UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the quarterly
period ended September 30, 2003.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT for the transition period
from _______ to _______.
Commission file number: 333-54822
STRONGHOLD TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 22-376235
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
106 Allen Road,
Basking Ridge, NJ 07920
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone number: (908) 903-1195
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Former name, former address
and former fiscal year, if
changed since last report N/A
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of June 30, 2003, 10,460,333
shares of the Registrant's Common Stock (par value, $0.0001) were outstanding.
Transitional Small Business Disclosure Format: (Check One): Yes [_] No [X]
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-QSB/A ("Amendment") is being filed to amend the
Registrant's Quarterly Report on Form 10-QSB for fiscal quarter ended September
30, 2003, as filed on November 13, 2003 (the "Original Report on Form 10-QSB),
by correcting several printer's typographical errors contained in the
consolidated financial statements of Stronghold Technologies, Inc.
Specifically, this amendment corrects the following printer's typographical
errors:
(i) Footnotes referencing "See Notes to consolidated financial
statements." were omitted from each of the Consolidated Balance Sheet,
Consolidated Statements of Operations, and Consolidated Statements of
Cash Flows,
(ii) An erroneous line item from a prior printer job was included as line 3
in the Consolidated Statements of Cash Flows,
(iii) The "$" symbol was omitted in several places in the Consolidated
Statements of Cash Flows and from the Table in Note 7 to the Notes to
consolidated financial statements, and
(iv) Two values in Note 6 to the Notes to consolidated financial statements
were incorrectly rounded by $1,000.
This Amendment does not reflect events occurring after the filing of the
Original Report on Form 10-QSB, and does not modify or update the disclosures
therein in any way other than as described above.
TABLE OF CONTENTS
Page
PART I - Financial Information
------------------------------
Item 1. Financial Statements...............................................1
Consolidated Balance Sheet
as of September 30, 2003 (unaudited)...............................1
Consolidated Statements of Operations For the Three
Months Ended September 30, 2003 and 2002 and the Nine
Months Ended September 30, 2003 and 2002
(unaudited)........................................................2
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2003 and 2002
(unaudited)........................................................3
Notes to consolidated financial statements.........................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................8
Item 3. Controls and Procedures...........................................30
PART II - Other Information
---------------------------
Item 1. Legal Proceedings.................................................31
Item 2. Changes in Securities and Use of Proceeds.........................31
Item 3. Defaults Upon Senior Securities...................................32
Item 4. Submission of Matters to a Vote of Security Holders...............32
Item 5. Other Information.................................................34
Item 6. Exhibits and Reports on Form 8-K..................................35
PART I - Financial Information
Item 1. Financial Statements
Stronghold Technologies, Inc. and Subsidiary
Consolidated Balance Sheet
September 30, 2003 (Unaudited)
ASSETS 2003
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(Unaudited)
Current assets
Cash $ 3,229
Accounts receivable, less allowance for returns and doubtful accounts of $170,172 1,554,533
Other receivables 18,548
Inventories 85,801
Prepaid expenses 12,741
------------
Total current assets 1,674,852
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Property and equipment, net 206,994
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Other assets
Software development costs, net of amortization 663,016
Other 70,122
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Total other assets 733,138
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$ 2,614,984
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 610,831
Accrued expenses and other current liabilities 1,670,920
Interest payable, stockholders 361,367
Notes payable, stockholders, current portion 1,106,781
Note payable, current portion 165,000
Obligations under capitalized leases, current portion 45,827
------------
Total current liabilities 3,960,726
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Long-term liabilities
Notes payable, stockholders, less current portion 561,330
Note payable, less current portion 1,096,667
Obligations under capitalized leases, less current portion 43,794
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Total long term liabilities 1,701,791
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Commitments and contingencies
Stockholders' deficit
Preferred stock, Series A, $.0001 par value; authorized 5,000,000 shares,
2,002,750 issued and outstanding (aggregate liquidation preference of
$3,004,125) and preferred stock, Series B, $.0001 par value; authorized
2,444,444 shares, 2,444,444 issued and
outstanding 445
Common stock, $.0001 par value, authorized 50,000,000
shares, 10,460,333 issued and outstanding 1,046
Additional paid-in capital 7,365,299
Stock subscription receivable (3,000)
Accumulated deficit (10,411,323)
------------
Total stockholders' deficit (3,047,533)
------------
$ 2,614,984
============
See notes to consolidated financial statements.
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Stronghold Technologies, Inc. and Subsidiary
Consolidated Statements of Operations
Three months Three months Nine months Nine months
ended ended ended ended
Sep 30, 2003 Sep 30, 2002 Sep 30, 2003 Sep 30, 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
Sales $ 904,254 706,486 2,450,043 1,797,601
Cost of sales 336,611 377,037 937,499 896,486
------------ ------------ ------------ ------------
Gross profit 567,643 329,449 1,512,544 901,115
Selling, general and administration 1,401,070 1,313,249 3,703,924 3,373,317
------------ ------------ ------------ ------------
Loss from operations (833,427) (983,800) (2,191,380) (2,472,202)
Interest expense 223,196 45,327 421,062 155,039
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (1,056,623) $ (1,029,127) $ (2,612,442) $ (2,627,241)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.10) $ (0.11) $ (0.26) $ (0.33)
============ ============ ============ ============
Weighted average number of
common shares outstanding 10,460,333 9,787,834 10,206,182 7,864,625
See notes to consolidated financial statements.
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Stronghold Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Nine months ended September 30, 2003 2002
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(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,612,442) $(2,627,241)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for returns and allowances 63,000 189,000
Depreciation and amortization 106,216 51,737
Non-cash interest expense for issuance of warrants 71,250
Changes in operating assets and liabilities:
Accounts receivable (425,082) (1,040,853)
Other receivables (18,548) 119,710
Inventories 142,612 (235,736)
Prepaid expenses 7,165 (23,136)
Accounts payable (240,829) 241,155
Interest payable, stockholders 168,249
Accrued expenses and other current liabilities 1,159,015 250,165
Other assets (43,047)
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NET CASH USED IN OPERATING ACTIVITIES (1,622,441) (3,075,199)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES,
Payments for purchase of property and equipment (10,859) (81,051)
Payments for software development costs (500,008) (231,292)
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NET CASH USED IN INVESTING ACTIVITIES (510,867) (312,343)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net of financing costs 1,887,968
Proceeds from issuance of common stock, net of financing costs 2,571,678
Proceeds from notes payable, stockholders 616,200 784,000
Principal repayments of notes payable, stockholders (127,089)
Principal repayments of note payable (238,332)
Principal payments for obligations under capital leases (15,594) (4,690)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 2,123,153 3,350,988
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NET INCREASE (DECREASE) IN CASH (10,155) (36,554)
CASH, BEGINNING OF PERIOD 13,384 38,267
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CASH, END OF PERIOD $ 3,229 $ 1,713
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION,
CASH PAID DURING THE PERIOD FOR INTEREST $ 164,120 155,050
=========== ===========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES, During
the nine months ended September 30, 2003 the Company issued 391,736 warrants
in connection with debt
During the nine months ended September 30, 2003, the Company entered into an
agreement to convert $543,000 of notes payable to stockholders into 603,333
shares of common stock.
During the nine months ended September 30, 2003, obligations under capital
leases aggregating $68,392 were incurred when the Company entered into a
lease for computer equipment.
See notes to consolidated financial statements.
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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 nine-month
periods ended September 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
September 30, 2002 results were not separately filed in an amended Form 10-QSB.
The comparative financial statements included herein, are compared to the
corresponding restated September 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
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No. 149 amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133. The Statement is
generally effective for contracts entered into or modified after 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 or
results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 requires certain freestanding financial instruments, such as mandatory
redeemable preferred stock, to be measured at fair value and classified as
liabilities. The provisions of SFAS No. 150 are effective for beginning July 1,
2003. The implementation of this standard is not expected to have a material
impact on the company's financial position or results of operations.
5. STOCK-BASED COMPENSATION
------------------------
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amended SFAS No. 123, "Accounting
for Stock-Based Compensation." This Statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation. It also amends the disclosure provisions to
require more prominent disclosure about the effects on reported net income
(loss) of an entity's accounting policy decisions with respect to stock-based
employee compensation. As permitted by the Statement, the Company does not plan
to adopt the fair value recognition provisions of SFAS No. 123 at this time.
However, the Company has adopted the disclosure provisions of the Statement.
The Company accounts for its stock-based employee compensation plans
under Accounting Principles Board Opinion No. 25, under which no compensation
cost has been recognized in the accompanying consolidated statements of
operations, as all options granted under those plans had an exercise price equal
to or in excess of the market value of the underlying common stock at the date
of grant.
Had compensation cost for these options been determined consistent with
the fair value method provided by SFAS No. 123, the Company's net loss and net
loss per common share would have been the following pro forma amounts for the
three-month and nine-month periods ended September 30, 2003 and 2002.
-5-
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss applicable to common shareholders,
as reported $(1,056,623) $(1,029,127) $(2,612,442) $(2,627,241)
Deduct
Total stock-based compensation expense
determined under fair value method for
all awards, net of related tax effect 23,430 27,122 63,033 41,247
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Pro Forma $(1,080,053) $(1,056,239) $(2,675,475) $(2,668,488)
=========== =========== =========== ===========
Basic and diluted EPS
As reported $ (0.10) $ (0.11) $ (0.26) $ (0.33)
Pro forma $ (0.10) $ (0.11) $ (0.26) $ (0.34)
September 30, 2003 and 2002
The fair value of issued stock options is estimated on the date of
grant using the Black-Scholes option-pricing model including the following
assumptions: expected volatility of 0%, expected dividend yield rate of 0%,
expected life of 10 years, and a risk-free interest rate of 4.91% and 4.68% for
September 30, 2003 and 2002, respectively.
6. GOING CONCERN
-------------
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Since the beginning
of the fiscal year, the Company has incurred a net loss of approximately
$2,612,000 and has negative cash flow from operations of approximately
$1,622,000 for the nine-month period ended September 30, 2003, and has a working
capital deficit of approximately $2,286,000 and a stockholders' deficit of
approximately $3,048,000 as of September 30, 2003. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
During 2003 and 2004, management of the Company will rely on raising additional
capital to fund its future operations. If the Company is unable to generate
sufficient revenues or raise sufficient additional capital, there could be a
material adverse effect on the consolidated financial position, results of
operations and cash flows of the Company. The accompanying consolidated
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
-6-
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
----------------------------------------------
Accrued expenses and other current liabilities consist of the following
at September 30, 2003:
Sales tax $ 60,788
Payroll taxes 878,254
Compensation 85,343
Commissions 210,169
Other accrued expenses 150,104
Deferred maintenance fees 286,262
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Total $1,670,920
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 occurred 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 603,000 shares of the Company's common stock at
a price of $0.90 per share. The value of the warrant modification was treated as
additional costs associated with raising capital and was shown as a reduction of
additional paid-in capital of approximately $557,000 (computed using the
Black-Scholes model with the following assumptions: expected volatility of 0%,
expected dividend yield rate of 0%, expected life of 5 years, and a risk-free
interest rate of 4.91% for September 30, 2003).
9. SUBSEQUENT EVENTS
-----------------
Private Placement
In October 2003, the Company commenced offerings to accredited
investors in private placements of up to $5,000,000 of the Company's Common
Stock. the proceeds of the private placements are to be used for general working
capital. The shares offered in the private placement are to be priced at the 5
trading day trailing average closing price of the Common Stock on the OTCBB,
less 20% ("Purchase Price"). For each share purchased in the private placements,
purchasers will receive a warrant to purchase one half (0.5) share of common
stock at 130% of the Purchase Price. A minimum of $25,000 is required per
investor.
-7-
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 the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" 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. Our reports, proxy statements and
other documents filed electronically with the Securities and Exchange Commission
("SEC") are available at the website maintained by the SEC at
http://www.sec.gov. We also make available free of charge on or through our
Internet website, http://www.strongholdtech.com, our annual, quarterly and
current reports, and, if applicable, amendments to those reports, filed or
furnished pursuant to Section 13(a) of the Exchange Act, as soon as reasonably
practicable after we electronically file
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such reports with the SEC. Information on our website is not a part of this
report. 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
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 wireless technology
business.
Wireless 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 is intended to
increase 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 capturing
a greater percentage of unsold customer prospects and increasing 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 profitability by managing dealer
service operations, customer information and vehicle inventory more effectively
than they are currently managed. 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.
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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.
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;
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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 ended March 31, 2002, adding customers
in New York. In the second quarter ended June 30, 2002, Stronghold installed
another 7 sites, adding customers in Arizona, Southern California and South
Carolina. In the third quarter ended 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 ended December 31, 2002, Stronghold installed an additional 13
dealerships, adding customers in Texas, Indiana and Michigan.
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 realigned
our sales force into geographic markets and hired several experienced industry
veterans as regional business development managers.
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
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the United States, and is continuing to add business development and operations
offices pursuant to an organized growth plan. Stronghold finished 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 generally associated with installation.
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 current version of
DealerAdvance Sales Solution(tm) provides auto dealerships with the ability to
capture and manage prospective customers 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 the first quarter 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) is also 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 a premium-pricing application to
increase revenue per repair order and an application to allow service marketing
through the DealerAdvance(tm) CRM application.
The development plan also includes another application called
DealerAdvance Inventory Management Solution(tm), which is intended to be a
handheld wireless system for the management of new and used car inventory. When
developed, the 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.
-12-
Research and Development
Since inception, we have spent approximately $3,364,023 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.
-13-
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 within its geographic territory units.
Employees
Stronghold currently has a total of 44 full-time employees and 2
part-time employees, of which 26 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 United States. Each Regional Manager is
responsible for recruiting, training and managing the Business Development
Managers in their territories. Each Regional Manager finished the quarter ended
June 30, 2003 with 3 sales associates.
During the quarter ended March 31, 2003, Stronghold promoted two
existing Consultants to the role of Eastern and Western Regional Manager for
Client Services, respectively, 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 who is headquartered 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/A 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
statements regarding the anticipated growth in the markets for our technologies,
the continued development
-14-
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 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 $1,056,670 for the quarter ended September
30, 2003. We had a net operating loss of $833,473 for the quarter ended
September 30, 2003 and a net operating loss of approximately $6,085,785 for the
period from May 17, 2002 through September 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.
-15-
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 third
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
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 provide assurance 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.
-16-
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, 9 sites in the
quarter ended June 30, 2003 and 12 sites for the quarter ended September 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 divided our sales force into
geographic markets and hired several experienced industry veterans as regional
business development managers.
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
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. We have strategically hired
additional sales representatives in the past twelve months, expanding into
Virginia, Southern California, Florida, Ohio and Texas.
-17-
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 a strain on our managerial,
operational and financial resources, and is expected to continue to do so.
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
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 provide assurance
that we will be able to retain existing personnel or attract and retain
additional 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
-18-
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.
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 dependent 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 ceases to be 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
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 we and
have more experience in research and development, sales, service, manufacturing
and marketing. We
-19-
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 patent application is
currently being prepared 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.
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 September 30, 2003, our executive officers and directors had
47.1% of the voting power of the Company on a fully diluted basis. 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
unaffiliated 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.
-20-
We Are Controlled by Our President, Which May Result in Our Other Shareholders
Having No Control in Our Direction or Affairs
As of September 30, 2003, our President and Chief executive Officer had
approximately 46.7% of the voting power of the Company on a fully diluted basis.
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 September 30, 2003, we had 10,460,333 shares of our Common Stock
issued and outstanding. In addition, we had the potential to issue 2,105,875
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.
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.
-21-
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.
Liquidity And Capital Resources
Overview
As of September 30, 2003, our cash balance was $3,229. We had a net
loss of $1,056,670 for the fiscal quarter ended September 30, 2003. We had a net
operating loss of $833,473 for the fiscal quarter ended September 30, 2003 and a
net operating loss of approximately $6,058,785 for the period from May 17, 2002
through September 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 September 30, 2003 was $1,554,533 (less
allowances for doubtful accounts of $170,172), as compared to $1,201,063 for the
quarter ended September 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
-22-
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. In accordance with the
terms of the 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 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.
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.
On May 15, 2002, we entered into a Securities Purchase Agreement with
Stanford Venture Capital Holdings, Inc., referred to herein as Stanford, in
which we issued to Stanford (i) such number of shares of our Series A $1.50
Convertible Preferred Stock, referred to herein as Series A Preferred Stock,
that would in the aggregate equal 20% of the total issued and outstanding shares
of our Common Stock, and (ii) such number of warrants for shares of our Common
Stock that would equal the number of shares of Series A Preferred Stock issued
to Stanford. The total aggregate purchase price for the Series A Preferred Stock
and warrants paid by Stanford was $3,000,000. The issuance of the Series A
Preferred Stock and warrants took place on each of four separate closing dates
(May 16, 2002, July 3, 2002, July 11, 2002, and July 19, 2002), at which we
issued an aggregate of 2,002,750 shares of our Series A Preferred Stock and
warrants for 2,002,750 shares of our Common Stock to Stanford.
On 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.
-23-
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 agreed to pay UnitedTrust Bank all amounts
outstanding under the line of credit. Such promissory note is to be paid in 36
monthly installments, which commenced in February 2003 and is due to terminate
on January 1, 2006. Interest accrues on the note at the prime rate, adjusted
monthly, which is the highest New York City prime rate as is published in The
Wall Street Journal. The initial prime rate that applied to the promissory note
was 4.750%.
During August and September 2002, we entered into 9 subscription
agreements with accredited private investors as defined in Rule 501 of the
Securities Act, pursuant to which we issued an aggregate of 179,333 shares of
our Common Stock at $1.50 per share. These private investments generated total
proceeds to us of $269,000.
On September 30, 2002, we renegotiated the $1,200,000 promissory note
with Mr. Carey 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 was for a period of
twelve months, with all principle due and payable on September 30, 2003. 12.5%
interest on the outstanding principle is due each year. At the end of the loan
period, the Fund will be entitled to exercise 25,000 warrants at $1.50 per
share. 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. 12.5%
interest on the outstanding principle is due each year. At the end of the loan
period, the Fund will be entitled to exercise 25,000 warrants at $1.50 per
share. 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, in exchange for a loan from Mr. Carey in an equal
amount, 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.
-24-
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 $0.90 Convertible Preferred Stock. The issuance of the Series B
Preferred Stock took place on six separate closing dates beginning on May 5,
2003 through September 15, 2003. In connection with the Securities Purchase
Agreement, we agreed to modify the previously issued five-year warrants 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 $0.25 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 $0.90 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 to provide for (i) better cash flow permitted by the reduced payments
and (ii) subordination that will provide flexibility by giving 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 on certain
real property owned by him.
On September 30, 2003, the CC Trust Fund agreed to extend the term of
its loan to December 30, 2003. As of September 30, 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, the AC Trust Fund agreed to extend the term of
its loan to December 30, 2003. As of September 30, 2003, $375,404 was
outstanding. 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.
-25-
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 in the section entitled, "Summary of Discontinued Truffle
Business Operations") 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 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 our Consolidated Financial Statements. The following is a brief discussion of
the more significant accounting policies and methods that we use.
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.
-26-
We evaluate our estimates on an ongoing basis. 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 are billed on a monthly basis. Stronghold provides other
services, including software and report customization, business and operations
consulting, 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 convert 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 an 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,
additional training, and 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, 2002 year-end audited financial statements and
included in our 2002 10-K filing. The corresponding
-27-
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 in
which "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, September 30, 2003, Stronghold
capitalized $171,945 of development costs in developing enhanced functionality
of its DealerAdvance(tm) product.
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND THREE MONTHS ENDED SEPTEMBER 30, 2002.
For the quarter ended September 30, 2003, we had revenue of $902,204
compared to revenue of $706,486 for the quarter ended September 30, 2002. This
represents an increase of $197,768 or 27.99%. The impact of our efforts to
strengthen and realign our sales force during the first half of 2003 positively
impacted revenue and the signing of new dealership customer contracts in the
third quarter. Additionally, the plan that we implemented in the second quarter
whereupon we divided our sales force into geographic markets and hired several
experienced industry veterans as regional business development managers has
improved results.
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
$83,000. 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 $567,593 in gross profits from sales for the quarter ended
September 30, 2003, which was an increase of $238,144 from the quarter ended
September 30, 2002, when we generated $329,449 in gross profits. We were able to
improve our gross profit margin from 46.6 % in the quarter ended September 30,
2002 to 62.8% in the quarter ended June 30, 2003. The
-28-
higher gross 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. Additional 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
September 30, 2003 were $1,401,070, an increase of 6.7% or $87,821 from the
quarter ended September 30, 2002 of $1,313,249. We completed DealerAdvance Sales
Solution(tm) Version 3.3. 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 and penalty expense increased from $45,327 in the quarter
ended September 30, 2002 to $223,196 in the quarter ended September 30, 2003.
This increase of $177,869 was based on the increase in loan amounts outstanding
and accrued payroll tax deposit penalties.
The net loss for the quarter ended September 30, 2003 was $1,056,623
which is an increase of $27,496 from the loss for the quarter ended September
30, 2002 of $1,029,127. The loss per share decreased by $.01 from $.11 loss per
share with a weighted average of 9,787,834 shares outstanding in the quarter
ended September 30, 2002 and $.10 loss per share in the quarter ended September
30, 2003 weighted average of with 10,460,339 shares outstanding.
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.
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
-29-
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.
Item 3. Controls and Procedures
Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of September 30, 2003. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that as of September 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 Chief Financial Officer by persons
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 September 30, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting, other than the promotion of Robert Nawy from Assistant Chief
Financial Officer to Chief Financial Officer on September 1, 2003. Mr. Nawy will
have among his duties the administration and oversight of disclosure procedures.
-30-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
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.
Pursuant to the terms of the Series B Purchase Agreement, the issuance
of the aforementioned Series B Preferred Stock took 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, respectively, 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. On the fifth and sixth closings, which occurred on
August 15, 2003 and September 15, 2003, respectively, the Company issued 222,222
shares of Series B Preferred Stock, and Stanford paid $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 March 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
-31-
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.
In addition, on May 6, 2003, the Company and Stanford 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 3. DEFAULTS UPON SENIOR SECURITIES
None.
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:
-32-
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:
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 proposal was approved by a majority of the shares in
attendance. The results of the vote taken at the annual meeting with respect to
such amendment were as follows:
-33-
Broker
For Against Abstain 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 proposal was approved by a majority of the
shares in attendance. The results of the vote taken at the annual meeting with
respect to such amendment are as follows:
Broker
For Against Abstain 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
ITEM 5. OTHER INFORMATION.
In October 2003, the Company issued a Private Placement offering to
accredited investors to raise up to $3,000,000 for the purposes of providing
general working capital. The purchase price of shares offered shall be based on
the average closing price less 20% of SGHT for the (5) five trading days prior
to the closing date(s) which will be each Friday after 4 p.m. E.S.T. until the
offering is completed or withdrawn by the Company. Shares will be offered as a
unit equal to one share of common stock and a warrant to purchase 0.5 of a share
of common stock in minimum amounts of $25,000 per investor. The warrants will
have a three (3) year term and an exercise price equal to 130% stock purchase
price of the trailing 5-day average OTCBB closing price of the Company's common
stock at the time the Unit was purchased. At the date of filing the 10Q for the
third quarter of 2003, the amount raised by the company under this Private
Placement is $150,000.00.
-34-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index.
(b) Reports on Form 8-K
None.
-35-
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 13th day of
November, 2003.
STRONGHOLD TECHNOLOGIES, INC.
BY: /s/ Christopher J. Carey
--------------------------------------
Name: Christopher J. Carey,
Title: President and Chief Executive
Officer
(principal executive officer)
BY: /s/ Robert M. Nawy
--------------------------------------
Name: Robert M. Nawy
Title: (principal financial officer)
BY: /s/ Karen S. Jackson
--------------------------------------
Name: Karen S. Jackson
Title: Controller (principal
accounting officer)
Dated: As of November 13, 2003
ITEM 6. EXHIBIT INDEX
Exhibit Description Number
------- ------------------
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.