
business development and operations offices pursuant to an organized growth
plan. Stronghold ended the quarter ended June 30, 2003 with personnel located in
Northern New Jersey, San Francisco, Washington, DC, Atlanta, Los Angeles,
Phoenix, Miami, Seattle, Cleveland, and Dallas.
At June 30, 2003, a total of 55 dealers were using the DealerAdvance
Sales Solution(TM), of which approximately 40 had reached or exceeded the 60-day
performance period associated with installation.
New Product Developments
The Company has identified five major prospect groups within an auto
dealership; walk in traffic, call in prospects, Internet based leads, the
existing owner base of customers and service prospects. The existing
DealerAdvance Sales Solution provides auto dealerships with the ability to
capture and manage prospects through a disciplined follow-up process to get them
into the dealership to buy. The current application has achieved best in class
status for managing walk in traffic, while being comparable in managing call in
and Internet prospects, and mining the owner base.
The Stronghold development team is currently working on a Call
Management application that will allow Stronghold customers to achieve best in
class performance for all call in prospects. The application will allow the
dealership to automatically capture and track the majority of prospects that
contact the dealership via phone. This new program is designed to allow the
salesperson to retrieve information about the customer while they are on the
phone and conduct a needs analysis following best practices for handling
prospect phone calls. The system automatically generates management logs and
reports that are designed to allow the dealer to determine which sales
associates need phone skills training. The call management feature is scheduled
for release in Q1 of 2004.
As a result of this initiative, development and release of
DealerAdvance Service Solution(tm), a handheld wireless system that allows
service advisors to leave their desks and greet clients at their cars to process
their service order initially scheduled for late 2003, will be delayed.. Initial
beta installations of the product are expected to begin in the fall of 2004,
with general availability by the end of 2004.
The DealerAdvance Service Solution(tm) is designed to provide for
improved customer service and reduced vehicle check in time and to allow dealer
representatives to scan a particular vehicle identification number from the
windshield or door. DealerAdvance Service Solution(tm) also is designed to
provide for instant mobile access to client and vehicle history and to allow the
dealer representatives to access warrantee and service period advice instantly.
This product also is expected to include an up-selling application to increase
revenue per repair order and an application to allow service marketing through
the DealerAdvance(tm) CRM application.
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The development plan also includes another application called
DealerAdvance Inventory Management Solution(tm), a handheld wireless system for
the management of new and used car inventory. DealerAdvance Inventory Management
Solution(tm) would provide a handheld device for the scanning of incoming and
outgoing vehicles, immediately adjusting inventory on hand for sale. In
addition, the system would provide for the printing of used car stickers, the
capture of Vehicle Identification Numbers for used car appraisal and estimates,
and the loading of vehicle specifics to the dealer web site. Development of this
application has not yet begun.
Research and Development
Since inception, we have spent approximately $2,706,321 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
The DealerAdvance Sales Solution(TM) is a wireless dealership sales
productivity system that improves sales performance, reduces costs and creates
operational efficiency. Currently, Stronghold does not believe that it has any
direct competition in this specific sector. However, Stronghold expects emerging
competitive players in the wireless handheld solutions market in the future.
Stronghold does compete with the traditional CRM providers and the emerging new
CRM providers in the retail automotive dealer software market. The leading CRM
companies that Stronghold competes against are:
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
Stronghold has defined a target market of approximately 12,000
dealerships that meet the base criteria for potential use of our system. More
specifically, Stronghold has qualified a primary target market of 6,500
dealerships where the potential sale and use of the system is the greatest. The
primary target market includes dealerships that sell a minimum of 75 new and
used cars each month and do not have a CRM system currently installed.
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Stronghold distributes its DealerAdvance Sales Solution(TM) through
direct sales, which Stronghold believes is most effective when introducing an
innovative new solution to the marketplace. Stronghold is continuing to grow its
Sales and Marketing team, which is aligned along geographic territory units.
Employees
Stronghold currently has a total of 39 full-time employees and 2
part-time employees, of which 27 are dedicated to marketing and sales and
regional customer support. Stronghold has hired senior and experienced business
development mangers to provide regional market penetration. During the quarter
ended March 31, 2003, Stronghold promoted two Business Development Managers to
Regional Sales Managers and Vice Presidents, to manage the sales force in the
Eastern and Western Regions of the US. Each Regional Manager is responsible for
recruiting, training and managing the Business Development Managers in their
territories. The Regional Managers each finished the quarter ended June 30, 2003
with 3 sales people.
During the quarter ended March 31, 2003, Stronghold promoted two
existing Consultants to the role of Eastern and Western Regional Manager for
Client Services, with the responsibility of managing Client Consultants in their
territories. These Client Consultants are responsible for providing
installation, training and ongoing support services to Stronghold's new and
existing customers. The Regional Managers report to the National Client Services
Manager located in Sterling, Virginia.
Stronghold hired a Vice President of Marketing in the quarter ended
March 31, 2003. The Vice President of Marketing works closely with the CEO and
the Regional Vice Presidents of Sales to execute Stronghold's marketing strategy
and to enhance market awareness of the DealerAdvance Sales Solution(TM). There
are no collective bargaining arrangements among Stronghold employees. We believe
Stronghold's relationship with its employees to be good.
Our Intellectual Property
We have been granted a trademark for DealerAdvance(TM) and have a
patent application pending that seeks protection of a number of developments
pertaining to the management of information flow for automotive dealer-based
software. An additional application is currently being planned which will
address certain proprietary features pertaining to systems components, related
equipment and software modules.
Safe Harbor Statement
The statements contained in this Quarterly Report on Form 10-QSB that
are not historical facts are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 as amended and the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements may be
identified by, among other things, the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should," or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. In particular, our
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statements regarding the anticipated growth in the markets for our technologies,
the continued development of our products, the approval of our Patent
Applications, the successful implementation of our sales and marketing
strategies, the anticipated longer term growth of our business, and the timing
of the projects and trends in future operating performance are examples of such
forward-looking statements. The forward-looking statements include risks and
uncertainties, including, but not limited to, the timing of revenues due to the
uncertainty of market acceptance and the timing and completion of pilot project
analysis, and other factors, including general economic conditions, not within
our control. The factors discussed herein and expressed from time to time in our
filings with the Securities and Exchange Commission could cause actual results
to be materially different from those expressed in or implied by such
statements. The forward-looking statements are made only as of the date of this
filing and we undertake no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
Factors that Might Affect Our Business, Future Operating Results, Financial
Condition and/or Stock Price
The more prominent risks and uncertainties inherent in our business are
described below. However, additional risks and uncertainties may also impair our
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations may suffer.
Risks Concerning Our Business
We have a history of incurring net losses; we expect our net losses to continue
as a result of planned increases in operating expenses; and we may never achieve
profitability.
We have a history of operating losses in our wireless business and have
incurred significant net losses in such business in each fiscal quarter since
our inception. We had a net loss of $934,665 for the quarter ended June 30,
2003. We had a net operating loss of $844,445 for the quarter ended June 30,
2003 and a net operating loss of approximately $5,002,115 for the period from
May 17, 2002 through June 30, 2003 to offset future taxable income. Losses prior
to May 17, 2002 were passed directly to the shareholders and, therefore, are not
included in the loss carry-forward. We expect to continue to incur net losses
and negative cash flows because we intend to increase operating expenses to
develop the Stronghold brand through marketing, promotion and enhancement of our
services. As a result of this expected increase in operating expenses, we will
need to generate significant additional revenue to achieve profitability. Our
ability to generate and sustain significant additional revenues or achieve
profitability will depend upon the factors discussed elsewhere in this "Risk
Factors" section, as well as numerous other factors outside of our control,
including:
o Development of 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 achieve increased sales for our existing products and
sales for 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 on a
quarterly basis in the future. If we do not achieve sustained profitability, we
will be unable to continue our operations.
If We Are Unable To Obtain Sufficient Funds, And Incur A Cash Flow Deficit, Our
Business Could Suffer.
We believe that the funds that were raised through our recent debt and
equity financings will only be sufficient for our needs for the immediate
future, raising doubt about our ability to continue as a going concern. We
anticipate that we will be required to raise additional capital after the second
quarter of 2003 and over the next several years in order to operate according to
our business plan. We may have difficulty obtaining additional funds as and if
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needed, and we may have to accept terms that would adversely affect our
stockholders. For example, the terms of any future financings may impose
restrictions on our right to declare dividends or on the manner in which we
conduct our business. Also, lending institutions or private investors may impose
restrictions on future decisions by us to make capital expenditures,
acquisitions or asset sales.
We may not be able to locate additional funding sources at all or on
acceptable terms. If we cannot raise funds on acceptable terms, if and when
needed, we may not be able to develop or enhance our products, grow our business
or respond to competitive pressures or unanticipated requirements, each of which
could seriously harm our business.
Since inception, we have financed all of our operations through private
equity and debt financings and commercial bank loans. Our future capital
requirements depend on numerous factors, including:
o The scope of our research and development;
o Our ability to successfully commercialize our technology; and
o Competing technological and market developments.
We Have A Limited Operating History.
We were formed in September 2000 to import and market truffle oil
products. As of May 16, 2002, our focus shifted to development and marketing of
handheld wireless technology for the automotive dealer software market. We
entered this business through the acquisition of an entity with only 22 months
of operating history. We must, therefore, be considered to be subject to all of
the risks inherent in the establishment of a new business enterprise. Our
limited operating history makes it difficult to evaluate our financial
performance and prospects. We cannot assure you at this time that we will
operate profitably or that we will have adequate working capital to meet our
obligations as they become due. Because of our limited financial history, we
believe that period-to-period comparisons of our results of operations will not
be meaningful in the short term and should not be relied upon as indicators of
future performance.
If We Fail to Gain Market Acceptance of our Products, our Business and Results
of Operations Would be Harmed.
We are still in the verification and validation 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, 11 sites in the quarter ended March 31, 2003 and 9 sites in the
quarter ended June 30, 2003. The impact of the war with Iraq on the overall
economy early in the second quarter and efforts to strengthen our sales force
during the first half of 2003 impacted revenue and the signing of new dealership
customer contracts in the second quarter. 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
segmented our sales force into geographic markets and replaced several
under-performing business development managers with experienced industry
veterans.
We expect to introduce our DealerAdvance Service Solution(TM) and
DealerAdvance Inventory Management Solution(TM) sometime over the next two
years. These solutions are still in the development stages and are not yet at
the point where they are ready to be installed in test sites. While we have
received positive feedback and market acceptance of DealerAdvance Sales
Solution(TM) by the test sites, fifty systems is a small number and results in
such sites may not be indicative of the overall market acceptance and success of
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DealerAdvance Sales Solutions(TM) or our entire DealerAdvance(TM) suite of
products. We may experience design, marketing, and other difficulties that could
delay or prevent our development, introduction, or marketing of these and other
new products and enhancements. In addition, the costs of developing and
marketing our products may far outweigh the revenue stream generated by such
products. Finally, our prospects for success will depend on our ability to
successfully sell our products to key automobile dealerships that may be
inhibited from doing business with us because of their commitment to their own
technologies and products, or because of our relatively small size and lack of
sales and production history.
The nature of our handheld product and technology requires us to market
almost exclusively to automobile dealerships. Should any particular dealership
or conglomerate of dealerships favor other providers of similar services or not
utilize our services to the extent anticipated, our business may be adversely
affected. The economy may also have an impact on the market acceptance of our
products. Big-ticket consumer purchases are sensitive to broad economic trends.
Therefore, our business could suffer if our customers, automobile dealerships,
are affected by the continuing poor economic conditions. For example, if dealer
sales are trending downward, capital expenditures, like those associated with
our DealerAdvance (TM) suite of products, may be delayed or abandoned.
If We Fail to Properly Manage Our Growth, Our Business and Results of Operations
Would be Harmed.
We have begun expanding our operations in anticipation of an aggressive
rollout of our DealerAdvance(TM) product suite. In the past twelve months, our
sales, marketing and customer support team has increased from 17 to 27
employees. We have strategically hired additional sales representatives in the
past twelve months, expanding into, Virginia, Southern California, Florida, Ohio
and Texas.. Additionally, we must continue to develop and expand our systems and
operations as the number of automobile dealerships installing our products and
requiring our ongoing services increases. The pace of our anticipated expansion,
together with the level of expertise and technological sophistication required
to provide implementation and support services, demands an unusual amount of
focus on the operational needs of our future customers for quality and
reliability, as well as timely delivery and post-installation and
post-consultation field and remote support. This development and expansion has
placed, and we expect it to continue to place, strain on our managerial,
operational and financial resources.
We may be unable to develop and expand our systems and operations for
one or more of the following reasons:
o We may not be able to locate or hire at reasonable compensation rates
qualified and experienced sales staff and other employees necessary to
expand our capacity on a timely basis;
o We may not be able to obtain the hardware necessary to meet the demand
by automobile dealership of our products, in a timely manner;
o We may not be able to expand our customer service, billing and other
related support systems;
o We may not be able to integrate new management and employees into our
overall operations;
o We may not be able to establish improved financial and accounting
systems; and
o We may not be able to successfully integrate our internal operations
with the operations of our product manufacturers, distributors and
suppliers to product and market commercially viable products.
If we cannot manage our growth effectively, our business and operating
results will suffer. Additionally, any failure on our part to develop and
maintain our wireless technology products during a period of rapid growth could
significantly adversely affect our reputation and brand name which could reduce
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demand for our services and adversely affect our business, financial condition
and operating results.
We Depend On Attracting And Retaining Key Personnel.
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
employment agreements with its other key personnel. If we are unable to hire and
retain personnel in key positions, our business could be significantly and
adversely affected unless qualified replacements can be found.
Our success is dependent on the vision, technological knowledge,
business relationships and abilities of Mr. Carey. Any reduction of Mr. Carey's
role in the handheld technology business would have a material adverse effect on
us. Mr. Carey's employment agreement expires on December 31, 2004.
Increasing political and social turmoil, such as terrorist and military actions,
increase the difficulty for us and our strategic partners to forecast accurately
and plan future business activities.
Recent political and social turmoil, including the terrorist attacks of
September 11, 2001 and the current conflict in the Middle East, can be expected
to put further pressure on economic conditions in the United States and
worldwide. These political, social and economic conditions may make it difficult
for us to plan future business activities. For example, if the current conflict
in the Middle East continues to escalate, our operations and general economic
conditions could be adversely affected. Specifically, if the current economic
conditions continue to decline, consumers may be less inclined to make large
purchases, such as automobiles. Consequently, if dealer sales suffer,
dealerships may decrease capital expenditures such as those associated with our
products.
Risks Concerning Our Handheld Technology
An Interruption In the Supply of Products and Services that We Obtain From Third
Parties 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 to our development effort.
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
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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.
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
margins and the inability to achieve market acceptance for our products. Our
competitors in the field are companies that include major international car
dealership service companies, specialized technology companies, and,
potentially, our joint venture and strategic alliance partners. Such companies
include: ADP Dealer Services, Reynolds and Reynolds Company, Automotive
Directions, Higher Gear, Autobase, Third Coast Media, Cowboy Corporation and
Autotown, among others. Many of these 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 or entirely
different approaches developed by one or more of our competitors.
We May Not Have Adequately Protected Our Intellectual Property Rights.
Our success depends on our ability to sell products and services for
which we may not 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. An additional application is
currently being planned 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
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 intellectual property law does not
adequately protect our technology, other companies could develop and market
similar products or services, which could adversely affect our business.
We May be Sued by Third Parties for Infringement of Their Proprietary Rights and
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, 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
by, for example, causing us to enter into costly royalty arrangements or forcing
us to incur settlement or litigation costs.
-18-
Risks Concerning Our Capital Structure
Our Management and Other Affiliates Have Significant Control of Our Common Stock
and Could Control Our Actions in a Manner That Conflicts with Our Interests and
the Interests of Other Stockholders.
As of June 30, 2003, our executive officers and directors beneficially
owned in the aggregate approximately 69%, and together with affiliated entities
beneficially owned approximately 75% of the outstanding shares of our Common
Stock, assuming the exercise of all options, warrants and the conversion of any
convertible securities held by such persons, which were presently exercisable or
will become exercisable within 60 days after June 30, 2003. As a result, these
stockholders, acting together, will be able to exercise considerable influence
over matters requiring approval by our stockholders, including the election of
directors, and may not always act in the best interests of other stockholders.
Such a concentration of ownership may have the effect of delaying or preventing
a change in control, including transactions in which our stockholders might
otherwise receive a premium for their shares over then current market prices.
We Are Controlled by Our President, Which May Result in You Having No Control in
Our Direction or Affairs.
As of June 30, 2003, our President and Chief executive Officer owned
approximately 60% of our current outstanding Common Stock, assuming the exercise
of all options, warrants and the conversion of any convertible securities held
by him, which were presently exercisable or will become exercisable within 60
days after June 30, 2003. As a result, he has the ability to control us and
direct our affairs and business, including the approval of significant corporate
transactions. This concentration of ownership may have the effect of delaying,
deferring or preventing a change in control and may make some transactions more
difficult or impossible without his support. Any of these events could decrease
the market price of our Common Stock.
Stockholders May Suffer Dilution as a Result of Shares Eligible for Future
Issuance.
As of June 30, 2003, we had 10,460,333 shares of our Common Stock
issued and outstanding. In addition, we had the potential to issue 1,183,579
shares of our Common Stock upon the exercise of all outstanding options, and
6,449,944 shares of our Common Stock upon the exercise of certain warrants
outstanding and upon the conversion of certain shares of our Series A and Series
B Preferred Stock. Consequently, sales of substantial amounts of our Common
Stock in the public market, or the perception that such sales could occur, may
adversely affect the market price of our Common Stock.
Volatility of Trading Market May Affect Your Investment.
The market price for our securities is highly volatile. The following
factors have a significant impact on the market price of our securities: our
financial results; introduction of new products into the marketplace; various
factors affecting the automobile industry and the wireless industry generally,
including extreme volatility and extended steep declines in equity market values
of other wireless-related publicly traded companies; sharp declines in private
equity valuations of wireless-related privately-held companies; the price and
volume volatility affecting small and emerging growth companies in general,
which are not necessarily related to the operating performance of such
companies.
-19-
Because We Do Not Intend to Pay Any Cash Dividends On Our Shares of Common
Stock, Our Stockholders Will Not Be Able to Receive a Return on Their Shares
Unless They Sell Them.
We have never paid or declared any cash dividends on our Common Stock
or other securities and intend to retain any future earnings to finance the
development and expansion of our business. We do not anticipate paying any cash
dividends on our Common Stock in the foreseeable future. Unless we pay
dividends, our stockholders will not be able to receive a return on their shares
unless they sell them.
Our Common Stock Is Considered A Penny Stock And May Be Difficult To Sell.
Investing in our stock involves a particular risk that does not exist
with many other companies - our stock is a penny stock. The Securities and
Exchange Commission has adopted regulations, which generally define penny stock
to be an equity security that has a market price of less than $5.00 per share or
an exercise price of less than $5.00 per share, subject to specific exemptions.
Presently, the market price of our Common Stock is less than $5.00 per share.
Therefore, the SEC "penny stock" rules govern the trading in our Common Stock.
These rules require, among other things, that any broker engaging in a
transaction in our securities provide its customers with the following:
o A risk disclosure document;
o Disclosure of market quotations, if any;
o Disclosure of the compensation of the broker and its salespersons in
the transaction; and
o Monthly account statements showing the market values of our securities
held in the customer's accounts.
The broker must provide the bid and offer quotations and compensation
information before effecting the transaction. This information must be contained
on the customer's confirmation. Generally, brokers may be less willing to effect
transactions in penny stocks due to these additional delivery requirements. This
may make it more difficult for investors to dispose of our Common Stock. In
addition, the broker prepares the information provided to the broker's customer.
Because we do not prepare the information, we cannot assure you that such
information is accurate, complete or current.
-20-
Liquidity And Capital Resources
Overview
As of June 30, 2003, our cash balance was $34,583. We had a net loss of
$934,665 for the fiscal quarter ended June 30, 2003. We had a net operating loss
of $844,445 for the fiscal quarter ended June 30, 2003 and a net operating loss
of approximately 5,002,115 for the period from May 17, 2002 through June 30,
2003 to offset future taxable income. Losses prior to May 17, 2002 were passed
directly to our 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 quarters. Our
accounts receivable at June 30, 2003 was $1,323,504 (less allowances for
doubtful accounts of $196,284), as compared to $1,081,027 for the quarter ended
June 30, 2002. The increase in accounts receivable represents amounts owed to
Stronghold for new installations and maintenance, service, training services,
software customization and additional systems components.
Financing Needs
To date, we have not generated revenues in excess of operating
expenses. We have not been profitable since our inception, we will incur
additional operating losses in the future, and we may require additional
financing to continue the development and subsequent commercialization of our
technology.
We expect our capital requirements to increase significantly over the
next several years as we continue to develop and test the DealerAdvance(TM)
suite of products and as we increase marketing and administration infrastructure
and embark on developing in-house business capabilities and facilities. Our
future liquidity and capital funding requirements will depend on numerous
factors, including, but not limited to, the levels and costs of our research and
development initiatives, the cost of hiring and training additional sales and
marketing personnel to promote our products and the cost and timing of the
expansion of our marketing efforts.
Financings
On July 31, 2000, the Predecessor Entity entered into a line of credit
with our President and Chief Executive Officer, Christopher Carey, who is also
the President and Chief Executive Officer of Stronghold. According to such line
of credit, Mr. Carey made available $1,989,500, which the Predecessor Entity
could borrow from time to time until August 1, 2001. The outstanding amounts
accrued interest at the per annum rate equal to the floating base rate, as
defined therein, computed daily, for the actual number of days elapsed as if
each full calendar year consisted of 360 days. The first interest payment under
the line of credit was due on August 1, 2001. On such date, the parties agreed
to extend the line of credit for one more year, until August 1, 2002.
On November 1, 2001, the Predecessor Entity entered into a line of
credit with UnitedTrust Bank pursuant to which the Predecessor Entity borrowed
$1.5 million. The line of credit was due to expire by its terms, and all
outstanding amounts were due to be paid, on June 30, 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 debt under the line of credit.
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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 agreed to issue 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 (May 16, 2002 and July 3, 11, and 19, 2002), at which we issued an
aggregate of 2,002,750 shares of our Series A Preferred Stock and warrants for
2,002,750 shares of our Common Stock to Stanford.
On May 16, 2002, the total amount outstanding under the 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 June 30, 2002, our line of credit with UnitedTrust Bank expired and
a three-month extension was granted. On September 30, 2002, we converted our
outstanding line of credit with UnitedTrust Bank into a $1,500,000 promissory
note, pursuant to which Stronghold will pay UnitedTrust Bank all amounts
outstanding under the line of credit. Such promissory note will be paid in 36
monthly installments, which will begin in February 2003 and will terminate on
January 1, 2006. Interest accrues on the note at the prime rate, which is the
highest New York City prime rate as is published in The Wall Street Journal. The
initial prime rate that applies to the promissory note is 4.750%.
During August and September 2002, we entered into 9 subscription
agreements with private investors, pursuant to which we issued an aggregate of
179,333 shares of our Common Stock at $1.50 per share. These private investments
generated total proceeds to us of $269,000.
On September 30, 2002, we renegotiated the $1,200,000 promissory note
with Mr. Carey as required by the promissory note with UnitedTrust Bank.
According to the new terms of the loan, Mr. Carey extended the repayment of the
principle amount until December 1, 2005. Until such time as the principle 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 Stronghold'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 principle payments or distribution of
assets. As of December 31, 2002, $970,749 was outstanding under the promissory
note issued to Mr. Carey.
On September 30, 2002, we entered into a loan agreement with CC Trust
Fund to borrow an amount up to $355,128. This bridge loan is for a period of
twelve months, with all principle due and payable on September 30, 2003. We will
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pay 12.5% interest on the outstanding principle each year. At the end of the
loan period, the 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. 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 principle due and payable on September 30, 2003. We will
pay 12.5% interest on the outstanding principle each year. At the end of the
loan period, the Fund will be entitled to exercise 25,000 warrants at $1.50 per
share. As of March 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, we issued a promissory note to Christopher J. Carey
for the amount of $165,000. Such promissory note is due on or before December
31, 2003. Until such time as the principle is paid, interest on the note will
accrue at the rate of 12.5% per year.
On March 18, 2003 we entered into a bridge loan agreement with our
President, 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
$.97 per share.
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 $.90 Convertible Preferred Stock. The issuance of the Series B
Preferred Stock will take 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 assigned
to Stanford to purchase 2,002,750 shares of our Common Stock at an exercise
price of $1.50 for the first 1,001,375 shares and $2.25 for the remaining
shares: (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.
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. In the modification agreement, UnitedTrust Bank
has 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
The purpose of this modification of the loan agreement with UnitedTrust
Bank is provide for (i) better cash flow permitted by the reduced payments and
(ii) subordination that provides the flexibility that will give us the option to
seek a new revolving line of credit to provide working capital. The new line of
credit has not yet been negotiated and we can not be certain of its placement.
In exchange for this reduced cash flow and subordination, Christopher J. Carey,
has provided substitute collateral in the form of a second mortgage certain real
property owned by him.
Results of Operations
Operations through May 16, 2002 were comprised solely of our truffle
business, which was conducted through our wholly owned subsidiaries, Terre di
Toscana, Inc. and Terres Toscanes, Inc. Operations from May 16, 2002 through
June 30, 2002 were comprised of our truffle business (which was divested on July
19, 2002, as described above) and our handheld wireless technology business. Our
results of operations as described below reflect the treatment of the truffle
business as discontinued operations and, therefore, figures from those periods
reflect operations of our handheld wireless technology business only, other than
with respect to other expenses. We believe that a comparison of our truffle
business to our handheld wireless technology business is not a relevant analysis
for purposes of this periodic filing. As a result, we believe that
-23-
period-to-period comparisons of our results of operations will not be meaningful
and should not be relied upon as indicators of future performance. Therefore,
results of operations for the fiscal years ended 2001 and 2002 reflect
operations of our handheld wireless technology business only.
We entered the handheld wireless technology business through the
acquisition of the Predecessor Entity, which had only twenty-two months of
operating history. We must, therefore, be considered to be subject to all of the
risks inherent in the establishment of a new business enterprise. Our limited
operating history makes it difficult to evaluate our financial performance and
prospects. We cannot make assurances at this time that we will operate
profitably or that we will have adequate working capital to meet our obligations
as they become due. Because of our limited financial history, we believe that
period-to-period comparisons of our results of operations will not be meaningful
in the short term and should not be relied upon as indicators of future
performance.
Changes to Critical Accounting Policies and Estimates
Financial Reporting Release No. 60, which was 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 the our Consolidated Financial Statements. The following is a brief
discussion of the more significant accounting policies and methods used by us.
In addition, Financial Reporting Release No. 61 was recently released
by the SEC to require all companies to include a discussion to address, among
other things, liquidity, off-balance sheet arrangements, contractual obligations
and commercial commitments.
The discussion and analysis of our financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of financial statements in accordance with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, including the recoverability of tangible and intangible
assets, disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses during
the reported period.
On an on-going basis, we evaluate our estimates. The most significant
estimates relate to our recognition of revenue and the capitalization of our
software development.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Revenue Recognition Policy
Revenue related to the sale of our products is comprised of one-time
charges to the dealerships for hardware (including server, wireless
infrastructure, desktop PC, printer, interior/exterior access points/antennas
and handheld devices), software licensing fees and installation/training
services. The average installation for DealerAdvance Sales Solution(TM) is
approximately $83,000. The most significant variable in pricing is the number of
handheld devices.
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 contract
these services and pay on a monthly basis. Stronghold provides other services,
including software and report customization, business and operations consulting,
-24-
and sales training services. All of these services are contracted on an as
needed basis and typically are charged on a time and expenses basis. In
addition, we offer a sixty-day performance trial period. After this time, a
large portion of the dealerships converts the one-time fee into a third party
lease. Stronghold has 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. Stronghold
accepts no liability under these arrangements, and the lease is based on the
creditworthiness of the dealership. The leasing company receives the invoice
from Stronghold, and remits funds upon acceptance by the dealership. Stronghold
receives all funds as invoiced, with all interest costs passed to the
dealership. These leases typically run 36 months in duration, during which time
Stronghold contracts for service and maintenance services. After the initial
installation Stronghold charges separately for future software customization,
for additional training, and for additions to the base system (e.g., more
handheld devices for additional sales people). Depending upon the dealership
arrangement, the support and maintenance contracts are either billed monthly and
recorded as revenue monthly, or are recorded up front to unearned maintenance
fees at the present value of the 36-month revenue stream and amortized monthly
to revenue over the life of the agreement.
Revenue Restatement
On December 26, 2002, we reclassified our consolidated financial
statements for the first three quarters of 2002. This step was taken on the
advice of Rothstein, Kass & Company, P.C., our accounting firm, to reflect
accounting changes in accordance with revenue recognition guidelines released by
the Securities and Exchange Commission.
Accordingly, our revenue was reclassified such that it may be
recognized in future quarters. For the nine months ended September 30, 2002,
revenue was reclassified from $2,952,076 to $1,898,884. The revenue restatement
was included in our December 31, 2003 year-end audited financial statements and
included in our 2002 10-K filing. The corresponding restated Q2 results for 2002
were not separately filed. The comparative financial statements included herein,
are compared to the corresponding restated Q2 2002 financial statements.
Historically, we have recorded revenue as a three-stage process: at the
time the equipment and software were delivered, installed and the personnel
trained. We will now recognize each sale with an additional stage as outlined in
the analysis provided by our accounting firm, which includes a fourth stage
defined as, "the system is handed over to the customer to run on their own."
This four-stage delivery process will result in current sales revenues being
carried into future quarters. We estimate that this change will delay the
recognition of revenue from installed dealership sites by 20-50 days.
Software Development Capitalization Policy
Software development costs, including significant product enhancements
incurred subsequent to establishing technological feasibility in the process of
software production, are capitalized according to Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed." Costs incurred prior to the
establishment of technological feasibility are charged to research and
development expenses. For the quarter ended June 30, 2003, Stronghold
capitalized $153,973 of development costs in developing enhanced functionality
of its DealerAdvance(TM) product.
-25-
Three Months Ended June 30, 2003 and Three Months Ended June 30, 2002
---------------------------------------------------------------------
For the quarter ended June 30, 2003, we had revenue of $626,779 compared to
revenue of $773,194 for the quarter ended June 30, 2002. This represents a
decrease of $146,415 or - 18.94%. The impact of the war with Iraq on the overall
economy early in the second quarter and efforts to strengthen our sales force
during the first half of 2003 impacted revenue and the signing of new dealership
customer contracts in the second quarter. 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
segmented our sales force into geographic markets and replaced several
under-performing business development managers with experienced industry
veterans.
Revenue is comprised of one-time charges to the dealerships for
hardware (including server, wireless infrastructure, desktop PC, printer,
interior/exterior access points/antennas and handheld devices), software
licensing fees and installation/training services. The average installation is
$80,000. The most significant variable in pricing is the number of handheld
devices. Other sources of revenue include monthly support and maintenance
contracts (required with purchase of DealerAdvance(TM)) and fee-based business
development consulting and sales training services. 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.
We generated $349,595 in gross profits from sales for the quarter ended
June 30, 2003, which was a decrease of $64,535 from the quarter ended June 30,
2002, when we generated $414,130 in gross profits. We were able to improve our
gross profit margin from 53.56 % in the quarter ended June 30, 2002 to 55.78% in
the quarter ended June 30, 2003. The lower gross profit in dollars and higher
profit as a percentage of revenue reflects the Company's ability to control its
prices given its premium product offering and continued efforts to reduce cost
of services. Additonal factors are attributed to better buying of subcontracted
services, lower software and information licensing costs, lower costs for
materials, and better negotiated prices with customers.
Total Selling, General and Administrative expense in the quarter ended
June 30, 2003 were $1,194,040, an increase of 14.18% or $148,262 from the
quarter ended June 30, 2002 of $1,045,778. We completed DealerAdvance Sales
Solution(TM) Version 3.2, and substantially completed DealerAdvance Sales
Solution(TM) Version 3.3 of which the release of is expected in Q3 2003. The
product enhancements included in Version 3.3 are designed to improve the user
environment, navigation and implementation of the system. These improvements are
anticipated to increase client return on investment as well as customer
satisfaction while providing overall increased sales for the Company. We will
continue to enhance our products, and offer customized services to our
customers, and will accomplish this with a smaller software support group. In
subsequent quarters we will consider additional staff to begin new applications
development as increased volume and cash allows.
Our interest expense increased from $53,672 in the quarter ended June
30, 2002 to $90,220 in the quarter ended June 30, 2003. This increase of $36,548
was based on the increase in loan amounts outstanding.
The net loss for the quarter ended June 30, 2003 was $934,665, which is
an increase of $249,345 from the loss for the quarter ended June 30, 2002 of
$685,320. There was no change in the loss per share of $.09 loss with a weighted
average of 7,829,459 shares outstanding in the quarter ended June 30, 2002 to
the $.09 loss per share in the quarter ended June 30, 2003 weighted average of
with 10,301,212 shares outstanding.
-26-
Industry Trends
The automotive industry has identified sales productivity tools and CRM
systems to be of high priority. Many consolidators and independent dealership
owners have begun to explore and pilot some of these solutions to determine the
most effective means for managing and exploiting prospects and customers to
increase car sales. To date, only a small number of the 22,600-dealership sites
in the United States have implemented these systems. There remains substantial
uncertainty as to the type of systems that will be implemented as well as the
pace at which implementation will take place.
Since big-ticket consumer purchases are sensitive to broad economic
trends, our operations may be affected by general economic conditions. Our
business could suffer if Stronghold's customers, automobile dealerships, are
affected by the continuing poor economic conditions. For example, if dealer
sales are trending downward, capital expenditures like those associated with
Stronghold's DealerAdvance(TM) suite of products may be delayed or abandoned.
The impact of the war with Iraq on the overall economy early in the
second quarter and efforts to strengthen our sales force during the first half
of 2003 impacted revenue and the signing of new dealership customer contracts in
the second quarter.
Dividend Policy
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 has sole discretion to pay cash
dividends based on our financial condition, results of operations, capital
requirements, contractual obligations and other relevant factors.
-27-
Item 3. Controls and Procedures
Our management, with the participation of our chief executive officer
and acting chief financial officer, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of June 30, 2003. Based on this evaluation, our chief
executive officer and acting chief financial officer concluded that as of June
30, 2003, our disclosure controls and procedures were (1) designed to ensure
that material information relating to us, including its consolidated
subsidiaries, is made known to our chief executive officer and acting chief
financial officer by others within those entities, particularly during the
period in which this report was being prepared and (2) effective, in that they
provide reasonable assurance that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
No change in our internal controls over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
fiscal quarter ended June 30, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting, other than the hiring of Robert Nawy as Assistant Chief Financial
Officer on July 22, 2003. Mr. Nawy is expected to become our chief financial
officer and will have among his duties the administration and oversight of
disclosure procedures.
-28-
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
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 is $2,200,000. The Company intends to use the proceeds to fund
its general working capital requirements.
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 April 30, 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 occurred on May 15, 2003 and June 13, 2003, the Company issued 555,556
shares of Series B Preferred Stock, and Stanford paid $500,000 upon each closing
for same. On the fourth closing date, which occurred 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 are scheduled for
August 15, 2003 and September 15, 2003, the Company will issue 222,222 shares of
Series B Preferred Stock, and Stanford will pay $200,000 upon each closing. For
so long as any shares of the Series B Preferred Stock are outstanding and held
by Stanford, if the Company issues additional shares of the Company's Common
Stock, or common stock equivalents, Stanford has the right to participate in the
issuance such that immediately after the subsequent issuance, Stanford's
ownership of the total number of outstanding shares of the Company's Common
Stock (assuming the conversion of all common stock equivalents into the
Company's Common Stock) equals the same percentage of the total shares of the
Company's Common Stock (assuming conversion of all common stock equivalents into
the Company's Common Stock) as Stanford held immediately prior to the subsequent
issuance.
In connection with the Series B Purchase Agreement, the Company and
Stanford also entered into a Registration Rights Agreement, dated April 30,
2003, in which the Company agreed to register the shares of the Company's Common
Stock issuable upon conversion of the Series B Preferred Stock with the
Securities and Exchange Commission, not later than November 15, 2003.
In connection with the Series B Purchase Agreement, the Company and
Stanford entered into a Consulting Agreement, pursuant to which Stanford has
agreed to perform certain financial consulting and advisory services, in
exchange for which the Company has agreed to pay Stanford a fee of $50,000 per
year for two years, 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, the Company may, at its sole option, choose to issue
shares of its Common Stock to Stanford in lieu of such payments.
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.
-29-
In addition, the Company and Stanford have 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 addition, the Company and Christopher J. Carey have agreed to extend
the maturity dates of the Promissory Notes, dated March 18, 2003, for an
aggregate amount of $400,000, to June 30, 2004.
In addition, the Company, Christopher J. Carey and Mary Carey (as
trustee) have agreed to extend the maturity dates of loans from the Carey family
trusts to the Company in the amount of $730,532, to December 31, 2003.
No underwriter was employed by the Company in connection with the
issuance of the securities described above. We believe that the issuance of the
foregoing securities was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving a public
offering. Each of the recipients were either accredited or sophisticated
investors as defined under Section 501 of the Securities Act, and acquired the
securities for investment purposes only and not with a view to distribution and
had adequate information about the Company. Neither the Company, nor any person
acting on its behalf, offered or sold the securities by means of any form of
general solicitation or general advertising. A legend was placed on the stock
certificates stating that the securities have not been registered under the
Securities Act and cannot be sold or otherwise transferred without an effective
registration or an exemption therefrom.
Item 4. Submission of Matters to a Vote of Security Holders
Our annual meeting of stockholders was held on July 22, 2003. The
following is a list of all of the nominees to serve as directors on our board of
directors, each of whom were elected at the annual meeting and whose term of
office continued after the annual meeting:
Christopher J. Carey
Robert J. Corliss
Robert Cox
William Lenahan
Luis Delahoz
There were present at the annual meeting, in person or by proxy,
9,706,394 shares, consisting of 5,259,200 shares of Common Stock, 2,002,750
shares of Series A Preferred Stock (on an as converted to Common Stock basis),
and 2,444,444 shares of Series B Preferred Stock (on an as converted to Common
Stock basis). The results of the vote of the stockholders taken at the annual
meeting by ballot and by proxy as solicited by us on behalf of our board of
directors were as follows:
(i) The results of the vote taken at the Meeting for the election of the
nominees for our board of directors were as follows:
-30-
Common Stock For Withheld
------------ --- -----------
Christopher J. Carey 5,259,200 0
Robert J. Corliss 5,259,200 0
Robert Cox 5,259,200 0
William Lenahan 5,259,200 0
Luis Delahoz 5,259,200 0
Series A Preferred Stock
-------------------------
Christopher J. Carey 2,002,750 0
Robert J. Corliss 2,002,750 0
Robert Cox 2,002,750 0
William Lenahan 2,002,750 0
Luis Delahoz 0 2,002,750
Series B Preferred Stock
------------------------
Christopher J. Carey 2,444,444 0
Robert J. Corliss 2,444,444 0
Robert Cox 2,444,444 0
William Lenahan 2,444,444 0
Luis Delahoz 0 2,444,444
(ii) A vote was taken on the proposal to approve an amendment to the
Company's Stock Plan to increase the maximum number of shares of the
Company's Common Stock available for issuance under the Plan from 300,000
shares to 1,300,000 shares. The results of the vote taken at the annual
meeting with respect to such amendment were as follows:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
Common Stock 4,444,500 4,300 0 810,400
Series A Preferred Stock 2,002,750 0 0 0
Series B Preferred Stock 2,444,444 0 0 0
(iii) A vote was taken on the proposal to approve an amendment to the
Company's California Stock Plan to increase the maximum number of shares of
the Company's Common Stock available for issuance under the California Plan
from 100,000 shares to 200,000 shares. The results of the vote taken at the
annual meeting with respect to such amendment are as follows:
-31-
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
Common Stock 4,444,500 4,300 0 810,400
Series A Preferred Stock 2,002,750 0 0 0
Series B Preferred Stock 2,444,444 0 0 0
(iv) A vote was taken on the proposal to ratify the appointment of
Rothstein, Kass & Company, P.C. as independent auditors of the Company for
the fiscal year ending December 31, 2003. The results of the vote taken at
the annual meeting with respect to such appointment were as follows:
For Against Abstain
--- ------- -------
Common Stock 5,259,200 0 0
Series A Preferred Stock 2,002,750 0 0
Series B Preferred Stock 2,444,444 0 0
-32-
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Securities Purchase Agreement, dated April 30, 2003, by and between
Stronghold Technologies, Inc. and Stanford Venture Capital Holdings,
Inc. (Incorporated by reference to Exhibit 99.1 to the Company's Form
8-K as filed with the Securities and Exchange Commission on May 8,
2003.)
10.2 Registration Rights Agreement, dated April 30, 2003, by and between
Stronghold Technologies, Inc. and Stanford Venture Capital Holdings,
Inc. (Incorporated by reference to Exhibit 99.2 to the Company's Form
8-K as filed with the Securities and Exchange Commission on May 8,
2003.)
10.3 Consulting Agreement, dated April 30, 2003, by and between Stronghold
Technologies, Inc. and Stanford Venture Capital Holdings, Inc.
(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.)
10.4 First Modification to Loan Agreement and Note among Stronghold
Technologies, Inc., Christopher J. Carey and UnitedTrust Bank, dated
July 31, 2003.
31.1 Certification of principal executive officer and principal financial
officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of principal executive officer and principal financial
officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. 1350.
(b) Reports on Form 8-K
Subsequent to the end of the quarter, on May 8, 2003, we filed with the
Securities and Exchange Commission a Current Report on Form 8-K pursuant to Item
5. Other Events. The Form 8-K described the Securities Purchase Agreement dated
as of April 30, 2003, by and between Stronghold Technologies, Inc. and Stanford
Venture Capital Holdings, Inc., pursuant to which the Company, among other
things, agreed to issue to Stanford and Stanford agreed to purchase 2,444,444
shares of the Company's Series B $0.90 Convertible Preferred Stock, $0.0001 par
value per share, for an aggregate purchase price of $2,200,000.
-33-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 14th day of
August, 2003.
STRONGHOLD TECHNOLOGIES, INC.
By: /s/ Christopher J. Carey
-----------------------------------------
Christopher J. Carey, President,
Chief Executive Officer and Acting
Chief Financial Officer
(principal executive officer and
principal financial officer)
By: /s/ Karen S. Jackson
-----------------------------------------
Karen S. Jackson, Controller
(principal accounting officer)
-34-
Item 6. Exhibit Index
Exhibit Description
Number
10.1 Securities Purchase Agreement, dated April 30, 2003, by and between Stronghold Technologies, Inc. and Stanford Venture
Capital Holdings, Inc. (Incorporated by reference to Exhibit 99.1 to the Company's Form 8-K as filed with the
Securities and Exchange Commission on May 8, 2003.)
10.2 Registration Rights Agreement, dated April 30, 2003, by and between Stronghold Technologies, Inc. and Stanford Venture
Capital Holdings, Inc. (Incorporated by reference to Exhibit 99.2 to the Company's Form 8-K as filed with the
Securities and Exchange Commission on May 8, 2003.)
10.3 Consulting Agreement, dated April 30, 2003, by and between Stronghold Technologies, Inc. and Stanford Venture Capital
Holdings, Inc. (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.)
10.4 First Modification to Loan Agreement and Note among Stronghold Technologies, Inc., Christopher J. Carey and UnitedTrust
Bank, dated July 31, 2003.
31.1 Certification of principal executive officer and principal financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of principal executive officer and principal financial officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.