UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission File No. 333-54822
STRONGHOLD TECHNOLOGIES, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 22-376235
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
777 Terrace Avenue, Hasbrouck Heights, NJ 07604
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(Address of Principal Executive Offices) (Zip Code)
(201) 727-1464
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(Issuer's Telephone Number, Including Area Code)
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(Former Name if changed since last report)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date: As of October 31, 2002, the
issuer had outstanding 9,857,000 shares of Common Stock, $0.0001 par value per
share.
Transitional Small Business Disclosure Format (check one):
Yes: No: X
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION..................................................1
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS..................................1
CONSOLIDATED BALANCE SHEETS
as of September 30, 2002 (unaudited).............................2
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2002 and
September 30, 2001 (unaudited)...................................3
For the Nine Months Ended September 30, 2002 and
September 30, 2001 (unaudited)...................................3
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2002 and
September 30, 2001 (unaudited)...................................4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
PLAN OF OPERATION.................................................12
ITEM 3. CONTROLS AND PROCEDURES...........................................33
PART II. OTHER INFORMATION..................................................II-1
ITEM 2. CHANGES IN SECURITIES...........................................II-1
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............II-2
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................II-2
SIGNATURES
CERTIFICATIONS
This Quarterly Report on Form 10-QSB contains forward-looking statements,
including information with respect to our plans and strategy for our business.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause actual events or our actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth below
under the caption "Factors Affecting Future Operating Results" included under
"Management's Discussion and Analysis of Financial Condition and Plan of
Operation" in Part I, Item 2 of this Quarterly Report on Form 10-QSB and other
factors expressed from time to time in our filings with the Securities and
Exchange Commission. We do not undertake to update any forward-looking
statements.
PART I. FINANCIAL INFORMATION.
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ITEM 1. FINANCIAL STATEMENTS.
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted from the following
consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission. However, Stronghold Technologies, Inc., a
Nevada corporation, and its wholly-owned subsidiary, Stronghold Technologies,
Inc., a New Jersey corporation, believe that the disclosures are adequate to
assure that the information presented is not misleading in any material respect.
The results of operations for the interim periods presented herein are not
necessarily indicative of the results to be expected for the entire fiscal year.
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
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September 30,
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ASSETS 2002 2001
(Unaudited) (Unaudited)
Current assets
Cash $ 4,617 $ 13,440
Accounts receivable, less allowance for doubtful
accounts of $189,000 in 2002 and nil in 2001 2,246,229 529,123
Other receivables, current portion 30,000
Inventories 139,379 80,695
Prepaid expenses 7,292
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Total current assets 2,427,517 623,258
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Property and equipment, net 175,646 104,199
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Other assets
Software development costs 231,292
Other receivables, less current portion 105,000
Security deposits 27,571 40,716
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Total other assets 363,863 40,716
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$ 2,967,026 $ 768,173
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 308,402 $ 71,480
Accrued expenses and other current liabilities 144,204 521,045
Obligations under capital leases, current portion 12,171
Note payable, current portion 500,000 885,440
Note payable, stockholder, current portion 183,600 1,370,049
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Total current liabilities 1,148,377 2,848,014
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Long-term liabilities
Obligations under capital leases, less
current portion 29,402
Note payable, less current portion 1,000,000
Note payable, stockholder, less current portion 854,247
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Total long-term liabilities 1,883,649
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Commitments and contingencies
Stockholders' deficit
Preferred stock, $.0001 par value; authorized 5,000,000
shares, 2,002,750 issued and outstanding (aggregate
liquidation preference of $3,004,125) 201
Common stock, $.0001 par value, authorized 50,000,000
shares, 9,823,000 issued and outstanding 983
Additional paid-in capital 4,578,841 13,500
Stock subscription receivable (3,000) (3,000)
Accumulated deficit (4,642,025) (2,090,341)
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Total stockholders' deficit (65,000) (2,079,841)
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$ 2,967,026 $ 768,173
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2
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three months Three months Nine months Nine months
ended ended ended ended
Sept 30, Sept 30, Sept 30, Sept 30,
2002 2001 2002 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sales $ 1,203,510 $ 261,112 $ 2,952,076 $ 576,831
Cost of sales 457,103 62,977 1,047,138 193,913
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Gross profit 746,407 198,135 1,904,938 382,918
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Operating expenses
General and administrative 1,273,046 677,910 3,226,424 1,707,631
Officer's salary 68,400 45,000 202,800 120,000
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1,341,446 722,910 3,429,224 1,827,631
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Loss from operations (595,039) (524,775) (1,524,286) (1,444,713)
Interest expense 33,189 38,246 142,504 90,480
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Net loss $ (628,228) $ (563,021) $ (1,666,790) $ (1,535,193)
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Basic and diluted loss per
common share $ (0.06) $ (0.10) $ (0.21) $ (0.26)
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Weighted average number of
common shares outstanding 9,787,834 5,906,250 7,864,625 5,906,250
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine months ended September 30, 2002 2001
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(Unaudited) (Unaudited)
Cash flows from operating activities
Net loss $ (1,666,790) $ (1,535,193)
Adjustments to reconcile net loss to
net cash used in operating activities:
Allowance for doubtful accounts 189,000
Depreciation and amortization 31,904 8,247
Changes in operating assets and liabilities:
Accounts receivable (2,152,869) (529,123)
Other receivables 115,139
Inventories (58,031) (80,695)
Prepaid expenses (2,407)
Software development costs (231,292)
Security deposits (484) (16,214)
Accounts payable 250,761 49,366
Accrued expenses and other current liabilities (118,486) 481,218
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Net cash used in operating activities (3,643,555) (1,622,394)
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Net cash used in investing activities,
payments for purchase of property and equipment (66,499) (65,646)
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Cash flows from financing activities
Issuance of common stock, net of issuance costs 2,566,525
Principal payments of obligations under capital leases (3,525)
Proceeds from stockholder loan 1,113,404 775,000
Proceeds from issuance of note payable 885,440
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Net cash provided by financing activities 3,676,404 1,660,440
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Net decrease in cash (33,650) (27,600)
Cash, beginning of period 38,267 41,040
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Cash, end of period $ 4,617 $ 13,440
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Supplemental disclosure of noncash investing and financing activities
Obligations under capital leases aggregating $45,098 were incurred when the
Company entered into various leases for computer equipment.
During the nine months ended September 30, 2002 the Company (as defined in
Note 1) entered into two separate agreements to convert $2,000,000 of loans
payable, stockholder into common stock.
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
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1. NATURE OF OPERATIONS
Stronghold Technologies, Inc. is the surviving entity (the "Surviving Entity")
of a merger of Stronghold Technologies, Inc., a New Jersey corporation (the
"Predecessor Entity") with and into the wholly-owned subsidiary of Stronghold
Technologies, Inc., a Nevada corporation (formerly known as TDT Development,
Inc., the "Parent")(the Surviving Entity) and Parent collectively, the
"Company"). The Predecessor Entity 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, which began
operations on April 1, 2001.
On May 15, 2002, the Predecessor Entity entered into a Merger Agreement (the
"Agreement") with the Parent whereby Parent issued 7,000,000 shares of its
common stock in exchange for all of the Predecessor Entity's outstanding shares
in a transaction accounted for as a reverse purchase acquisition. As a result,
the Predecessor Entity is considered for accounting purposes, to be the
acquiring company since the stockholders of the Predecessor Entity acquired more
than 50% of the issued and outstanding stock of the Parent. Pursuant to this
Agreement, the outstanding options of the Predecessor Entity were also converted
into options to purchase the Parent's common stock based on a conversion rate of
2.1875 as defined in the Agreement. Prior to the merger, the Parent's operations
were comprised solely of a business that sold truffle-based food products
imported from Italy through its wholly owned subsidiaries, Terre di Toscana,
Inc. and Terres Toscanes, Inc. (the "Subsidiaries"). The Subsidiaries were sold
on July 19, 2002 and had virtually no material operations for the period of May
16, 2002 through July 19, 2002. Since this transaction resulted in a change in
reporting entity, the historical financial statements prior to May 16, 2002 are
those of the Predecessor Entity. The stockholders' equity of the Company has
been retroactively restated.
2. UNAUDITED STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED STATEMENTS
The accompanying condensed consolidated financial statements of the Company as
of September 30, 2002 and for the nine and three-month periods ended September
30, 2002 and 2001 are unaudited and reflect all adjustments of a normal and
recurring nature to present fairly the financial position, results of operations
and cash flows for the interim periods. These unaudited condensed consolidated
financial statements have been prepared by the Company pursuant to instructions
to Form 10-QSB. Pursuant to such instructions, certain financial information and
footnote disclosures normally included in such financial statements have been
omitted. The results of operations for the nine and three-month periods ended
September 30, 2002 are not necessarily indicative of the results that may occur
for the year ending December 31, 2002.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. The Company provides for depreciation and amortization as follows:
Estimated
Asset Useful Life Principal Method
Computer equipment 5 Years Declining-balance
Computer software 3 Years Declining-balance
Furniture and fixtures 7 Years Declining-balance
Leasehold improvements 10 Years Straight-line
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
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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.
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 three-month and nine-month periods ended
September 30, 2002 and 2001.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's assets and liabilities that qualify as
financial instruments under SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," approximate their carrying amounts presented in the
balance sheet at September 30, 2002.
REVENUE RECOGNITION
The Company recognizes revenue at the time the product is installed. Sales
revenue and cost of sales reported in the statement of operations is reduced to
reflect estimated returns. Service revenue is recognized when incurred.
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
6
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
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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 excludes dilutions and is computed by dividing net
loss applicable to common stockholders by the weighed-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 loss of the entity. Since the
effect of the outstanding options and convertible debt is anti-dilutive, they
have been excluded from the Company's computation of loss per common share.
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2002 consists of the following:
Computer equipment $ 152,102
Computer software 19,193
Furniture and fixtures 20,523
Computer equipment recorded under capital lease 45,099
Leasehold improvements 7,982
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244,899
Less accumulated depreciation
and amortization 69,253
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$ 175,646
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4. SOFTWARE DEVELOPMENT COSTS
For the quarters ended September 30, 2002 and 2001, amortization of software
development costs charged to operations was nil due to the release of the
capitalized product being projected in the first quarter of 2003. Technological
feasibility was met as of July 1, 2002.
5. NOTE PAYABLE, STOCKHOLDER
Note payable, stockholder, at September 30, 2002 consists of a promissory note
that was entered into on May 15, 2002 with the Company that consolidated the
outstanding balances of advances; expenses paid by the stockholder, accrued
salary, and accrued interest. The balance of the outstanding loan at September
30, 2002 is approximately $1,038,000. The loan principal is due in six equal
quarterly installments, plus interest of 10% per annum, commencing in March
2003. At each payment date, if the Company does not meet certain benchmarks,
then either the principal balance and accrued interest due for the quarter will
be deferred and the repayment will be amortized during the remaining quarters
or, depending upon the net income achieved, the principal and accrued interest
due will be automatically converted into shares of common stock (Note 12).
Accrued interest on this loan, and the preceding loan balances prior to
consolidation of the outstanding stockholder balances, which approximates
$50,000, is included in accrued expenses and other current liabilities. Interest
expense on the note
7
STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
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payable, stockholder, for the three and nine months ended September 30, 2002,
were approximately $27,000 and $100,000, respectively.
6. NOTE PAYABLE
At June 30, 2002, the Company converted its outstanding line of credit into a
note payable of $1,500,000. The loan bears interest at a rate of 4.750% per
annum and is due in monthly installments of $41,667 plus interest to United
Trust Bank through January 1, 2006. The note is collateralized by substantially
all the assets of the Company and is guaranteed by the majority stockholder of
the Company. The note payable, stockholder, is subordinated to this note. The
principal portion due for each of the next three years will be $500,000.
7. STOCK SUBSCRIPTION RECEIVABLE
The stock subscription receivable represents 600,000 shares of the Predecessor
Entity's original common stock (restated to 1,312,500 of the Parent's stock as
defined in the Agreement) due from three key employees.
8. STOCK OPTION PLANS
The Parent has adopted two stock option plans and assumed one stock plan of the
Predeccor Entity (the three plans together, the "Plans") providing for incentive
stock options ("ISOs") and non-qualified stock options ("NQSOs"). The Parent has
reserved 1,598,750 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 Parent'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 Parent's common stock will not be less than 110%
of the fair market value of the Parent'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.
The status of the Parent's stock options is summarized below:
RESTATED WEIGHTED
PLAN PER SHARE AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
Outstanding at
January 1, 2001 415,625 $0.05 - $0.12 $0.12
Granted nine months
ended September 30, 2001 260,312 $0.12 - $0.69 $0.32
Terminated nine months
ended September 30, 2001 (122,500) $0.05 $0.05
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Outstanding at
September 30, 2001 553,437 $0.05 - $0.69 $0.11
Granted twelve months
ended September 30, 2002 872,369 $0.11 - $1.50 $0.84
Terminated twelve months
ended September 30, 2002 (26,250) $0.11 - $0.69 $0.69
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Outstanding at
September 30, 2002 1,399,556 $0.05 - $1.50 $0.50
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
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There were 356,200 shares exercisable at September 30, 2002.
The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation". SFAS No. 123 requires compensation expense to be
recorded (i) using the new fair value method or (ii) using existing accounting
rules prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related interpretations with pro forma
disclosure of what net income would have been had the Company adopted the new
fair value method. If the Company adopted the new fair value method using the
Black-Scholes option-pricing model, the Company's net loss would have been
impacted by approximately $120,000 and $7,000 for the nine-month periods ended
September 30, 2002 and 2001. The Company accounts for its stock based
compensation plans in accordance with the provisions of APB 25 and, accordingly,
no compensation cost has been recognized because stock options granted under the
plan were at exercise prices which were equal to or above the market value of
the underlying stock at date of grant.
The fair value of issued stock options is estimated on the date of grant using
the Black-Scholes option-pricing model including the following assumptions:
expected volatility of 0%, expected dividend yield rate of 0%, expected life of
10 years, and a risk-free interest rates between 3.88% and 5.74% for 2002 and
2001.
9. INCOME TAXES
Until May 15, 2002, the date of the Agreement, the Predecessor Entity operated
as an "S" corporation and, as a result, the earnings and losses were included in
the personal income tax returns of the respective stockholders. From the date of
the Agreement through September 30, 2002, the Company operated as a "C"
corporation and had net operating losses ("NOL") of approximately $1,250,000
that will expire between 2009 and 2022. The deferred tax asset from the
Company's NOL's approximated $339,000 for which a valuation allowance in an
equal amount has been established.
10. COMMITMENTS AND CONTINGENCIES
SECURITIES PURCHASE AGREEMENT
The Company and certain stockholders of the Company (together the "Parties"),
entered into a Securities Purchase Agreement (the "Purchase Agreement") dated
and executed on May 15, 2002, with Stanford Venture Capital Holdings, Inc.
("Stanford"). Pursuant to the Purchase Agreement, the Parent agreed to issue to
Stanford a total of 2,002,750 shares of the Parent's Series A $1.50 Convertible
Preferred Stock ("Series A Preferred Stock"), which was equal to 20% of the
total issued and outstanding shares of the Parent's common stock (assuming
conversion of the Series A Preferred Stock, but excluding certain shares which
may be issued upon the occurrence of certain events as disclosed in the Purchase
Agreement), plus five-year warrants to purchase 2,002,750 shares of the
Company's common stock at an exercise price of $1.50 for half of such shares and
$2.25 for the remaining shares, for an aggregate purchase price of $3,000,000.
Pursuant to the Purchase Agreement, the issuance of the Series A Preferred Stock
and Warrants took place on four separate closing dates (May 16, 2002 and July 3,
11, and 19, 2002).
In connection with the Purchase Agreement, the Parent and Stanford entered into
a Registration Rights Agreement, dated May 16, 2002, in which Parent agreed to
register the shares of its Common Stock issuable upon conversion of the Series A
Preferred Stock and upon conversion of the Warrants with the Securities and
Exchange Commission within 180 days from the date of the last closing under the
Purchase Agreement, which was July 19, 2002. In addition, 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.
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
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LEASES
The Company rents facilities under leases in New Jersey, Virginia and
California. The Company is obligated under these leases through April 2006. In
addition to the base rent, one lease provides for the Company to pay a
proportionate share of operating costs and other expenses.
Future aggregate minimum annual rent payments under these leases are
approximately as follows:
YEAR ENDING SEPTEMBER 30,
2003 $ 72,000
2004 102,000
2005 105,000
2006 108,000
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$ 387,000
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------------------
Rent expense was approximately $20,000 and $34,000 for the three-month periods
ended September 30, 2002 and 2001 and approximately $100,000 and $71,000 for the
nine-month periods ended September 30, 2002 and 2001.
OBLIGATIONS UNDER CAPITAL LEASES
At September 30, 2002, the Company has computer equipment under
capital leases expiring at various dates through 2005. The assets and
liabilities under capital leases are recorded at the lower of the present values
of the minimum lease payments or the fair values of the assets. The assets are
included in property and equipment and are depreciated over their estimated
useful lives.
As of September 30, 2002, minimum future lease payments are as follows:
YEAR ENDING SEPTEMBER 30,
2003 $ 18,492
2004 18,492
2005 10,309
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Total minimum lease payments 47,293
Less amounts representing interest 5,720
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Present value of net minimum lease payments 41,573
Less current portion 12,171
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Long-term portion $ 29,402
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
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EMPLOYMENT AND NON-COMPETITION AGREEMENTS
The Company is obligated under employment and non-competition agreements with
four key employees through July 2005. The first agreement provides for base
salary of $180,000 for the first year, increasing to $192,000 per annum for the
second year (through August 13, 2002). The second agreement provides for a
minimum annual salary of $138,000 for the first year, increasing to $150,000 for
the second year, which may increase to $175,000 based on earnings for such year,
and increasing to $175,000 for the third year, which may increase to $200,000
based on earnings for such year (through July 31, 2003). The third agreement
provides for base salary of $102,000 for the first year, increasing to $112,000
for the second year, and increasing to $122,000 for the third year (through July
9, 2003). The fourth agreement provides for a base salary of $260,000 from May
15, 2002 through December 31, 2002, which increases to $300,000 from January 1,
2003 through December 31, 2003, and $350,000 from January 1, 2004 through
December 31, 2004. Thereafter, for each succeeding year during the term of these
agreements, base salary shall be increased annually by a percentage equal to the
percentage by which the Consumers Price Index has increased over the preceding
year. The agreements further provide for a commission equal to one percent of
net sales during each year of their term. The agreements also provide for the
key employees not to engage in certain competitive activities for one year after
termination of employment.
LICENSE AGREEMENT
On February 27, 2001, the Company entered into a software license agreement
expiring June 30, 2003. Future aggregate annual payments under this agreement
for the year ending June 30, 2003 totals $75,000. In addition, the agreement
provides for an option to renew from July 1, 2003 to June 30, 2005. The Company
will be required to pay $100,000 a year plus a percentage equal to the last
published Consumer Price Index.
11. LIQUIDITY
The Company has incurred a loss from operations for the nine months ended
September 30, 2002 of approximately $1,500,000 and has working capital of
approximately $1,280,000 and a stockholders' deficit of approximately $65,000 as
of September 30, 2002. The majority stockholder of the Company has committed to
fund additional long-term debt financing, on an as needed basis. Long-term
liquidity is dependent on the Company's ability to obtain additional long-term
financing and attain profitable operations.
12. STOCKHOLDERS' DEFICIT
On April 22, 2002 and May 16, 2002, the majority stockholder converted and
exchanged an aggregate of $2,000,000 of borrowings that were outstanding under a
line of credit agreement for an aggregate of 1,093,750 and 666,667 shares of the
Company's common stock, at a per share value of $.91 and $1.50, respectively.
The remaining amounts outstanding under the line of credit, plus accrued
interest, accrued officer compensation and un-reimbursed expenses were converted
into a promissory note (Note 5).
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
OF OPERATION.
OVERVIEW OF OPERATIONAL HISTORY
We were created on September 8, 2000, under the name TDT Development, Inc.
On July 11, 2002 we changed our name from TDT Development, Inc. to Stronghold
Technologies, Inc. We were originally created for the business purpose of
importing and distributing specialized truffle-based food products which
included fresh truffles, truffle oils, truffle pates, truffle creams, and
truffle butter (the "Truffle Business"). As a result of recent transactions,
described below, our business has changed.
We now market, sell and support an integrated enterprise software system
that utilizes wireless technology to improve and create greater efficiency in
auto dealer operations. Our wireless technology, DealerAdvance(TM), is marketed
through our wholly owned subsidiary, Stronghold Technologies, Inc, a New Jersey
entity, and is designed to help auto dealer sales professionals increase sales,
improve customer return and follow-up rates, and reduce administrative costs.
The DealerAdvance(TM) suite of products is designed to run on a handheld device
and will allow automobile dealers to capture a prospective purchaser's
automotive requirements and personal profile, search inventory at multiple
locations, locate an appropriate vehicle in stock, print out the necessary
forms, and communicate follow-up tasks to the sales people through a Customer
Relationship Management ("CRM") application.
Stronghold Technologies, Inc. ("Stronghold") became our wholly owned
subsidiary on May 16, 2002 pursuant to a merger of its predecessor, Stronghold
Technologies, Inc., a New Jersey corporation (the "Predecessor Entity"), with
and into our wholly-owned subsidiary, TDT Stronghold Acquisition Corp.
("Acquisition Sub"). Acquisition Sub was created on May 9, 2002 for the purpose
of merging with Predecessor Entity. After the closing of the merger, Acquisition
Sub, the survivor of the merger, changed its name to Stronghold Technologies,
Inc. and remains our wholly owned subsidiary. Stronghold continues to conduct
the Predecessor Entity's handheld wireless technology business.
On July 19, 2002 we exchanged all of the shares that we held in two wholly
owned subsidiaries, Terre di Toscana, Inc. and Terres Toscanes, Inc., for 75,000
shares of our common stock held by Mr. Pietro Bortolatti, our former president.
These subsidiaries conducted the Truffle Business and, as a result of the
exchange with Mr. Bortolatti, 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. Due to the disposition of the Truffle Business, the results
of operations set forth above and discussed below describe the operations of the
handheld technology business of Stronghold only, except for Operating Expenses.
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, which included
fresh truffles, truffle oils, truffle pates, truffle creams and truffle butter,
through our former wholly-owned subsidiaries,
12
Terre di Toscana, Inc. and Terres Toscanes, Inc. Our target market included
retailers such as restaurants, specialty food stores, delicatessens and
supermarkets. We imported products directly from Italian producers and marketed
our products in the specialty food industry. We marketed our products primarily
in Florida, South Carolina, North Carolina and California, and also earned
commissions from Italy on sales made in Belgium, Holland and Germany. The
Truffle Business made no contribution to our operating profit, and sales revenue
therefrom did not constitute a material amount of our sales for the quarter. As
a result of the sale of Terre di Toscana, Inc. and Terres Toscanes, Inc. to
Pietro Bortolatti, we no longer own any portion of the Truffle Business.
OVERVIEW OF HANDHELD TECHNOLOGY BUSINESS
On May 16, 2002, we entered the handheld wireless technology business via
our acquisition by merger of the Predecessor Entity. The Predecessor Entity was
founded on August 1, 2000 by Christopher J. Carey, our current Chief Executive
Officer and President, and three other executive officers of Stronghold: Lenard
J. Berger, Chief Technology Officer; James J. Cummiskey, Vice President, Sales &
Marketing; and Salvatore F. D'Ambra, Vice President, Product Development. This
founding group has substantial expertise in systems design, software
development, wireless technologies and automotive dealer software applications.
The Predecessor Entity was founded to develop proprietary handheld wireless
technology for the automotive dealer software market. Since the merger of the
Predecessor Entity into our subsidiary (now Stronghold), Stronghold continues to
conduct the Predecessor Entity's handheld wireless technology business.
Stronghold's DealerAdvance(TM) suite of software systems has been designed
to utilize wireless technologies to improve operations within an automotive
dealership by maximizing revenues and reducing operating expenses. The
DealerAdvance(TM) suite encompasses three distinct products, each at a different
stage of development. The first product, DealerAdvance Sales Solution(TM), has
already been introduced into the market and is designed to increase sales by
effectively capturing a greater percentage of unsold customer prospects and
maximizing their "be-back" (return) and closure rates. Currently, we believe
there are no other front-end or CRM systems that perform comparably to
DealerAdvance Sales Solution(TM). Stronghold's second product, DealerAdvance
Service Solution(TM), will be installed into select pilot locations in Spring
2003 and is designed to increase the efficiency with which an automobile
dealership can check in an automobile for service and recall necessary
information on that vehicle. Stronghold has not yet started to develop its third
product, DealerAdvance Inventory Management Solution(TM), which is also designed
to increase revenues and maximize profitability, in this case by effectively
managing dealer vehicle inventory. DealerAdvance Inventory Management
Solutions(TM) is scheduled for introduction in early 2004.
Stronghold also offers support services to its automobile dealership
customers designed to complement the DealerAdvance(TM) suite of products.
Services offered include project and implementation management, business and
operations consulting, sales and service training and maintenance and support of
installed systems components and software. Stronghold currently sells and
supports its systems directly, and has therefore placed a number of sales and
support personnel in strategic locations throughout major metropolitan areas of
the United States. In addition, in October 2002, Stronghold launched a Dealer
Performance Services group in its
13
Virginia Development and Support Center to provide customer support for car
dealerships and the training and support of field personnel. The group will
assist dealers in optimizing their investment in Stronghold's DealerAdvance(TM)
technology by providing business development consulting, business process
improvement, software customization and sales training.
DESCRIPTION OF PRODUCTS
Stronghold's DealerAdvance(TM) suite of products was designed to improve
auto dealer operations by creating a more efficient flow of information between
the customer and the dealership database and between the dealership database and
the sales person. DealerAdvance(TM) software utilizes a wireless network to
connect the dealership server with handheld devices utilized by various
dealership personnel. Stronghold provides the wireless handheld devices and
installs its software on the dealership server. The server is connected to the
Internet, each salesperson via the wireless network, and the existing dealership
accounting system (which provides access to inventory, customer, and vehicle
history files). Each sales person will therefore have a wealth of information at
his fingertips and be able to add customer information directly to the database
for future reference.
Stronghold's local wireless network will provide coverage throughout all
the dealership facilities, including the surrounding car lots, and will include
the handheld devices, administrative terminals (where necessary), printers, and
scanning stations. In addition, the dealership will be able to utilize Internet
connectivity to gain access to Stronghold's Virginia Development and Support
Center, which will enable Stronghold to remotely repair, customize, and upgrade
the dealership software. Through the Internet connection, Stronghold offers the
following additional services: support, including project and implementation
management; software customization; sales and service operations consulting;
technical, sales and service training; and systems and software maintenance.
Stronghold's local resources also oversee performance reports and offer
executive coaching for dealership management. Stronghold offers the following
three products that are designed to take advantage of our hardware and wireless
technology.
DealerAdvance Sales Solution(TM)
--------------------------------
How DealerAdvance Sales Solution(TM) Works
------------------------------------------
The DealerAdvance Sales Solution(TM) was designed to assist auto dealership
sales personnel by utilizing wireless technology to increase the flow of
information between the customer and the dealership database and between the
dealership database and the sales person. Stronghold believes this increased
access to information is helpful to both the sales personnel and the dealership
database and will increase sales by lessening the time in which sales can be
made, effectively capturing a greater percentage of unsold customer prospects
and maximizing potential customer "be-back" (return) and closure rates. The
DealerAdvance Sales Solution(TM) is designed to quickly provide inventory,
product details and purchase agreements and other deal forms to the salesperson.
Furthermore, the product allows the salesperson to fill out, edit and print the
deal forms, while at the same time capturing customer information which is sent
to the dealership database. In addition, DealerAdvance Sales Solution(TM)
assigns follow-up tasks to sales
14
associates and other dealership personnel and provides for customizable reports
for use by management in reviewing individual and group sales performance.
Stronghold believes that the DealerAdvance Sales Solution(TM) improves the
dealership's ability to set appointments with potential customers, improves the
rate at which potential customers enter the dealership, and increases the
chances that a potential customer will purchase an automobile. In addition,
Stronghold believes that by eliminating paperwork and increasing the
availability of information on customers and automobiles, the DealerAdvance
Sales Solution(TM) drastically reduces the time necessary to complete a sale.
Stronghold does not believe that there are any other systems for use in
automotive sales that utilize wireless handheld technologies, nor does it
believe that there are any CRM systems that perform comparably to its
DealerAdvance Sales Solution(TM).
The typical dealership sales associate carries the DealerAdvance Sales
Solution(TM) handheld device in a hip holster. Once they have met and greeted a
prospective customer, they introduce the device as an aide to the process. The
sales associate begins by utilizing the system to access inventory information,
and may conduct an online comparison of the vehicle the prospective customer is
considering buying to a vehicle from another brand. During this process, the
sales associate will casually begin capturing information about the prospect
(name, address, phone number, e-mail address).
In preparation for a demonstration drive of the selected vehicle, the sales
associate will use the driver's license scanning feature to capture name,
address and valid driver's license information, which is stored for insurance
purposes, but also populates those field not already completed. In addition, the
sales associate may input the prospect's home phone number, which triggers a
search through a reverse directory lookup feature for the customer's name and
address.
Once interest is qualified in a car, the sales associate will complete a
used car appraisal, print out negotiation forms, and once negotiations are
complete, will print out all purchase agreements, buyers forms, and credit
applications. After these agreements are signed, all information is sent through
the accounting system to the finance and insurance department for their closing
of the sale.
Once the sale is complete, the DealerAdvance Sales Solution(TM) system
automatically sends out letters from dealership management and initiates the
service relationship with the customer. If the customer leaves without buying,
the system creates a follow-up letter or e-mail, and later prompts the sales
associate for a follow-up call. Later contacted, the sales associate sets a
return appointment, and the system prompts a reminder call to confirm the time
and date. Extensive customizable reports are available which show the
effectiveness of individuals and groups of sales associates to assist management
in establishing best practices for the dealership.
The DealerAdvance Sales Solution(TM) provides the following advantages for
dealerships and sales associates:
o Ease of use associated with handheld mobile communications;
o The handheld unit is both an input and display device;
o The handheld unit is programmed to access competitive and proprietary
industry information from a variety of sources;
15
o The system provides the capability for immediate management
involvement in the selling process;
o Provides for effective monitoring of sales performance and follow-up
by sales personnel; and
o Enables integration with existing automotive dealer accounting and
business systems.
The DealerAdvance Sales Solution(TM) offers the following unique features:
o Enables a high capture rate on walk-in traffic;
o Streamlines all sales and other follow-on processes;
o Provides current and comprehensive information and data for new and
used car inventory (on a real-time basis), all competing products, and
customer history with dealership;
o Provides performance data and analysis on each member of a sales team;
and
o Provides management with valuable and relevant transaction data on a
real-time basis.
The DealerAdvance Sales Solution(TM) offers the following features:
o Customer profiling;
o Drivers license scanning;
o Electronic signature capture;
o Dealer vehicle information and competitive product comparisons;
o Vehicle inventory status;
o Financial calculator;
o Integrated purchase forms completion and printing;
o Used car appraisal;
o Management reports;
o Customer Relationship Management (CRM) system functions;
o DMS integration capability; and
o E-mail and Internet access.
DealerAdvance Sales Solution(TM) Installations
----------------------------------------------
Stronghold's first pilot system for DealerAdvance Sales Solution(TM) was
installed in April 2001 at a Honda dealership in Clifton, New Jersey. In May
2001, Stronghold installed a second pilot system at a Jeep GMC dealership in
Concord, California and a third followed in June 2001 at a Honda dealership, in
Roseville, California. Stronghold installed a fourth pilot system at another
Honda location in Passaic, New Jersey in July 2001. A fifth pilot at BMW in
Greenwich, Connecticut followed in August 2001. In September 2001, Stronghold
completed its pilot phase with a sixth installation at a Nissan dealership in
Roseville, California and introduced Version 2.0 of DealerAdvance Sales
Solution(TM) at all of its sites by the end of September 2001. Stronghold will
release a beta test of version 3.2 of the DealerAdvance Sales Solution(TM)
16
in December 2002 and expects to distribute version 3.2 generally to dealerships
by February 2003.
Stronghold installed 20 dealership sites in the first six months of 2002,
and an additional 15 sites in the third quarter ending September 30, 2002. These
sites are geographically dispersed throughout the country, and Stronghold is
currently soliciting sales opportunities in all states in the continental United
States.
DealerAdvance Service Solution(TM)
----------------------------------
The second product to be included in the DealerAdvance(TM) suite of
products is currently in development and is called the DealerAdvance Service
Solution(TM). To implement the DealerAdvance Service Solution(TM) a dealership
service advisor will utilize a tablet-sized mobile device coupled with a
wireless printer worn on his belt, and will meet and greet the customer at car
side in the service lanes to process service orders. Utilizing the scanning
feature, the service advisor will read the vehicle identification number from
the windshield or door jam, which will bring up the vehicle and customer
history. The system will create a repair order, and will prompt the service
advisor through warrantee, service and recall actions. DealerAdvance Service
Solution(TM) will then compute the price estimate for the services to be
performed. Once the price estimate is completed, the service advisor will print
out an estimate form for signature. The system will interface with Stronghold's
CRM application, which will aid in services marketing to existing customers,
prospective customers and other prospect sources from third party information
providers (Internet sites, manufacturers, etc.).
For the DealerAdvance Service Solution(TM), Stronghold has advanced to a
second hand held prototype for demonstration purposes with prospective and
existing clients. Stronghold is confident that all features are technologically
feasible, and has identified a development plan and schedule to deliver these
features in early 2003. Stronghold has received approval for a limited number of
pilot sites for the Spring of 2003.
Stronghold anticipates that the service advisor will be more efficient
through the use of this mobile solution, and will be able to process more
vehicles per shift. Stronghold also believes that it will be able to increase
the average repair order value. Stronghold estimates that it will increase
revenue for the dealership through more effective services marketing. However,
none of the components of the DealerAdvance Service Solution(TM) are currently
operational, and there can be no assurance that the components will proceed
through the development and beta testing stages.
DealerAdvance Inventory Management Solution(TM)
-----------------------------------------------
Stronghold has identified its third product, called DealerAdvance Inventory
Management Solution(TM), which is envisioned to improve dealership operations by
providing a software system that utilizes wireless handheld devices to manage
new and used car inventory. The system is intended to be able to scan vehicle
identification numbers from the VIN tag for incoming and outgoing vehicles,
which would immediately adjust inventory on hand for sale on the dealership
accounting system. In addition, the system would provide for the printing of
used
17
car stickers, the capture of Vehicle Identification Numbers for used car
appraisal and estimates, and the loading of vehicle specifics to the dealer web
site.
Current dealer systems often delay or inaccurately load inventory
information to their internal accounting system. This results in inaccurate
inventory available for sale, and causes a loss in revenue. Dealers currently
utilize internal and third party resources to create used car stickers.
Stronghold expects that it will provide this feature for less than current
costs. However, Stronghold has not begun development efforts, and has not fully
qualified the costs and returns associated with these functions. Stronghold is
confident that it has the technological capabilities to create this product, but
Stronghold will not be certain until prototypes and tests have been completed.
DealerAdvance Inventory Management Solution(TM) is expected to be
introduced in early 2004. Development efforts are in the initial feasibility
stages of operational analysis and a prototype of the product has yet to be
developed. There can be no assurance that DealerAdvance Inventory Management
Solution(TM) will proceed to the developmental stage or that an operational
product will result.
Product Research and Development
--------------------------------
Since August 1, 2000, Stronghold has spent approximately $1,658,173 on
research and development activities. While Stronghold has been successful in
meeting planned goals in the development and introduction of DealerAdvance Sales
Solution(TM), there can be no assurance that its research and development
efforts will be successful with respect to DealerAdvance Service Solution(TM),
DealerAdvance Inventory Management Solution(TM), or additional products, or if
successful, that Stronghold will be able to successfully commercially exploit
such additional products.
COMPETITION RELATED TO HANDHELD TECHNOLOGY BUSINESS
The DealerAdvance Sales Solution(TM) is a wireless dealership sales
productivity system that improves sales performance, reduces costs and creates
operational efficiency. Currently, Stronghold does not believe that it has any
direct competition in this specific sector. However, Stronghold expects emerging
competitive players in the wireless handheld solutions market in the future.
Stronghold does compete with the traditional CRM providers and the emerging new
CRM providers in the retail automotive dealer software market. The leading CRM
solutions that Stronghold competes against are:
o Automotive Directions, a division of ADP Dealer Services, and a
provider of PC-based customer relationship management systems as well
as marketing research and consulting services;
o Higher Gear, a provider of client server based front-end sales and
customer relationship management software which serves the retail
automotive industry exclusively;
o Autobase, a provider of PC based front-end software which serves the
retail automotive industry exclusively;
18
o Cowboy Corporation, a provider of ASP sales prospect management
systems and customer relationship management systems which services
the retail automotive industry exclusively; and
o Autotown, a provider of PC and web-based front-end sales systems,
which services the retail automotive industry exclusively.
Stronghold believes that its proprietary technology is unique and,
therefore, places it at a competitive advantage in the industry. However, there
can be no assurance that Stronghold's competitors will not develop a similar
product with properties superior to its own or at greater cost-effectiveness.
INDUSTRY TRENDS
The automotive industry has identified sales productivity tools and
customer relationship management systems to be of high priority. Many
consolidators and independent dealership owners have begun to explore and pilot
some of these solutions to determine the most effective means for managing and
exploiting prospects and customers to increase car sales. To date, only a small
number of the 22,600-dealership sites have implemented these systems. There
remains substantial uncertainty as to the type of systems that will be
implemented as well as the pace at which implementation will take place.
Since big-ticket consumer purchases are sensitive to broad economic trends,
our operations may be affected by general economic conditions. Our business
could suffer if Stronghold's customers - automobile dealerships - are affected
by the continuing poor economic conditions. For example, if dealer sales are
trending downward, capital expenditures like those associated with Stronghold's
DealerAdvance(TM) suite of products may be delayed or abandoned.
Finally, seasonality may have some impact on our operations. Consumers tend
to purchase automobiles during the summer months. While we could not detect any
seasonality impact on our third quarter results, this factor may have an impact
on our fourth quarter, 2002 and first quarter, 2003 results as automobile
dealerships may decide not to implement Stronghold's DealerAdvance Sales
Solution(TM) during such months. The resulting impact is that our revenues may
have a corresponding decrease during the winter months. Due to our limited
operating history and the developmental stage of Stronghold's products, it is
difficult to determine precisely what effect seasonality will have on our
operations.
MARKETING AND SALES
Stronghold has defined a target market of approximately 12,600 dealerships
that meet the base criteria for potential use of its system. These dealerships
were identified in a study conducted by the National Automotive Dealers
Association (NADA) which reported that 12,600 dealerships sold at least 400 new
vehicles each year. Using the NADA study, Stronghold has qualified a primary
target market of 6,500 dealerships where the potential sale and use of the
system is the greatest. It includes dealerships that sell a minimum of 75 new
and used cars each month.
19
Stronghold's marketing strategy is to utilize a direct sales and support
organization to market and support DealerAdvance(TM) products on a national
basis, which Stronghold believes is most effective when introducing an
innovative new solution to the marketplace. Stronghold will continue to add to
its Sales and Marketing team, which is aligned along geographic territory units.
With ten metropolitan areas now serviced by sales and support personnel,
Stronghold is responding to and soliciting sales opportunities in all states in
the continental United States. Stronghold now has personnel in Hasbrouck
Heights, New Jersey; Sterling, Virginia; Atlanta, Georgia; Miami, Florida;
Cleveland, Ohio; Chicago, Illinois; Dallas, Texas; Phoenix, Arizona; Los Angeles
and San Francisco, California; and Washington, D.C. Stronghold expects to add
Business Development Managers in Denver and Seattle in the fourth quarter.
Stronghold currently expects to add two business development managers per
quarter in major metropolitan areas during 2003.
Stronghold currently has a total of 43 full-time employees of which 20 are
dedicated to marketing and sales, and one part-time employee. During
Stronghold's initial expansion, Stronghold has hired senior and experienced
Business Development Mangers to provide initial regional market penetration. As
Regional Managers are hired or promoted after the initial expansion, Stronghold
will shift to less senior, but equally aggressive and professional, sales
executives for continued expansion. Project Managers will be responsible for
providing installation, training and ongoing support services to Stronghold's
new and existing customers. Project Managers will report to the Business
Development Managers. In 2003, Stronghold anticipates hiring both a Marketing
Manager and a Director of Customer Service. The Marketing Manager will work
closely with the CEO and the Vice President of Sales and Marketing to execute
Stronghold's marketing strategy and to enhance market awareness of the
DealerAdvance Sales Solution(TM). The Director of Customer Services will have
responsibility for customer satisfaction and support and will be responsible for
managing all internal project management training programs, customer
satisfaction measurements, additional consulting services, and fee-based
customer training programs.
OUR INTELLECTUAL PROPERTY
Stronghold has trademark and patent applications pending in connection with
its technology business. Stronghold has filed a trademark application for
"DealerAdvance." The patent application protects a number of developments
pertaining to the management of information flow for automotive dealer-based
software. An additional application is currently being planned which will
address certain proprietary features pertaining to systems components, related
equipment and software modules.
Despite efforts to protect its proprietary rights, unauthorized parties may
misappropriate Stronghold's proprietary technology or obtain and use information
that Stronghold regards as proprietary. Stronghold may not be able to detect
these or any other unauthorized uses of Stronghold's intellectual property or
take appropriate steps to enforce its proprietary rights. In addition, others
could independently develop substantially equivalent intellectual property.
20
LIQUIDITY AND CAPITAL RESOURCES
Overview
--------
As of September 30, 2002, our cash balance was $4,617. As of September 30,
2002, we had net operating losses of approximately $846,000 to offset future
taxable income. There can be no assurance, however, that we will be able to take
advantage of any or all such tax loss carry-forwards, in future fiscal years.
Our accounts receivable at September 30, 2002 were $2,246,229, as compared to
$282,360 for the fiscal year ended December 31, 2001. The increase in accounts
receivables represents amounts owed to Stronghold from 35 new dealership sites,
which installed Stronghold's DealerAdvance(TM) products during the first, second
and third quarters of 2002. Stronghold currently offers dealerships a 60-day
performance guarantee, after which Stronghold is owed the full amount of its
receivable from the customer. The performance guarantee period (previously 90
days) has created a larger Accounts Receivable balance, proportionate to sales,
than Stronghold expects to incur after its products have reached a higher level
of general market acceptance, at which time the performance guarantee will
likely be shortened in length, modified, or eliminated. While Stronghold has
historically encountered only one cancellation after the performance guarantee
period, there is no assurance that it will not encounter higher cancellations in
the future.
Financing Needs
---------------
To date, we have not generated revenues in excess of operating expenses. We
have not been profitable since our inception, we will incur additional operating
losses in the future, and we may require additional financing to continue the
development and subsequent commercialization of our technology.
Stronghold expects its capital requirements to increase significantly over
the next several years as Stronghold continues to develop and test the
DealerAdvance(TM) suite of products and as it increases marketing and
administration infrastructure and embark on developing in-house business
capabilities and facilities. Stronghold's future liquidity and capital funding
requirements will depend on numerous factors, including, but not limited to, the
levels and costs of Stronghold's research and development initiatives, the cost
of hiring and training additional sales and marketing personnel to promote
Stronghold's products, the cost and timing of the expansion of Stronghold's
marketing efforts, and the timing of payments from Stronghold's customers or
third-party leasing companies.
Financings
----------
During August, September, and October 2002 we entered into eight
subscription agreements with private investors, pursuant to which we issued an
aggregate of 179,333 shares of our common stock at $1.50 per share. These
private investments generated total proceeds to us of $269,000.
On May 15, 2002, we entered into a Securities Purchase Agreement with
Stanford Venture Capital Holdings, Inc. ("Stanford"), in which we agreed to
issue to Stanford (i) such number of shares of our Series A $1.50 Convertible
Preferred Stock that would in the aggregate
21
equal 20% of the total issued and outstanding shares of our common stock, and
(ii) such number of warrants for shares of our common stock that would equal the
number of shares of Series A Preferred Stock issued to Stanford. The total
aggregate purchase price for the Series A Preferred Stock and warrants paid by
Stanford was $3,000,000. The issuance of the Series A Preferred Stock and
warrants took place on each of four separate closing dates (May 16, 2002 and
July 3, 11, and 19, 2002), in which the Company issued an aggregate of 2,002,750
shares of our Series A $1.50 Convertible Preferred Stock to Stanford and
warrants for 2,002,750 shares of our common stock. After the closings, Stanford
assigned warrants for a total of 1,001,376 shares of common stock to four of its
affiliates.
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. According to such arrangement, Mr. Carey made available $1,989,500,
which the Predecessor Entity could borrow from time to time until August 1,
2001. The outstanding amounts accrued interest at the 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. Under the
agreement, the first interest 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. Stronghold will pay Mr. Carey
$1,037,847, the amount remaining as of September 30, 2002, according to the
terms of a Non-Negotiable Promissory Note, which was issued on May 16, 2002.
Under the promissory note, the principal amount and accrued interest is due
and payable in six equal consecutive quarterly installments commencing on the
date which is two business days after we have filed our Annual Report on Form
10-K or 10-KSB for the year ended December 31, 2002. Each subsequent quarterly
installment will be paid two days after we file each subsequent Form 10-Q or
10-QSB. Interest accrues under the promissory note at an annual rate of 10%. If
Stronghold's net income in the relevant quarter is less than 55%, but equal to
or greater than 40% of the net income amount specified in the promissory note
for such quarter, then the principal balance and accrued interest due for the
quarter will be deferred and the repayment will be amortized during the
remaining quarters. If, however, the net income for such fiscal quarter does not
exceed 40% of the specified net income amount specified for such fiscal quarter,
the principal balance and accrued interest due for such quarter shall be
automatically converted into fully paid and non-assessable shares of our common
stock as of the date such payment would have been due, at a conversion price
equal to the average closing price of our common stock for the twenty (20)
trading days immediately preceding the date of conversion. The promissory note
is expressly subordinated in right of payment to the prior payment in full of
all of Stronghold's senior indebtedness. Subject to the payment in full of all
senior indebtedness, Mr. Carey is subrogated to the rights of the holders of
such senior indebtedness to receive payments or distribution of assets.
22
On November 1, 2001, the Predecessor Entity entered into a loan arrangement
with United Trust Bank pursuant to which the Predecessor Entity borrowed $1.5
million. The loan arrangement was due to expire by its terms, and all
outstanding amounts were due to be paid, on June 30, 2002. On such date,
Stronghold (as successor to the Predecessor Entity) entered into a loan
arrangement and promissory note with United Trust Bank, pursuant to which
Stronghold will pay back the $1.5 million outstanding under the loan in 36
monthly installments (35 principal payments of $41,667 and one final principal
and interest payment of $41,837), which will begin in February 2003 and will
terminate on January 1, 2006. Interest accrues on the loan at the Prime Rate,
which is the highest New York City Prime Rate as is published in The Wall Street
Journal. The initial Prime Rate that applies to the promissory note is 4.750%.
The annual interest rate is computed on a 365/360 basis.
On June 30, 2002, Stronghold entered into a commercial security agreement
with United Trust Bank, pursuant to which Stronghold granted to United Trust
Bank a security interest in all of Stronghold's inventory, chattel paper,
accounts, equipment and general intangibles. Such security interest was granted
to ensure payment of indebtedness and performance of all other obligations under
the promissory note and the commercial security agreement.
We plan to complete a private sale of common stock and warrants by the end
of December 2002 in which we expect to receive aggregate proceeds of $2,000,000.
In addition, we have received a commitment from our Chief Executive Officer,
Christopher J. Carey, for bridge financing of $250,000, at an interest rate of
10% per year, which will be repaid from proceeds of the aforementioned private
sale of common stock. As of November 12, 2002, we have borrowed approximately
$170,000 of the total commitment from Mr. Carey.
We believe that with the bridge financing and private placement described
above, we will have sufficient cash on hand to support our operating plan until
we reach operating profitability and we are cash flow positive. Therefore, at
this time, we do not anticipate a need to seek additional funding.
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
September 30, 2002 were comprised of our Truffle Business (which was
discontinued on July 19, 2002, as described above) and our handheld wireless
technology business. Results of operations for the three months and nine months
ended September 30, 2002 reflect the treatment of the Truffle Business as
discontinued operations and, therefore, figures from those periods reflect
operations of our handheld wireless technology business only, other than
Operating Expenses. As a result, we believe that period-to-period comparisons of
our results of operations will not be meaningful and should not be relied upon
as indicators of future performance.
23
We entered the handheld wireless technology business through our
acquisition of the Predecessor Entity, which had only twenty-two months of
operating history. We must, therefore, be considered to be subject to all of the
risks inherent in the establishment of a new business enterprise. Our limited
operating history makes it difficult to evaluate our financial performance and
prospects. We cannot make assurances at this time that we will operate
profitably or that we will have adequate working capital to meet our obligations
as they become due. Because of our limited financial history, we believe that
period-to-period comparisons of our results of operations will not be meaningful
in the short term and should not be relied upon as indicators of future
performance.
Revenue Recognition Policy
--------------------------
Revenue related to the sale of Stronghold's products is comprised of
one-time charges to the dealerships for hardware (including server, wireless
infrastructure, desktop PC, printer, interior/exterior access points/antennas
and handheld devices), software licensing fees and installation/training
services. Stronghold charged each of its DealerAdvance Sales Solution(TM) pilot
dealers and all of its subsequent dealers for all costs associated with
installation. The average installation for DealerAdvance Sales Solution(TM) from
inception through September 30, 2002 was $83,000. The most significant variable
in pricing is the number of handheld devices. Stronghold has not qualified its
pricing for DealerAdvance Service Solution(TM), but expects that it will be
approximately $50,000.
Once DealerAdvance Sales Solution(TM) is installed, Stronghold provides
hardware and software maintenance services for a yearly fee equal to
approximately 10% of the one-time implementation fees. All dealerships contract
these services, and pay on a monthly basis. Stronghold provides other services,
including software and report customization, business and operations consulting,
and sales training services. All of these services are contracted on an as
needed basis, and typically are charged on a time and expenses basis. A large
portion of the dealerships convert the one-time fee into a third party lease.
Stronghold has entered into a number of relationships with leasing companies in
which the leasing company finances the implementation fees for the dealership in
a direct contractual relationship with the dealership. Stronghold accepts no
liability under these arrangements, and the lease is based on the
creditworthiness of the dealership. The leasing company receives the invoice
from Stronghold, and remits funds upon acceptance by the dealership. Stronghold
receives all funds as invoiced, with all interest costs passed to the
dealership. These leases typically run 36 months in duration, during which time
Stronghold contracts for service and maintenance services. Stronghold charges
separately for future software customization after the initial installation, for
additional training, and for additions to the base system (e.g., more handheld
devices for additional sales people). Depending upon the dealership arrangement,
the support and maintenance contracts are either billed monthly and recorded as
revenue monthly, or are recorded up front to unearned maintenance fees at the
present value of the 36-month revenue stream and amortized monthly to revenue
over the life of the agreement.
Software Development Capitalization Policy
------------------------------------------
Software development costs, including significant product enhancements
incurred subsequent to establishing technological feasibility in the process of
software production, are
24
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. In the three
months ending September 30, 2002, Stronghold capitalized $231,292 of development
costs in developing enhanced functionality of its DealerAdvance(TM) product.
Three Months Ended September 30, 2002 and Three Months Ended September 30, 2001
-------------------------------------------------------------------------------
For the three months ending September 30, 2002, we had total revenue of
$1,203,510. For the three months ending September 30, 2001, we had revenues of
$261,111, representing an increase of 360%. This increase is due to the progress
of Stronghold's business from beta-test phase to sales and marketing phase and
the related installation of Stronghold's DealerAdvance(TM) products in 15 new
dealerships from July 1, 2002 through September 30, 2002, versus the
installation of 3 dealerships in the comparable period in 2001.
Operating expenses for the three-month periods ended September 30, 2002 and
September 30, 2001 were $1,341,446 and $722,910, respectively, representing an
increase of $618,536, or 86%. The increase in operating expenses is attributable
to the continued investments in overhead to manage the ongoing expansion of the
business, and as with prior quarters, includes significant increases in product
development, the continued build-out of a support network for Stronghold's
dealership sites, and salaries for sales personnel and project managers who
oversee the dealerships where Stronghold's DealerAdvance(TM) products are
installed. In addition, Stronghold increased its allowance for doubtful accounts
during the three-month period ending September 30, 2002 by $120,000 to account
for potential cancellations at a small number of dealerships.
Gross profit contribution, after direct costs of goods sold, totaled
$746,407 for the three months ending September 30, 2002, and was 62% of revenue.
This compares to $198,134 in the same three-month period in 2001, which was 76%
of revenue. While Stronghold continues to tightly control and monitor costs, the
decrease in gross profit margin from the third quarter last year is attributable
to a small number of high-margin deals in last year's third quarter. Stronghold
expects gross margins to run between 60% and 68% as the business grows.
Stronghold has moved out of its beta testing phase, which essentially
covered all of 2001, and into a marketing and sales mode during the first and
second quarters of 2002. During the second and third quarters, revenues
increased significantly as the number of dealerships installing Stronghold's
DealerAdvance(TM) suite of products increased. We can offer no assurance,
however, that revenues in future quarters will increase at the rate that
revenues grew during the quarter ended September 30, 2002 or that gross margins
will continue to increase. Notwithstanding the revenue and gross profit growth,
Stronghold has yet to generate an operating profit in any accounting period.
Nine Months Ended September 30, 2002 and Nine Months Ended September 30, 2001
-----------------------------------------------------------------------------
For the nine months ended September 30, 2002, Stronghold reported total
revenue of $2,952,076, compared to the revenue for the nine-month period ended
September 30, 2001 of
25
$576,830, representing an increase of 411%. This increase is due to the
implementation of DealerAdvance(TM) products and services in 35 new dealerships
from January 1, 2002 through September 30, 2002, compared with five dealerships
implemented in the comparable nine-month period in 2001.
Operating expenses for the nine-month periods ended September 30, 2002 and
September 30, 2001 were $3,429,224 and $1,827,631, respectively, representing an
increase of $1,601,593, or 88%. The increase in operating expenses is
attributable to the continued investments in overhead to manage the expansion of
the business, significant increases in product development, the continued
build-out of a support network for Stronghold's dealership sites, and salaries
for sales personnel and project managers who oversee the dealerships where
Stronghold's DealerAdvance(TM) products are installed.
Gross profit contribution, after direct costs of goods sold, totaled
$1,904,938 for the nine months ending September 30, 2002, and was 64% of
revenue. This compares to $382,917 in the same nine-month period in 2001, which
was 66% of revenue. As stated above, the smaller number of deals in 2001 has led
to some fluctuations in year-over-year comparisons, but Stronghold expects gross
profit margins to run between 60% and 68% as the business grows.
Stronghold has moved out of its beta testing phase, which essentially
covered all of 2001, and into a marketing and sales mode during the first and
second quarters of 2002. During the second and third quarters, revenues
increased significantly as the number of dealerships installing Stronghold's
DealerAdvance(TM) suite of products increased. We can offer no assurance,
however, that revenues in future quarters will increase at the rate that
revenues grew during the quarter ended September 30, 2002 or that gross margins
will continue to increase. Notwithstanding the revenue and gross profit growth,
Stronghold has yet to generate an operating profit in any accounting period.
Period From Inception in September 2000 through September 30, 2002
------------------------------------------------------------------
We have incurred losses each year since our inception and we have an
accumulated deficit of $4,642,025 at September 30, 2002. We expect to continue
to incur losses from expenditures on research, product development, marketing
and administrative activities.
We do not expect to generate revenues in excess of operating expenses in
the near future, during which time we will engage in significant research and
development, and marketing and sales efforts. While Stronghold has entered into
relationships with 50 automobile dealerships to use the DealerAdvance Sales
Solution(TM) products through October, 2002, there can be no assurance that
Stronghold will be successful in attracting other dealerships willing to use
newly developed technology. Furthermore, no assurance can be given that our
research and development efforts will result in any commercially viable
products, or that our marketing and sales efforts will result in increased
product exposure that would create sufficient revenues to support the business.
Successful future operations will depend on our ability to transform our newly
integrated and developed technology into commercially viable products.
26
FACTORS AFFECTING FUTURE OPERATING RESULTS
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 If We Cannot
Eventually Sustain Profitability We May Not Be Able To Continue Operations
We have a history of operating losses in our wireless business and have
incurred significant net losses in such business in each fiscal quarter since
our inception. From inception to the quarter ending September 30, 2002, we
incurred net losses totaling $4,642,025 and we had a net loss of $2,420,088 for
the fiscal year ended December 31, 2001. We expect to continue to incur net
losses and negative cash flows throughout 2002 because we intend to increase
operating expenses to develop the Stronghold brand through marketing, promotion
and enhancement of our services. As a result of this expected increase in
operating expenses, we will need to generate significant additional revenue to
achieve profitability. Our ability to generate and sustain significant
additional revenue or achieve profitability will depend upon the factors
discussed elsewhere in this Quarterly Report on Form 10-QSB, as well as numerous
other factors outside of our control, including:
o Development of competing products that are more effective or less
costly than ours;
o Our ability to develop and commercialize our own products and
technologies; and
o Our ability to achieve increased sales for our existing products and
sales for any new products.
It is possible that we may never achieve profitability and, even if we do
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis in the future. If we do not achieve sustained
profitability, we may be unable to continue our operations.
We Are Subject to the Financial Risks of a New Business Enterprise
We were formed in September 2000 to import and market truffle oil products.
Our focus has recently shifted to development and marketing of handheld wireless
technology for the automotive dealer software market. We entered this business
through the acquisition of an entity with only 26 months of operating history.
We must, therefore, be considered to be subject to all of the risks inherent in
the establishment of a new business enterprise, including depletion of operating
funds. In addition, as with other young companies, we may experience design,
marketing, and other difficulties that could delay or prevent the development,
introduction or marketing of our products and enhancements. If we are unable to
sustain cash for operating purposes or if we have problems delivering our
products to market, we may have to cease operations completely.
Our Limited Operating History Provides Little Guidance for Future Performance
Our limited operating history may be misleading and makes it difficult to
evaluate our financial performance and prospects. Although we have had
sufficient access to working capital historically, we cannot assure you at this
time that we will have adequate working capital to meet our obligations as they
become due. In addition, we have not operated profitably historically, and
27
we cannot assure you at this time that we will ever operate profitably. Because
of our limited financial history, we believe that period-to-period comparisons
of our results of operations will not be meaningful in the short term and should
not be relied upon as indicators of future performance.
If We Fail to Collect on Our Accounts Receivable, We May be Unable to Pay For
Our Liabilities
Our accounts receivable from the 2001 fiscal year end of $282,360,
increased to $2,246,229 for the nine-month period ended September 30, 2002. This
represents an increase of $1,963,869. During the first nine months of 2002 we
implemented our DealerAdvance Sales Solution(TM) in a total of 35 additional
dealerships. Each dealership was billed for hardware (including server, wireless
infrastructure, desktop PC, printer, interior/exterior access points/antennas
and handheld devices), and depending upon the arrangement, we may have also
billed such dealerships for software licensing fees and installation/training
services. We currently offer dealerships a 60-day performance guarantee, after
which we are owed the full amount of the receivable from the customer. The
performance guarantee period (previously 90 days) has created a larger Accounts
Receivable balance, proportionate to sales, than we expect to incur after our
products have reached a higher level of general market acceptance, at which time
the performance guarantee will likely be shortened in length, modified, or
eliminated. While we have historically encountered only one cancellation after
the performance guarantee period, there is no assurance that we will not
encounter higher cancellations in the future. There can be no assurance that we
will collect on the total amount of outstanding accounts receivable. If we do
not receive even a portion of the accounts receivable from the dealerships, our
liquidity position may be harmed such that we may be unable to pay for our own
liabilities, including making payroll payments to our employees.
If We Fail To Gain Market Acceptance Of Our Products We May Never Achieve
Profitability
We are still in the verification and validation stages of our
DealerAdvance(TM) suite of products. Our first pilot system for DealerAdvance
Sales Solution(TM) was installed in April 2001 and our sixth and final pilot
system was installed in September 2001. We have implemented a total of 35
additional sites during 2002, 34 of which are still operating. We expect to
introduce our DealerAdvance Service Solution(TM) and DealerAdvance Inventory
Management Solution(TM) over the next two years. These solutions are still in
the development stages and are not yet at the point where they are ready to be
installed in test sites. While we have received positive feedback and market
acceptance of DealerAdvance Sales Solution(TM) by the test sites, we have
overall limited commercial sales to dealers. Fifty total systems is a small
number and results in such sites may not be indicative of the overall market
acceptance and success of DealerAdvance Sales Solutions(TM) or our entire
DealerAdvance(TM) suite of products.
Furthermore, the nature of our handheld product and technology requires us
to market almost exclusively to automobile dealerships. Should any particular
dealership or conglomerate of dealerships favor other providers of similar
services or not utilize our services to the extent anticipated, our revenue will
decrease. Therefore, our prospects for future profitability 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
28
poor economy may also have an impact on the market acceptance of our products.
Big-ticket consumer purchases are sensitive to broad economic trends, and our
business could suffer if automobile dealerships are affected by the continuing
poor economic conditions. For example, if dealer sales are trending downward,
capital expenditures like those associated without our DealerAdvance(TM) suite
of products may be delayed or abandoned. If, for any of the above reasons, our
products do not gain market acceptance, we may not achieve profitability and may
eventually have to cease operations.
If We Fail To Manage Our Growth Effectively, We Will Lose Sales To Our
Competitors And Our Revenue Will Decrease
The future success and profitability of the Company depends upon our
ability to sell our products to a large number of customers throughout the
country. In order to reach our target markets, we need to sustain sales
operations in many different states. We have begun expanding our operations in
anticipation of an aggressive rollout of our DealerAdvance(TM) product suite. In
the past nine months our sales and marketing team has increased from 7 to 22
employees. We have strategically hired additional sales representatives in eight
more states in the past nine months, expanding into Arizona, Virginia, Southern
California, Florida, Illinois, Ohio, Texas and Georgia. Additionally, we must
continue to develop and expand our systems and operations as the number of
automobile dealerships installing our products and requiring our ongoing
services increases. The pace of our anticipated expansion, together with the
level of expertise and technological sophistication required to provide
implementation and support services, demands an unusual amount of focus on the
operational needs of our future customers for quality and reliability, as well
as timely delivery and post-installation and post-consultation field and remote
support. This development and expansion has placed, and we expect it to continue
to place, strain on our managerial, operational and financial resources.
We may be unable to develop and expand our systems and operations for one
or more of the following reasons:
o We may not be able to locate or hire at reasonable compensation rates
qualified and experienced sales staff and other employees necessary to
expand our capacity on a timely basis;
o We may not be able to obtain the hardware necessary to expand the
automobile dealership capacity of our products on a timely basis;
o We may not be able to expand our customer service, billing and other
related support systems;
o We may not be able to integrate new management and employees into our
overall operations;
o We may not be able to establish improved financial and accounting
systems; and
o We may not be able to successfully integrate our internal operations
with the operations of our product manufacturers, distributors and
suppliers to product and market commercially viable products.
If we cannot manage our growth effectively, we will lose ground to our
competitors, our revenue will fall, and our costs of doing business will rise.
Additionally, any failure on our part to develop and maintain our wireless
technology products if we experience rapid growth could
29
significantly adversely affect our reputation and brand name which could reduce
demand for our services and reduce the corresponding revenue associated with the
lost demand.
If We Are Unable To Obtain Sufficient Funds, And Continue To Incur A Cash Flow
Deficit, We May Eventually Be Forced To Cease Operations
We are an early stage company with high research and development costs and
low levels of revenue. We do not expect to earn a profit this quarter. Because
we may not generate significant revenue from continuing operations, we must
raise working capital from outside sources. If we cannot raise capital from
investors, we will incur a cash flow deficit and be forced to curtail and
eventually cease operations.
We are currently taking steps to raise additional capital by the end of
2002 and anticipate that we will be required to periodically raise more capital
over the next several years in order to operate according to our business plan.
We may have difficulty obtaining additional funds as and if needed, and we may
have to accept terms that would adversely affect our shareholders. For example,
the terms of any future financings may impose restrictions on our right to
declare dividends or on the manner in which we conduct our business. Also,
lending institutions or private investors may impose restrictions on future
decisions by us to make capital expenditures, acquisitions or asset sales.
Since inception, we have financed all of our operations through private
equity financings and a commercial bank loan. Our future capital requirements
depend on numerous factors, including:
o The scope of our research and development;
o Our ability to attract business partners willing to share in our
development costs;
o Our ability to successfully commercialize our technology;
o Competing technological and market developments;
o Our ability to collect our accounts receivable in a timely manner; and
o Our ability to enter into collaborative arrangements for the
development, regulatory approval and commercialization of other
products.
We may not be able to locate additional funding sources at all or on
acceptable terms. If we cannot raise funds on acceptable terms, if and when
needed, we may not be able to develop or enhance our products to customers, grow
our business or respond to competitive pressures or unanticipated requirements,
which could seriously harm our business by forcing us to curtail operations.
We Depend On Attracting And Retaining Key Personnel and the Loss of Their
Services Might Significantly Delay or Prevent the Achievement of Development or
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 development or 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
30
cannot assure you that we will be able to retain existing personnel or attract
and retain additional highly qualified employees in the future.
Furthermore, our products are based upon a proprietary technology developed
by our key personnel. Our technology is innovative in many ways and has not yet
been widely accepted in the market. Therefore, there are no replacement
personnel available who have the appropiate knowledge of our products or
industry. As a result, with the loss of our key personnel, we would lose
expertise and business contacts that are not replaceable. The loss of our key
personnel would eventually lead to a clouding of our direction and purpose, and
may result in declining profits.
Our subsidiary, Stronghold, has an employment agreement in place with its
President and Chief Executive Officer, Christopher J. Carey, which provides for
vesting of stock options for the purchase of shares of our common stock based on
continued employment or on the achievement of performance objectives as set
forth in the employment agreement. Although the options held by other key
personnel also vest upon the achievement of performance objectives, their
options are not assured to vest based upon continued employment, as is the case
with Mr. Carey. If we are unable to hire and retain personnel in key positions,
our business could be significantly and adversely affected unless qualified
replacements can be found.
Our success is heavily dependent on the vision, technological knowledge,
business relationships and abilities of our current president, Mr. Carey. Any
reduction of Mr. Carey's role in the handheld technology business would lead to
a loss of vision and momentum of our product development and the loss of revenue
due to a decrease in dealership contacts. Mr. Carey's employment contract
expires on December 31, 2004.
An Interruption In The Supply of Products and Services that We Obtain From Third
Parties Could Cause a Decline in Sales of Our Products and Services
We are dependant upon certain providers of operating software, including
Microsoft and their Pocket PC software, to provide the backdrop for our
applications work. If there are significant changes to this software, or if this
software stops being available or supported, we will experience a disruption to
our product and to our development effort.
In designing, developing and supporting our wireless data services, we rely
on mobile device manufacturers, content providers, database providers and
software providers. These suppliers may experience difficulty in supplying us
products or services sufficient to meet our needs or they may terminate or fail
to renew contracts for supplying us these products or services on terms we find
acceptable. Any significant interruption in the supply of any of these products
or services could cause a decline in sales of our products and services, unless
and until we are able to replace the functionality provided by these products
and services. We also depend on third parties to deliver and support reliable
products, enhance their current products, develop new products on a timely and
cost-effective basis and respond to emerging industry standards and other
technological changes.
31
Due To Intense Competition And Rapidly Changing Technology In The Wireless
Industry, We May Be Unable To Successfully Gain Market Share From Our
Competitors
Many wireless technology and software companies are engaged in research and
development activities relating to our range of products. The market for
handheld wireless technology is intensely competitive, rapidly changing due to
continual technological innovation, and undergoing consolidation. We may be
unable to compete successfully against our current and future competitors, which
may result in price reductions, reduced margins and the inability to achieve
market acceptance for our products. Our competitors in the field are companies
that include major international car dealership service companies, specialized
technology companies, and, potentially, our joint venture and strategic alliance
partners. Such companies include: Automotive Directions, Higher Gear, Autobase,
Cowboy Corporation and Autotown, among others. Many of these competitors have
substantially greater financial, marketing, sales, distribution and technical
resources than us and have more experience in research and development, sales,
service, manufacturing and marketing. We anticipate increased competition in the
future as new companies enter the market and new technologies become available.
Our technology may be rendered obsolete or uneconomical by technological
advances or entirely different approaches developed by one or more of our
competitors.
If Intellectual Property Law Does Not Adequately Protect Our Technology, Other
Companies Could Develop And Market Similar Products Or Services, Which Could
Decrease Our Market Share
Our success depends on our ability to sell products and services for which
we may not have intellectual property rights. We currently do not have patents
on any of our intellectual property. We have filed for a patent, which protects
a number of developments pertaining to the management of information flow for
automotive dealer-based software. An additional application is currently being
planned which will address certain proprietary features pertaining to our
systems components, related equipment and software modules. We cannot assure you
we will be successful in protecting our intellectual property through patent
law. In addition, although we have applied for U.S. federal trademark protection
for "DealerAdvance", we do not have any U.S. federal trademark registrations for
the marks "DealerAdvance Sales Solution", "DealerAdvance Service Solution",
"DealerAdvance Inventory Management Solution", or certain of our other marks and
we may not be able to obtain such registrations due to conflicting marks or
otherwise. We rely primarily on trade secret laws, patent law, copyright law,
unfair competition law and confidentiality agreements to protect our
intellectual property. To the extent that intellectual property law does not
adequately protect our technology, other companies could develop and market
similar products or services without the same level of capital expenditure that
we incurred, which could increase our competition and decrease our market share.
We May Be Sued By Third Parties For Infringement Of Their Proprietary Rights And
We May Incur Defense Costs And Possibly Royalty Obligations Or Lose The Right To
Use Technology Important To Our Business
The wireless technology and software industries are characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of participants in our market
32
increases, the possibility of an intellectual property claim against us could
increase. Any intellectual property claims, with or without merit, could be time
consuming and expensive to litigate or settle and could divert management
attention from administering our business. A third party asserting infringement
claims against us or our customers with respect to our current or future
products may adversely affect us by, for example, causing us to enter into
costly royalty arrangements or forcing us to incur settlement or litigation
costs.
Our Management And Other Affiliates Have Significant Control Of Our Common Stock
And Could Control Our Actions In A Manner That Conflicts With Our Interests And
The Interests Of Other Stockholders
As of September 30, 2002, our executive officers, directors and affiliated
entities together beneficially own approximately 72.0% of the outstanding shares
of our common stock, assuming the exercise of warrants which are currently
exercisable and held by such persons, and the conversion of outstanding shares
of our Series A $1.50 Convertible Preferred Stock held by such persons. As a
result, these stockholders, acting together, will be able to exercise
considerable influence over matters requiring approval by our stockholders,
including the election of directors, and may not always act in the best
interests of other stockholders. Such a concentration of ownership may have the
effect of delaying or preventing a change in control of our company, including
transactions in which our stockholders might otherwise receive a premium for
their shares over then current market prices.
In addition, our president owns approximately 58% of our current
outstanding common stock. As a result, he has the ability to control our company
and direct our affairs and business, including the approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of our company and may
make some transactions more difficult or impossible without the support of these
stockholders. Any of these events could decrease the market price of our common
stock.
ITEM 3. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. Based on his
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this Quarterly Report on Form 10-QSB,
our chief executive officer and acting chief financial officer has concluded
that our disclosure controls and procedures are designed to ensure that the
information we are required to disclose in the reports we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and are operating in an effective
manner.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation.
33
PART II. OTHER INFORMATION.
-------- ------------------
ITEM 2. CHANGES IN SECURITIES.
RECENT SALES OF UNREGISTERED SECURITIES
Options
On July 17, 2002 our board of directors and stockholders approved the
adoption of our 2002 Stock Incentive Plan. Under such plan we have granted
158,350 options to certain employees at a weighted average exercise price of
$1.50 per share. Of the employee options, 8,150 were fully vested upon grant,
149,200 vest according to a three-year vesting schedule, and 1,000 vest
according to the achievement of certain performance goals.
On August 20, 2002, our board of directors and stockholders approved the
adoption of the 2002 California Stock Incentive Plan. Under such plan we have
granted 69,600 options to certain employees at a weighted average exercise price
of $1.50. 15,600 of such options were fully vested upon grant, and 54,600 vest
according to a three-year schedule.
Preferred Stock and Warrants
On each of May 16, July 3, July 11 and July 19, 2002 we issued (i) 500,000,
500,000, 500,000 and 502,750 shares, respectively, of our Series A $1.50
Convertible Preferred Stock and (ii) warrants to purchase 500,000, 500,000,
500,000 and 502,750 shares, respectively, of our common stock, to Stanford
Venture Capital Holdings, Inc. for an aggregate purchase price of $3 million.
Stanford subsequently assigned warrants for a total of 1,001,376 shares of
common stock to four of its affiliates. Stanford is an accredited investor.
Common Stock
During August, September, and October 2002 we entered into eight
subscription agreements with private investors, pursuant to which we issued an
aggregate of 179,333 shares of our common stock at $1.50 per share. These
private investments generated total proceeds to us of $269,000. Each private
investor has signed a questionnaire certifying that he/she is an accredited
investor.
No underwriter was employed by us in connection with the issuance of the
securities described above. We believe that the issuance of the foregoing
securities was exempt from registration under Section 4(2) of the Securities Act
of 1933, as amended, as transactions not involving a public offering. Each of
the recipients acquired the securities for investment purposes only and not with
a view to distribution and had adequate information about us. Neither we, nor
any person acting on our behalf offered or sold the securities by means of any
form of general solicitation or general advertising. A legend was placed, or
will be placed, on the stock certificates stating that the
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securities have not been registered under the Securities Act and cannot be sold
or otherwise transferred without an effective registration or an exemption
therefrom.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to a Written Action of Stockholders, dated July 31, 2002, a
majority of our stockholders approved the adoption of our 2002 Stock Incentive
Plan. Pursuant to a Written Consent of Stockholders dated August 20, 2002, a
majority of our stockholders approved the adoption of our 2002 California Stock
Incentive Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The exhibits listed on the Exhibit Index immediately preceding such
exhibits are filed as part of this report.
(b) Reports on Form 8-K.
During the quarter ended September 30, 2002, we filed one Current Report on
Form 8-K and one Amendment to Current Report on Form 8-K/A.
On July 17, 2002, we filed a Current Report on Form 8-K. The Form 8-K
disclosed (i) the change in our certifying accountant from Rogoff & Company,
P.C. to Rothstein, Kass & Company, P.C., as required pursuant to Item 4 of Form
8-K and (ii) the Amendment to our Articles of Incorporation to reflect our name
change from "TDT Development, Inc." to "Stronghold Technologies, Inc.", pursuant
to Item 5 of Form 8-K.
On July 30, 2002 we filed a Current Report on Form 8-K/A. The Form 8-K/A
amended the Current Report on Form 8-K, dated May 31, 2002, which we filed to
furnish information regarding the merger of Stronghold Technologies, Inc., a New
Jersey corporation, with our wholly-owned subsidiary, TDT Stronghold Acquisition
Corp., pursuant to Item 2 of Form 8-K. The Form 8-K/A includes, pursuant to Item
7 of Form 8-K, unaudited financial statements of Stronghold Technologies, Inc.,
and unaudited pro forma financial statements of the Company that give effect to
the merger.
We filed no other reports on Form 8-K during the quarter ended September
30, 2002.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STRONGHOLD TECHNOLOGIES, INC.
DATE: November 14, 2002 By: /s/ Christopher J. Carey
-------------------------------------
Christopher J. Carey, President, Chief
Executive Officer and Acting Chief
Financial Officer
CERTIFICATIONS
I, Christopher J. Carey, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Stronghold
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Christopher J. Carey
-----------------------------------------
Christopher J. Carey
President, Chief Executive Officer and
Acting Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Title of Document
------ -----------------
10.1 Employment Agreement by and between Stronghold Technologies, Inc.
and Gregory P. Sargen, dated October 31, 2002.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.