UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
fiscal year ended December 31,
2005
Commission File No. 333-54822
STRONGHOLD
TECHNOLOGIES, INC.
(Exact
Name of Registrant as Specified in Its Charter) |
Nevada
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22-376235
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(State
or Other Jurisdiction of
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(I.R.S.
Employer Identification No.)
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Incorporation
or Organization)
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PO
Box 523, Mendham, NJ
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07945-0523
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(908)
903-1195
(Registrant's
Telephone Number, Including
Area Code)
Securities
registered under Section 12(b) of the Exchange Act: None.
Securities
registered under Section 12(g) of the Exchange Act: None.
Check
whether the Registrant: (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: [_]
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State
Registrant's revenues for fiscal year ended December 31, 2005: $943,735
State
the
aggregate market value of the common stock held by non-affiliates of the
Registrant: $855,553 as of April 7, 2006 based on the closing sales price of
$0.65 on that date.
Indicate
the number of shares outstanding of each of the Registrant's classes of common
stock, as of April 7, 2005:
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Class
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Number
of Shares
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|||
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Common
Stock, $0.0001 par value
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37,688,793
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|||
The
following documents are incorporated by reference into the Annual Report on
Form
10-KSB: None.
Transitional
Small Business Disclosure Format
Yes:
[_]
No: [X]
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F-1
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SAFE
HARBOR STATEMENT
The
statements contained in this Annual Report on Form 10-KSB that are not
historical facts are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 ("the Securities Act"), 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 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 SEC 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.
OUR
HISTORY
We
were
incorporated as a Nevada corporation on September 8, 2000, under the name TDT
Development, Inc. On May 16, 2002, we acquired Stronghold Technologies, Inc.,
a
New Jersey corporation, referred to herein as our "Predecessor Entity", pursuant
to a merger of Stronghold Technologies into our wholly-owned subsidiary, TDT
Stronghold Acquisition Corp., referred to herein as "Acquisition Sub". Our
company, formerly TDT Development, Inc., was a reporting entity at the time.
Its
principals were Pietro Bortolatti, President, CEO and Chairman, Tiziana DiRocco,
Vice-President and Director of European Operations and David Rector, Director.
The merger was an arms length transactions and none of the parties had a prior
existing relationship. As consideration for the merger, we issued 7,000,000
shares of our common stock valued at $.75 per share to the stockholders of
the
Predecessor Entity in exchange for all of the issued and outstanding shares
of
the Predecessor Entity. No fairness opinion was issued in connection with this
merger. Following the merger, Acquisition Sub, the survivor of the merger,
changed its name to Stronghold Technologies, Inc. (NJ) and remains our only
wholly-owned subsidiary. We approved the transaction as the sole shareholder
of
the Acquisition Sub as did the shareholders of the Predecessor Entity.
On
July
11, 2002, we changed our name from TDT Development, Inc. to Stronghold
Technologies, Inc. (NV). On July 19, 2002, we exchanged all of the shares that
we held in our two other wholly-owned subsidiaries, Terre di Toscana, Inc.
and
Terres Toscanes, Inc., which conducted an import and distribution business
specializing in truffle-based food product, for 75,000 shares of our common
stock held by Mr. Pietro Bortolatti, our former president.
Our
principal executive offices mailing address is PO Box 523, Mendham, NJ 07945.
Our telephone number is 908-903-1195 and our Internet address is
www.strongholdtech.com.
OVERVIEW
OF OUR HANDHELD TECHNOLOGY BUSINESS
On
May
16, 2002, we entered the handheld wireless technology business via our
acquisition by merger of the Predecessor Entity. The Predecessor Entity was
founded on August 1, 2000 by Christopher J. Carey, our current Chief Executive
Officer and President, and Lenard J. Berger, Chief Technology Officer and
Salvatore F. D'Ambra, Vice President, Product Development, of our wholly-owned
subsidiary. This founding group has substantial expertise in systems design,
software development, wireless technologies and automotive dealer software
applications. The Predecessor Entity was founded to develop proprietary handheld
wireless technology for the automotive dealer software market. Since the merger
of the Predecessor Entity into our subsidiary, we continue to conduct the
Predecessor Entity's handheld wireless technology business.
We
are
engaged in the business of selling, marketing and installing an Intel based
server that, together with wireless handheld PDA's, manages the auto
dealer-client relationship. Our DealerAdvance(TM) suite of Customer Relationship
Management ("CRM") software has been designed to assist auto dealerships in
collecting cliental contact information, following up on sales prospects and
aiding dealership sales person in finalizing the sale of its automobiles. We
are
in various stages of development of complimentary CRM systems, including a
web
based compliment to DealerAdvance which will provide for the posting of
dealership inventory and other information for prospective buyers.
DESCRIPTION
OF PRODUCTS
Most
auto
dealerships rely on a paper based process to capture its prospects and track
their progress to purchasing a vehicle. This paper process is difficult to
manage due to high turnover and skills of the typical sales force. Management
does not have the tools to determine how many opportunities have been generated
and if they are receiving follow up after leaving the dealership. DealerAdvance
prompts the salesperson to capture more information about each prospect and
advises them of the appropriate follow up activities. When a customer is ready
to purchase a vehicle, the system aids the dealership in completing the sales
through features such as forms printing. Management is able to view dealership
traffic in real-time, by salesperson, and can easily pinpoint deficiencies
in
the capture and follow up process. The DealerAdvance Sales Solution(TM) has
been
designed to allow sales associates of our customers to maintain on the handheld
units and on workstations, a personal calendar and instructions on follow-up
tasks. Sales associates, using the handheld units or a workstation, collect
customer contact information and other data relevant to the customer's
automotive needs.
We
install an Intel based server in a dealership site. The server holds all of
the
customer data and connects to other services used by the dealership. These
services include the legacy IT system used by the dealer (known as the Dealer
Management System), Internet based services such as Internet Customer leads,
telephony management services, and customer address lookup services. We provide
an administrative workstation which includes a driver license scanning station,
a printer for negotiation and purchase forms, letters and reports, and wireless
handheld PDA's for each of the sales people. The company installs a wireless
antennae network (Wi-Fi) with communications coverage of the building and most
of the car lot. The DealerAdvance client application is installed, on the
handhelds, on the administrative workstation and on the existing workstations
in
the sales department.
The
DealerAdvance Sales Solution(TM) provides certain advantages to automobile
dealerships, including:
| o |
convenient
use associated with handheld mobile communications;
|
| o |
use
from existing workstations;
|
| o |
access
to competitive and proprietary industry information from a variety
of
sources, such as convenient access to vehicle identification numbers,
drivers license numbers and reverse telephone number information
which
provides home addresses;
|
| o |
employee
access to sales contracts as well as access to sales and performance
reports; and
|
| o |
allows
integration with existing automotive dealer accounting and business
systems such as ADP and Reynolds and Reynolds.
|
The
DealerAdvance Sales Solution(TM) has been designed to be a comprehensive CRM
system implemented through the use of a wireless handheld device or through
workstations connected to a server that distributes the functional applications
to the units. Sales associates can also maintain on the handheld units or their
workstations a personal calendar and instructions on follow-up tasks. Sales
associates collect customer contact information and other data relevant to
the
customer's automotive needs. The DealerAdvance Sales Solution technology aids
automobile dealerships in making sales transactions quicker and more efficient.
The
DealerAdvance Sales Solution(TM) offers features that aid in automobile sales
and service such as:
| o |
enabling
a high sales capture rate on walk-in, phone-in and Internet customers;
|
| o |
streamlining
and simplifying sales and follow-up processes;
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| o |
providing
current and comprehensive information and data for new and used car
inventory, including information regarding competing products, and
customer history with the dealership;
|
| o |
providing
performance data and analysis on each member of a sales team; and
|
| o |
providing
management with valuable and relevant transaction information on
a
real-time basis.
|
A
user
can enter data via the DealerAdvance application running on any desktop or
handheld unit. Data can be entered into the system typed by the user, through
drivers’ license scanning, or via a DealerAdvance Import tool. Data entered by
the user is transmitted to the server in real time.
The
system contains a "rules" engine which is triggered at different points in
the
sales process. The rules engine updates the activities scheduled for each
customer based on business rules defined by the dealer. For example, when a
new
customer is entered by a user, the system will schedule a letter to be sent
to
the customer and a follow up phone call for the next day. If that same customer
buys a vehicle, the system will remove the letter and follow up call and replace
it with activities appropriate for follow up.
Users
also have the ability to manually schedule activities with a customer. All
activities are displayed on the user's work plan in chronological order. The
user may select any activity, view the details of the activity and customer
information and complete the activity.
The
system will prompt the user to schedule additional activities when completing
follow up with a customer. For example, if the user completes a follow up call
the system will prompt the user to set an appointment. The user can enter a
date
and time for the appointment, schedule an additional follow up call or indicate
that no additional activities are required at this time. The system offers
a
variety of reports to management to show the volume of traffic at the dealership
and if those prospects are receiving follow up in a timely fashion.
The
DealerAdvance Suite includes Master Server Software, which manages all customer
data and access to third party services. One copy of server software is required
for each dealership. DealerAdvance Desktop Application, which is used to access
customer data, present work plans, reports and logs, scan drivers’ licenses, and
manage user access to the system. This application must be installed on each
desktop in the dealership. Each Dealership receives a license to install an
unlimited number of desktops associated with a particular DealerAdvance Server.
DealerAdvance Handheld Application, which is used to access customer data,
present work plans, product comparison and available inventory. Each dealership
must purchase a license of this application for each handheld in use at the
dealership.
The
system has the following features:
| o |
Prospect
capture and profiling, which allows the user to input the required
information, reverse phone lookup, duplicate record checking, electronic
guest sheet and capture signatures electronically.
|
| o |
The
system tracks compliance with National Registry and Dealership specific
DNC (do not call) list. Customers marked "DNC" have phone number
hidden to
avoid accidental calling. In addition, the dealer can print a report
to
insure compliance.
|
| o |
The
system can scan and authenticate driver licenses.
|
| o |
Provides
a call management system for follow ups.
|
| o |
Provides
daily work plan and appointment scheduling with appointments and
calls for
salespeople.
|
| o |
Generates
prospect reports, scoreboard, appointment calendar and activity reports
sorted by salesperson.
|
| o |
Receives
leads from all internet lead sources and manage follow up from DA.
Features include: route leads to a specific user based on lead source,
auto responders, templates, customers using multiple lead sources,
lead
protection.
|
DEALERADVANCE
is compatible with and works with:
| o |
Intel
Based Server running Red Hat Linux
|
| o |
Wireless
Network Access Points (802.11 - WiFi). We supply a model made by
Vivato
but any 802.11b compliant Access Point will work.
|
| o |
Windows
98, 2000, XP.
|
| o |
Magnetic
Stripe Reader or 2D Bar Code Scanner.
|
We
use
commercially available off the shelf products primarily purchased from Dell
and
Compaq. All these products are typically available on demand within reasonable
ordering and receipt cycles that range from one to ten days.
We
installed Version 1.0 of the DealerAdvance Sales Solution(TM) in six pilot
dealerships during 2001. The initial release contained the ability to capture
and display information about a prospective customer, search the dealership
inventory, display competitive product information, a financial calculator,
and
paging functionality from a wireless handheld. Drivers’ license scanning, from a
desktop station, was introduced for the State of California. Stronghold
introduced Version 2.0 of DealerAdvance Sales Solution(TM) at all of its sites
by the end of September 2001. Version 2.0 offered an electronic desk log, email
and internet access from the handheld, printing of correspondence (forms
letters), a reporting engine, the printing of sales forms, and the ability
to
import prospect records from 3rd party sources.
We
introduced Version 3.0 of our software in the quarter ended March 31, 2002.
Version 3.0 introduced the CRM rules engine, which allowed the system to
automatically schedule and manage customer follow up activities for salespeople
based on rules established by the dealership management. Other features included
DMS deal creation (allowing a user to pass information from DealerAdvance to
the
DMS), management reporting, and the expansion of drivers’ license scanning to
include 39 states (through a partnership with Intellicheck).
In
the
quarter ended June 30, 2002, through our wholly owned subsidiary, we introduced
Version 3.1 of the software to improve the communication protocol between the
handheld and the DealerAdvance Server. In the first quarter of 2003, we released
Version 3.2 with new features including reverse phone lookup (via partnership
with Acxiom), searches for duplicate customer records, wireless PDA trade
appraisal, electronic buyers order, nightly download of sold customers from
the
DMS, and customer search. Additional functionality was added to the rules
engine, forms printing, management functions were added to the PDA, 3rd party
data imports, and customer tracking.
Version
3.3, released in August 2003 introduced the concept of a work-plan, which
assists the user in prioritizing follow up for prospective customers. The
work-plan generates a simple daily "to-do" list for each salesperson, which
can
be viewed and updated on the handheld. Version 3.3 also introduced the concept
of "prompted follow up" to guide the salesperson through best of breed follow
up
processes. The salesperson is prompted to indicate the action taken to complete
an activity and to enter a next activity for the customer with the goal of
scheduling a next activity for a prospective customer until they either purchase
a vehicle or indicate they are no longer in the market.
Version
3.4 released in January 2004 introduced integration with WhosCalling? and Call
Bright, the two leading providers of phone call management services. The dealer
is assigned several toll free numbers to place in a specific advertising outlet
(newspaper, TV, radio, etc). When the customer dials the toll free number,
the
call management service identifies the caller’s information (name, address,
demographics) and records the call. The call information and a link to the
call
recording is passed by the call management service to DealerAdvance. Version
3.4
introduced the ability to receive Internet leads in DealerAdvance. An Internet
Manager can view leads and follow up via email with prospective customers that
view the dealer's web site or are passed by 3rd party lead providers. Through
a
subscription service, in Version 3.4, the dealer can maintain their compliance
with the National Do Not Call Regulations managed by the FTC. DealerAdvance
will
automatically determine which customers are safe to call based on the
"established business relationship" rules defined in the regulations. The system
can produce the documentation required to demonstrate compliance.
Version
4.0 released in April 2004 introduced The Dealer Advance (DA) Campaign Manager
feature, designed to provide for the simple, quick, and easy creation of
targeted marketing activities. With DA Campaign Manager, a dealership Sales
Manager or BDC/CDC Manager can define a sales campaign, including:
|
§
|
Target
Audience
|
|
§
|
Personalized
content (text, graphics, web links for click
thru)
|
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§
|
Campaign
Media (letter, email, call, other,
combinations)
|
|
§
|
Follow
Up
|
|
§
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Sales
Contact
|
|
§
|
Frequency
|
The
4.0
release is designed to enable a campaign that is a collection of data which
define a marketing initiative. The software enables the client to create a
Campaign to potential clients captured by the CRM software that include the
Campaign
Target List,
Campaign Material, Content and Client preferences.
From
2002
through 2005, we generally have granted a 60-day performance guarantee period
for each new installation. If performance goals were met, the contracts became
noncancellable for their terms, usually 36 months As of December 31, 2005,
a
total of 83
dealers were using the DealerAdvance Sales Solution(tm), down from 91 as of
December 31, 2004.
This
net
reduction of 8 clients represents 12 contracts that came to their term that
were
not renewed and 4 new client installations. As a result of this first time
reversal in growth, the Company has taken proactive measures to reprice and
reintroduce the software to the buying marketplace. This is detailed in this
Revenues section below. Additionally, in 2006 the Company has discontinued
the
60-day performance period guarantee to coincide with the new
program.
We
will
continue to utilize our direct sales force to market the DealerAdvance Sales
Solution™ on a national basis. We have established a strong presence in several
regions of the United States, and in 2006 we will add business development
managers pursuant to an organized growth plan. As of December 31, 2005, we
had
employees in Northern New Jersey, San Francisco, Washington, DC, Seattle and
Dallas.
NEW
PRODUCT DEVELOPMENTS
We
have
identified five major prospect and customer sources within an auto dealership
that can be leveraged for revenue and profit: walk in showroom traffic, call-in
prospects, internet based leads, the existing owner base of customers and
service prospects. The vision for
DealerAdvance™
is to provide a single solution to attack all of these groups to increase
profitability and improve customer service in the dealership. DealerAdvance™
provides information captured from prospects, and provides automobile
dealerships with the ability to manage prospects and customers through a
disciplined follow-up process.
The
development plan includes the addition of the following applications and
functions:
| o |
With
Version 3.4 introduced in January 2004, we introduced a Call Management
application that allows dealerships to automatically capture and
track
prospects that contact the dealership via phone. This program allows
salespeople to retrieve customer information while talking to the
customer
and to conduct a needs analysis for handling prospect phone calls.
The
Call Management application automatically generates management logs
and
reports designed to identify sales associates that need phone skills
training. In addition, we have partnered with the two leading Call
Management Systems providers, Call Bright and Who's Calling, who
provide
800 number and web based system forwarding functions to DealerAdvance™. We
have created software to poll the web sites for incoming caller ID
and
provide prospect assignment, and comparative analysis relating to
follow
up activities. This application is expected to significantly increase
the
conversion of call-in prospects to customers.
|
| o |
In
Version 3.4 we expanded our offerings to include an initial application
for Internet Lead Management. Most dealerships secure Internet leads
through multiple sources including their own web site, manufacturers'
forwarded leads, and subscription services including Autobytel and
others.
These lead sources are received through DealerAdvance™, which processes a
quick response via email, and then passes qualified leads to sales
associates for phone follow-up leading to appointment setting. We
plan
several enhancements to this application.
|
| o |
In
January 2004, we also introduced an application that lessens potential
violations of the 2003 federal Do Not Call regulations. Our system
automatically and regularly compares the prospect and customers within
the
system to the Do Not Call registry data base. The application also
allows
the dealership personnel to log prospect and customer requests not
to be
contacted. The system deletes from the database telephone numbers
that
match numbers in the Do Not Call database.
|
| o |
In
2006 we will introduce a web based program that will provide for
certain
customized functions for each dealership client to include inventory,
contact information and a promotional credit pull and response. We
expect
to connect the web site functionality to DealerAdvance™ software and the
dealership DMS.
|
OUR REVENUES
Our
revenues are primarily received from system installation, software licenses
and
system maintenance.
Since
the
inception of the Company through the end of 2005, the approximate average
selling package price of the software system and installation has been
approximately $70,000. Additional revenues have been derived from 36 month
system maintenance agreements that have a monthly fee that has averaged $750
per
month and a total contract value of $27,000.
The
revenues derived from these categories from 2002 through 2005 are summarized
below:
| o |
Software
License Revenues: This represents the software license portion of
the
DealerAdvance™ system purchased by our customers. The software and
intellectual property of DealerAdvance™ has been developed and is owned by
us. The average upfront license cost to the customer has been
approximately $35,000.
|
| o |
System
Installation Revenues: This represents the installation and hardware
portion of the DealerAdvance™ system. All project management during the
installation is performed by us. The installation and hardware portions
include cable wiring subcontracted services and off the shelf hardware
and
handheld computers ("PDA"s). The average upfront installation cost
to the
customer has been approximately $35,000.
|
| o |
Monthly
Recurring Maintenance Revenue: This represents the maintenance and
support
contract for the DealerAdvance™ system that the customer executes with the
system installation. The typical maintenance contract is for 36 months
and
is $750.00 per month. The average total 36 month maintenance portion
of
the contact is $27,000. In the four year operating history from 2002
through 205, approximately 50% of all our customers have prepaid
the
maintenance fees through a third party leasing finance company. These
prepaid maintenance fees have provided additional cash flow to us
and have
generated a deferred revenue liability on or balance sheet.
|
Historically,
the average gross profit and cost of sales for the revenues associated with
software licenses and systems installation are summarized in the following
table:
|
Approximate
Average Gross Profit per Installation
|
|||||||
|
Software
License Revenue
|
$
|
35,000
|
|||||
|
System
Installation Revenue
|
$
|
35,000
|
|||||
|
Gross
Revenue per Installation:
|
$
|
70,000
|
|||||
|
Gross
Profit
|
GP
$
|
GP
%
|
|
||||
|
Software
License Revenue
|
$
|
31,500
|
90
|
%
|
|||
|
System
Installation Revenue
|
$
|
12,600
|
36
|
%
|
|||
|
Gross
Revenue per Installation:
|
$
|
44,100
|
63
|
%
|
|||
|
Cost
of Sales
|
|||||||
|
Software
License Revenue
|
$
|
3,500
|
10
|
%
|
|||
|
System
Installation Revenue
|
$
|
22,400
|
64
|
%
|
|||
|
Gross
Revenue per Installation:
|
$
|
25,900
|
37
|
%
|
|||
New
Revenue Plan for 2006 and the future
From
2002
through 2005, we generally have granted a 60-day performance guarantee period
for each new installation. If performance goals were met, the contracts became
noncancellable for their terms, usually 36 months. As of December 31, 2005,
a
total of 83
dealers were using the DealerAdvance Sales Solution(tm), down from 91 as of
December 31, 2004.
This
net
reduction of 8 clients represents 12 contracts that came to their term that
were
not renewed and 4 new client installations. As a result of this first time
reversal in growth, the Company has taken proactive measures to reprice and
reintroduce the software to the buying marketplace. This is detailed in this
section below. Additionally, in 2006 the Company has discontinued the 60-day
performance period guarantee to coincide with the new program.
In
order
to resume the growth periods of client adoption experienced from 2002 through
2004 that reversed in 2005, the Company has created a new revenue plan that
will
enable the dealer to rapidly deploy the software by purchasing a base package
that includes a desktop version only and providing the wireless network
installation as an add on feature.
The
price
point of the software has also been reduced thereby enabling the dealer to
enter
into a contract to utilize the system with a minimal upfront expense and a
reduced contract period that previously averaged 36 months to 12
months.
The
new
plan will include a set up and installation fee for the software of $2,500.00
and a monthly fee of $2,500.00. The monthly fee will include both the services
associated with the customer relationship management (CRM) software and the
maintenance. Approximately $750.00/month of the $2,500/month fee will be
allocated to maintenance and the remaining $1,175.00/month will be allocated
to
customer relationship management (CRM) software. The allocation to maintenance
is consistent with prior evidence of clients paying this amount for many
years.
The
Company will recognize the revenue as earned on a monthly basis as the software
system is used. In the event that a client does not renew use of the system
after 12 months, then the Company will turn off the software and leave the
hardware behind.
In
the
event that the dealer wishes to purchase the wireless network system and
handheld devices, Stronghold will only provide a site license for the wireless
network and a per handheld license. The installation and maintenance of the
wireless network shall be acquired by the dealer from an outsourced vendor
not
related to the Company.
Cost
of Sales under new revenue plan
The
Cost
of Goods Sold for new software sales are as follows:
The
Gross
Profit for new software sales are as follows:
GENERAL
AND ADMINISTRATIVE OPERATING EXPENSES
Our
general operating expenses are primarily comprised of:
| o |
Marketing
and Selling;
|
| o |
General
and Administrative; and
|
| o |
Development
& Operations.
|
MARKETING
AND SELLING
Our
marketing and selling expenses include all labor, sales commissions and
non-labor expenses of selling and marketing of our products and services.
As
a
means to conserve capital and deploy an effective and efficient sale and
marketing plan, the Company entered into a Letter of Intent, in February of
2006
with one of its distribution partners, Humphries Marketing Group (“HMG”), to
provide executive sales and marketing management services. HMG is a boutique
advertising agency primarily focused on the automobile retail industry and
currently has approximately 20 dealer clients nationwide. Humphries also
provides consulting services to members of the National Automobile Dealers
Agency (“NADA”) for advertising and CRM services.
The
agreement signed is a Letter of Intent and the final definitive documents have
not yet been executed, however Stronghold and HMG are operating under the terms
that includes a monthly retainer to HMG of approximately $15,000 per month
plus
travel and a 20% commission payable to HMG.
Additionally,
Russ Stryker, the former VP of Sales of Marketing who was terminated by
Stronghold Technologies in May of 2005 for budgetary reasons, is a member of
HMG
and will also be providing sales management services to the Company through
HMG.
GENERAL
AND ADMINISTRATIVE
Our
general and administrative expenses include expenses for all facilities,
insurance, benefits, telecommunications, legal and auditing expenses are
included as well as the executive management group wage expense.
RESEARCH
AND DEVELOPMENT
Since
our
inception in September 2000, we have spent approximately $4,265,302 on research
and development activities. While we have been successful in meeting planned
goals in the development and introduction of DealerAdvance Sales Solution™ ,
there can be no assurance that our research and development efforts will be
successful with respect to additional products, or if successful, that we will
be able to successfully commercially exploit such additional products.
COMPETITION
RELATED TO HANDHELD TECHNOLOGY BUSINESS
We
do not
believe that we have direct competition for our handheld product. However,
we
expect competitors in the wireless handheld solutions market in the future.
We
compete with the traditional CRM providers and the emerging new CRM providers
in
the retail automotive dealer software market.
Some
of
our potential competitors include:
| o |
Automotive
Directions, a division of ADP Dealer Services, and a provider of
PC-based
customer relationship management systems as well as marketing research
and
consulting services;
|
| o |
Higher
Gear, a provider of client server based front-end sales and customer
relationship management software which serves the retail automotive
industry exclusively;
|
| o |
Autobase,
a provider of PC based front-end software which serves the retail
automotive industry exclusively;
|
| o |
Cobalt
Corporation, a provider of ASP sales prospect management systems
and
customer relationship management systems which services the retail
automotive industry exclusively; and
|
We
believe that our proprietary technology is unique and, therefore, places us
at a
competitive advantage in the industry. However, there can be no assurance that
our competitors will not develop a similar product with properties superior
to
our own or at greater cost-effectiveness.
MARKETING
AND SALES
We
have
identified a target market of approximately 12,000 automobile dealerships in
the
United States that meet the base criteria for our system. More specifically,
we
target a primary market of 6,500 dealerships that sell a minimum of 75 new
and
used cars each month. Generally, our target market consists of midline
dealerships, including brands such as Chevrolet, Ford, Nissan, Volkswagen,
Toyota, Honda, Buick, Pontiac, GMC Trucks, Chrysler and Dodge. The reason for
this is that midline dealers typically have high prospect and customer traffic,
which makes for large untapped prospect opportunities that the client can
leverage through the follow-up process from DealerAdvance™. In addition, these
dealers often have not made significant investments in sales automation and
in
Customer Relationship Management systems.
We
further qualify our market as dealerships with over $15 million in annual
revenue. Obviously, a larger dealership has more traffic, more customer
transactions, more sales people, and can more easily justify the investment.
Finally, we limit our market to dealerships in those parts of the country where
we have sales support coverage.
As
a
means to conserve capital and deploy an effective and efficient sale and
marketing plan, the Company entered into a Letter of Intent, in February of
2006
with one of its distribution partners, Humphries Marketing Group (“HMG”), to
provide executive sales and marketing management services. HMG is a boutique
advertising agency primarily focused on the automobile retail industry and
currently has approximately 20 dealer clients nationwide. Humphries also
provides consulting services to members of the National Automobile Dealers
Agency (“NADA”) for advertising and CRM services.
The
agreement signed is a Letter of Intent and the final definitive documents have
not yet been executed, however Stronghold and HMG are operating under the terms
that includes a monthly retainer to HMG of approximately $15,000 per month
plus
travel and a 20% commission payable to HMG.
Additionally,
Russ Stryker, the former VP of Sales of Marketing who was terminated by
Stronghold Technologies in May of 2005 for budgetary reasons, is a member of
HMG
and will also be providing sales management services to the Company through
HMG.
OUR
INTELLECTUAL PROPERTY
We
have a
trademark for "DealerAdvance™" and have one patent application pending covering
the system for management of information flow in automotive dealerships using
handheld technology. The patent application is currently being reviewed by
the
United States Patent and Trademark Office. We may face unexpected competition
from various sources if our patent is denied however we do not believe this
will
have a material impact on our business.
SUMMARY
OF DISCONTINUED TRUFFLE BUSINESS OPERATIONS
From
our
inception on September 8, 2000, through July 19, 2002, we imported, marketed
and
distributed specialized truffle-based food products, including fresh truffles,
truffle oils, truffle pates, truffle creams and truffle butter, through our
former wholly-owned subsidiaries, Terre di Toscana, Inc. and Terres Toscanes,
Inc. Our target market included retailers such as restaurants, specialty food
stores, delicatessens and supermarkets. We imported products directly from
Italian producers and marketed our products in the specialty food industry
primarily in Florida, South Carolina, North Carolina and California, and also
earned commissions on sales made in Belgium, Holland and Germany. On July 19,
2002, we exchanged all of the shares that we held in our wholly-owned
subsidiaries for 75,000 shares of our Common Stock held by Mr. Pietro
Bortolatti, our former president. As a result of our transfer of our interest
in
the truffle business to Mr. Bortolatti him, we are no longer involved in the
truffle business. The sale of these subsidiaries was part of our effort to
focus
on the handheld technology business.
EMPLOYEES
As
of
December 31, 2005, we had a total of 8 full-time employees, of which 4 are
dedicated to marketing and sales and regional customer support. As of December
31, 2005, 2 in New Jersey, 1 in Texas, 4 in Virginia, 1 in Texas and 1 in
Washington state.
We
have
no collective bargaining arrangements with our employees. We believe that our
relationship with our employees is good.
Risks
Concerning Our Business
We
Have A History Of Incurring Net Losses; We Expect Our Net Losses To Continue
As
A Result Of Planned Increases In Operating Expenses; And, Therefore, We May
Never Achieve Profitability Which May Cause Us To Seek Additional Financing
Or
To Cease Operations.
We
have a
history of operating losses and have incurred significant net losses in each
fiscal quarter since our inception. We had a net loss of $3,632,448 and
$3,029,373 for the fiscal years ended December 31, 2004 and December 31, 2005,
respectively. We have an accumulated net operating loss of approximately
$12,000,000 for the period from May 17, 2002 through December 31, 2005 to offset
future taxable income. Losses prior to May 17, 2002 were passed directly to
the
shareholders and, therefore, are not included in the loss carry-forward. We
expect to continue to incur net losses and negative cash flows for the
foreseeable future. We will need to generate significant additional revenue
to
achieve profitability. Our ability to generate and sustain significant
additional revenues or achieve profitability will depend upon the factors
discussed elsewhere in this "Risk Factors" section, as well as numerous other
factors outside of our control, including:
| o |
Competing
products that are more effective or less costly than ours;
|
| o |
Our
ability to develop and commercialize our own products and technologies;
and
|
| o |
Our
ability to increase sales of our existing products and any new products.
|
It
is
possible that we may never achieve profitability and, even if we do achieve
profitability, we may not sustain or increase profitability in the future.
If we
do not achieve sustained profitability, we may be unable to continue our
operations.
There
Is A Possibility That We Will Be Unable To Obtain Sufficient Funds, Will Incur
A
Cash Flow Deficit, Therefore Our Business
Could Suffer A Loss Of Clients And Employees As Well As A Decrease In Continued
Research And Development Efforts.
We
believe that our current funds and accounts receivable will only be sufficient
for our immediate future, raising substantial doubt about our ability to
continue as a going concern. During 2006, the management of the Company will
rely on receiving the balance of the $1,450,000 committed by the current
investors of Convertible Notes to provide the company with sufficient working
capital for the next 12 months. Of the $1,450,000 committed, $250,000 has
already been infused into the Company leaving a remaining $1,200,000. In the
event that the Company does not meet its business plan in 2006, the balance
of
the remaining $1,200,000 may not satisfy the working capital requirements and
the Company may need to raise additional capital to fund its operations in
the
fourth quarter of 2006. 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.
Since
our
inception, we have financed all of our operations through sales of private
equity, 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; Therefore It Is Difficult To Evaluate Our
Financial Performance And Prospects.
We
were
formed in September 2000 to import and market truffle oil products. As of May
16, 2002, our business purpose focus shifted to the development and marketing
of
handheld wireless technology for the automotive dealer software market. We
entered the handheld wireless technology business through the acquisition of
an
entity with a 23-month operating history. We are, therefore, subject to all
of
the risks inherent in a new business enterprise. Our limited operating history
makes it difficult to evaluate our financial performance and prospects. We
cannot assure you that in the future we will operate profitably or that we
will
have adequate working capital to meet our obligations as they become due.
Because of our limited financial history, we believe that period-to-period
comparisons of our results of operations will not be meaningful in the short
term and should not be relied upon as indicators of future performance.
We
May Fail To Gain Market Acceptance Of Our Products, Therefore Our Business
And
Results Of Operations Could Be Harmed.
We
are
still in the early marketing stages of our DealerAdvance™ suite of products. Our
first pilot system for DealerAdvance Sales Solution™ was installed in April 2001
and our sixth and final pilot system was installed in September 2001. We
implemented a total of 33 additional sites in 2002. As of December 31, 2003,
a
total of 64 Dealerships were using the DealerAdvance Sales Solution™ in 13
states. As of December 31, 2004 a total of 91 Dealerships were using the
DealerAdvance Sales Solution™ and as of December 31, 2005, 83 Dealerships were
using the DealerAdvance Sales Solution™. 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 product and technology requires us to market almost exclusively
to
automobile dealerships. Should any particular dealership or group of dealerships
decide not to utilize our services to the extent anticipated, our business
may
be adversely affected. Large and costly consumer products such as automobiles
are sensitive to broad economic trends. Therefore, our business could suffer
if
automobile dealerships are affected by poor economic conditions. If dealer
sales
are trending downward, capital expenditures, like those associated with our
DealerAdvance™ suite of products, may be delayed or abandoned.
We
Depend On Attracting And Retaining Key Personnel To Maintain Our Competitive
Advantage, Therefore The Loss Of Their Services May Significantly Delay Or
Prevent The Achievement Of Our Strategic Objectives.
In
2005
the Company was unable to retain its Chief Technology Officer, Lenard Berger
and
its Chief Financial Officer, Robert Nawy, the losses of the services of these
executives contributes to this risk of preventing the achievement of Strategic
Objectives.
We
are
highly dependent on the principal members of our management, research and sales
staff. The loss of their services might significantly delay or prevent the
achievement of our strategic objectives. Our success depends on our ability
to
retain key employees and to attract additional qualified employees. Competition
for personnel is intense, and we cannot assure you that we will be able to
retain existing personnel or attract and retain additional highly qualified
employees in the future.
Our
success is dependent on the vision, technological knowledge, business
relationships and abilities of our president, Mr. Carey. Any reduction of Mr.
Carey's role in our business would have a material adverse effect on us. Mr.
Carey's employment contract expired on December 31, 2004. He continues to
function as the Chief Executive Officer and Chairmen of the Board of Directors
Risks
Concerning Our Technology
We
Obtain Products And Services From Third Parties, Therefore An Interruption
In
The Supply Of These Products And Services Could Cause A Decline In Sales Of
Our
Products And Services.
We
are
dependant upon certain providers of software, including Microsoft Corporation,
to provide the operating system for our applications. If there are significant
changes to this software, or if this software stops being available or
supported, we will experience a disruption to our product and development
efforts.
In
designing, developing and supporting our data services, we rely on certain
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 Technology Industry Is Intense And Technology Is Changing Rapidly,
Therefore We May Be Unable To Compete Successfully Against Our Current And
Future Competitors In The Future.
Many
technology and software companies are engaged in research and development
activities relating to our range of products. The market for auto dealership
technology is intensely competitive, rapidly changing and undergoing
consolidation. We may be unable to compete successfully against our current
and
future competitors, which may result in price reductions, reduced profit margins
and the inability to achieve market acceptance for our products. Our competitors
in the field are major international car dealership service companies,
specialized technology companies, and, potentially, our joint venture and
strategic alliance partners. Many of our competitors have substantially greater
financial, marketing, sales, distribution and technical resources than us and
have more experience in research and development, sales, service, manufacturing
and marketing. We anticipate increased competition in the future as new
companies enter the market and new technologies become available. Our technology
may be rendered obsolete or uneconomical by technological advances developed
by
one or more of our competitors.
We
May Not Have Adequately Protected Our Intellectual Property Rights, Therefore
We
May Not Be Successful In Protecting Our Intellectual Property Rights.
Our
success depends on our ability to sell products and services for which we do
not
currently have intellectual property rights. We currently do not have patents
on
any of our intellectual property. We have filed for a patent which protects
a
number of developments pertaining to the management of information flow for
automotive dealer-based software. We plan to file an additional patent
application which will address certain proprietary features pertaining to our
systems components, related equipment and software modules. We cannot assure
you
we will be successful in protecting our intellectual property right through
patent law.
We
rely
primarily on trade secret laws, patent law, copyright law, unfair competition
law and confidentiality agreements to protect our intellectual property. To
the
extent that these avenues do not adequately protect our technology, other
companies could develop and market similar products or services, which could
adversely affect our business.
We
May Be Sued By Third Parties For Infringement Of Their Proprietary Rights,
Therefore We May Incur Defense Costs And Possibly Royalty Obligations Or Lose
The Right To Use Technology Important To Our Business.
The
technology and software industries are characterized by the existence of a
large
number of patents and frequent litigation based on allegations of patent
infringement or other violations of intellectual property rights. As the number
of participants in our market increases, the possibility of an intellectual
property claim against us could increase. Any intellectual property claims,
whether with or without merit, could be time consuming and expensive to litigate
or settle and could divert management attention from the administration of
our
business. A third party asserting infringement claims against the Company or
our
customers with respect to our current or future products may adversely affect
us.
Risks
Relating to Our Current Financing Arrangement:
There
Are
a Large Number of Shares Underlying Our Callable Secured Convertible Notes,
and
Warrants That May be Available for Future Sale and the Sale of These Shares
May
Depress the Market Price of Our Common Stock.
As
of
April 12, 2006, we had 37,688,793 shares of common stock issued and outstanding
and callable secured convertible notes outstanding or an obligation to issue
callable secured convertible notes that may be converted into an estimated
1,026,000,000 shares of common stock at current market prices, and outstanding
warrants or an obligation to issue warrants to purchase 5,530,000 shares of
common stock. In addition, the number of shares of common stock issuable upon
conversion of the outstanding callable secured convertible notes may increase
if
the market price of our stock declines. All of the shares, including all of
the
shares issuable upon conversion of the notes and upon exercise of our warrants,
may be sold without restriction. The sale of these shares may adversely affect
the market price of our common stock. As the market price declines, then the
callable secured convertible notes will be convertible into an increasing number
of shares of common stock resulting in dilution to our shareholders.
The
Continuously Adjustable Conversion Price Feature of Our Callable Secured
Convertible Notes Could Require Us to Issue a Substantially Greater Number
of
Shares, Which Will Cause Dilution to Our Existing Stockholders.
Our
obligation to issue shares upon conversion of our callable secured convertible
notes is essentially limitless. The following is an example of the amount of
shares of our common stock that are issuable, upon conversion of the Notes
(excluding accrued interest), based on market prices 25%, 50% and 75% below
the
average of the three lowest intraday trading prices for our common stock during
the previous 20 trading days as of April 12, 2006 of $0.02.
|
Number
|
|||||||||||||
|
Number
|
%
of
|
||||||||||||
|
%
Below
|
Price
Per
|
With
Discount
|
of
Shares
|
Outstanding
|
|||||||||
|
Market
|
Share
|
at
75%
|
Issuable
|
Stock
|
|||||||||
|
25%
|
$
|
.0150
|
$
|
.0038
|
1,368,000,000
|
97.32
|
%
|
||||||
|
50%
|
$
|
.0100
|
$
|
.0025
|
2,052,000,000
|
98.20
|
%
|
||||||
|
75%
|
$
|
.0050
|
$
|
.0013
|
4,104,000,000
|
99.09
|
%
|
||||||
As
illustrated, the number of shares of common stock issuable upon conversion
of
our secured convertible notes will increase if the market price of our stock
declines, which will cause dilution to our existing stockholders.
The
Continuously Adjustable Conversion Price feature of our Callable Secured
Convertible Notes May Encourage Investors to Make Short Sales in Our Common
Stock, Which Could Have a Depressive Effect on the Price of Our Common
Stock.
The
callable secured convertible notes are convertible into shares of our common
stock at a 75% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the common stock
as the selling stockholder converts and sells material amounts of common stock
could encourage short sales by investors. This could place further downward
pressure on the price of the common stock. The selling stockholder could sell
common stock into the market in anticipation of covering the short sale by
converting their securities, which could cause the further downward pressure
on
the stock price. In addition, not only the sale of shares issued upon conversion
or exercise of notes, warrants and options, but also the mere perception that
these sales could occur, may adversely affect the market price of the common
stock.
The
Issuance of Shares Upon Conversion of the Callable Secured Convertible Notes
and
Exercise of Outstanding Warrants May Cause Immediate and Substantial Dilution
to
Our Existing Stockholders.
The
issuance of shares upon conversion of the callable secured convertible notes
and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although the selling stockholders
may not convert their callable secured convertible notes and/or exercise their
warrants if such conversion or exercise would cause them to own more than 4.99%
of our outstanding common stock, this restriction does not prevent the selling
stockholders from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, the selling stockholders
could sell more than this limit while never holding more than this limit. There
is no upper limit on the number of shares that may be issued which will have
the
effect of further diluting the proportionate equity interest and voting power
of
holders of our common stock, including investors in this offering.
If
We Are Required for any Reason to Repay Our Outstanding Callable Secured
Convertible Notes, We Would Be Required to Deplete Our Working Capital, If
Available, Or Raise Additional Funds. Our Failure to Repay the Callable Secured
Convertible Notes, If Required, Could Result in Legal Action Against Us, Which
Could Require the Sale of Substantial Assets.
We
entered three Securities Purchase Agreements for the sale of an aggregate of
$5,130,000 principal amount of callable secured convertible notes. The callable
secured convertible notes are due and payable, with 12% interest, two years
from
the date of issuance, unless sooner converted into shares of our common stock.
In addition, any event of default such as our failure to repay the principal
or
interest when due, our failure to issue shares of common stock upon conversion
by the holder, our failure to timely file a registration statement or have
such
registration statement declared effective, breach of any covenant,
representation or warranty in the Securities Purchase Agreement or related
convertible note, the assignment or appointment of a receiver to control a
substantial part of our property or business, the filing of a money judgment,
writ or similar process against our company in excess of $50,000, the
commencement of a bankruptcy, insolvency, reorganization or liquidation
proceeding against our company and the delisting of our common stock could
require the early repayment of the callable secured convertible notes, including
a default interest rate of 15% on the outstanding principal balance of the
notes
if the default is not cured with the specified grace period. We anticipate
that
the full amount of the callable secured convertible notes will be converted
into
shares of our common stock, in accordance with the terms of the callable secured
convertible notes. If we are required to repay the callable secured convertible
notes, we would be required to use our limited working capital and raise
additional funds. If we were unable to repay the notes when required, the note
holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
Risks
Relating to Our Common Stock:
If
We
Fail to Remain Current on Our Reporting Requirements, We Could be Removed From
the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to Sell
Our Securities and the Ability of Stockholders to Sell Their Securities in
the
Secondary Market.
Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board. If we fail to remain current on our
reporting requirements, we could be removed from the OTC Bulletin Board. As
a
result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary
market.
Risks
Concerning Our Capital Structure
We
are
controlled by our President, which, therefore, may result in shareholders having
no control over our direction or affairs.
As
of
December 31, 2005, our President and Chief Executive Officer holds approximately
61% of the voting power of the Company. 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 could 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.
We
do not
intend to pay cash dividends on our shares of Common Stock, therefore our
stockholders will not be able to receive a return on their shares unless they
sell them.
We
have
never declared or paid dividends on our Common Stock and we do not intend to
pay
any Common Stock dividends in the foreseeable future. We 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 A Penny Stock And Therefore May Be Difficult To Sell.
Our
stock
is a penny stock. The SEC generally defines a penny stock as 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. The market price
of
our Common Stock is currently less than $5.00 per share. The SEC "penny stock"
rules govern the trading of our Common Stock. These rules require, among other
things, that any broker engaging in a purchase or sale of 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 sell our Common Stock. Because
the
broker, not us, prepares this information, we cannot assure that such
information is accurate, complete or current.
We
do not
currently own any real property.
The
Company leases
facilities under an operating lease which expires in January, 2008 and provides
for annual base rental of $25,416 plus a proportionate share of operating costs
and other expenses. Future aggregate minimum annual rent payments under these
leases are approximately as follows:
|
Year
ending December 31,
|
||||
|
2006
|
$
|
25,586
|
||
|
2007
|
26,612
|
|||
|
2008
|
22,910
|
|||
|
$
|
75,108
|
|||
Rent
expense was approximately $90,000 and $107,000 for the years ended December
31,
2005 and 2004, respectively.
From
time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. Except as disclosed below,
we are currently not aware of any such legal proceedings or claims that we
believe will have, individually or in the aggregate, a material adverse affect
on our business, financial condition or operating results.
None.
Our
Common Stock is traded on the OTC Bulletin Board, referred to herein as the
OTCBB, under the symbol "SGHT". The following table sets forth the high and
low
bid prices of our Common Stock, as reported by the OTCBB for each quarter since
January 1, 2002. The quotations set forth below reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not represent actual
transactions.
|
2004
|
High
|
Low
|
|||||
|
January
1, 2004 - March 31, 2004
|
$
|
0.85
|
$
|
0.45
|
|||
|
April
1, 2004 - June 30, 2004
|
$
|
0.60
|
$
|
0.24
|
|||
|
July
1, 2004 - September 30, 2004
|
$
|
0.27
|
$
|
0.11
|
|||
|
October
1, 2004 - December 31, 2004
|
$
|
0.40
|
$
|
0.11
|
|||
|
2005
|
High
|
Low
|
|||||
|
January
1, 2005 - March 31, 2005
|
$
|
0.23
|
$
|
0.02
|
|||
|
April
1, 2005 - June 30, 2005
|
$
|
0.09
|
$
|
0.01
|
|||
|
July
1, 2005 - September 30, 2005
|
$
|
0.10
|
$
|
0.04
|
|||
|
October
1, 2005 - December 31, 2005
|
$
|
0.04
|
$
|
0.03
|
|||
We
have
appointed Continental Stock Transfer & Trust Company, 17 Battery Place, New
York, New York 10004, as transfer agent for our shares of Common Stock.
Item
6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF
OPERATIONS
This
section provides a narrative on the Company's operating performance, financial
condition and liquidity and should be read in conjunction with the accompanying
financial statements. Certain statements under the caption "Management's
Discussion and Analysis and Results of Operation" constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. See
"Risk Factors-Cautionary Note Regarding Forward Looking Statements". For a
more
complete understanding of our operations see "Risk Factors" and "Description
of
Business".
OUR
HISTORY
We
were
incorporated as a Nevada corporation on September 8, 2000, under the name TDT
Development, Inc. On May 16, 2002, we acquired Stronghold Technologies, Inc.,
a
New Jersey corporation, referred to herein as our "Predecessor Entity", pursuant
to a merger of Stronghold Technologies into our wholly-owned subsidiary, TDT
Stronghold Acquisition Corp., referred to herein as "Acquisition Sub". Our
company, formerly TDT Development, Inc., was a reporting entity at the time.
Its
principals were Pietro Bortolatti, President, CEO and Chairman, Tiziana DiRocco,
Vice-President and Director of European Operations and David Rector, Director.
The merger was an arms length transactions and none of the parties had a prior
existing relationship. As consideration for the merger, we issued 7,000,000
shares of our common stock valued at $.75 per share to the stockholders of
the
Predecessor Entity in exchange for all of the issued and outstanding shares
of
the Predecessor Entity. No fairness opinion was issued in connection with this
merger. Following the merger, Acquisition Sub, the survivor of the merger,
changed its name to Stronghold Technologies, Inc. (NJ) and remains our only
wholly-owned subsidiary. We approved the transaction as the sole shareholder
of
the Acquisition Sub as did the shareholders of the Predecessor Entity.
On
July
11, 2002, we changed our name from TDT Development, Inc. to Stronghold
Technologies, Inc. (NV). On July 19, 2002, we exchanged all of the shares that
we held in our two other wholly-owned subsidiaries, Terre di Toscana, Inc.
and
Terres Toscanes, Inc., which conducted an import and distribution business
specializing in truffle-based food product, for 75,000 shares of our common
stock held by Mr. Pietro Bortolatti, our former president.
Our
principal executive offices mailing address is PO Box 523, Mendham, NJ 07945.
Our telephone number is 908-903-1195 and our Internet address is
www.strongholdtech.com.
OVERVIEW
OF OUR HANDHELD TECHNOLOGY BUSINESS
On
May
16, 2002, we entered the handheld wireless technology business via our
acquisition by merger of the Predecessor Entity. The Predecessor Entity was
founded on August 1, 2000 by Christopher J. Carey, our current Chief Executive
Officer and President, and Lenard J. Berger, Chief Technology Officer and
Salvatore F. D'Ambra, Vice President, Product Development, of our wholly-owned
subsidiary. This founding group has substantial expertise in systems design,
software development, wireless technologies and automotive dealer software
applications. The Predecessor Entity was founded to develop proprietary handheld
wireless technology for the automotive dealer software market. Since the merger
of the Predecessor Entity into our subsidiary, we continue to conduct the
Predecessor Entity's handheld wireless technology business.
We
are
engaged in the business of selling, marketing and installing an Intel based
server that, together with wireless handheld PDA's, manages the auto
dealer-client relationship. Our DealerAdvance(TM) suite of Customer Relationship
Management ("CRM") software, has been designed to assist auto dealerships in
collecting cliental contact information, following up on sales prospects and
aiding dealership sales person in finalizing the sale of its automobiles. We
are
in various stages of development of complimentary CRM systems for our handheld
devices, including the DealerAdvance Service Solution(TM), which is designed
to
manage dealer service operations, customer information and vehicle inventory.
We
are designing our products to be functionally equivalent to the devices used
by
automobile rental agencies in which automobile return and checkout is automated
using scanning and other point of sale technology.
OUR
REVENUES
Our
revenues are primarily received from system installation, software licenses
and
system maintenance.
Since
the
inception of the Company through the end of 2005, the approximate average
selling package price of the software system and installation has been
approximately $70,000. Additional revenues have been derived from 36 month
system maintenance agreements that have a monthly fee that has averaged $750
per
month and a total contract value of $27,000.
The
revenues derived from these categories from 2002 through 2005 are summarized
below:
| o |
Software
License Revenues: This represents the software license portion of
the
Dealer Advance Service Solution purchased by our customers. The software
and intellectual property of Dealer Advance has been developed and
is
owned by us. The average upfront license cost to the customer has
been
approximately $35,000.
|
| o |
System
Installation Revenues: This represents the installation and hardware
portion of the Dealer Advance Service Solution. All project management
during the installation is performed by us. The installation and
hardware
portions include cable wiring subcontracting services and off the
shelf
hardware and handheld computers ("PDA"s). The average upfront installation
cost to the customer has been approximately $35,000.
|
| o |
Monthly
Recurring Maintenance Revenue: This represents the maintenance and
support
contract for the Dealer Advance Service Solution that the customer
executes with the system installation. The typical maintenance contract
is
for 36 months and is $750.00 per month. The average total 36 month
maintenance portion of the contact is $27,000. In the four year operating
history from 2002 through 205, approximately 50% of all our customers
have
prepaid the maintenance fees through a third party leasing finance
company. These prepaid maintenance fees have provided additional
cash flow
to us and have generated a deferred revenue liability on or balance
sheet.
|
Historically,
Cost of Sales for software licensing with the installation are estimated at
10%
of revenue for reproduction, minor customer specific configurations and the
setup cost of interface with the customers DMS. Cost of sales for the system
installation has included direct labor and travel, subcontractors and third
party hardware.
Historically,
the average gross profit and cost of sales for the revenues associated with
software licenses and systems installation are summarized in the following
table:
|
Approximate
Average Gross Profit per Installation
|
|||||||
|
Software
License Revenue
|
$
|
35,000
|
|||||
|
System
Installation Revenue
|
$
|
35,000
|
|||||
|
Gross
Revenue per Installation:
|
$
|
70,000
|
|||||
|
Gross
Profit
|
GP
$
|
GP
%
|
|
||||
|
Software
License Revenue
|
$
|
31,500
|
90
|
%
|
|||
|
System
Installation Revenue
|
$
|
12,600
|
36
|
%
|
|||
|
Gross
Revenue per Installation:
|
$
|
44,100
|
63
|
%
|
|||
|
Cost
of Sales
|
|||||||
|
Software
License Revenue
|
$
|
3,500
|
10
|
%
|
|||
|
System
Installation Revenue
|
$
|
22,400
|
64
|
%
|
|||
|
Gross
Revenue per Installation:
|
$
|
25,900
|
37
|
%
|
|||
New
Revenue Plan for 2006 and the future
From
2002
through 2005, we generally have granted a 60-day performance guarantee period
for each new installation. If performance goals were met, the contracts became
noncancellable for their terms, usually 36 months. As of December 31, 2005,
a
total of 83
dealers were using the DealerAdvance Sales Solution(tm), down from 91 as of
December 31, 2004.
This
reduction net reduction of 8 clients represents 12 contracts that came to their
term that were not renewed and 4 new client installations. As a result of this
first time reversal in growth, the Company has taken proactive measures to
reprice and reintroduce the software to the buying marketplace. This is detailed
in this section below. Additionally, in 2006 the Company has discontinued the
60-day performance period guarantee to coincide with the new
program.
In
order
to resume the growth periods of client adoption experienced from 2002 through
2004 that reversed in 2005, the Company has created a new revenue plan that
will
enable the dealer to rapidly deploy the software by purchasing a base package
that includes a desktop version only and providing the wireless network
installation as an add on feature.
The
price
point of the software has also been reduced thereby enabling the dealer to
enter
into a contract to utilize the system with a minimal upfront expense and a
reduced contract period that previously averaged 36 months to 12
months.
The
new
plan will include a set up and installation fee for the software of $2,500.00
and a monthly fee of $2,500.00. The monthly fee will include both the services
associated with the customer relationship management (CRM) software and the
maintenance. Approximately $750.00/month of the $2,500/month fee will be
allocated to maintenance and the remaining $1,175.00/month will be allocated
to
customer relationship management (CRM) software. The allocation to maintenance
is consistent with prior evidence of clients paying this amount for many
years.
The
Company will recognize the revenue as earned on a monthly basis as the software
system is used. In the event that a client does not renew use of the system
after 12 months, then the Company will turn off the software and leave the
hardware behind.
In
the
event that the dealer wishes to purchase the wireless network system and
handheld devices, Stronghold will only provide a site license for the wireless
network and a per handheld license. The installation and maintenance of the
wireless network shall be acquired by the dealer from an outsourced vendor
not
related to the Company.
Cost
of Sales under new revenue plan
The
Cost
of Goods Sold for new software sales are as follows:
The
Gross
Profit for new software sales are as follows:
GENERAL
AND ADMINISTRATIVE OPERATING EXPENSES
Our
general operating expenses are primarily comprised of:
| o |
Marketing
and Selling;
|
| o |
General
and Administrative; and
|
| o |
Development
& Operations.
|
MARKETING
AND SELLING
Our
marketing and selling expenses include all labor, sales commissions and
non-labor expenses of selling and marketing of our products and services.
As
a
means to conserve capital and deploy an effective and efficient sale and
marketing plan, the Company entered into a Letter of Intent, in February of
2006
with one of its distribution partners, Humphries Marketing Group (“HMG”), to
provide executive sales and marketing management services. HMG is a boutique
advertising agency primarily focused on the automobile retail industry and
currently has approximately 20 dealer clients nationwide. Humphries also
provides consulting services to members of the National Automobile Dealers
Agency (“NADA”) for advertising and CRM services.
The
agreement signed is a Letter of Intent and the final definitive documents have
not yet been executed, however Stronghold and HMG are operating under the terms
that includes a monthly retainer to HMG of approximately $15,000 per month
plus
travel and a 20% commission payable to HMG.
Additionally,
Russ Stryker, the former VP of Sales of Marketing who was terminated by
Stronghold Technologies in May of 2005 for budgetary reasons, is a member of
HMG
and will also be providing sales services to the Company through
HMG.
GENERAL
and ADMINISTRATIVE
Our
general and administrative expenses include expenses for all facilities,
insurance, benefits, telecommunications, legal and auditing expenses are
included as well as the executive management group wage expense.
DEVELOPMENT
and OPERATIONS
Our
development & operations expenses include the expenses for the Client
Consultant group which advises and supports the installations of our
Dealer
Advance(TM)
clients.
Bad
debt
expenses are also included under Selling, General and Administrative Expenses.
The policy for recognition of bad debt expenses established for the year end
December 31, 2003 is still in effect for 2005, however with the new Revenue
plan
described in the revenue section that includes the discontinuity of the Right
of
Retrun, the policy sections regarding the right of return will no longer be
required in the future.
This
policy had been established utilizing the amount of future returns estimated
based on historical calculations, technology obsolescence and return period.
The
policy for reserves for doubtful accounts was set at 20% of our accounts
receivables to accountfor estimated rights of returns and uncollectible
accounts. This was based on a historical return rate of 18% for 2003 and 16%
in
2004. In the first full operating year of 2002 the return rate was 25%. The
estimate for total returns
in
the
life of our company as of September 30, 2005 is 24 returns on 119 sales for
a
return rate of 20.16% for the life of operations. In recognizing revenue, we
consider the following factors:
| o |
Our
price to the buyer is substantially fixed or determinable at the
date of
sale as evidenced by the contract signed for each sales and the terms
and
conditions of each;
|
| o |
The
buyer has paid our company and the buyers obligation is not contingent
on
resale of the product;
|
| o |
The
buyer's obligation to our company would not be changed in the event
of
theft or physical destruction or damage of the
product;
|
| o |
The
buyer acquiring the product for resale has economic substance apart
from
that provided by our company;
|
| o |
we
do not have significant obligations for future performance to directly
bring about resale of the product by the buyer;
and
|
| o |
The
amount of future returns can be reasonably estimated based on historical
calculations, technology obsolescence and return
period.
|
YEAR
ENDED DECEMBER 31, 2005 AND YEAR ENDED DECEMBER 31,
2004.
Revenue
For
the
year ended December 31, 2005 we had revenue of $943,735 compared with revenue
of
$2,489,790 for the year ended December 31, 2004 for a decrease of 62%. Revenue
is generated from software license and system installation, maintenance support
and service revenues. Revenues for the years ended December 31, 2005 and
December 31, 2004 are broken down as follows:
|
2005
|
2004
|
$
Change
|
%
Change
|
||||||||||
|
Software
License & System Installation
|
$
|
288,200
|
$
|
1,923,523
|
$
|
(1,635,323
|
)
|
-85
|
%
|
||||
|
Support
& Maintenance
|
$
|
605,723
|
$
|
528,887
|
$
|
76,835
|
15
|
%
|
|||||
|
Services
|
$
|
49,812
|
$
|
37,380
|
$
|
12,432
|
33
|
%
|
|||||
|
Total
Revenue
|
$
|
943,735
|
$
|
2,489,790
|
$
|
(1,546,055
|
)
|
-62
|
%
|
||||
Software
license and system installation revenue decreased $1,623,323 in 2005to $288,200
as compared to $1,923,523 in 2004 for a decrease of 85%. The company installed
4
sites in 2005 with an average sales price of $51,000 as compared to 27 sites
in
2003, with an average sales price of $58,000. The primary reasons for the
decrease in revenue can be attributed to 1) a reduction in the number of sales
people due to budget constraints and lack of capital which resulted in fewer
new
dealership sales and 2) repeated concerns in the marketplace about the Company’s
ability to continue as a going concern.
Support
and maintenance revenues increased $76,835 in 2005 to $605,723 as compared
to
$528,887 in 2004 for an increase of 15%. This increase was attributable to
an
increase of 9 sites under maintenance contracts from 84 at the end of 2004
to a
maximum of 93 during 2005. Eleven maintenance contracts expired in the
4th
quarter
of 2005.
Services
revenue consisting of 3rd
party
subscription services increased $12,432 in 2005 to $49,812 as compared to
$37,380 in 2004 for an increase of 45%. The increase is attributable to demand
for services such as Do Not Call and reverse phone lookup.
Given
that the company has continued to generate losses and are reliant on raising
capital to support operations, the continued loss of momentum may cause us
our
revenues to continue to decrease.
Cost
of Sales
Cost
of
sales on a percentage of revenue basis was increased 0.86%% to 34.37% of revenue
for the twelve months ended December 31, 2005 as compared to 33.51% of revenue
for the twelve months ended December 31, 2004. The table below shows the Cost
of
Sales and percentage by category and the comparison in dollars and percentage
for the twelve months ended December 31, 2005 and twelve months ended December
31, 2004.
|
2005
|
2004
|
2005
|
2004
|
|||||||||||||
|
Cost
of Sales
|
Dollars
|
Dollars
|
%
of Revenue
|
%
of Revenue
|
%
Change
|
|||||||||||
|
Hardware
Components
|
$
|
90,957
|
$
|
341,245
|
9.64
|
%
|
13.71
|
%
|
-4.07
|
%
|
||||||
|
Client
Software & Licensing
|
39,631
|
97,537
|
4.20
|
%
|
3.92
|
%
|
0.28
|
%
|
||||||||
|
Distribution
Fees
|
3,274
|
11,810
|
0.35
|
%
|
-
|
0.35
|
%
|
|||||||||
|
Subcontractors
|
21,941
|
28,987
|
2.32
|
%
|
1.16
|
%
|
1.16
|
%
|
||||||||
|
Misc
Installation Costs
|
3,971
|
6,661
|
0.42
|
%
|
0.27
|
%
|
0.15
|
%
|
||||||||
|
Installations/Travel
|
29,063
|
149,243
|
3.08
|
%
|
5.99
|
%
|
-2.91
|
%
|
||||||||
|
Repairs
|
80
|
895
|
0.01
|
%
|
0.04
|
%
|
-0.03
|
%
|
||||||||
|
Shipping
|
15,630
|
41,677
|
1.66
|
%
|
1.67
|
%
|
-0.02
|
%
|
||||||||
|
Labor
|
119,813
|
156,295
|
12.70
|
%
|
6.28
|
%
|
6.42
|
%
|
||||||||
|
Total
Cost of Sales
|
$
|
324,360
|
$
|
834,350
|
||||||||||||
|
Total
Cost of Sales % of Revenue
|
34.37
|
%
|
33.51
|
%
|
0.86
|
%
|
||||||||||
Gross
Profits
We
generated $619,376 in gross profits from sales for the year ended December
31,
2005, which was a decrease of $1,036,065 from the year ended December 31, 2004,
when we generated $1,655,441 in gross profits. Our gross profit margin
percentage decreased by 1.14% from 66.49% in the year ended December 31, 2004
to
65.63% in the year ended December 31, 2005.
Selling,
General and Administrative Expenses
Total
Selling, General and Administrative expenses in the year ended December 31,
2005
were $2,732,954, a decrease of 35.32% or $1,492,698 from the year ended December
31, 2004 of $4,225,652. The significant reduction in expense is primarily
attributable to efficiencies gained through the reduction of staff from 21
on
December 31, 2004 to 8 in the year ended December 31, 2005. The significant
reduction in staffing resulted in a reduction of payroll expenses of $701,255,
which was the largest portion of the $1,492,698 reduction. Other significant
expense reductions within selling, general and administrative expenses for
the
year ended December 31, 2005 and December 31, 2004 included reductions as
follows:
|
·
|
legal
expenses of $36,541
|
|
·
|
printing
and reproduction expenses of $40,427
|
|
·
|
travel
and automobile expenses reductions of
$175,504
|
|
·
|
marketing
expenses of $47,047.
|
|
·
|
employee
benefits of $60,192
|
|
·
|
consultant
expenses of $26,853
|
Our
interest and penalty expense increased from $327,429 in the year ended December
31, 2004 to $747,383 in the year ended December 31, 2005. This increase of
$419,954 is primarily due to interest expense attributed to the AJW Convertible
Notes.
Operating
Loss
The
Company’s operating losses decreased by $456,632 in comparing the year ended
December 31, 2005 to the year ended December 31, 2004, which were $2,113,579
and
$2,570,211, respectively. This improvement in operating loss despite the
significant reduction in revenues is due to the significant reductions of
selling, general and administrative expenses of $1,492,698.
Net
Loss
We
had a
net loss of $3,632,448 for the year ended December 31, 2005 compared to
$3,029,373 the year ended December 31, 2004, an increase in the net loss of
$603,075. This increase of net loss of 19.9% is attributable to a decrease
of
revenue, increased interest expense and liquidated damages associated with
the
convertible debt Registration Rights Agreement. Our loss per share also reduced
to $.17 loss per share with a weighted average of 16,997,444 shares outstanding
in the year ended December 31, 2005 as compared to $0.21 loss per share in
the
year ended December 31, 2004 with a weighted average of 14,081,263 shares
outstanding.
We
have
never declared or paid any cash dividends on our common stock. We anticipate
that any earnings will be retained for development and expansion of our business
and we do not anticipate paying any cash dividends in the foreseeable future.
Our board of directors, subject to any restrictions or prohibitions that may
be
contained in our loan or preferred stock agreements, has sole discretion to
pay
dividends based on our financial condition, results of operations, capital
requirements, contractual obligations and other relevant factors.
FINANCIAL
CONDITION
LIQUIDITY
AND CAPITAL RESOURCES
OVERVIEW
As
of
December 31, 2005, our cash balance was $67,060.We had a net loss of $3,632,448
for the fiscal year ended December 31, 2005. We had a net operating loss of
approximately $12,000,000 for the period from May 17, 2002 through December
31,
2005 to offset future taxable income. Losses incurred prior to May 17, 2002
were
passed directly to the shareholders and, therefore, are not included in the
loss
carry-forward. There can be no assurance, however, that we will be able to
take
advantage of any or all tax loss carry-forwards, in future fiscal years. Our
accounts receivable as of December 31, 2005, less allowance for doubtful
accounts of $60,000, was $43,437, and $523,689 as of the year ended December
31,
2004, less allowances for doubtful accounts of $219,891,.The reason for the
decrease in accounts receivable of $420,252 when comparing accounts receivable
as of December 31, 2005 to December 31, 2004 was due to the decrease in
revenues, a faster collection cycle and elimination of 30 to 60 day performance
period Accounts receivable balances represent amounts owed to us for
maintenance, service, training services, software customization and additional
systems components.
As
of
December 31, 2005, we had the following financing arrangements:
|
Debt
Liability Summary Table
|
|
|||
|
Current
Debt liabilities
|
|
|||
|
IRS
Payment Plan
|
329,830
|
|||
|
Interest
payable, stockholders (founding shareholder)
|
1,039,315
|
|||
|
Notes
payable, stockholders, current portion (founding
shareholder)
|
1,352,531
|
|||
|
Total
Debt current liabilities
|
3,227,576
|
|||
|
|
||||
|
Long-term
Debt liabilities
|
||||
|
Notes
payable, stockholders, less current portion (founding shareholder
and
Stanford)
|
875,000
|
|||
|
Note
payable, convertible debt
|
4,496,389
|
|||
|
IRS
Payment Plan (Long term portion)
|
45,000
|
|||
|
Total
long term Debt liabilities
|
5,416,389
|
|||
With
respect to liabilities for real property leases, the following table summarizes
these obligations:
|
Months
|
Balance
|
||||||||||||
|
Location
|
Date
|
Term
|
Remaining
|
on
Lease
|
|||||||||
|
VA
|
11/4/2005
|
36
mos
|
34
|
$
|
97,622
|
||||||||
FINANCING
NEEDS
To
date,
we have not generated revenues in excess of our operating expenses. We have
not
been profitable since our inception; we expect to incur additional operating
losses in the future and will require additional financing to continue the
development and commercialization of our technology. We have incurred a net
loss
of approximately $3,632,000 and have negative cash flows from operations of
approximately $2,398,000 for the year ended December 31, 2005, and have a
working capital deficit of approximately $5,879,000 and a stockholders' deficit
of approximately $10,712,000 as of December 31, 2005. These conditions raise
substantial doubt about our ability to continue as a going concern. During
2006,
our management will rely on raising additional capital to fund its future
operations. If we are unable to generate sufficient revenues or raise sufficient
additional capital, there could be a material adverse effect on the consolidated
financial position, results of operations and we may be unable to continue
our
operations.
As
of
April 11, 2006, we had a commitment for an additional $1,200,000 financing
with
the issuance of a convertible note financing of which $200,000 shall be
purchased in April 2006 and May 2006 and $100,000 of notes shall be purchased
on
the final business day of each month from the period of June 2006 through
January 2007.,
We
expect
that the remaining $1,200,000 will provide the necessary cash to support
operations throughout 2005 and throughout the first quarter of 2006. In the
event that the company is unable to maintain its sales volume, collect current
receivables and sustain operations until the final $1,200,000 is received,
we
may be unable to continue operations. Additionally, in the event that the
Investors invoke their right to terminate additional purchases with 30 days
notice during the financing period of the $1,200,000 detailed above, the Company
could find itself without cash to support operations and unable to perform
regular business.
We
expect
our capital requirements to increase significantly over the next several years
as we continue to develop and market the DealerAdvance™ suite and as we increase
marketing and administration infrastructure and develop capabilities and
facilities. Our future liquidity and capital funding requirements will depend
on
numerous factors, including, but not limited to, the levels and costs of our
research and development initiatives, the cost of hiring and training additional
sales and marketing personnel and the cost and timing of the expansion of our
marketing efforts.
FINANCINGS
We
have
entered into the following financing transactions:
LOANS
FROM CHRISTOPHER J. CAREY, AN EXECUTIVE OFFICER, DIRECTOR AND SHAREHOLDER OF
THE
COMPANY
On
July
31, 2000, the Predecessor Entity entered into a line of credit with Mr. Chris
Carey, our President and Chief Executive Officer and the President and Chief
Executive Officer of Stronghold. The terms of the line of credit made available
$1,989,500, which the Predecessor Entity could borrow from time to time, until
August 1, 2001. The outstanding amounts accrued interest at the per annum rate
equal to the floating base rate, as defined therein, computed daily, for the
actual number of days elapsed as if each full calendar year consisted of 360
days. The first interest payment under the line of credit was due on August
1,
2001. On such date, the parties agreed to extend the line of credit for one
more
year, until August 1, 2002.
On
April
22, 2002, the Predecessor Entity issued 500,000 shares of its common stock
to
Mr. Carey (which converted into 1,093,750 shares of our common stock when we
acquired the Predecessor Entity on May 16, 2002) in exchange for cancellation
of
$1 million of outstanding indebtedness under the July 31, 2000 line of credit
from Mr. Carey.
On
May
16, 2002, the total amount outstanding under the July 31, 2000 line of credit
with Mr. Carey was $2.2 million. On such date, we issued 666,667 shares of
our
common stock to Mr. Carey in exchange for the cancellation of $1 million of
the
then outstanding amount under the line of credit. We agreed to pay Mr. Carey
the
remaining $1.2 million according to the terms of a non-negotiable promissory
note, which was issued on May 16, 2002.
On
September 30, 2002, we renegotiated the $1,200,000 promissory note with Mr.
Carey pursuant to a requirement contained in the promissory note with
UnitedTrust Bank. According to the new terms of the loan, Mr. Carey extended
the
repayment of the principal amount until December 1, 2005. On December 1, 2005
Mr. Carey extended the term of the loan to May 31, 2006.Until such time as
the
principal is paid, we will pay an interest only fee of 12% per year. As of
December 31, 2005, $262,000 was outstanding under the promissory note issued
to
Mr. Carey.
On
September 30, 2002, we entered into a loan agreement with CC Trust Fund to
borrow an amount up to $355,128. Christopher Carey Jr., Mr. Carey's son, is
the
beneficiary of the trust, and Mary Carey, Mr. Carey's wife, is the trustee
of
the trust. This bridge loan was for a period of twelve months, with all
principal due and payable on September 30, 2003. The 12.5% interest on the
outstanding principal is due each year. At the end of the loan period, the
CC
Trust Fund will be entitled to exercise 25,000 warrants at $1.50 per share.
On
September 30, 2003, the CC Trust Fund agreed to extend the term of their loan
to
December 30, 2003. On December 30, 2003, the CC Trust Fund agreed to extend
the
term of their loan to June 30, 2004. On March 30, 2004, the CC Trust Fund agreed
to extend the term of their loan to March 31, 2005. On May 1, 2004, the AC
Trust
Fund agreed to extend the term of their loan to November 1, 2005. On December
31, 2005 the AC Trust Fund agreed to extend the term of the loan to May 31,
2006. As of December 31, 2005, $447,454, including interest, was outstanding
under the CC Trust Fund loan agreement.
On
September 30, 2002, we entered into a loan agreement with AC Trust Fund to
borrow an amount up to $375,404. Amie Carey, Mr. Carey's daughter, is the
beneficiary of the trust, and Mary Carey, Mr. Carey's wife, is the trustee
of
the trust. This bridge loan is for a period of twelve months, with all principal
due and payable on September 30, 2003. The 12.5% interest on the outstanding
principal is due each year. At the end of the loan period, the Fund will be
entitled to exercise 25,000 warrants at $1.50 per share. On September 30, 2002,
the AC Trust Fund agreed to extend the term of their loan to December 30, 2003.
On December 30, 2003, the AC Trust Fund agreed to extend the term of their
loan
to June 30, 2004. On March 30, 2004, the AC Trust Fund agreed to extend the
term
of their loan to March 31, 2005. On May 1, 2004, the AC Trust Fund agreed to
extend the term of their loan to November 1, 2005. As of December 31, 2005,
$470,058, including interest, was outstanding under the AC Trust Fund loan
agreement.
On
March
18, 2003, we entered into a bridge loan agreement with Christopher J. Carey,
for
a total of $400,000. The agreement stipulates that the Company will pay an
8%
interest rate on a quarterly basis until the loan becomes due and payable on
June 30, 2004. We also issued to Mr. Carey 391,754 warrants exercisable for
common stock for 10 years at a price of $0.97 per share. On December 30, 2003,
Christopher J. Carey agreed to extend the term of the promissory note to June
30, 2004. On May 1, 2004, Christopher J. Carey agreed to extend the term of
the
loan to June 1, 2005. On June 1, 2005 Mr. Carey extended the loan to May 31,
2006. As of December 31, 2005, $394,995, including interest, was outstanding
under the agreement.
On
April
24, 2003, our President and Chief Executive Officer, Christopher J. Carey,
agreed to convert outstanding loans of $543,000 to 603,333 shares of our common
stock at a price of $.90 per share in conjunction with the Series B Convertible
Stock Financing detailed below.
FINANCINGS
FROM PNC BANK (FORMERLY UNITED TRUST BANK)
On
November 1, 2001, the Predecessor Entity entered into a line of credit with
UnitedTrust Bank (now PNC Bank) pursuant to which the Predecessor Entity
borrowed $1.5 million. This line of credit was due to expire by its terms,
and
all outstanding amounts were due to be paid, on September 30, 2002. On September
30, 2002, the line of credit came due and the bank granted a three-month
extension. On September 30, 2002, we converted the outstanding line of credit
with UnitedTrust Bank into a $1,500,000 promissory note. Such promissory note
is
to be paid in 36 monthly installments, which commenced in February 2003 and
is
due to terminate on January 1, 2006. Interest accrues on the note at the prime
rate, adjusted annually, which is the highest New York City prime rate published
in The Wall Street Journal. The initial prime rate that applied to the
promissory note was 4.750%.
On
August
7, 2003, we entered into a modification of the loan agreement with UnitedTrust
Bank, of which the principal balance was $1,291,666 at the time of closing
of
the modification. Pursuant to the modification agreement, UnitedTrust Bank
agreed to subordinate its lien against our assets to a new lender and reduce
the
monthly payments from $41,666 per month principal plus accrued interest as
follows: (a) from the date of closing through December 15, 2003, $10,000 per
month plus accrued interest (b) from January 15, 2004 through December 15,
2004,
$15,000 per month plus accrued interest, (c) from January 15, 2005 through
December 15, 2005, $20,000 per month plus interest and (d) on the maturity
date
of January 1, 2006, a balloon payment equal to all the outstanding principal
and
accrued interest.
On
January 9, 2004, we were served with a notice of an event of default by United
Trust Bank, now PNC Bank, a successor by merger effective January 2004 with
United Trust Bank, ("the Bank"), under its Loan Agreement. Pursuant to section
6.01(d) of the Loan Agreement, an Event of Default exists due to the Company's
failure to pay Payroll Tax Obligations aggregating in the amount of $1,089,897
as of December 31, 2003 (including estimated penalties and interest). The
Company continued to make timely scheduled payments pursuant to the terms of
the
loan. On April 1, 2004, the Company received a second Notice of Event of Default
stating that the Bank had accelerated the maturity of the Loan and declared
all
principal, interest, and other outstanding amounts due and payable.
Because
we were in default under the terms of the loan due primarily to our payroll
tax
default, the Bank instituted the default rate of interest which was 5% above
the
"highest New York City prime rate" stated above. We entered into an installment
agreement with the United States Internal Revenue Service to pay the withholding
taxes, under the terms of which we will pay $100,000 by May 31, 2004 and $35,000
each month, commencing June 28, 2004, until we have paid the withholding taxes
due in full.
On
April
27, 2004, PNC Bank, N.A., as successor by merger to UnitedTrust Bank filed
a
complaint in the Superior Court of New Jersey, Law Division, Union County
(Docket No. UNN-L_001522-04) against our company and Christopher J. Carey,
in
his capacity as guarantor, to collect the sums outstanding under the Loan
Agreement, dated as of September 30, 2002.
On
July
15, 2004, we entered into a fully executed forbearance agreement with PNC Bank,
N.A. We made an initial principal payment of $420,000 with the execution of
the
forbearance. Additionally, we were required to make four consecutive monthly
installments of $50,000.00 on August 15, 2004, September 15, 2004, October
15,
2004 and November 15, 2004 followed by the remaining principal on or before
December 15, 2004.
On
November 12, 2004, our company and PNC Bank agreed upon terms of an amendment
to
the forbearance agreement whereby by the payment schedule changed to include
interest only payments on November 15, 2004, December 15, 2004 and January
15,
2005. We made all interest payments.
On
March
31, 2005, the Company paid off and satisfied the note due to PNC bank in the
principal amount of $606,667. All accrued interest in the amount of $16,830
was
all paid off.
FINANCINGS
BY STANFORD VENTURE CAPITAL HOLDINGS, INC.
On
May
15, 2002, we entered into a Securities Purchase Agreement with Stanford Venture
Capital Holdings, Inc., referred to herein as Stanford, in which we issued
to
Stanford (i) such number of shares of our Series A $1.50 Convertible Preferred
Stock, referred to herein as Series A Preferred Stock, that would in the
aggregate equal 20% of the total issued and outstanding shares of our common
stock, and (ii) such number of warrants for shares of our common stock that
would equal the number of shares of Series A Preferred Stock issued to Stanford.
The total aggregate purchase price for the Series A Preferred Stock and warrants
paid by Stanford was $3,000,000. The issuance of the Series A Preferred Stock
and warrants took place on each of four separate closing dates from May 16,
2002
through and July 19, 2002, at which we issued an aggregate of 2,002,750 shares
of our Series A Preferred Stock and warrants for 2,002,750 shares of our common
stock to Stanford.
The
Series A amounts and closing dates are as follows:
|
CLOSING
DATE
|
PURCHASE
PRICE
|
|||
|
May
17, 2002
|
$
|
750,000
|
||
|
July
3, 2002
|
$
|
750,000
|
||
|
July
11, 2002
|
$
|
750,000
|
||
|
July
19, 2002
|
$
|
750,000
|
||
The
warrants issued in 2002 were valued at $294,893 using the Black-Scholes model
using the following assumptions and a stock price of $1.50:
| o |
Conversion
price $1.50;
|
| o |
expected
volatility of 0%;
|
| o |
expected
dividend yield rate of 0%;
|
| o |
expected
life of 5 years; and
|
| o |
a
risk-free interest rate of 4.91% for the period ended June 30, 2002.
|
In
connection with our Series B financing, as partial consideration for the funds
received pursuant to the Series B financing, we agreed to decrease the exercise
price to $.25. With respect to the decrease in the exercise price and the
warrants being treated as a cost of the series B financing, the reduction of
series A warrants was written in to the Series B preferred stock agreements
as
part of the negotiation. At the end of fiscal 2003, Stanford exercised the
warrants for 2,002,750 shares of our common stock.
On
April
24, 2003, we entered into a Securities Purchase Agreement with Stanford Venture
Capital Holdings, Inc. for the issuance of 2,444,444 shares of our Series B
$0.90 Convertible Preferred Stock. The issuance of the Series B Preferred Stock
took place on six separate closing dates beginning on May 5, 2003 through
September 15, 2003. In connection with the Securities Purchase Agreement, we
agreed to modify the previously issued five-year warrants to purchase 2,002,750
shares of our common stock: (i) to reduce the exercise price to $.25 per share;
and (ii) to extend the expiration date through August 1, 2008. In addition,
our
President and Chief Executive Officer, Christopher J. Carey, agreed to convert
outstanding loans of $543,000 to 603,333 shares of our common stock at a price
of $.90 per share. In addition, the Company and Stanford entered into a
Registration Rights Agreement, dated April 30, 2003, in which the Company agreed
to register the shares of the Company's common stock issuable upon conversion
of
the Series A and Series B Preferred Stock with the Securities and Exchange
Commission, no later than November 15, 2003. The Company and Stanford agreed
to
extend the date of the filing requirements of the Registration Rights Agreement
to March 14, 2004. We have not yet filed a registration statement, and are
in
negotiations with Stanford regarding an extension of the registration filing
date.
On
March
3, 2004 and March 15, 2004 we received loans in the amount of $437,500 each
from
Stanford, resulting in a total loan of $875,000. We have agreed to pay Stanford
an 8% annual dividend on the funds invested and to redeem the securities not
later than three years from the date of funding.
PRIVATE
PLACEMENTS WITH ACCREDITED PRIVATE INVESTORS
During
August and September 2002, we entered into 9 subscription agreements with
accredited private investors, as defined in Rule 501 of the Securities Act,
pursuant to which we issued an aggregate of 179,333 shares of our common stock
at $1.50 per share. These private investments generated total proceeds to us
of
$269,000.
In
October 2003, we commenced offerings to accredited investors in private
placements of up to $3,000,000 of our common stock. In the period of October
2003 through January 9, 2004 we raised $225,000 under the terms of these private
placements. The shares offered in the private placement are priced at the 5
trading day trailing average closing price of the common stock on the OTCBB,
less 20%. For each share purchased in the private placements, purchasers
received a warrant to purchase one half (0.5) share of common stock at 130%
of
the purchase price. A minimum of $25,000 was required per investor. The number
shares issued under this placement total 509,559, at an average price of
$0.44/share.
CALLABLE
SECURED CONVERTIBLE NOTES
Callable
Secured Convertible Notes
To
obtain
funding for its ongoing operations, Stronghold Technologies, Inc. (the
"Company") entered into a Securities Purchase Agreement (the "Securities
Purchase Agreement") with New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC (collectively, the
"Investors") on June 18, 2004 for the sale of (i) $3,000,000 in callable
convertible secured notes (the "Notes") and (ii) stock purchase warrants to
buy
3,000,000 shares of the Company's common stock (the "Warrants").
To
date,
the Investors purchased $4,930,000 in Notes, and received Warrants to purchase
an aggregate of 4,930,000 shares of the companies stock, in thirteen different
traunches dated June 18, 2004 for $1,000,000, July 21, 2004 for $500,000,
October 22, 2004 for $350,000, March 18, 2005 for $650,000, March 31, 2005
for
$350,000, May 4, 2005 for $300,000, July 18, 2005 for $282,500, August 30,
2005
for $100,000, October 6, 2005 for $210,000, November 9, 2005 for $150,000,
December 31, 2005 for $107,480, February 6 2006 for $180,000 and on March 17,
2006 for $250,000. On Dec 20, 2005 the investors converted $5,186 of the
convertible notes into 172,873 shares of common stock.
The
Notes
bear interest at 12%, mature two years from the date of issuance, and are
convertible into our common stock, at the Investors' option, at the lower of
(i)
$0.70 or (ii) 75% of the average of the three lowest intraday trading prices
for
the Company's common stock during the 20 trading days before, but not including,
the conversion date. The Company may prepay the Notes in the event that no
event
of default exists, there are a sufficient number of shares available for
conversion of the Notes and the market price is at or below $0.57 per share.
The
full principal amount of the Notes is due upon default under the terms of Notes.
In addition, the Company has granted the investors a security interest in
substantially all of its assets and intellectual property as well as
registration rights.
The
Notes
bear interest at 12%, mature two years from the date of issuance, and are
convertible into our common stock, at the Investors' option, at the lower of
(i)
$0.70 or (ii) 75% of the average of the three lowest intraday trading prices
for
the Company's common stock during the 20 trading days before, but not including,
the conversion date. The Company may prepay the Notes in the event that no
event
of default exists, there are a sufficient number of shares available for
conversion of the Notes and the market price is at or below $0.57 per share.
The
full principal amount of the Notes is due upon default under the terms of Notes.
In addition, the Company has granted the investors a security interest in
substantially all of its assets and intellectual property as well as
registration rights.
Restatement
of financial statements
In
connection with the preparation of the Annual Report on Form 10-KSB of the
Company for the fiscal year ended December 31, 2005, the Company's management
reviewed the Securities and Exchange Commission’s release on Dec. 1, 2005
entitled “Current
Accounting and Disclosure Issues in the Division of Corporation Finance” as
Prepared by Accounting Staff Members in the Division of Corporation Finance,
U.S. Securities and Exchange Commission Washington, D.C., may impact the
reporting of the Convertible Debenture Notes, Stand Alone Warrants and as a
result of certain registration rights granted to the investors of these notes,
potential Liquidated Damages that were not previously recorded.
Specifically,
the Company deemed the Convertible Debt previously reported under EITF 98-5
and
EITF 00-27 must now be reported within the guidelines of EITF 00-19 and
therefore restatements of previously issued financial statements must be done.
In preparing the detail for this restatement, the Company concluded that the
fair value of the debt at all points in time was greater than the fair value
of
the Company in total. This conclusion is the basis that there is no value
attributable to the Conversion Feature of this debt.
After
reviewing the matter with its current and former independent registered public
accounting firms, the Company has identified certain adjustments that
necessitate the restatement of its financial statements for the second and
third
quarters of fiscal 2004, the interim periods of fiscal 2005, and for the fiscal
years 2004.
These
adjustments reflect the following with respect to the Convertible Debt and
Stand
Alone Warrants:
Convertible
Debt: In
accordance with EITF 00-19, since
there is no explicit limit on the number of shares that are to be delivered
upon
exercise of the conversion feature, SGHT is not able to assert that it will
have
sufficient authorized and unissued shares to settle the conversion option.
As a
result, the conversion feature should be accounted for as a derivative
liability, with changes in fair value recorded in earnings each period and
therefore the previous reporting in accordance with EITF’s 98-5 and 00-27 for
the beneficial conversion feature and debt discount should be restated as
such.
In
recording the valuation of the Convertible Feature Liability within the
restatement, the Company has determined that the fair value of this liability
is
zero due to the carrying value of the convertible debt exceeding the fair value
of the Company. The primary impact of adhering to EITF 00-19 is to eliminate
the
portion of the debt previously recorded as equity. Additionally, the Company
has
written off the loan acquisition costs associated with convertible debt,
previously recorded as a Deferred Charge asset.
Stand
Alone Warrants: The
Company determined that the Stand Alone Warrants include a provision in the
Registration Rights Agreement for “partial
relief for the damages to the Investors by reason of any such delay in or
reduction of their ability to sell the Registrable Securities”. As a result,
this relief for the investors should be accounted for as a liability and the
previous reporting should be restated as such.
The
restatement adjustments to the Company's financial statements for the years
ended December 31, 2004 and 2003, respectively, are summarized in Note 5 of
the
enclosed audited financial statements herein:
The
Warrants are exercisable until five years from the date of issuance at a
purchase price of $0.57 per share. In addition, the exercise price of the
Warrants is adjusted in the event the Company issues common stock at a price
below market. Since the Company does not intend to issue common stock at below
market price the warrants were valued at $NIL using the Black- Scholes option
pricing model including the following assumptions: exercise price of $0.57,
expected volatility of approximately 15%, expected dividend yield rate of 0%,
expected life of 5 years, and a risk free interest rate of 4.23% for December
31, 2004.
The
Investors have contractually agreed to restrict their ability to convert the
Notes and exercise the Warrants and receive shares of the Company's common
stock
such that the number of shares of the Company's common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of
the
then issued and outstanding shares of the Company's common stock.
All
shares of the Company's common stock associated with this private placement
are
restricted securities in accordance with Rule 144 as promulgated under the
of
the Securities Act of 1933.
On
March,
18 2005, the Investors purchased an additional $650,000 in Notes and received
additional Warrants to purchase 650,000 shares of our common stock, completing
the sale of (i) $3,000,000 in callable secured convertible notes (the "Notes")
and (ii) stock purchase warrants (the "Warrants") to buy 3,000,0000 shares
of
our common stock that was agreed upon on June 18, 2004.
The
agreement entered into on June 18, 2004 was amended on March 4, 2005, changing
the conversion price of the convertible notes to the lower of (i) $0.70 or
(ii)
25% of the average of the three lowest intraday trading prices for our common
stock during the 20 trading days before, but not including, the conversion
date.
The original agreement had the conversion price as the lower of (i) $0.70 or
(ii) 50% of the average of the three lowest intraday trading prices for our
common stock during the 20 trading days before, but not including, the
conversion date.
RESULTS
OF OPERATIONS
Operations
through May 16, 2002, were comprised solely of our truffle business, which
was
conducted through our wholly-owned subsidiaries, Terre di Toscana, Inc. and
Terres Toscanes, Inc. Operations from May 16, 2002 through June 30, 2002 were
comprised of our truffle business (which was divested on July 19, 2002, as
described above) and our Dealer Customer Relationahip Management 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 dealership technology business only, other
than with respect to other expenses. We believe that a comparison of our truffle
business to our technology business is not a relevant analysis. Therefore,
results of operations for the fiscal years ended 2001 and 2002 reflect
operations of our technology business only.
We
entered the Dealership Customer Relationship Management technology business
through the acquisition of the Predecessor Entity, which had only twenty-two
months of operating history. We are subject to all of the risks inherent in
a
new business enterprise. Our limited operating history makes it difficult to
evaluate our financial performance and prospects. We cannot 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.
CRITICAL
ACCOUNTING POLICIES AND USE OF ESTIMATES
Financial
Reporting Release No. 60, recently released by the Securities and Exchange
Commission, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
The notes to the consolidated financial statements include a summary of
significant accounting policies and methods used in the preparation of our
Consolidated Financial Statements. In addition, Financial Reporting Release
No.
61 was recently released by the SEC requires all companies to include a
discussion which addresses, among other things, liquidity, off-balance sheet
arrangements, contractual obligations and commercial commitments. The following
is a brief discussion of the more significant accounting policies and methods
used by us.
The
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of financial statements in accordance with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
including the recoverability of tangible and intangible assets, disclosure
of
contingent assets and liabilities as of the date of the financial statements
and
the reported amounts of revenues and expenses during the reported period.
On
an
on-going basis, we evaluate our estimates. The most significant estimates relate
to our recognition of revenue and the capitalization of our software
development.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements:
REVENUE
RECOGNITION POLICY
Revenue
is recognized under the guidelines of Statement of Position SOP 97-2 Software
Revenue Recognition.
All
sales
agreements with clients do not require significant production, modification,
or
customization of software, additionally all the functionality of the product
is
made available upon delivery, therefore the Company recognizes revenue in
accordance with Paragraph 8 of 97-2 when:
| 1) |
Persuasive
evidence of an arrangement exists as evidenced by a signed contract,
|
| 2) |
Delivery
has occurred, please note that Stronghold does not recognize revenue
prior
to delivery,
|
| 3) |
The
price of Stronghold's system is fixed and determinable as evidence
by the
contract, and
|
| 4) |
Collectability
is highly probable.
|
Previously
in the periods of 2002 through 2005, the Company had also recognized revenue
under the guideline of SFAS No. 48 “Revenue Recognition When Right of Return
Exists”. Consistent with the new revenue plan of a shorter time commitment and
proportionally minimal upfront fees as detailed in the Revenue sections herein,
the Company has discontinued the 60 day trial period and the corresponding
right
of return. Additionally, the Company has also discontinued the third party
long
term lease arrangement that the Company also used from 2002 through
2005.
The
current revenue recognition plan will include a set up and installation fee
for
the software of $2,500.00 and a monthly fee of $2,500.00. The monthly fee will
include both the services associated with the customer relationship management
(CRM) software and the maintenance. Approximately $750.00/month of the
$2,500/month fee will be allocated to maintenance and the remaining
$1,175.00/month will be allocated to customer relationship management (CRM)
software. The allocation to maintenance is consistent with prior evidence of
clients paying this amount for many years.
The
Company will recognize the revenue as earned on a monthly basis as the software
system is used. In the event that a client does not renew use of the system
after 12 months, then the Company will turn off the software and leave the
hardware behind.
DEFERRED
REVENUE
Deferred
revenue is recorded as a liability when we receive the three year maintenance
contact in a one-time advance payment. We then recognize the revenue from the
maintenance portion of the contract on a pro rata basis over 36 months as the
service is delivered.
SOFTWARE
DEVELOPMENT CAPITALIZATION POLICY
Software
development costs, including significant product enhancements incurred
subsequent to establishing technological feasibility in the process of software
production, are capitalized according to Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed." Costs incurred prior to the establishment of
technological feasibility are charged to research and development expenses.
For
the year ended December 31, 2005, we capitalized $65,455 of development costs
in
developing enhanced functionality of our DealerAdvance™ products. This compares
with $407,585 for the year ended December 31, 2004.
INDUSTRY
TRENDS
The
automotive industry has identified sales productivity tools and CRM systems
as
high priorities. 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.
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
large consumer purchases are sensitive to broad economic trends, our operations
may be affected by general economic conditions. For example, if dealer sales
are
trending downward, capital expenditures like those associated with our
DealerAdvance™ suite of products may be delayed or abandoned.
Our
Customers
As
of
December 2005, the U.S. retail automotive industry consisted of approximately
21,000 franchise dealerships covering all domestic and foreign brands. These
franchises are granted for specific geographic territories and allow the
franchisee to pursue sales within that territory. In many cases, a franchisee
with two or more brands will operate at one location or property (e.g.,
Honda/Acura or Lincoln/Mercury).
Over
the
last 10 years, the industry has experienced some consolidation of ownership
with
large consolidators (large public and private companies) buying up independently
owned retail sites and dealer groups. However, the market is still highly
fragmented with the 100 top consolidators operating approximately 1,800
dealerships, or only 8.5% of total dealerships.
The
Automobile Dealer Software Market
The
automotive dealer software industry began as a spin-off of companies providing
accounting and business forms to dealerships. Today, two major and one minor
providers control the market for DMS, which is primarily an accounting and
business system. The major providers are ADP Dealer Services, a unit of ADP,
Inc. (40% market share) and Reynolds & Reynolds, an $850 million (in
revenue) public company (35% market share). The minor player is Universal
Computer Systems (UCS), a privately held company with approximately $150 million
in revenues (1% market share). Approximately 98% of dealerships utilize some
form of DMS.
DIVIDEND
POLICY
We
have
never declared or paid any cash dividends on our Common Stock. We anticipate
that any earnings will be retained for development and expansion of our business
and we do not anticipate paying any cash dividends in the foreseeable future.
Our board of directors, subject to any restrictions or prohibitions that may
be
contained in our loan or preferred stock agreements, has sole discretion to
pay
dividends based on our financial condition, results of operations, capital
requirements, contractual obligations and other relevant factors.
The
financial statements required to be filed pursuant to this Item 7 are included
in this Annual Report on Form 10-KSB beginning on page F-1. A list of the
financial statements filed herewith is found on page F-1.
On
March
13, 2006, Stronghold Technologies, Inc. (the "Company") engaged the firm of
Paritz & Company, PA ("New Auditors") to serve as its independent registered
public accountants for the fiscal year ending December 31, 2005. On March 10,
2006 (the "Termination Date"), the Company notified Rothstein, Kass &
Company, P.C. ("Former Auditors") that it was terminating Former Auditors'
services. The decision to change accountants was recommended and approved by
the
Company's Audit Committee and Board of Directors.
During
the two years ended December 31, 2005, and through the Termination Date, (i)
there were no disagreements between the Company and Former Auditors on any
matter of accounting principles or practices, financial statement disclosure
or
auditing scope or procedure which, if not resolved to the satisfaction of Former
Auditors would have caused Former Auditors to make reference to the matter
in
its reports on the Company's financial statements, and (ii) except for Former
Auditors' report on the Company's December 31, 2004 financial statements, which
included an explanatory paragraph wherein they expressed substantial doubt
about
the Company's ability to continue as a going concern, Former Auditors' reports
on the Company's financial statements did not contain an adverse opinion or
disclaimer of opinion, or was modified as to uncertainty, audit scope or
accounting principles. During the two fiscal years ended December 31, 2004
and
2003 and through the Termination Date, there were no reportable events as the
term described in Item 304(a)(1)(iv) of Regulation S-B.
During
the two fiscal years ended December 31, 2005, and through the Termination Date,
the Company has not consulted with New Auditors regarding either:
|
1.
|
The
application of accounting principles to any specific transaction,
either
completed or proposed, or the type of audit opinion that might be
rendered
on the Company's financial statements, and neither a written report
was
provided to New Auditors nor oral advice was provided that New Auditors
concluded was an important factor considered by the Company in reaching
a
decision as to the accounting, auditing or financial reporting issue;
or
|
|
2.
|
Any
matter that was either subject of disagreement
or event, as defined in Item 304(a)(1)(iv) of Regulation S-B and
the
related instruction to Item 304 of Regulation S-B, or a reportable
event,
as that term is explained in Item 304(a)(1)(iv) of Regulation S-B.
|
As
of the
end of the period covered by this report, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. This evaluation was done under
the supervision and with the participation of our sole executive officer that
acts as both the principal executive officer and principal financial officer.
Based on their evaluation of our disclosure controls and procedures (as defined
in the Exchange Act Rule 13a-15e), our principal executive officer/principal
financial officer has concluded that during the period covered by this report,
such disclosure controls and procedures were not effective to detect the
inappropriate application of US GAAP rules as more fully described below. This
was due to deficiencies that existed in the design or operation of our internal
control over financial reporting that adversely affected our disclosure controls
and that may be considered to be “material weaknesses.” The Public Company
Accounting Oversight Board has defined a material weakness as a “significant
deficiency or combination of significant deficiencies that results in more
than
a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.”
We
identified deficiencies in our internal controls and disclosure controls related
to the treatment of our convertible debt and the related liquidated damages.
As
a
result of the identification of the misapplication of US GAAP rules, our
principal executive officer/principal financial officer has concluded that,
as
of December 31, 2005, our internal control over financial reporting was not
effective.
Remediation
of Material Weaknesses
We
have
formulated a program to remedy the material weaknesses identified above.
In
the
second phase of the program, we expect to (i) engaged additional accounting
personnel and (ii) increase our auditor’s review work quarterly, as well
as, increase the areas reviewed and discussed with the audit committee and
auditors beforehand, on any changes in accounting principles or revenue or
expense recognition. Specifically, we plan to implement the following
remediation measures relating to the identified material weaknesses:
We
plan
to complete our remediation program during the second and third quarters of
fiscal 2006. The material weaknesses will not be considered remediated until
the
applicable remedial controls operate for a sufficient period of time and
management has concluded, through testing, that these controls are operating
effectively.
Changes
in Internal Control Over Financial Reporting
Except
as
set forth above, there have been no changes in our internal control over
financial reporting that occurred during the three months ended
December 31, 2005 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
Our
executive officers and directors and their respective ages and positions as
of
December 31, 2003 are as follows:
|
Name
|
Age
|
Position(s)
|
||
|
Christopher
J. Carey
|
52
|
President,
Chief Executive Officer and
Director
|
Christopher
J. Carey has served as our President and Chief Executive Officer since May
2002.
Mr. Carey is also the founder, President and Chief Executive Officer of
Stronghold, our wholly-owned subsidiary. Since founding Stronghold in 2000,
Mr.
Carey has set the strategic direction and corporate vision for Stronghold,
drawing on over 25 years of experience building technology-focused businesses.
From 1976 until 1996, Mr. Carey was President and Chief Executive Officer of
Datatec Industries, Inc., which specialized in the rapid deployment of network
and computing systems. After negotiating a merger with Glasgal Communications
in
1996, Mr. Carey became President of Datatec Systems, Inc., the combined entity
until May 2002.
EXECUTIVE
OFFICERS
Christopher
J. Carey has employment contracts with our company that has completed its term.
Mr. Carey continues to serve as the Chief Executive Officer and Chairman of
the
Board.
BOARD
COMMITTEES
Our
board
of directors has an audit committee, compensation committee and
governance/nominating committee. The audit committee reviews the results and
scope of the audit and other services provided by our independent public
accountant. The audit committee does not currently have an "audit committee
financial expert", as defined by the SEC, due to our status as an
early-development stage company. We are in the process of identifying an audit
committee financial expert to join its board of directors and audit committee.
The
compensation committee establishes the compensation policies applicable to
our
executive officers and administers and grants stock options pursuant to our
stock plans. The governance/nominating committee oversees board procedures
and
nominates prospective members of the board should a vacancy arise.
CODE
OF ETHICS
Because
we are an early-development stage company with limited resources, we have not
yet adopted a "code of ethics", as defined by the SEC, that applies to our
Chief
Executive Officer, Chief Financial Officer, principal accounting officer or
controller and persons performing similar functions. We are in the process
of
drafting and adopting a Code of Ethics.
DIRECTOR
COMPENSATION
We
granted an initial one-time option grant to purchase 40,000 shares of common
stock to each non-employee board member upon election to our board of directors.
This one-time grant was awarded to the current non-employee board members on
October 7, 2003. The options will vest 50% on each of the first and second
anniversaries of the date of grant. The option is exercisable at $.60 per share.
In addition, each non-employee director will be granted, on an annual basis,
an
option to purchase 30,000 shares of our common stock, which will vest 50% on
each of the first and second anniversaries of the date of grant. These options
were granted in November 2004 and have an exercise price of $.25. All stock
options granted to members of our board of directors will have exercise prices
equal to the fair market value of the Common Stock on the date of grant. We
also
reimburse directors for reasonable out-of-pocket expenses incurred in attending
meetings of the board of directors and any meetings of its
committees.
The
following table sets forth executive compensation for fiscal years ended
December 31, 2004, 2003, 2002 and 2001. We have not paid any bonuses to any
of
our officers from our inception through the date hereof. All of our executive
officers also serve as officers of and are paid by our operating subsidiary.
The
following table shows compensation paid during the fiscal years ended December
31, 2002 and 2001 by our wholly owned subsidiary to our former president and
other former executive officers. The table also provides information regarding
executive compensation for our wholly owned subsidiary's current president
and
three other most highly compensated executive officers. We refer to all of
these
officers collectively as our "named executive officers."
| (1) |
Christopher
J. Carey became our President and Chief Executive Officer on May
16, 2002,
following the merger. Mr. Carey also remains the President, Chief
Executive Officer and the sole Director of Stronghold. Mr. Carey's
base
salary from May 15, 2002 until December 31, 2002 was $260,000, as
set
forth in his Employment Agreement with Stronghold. The terms of Mr.
Carey's Employment Agreement are more fully set forth below. "Other
Annual
Compensation" consists solely of the reimbursement of automobile
expenses.
All of Mr. Carey's salary for 2002 has been deferred and accrued.
$201,200
of Mr. Carey’s salary and other annual compensation was deferred and
accrued in 2003. $210,800 of Mr. Carey’s salary and other annual
compensation was deferred and accrued in 2004. $359,600 of Mr. Carey’s
salary and other annual compensation was deferred and accrued in
2005.
|
| (2) |
Lenard
Berger had been our Vice President and Chief Technology Officer since
the
merger, and held the same positions with our wholly owned subsidiary.
Mr.
Berger's base salary for the period of July 2001 through July 2002
was
$112,000, as set forth in his Employment Agreement. As of July 2002,
Mr.
Berger's salary increased to $122,000. $36,000 of Mr. Berger’s salary and
other annual compensation was deferred and accrued in 2004. Mr. Berger
resigned from his position in July 2005. "Other Annual Compensation"
consists solely of the reimbursement of automobile expenses.
|
| (3) |
Robert
Nawy joined Stronghold on July 22, 2003 as Assistant Chief Financial
Officer and became the Chief Financial Officer in November 2003.
Mr.
Nawy's base salary for the period of June 2003 through July 2004
was
$180,000, as set out in his Employment Agreement. As of August 1,
2004,
Mr. Nawy’s salary increased to $185,400. $15,300 of Mr. Nawy’s salary and
other annual compensation was deferred and accrued in 2004. Mr. Nawy
resigned from his position with our wholly owned subsidiary in May
2005.
"Other Annual Compensation" consists solely of the reimbursement
of
automobile expenses.
|
OPTIONS GRANTS
There
were no individual grants of stock options under the 2002 Stock Incentive Plan
during the fiscal year ended December 31, 2005 to any of the named executive
officers.
AGGREGATED
OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
|
SHARES
|
NUMBER OF SECURITIES | ||||||||||||||||||
|
ACQUIRED
|
VALUE
|
UNDERLYING OPTIONS |
VALUE
OF IN-THE-MONEY OPTIONS
|
||||||||||||||||
|
ON
EXERCISE (#)
|
REALIZED
($)(1)
|
AT YEAR END (#) |
AT
YEAR-END ($)(2)
|
||||||||||||||||
|
NAME
|
EXERCISABLE
|
UNEXERCISABLE
|
EXERCISABLE
|
UNEXERCISABLE
|
|||||||||||||||
|
Christopher
J. Carey
|
—
|
—
|
—
|
200,000
|
—
|
—
|
|||||||||||||
| (1) |
Based
on the difference between the option exercise price and the fair
market
value of our common stock on the exercise date.
|
| (2) |
Based
on the difference between the option exercise price and the closing
sale
price of $0...03 of our common stock as reported on the OTC Bulletin
Board
on December 31, 2005, the last trading day of our 2005 fiscal year.
None
of these options are currently in the money.
|
EMPLOYMENT
AGREEMENTS WITH EXECUTIVE OFFICERS
CHRISTOPHER
J. CAREY
On
May
15, 2002, we assumed the employment agreement that was in place between
Christopher J. Carey and the Predecessor Entity. Under the terms of the
agreement, Mr. Carey's employment as Chairman of the Board, President and Chief
Executive Officer continued until December 31, 2004. The agreement may be
renewed through mutual agreement of the parties. Mr. Carey receives a base
salary of $260,000 per year. Such base salary was increased effective January
1,
2003, to the annualized rate of $300,000 and increased, effective January 1,
2004, to the annualized rate of $350,000. Such salary will be reviewed annually
and is subject to increase as determined by our board of directors or the
Compensation Committee in its sole discretion. Mr. Carey’s employment agreement
expired on December 31, 2004, however he continues to function as the Chief
Executive Officer and Chairmen of the Board.
The
employment agreement provides that each fiscal year after fiscal year 2002,
Mr.
Carey will be eligible to receive an annual bonus based upon our meeting and
exceeding our annual budget, as same has been reviewed and approved by the
board
of directors for earnings before interest, taxes, depreciation and amortization,
referred to as EBITDA. This bonus will be earned according to the following:
(i)
if we achieve 90-100% of budgeted EBITDA, Mr. Carey will receive a bonus of
10%
of his then current annual base salary; (ii) if we achieve 101-110% of budgeted
EBITDA, Mr. Carey will receive a total bonus of 20% of his then current annual
base; and (iii) if we achieve 111-120% of budgeted EBITDA, Mr. Carey will
receive a total bonus of 30% of his then current annual base salary; (iv) if
we
achieve 121-130% of budgeted EBITDA, Mr. Carey will receive a total bonus of
40%
of his then current annual base salary; (v) if we achieve 131-140% of budgeted
EBITDA, Mr. Carey will receive a total bonus of 50% of his then current annual
base salary; (vi) if we achieve 141-150% of budgeted EBITDA, Mr. Carey will
receive a total bonus of 55% of his then current annual base salary; and (vii)
if we achieve 151% or more of budgeted EBITDA, Mr. Carey will receive a total
bonus of 60% of his then current annual base salary. The bonus, if any, shall
be
paid in one lump sum within sixty (60) days after the close of the fiscal year
for which it was earned. To date, Mr. Carey has not been awarded a
bonus.
In
accordance with the agreement, the Predecessor Entity granted to Mr. Carey
stock
options under the 2000 Stock Option Plan for the purchase of an aggregate of
200,000 shares of the Predecessor Entity's common stock at an option exercise
price equal of $1.50 per share, the fair market value of the underlying common
stock on the date of the grant. Such option converted into an option to purchase
437,500 shares of our Common Stock when we merged with the Predecessor Entity
and our wholly-owned subsidiary, Stronghold, assumed the 2000 Stock Option
Plan.
While Mr. Carey is employed by our company, the option will become exercisable
on the earlier of: (i) the seventh anniversary of May 15, 2002; or (ii) the
achievement of the performance goals set forth above in the paragraph above.
Upon
a
change in control of our company, the unvested portion of the options shall
immediately vest and become exercisable by Mr. Carey. If we terminate Mr.
Carey's employment (i) after the expiration of the term of employment; or (ii)
with cause; or if Mr. Carey resigns for no good reason, he will receive all
accrued compensation and vested benefits. If we terminate his employment without
cause, Mr. Carey will receive all unpaid accrued compensation, vested benefits
and a severance benefit equal to his base salary until the earlier of the
balance of the term of his agreement, the renewal term or twelve months
following the date of termination.
Mr.
Carey's agreement contains a confidentiality provision and further provides
that
Mr. Carey may not work for, or hold 1% or more of the outstanding capital stock
of a publicly traded corporation, which is a competing business anywhere in
the
world for one year after the conclusion of his employment. Mr. Carey has not
expressed a desire to leave.
The
following table sets forth information regarding the beneficial ownership of
our
common stock as of January 31, 2005. The information in this table provides
the
ownership information for:
| o |
each
person known by us to be the beneficial owner of more than 5% of
our
Common Stock;
|
| o |
each
of our directors;
|
| o |
each
of our executive officers; and
|
| o |
our
executive officers and directors as a group.
|
Beneficial
ownership has been determined in accordance with the rules and regulations
of
the SEC and includes voting or investment power with respect to the shares.
Unless otherwise indicated, the persons named in the table below have sole
voting and investment power with respect to the number of shares indicated
as
beneficially owned by them. Common Stock beneficially owned and percentage
ownership is based on 37,688,793 shares outstanding on April 12, 2006, and
assuming the exercise of any options or warrants or conversion of any
convertible securities held by such person, which are presently exercisable
or
will become exercisable within 60 days after April 12, 2006.
|
Number
of Shares
|
Percentage
|
||||||
|
Name
and Address of Beneficial Owner
|
Beneficially
Owned
|
Outstanding
|
|||||
|
5%
Stockholders
|
|||||||
|
Christopher
J. Carey
|
|||||||
|
60
Broadway, PH2
|
|||||||
|
Brooklyn,
NY 11211
|
26,569,821(1
|
)
|
63.04
|
||||
|
Stanford
Venture Capital Holdings, Inc.
|
|||||||
|
6075
Poplar Avenue
|
|||||||
|
Memphis,
TN 38119
|
9,521,673(2
|
)
|
22.59
|
||||
|
Other
Executive Officers and Directors
|
|||||||
|
Executive
Officers and Directors as a Group (1 person)
|
26,569,821
|
63.04
|
|||||
| (1) |
3,937,500
of these shares are owned by Christopher J. Carey and his wife, Mary
Carey, as Joint Tenants with Right of Survivorship.
|
| (2) |
The
total beneficial ownership of Stanford Venture Capital Holdings,
Inc. is
9,521,273 shares which consists of: (i) 2,002,750 shares of Common
Stock
issuable upon the conversion of 2,002,750 shares of our Series A
Preferred
Stock; and (ii) 2,444,444 shares of Common Stock issuable upon the
conversion of 2,444,444 shares of our Series B Preferred Stock and
(iii)
5,074,079 shares of Common Stock.
James M. Davis has voting and investment control over the securities
held
by Stanford Venture Capital Holdings, Inc., but he disclaims beneficial
ownership of such securities, except to the extent of any pecuniary
interest therein.
|
EQUITY COMPENSATION IN FISCAL 2004
The
following table provides information about the securities authorized for
issuance under our equity compensation plans as of December 31, 2004.
EQUITY
COMPENSATION PLAN INFORMATION
|
Number
of securities to be issued upon |
Weighted-average
|
Number
of securities remaining available
or
future issuance
|
||||||||
|
exercise
of
outstanding
options (1)
|
exercise
price of outstanding options |
under
equity
compensation
plans (2)
|
||||||||
|
Equity
compensation plans approved by security holders
|
501,131
|
$
|
0.64
|
1,765,900
|
||||||
|
Equity
compensation plans not approved by security holders
|
—
|
—
|
—
|
|||||||
|
Total
|
501,131
|
$
|
0.64
|
1,765,900
|
||||||
| (1) |
Issued
pursuant to our 2002 Stock Incentive Plan, our 2002 California Stock
Incentive Plan, and our 2000 Stock Option Plan.
|
| (2) |
1,574,900
shares are available for future issuance pursuant to the 2002 Stock
Incentive Plan and 191,000 shares are available for future issuance
pursuant to the 2002 California Stock Incentive Plan. We do not intend
to
issue any additional options under our 2000 Stock Option Plan.
|
Stronghold
Technologies, Inc., the Predecessor Entity, became our wholly-owned subsidiary
on May 16, 2002 pursuant to a merger with and into Acquisition Sub. Pursuant
to
the merger, the Predecessor Entity's stockholders surrendered all of their
outstanding shares of the Predecessor Entity's common stock in exchange for
a
total of 7,000,000 shares of our common stock. Of these shares, Christopher
J.
Carey, our current President, and his wife received a total of 3,937,500 shares
held jointly, and Mr. Carey received an additional 1,093,750 shares
individually.
Pursuant
to a Securities Purchase Agreement which we entered into on May 15, 2002, with
Stanford, a major shareholder of our company, Pietro Bortolatti, a former
officer and director of our company, and Mr. Carey, we agreed to issue to
Stanford such number of shares of our Series A Preferred Stock that would in
the
aggregate equal 20% of the total issued and outstanding shares of our common
stock, and a warrant to purchase an equal number of shares of our common stock.
The aggregate purchase price for the Series A Preferred Stock and warrants
purchased by Stanford was $3,000,000. The Series A Preferred Stock and warrant
purchase took place on four separate closing dates from May 16, 2002 through
July 19, 2002, in which we issued an aggregate of 2,002,750 shares of our Series
A Preferred Stock to Stanford and warrants for 2,002,750 shares of our common
stock. So long as any shares of Series A Preferred Stock are outstanding and
held by Stanford, Stanford had the right to maintain its percentage ownership
with respect to any additional securities we may issue, with certain exceptions
under the Series A Securities Purchase Agreement.
Pursuant
to a Securities Purchase Agreement which we entered into on April 24, 2003,
we
agreed to issue to Stanford a total of 2,444,444 shares of our Series B $0.90
Convertible Preferred Stock ("Series B Preferred Stock"). The issuance of the
Series B Preferred Stock occurred on six separate closing dates beginning on
April 24, 2003 and closing on September 15, 2003. In connection with the
Purchase Agreement, we modified the warrants issued in connection with the
Series A offering to reduce the exercise price to $0.25 per share and extend
the
expiration date to August 1, 2008. Stanford was also granted the right to
maintain its percentage ownership with respect to any additional securities
we
may issue, with certain exceptions under the Series B Securities Purchase
Agreement. In addition, we agreed to convert all outstanding loans and
unreimbursed expenses to certain stockholders of our company for 603,000 shares
of our common stock at a price of $0.90 per share. The value of the warrant
modification was treated as additional costs associated with raising capital
and
was shown as a reduction of additional paid-in capital of approximately $557,000
(computed using the Black-Scholes model with the following assumptions: expected
volatility of 0%, expected dividend yield rate of 0%, expected life of 5 years,
and a risk-free interest rate of 4.91% for September 30, 2003).
In
connection with the Series B Purchase Agreement, we entered into a Registration
Rights Agreement with Stanford, dated April 30, 2003, in which we agreed to
register the shares of common stock issuable upon conversion of the Series
B
Preferred Stock, no later than November 15, 2003. Stanford has agreed to extend
the date to register the common stock issuable upon conversion of the Series
B
Preferred Stock until March 15, 2004, which was further extended in June 2004.
In
connection with the Series B Purchase Agreement, we entered into a Consulting
Agreement with Stanford, pursuant to which Stanford has agreed to perform
certain financial consulting and advisory services, in exchange for which we
agreed to pay Stanford a fee of $50,000 per year for two years, payable
quarterly in equal installments of $12,500, with the first such installment
due
on July 1, 2003. Pursuant to the terms of the Consulting Agreement, we may,
at
our sole option, choose to issue shares of our common stock to Stanford in
lieu
of such payments.
On
November 11, 2003, we agreed with Stanford to modify the terms of the Series
A
and Series B Preferred Stock to facilitate acquisitions and other company
actions. The basic terms of the modification are: (i) waiver Section 2(e)(iii)
of the Series A Certificate of Designation, which provides for anti-dilution
protection if we shall issue securities which are convertible into shares of
our
common stock for an exercise price of less than $1.50; (ii) waiver of any rights
of Stanford to Default Warrants (as defined in the Series A Registration Rights
Agreement) due to our failure to register our shares of common stock; and (iii)
modification of the warrants previously issued to Stanford and its assigns
to
purchase 2,002,750 shares of our common stock to reduce the initial exercise
price to $0.25 per share and to extend the expiration date to August 1,
2008.
Pursuant
to the Amended and Restated Series A Certificate of Designation and Series
B
Certificate of Designation, dated November 11, 2003, by and between our company
and Stanford and a Written Notice, Consent, and Waiver Among The Holders Of
Series A $1.50 Convertible Preferred Stock, Series B $.90 Convertible Preferred
Stock and Warrants, our company and Stanford agreed to certain amendments and
restatements including:
(a)
the
filing of an Amended and Restated Certificate of Designation for Series A $1.50
Convertible Preferred Stock substantially in the form attached hereto ("Amended
and Restated Series A Certificate of Designation") pursuant to which Stanford
will (x) waive dilution adjustments for certain issuances of Common Stock and
Common Stock equivalents, (y) reduce for an eighteen month period the Stated
Value and Conversion Price (each as defined therein) to $0.50 and to $0.87
thereafter and (z) forego certain rights to approve acquisitions of fixed
assets, capital stock or capital expenditures, credit facilities and sales
of
shares of our securities. The authorized shares of Series A Preferred Stock
was
reduced from 2,017,200 to 2,002,750 shares.
(b)
the
filing of an Amended and Restated Certificate of Designation Series B $0.90
Convertible Preferred Stock substantially in the form attached hereto pursuant
to which Stanford will (x) waive dilution adjustments for certain issuances
of
Common Stock and Common Stock equivalents, (y) reduce for an eighteen month
period the Stated Value and Conversion Price (each as defined therein) to $0.50
and to $0.87 thereafter and (z) forego certain rights to approve acquisitions
of
fixed assets, capital stock or capital expenditures, credit facilities and
sales
of shares of our securities.
In
connection with the Series B Purchase Agreement, our company and Stanford also
entered into a Registration Rights Agreement, dated April 30, 2003, in which
we
agreed to register the shares of our common stock issuable upon conversion
of
the Series B Preferred Stock, no later than November 15, 2003. Stanford has
agreed to extend dare of the filing requirements of the Registration Rights
Agreement to March 14, 2004, which was subsequently extended.
(c)
In
consideration of the Notice and the granting of the Consents and Waivers, we
reduced the exercise price of the Stanford Warrants from $0.25 per share to
$.001. On November 11, 2003, Stanford exercised in full the Stanford Warrant
purchasing 2,002,750 shares of common stock for the purchase price of $2,002.75.
Pursuant
to a Stockholders' Agreement which we entered into on May 16, 2002 with
Stanford, Mr. Carey and his wife, if either Stanford or the Careys should ever
want to sell any shares of our Series A Preferred Stock or common stock, the
other party has a right of first refusal regarding such sale and, if such
non-selling party does not want to exercise its right of first refusal, we
have
the right to purchase such shares, and a right of co-sale under the same terms
and for the same type of consideration. In the case of a material adverse event
related to our company, the Careys agreed to vote their shares as directed
by
Stanford, including removing and replacing the members of the board with
designees nominated by Stanford. Finally, Stanford has the right to nominate
one
member to our board of directors and the Carey's have agreed to vote for such
nominee.
Stanford
is an affiliate of Stanford Financial Group, which is the majority stockholder
of TWS International, Inc. Luis Delahoz, one of our outside directors, is the
president and chief executive officer of TWS International, Inc. and is
Stanford's representative on our board of directors.
On
July
31, 2000, the Predecessor Entity entered into a line of credit loan arrangement
with our President, Christopher Carey, who is also president of Stronghold.
Mr.
Carey made available $1,989,500, which the Predecessor Entity could borrow
from
time to time until August 1, 2001. Outstanding amounts accrued interest at
the
rate of interest per annum equal to the floating Base Rate, computed daily,
for
the actual number of days elapsed as if each full calendar year consisted of
360
days. Overdue amounts accrued interest at an annual rate of 2% greater than
the
base rate, which is 2% above the floating base rate announced from time to
time
by Citibank, N.A. Under the agreement, the first payment was due on August
1,
2001. On such date, the line of credit was extended for one more year, until
August 1, 2002. On April 22, 2002, the Predecessor Entity issued 500,000 shares
of its common stock (which converted into 1,093,750 shares of our common stock
when we acquired the Predecessor Entity on May 16, 2002) in exchange for
cancellation of $1 million of outstanding debt under such line of credit. On
May
16, 2002, the total amount outstanding under the line of credit was $2.2
million. On such date, we issued 666,667 shares of our Common Stock to Mr.
Carey
in exchange for cancellation of $1 million of the then outstanding amount.
We
will pay Mr. Carey the remaining $1.2 million according to the terms of a
non-negotiable promissory note, which was issued on May 16, 2002, and amended
and restated in September 2002. The terms of the amended and restated note
stipulate that the Company may not make principle payments to Mr. Carey until
the retirement of the United Trust Bank loan. Until such time as the principal
is paid, we will pay an interest only fee of 12% per year. Mr. Carey's
promissory note is expressly subordinated in right of payment to the prior
payment in full of all of our senior indebtedness.
On
September 14, 2000, we issued 5,000,000 shares of our common stock to our former
president, Pietro Bortolatti, in exchange for the transfer from Mr. Bortolatti
of all of the outstanding shares of Terre di Toscana, Inc. to us. The assets
of
Terre di Toscana, Inc. included rights in several customer agreements. We valued
the 5,000,000 shares issued to Mr. Bortolatti at par value, $.0001 per share.
As
part of our merger with the Predecessor Entity and the exchange of shares for
our truffle business, Mr. Bortolatti has surrendered or exchanged all of such
shares.
In
August
2002, one of our outside directors, Robert Cox, purchased 60,000 shares of
our
common stock at a purchase price of $1.50 per share for aggregate proceeds
to us
of $90,000. Such purchase was pursuant to a Subscription Agreement in which
Mr.
Cox made certain investment representations and warranties. The price paid
by
Mr. Cox had been negotiated by third parties in an arms-length transaction.
The
third parties who negotiated the transaction purchased a number of shares
concurrently with Mr. Cox.
In
January 2004, our outside director, Robert Cox, purchased an additional 147,059
shares and a warrant to purchase 73,529 shares at $0.59/share. The price of
$0.59/share was based on 130% of the trailing five day closing price of our
common stock on the effective purchase date of January 9, 2004.
Lenard
Berger, our Chief Technology Officer and Vice President and James Cummiskey,
our
Vice President of Sales and Marketing, received 200,000 shares of common stock
from the Predecessor Entity as founders of such entity, at a per share price
of
$0.005. Such shares converted into 437,400 shares of our Common Stock.
On
September 30, 2002, we entered into a loan agreement with CC Trust Fund to
borrow an amount up to $355,128. This bridge loan was for a period of twelve
months, with all principal due and payable on September 30, 2003. The 12.5%
interest on the outstanding principal is due each year. At the end of the loan
period, the CC Trust Fund will be entitled to exercise 25,000 warrants at $1.50
per share. As of March 31, 2003, $355,128 was outstanding under the CC Trust
Fund loan agreement. On September 30, 2003, the CC Trust Fund agreed to extend
the term of their loan to December 30, 2003. On December 30, 2003, the CC Trust
Fund agreed to extend the term of their loan to March 31, 2004. On March 30,
2004, the CC Trust Fund agreed to extend the term of their loan to March 31,
2005. As of December 31, 2003, $355,128 was outstanding under the CC Trust
Fund
loan agreement. Christopher Carey Jr., Mr. Carey's son, is the beneficiary
of
the trust, and Mary Carey, Mr. Carey's wife, is the trustee of the trust.
On
September 30, 2002, we entered into a loan agreement with AC Trust Fund to
borrow an amount up to $375,404. This bridge loan is for a period of twelve
months, with all principal due and payable on September 30, 2003. The 12.5%
interest on the outstanding principal is due each year. At the end of the loan
period, the AC Trust Fund will be entitled to exercise 25,000 warrants at $1.50
per share. On September 30, 2002, the AC Trust Fund agreed to extend the term
of
their loan to December 30, 2003. On December 30, 2003, the AC Trust Fund agreed
to extend the term of their loan to March 31, 2004. On March 30, 2004, the
AC
Trust Fund agreed to extend the term of their loan to March 31, 2005. As March
31, 2005 Mr. Carey extended the term of the loan to May 31, 2006. As of December
31, 2005, $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.
We
believe that the terms of all of the above transactions are commercially
reasonable and no less favorable to us than we could have obtained from an
unaffiliated third party on an arm's length basis. Our policy requires that
all
related parties recuse themselves from negotiating and voting on behalf of
our
company in connection with related party transactions.
| 31.1 |
Certification
by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
| 31.2 |
Certification
by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
| 32.1 |
Certification
by the Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
| 32.2 |
Certification
by the Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
|
Description
|
|
|
2.1
(1)(4)
|
Merger
Agreement and Plan of Merger, dated May 15, 2002, by and among TDT
Development, Inc., Stronghold Technologies, Inc., TDT Stronghold
Acquisition Corp., Terre Di Toscana, Inc., Terres Toscanes, Inc.,
certain
stockholders of TDT Development, Inc. and Christopher J.
Carey.
|
|
2.2
(5)
|
Stock
Purchase Agreement, dated July 19, 2002, by and between TDT Development,
Inc. and Mr. Pietro Bortolatti.
|
|
3.1
(2)
|
Articles
of Incorporation, as amended on July 11,
2002.
|
|
Exhibit
Number
|
Description
|
|
3.2
(3)
|
By-Laws.
|
|
3.3
(20)
|
Certificate
of Amendment to the Company’s Certificate of
Incorporation.
|
|
3.4
(21)
|
Certificate
of Designation of Series C Preferred Stock.
|
|
4.1
(2)
|
Certificate
of Designations filed on May 16, 2002.
|
|
4.2
(5)
|
Specimen
Certificate of Common Stock.
|
|
4.3
(8)
|
Promissory
Note for $300,000, dated March 18, 2003, made by Stronghold Technologies,
Inc. in favor of Christopher J. Carey.
|
|
4.4
(8)
|
Promissory
Note for $100,000, dated March 18, 2003, made by Stronghold Technologies,
Inc. in favor of Christopher J. Carey.
|
|
4.5
(8)
|
Form
of Warrant with Christopher J. Carey.
|
|
4.6
(10)
|
Amended
and Restated Certificate of Designation of Series A $1.50 Convertible
Preferred Stock of Stronghold Technologies, Inc.
|
|
4.7
(10)
|
Amended
and Restated Certificate of Designation of Series B $0.90 Convertible
Preferred Stock of Stronghold Technologies, Inc.
|
|
4.8
(11)
|
Securities
Purchase Agreement dated June 18, 2004 between the Company and New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
AJW
Offshore, Ltd. and AJW Partners, LLC
|
|
4.9
(11)
|
Callable
Secured Convertible Note in the name of New Millennium Capital Partners
II, LLC dated June 18, 2004
|
|
4.10
(11)
|
Callable
Secured Convertible Note in the name of AJW Qualified Partners, LLC
dated
June 18, 2004
|
|
4.11
(11)
|
Callable
Secured Convertible Note in the name of AJW Offshore, Ltd. dated
June 18,
2004
|
|
4.12
(11)
|
Callable
Secured Convertible Note in the name of AJW Partners, LLC dated June
18,
2004
|
|
4.13
(11)
|
Stock
Purchase Warrant in the name of New Millennium Capital Partners II,
LLC
dated June 18, 2004
|
|
4.14
(11)
|
Stock
Purchase Warrant in the name of AJW Qualified Partners, LLC dated
June 18,
2004
|
|
4.15
(11)
|
Stock
Purchase Warrant in the name of AJW Offshore, Ltd. Dated June 18,
2004
|
|
Exhibit
Number
|
Description
|
|
4.16
(11)
|
Stock
Purchase Warrant in the name of AJW Partners, LLC dated June 18,
2004
|
|
4.17
(11)
|
Registration
Rights Agreement dated June 18, 2004 between the Company and New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
AJW
Offshore, Ltd. and AJW Partners, LLC
|
|
4.18(11)
|
Security
Agreement dated June 18, 2004 between the Company and New Millennium
Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd.
and AJW Partners, LLC
|
|
4.19(11)
|
Intellectual
Property Security Agreement dated June 18, 2004 between the Company
and
New Millennium Capital Partners II, LLC, AJW Qualified Partners,
LLC, AJW
Offshore, Ltd. and AJW Partners, LLC
|
|
4.20
(16)
|
Callable
Secured Convertible Note in the name of New Millennium Capital Partners
II, LLC dated July 27, 2004
|
|
4.21(16)
|
Callable
Secured Convertible Note in the name of AJW Qualified Partners, LLC
dated
July 27, 2004
|
|
4.22(16)
|
Callable
Secured Convertible Note in the name of AJW Offshore, Ltd. dated
July 27,
2004
|
|
4.23
(16)
|
Callable
Secured Convertible Note in the name of AJW Partners, LLC dated July
27,
2004(16)
|
|
4.24
(16)
|
Stock
Purchase Warrant in the name of New Millennium Capital Partners II,
LLC
dated July 27, 2004
|
|
4.25(16)
|
Stock
Purchase Warrant in the name of AJW Qualified Partners, LLC dated
July 27,
2004(16)
|
|
4.26
(16)
|
Stock
Purchase Warrant in the name of AJW Offshore, Ltd. Dated July 27,
2004(16)
|
|
4.27
(16)
|
Stock
Purchase Warrant in the name of AJW Partners, LLC dated July 27,
2004
|
|
4.28
(16)
|
Callable
Secured Convertible Note in the name of New Millennium Capital Partners
II, LLC dated October 22, 2004
|
|
4.29
(16)
|
Callable
Secured Convertible Note in the name of AJW Qualified Partners, LLC
dated
October 22, 2004
|
|
4.30
(16)
|
Callable
Secured Convertible Note in the name of AJW Offshore, Ltd. dated
October
22, 2004
|
|
4.31
(16)
|
Callable
Secured Convertible Note in the name of AJW Partners, LLC dated October
22, 2004
|
|
4.32
(16)
|
Stock
Purchase Warrant in the name of New Millennium Capital Partners II,
LLC
dated October 22, 2004
|
|
4.33
(16)
|
Stock
Purchase Warrant in the name of AJW Qualified Partners, LLC dated
October
22, 2004
|
|
Exhibit
Number
|
Description
|
|
4.34
(16)
|
Stock
Purchase Warrant in the name of AJW Offshore, Ltd. Dated October
22,
2004
|
|
4.35
(16)
|
Stock
Purchase Warrant in the name of AJW Partners, LLC dated October 22,
2004
|
|
4.36
(16)
|
Callable
Secured Convertible Note in the name of New Millennium Capital Partners
II, LLC dated March 18, 2005
|
|
4.37(16)
|
Callable
Secured Convertible Note in the name of AJW Qualified Partners, LLC
dated
March 18, 2005
|
|
4.38(16)
|
Callable
Secured Convertible Note in the name of AJW Offshore, Ltd. dated
March 18,
2005
|
|
4.39(16)
|
Callable
Secured Convertible Note in the name of AJW Partners, LLC dated March
18,
2005
|
|
4.40
(16)
|
Stock
Purchase Warrant in the name of New Millennium Capital Partners II,
LLC
dated March 18, 2005
|
|
4.41(16)
|
Stock
Purchase Warrant in the name of AJW Qualified Partners, LLC dated
March
18, 2005
|
|
4.42(16)
|
Stock
Purchase Warrant in the name of AJW Offshore, Ltd. dated March 18,
2005
|
|
4.43(16)
|
Stock
Purchase Warrant in the name of AJW Partners, LLC dated March 18,
2005
|
|
4.44
(16)
|
Amendment
No. 2 to the Securities Purchase Agreement dated March 4, 2005 by
and
among the Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
|
|
4.45
(16)
|
Letter
Agreement dated March 4, 2005 by and among the Company and New Millennium
Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd.
and AJW Partners, LLC
|
|
4.46(16)
|
Amendment
No. 1 to the Securities Purchase Agreement dated October 22, 2004
by and
among the Company and New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners,
LLC
|
|
4.47
(17)
|
Securities
Purchase Agreement dated March 31, 2005 by and among the Company
and New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
AJW
Offshore, Ltd. and AJW Partners, LLC
|
|
4.48
(17)
|
Form
of Callable Secured Convertible dated March 31, 2005
|
|
4.49(17)
|
Form
of Stock Purchase Warrant dated March 31, 2005(17)
|
|
4.50
(17)
|
Registration
Rights Agreement dated March 31, 2005 by and among the Company and
New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
AJW
Offshore, Ltd. and AJW Partners, LLC
|
|
Exhibit
Number
|
Description
|
|
4.51
(17)
|
Security
Agreement dated March 31, 2005 by and among the Company and New Millennium
Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd.
and AJW Partners, LLC
|
|
4.52
(17)
|
Intellectual
Property Security Agreement dated March 31, 2005 by and among the
Company
and New Millennium Capital Partners II, LLC, AJW Qualified Partners,
LLC,
AJW Offshore, Ltd. and AJW Partners, LLC
|
|
4.53
(18)
|
Securities
Purchase Agreement dated July 15, 2005 by and among the Company and
New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
AJW
Offshore, Ltd. and AJW Partners, LLC
|
|
4.54
(18)
|
Form
of Callable Secured Convertible dated July 15, 2005
|
|
4.55
(18)
|
Form
of Stock Purchase Warrant dated July 15, 2005
|
|
4.56
(18)
|
Registration
Rights Agreement dated July 15, 2005 by and among the Company and
New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
AJW
Offshore, Ltd. and AJW Partners, LLC
|
|
4.57
(18)
|
Security
Agreement dated July 15, 2005 by and among the Company and New Millennium
Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd.
and AJW Partners, LLC
|
|
4.58
(18)
|
Intellectual
Property Security Agreement dated July 15, 2005 by and among the
Company
and New Millennium Capital Partners II, LLC, AJW Qualified Partners,
LLC,
AJW Offshore, Ltd. and AJW Partners, LLC
|
|
4.59
(18)
|
Escrow
Agreement dated July 15, 2005 by and among the Company and New Millennium
Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd.
and AJW Partners, LLC and the Escrow Agent
|
|
4.60
(20)
|
Securities
Purchase Agreement dated February 6, 2006 by and among the Company
and New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
AJW
Offshore, Ltd. and AJW Partners, LLC
|
|
4.61(20)
|
Form
of Callable Secured Convertible dated February 6, 2006
|
|
4.
62(20)
|
Form
of Stock Purchase Warrant dated February 6, 2006
|
|
4.
63(20)
|
Registration
Rights Agreement dated February 6, 2006 by and among the Company
and New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
AJW
Offshore, Ltd. and AJW Partners, LLC
|
|
4.64
(20)
|
Security
Agreement dated February 6, 2006 by and among the Company and New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
AJW
Offshore, Ltd. and AJW Partners, LLC
|
|
Exhibit
Number
|
Description
|
|
4.65
(20)
|
Intellectual
Property Security Agreement dated February 6, 2006 by and among the
Company and New Millennium Capital Partners II, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC
|
|
4.66(22)
|
Securities
Purchase Agreement dated March 17, 2006 by and among the Company
and New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
AJW
Offshore, Ltd. and AJW Partners, LLC
|
|
4.66(22)
|
Form
of Callable Secured Convertible dated March 17, 2006
|
|
4.67(22)
|
Form
of Stock Purchase Warrant dated March 17, 2006
|
|
4.68(22)
|
Registration
Rights Agreement dated March 17, 2006 by and among the Company and
New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC,
AJW
Offshore, Ltd. and AJW Partners, LLC
|
|
4.69(22)
|
Security
Agreement dated March 17, 2006 by and among the Company and New Millennium
Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd.
and AJW Partners, LLC
|
|
4.70(22)
|
Intellectual
Property Security Agreement dated March 17, 2006 by and among the
Company
and New Millennium Capital Partners II, LLC, AJW Qualified Partners,
LLC,
AJW Offshore, Ltd. and AJW Partners, LLC
|
|
5.1
|
Sichenzia
Ross Friedman Ference LLP Opinion and Consent
|
|
10.1
(2)
|
2002
Stock Incentive Plan.
|
|
10.2
(2)
|
Form
of Incentive Stock Option Agreement to be issued under the 2002 Stock
Incentive Plan.
|
|
10.3
(2)
|
Form
of Nonstatutory Stock Option Agreement to be issued under the 2002
Stock
Incentive Plan.
|
|
10.4
(5)
|
California
2002 Stock Incentive Plan.
|
|
10.5
(5)
|
Form
of Incentive Stock Option Agreement to be issued under the California
2002
Stock Incentive Plan.
|
|
10.6
(5)
|
Form
of Nonstatutory Stock Option Agreement to be issued under the California
2002 Stock Incentive Plan.
|
|
10.7
(2)
|
Executive
Employment Agreement by and between Stronghold Technologies, Inc.
and
Christopher J. Carey, dated May 15, 2002.
|
|
10.8
(2)
|
Employment
and Non-Competition Agreement by and between Stronghold Technologies,
Inc.
and Lenard Berger, dated August 1, 2000.
|
|
Exhibit
Number
|
Description
|
|
10.9
(2)
|
Employment
and Non-Competition Agreement by and between Stronghold Technologies,
Inc.
and Salvatore D'Ambra, dated July 10, 2000.
|
|
10.10
(2)
|
Employment
and Non-Competition Agreement by and between Stronghold Technologies,
Inc.
and James J. Cummiskey, dated August 14, 2000.
|
|
10.11
(2)
|
Business
Loan Agreement by and between Stronghold Technologies, Inc. and
UnitedTrust Bank, dated June 30, 2002.
|
|
10.12
(2)
|
Promissory
Note issued by Stronghold Technologies, Inc. made payable to UnitedTrust
Bank, Dated June 30, 2002.
|
|
10.13
(2)
|
Commercial
Security Agreement by and between Stronghold Technologies, Inc. and
UnitedTrust Bank, dated June 30, 2002.
|
|
10.14
(2)
|
Promissory
Note issued by Stronghold Technologies, Inc. made payable to Christopher
J. Carey, dated May 16, 2002.
|
|
10.15
(4)
|
Securities
Purchase Agreement, dated May 15, 2002, by and among TDT Development,
Inc., Stanford Venture Capital Holdings, Inc., Pietro Bortolatti,
Stronghold Technologies, Inc. and Christopher J. Carey.
|
|
10.16
(4)
|
Registration
Rights Agreement, dated May 16, 2002, by and among TDT Development,
Inc.
and Stanford Venture Capital Holdings, Inc.
|
|
10.17
(4)
|
Lock-Up
Agreement, dated May 16, 2002, by and among TDT Development,
Inc.
|
|
10.18
(4)
|
Stockholders'
Agreement, dated May 16, 2002, by and among TDT Development, Inc.,
Christopher J. Carey, Mary Carey and Stanford Venture Capital Holdings,
Inc.
|
|
10.19
(4)
|
Form
of Warrant to be issued pursuant to the Securities Purchase Agreement
(Exhibit 10.11).
|
|
10.20
(6)
|
Loan
Agreement by and among Stronghold Technologies, Inc., its subsidiary
and
UnitedTrust Bank, dated September 30, 2002.
|
|
10.21
(6)
|
Commercial
Loan Note issued by Stronghold Technologies, Inc. and its subsidiary
made
payable to UnitedTrust Bank, dated September 30,2002
|
|
10.22
(6)
|
Security
Agreement by and between Stronghold Technologies, Inc. and UnitedTrust
Bank, dated September 30, 2002.
|
|
10.23
(6)
|
Security
Agreement by and between Stronghold's subsidiary and UnitedTrust
Bank,
dated September 30, 2002.
|
|
10.24
(6)
|
Subordination
Agreement by and among Christopher J. Carey, Stronghold Technologies,
Inc.
and UnitedTrust Bank, dated September 30,
2002.
|
|
Exhibit
Number
|
Description
|
|
10.25
(6)
|
Subordination
Agreement by and among Christopher J. Carey, Stronghold's subsidiary
and
UnitedTrust Bank, dated September 30, 2002.
|
|
10.26
(6)
|
Guaranty
by Christopher J. Carey in favor UnitedTrust Bank, dated September
30,
2002.
|
|
10.27
(6)
|
Loan
Agreement by and among Stronghold Technologies, Inc., its subsidiary
and
AC Trust Fund, dated September 30, 2002.
|
|
10.28
(6)
|
Loan
Agreement by and among Stronghold Technologies, Inc., its subsidiary
and
CC Trust Fund, dated September 30, 2002.
|
|
10.29
(6)
|
Form
of Subscription Agreement by and between Stronghold Technologies,
Inc. and
each of the parties listed on the schedule of purchasers attached
thereto.
|
|
10.30
(6)
|
Promissory
Note issued by Stronghold Technologies, Inc. made payable to Christopher
J. Carey, dated September 30. 2002.
|
|
10.31
(7)
|
Securities
Purchase Agreement, dated April 30, 2003, by and between Stronghold
Technologies, Inc. and Stanford Venture Capital Holdings,
Inc.
|
|
10.32
(7)
|
Registration
Rights Agreement, dated April 30, 2003, by and between Stronghold
Technologies, Inc. and Stanford Venture Capital Holdings,
Inc.
|
|
10.33
(7)
|
Consulting
Agreement, dated April 30, 2003, by and between Stronghold Technologies,
Inc. and Stanford Venture Capital Holdings, Inc.
|
|
10.34
(9)
|
First
Modification to Loan Agreement and Note among Stronghold Technologies,
Inc., Christopher J. Carey and UnitedTrust Bank, dated July 31,
2003.
|
|
10.35(13)
|
Lease
Agreement entered between the Company and APA Properties No. 2,
LP
|
|
10.36(13)
|
Sublease
Agreement between Clark/Bardes Consulting, Inc. and the
Company
|
|
10.37(14)
|
Forbearance
Agreement entered by and between the Company and PNC
Bank
|
|
10.38
(14)
|
Amendment
No. 1 to the Forbearance Agreement entered by and between the Company
and
PNC Bank
|
|
10.39(21)
|
Agreement
of Settlement dated February 6, 2006 by and between Christopher Carey
and
Stronghold Technologies, Inc.
|
|
10.40(23)
|
Agreement
of Settlement dated February 6, 2006 by and between Christopher Carey
and
Stronghold Technologies, Inc.
|
|
Exhibit
Number
|
Description
|
|
16.1
|
Letter
on change in certifying accountant dated March 15, 2006 (incorporated
by
reference to the Form 8-K Current Report filed on March 16, 2006)
|
|
|
|
|
21
(5)
|
Subsidiaries
of the Registrant.
|
|
31.1
|
Certification
of the Chief Executive Officer and the Principal Financial Officer
of the
company pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certification
of the Chief Executive Officer and Principal Financial Officer of
the
company Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002.
|
| (1) |
The
exhibits and schedules to the Merger Agreement have been omitted
from this
filing pursuant to Item 601(b)(2) of Regulation S-K. The Company
will
furnish copies of any of the exhibits and schedules to the U.S. Securities
and Exchange Commission upon request
|
| (2) |
Incorporated
herein by reference to the exhibits to Registrant's Quarterly Report
on
Form 10-QSB for the fiscal quarter ended June 30, 2002.
|
| (3) |
Incorporated
herein by reference to the exhibits to the Registrant's Registration
Statement on Form SB-2 as filed with the Securities and Exchange
Commission on February 1, 2001 (No. 333-54822).
|
| (4) |
Incorporated
herein by reference to the exhibits to the Registrant's Current Report
on
Form 8-K dated May 16, 2002.
|
| (5) |
Incorporated
herein by reference to the exhibits to the Registrant's Registration
Statement on Form SB-2 as filed with the Securities and Exchange
Commission on September 24, 2002.
|
| (6) |
Incorporated
herein by reference to the exhibits to Registrant's Annual Report
on Form
10-KSB for the fiscal year ended December 31, 2002.
|
| (7) |
Incorporated
by reference to Exhibit 99.3 to the Company's Form 8-K as filed with
the
Securities and Exchange Commission on May 8, 2003.)
|
| (8) |
Incorporated
by reference to the exhibits to Registrants Quarterly Report on Form
10-QSB for the quarterly period ended March 31, 2003.
|
| (9) |
Incorporated
by reference to the exhibits to Registrants Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 2003.
|
| (10) |
Incorporated
by reference to the exhibits to Registrants Form 10-KSB for the year
ended
December 31, 2003.
|
| (11) |
Incorporated
by reference to the exhibits to Registrants Form 8-K Current Report
filed
June 28, 2004.
|
| (12) |
Incorporated
by reference to the exhibits to Registrants Form SB-2 Registration
Statement filed July 21, 2004.
|
| (13) |
Incorporated
by reference to the exhibits to Registrants Quarterly Report on Form
10-QSB for the quarterly period ended September 30, 2004.
|
| (14) |
Incorporated
by reference to the exhibits to Registrants Form SB-2 Registration
Statement filed February 11, 2005.
|
| (15) |
Incorporated
by reference to the exhibits to Registrants Form 8-K Current Report
filed
June 28, 2004.
|
| (16) |
Incorporated
by reference to the exhibits to Registrants Form 8-K Current Report
filed
March 25, 2005.
|
| (17) |
Incorporated
by reference to the exhibits to Registrants Form 8-K Current Report
filed
April 11, 2005.
|
| (18) |
Incorporated
by reference to the exhibits to Registrants Form 8-K Current Report
filed
July 20, 2005.
|
| (19) |
Incorporated
by reference to the exhibits to Registrants Form SB-2 Registration
Statement filed August 2, 2005.
|
| (20) |
Incorporated
by reference to the exhibits to Registrants Form 8-K Current Report
filed
February 9, 2006.
|
| (21) |
Incorporated
by reference to the exhibits to Registrants Form 8-K Current Report
filed
February 14, 2006.
|
| (22) |
Incorporated
by reference to the exhibits to Registrants Form 8-K Current Report
filed
March 23, 2006.
|
| (23) |
Incorporated
by reference to the exhibits to Registrants Form 8-K Current Report
filed
April 12, 2006.
|
The
following table presents the aggregate fees billed for professional services
rendered by Rothstein, Kass & Company, P.C. in 2004 and 2005. Other than as
set forth below, no professional services were rendered or fees billed by
Rothstein, Kass & Company, P.C. during 2004 or 2005.
|
2005
|
2004
|
||||||
|
Audit
Fees (1)
|
$
|
24,500
|
$
|
25,200
|
|||
|
Tax
Fees (2)
|
$
|
3,000
|
$
|
20,000
|
|||
|
Other
Fees
|
$
|
500
|
$
|
6,000
|
|||
|
TOTAL
|
$
|
28,000
|
$
|
51,200
|
|||
| (1) |
Audit
fees consist of professional services rendered for the audit of the
Company's annual financial statements and the reviews of the quarterly
financial statements.
|
| (2) |
Tax
fees consist of fees for services rendered to the Company for tax
compliance, tax planning and advice.
|
All
work
performed by Rothstein, Kass & Company, P.C. as described above under the
caption Audit Fees for the fiscal year ended March 31, 2005, has been approved
by the Audit Committee.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized this 14th day of April, 2004.
| STRONGHOLD TECHNOLOGIES, INC. | ||
| |
|
|
| By: | /s/ Christopher J. Carey | |
|
|
||
|
Name:
Christopher J. Carey
Title:
President and Chief Executive
Officer
|
||
POWER
OF ATTORNEY
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Christopher J. Carey his true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this registration statement,
and
to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do
and perform each and every act and thing requisite or necessary to be done
in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully
do
or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Christopher J. Carey
|
President
and, Chief Executive Officer,
|
April
14, 2006
|
||
|
Christopher
J. Carey
|
Principal
Financial Officer and
|
|||
|
Chairman
of the Board of Directors
|
||||
|
/s/
Karen Jackson
|
Controller
|
April
14, 2006
|
||
|
Karen
Jackson
|
(Principal
Accounting Officer)
|
|||
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
F-2
|
|
STRONGHOLD
TECHNOLOGIES, INC. AND SUBSIDIARY
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
|
To
the
Board of Directors and Shareholders Stronghold Technologies, Inc.
We
have
audited the accompanying consolidated balance sheet of Stronghold Technologies,
Inc. and Subsidiary as of December 31, 2005, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the year
then ended. These consolidated financial statements are the responsibility
of
the Company's management. Our responsibility is to express an opinion on
these
consolidated financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the
overall financial statement presentation. We believe that our audit provides
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Stronghold Technologies,
Inc. and Subsidiary as of December 31, 2005, and the results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 2, the
Company's ability to continue in the normal course of business is dependent
upon, among other things, its success in raising additional capital and
achieving profitable operations. The Company has recurring losses, substantial
working capital and stockholders' deficits and negative cash flows from
operations. These conditions among others, raise substantial doubt about
the
Company's ability to continue as a going concern. Management's plans regarding
these matters are also described in Note 2. These consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
Hackensack,
New Jersey
Except
for Note 13, as to which the dates are February 6, 2006 and March 17,
2006
To
the
Board of Directors and Shareholders Stronghold Technologies, Inc.
We
have
audited the accompanying of Stronghold Technologies, Inc. and Subsidiary
for the year ended December 31, 2004, consolidated statements of
operations, stockholders' deficit, and cash flows. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, of Stronghold Technologies, Inc. and
Subsidiary for the year ended December 31, 2004, the results of their
operations and their cash flows, in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 2, the
Company's ability to continue in the normal course of business is dependent
upon
the success of future operations. The Company has recurring losses, substantial
working capital and stockholders' deficit and negative cash flows from
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding these matters
are
also described in Note 2. These consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
As
discussed in note 5 to the consolidated financial statements, the Company has
restated its December 31, 2004 consolidated financial statements to reflect
the
proper treatment of its convertible debt and the associated liabilities
surrounding that debt.
Roseland,
New Jersey
March
31,
2005, except for Note 14, as to which the date is April 7, 2006
|
STRONGHOLD
TECHNOLOGIES, INC. AND SUBSIDIARY
|
||||
|
December
31,
|
||||
|
ASSETS
|
2005
|
|||
|
Current
assets
|
||||
|
Cash
|
$
|
67,060
|
||
|
Accounts
receivable, less allowance for returns and
|
||||
|
doubtful
accounts of $60,000
|
43,437
|
|||
|
Inventories
|
18,093
|
|||
|
Prepaid
expenses
|
27,038
|
|||
|
Total
current assets
|
155,628
|
|||
|
Property
and equipment, net
|
15,635
|
|||
|
Other
assets
|
||||
|
Software
development costs, net of accumulated amortization of
$888,391
|
490,846
|
|||
|
Deferred
charge, convertible debt loan acquisition costs, net of
amortization
|
37,288
|
|||
|
Other
|
40,193
|
|||
|
Total
other assets
|
568,327
|
|||
|
$
|
739,590
|
|||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||
|
Current
liabilities
|
||||
|
Accounts
payable
|
$
|
508,058
|
||
|
Interest
payable, stockholders
|
1,039,315
|
|||
|
Notes
payable, stockholders, current portion
|
1,352,531
|
|||
|
Deferred
revenue
|
358,959
|
|||
|
Liquidated
damages payable
|
903,219
|
|||
|
Accrued
expenses and other current liabilities
|
1,873,250
|
|||
|
Total
current liabilities
|
6,035,332
|
|||
|
Long-term
liabilities
|
||||
|
Notes
payable, stockholders, less current portion
|
875,000
|
|||
|
Note
payable, convertible debt
|
4,496,389
|
|||
|
Payroll
taxes payable, long term
|
45,000
|
|||
|
Total
long term liabilities
|
5,416,389
|
|||
|
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 (aggregate liquidation preference
$2,200,000)
|
445
|
|||
|
Common
stock, $.0001 par value, authorized 8,500,000,000
|
||||
|
shares,
17,460,222 issued and outstanding
|
1,746
|
|||
|
Additional
paid-in capital
|
8,004,389
|
|||
|
Accumulated
deficit
|
(18,718,711
|
)
|
||
|
Total
stockholders' deficit
|
(10,712,131
|
)
|
||
|
$
|
739,590
|
|||
See
accompanying notes to consolidated financial statements.
|
STRONGHOLD
TECHNOLOGIES, INC. AND SUBSIDIARY
|
|||||||
|
Years
Ended December 31,
|
2005
|
2004
|
|||||
|
Sales
|
$
|
943,735
|
$
|
2,489,790
|
|||
|
Cost
of sales
|
324,360
|
834,349
|
|||||
|
Gross
profit
|
619,375
|
1,655,441
|
|||||
|
Selling,
general and
|
|||||||
|
administration
|
2,732,954
|
4,225,652
|
|||||
|
Loss
from operations
|
(2,113,579
|
)
|
(2,570,211
|
)
|
|||
|
Interest
expense
|
747,383
|
327,429
|
|||||
|
Liquidated
damages
|
771,486
|
131,733
|
|||||
|
Net
loss applicable to common
|
|||||||
|
stockholders
|
$
|
(3,632,448
|
)
|
$
|
(3,029,373
|
)
|
|
|
Basic
and diluted loss per
|
|||||||
|
common
share
|
$
|
(0.17
|
)
|
$
|
(0.21
|
)
|
|
|
Weighted
average number of
|
|||||||
|
common
shares outstanding
|
16,997,444
|
14,081,263
|
|||||
See
accompanying notes to consolidated financial statements.
|
STRONGHOLD
TECHNOLOGIES, INC. AND SUBSIDIARY
|
|||||||
|
Years
ended December 31,
|
2005
|
2004
|
|||||
|
Cash
flows from operating activities
|
|||||||
|
Net
loss
|
$
|
(3,632,448
|
)
|
$
|
(3,029,373
|
)
|
|
|
Adjustments
to reconcile net loss to
|
|||||||
|
net
cash used in operating activities:
|
|||||||
|
Provision
for returns and allowances
|
(159,891
|
)
|
1,445
|
||||
|
Depreciation
|
65,520
|
417,583
|
|||||
|
Amortization
|
467,651
|
||||||
|
Stock
issued for services
|
—
|
161,441
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable
|
420,252
|
281,545
|
|||||
|
Inventories
|
26,610
|
127,042
|
|||||
|
Prepaid
expenses
|
63,446
|
(78,843
|
)
|
||||
|
Other
receivables
|
—
|
(3,804
|
)
|
||||
|
Accounts
payable
|
(111,121
|
)
|
(62,144
|
)
|
|||
|
Interest
payable, stockholders
|
603,261
|
64,875
|
|||||
|
Software
development costs
|
(65,455
|
)
|
(407,405
|
)
|
|||
|
Accrued
expenses and other current liabilities
|
(362,079
|
)
|
(409,380
|
)
|
|||
|
Deferred
revenue
|
250,987
|
250,987
|
|||||
|
Other
Assets
|
34,909
|
2,910
|
|||||
|
Net
cash used in operating activities
|
(2,398,358
|
)
|
(2,683,121
|
)
|
|||
|
Cash
flows from investing activities,
|
|||||||
|
Payments
for purchase of property and equipment
|
(1,970
|
)
|
(3,737
|
)
|
|||
|
Net
cash used in investing activities
|
(1,970
|
)
|
(3,737
|
)
|
|||
|
Cash
flows from financing activities
|
|||||||
|
Proceeds
from issuance of common stock, net of financing costs
|
79,461
|
52,000
|
|||||
|
Proceeds
from notes payable, stockholders
|
155,000
|
920,000
|
|||||
|
Principal
repayments of notes payable, stockholders
|
(50,496
|
)
|
(21,775
|
)
|
|||
|
Proceeds
from notes payable, convertible debt
|
2,151,575
|
2,350,000
|
|||||
|
Payments
made for loan acquisition cost relating to notes payable,
stockholders
|
—
|
(82,095
|
)
|
||||
|
Liquidated
damages payable
|
771,486
|
131,733
|
|||||
|
Principal
repayments of notes payable
|
(606,667
|
)
|
(625,000
|
)
|
|||
|
Principal
payments for obligations under capital leases
|
(33,471
|
)
|
(45,566
|
)
|
|||
|
Net
cash provided by financing activities
|
2,466,888
|
2,679,297
|
|||||
|
Net
increase (decrease) in cash
|
66,560
|
(7,561
|
)
|
||||
|
Cash,
beginning of period
|
500
|
8,161
|
|||||
|
Cash,
end of period
|
$
|
67,060
|
$
|
600
|
|||
|
Supplemental
disclosure of cash flow information,
|
|||||||
|
cash
paid during the period for interest
|
$
|
80,235
|
$
|
262,554
|
|||
See
accompanying notes to consolidated financial statements.
|
STRONGHOLD
TECHNOLOGIES, INC. AND SUBSIDIARY
|
|||||||
|
Years
Ended December 31, 2005 and 2004
|
|||||||||||||||||||||||||||||||
|
Preferred
Stock
|
Preferred
Stock
|
Additional
|
Stock
|
Total
|
|||||||||||||||||||||||||||
|
Series
A
|
Series
B
|
Common
Stock
|
Paid-in
|
Subscription
|
Accumulated
|
Stockholders'
|
|||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Receivable
|
Deficit
|
Deficit
|
||||||||||||||||||||||
|
Balances,
December 31, 2003
|
2,002,750
|
$
|
201
|
2,444,444
|
$
|
244
|
13,291,218
|
$
|
1,329
|
$
|
7,711,767
|
$
|
(3,000
|
)
|
$
|
(12,056,889
|
)
|
$
|
(4,346,349
|
)
|
|||||||||||
|
—
|
|||||||||||||||||||||||||||||||
|
Issuance
of common stock
|
157,059
|
16
|
49,984
|
50,000
|
|||||||||||||||||||||||||||
|
Conversion
of warrants
|
|||||||||||||||||||||||||||||||
|
to
common stock
|
2,000,000
|
200
|
1,800
|
2,000
|
|||||||||||||||||||||||||||
|
Stock
issued for services
|
639,072
|
64
|
161,377
|
161,441
|
|||||||||||||||||||||||||||
|
Conversion
of stockholder
|
|||||||||||||||||||||||||||||||
|
loan
to common stock
|
—
|
||||||||||||||||||||||||||||||
|
Net
loss
|
(3,029,373
|
)
|
(3,029,373
|
)
|
|||||||||||||||||||||||||||
|
Balances,
December 31, 2004
|
2,002,750
|
201
|
2,444,444
|
244
|
16,087,349
|
1,609
|
7,924,928
|
(3,000
|
)
|
(15,086,263
|
)
|
$
|
(7,162,281
|
)
|
|||||||||||||||||
|
Conversion
of convertible
|
|||||||||||||||||||||||||||||||
|
notes
to common stock
|
172,873
|
17
|
5,152
|
5,169
|
|||||||||||||||||||||||||||
|
Stock
issued for interest due, net of costs
|
1,200,000
|
120
|
74,309
|
74,429
|
|||||||||||||||||||||||||||
|
Payment
of stock subscription
|
—
|
||||||||||||||||||||||||||||||
|
receivable
|
3,000
|
3,000
|
|||||||||||||||||||||||||||||
|
Net
loss
|
(3,632,448
|
)
|
(3,632,448
|
)
|
|||||||||||||||||||||||||||
|
Balances,
December 31, 2005
|
2,002,750
|
$
|
201
|
2,444,444
|
$
|
244
|
17,460,222
|
$
|
1,746
|
$
|
8,004,389
|
$
|
—
|
$
|
(18,718,711
|
)
|
(10,712,131
|
)
|
|||||||||||||
See
accompanying notes to consolidated financial statements.
|
1.
|
Nature
of operations
|
Stronghold
Technologies, Inc. (the "Company") was incorporated in the state of New Jersey
on August 1, 2000. The Company is engaged principally as a developer of wireless
and internet-based systems for auto dealers in the United States.
|
2.
|
Going
concern
|
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. The Company has incurred a
net
loss of approximately $3,632,000 and has negative cash flows from operations
of
approximately $2,400,000 for the year ended December 31, 2005, and has a
working
capital deficit of approximately $5,880,000 and a stockholders’ deficit of
approximately $10,700,000 as of December 31, 2005. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern.
During 2006, management of the Company will rely on raising additional capital
to fund its future operations. If the Company is unable to generate sufficient
revenues or raise sufficient additional capital, there could be a material
adverse effect on the consolidated financial position, results of operations
and
cash flows of the Company. The accompanying consolidated financial statements
do
not include any adjustments that might be necessary if the Company is unable
to
continue as a going concern.
|
3.
|
Summary
of significant accounting
policies
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and
its
wholly owned subsidiary. All significant intercompany balances and transactions
have been eliminated in consolidation.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation for equipment, software
and
furniture is provided for financial reporting and tax purposes using declining
balance methods. Leasehold improvements are amortized by the straight line
method.
Maintenance,
repairs and minor renewals are charged to expenses when incurred. Replacements
and major renewals are capitalized.
Accounts
Receivable
The
Company carries its accounts receivable at cost less an allowance for doubtful
accounts. On a periodic basis, the Company evaluates its accounts receivable
and
establishes an allowance for doubtful accounts, based on a history of past
write-offs and collections and current credit conditions. Accounts are written
off as uncollectible at the discretion of management.
Inventories
Inventories,
which are comprised of hardware for resale, are stated at cost, on an average
cost basis, which does not exceed market value.
Software Development
Costs
Capitalized
software development costs, including significant product enhancements, incurred
subsequent to establishing technological feasibility in the process of software
development and production, are capitalized according to Statement of Financial
Accounting Standards (SFAS) No. 86, “Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed.” Costs incurred prior to the
establishment of technological feasibility are charged to research and
development expenses. The capitalized software is amortized over a three
year
period using the straight-line method
Fair
Value of Financial Instruments
Financial
instruments held by the Company include cash, accounts receivable, notes
payable
and accounts payable. The book value of cash, accounts receivable and accounts
payable are considered to be representative of fair value because of the
short
maturity of these instruments. The fair values of the notes payable approximate
book values primarily because the contractual interest rates approximate
prevailing market rates.
Impairment
of Long-Lived Assets
The
Company periodically assesses the recoverability of the carrying amounts
of
long-lived assets, including intangible assets. A loss is recognized when
expected undiscounted future cash flows are less than the carrying amount
of the
asset. The impairment loss is the difference by which the carrying amount
of the
asset exceeds its fair value.
Retirement
Plan
The
Company has a retirement plan under Section 401(k) of the Internal Revenue
Code
(“the Plan”), which covers all eligible employees. The Plan provides for
voluntary deduction of the employee’s salary, subject to Internal Revenue Code
limitations. The Company can make a matching contribution to the Plan, which
is
at the discretion of the Company and is determined annually. There were no
matching contributions for the years ended December 31, 2005 and
2004.
Income
Taxes
The
Company complies with SFAS No. 109, “Accounting for Income Taxes,” which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts, based
on
enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
Stock-Based
Compensation
In
December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No.
148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which
amended SFAS No. 123, “Accounting for Stock-Based Compensation.” This Statement
provides alternative methods of transition for a voluntary change to the
fair
value based method of accounting for stock-based compensation. It also amends
the disclosure provisions to require more prominent disclosure about the
effects
on reported net income (loss) of an entity’s accounting policy decisions with
respect to stock-based employee compensation. As permitted by the Statement,
the
Company does not plan to adopt the fair value recognition provisions of SFAS
No.
123 at this time. However, the Company has adopted the disclosure provisions
of
the Statement.
The
Company accounts for its stock-based employee compensation plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost
has
been recognized in the accompanying consolidated statements of operations,
as
all options granted under those plans had an exercise price equal to or in
excess of the market value of the underlying common stock at the date of
grant
(see
Note 10).
Had
compensation cost for these options been determined consistent with the fair
value method provided by SFAS No. 123, the Company’s net loss and net loss per
common share would have been the following pro forma amounts for the years
ended
December 31, 2005 and 2004.
|
2005
|
2004
|
||||||
|
Net
loss applicable to common
|
|||||||
|
shareholders,
as reported
|
$
|
(3,632,448
|
)
|
$
|
(3,029,373
|
)
|
|
|
Add
|
|||||||
|
Total
stock-based compensation
|
|||||||
|
expense
determined under fair
|
|||||||
|
value
method for all awards, net
|
|||||||
|
of
related tax effect
|
12,647
|
47,793
|
|||||
|
Pro
forma
|
$
|
(3,645,095
|
)
|
$
|
(3,077,166
|
)
|
|
|
Basic
and diluted EPS
|
|||||||
|
As
reported
|
$
|
(0.14
|
)
|
$
|
(0.22
|
)
|
|
|
Pro
forma
|
$
|
(0.14
|
)
|
$
|
(0.22
|
)
|
|
The
fair
value of issued stock options is estimated on the date of grant using the
Black-Scholes option-pricing model including the following assumptions: expected
volatility of approximately 15%, expected dividend yield rate of 0%, expected
life of 10 years, and a risk-free interest rate of 4.23% and 4.27% for the
years
ended December 31, 2005 and 2004, respectively.
Revenue
Recognition
Revenue
is recognized under the guidelines of Statement of Position SOP 97-2 Software
Revenue Recognition.
All
sales
agreements with clients do not require significant production, modification,
or
customization of software, additionally all the functionality of the product
is
made available upon delivery, therefore the Company recognizes revenue in
accordance with Paragraph 8 of 97-2 when:
| 1) |
Persuasive
evidence of an arrangement exists as evidenced by a signed contract,
|
| 2) |
Delivery
has occurred, please note that Stronghold does not recognize revenue
prior
to delivery,
|
| 3) |
The
price of Stronghold’s system is fixed and determinable as evidence by the
contract, and
|
| 4) |
Collectability
is highly probable.
|
Deferred
Revenue
Deferred
revenue is recorded as a liability when the Company receives the three year
maintenance contact in an a one-time advance payment. The Company then
recognizes the revenue from the maintenance portion of the contract on a
pro
rata basis over the term of the contract.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Loss
Per Common Share
Loss
per
common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, “Earnings Per Share,” which
requires dual presentation of basic and diluted earnings (loss) per share.
Basic
earnings (loss) per share exclude dilutions and are computed by dividing
net
loss applicable to common stockholders by the weighted average number of
common
shares outstanding for the year. Diluted earnings (loss) per share reflects
the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in
the
issuance of common stock that then shared in the earnings of the entity.
Since
the effect of the outstanding options and warrants are anti-dilutive, they
have
been excluded from the Company’s computation of loss per common
share.
Recently
Issued Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123(R), “Accounting for Stock-based Compensation (Revised).” SFAS No. 123(R)
supersedes APB No. 25 and its related implementation guidance. SFAS No. 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods
or
services that are based on the fair value of the entity’s equity instruments or
tha may be settled by the issuance of those equity instruments. SFAS No.
123(R)
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of
the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award the requisite service period (usually the vesting period). No compensation
costs are recognized for equity instruments for which employees do not render
the requisite service. The grant-date fair value of employee share options
and
similar instruments will be estimated using option-pricing models adjusted
for
the unique characteristics of those instruments (unless observable market
prices
for the same or similar instruments are available). If an equity award is
modified after the grant-date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award
over
the fair value of the original award immediately before the modification.
The
Company has not completed its evaluation of SFAS No. 123(R) but expects the
adoption of this new standard will have an impact on operating results due
to
the Company’s use of options as employee incentives.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs-an amendment of
ARB No. 43, Chapter 4”. SFAS No. 151 has been issued to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage), which requires that those items be recognized
as
current-period charges regardless of whether they meet the criterion of “so
abnormal.” In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. Management of the Company does not believe
the
effects of SFAS No. 151 have a material effect on the consolidated financial
statements, as the Company has not incurred any inventory costs that meet
the
definition of “so abnormal.”
|
4.
|
Property
and equipment
|
A
summary
of property and equipment at December 31, 2005 and the estimated lives used
in
the computation of depreciation and amortization is as follows:
|
|
|
Estimated
|
|
|||||||
|
|
Amount
|
Useful
Life
|
Principal
Method
|
|||||||
|
|
|
|
|
|||||||
|
Computer
equipment
|
$
|
192,766
|
5
years
|
Declining-balance
|
||||||
|
Computer
software
|
19,166
|
3
years
|
Declining-balance
|
|||||||
|
Furniture
and fixtures
|
21,717
|
7
years
|
Declining-balance
|
|||||||
|
Computer
equipment recorded under capital leases
|
113,491
|
5
years
|
Declining-balance
|
|||||||
|
Leasehold
improvements
|
7,982
|
4
years
|
Straight-line
|
|||||||
|
|
355,122
|
|||||||||
|
Less
accumulated depreciation
|
||||||||||
|
and
amortization
|
(339,487
|
)
|
||||||||
|
|
$
|
15,635
|
||||||||
|
5.
|
Accrued
expenses and other current
liabilities
|
Accrued
expenses and other current liabilities consist of the following at December
31,
2005:
|
Payroll
taxes, including penalties and interest
|
$
|
631,676
|
||
|
Commissions
|
116,372
|
|||
|
Compensation
|
117,395
|
|||
|
Sales
tax
|
105,140
|
|||
|
Accrued
officer's compensation
|
785,974
|
|||
|
Other
|
116,693
|
|||
|
$
|
1,873,250
|
|||
|
6.
|
Notes
payable, stockholders
|
At
December 31, 2005, notes payable, stockholders consists of the
following:
|
Note
payable bearing interest at 8% and due in March, 2007
|
$
|
875,000
|
||
|
Notes
payable bearing interest at 12.5% and due in May, 2006
|
992,531
|
|||
|
Notes
payable bearing interest at 8% and due in May, 2006
|
360,000
|
|||
|
$
|
2,227,531
|
|||
|
Less
current portion
|
1,352,531
|
|||
|
$
|
875,000
|
|
7.
|
Note
payable
|
During
the year ended December 31, 2005 the Company repaid its notes payable to
a bank
of $606,667 and interest of $16,830. This note was in default as of December
31,
2004 and had been classified short term.
|
8.
|
Callable
secured convertible notes
|
To
obtain
funding for its ongoing operations, Stronghold Technologies, Inc. (the
"Company") entered into an agreement with a group of investors pursuant to
which
it agreed to sell $4,501,575 in callable convertible secured notes and stock
purchase warrants to buy 4,501,575 shares of the Company’s common stock (the
“Warrants”)..
The
Notes
bear interest at 12%, mature two years from the date of issuance, and are
convertible into our common stock, at the Investors' option, at the lower
of (i)
$0.70 or (ii) 75% of the average of the three lowest intraday trading prices
for
the Company's common stock during the 20 trading days before, but not including,
the conversion date. The Company may prepay the Notes in the event that no
event
of default exists, there are a sufficient number of shares available for
conversion of the Notes and the market price is at or below $0.57 per share.
The
full principal amount of the Notes is due upon default under the terms of
Notes.
In addition, the Company has granted the investors a security interest in
substantially all of its assets and intellectual property as well as
registration rights.
|
9.
|
Income
taxes
|
At
December 31, 2005, the Company had net operating loss carryforwards of
approximately$12,545,000 which expire between 2009 and 2024.
As
of
December 31, 2005 the valuation of the Company’s deferred tax asset is
zero.
A
reconciliation of the credit for income taxes with the amount computed by
applying the statuatory Federal income tax rate to loss before income taxes
is
as follows:
|
2005
|
2004
|
||||||
|
Computed
expected tax credit rate
|
(34
|
)%
|
(34
|
)%
|
|||
|
State
income tax credit, net of federal benefit
|
(7
|
)
|
(7
|
)
|
|||
|
Change
in valuation allowance and other
|
41
|
41
|
|||||
|
Effective
income tax rate
|
0
|
%
|
0
|
%
|
|||
|
10.
|
Stock
option plans
|
The
Company has adopted three stock option plans (“Plans”) providing for incentive
stock options (“ISOs”) and non-qualified stock options (“NQSOs”). The Company
has reserved 2,358,541 shares of common stock for issuance upon the exercise
of
stock options granted under the Plans. The exercise price of an ISO or NQSO
will
not be less than 100% of the fair market value of the Company’s common stock at
the date of the grant. The exercise price of an ISO granted to an employee
owning greater than 10% of the Company’s common stock will not be less than 110%
of the fair market value of the Company’s common stock at the date of the grant.
The Plans further provide that the maximum period in which stock options
may be
exercised will be determined by the board of directors, except that they
may not
be exercisable after ten years from the date of grant. All of the stock option
plans vest over a three year period with each year earning 1/3 of total options
granted as long as the employee is in employment with the Company upon the
anniversary date.
The
status of the Company’s restated stock options per the Plans are summarized
below:
|
Restated
|
Weighted
|
|||||||||
|
Plan
|
Per
Share
|
Average
|
||||||||
|
Options
|
Exercise
Price
|
Exercise
Price
|
||||||||
|
Outstanding
at
|
||||||||||
|
January
1, 2004
|
1,909,309
|
$
|
0.10-$2.25
|
$
|
0.50
|
|||||
|
Granted
in the year ended
|
||||||||||
|
December
31, 2004
|
113,000
|
$
|
0.11-$0.85
|
$
|
0.59
|
|||||
|
Terminated
in the year ended
|
||||||||||
|
December
31, 2004
|
(796,901
|
)
|
$
|
0.10-$2.25
|
$
|
0.82
|
||||
|
Outstanding
at
|
||||||||||
|
December
31, 2004
|
1,225,408
|
$
|
0.11-$2.00
|
$
|
0.85
|
|||||
|
Granted
in the year ended
|
||||||||||
|
December
31, 2005
|
4,000
|
$
|
0.05
|
$
|
0.05
|
|||||
|
Terminated
in the year ended
|
||||||||||
|
December
31, 2005
|
(728,277
|
)
|
$
|
0.07-$1.50
|
$
|
1.22
|
||||
|
Outstanding
at
|
||||||||||
|
December
31, 2005
|
501,131
|
$
|
0.05-$1.50
|
$
|
0.64
|
|||||
The exercise price ranges for options outstanding and exercisable at December 31, 2005 were:
|
Weighted
|
|||||||||||||
|
Number
of Shares
|
Number
of Shares
|
Weighted
|
Average
|
||||||||||
|
Exercise
|
Outstanding
as of
|
Exercisable
at
|
Average
|
Remaining
|
|||||||||
|
Price
|
December
31,
|
December
31,
|
Exercise
|
Contractual
|
|||||||||
|
Range
|
2005
|
2005
|
Price
|
Life
|
|||||||||
|
$.05
through $.50
|
33,344
|
28,344
|
$
|
0.11
|
8
Years
|
||||||||
|
$.51
through $1.50
|
467,787
|
27,787
|
$
|
0.69
|
9
Years
|
||||||||
|
$1.51
through $2.25
|
0
|
—
|
$
|
0.00
|
9
Years
|
||||||||
|
501,131
|
56,131
|
||||||||||||
| 11. |
Stockholders’
Equity
|
Securities
Purchase Agreements
The
Company, along with Parent, and certain stockholders of the Company (together
the "Parties"), entered into a Securities Purchase Agreement (the "Series
A
Purchase Agreement") dated and executed on May 15, 2002, with Stanford Venture
Capital Holdings, Inc. ("Stanford"). Pursuant to the Series A Purchase
Agreement, the Parties agreed to issue to Stanford a total of 2,002,750 shares
of the Company's Series A $1.50 Convertible Preferred Stock ("Series A $1.50
Preferred Stock"), plus five-year warrants purchasing 2,002,750 shares of
the
Company's common stock at an exercise price of $1.50 for the first 1,001,375
shares and $2.25 for the remaining shares. The value of the warrants was
treated
as a dividend for approximately $295,000 (computed using the Black-Scholes
model
with the following assumptions: expected volatility of 0%, expected dividend
yield rate of 0%, expected life of 5 years, and a risk-free interest rate
of
4.03% for December 31, 2002) on May 15, 2002, the date of issuance. Pursuant
to
the Series A Purchase Agreement, the issuance of the Series A Preferred Stock
and Warrants took place on four separate closing dates beginning on May 16,
2002
and closing on July 19, 2002.
The
Parties entered into an additional Securities Purchase Agreement (the "Series
B
Purchase Agreement") dated and executed on April 30, 2003 with Stanford.
Pursuant to the Series B Purchase Agreement, the Parties agreed to issue
to
Stanford a total of 2,444,444 shares of the Company's Series B $.90 Convertible
Preferred Stock ("Series B Preferred Stock"). Pursuant to the Series B Purchase
Agreement, the issuance of the Series B Preferred Stock took place on six
separate closing dates beginning on April 30, 2003 and closing on September
15,
2003. In connection with the issuance of the Series B Preferred Stock, the
Series B Purchase Agreement also required the Company to lower the exercise
price of the 2,002,750 warrants that were issued with the Series A Purchase
Agreement. The conversion price for these warrants was reduced to $0.25 from
the
original conversion prices of $1.50 and $2.25, and was accounted for as a
cost
of issuance of the Series B Purchase Agreement.
In
connection with both the Series A and Series B Purchase Agreements, certain
stockholders of the Company entered into a Lock-Up Agreement in which the
Parties agreed not to sell, assign, transfer, pledge, mortgage, encumber
or
otherwise dispose of their shares of the Company's capital stock for a period
of
two years, with certain exceptions, as defined in the Lock-Up Agreement.
In
accordance with FAS 129 Paragraph 4, the Company is providing the following
summary pf the pertinent rights and privileges of these outstanding
securities:
Each
Series A $1.50 preferred share and each Series B convertible $.90 Preferred
share is convertible into common shares at a predefined “conversion rate”
(described below). There are two ways to convert this Preferred
stock:
Optional
conversion: The holder may at any time convert the preferred shares at the
stated “conversion rate” rate into Common stock
Automatic
conversion: The shares can be converted by: A) at the date of a vote by at
least
two-thirds of the outstanding Preferred shares to convert or, B) upon the
closing of a qualified public offering where the stock is offered to the
public
at a price equal to or exceeding $3.00 which generates net proceeds to the
company equal to or exceeding $15,000,000.
“Conversion
rate” - each share of the Series A preferred stock and Series B preferred stock
is convertible into the number of shares of the common stock as shall be
calculated by dividing the stated value by $1.50 and $.90,
respectively.
Warrants
On
June
16, 2004, in consideration of and as an inducement to Stanford for the Company
to enter into the issuance of the 12% callable secured convertible notes
(the
“NIR Notes”) referenced below, Stanford has been issued a warrant (the “Stanford
Warrants”) to purchase an additional 2,000,000 shares of Common Stock, expiring
in five years, at an exercise price of $.0001 in exchange for i) agreeing
to a
waiver of existing registration rights that included a lock up period for
one
year after the effective date of a registration statement prohibiting the
registration and sale of Stanford’s securities and ii) agreeing as holder of
Stronghold’s Series A $1.50 Convertible Preferred Stock (“Series A Stock”) and
Series B $.90 Convertible Preferred Stock (“Series B Stock”), to waive any
dilution protection which would otherwise accrue to the Series A Stock and
the
Series B Stock pursuant to the respective certificates of designation filed
with
the Secretary of State of the State of Nevada, as amended, as a result of
the
conversion of the NIR Notes or exercise of the Stanford Warrants into the
Company’s common stock. This issuance of the Stanford Warrants has been
accounted for as an adjustment of capital for the waiving of the dilution
protection for the Series A and Series B preferred stock. The Stanford Warrants
were valued at approximately $360,000 using the Black-Scholes option pricing
model including the following assumptions: exercise price of $0.0001, expected
volatility of 2.06%, expected dividend yield rate of 0%, expected life of
5
years, and a risk free interest rate of 4.73%.
| 12. |
Commitments
and contingencies
|
Leases
The
Company leases
facilities under an operating lease which expires in January, 2008 and provides
for annual base rental of $25,416 plus a proportionate share of operating
costs
and other expenses. Future aggregate minimum annual rent payments under these
leases are approximately as follows:
|
Year
ending December 31,
|
||||
|
2006
|
$
|
25,586
|
||
|
2007
|
26,612
|
|||
|
2008
|
22,910
|
|||
|
$
|
75,108
|
|||
Rent
expense was approximately $90,000 and $107,000 for the years ended December
31,
2005 and 2004, respectively.
Legal
proceedings
The
Company is subject to legal proceedings and claims which have arisen in the
ordinary course of its business and have not been finally adjudicated. These
actions when ultimately concluded and determined will not, in the opinion
of
management, have a material adverse effect on results of operations or the
financial condition of the Company.
| 13. |
Subsequent
events
|
Callable
Secured Convertible Notes
On
February 6, 2006, to obtain funding for its ongoing operations, the
"Company" entered into an agreement with a group of investors for the sale
of
(i) $180,000 in callable secured convertible notes (the "Notes") and (ii)
stock
purchase warrants (the "Warrants") to buy 180,000 shares of our common stock.
The
Notes
bear interest at 12%, mature two years from the date of issuance, and are
convertible into our common stock, at the Investors' option, at a conversion
price, equal to the lower of (i) $0.05 or (ii) 25% of the average of the
three
lowest intraday trading prices for our common stock during the 20 trading
days
before, but not including, the conversion date. As of February 6, 2006, the
average of the three lowest intraday trading prices for our common stock
during
the preceding 20 trading days as reported on the Over-The-Counter Bulletin
Board
was $.01 and, therefore, the conversion price for the secured convertible
notes
was $.0025. Based on this conversion price, the Notes, excluding interest,
were
convertible into 72,000,000 shares of our common stock.
Conversion
of Christopher Carey Stockholder Loan from debt to equity
On
Feb.
6, 2006 a stockholder converted $150,000 of deferred compensation into
21,428,571 shares of common stock of the Company (the “Shares”) and (ii)
$781,369 deferred compensation into 10,000 shares of Series C Preferred Stock
(the “Preferred Shares”),
New
Callable Secured Convertible Notes Issuance
On
March
17, 2006, to obtain funding for its ongoing operations, the "Company"
entered into a Securities Purchase Agreement (the "Agreement") with a group
of
investors for the sale of (i) $1,450,000 in callable secured convertible
notes
(the "Notes") and (ii) stock purchase warrants (the "Warrants") to buy 2,900,000
shares of our common stock.
On
March
17, 2006, the Investors purchased $250,000 in Notes and received Warrants
to
purchase 250,000 shares of the Company's common stock. In addition, provided
that all of the conditions in the Securities Purchase Agreement are satisfied,
on the final business day of each month commencing in April 2006 and ending
in
January 2007, the Company will issue to the Investors and the Investors will
purchase $200,000 in Notes and related Warrants in April 2006 and May 2006
and
$100,000 in Notes and related Warrants thereafter. The Company or a majority
in
interest of the Investors may terminate the obligation to issue additional
Notes
and Warrants upon 30 days notice.
The
Notes
bear interest at 8%, mature two years from the date of issuance, and are
convertible into our common stock, at the Investors' option, at a conversion
price, equal to the lower of (i) $0.05 or (ii) 25% of the average of the
three
lowest intraday trading prices for our common stock during the 20 trading
days
before, but not including, the conversion date. As of March 21, 2006, the
average of the three lowest intraday trading prices for our common stock
during
the preceding 20 trading days as reported on the Over-The-Counter Bulletin
Board
was $.01 and, therefore, the conversion price for the secured convertible
notes
was $.0025. Based on this conversion price, the Notes in the amount of $250,000
issued on March 17, 2006 were convertible into 100,000,000 shares of our
common
stock.
| 14. |
Restatement
of previously issued financial
statements
|
In
connection with the preparation of the Annual Report on Form 10-KSB of the
Company for the fiscal year ended December 31, 2005, the Company's management
reviewed the Securities and Exchange Commission’s release of December 1,
2005 entitled “Current
Accounting and Disclosure Issues in the Division of Corporation Finance” as
Prepared by Accounting Staff Members in the Division of Corporation Finance,
U.S. Securities and Exchange Commission Washington, D.C. The Company determine
that an adjustment was necessary for the reporting of the Convertible Debenture
Notes, Stand Alone Warrants and as a result of certain registration rights
granted to the investors of these notes, potential Liquidated Damages that
were
not previously recorded.
Specifically,
the Company deemed the Convertible Debt previously reported under EITF 98-5
and
EITF 00-27 must now be reported within the guidelines of EITF 00-19 and
therefore restatements of previously issued financial statements were necessary.
In determining the amount of this restatement, the Company concluded that
the
fair value of the debt at all points in time was greater than the fair value
of
the Company in total. As a result, the Company determined that there is no
value
attributable to the Conversion Feature of this debt.
After
reviewing the matter with its current and former independent registered public
accounting firms, the Company has identified certain adjustments that
necessitate the restatement of its financial statements for the second and
third
quarters of fiscal 2004, the interim periods of fiscal 2005, and for the
fiscal
year end 2004.
These
adjustments reflect the following with respect to the Convertible Debt:
Convertible
Debt: In
accordance with EITF 00-19, since
there is no explicit limit on the number of shares that are to be delivered
upon
exercise of the conversion feature,the Company is not able to assert that
it
will have sufficient authorized and unissued shares to settle the conversion
option. As a result, the conversion feature should be accounted for as a
derivative liability rather than permanent equity, with changes in fair value
recorded in earnings each period and therefore the previous reporting in
accordance with EITF’s 98-5 and 00-27 for the beneficial conversion feature and
debt discount should be restated as such.
In
recording the valuation of the Convertible Feature Liability within the
restatement, the Company has now determined that the fair value of this
liability is zero due to the carrying value of the convertible debt exceeding
the fair value of the Company. The primary impact of adhering to EITF 00-19
is
to eliminate the debt discount previously recorded as equity. Additionally,
the
Company had deemed the Convertible Debt to be in default and has written
off the
loan acquisition costs associated with convertible debt, previously recorded
as
a Deferred Charge asset.
The
restatement adjustments to the Company's financial statements for the year
ended
December 31, 2004 are summarized as follows:
|
|
|
|
|
|||||||
|
STRONGHOLD
TECHNOLOGIES, INC. AND SUBSIDIARY
|
||||||||||
|
NOTES
TO FINANCIAL STATEMENTS
|
||||||||||
|
RESTATED
BALANCE SHEET as of 12/31/2004
|
||||||||||
|
|
|
|
|
|||||||
|
December
31,
|
||||||||||
|
|
|
|
|
|||||||
|
|
As
previously
|
Restatement
|
As
|
|||||||
|
|
Reported
|
Adjustment
|
Restated
|
|||||||
|
ASSETS
|
12/31/04
|
12/31/04
|
12/31/04
|
|||||||
|
|
|
|
|
|||||||
|
Current
assets
|
|
|
|
|||||||
|
Cash
|
$
|
500
|
—
|
500
|
||||||
|
Accounts
receivable, less allowance for returns and
|
—
|
—
|
||||||||
|
doubtful
accounts of $219,891
|
303,798
|
—
|
303,798
|
|||||||
|
Inventories
|
44,704
|
—
|
44,704
|
|||||||
|
Prepaid
expenses
|
90,484
|
—
|
90,484
|
|||||||
|
Total
current assets
|
439,486
|
—
|
439,786
|
|||||||
|
Property
and equipment, net
|
79,185
|
—
|
79,185
|
|||||||
|
|
||||||||||
|
Other
assets
|
||||||||||
|
Software
development costs, net of amortization
|
867,786
|
—
|
867,786
|
|||||||
|
Deferred
charge, convertible debt loan acquisition costs, net of
amortization
|
347,608
|
(347,608
|
)
|
0
|
||||||
|
Other
|
137,645
|
—
|
137,645
|
|||||||
|
Total
other assets
|
1,353,039
|
(347,608
|
)
|
1,005,431
|
||||||
|
$
|
871,710
|
(347,608
|
)
|
1,524,100
|
||||||
|
|
||||||||||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||||
|
|
||||||||||
|
Current
liabilities
|
||||||||||
|
Accounts
payable
|
$
|
619,178
|
—
|
619,178
|
||||||
|
Accrued
expenses and other current liabilities
|
1,172,897
|
—
|
1,172,897
|
|||||||
|
Liquidated
damages payable
|
—
|
131,733
|
131,733
|
|||||||
|
Interest
payable, stockholders
|
472,779
|
—
|
472,779
|
|||||||
|
Notes
payable, stockholders, current portion
|
1,145,530
|
—
|
1,145,530
|
|||||||
|
Note
payable
|
606,667
|
—
|
606,667
|
|||||||
|
Deferred
Revenue
|
593,408
|
—
|
593,408
|
|||||||
|
Obligations
under capitalized leases, current portion
|
25,808
|
—
|
25,808
|
|||||||
|
Total
current liabilities
|
4,636,267
|
131,733
|
4,767,998
|
|||||||
|
|
||||||||||
|
Long-term
liabilities
|
||||||||||
|
Notes
payable, stockholders, less current portion
|
1,129,600
|
—
|
1,129,600
|
|||||||
|
Note
payable, convertible debt of $2,350,000 net of debt discount of
$2,350,000
|
||||||||||
|
and
debt discount amortization of $539,581
|
539,581
|
(539,581
|
)
|
—
|
||||||
|
Note
Payable Convertible Debt of $2,350,000
|
2,350,000
|
2,350,000
|
||||||||
|
Obligations
under capitalized leases, less current portion
|
8,783
|
—
|
8,783
|
|||||||
|
Payroll
taxes payable, long term
|
430,000
|
—
|
430,000
|
|||||||
|
Total
long term liabilities
|
2,107,964
|
1,810,419
|
3,918,383
|
|||||||
|
|
||||||||||
|
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 (aggregate liquidation preference
$2,200,000)
|
445
|
—
|
445
|
|||||||
|
Common
stock, $.0001 par value, authorized 50,000,000
|
—
|
|||||||||
|
shares,
16,087,349 issued and outstanding
|
1,609
|
—
|
1,609
|
|||||||
|
Additional
paid-in capital
|
10,274,928
|
(2,350,000
|
)
|
7,924,928
|
||||||
|
Stock
subscription receivable
|
(3,000
|
)
|
—
|
(3,000
|
)
|
|||||
|
Accumulated
deficit
|
(15,146,503
|
)
|
60,240
|
(15,086,263
|
)
|
|||||
|
Total
stockholders' deficit
|
(4,872,521
|
)
|
(2,289,760
|
)
|
(7,162,281
|
)
|
||||
|
$
|
1,871,708
|
347,608
|
1,524,100
|
|||||||
|
|
||||||||||
|
STRONGHOLD
TECHNOLOGIES INC.
|
||||||||||
|
RESTATED
STATEMENTS OF OPERATIONS
|
||||||||||
|
FOR
THE YEAR ENDED December 31, 2004
|
||||||||||
|
|
|
|
|
|||||||
|
|
For
the
|
Restatemenmt
|
For
the
|
|||||||
|
|
year
ended
|
Adjustment
|
Year
|
|||||||
|
|
12/31/2004
|
12/31/2004
|
12/31/2004
|
|||||||
|
|
As
previously
|
Restatement
|
As
|
|||||||
|
|
Reported
|
Adjustment
|
Restated
|
|||||||
|
|
|
|
|
|||||||
|
Sales
|
2,489,790
|
—
|
2,489,790
|
|||||||
|
Cost
of sales
|
834,349
|
—
|
834,349
|
|||||||
|
Gross
profit
|
1,655,441
|
—
|
1,655,441
|
|||||||
|
|
||||||||||
|
Selling,
general and
|
||||||||||
|
administrative
|
3,878,044
|
347,608
|
4,225,652
|
|||||||
|
Loss
from operations
|
(2,222,603
|
)
|
(347,608
|
)
|
(2,570,211
|
)
|
||||
|
|
||||||||||
|
Interest
expense
|
867,010
|
(539,581
|
)
|
327,429
|
||||||
|
Liquidated
damages
|
—
|
131,733
|
131,733
|
|||||||
|
|
||||||||||
|
New
loss applicable to common
|
||||||||||
|
stockholders
|
(3,089,613
|
)
|
60,240
|
(3,029,373
|
)
|
|||||
|
|
||||||||||
|
Basis
and diluted loss per
|
||||||||||
|
common
share
|
(0.22
|
)
|
(0.22
|
)
|
||||||
|
|
||||||||||
|
Weighted
average number of
|
||||||||||
|
common
shares outstanding
|
14,081,263
|
14,081,263
|
||||||||
| 15. |
RESTATEMENT
OF PREVIOUSLY ISSUED QUARTERLY DATA
(UNAUDITED)
|
In
connection with the preparation of the Annual Report on Form 10-KSB of the
Company for the fiscal year ended December 31, 2005, the Company's management
reviewed the Securities and Exchange Commission’s release of December 1, 2005
entitled “Current
Accounting and Disclosure Issues in the Division of Corporation Finance” as
Prepared by Accounting Staff Members in the Division of Corporation Finance,
U.S. Securities and Exchange Commission Washington, D.C. The Company determined
that an adjustment was necessary for the reporting of the Convertible Debenture
Notes, Stand Alone Warrants and as a result of certain registration rights
granted to the investors of these notes, potential Liquidated Damages that
were
not previously recorded.
Specifically,
the Company deemed the Convertible Debt previously reported under EITF 98-5
and
EITF 00-27 must now be reported within the guidelines of EITF 00-19 and
therefore restatements of previously issued financial statements were necessary.
In determining the amount of this restatement, the Company concluded that
the
fair value of the debt at all points in time was greater than the fair value
of
the Company in total. As a result the Company determined that there is no
value
attributable to the Conversion Feature of this debt.
After
reviewing the matter with its current and former independent registered public
accounting firms, the Company has identified certain adjustments that
necessitate the restatement of its financial statements for the second and
third
quarters of fiscal 2004, the interim periods of fiscal 2005, and for the
fiscal
year end 2004.
These
adjustments reflect the following with respect to the Convertible Debt:
Convertible
Debt: In
accordance with EITF 00-19, since
there is no explicit limit on the number of shares that are to be delivered
upon
exercise of the conversion feature, the Company is not able to assert that
it
will have sufficient authorized and unissued shares to settle the conversion
option. As a result, the conversion feature should be accounted for as a
derivative liability rather than permanent equity, with changes in fair value
recorded in earnings each period and therefore the previous reporting in
accordance with EITF’s 98-5 and 00-27 for the beneficial conversion feature and
debt discount should be restated as such.
In
recording the valuation of the Convertible Feature Liability within the
restatement, the Company has now determined that the fair value of this
liability is zero due to the carrying value of the convertible debt exceeding
the fair value of the Company. The primary impact of adhering to EITF 00-19
is
to eliminate the debt discount previously recorded as equity. Additionally,
the
Company had deemed the Convertible Debt to be in default and has written
off the
loan acquisition costs associated with convertible debt, previously recorded
as
a Deferred Charge asset.
The
following tables show the effects of the restatement on the Company’s quarterly
results of operations for the first and second quarters 2004 and the first,
second and third quarters 2005. In the tables that follow, the columns labeled
“Restatement Adjustments” represent adjustments for fair value of the conversion
feature and liquidated damages associated with the Registration Rights
Agreement.
|
STRONGHOLD
TECHNOLOGIES INC.
|
||||||||||
|
RESTATED
STATEMENT OF OPERATIONS
|
||||||||||
|
FOR
THE QUARTER ENDED JUNE 30, 2004
|
||||||||||
|
As
previously
|
Restatement
|
|||||||||
|
Reported
|
Adjustment
|
As
Restated
|
||||||||
|
For
the Qtr
|
For
the Qtr
|
For
the Qtr
|
||||||||
|
Ended
|
Ended
|
Ended
|
||||||||
|
6/30/2004
|
6/30/2004
|
6/30/2004
|
||||||||
|
Sales
|
700,250
|
700,250
|
||||||||
|
Cost
of sales
|
215,358
|
215,358
|
||||||||
|
Gross
profit
|
484,892
|
484,712
|
||||||||
|
Selling,
general and
|
||||||||||
|
administrative
|
873,550
|
137,512
|
1,011,062
|
|||||||
|
Loss
from operations
|
(388,658
|
)
|
(137,512
|
)
|
(526,170
|
)
|
||||
|
Interest
expense
|
98,609
|
(31,250
|
)
|
67,359
|
||||||
|
Net
loss applicable to common
|
||||||||||
|
stockholders
|
(487,267
|
)
|
(106,262
|
)
|
(593,529
|
)
|
||||
|
Basis
and diluted loss per
|
||||||||||
|
common
share
|
(0.04
|
)
|
(0.01
|
)
|
(0.04
|
)
|
||||
|
Weighted
average number of
|
||||||||||
|
common
shares outstanding
|
13,438,277
|
13,438,277
|
||||||||
|
STRONGHOLD
TECHNOLOGIES INC.
|
||||
|
RESTATED
STATEMENT OF OPERATIONS
|
||||
|
FOR
THE QUARTER ENDED SEPTEMBER 30,
2004
|
|
As
previously
|
Restatement
|
|||||||||
|
Reported
|
Adjustment
|
As
Restated
|
||||||||
|
For
the Qtr
|
For
the Qtr
|
For
the Qtr
|
||||||||
|
Ended
|
Ended
|
Ended
|
||||||||
|
9/30/2004
|
9/30/2004
|
9/30/2004
|
||||||||
|
Sales
|
475,969
|
475,969
|
||||||||
|
Cost
of sales
|
175,863
|
175,863
|
||||||||
|
Gross
profit
|
300,106
|
300,106
|
||||||||
|
Selling,
general and
|
||||||||||
|
administrative
|
947,301
|
(85,838
|
)
|
861,463
|
||||||
|
Loss
from operations
|
(647,195
|
)
|
85,838
|
(561,357
|
)
|
|||||
|
Interest
expense
|
349,988
|
(229,166
|
)
|
120,822
|
||||||
|
Liquidated
damages
|
—
|
14,007
|
14,007
|
|||||||
|
Net
loss applicable to common
|
||||||||||
|
stockholders
|
(997,183
|
)
|
300,997
|
|
(696,186
|
)
|
||||
|
Basis
and diluted loss per
|
||||||||||
|
common
share
|
(0.07
|
)
|
(0.02
|
)
|
(0.05
|
)
|
||||
|
Weighted
average number of
|
||||||||||
|
common
shares outstanding
|
14,024,528
|
14,024,528
|
||||||||
|
STRONGHOLD
TECHNOLOGIES INC.
|
||||||||||
|
RESTATED
STATEMENT OF OPERATIONS
|
||||||||||
|
FOR
THE QUARTER ENDED MARCH 31, 2005
|
||||||||||
|
As
previously
|
Restatement
|
|||||||||
|
Reported
|
Adjustment
|
As
Restated
|
||||||||
|
For
the Qtr
|
For
the Qtr
|
For
the Qtr
|
||||||||
|
Ended
|
Ended
|
Ended
|
||||||||
|
3/31/2005
|
3/31/2005
|
3/31/2005
|
||||||||
|
Sales
|
261,652
|
261,652
|
||||||||
|
Cost
of sales
|
118,179
|
118,179
|
||||||||
|
Gross
profit
|
143,473
|
143,473
|
||||||||
|
Selling,
general and
|
||||||||||
|
administrative
|
800,285
|
800,285
|
||||||||
|
Loss
from operations
|
(656,812
|
)
|
(656,812
|
)
|
||||||
|
Interest
expense
|
416,098
|
(302,628
|
)
|
113,470
|
||||||
|
Liquidated
damages
|
—
|
136,402
|
136,402
|
|||||||
|
Net
loss applicable to common
|
||||||||||
|
stockholders
|
(1,072,910
|
)
|
166,226
|
(906,684
|
)
|
|||||
|
Basis
and diluted loss per
|
||||||||||
|
common
share
|
(0.07
|
)
|
0.01
|
(0.06
|
)
|
|||||
|
Weighted
average number of
|
||||||||||
|
common
shares outstanding
|
16,394,016
|
16,394,016
|
||||||||
|
STRONGHOLD
TECHNOLOGIES INC.
|
||||||||||
|
RESTATED
STATEMENT OF OPERATIONS
|
||||||||||
|
FOR
THE QUARTER ENDED JUNE 30, 2005
|
||||||||||
|
As
previously
|
Restatement
|
|||||||||
|
Reported
|
Adjustment
|
As
Restated
|
||||||||
|
For
the Qtr
|
For
the Qtr
|
For
the Qtr
|
||||||||
|
Ended
|
Ended
|
Ended
|
||||||||
|
6/30/2005
|
6/30/2005
|
6/30/2005
|
||||||||
|
Sales
|
365,869
|
365,869
|
||||||||
|
Cost
of sales
|
99,639
|
99,639
|
||||||||
|
Gross
profit
|
266,230
|
266,230
|
||||||||
|
Selling,
general and
|
||||||||||
|
administrative
|
174,873
|
174,873
|
||||||||
|
Loss
from operations
|
91,357
|
91,357
|
||||||||
|
Interest
expense
|
576,557
|
(443,746
|
)
|
132,811
|
||||||
|
Liquidated
damages
|
—
|
148,941
|
148,941
|
|||||||
|
Net
loss applicable to common
|
||||||||||
|
stockholders
|
(485,200
|
)
|
294,805
|
(190,395
|
)
|
|||||
|
Basis
and diluted loss per
|
||||||||||
|
common
share
|
(0.03
|
)
|
0.02
|
(0.01
|
)
|
|||||
|
Weighted
average number of
|
||||||||||
|
common
shares outstanding
|
17,287,349
|
17,287,349
|
||||||||
|
STRONGHOLD
TECHNOLOGIES INC.
|
||||
|
RESTATED
STATEMENT OF OPERATIONS
|
||||
|
FOR
THE QUARTER ENDED SEPTEMBER 30,
2005
|
|
As
previously
|
Restatement
|
|||||||||
|
Reported
|
Adjustment
|
As
Restated
|
||||||||
|
For
the Qtr
|
For
the Qtr
|
For
the Qtr
|
||||||||
|
Ended
|
Ended
|
Ended
|
||||||||
|
9/30/2005
|
9/30/2005
|
9/30/2005
|
||||||||
|
Sales
|
189,782
|
189,782
|
||||||||
|
Cost
of sales
|
68,381
|
68,381
|
||||||||
|
Gross
profit
|
121,401
|
121,401
|
||||||||
|
Selling,
general and
|
||||||||||
|
administrative
|
537,916
|
537,916
|
||||||||
|
Loss
from operations
|
(416,515
|
)
|
(416,515
|
)
|
||||||
|
Interest
expense
|
639,773
|
(494,007
|
)
|
145,766
|
||||||
|
Liquidated
damages
|
—
|
217,375
|
217,375
|
|||||||
|
Net
loss applicable to common
|
||||||||||
|
stockholders
|
(1,056,288
|
)
|
276,632
|
|
(779,656
|
)
|
||||
|
Basis
and diluted loss per
|
||||||||||
|
common
share
|
(0.06
|
)
|
0.02
|
(0.05
|
)
|
|||||
|
Weighted
average number of
|
||||||||||
|
common
shares outstanding
|
17,287,349
|
17,287,349
|
||||||||
The
Warrants are exercisable until five years from the date of issuance at a
purchase price of $0.57 per share. In addition, the exercise price of the
Warrants is adjusted in the event the Company issues common stock at a price
below market. Since the Company does not intend to issue common stock at
below
market price the warrants were valued at $NIL using the Black- Scholes option
pricing model including the following assumptions: exercise price of $0.57,
expected volatility of approximately 15%, expected dividend yield rate of
0%,
expected life of 5 years, and a risk free interest rate of 4.23% for December
31,2004.
The
Investors have contractually agreed to restrict their ability to convert
the
Notes and exercise the Warrants and receive shares of the Company's common
stock
such that the number of shares of the Company's common stock held by them
and
their affiliates after such conversion or exercise does not exceed 4.99%
of the
then issued and outstanding shares of the Company's common stock.
All
shares of the Company's common stock associated with this private placement
are
restricted securities in accordance with Rule 144 as promulgated under the
of
the Securities Act of 1933.
F-21