U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 Identification No.)
Incorporation or Organization)
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)
TDT Development, Inc.
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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 July 31, 2002, the
issuer had outstanding 9,677,667 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
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TABLE OF CONTENTS
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Page
PART I. FINANCIAL INFORMATION. ----
Item 1. Financial Statements.................................................................. 1
CONSOLIDATED BALANCE SHEET
as of June 30, 2002 (unaudited)............................................................. 2
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2002 and June 30, 2001 (unaudited),
For the Six Months Ended June 30, 2002 and June 30, 2001 ..........(unaudited).............. 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2002 and June 30, 2001 (unaudited)........................ 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) ..................................... 5-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Plan of Operation....................................................... 12
Liquidity and Capital Resources............................................................. 18
Results of Operations....................................................................... 20
PART II. OTHER INFORMATION.
Item 2. Changes in Securities and Use of Proceeds............................................. 28
Item 6. Exhibits and Reports on Form 8-K...................................................... 31
SIGNATURE ............................................................................................ 32
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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 ("Stronghold"), 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
BALANCE SHEET
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June 30, 2002 (Unaudited)
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ASSETS
Current assets
Cash $ 312
Accounts receivable, less allowance for doubtful
accounts of $69,000 1,610,484
Other receivables, current portion 30,000
Inventories 164,803
Prepaid expenses 7,292
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Total current assets 1,812,891
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Property and equipment, net 151,196
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Other assets
Other receivables, less current portion 112,500
Security deposits 27,587
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Total other assets 140,087
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$2,104,174
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 671,694
Accrued expenses and other current liabilities, including
interest payable, stockholder of $50,496 553,884
Obligations under capital leases, current portion 5,182
Note payable, current portion 500,000
Note payable, stockholder, current portion 183,600
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Total current liabilities 1,914,360
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Long-term liabilities
Obligations under capitalized leases, less current portion 9,500
Note payable, less current portion 1,000,000
Note payable, stockholder less current portion 908,647
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Total long term liabilities 1,918,147
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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, 9,752,667 issued and outstanding 976
Additional paid-in capital 4,450,287
Stock subscription receivable (2,166,000)
Accumulated deficit (4,013,797)
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Total stockholders' deficit (1,728,333)
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$2,104,174
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See accompanying notes to financial statements.
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
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Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sales $ 1,054,928 $ 315,719 $ 1,748,566 $ 315,719
Cost of sales 380,909 130,936 590,035 130,936
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Gross profit 674,019 184,783 1,158,531 184,783
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Operating expenses
General and administrative 993,432 576,650 1,953,377 1,021,440
Officer's salary 68,400 45,000 134,400 75,000
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1,061,832 621,650 2,087,777 1,096,440
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Loss from operations (387,813) (436,867) (929,246) (911,657)
Interest expense 53,276 30,903 109,315 52,268
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Net loss $ (441,089) $ (467,770) $ (1,038,561) $(963,925)
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Basic and diluted loss per
common share $ (0.06) $ (0.08) $ (0.15) $ (0.16)
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Weighted average number of
common shares outstanding 7,829,459 5,906,250 6,867,854 5,906,250
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See accompanying notes to financial statements.
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STRONGHOLD TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
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Six months Six months
ended ended
June 30, June 30,
2002 2001
(Unaudited) (Unaudited)
Cash flows from operating activities
Net loss $(1,038,561) $(963,925)
Adjustments to reconcile net loss to
net cash used in operating activities:
Bad debt expense 47,459
Depreciation and amortization 10,538 8,247
Changes in operating assets and liabilities:
Accounts receivable (1,375,583)
Inventories (83,455)
Prepaid expenses (2,407) (345,560)
Other receivables 107,639 (22,830)
Accounts payable 614,053 903
Accrued expenses and other current liabilities 290,693 317,861
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Net cash used in operating activities (1,429,624) (1,005,304)
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Net cash used in investing activities,
Payments for purchase of property and equipment (50,236) (63,285)
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Cash flows from financing activities
Proceeds from issuance of preferred stock and warrants, net of financing costs 478,287
Principal payments obligations under capital leases (864)
Proceeds from stockholder loan 964,482
Proceeds from issuance of note payable 1,035,440
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Net cash provided by financing activities 1,441,905 1,035,440
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Net decrease in cash (37,955) (33,149)
Cash, beginning of period 38,267 41,040
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Cash, end of period $ 312 $ 7,891
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Supplemental disclosure of cash flow information,
cash paid during the period for interest $ 114,859 $ 897
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Supplemental disclosure of noncash investing and financing activities
During the six months ended June 30, 2002 the Company entered into two
separate agreements to convert $2,000,000 of loans payable, stockholder
into common stock.
On May 15, 2002 the Company consolidated approximately $1,200,000 due to
the majority stockholder with balances in loans payable, stockholder and
accrued expenses and other current liabilities, into a promissory note
classified as note payable, stockholder.
On June 30, 2002 the Company converted their outstanding line of credit
with a non affiliated bank into a note payable of $1,500,000.
Obligations under capital leases aggregating $15,545 were incurred when the
Company entered into various leases for computer equipment.
See accompanying notes to financial statements.
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STRONGHOLD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
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1. NATURE OF OPERATIONS
Stronghold Technologies, Inc. (the "Company") was incorporated in the state of
New Jersey on August 1, 2000. The Company is engaged principally as a developer
of wireless and internet based systems for auto dealers in the United States,
which began operations on April 1, 2001.
On May 15, 2002, the Company entered into a Merger Agreement (the "Agreement")
with Stronghold Technologies, Inc. (formerly known as TDT Development, Inc. (the
"Parent")) whereby Parent issued 7,000,000 shares of its common stock in
exchange for all of the Company's outstanding shares in a transaction accounted
for as a reverse purchase acquisition. As a result, the Company is considered
for accounting purposes, to be the acquiring company since the stockholders of
the Company acquired more than 50% of the issued and outstanding stock of
Parent. Pursuant to this agreement, the outstanding options of the Company were
also converted into options to purchase Parent common stock based on a
conversion rate of 2.1875 as defined in the agreement. Prior to the merger,
Parent's operations were comprised solely of a business that sold truffles
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 (Note 12) 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 Company. 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 June 30, 2002 and for the six and three-month periods ended June 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 six and three-month periods ended
June 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
INVENTORIES
Inventories, which are comprised of hardware for resale, are stated at cost, on
an average cost basis, which does not exceed market value.
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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 six-month periods ended June 30,
2002 and 2001.
INCOME TAXES
The Company complies with SFAS 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 June 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS 128, "Earnings Per Share", which
requires dual presentation of basic and diluted earnings (loss) per share. Basic
earnings (loss) per share excludes dilution and is computed by dividing net loss
applicable to common stockholders by the weighted-average number of common
shares outstanding for the year. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the loss of the entity. Since the
effect of the outstanding options and convertible debt is antidilutive, they
have been excluded from the Company's computation of loss per common share.
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3. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2002 consists of the following:
Computer equipment $ 149,516
Computer software 18,001
Furniture and fixtures 14,963
Computer equipment recorded under capital lease 15,546
Leasehold improvements 7,982
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206,008
Less accumulated depreciation
and amortization 54,812
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$ 151,196
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4. NOTE PAYABLE, STOCKHOLDER
Note payable, stockholder at June 30, 2002 (unaudited) 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 June 30,
2002 is approximately $1,092,000. 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 11).
Interest expense on the note payable, stockholder for the three and six months
ended June 30, 2002 were approximately $35,000 and $74,000, respectively.
5. NOTE PAYABLE
At June 30, 2002, the Company converted their 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.
6. STOCK SUBSCRIPTION RECEIVABLE
The stock subscription receivable represents 600,000 shares of the Company's
original common stock (restated to 1,312,500 as defined in the Agreement) due
from three key employees and 1,502,750 shares of the Company's preferred stock
due from a minority shareholder.
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7. STOCK OPTION PLANS
The Company adopted a stock option plan ("Plan") providing for incentive stock
options ("ISOs") and non-qualified stock options ("NQSOs"). The Company has
reserved 500,000 shares of common stock for issuance upon the exercise of stock
options granted under the Plan. In May 2002, the Board of Directors increased
the shares reserved under the plan to 725,000. The exercise price of an ISO or
NQSO will not be less than 100% of the fair market value of the Company's common
stock at the date of the grant. The exercise price of an ISO granted to an
employee owning greater than 10% of the Company's common stock will not be less
than 110% of the fair market value of the Company's common stock at the date of
the grant. The Plan further provides 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 Company's restated stock options per the Agreement are
summarized below:
RESTATED WEIGHTED
PER SHARE AVERAGE
PLAN EXERCISE EXERCISE
OPTIONS PRICE PRICE
Outstanding at
December 31, 2001 675,938 $0.05 - $0.12 $0.12
Granted 2002 644,218 $0.12 - $0.69 $0.32
Terminated 2002 (131,250) $0.05 $0.05
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Outstanding at
June 30, 2002 1,188,906 $0.05 - $0.69 $0.11
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There were 8,332 shares exercisable at June 30, 2002.
The Company has adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". SFAS 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 not have been materially
impacted for the three-month and six-month periods ended June 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 rate of 4.68% and 5.35% in 2002 and 2001,
respectively.
-8-
8. INCOME TAXES
Until May 16, 2002, the date of the Agreement, the Company operated as an "S"
corporation and, as a result, the earnings and losses were included in the
personal income tax returns of the respective stockholders. From the date of the
Agreement through June 30, 2002, the Company operated as a "C" corporation and
had net operating losses ("NOL") of approximately $220,000 that will expire
between 2009 and 2022. The deferred tax asset from the Company's NOL's
approximated $88,000 for which a valuation allowance in an equal amount has been
established.
9. COMMITMENTS AND CONTINGENCIES
SECURITIES PURCHASE AGREEMENT
The Company, along with Parent, 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
parties agreed to issue to Stanford a total of 2,002,750 shares of the Company's
Series A $1.50 Convertible Preferred Stock ("Series A Preferred Stock"), which
is equal to 20% of the total issued and outstanding shares of the Company's
common stock (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 or $2.25, for an aggregate purchase price of $3,000,000.
Pursuant to the Purchase Agreement, the issuance of the Series A Preferred Stock
and Warrants will take place on four separate closing dates beginning on May 16,
2002 and closing on July 19, 2002.
In connection with the Purchase Agreement, Parent and Stanford entered into a
Registration Rights Agreement, dated May 16, 2002, in which the Company agreed
to register the shares of the Company's 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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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 JUNE 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 $39,000 and $34,000 for the three-month periods
ended June 30, 2002 and 2001 and approximately $80,000 and $71,000 for the six-
month periods ended June 30, 2002 and 2001.
OBLIGATIONS UNDER CAPITAL LEASES
For the year ended June 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 June 30, 2002, minimum future lease payments are as follows:
YEAR ENDING JUNE 30,
2003 $ 6,160
2004 6,160
2005 5,133
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Total minimum lease payments 17,453
Less amounts representing interest 2,771
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present value of net minimum lease payments 14,682
Less current portion 5,182
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Long-term portion $ 9,500
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EMPLOYMENT AND NON-COMPETITION AGREEMENTS
The Company is obligated under employment and non-competition agreements with
three key employees through July 2005. The first agreement provides for base
salary of $192,000 per annum. The second agreement provides for base salary of
$150,000, beginning in August 2002 through July 31, 2003, and $175,000 in the
next year. The third agreement provides for base salary of $112,000, beginning
in August 2002 through July 31, 2003, and $122,000 in the next year. 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 payments under this agreement total
$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.
10. LIQUIDITY
The Company has incurred a loss from operations for the six months ended June
30, 2002 of approximately $1,039,000 and has a working capital deficit of
approximately $101,000 and a stockholders' deficit of approximately $1,728,000
as of June 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.
11. 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 4).
12. SUBSEQUENT EVENTS
On July 19, 2002 the Subsidiaries were sold to a minority stockholder for the
consideration of all his outstanding common stock in the Company.
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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 and sell an integrated wireless technology, called
DealerAdvance(TM), through our wholly owned subsidiary, a New Jersey entity,
Stronghold Technologies, Inc. Among many features, DealerAdvance(TM) allows
automobile dealers to capture a prospect's purchasing requirements and profile,
search inventory at multiple locations, locate an appropriate vehicle in stock
and print out the necessary forms, and communicate follow-up tasks to the sales
people through a Customer Relationship Management application. DealerAdvance(TM)
is a handheld device, which allows sales professionals to increase sales,
improve customer follow-up, and reduce administrative costs.
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 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, 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
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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., 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
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 maximize revenues and reduce operating expenses. Stronghold has completed
development of the DealerAdvance Sales Solution(TM), designed to increase sales
by effectively capturing a greater percentage of unsold customer prospects and
maximizing their "be-back" (return) and closure rates. Currently there are no
other front-end or Customer Relationship Management ("CRM") systems that perform
comparably to DealerAdvance Sales Solution(TM). Future products will include the
DealerAdvance Service Solution, and the DealerAdvance Inventory Management
Solutions, which are products also designed to increase revenues and maximize
profitability by effectively managing dealer service operations, their customers
and vehicle inventory. These products are not unlike the handheld and wireless
systems used in the auto rental industry. We are now accustomed to returning our
car where the attendant scans the car, brings up the rental terms, completes the
sale and prints out a receipt, all without having to step over to a counter.
DESCRIPTION OF PRODUCTS
The DealerAdvance Sales Solution(TM) provides the following advantages:
o Ease of use associated with handheld mobile communications;
o The handheld unit is both an input and display device;
o The handheld unit is programmed to access competitive and
proprietary industry information from a variety of sources;
o The system provides the capability for immediate management involvement
in the selling process;
-13-
o Provides for effective monitoring of sales performance and follow-up
by sales personnel; and
o Enables integration with existing automotive dealer accounting and
business systems.
The DealerAdvance Sales Solution(TM) is a comprehensive CRM system,
providing customer history and contact information, as well as a personal
calendar and instructions on follow-up tasks directly to the handheld, creating
a highly effective communications tool for business development.
The DealerAdvance Sales Solution(TM) offers the following unique features:
o Enables a high capture rate on walk-in traffic;
o Streamlines all sales and other follow-on processes;
o Provides current and comprehensive information and data for new and
used car inventory (on a real-time basis), all competing products,
and customer history with dealership;
o Provides performance data and analysis on each member of a sales
team; and
o Provides management with valuable and relevant transaction data on a
real-time basis.
The DealerAdvance Sales Solution(TM) offers the following 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;
-14-
o DMS integration capability; and
o E-mail and Internet access.
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 installed another 7 dealership sites in the first quarter ending
March 31, 2002, including sites in Georgia, Arizona, California, New York and
New Jersey. In the second quarter ending June 30, 2002, it installed another 13
sites including dealerships in California, Arizona, Virginia and North Carolina.
Stronghold's marketing strategy is to utilize its growing direct sales
force to market the DealerAdvance Sales Solution(TM) on a national basis.
Stronghold has established a strong presence in the Northeast, the Southeast and
on the West Coast, and is adding additional business development and operations
offices pursuant to an organized growth plan. Stronghold began this quarter with
Business Development Managers in New Jersey, Atlanta, San Francisco, Los Angeles
and Phoenix, and in the 2nd quarter we added Miami, Chicago and Washington, DC.
Stronghold expects to add Business Development Managers in Cleveland and Dallas
in the 3rd quarter.
NEW PRODUCT DEVELOPMENTS
The Stronghold development staff has begun development efforts on our next
application, DealerAdvance Service Solution(TM). Stronghold is developing a
handheld wireless system for dealership Service Advisors to allow them to leave
their desks and meet and greet clients in their cars in the service lanes, and
process their service order. The product is expected to be introduced at the
February 2003 National Automobile Dealers Association Conference. Initial Beta
installations are expected to begin in March 2003.
The DealerAdvance Service Solution(TM) will provide for improved customer
service and reduced time to vehicle check in and will allow the dealer
representatives to scan a particular vehicle identification number from the
windshield or door. DealerAdvance Service Solution(TM) will also provide for
instant mobile access to client and vehicle history and will allow the dealer
representatives to access warrantee and service period advice instantly. This
product will also provide an up selling application to increase revenue per
repair order and will include an application to allow service marketing through
the DealerAdvance(TM) CRM application.
The development plan includes the addition of a third product called
DealerAdvance Inventory Management Solution(TM). The intention is to provide a
handheld wireless system for the management of new and used cars. The system
would provide a handheld device for the scanning of incoming and outgoing
vehicles, which would immediately adjust inventory on hand
-15-
for sale. In addition, the system would provide for the printing of used car
stickers, the capture of Vehicle Identification Number for used car appraisal
and estimates, and the loading of vehicle specifics to the dealer web site. This
product is expected to be introduced in early 2004. Development efforts are in
the initial feasibility stages of operational analysis and client ROI
calculations.
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 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;
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
-16-
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. This factor may have an impact
on our third quarter results as automobile dealerships may determine to try
Stronghold's DealerAdvance(TM) suite of products 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 10,000 dealerships
that meet the base criteria for potential use of its system. In addition,
Stronghold has qualified a primary target market 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 and do not have a CRM system currently
installed.
Stronghold distributes its DealerAdvance Sales Solution(TM) through direct
sales, which Stronghold believes is most effective when introducing an
innovative new solution to the marketplace. Stronghold is currently forming its
Sales and Marketing team, which will be aligned along geographic territory
units.
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.
-17-
OUR INTELLECTUAL PROPERTY
We have trademark and patent applications pending in connection with our
technology business. We have filed trademarks for "DealerAdvance,"
"DealerAdvance Sales Solution," "Dealer Advance Service Solution" and
"DealerAdvance Inventory Management Solution." Our 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.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
As of June 30, 2002, our cash balance was $312. As of June 30, 2002, we had
a net operating loss of approximately $220,000 to offset future taxable income.
There can be no assurance, however, that we will be able to take advantage of
any or all of such tax loss carry-forwards, if at all, in future fiscal years.
Our accounts receivable at June 30, 2002 were $1,610,484, as compared to
$282,360 for the fiscal year ended December 31, 2001. The increase in accounts
receivables represents amounts owed to Stronghold from twenty new dealership
sites, which installed Stronghold's DealerAdvance(TM) products during the first
and second quarters of 2002.
FINANCING NEEDS
To date, we have not generated revenues in excess of operating expenses. We
have not been profitable since our inception, we will incur additional operating
losses in the future, and we may require additional financing to continue the
development and subsequent commercialization of our technology.
We expect our capital requirements to increase significantly over the next
several years as we continue to develop and test the DealerAdvance(TM) suite of
products and as we increase marketing and administration infrastructure and
embark on developing in-house business capabilities and facilities. Our future
liquidity and capital funding requirements will depend on numerous factors,
including, but not limited to, the levels and costs of our research and
development initiatives, the cost of hiring and training additional sales and
marketing personnel to promote our products and the cost and timing of the
expansion of our marketing efforts.
FINANCINGS
On 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 the Company's Series A $1.50
Convertible Preferred Stock that would in the aggregate equal 20% of the total
issued and outstanding shares of our common stock, and (ii) such number of
warrants for shares of our common stock that would equal the number of shares of
Series A Preferred Stock issued to Stanford. The total aggregate purchase price
for the Series A Preferred Stock and warrants paid by Stanford was $3,000,000.
The issuance of the Series A Preferred Stock and warrants took place on each of
four separate closing dates (May 16, 2002 and July 3, 11, and 19, 2002), 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.
-18-
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 the
remaining $1.2 million 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 for the year ended December 31, 2002. Each subsequent quarterly installment
will be paid two days after we file each subsequent Form 10-Q. Interest accrues
under the promissory note at an annual rate of 10%. If Stronghold's net income
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 amount
achieved, the principal balance and accrued interest due will be automatically
converted into shares of our common stock, 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.
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 all amounts outstanding under the loan in 36 monthly
installments, which will begin on 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.
We believe we have sufficient cash on hand to support our operating plan
for at least the next six months. To enable us to fund our research and
development and commercialization efforts, during the next several months we
anticipate entering into private placement transactions with individual
investors.
-19-
RESULTS OF OPERATIONS
Operations through May 16, 2002 were comprised solely of our Truffle
Business, which was conducted through our wholly owned subsidiaries, Terre di
Toscana, Inc. and Terres Toscanes, Inc. Operations from May 16, 2002 through
June 30, 2002 were comprised of our Truffle Business (which was discontinued on
July 19, 2002, as described above) and our handheld wireless technology
business. Results of operations for the three months and six months ended June
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 Other 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.
We entered the handheld wireless technology business through the
acquisition of the Predecessor Entity, which had only twenty-two months of
operating history. We must, therefore, be considered to be subject to all of the
risks inherent in the establishment of a new business enterprise. Our limited
operating history makes it difficult to evaluate our financial performance and
prospects. We cannot make assurances at this time that we will operate
profitably or that we will have adequate working capital to meet our obligations
as they become due. Because of our limited financial history, we believe that
period-to-period comparisons of our results of operations will not be meaningful
in the short term and should not be relied upon as indicators of future
performance.
Three Months Ended June 30, 2002 and Three Months Ended June 30, 2001
---------------------------------------------------------------------
For the three months ending June 30, 2002, we had total revenue of
$1,054,928. For the three months ending June 30, 2001, we had revenues of
$315,719, representing an increase of 234%. 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 13 new
dealerships from April 1, 2002 through June 30, 2002, versus the installation of
3 dealerships in the comparable period in 2001.
Revenue is comprised of one-time charges to the dealerships for hardware
(including server, wireless infrastructure, desktop PC, printer,
interior/exterior access points/antennas and handheld devices), software
licensing fees and installation/training services. The average installation is
$85,000. The most significant variable in pricing is the number of handheld
devices. Other sources of revenue include monthly support and maintenance
contracts (required with purchase of DealerAdvance(TM)) and fee-based business
development consulting and sales training services. Depending upon the
dealership arrangement, the support and maintenance contracts are either billed
monthly and recorded as revenue monthly, or are recorded up front to unearned
maintenance fees at the present value of the 36-month revenue stream and
amortized monthly to revenue.
Total operating expenses in each of the three-month periods ended June 30,
2002 and June 30, 2001 were comprised of general and administrative expenses,
research and development expenses and consulting and professional costs,
professional salaries and benefits, recruiting fees, office rent and investor
relations expenses. Operating expenses for the three month periods ended June
30, 2002 and June 30, 2001 were $1,061,832 and $621,650, respectively, an
increase of $440,182, or 71%. The increase in operating expenses is attributable
to the general increase in overhead which accompanies the expansion of a
business, and specifically includes an increase in product development, the
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.
-20-
Gross profit contribution, after direct costs of goods sold, totaled
$674,019 for the three months ending June 30, 2002, and was 64% of revenue. This
is compared to $184,783 in the same three-month period in 2001, which was 59% of
revenue. The increase in our gross profit is due to Stronghold's tighter control
and monitoring of the costs associated with the installation of its
DealerAdvance(TM) products.
Stronghold's business operations and financial results for the prior
quarter were representative of a start-up company in a beta-testing phase and,
therefore, not in a position to generate significant revenue. As Stronghold
moved out of its beta testing phase and into a marketing and sales position,
revenues increased as the number of dealerships installing Stronghold's
DealerAdvance(TM) suite of products increased. By monitoring costs and through
increased efficiencies, Stronghold has been able to realize an increase in gross
margins. We can offer no assurance, however, that revenues in future quarters
will increase at the rate that revenues grew during the quarter ended June 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.
Six Months Ended June 30, 2002 and Six Months Ended June 30, 2001
-----------------------------------------------------------------
For the six months ended June 30, 2002, we had total revenue of $1,748,566.
Revenue for the six-month period ended June 30, 2001 was $315,719, representing
an increase of 454%. 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 20 new dealerships
from January 1, 2002 through June 30, 2002, compared with 3 dealerships
implemented in the comparable six-month period in 2001.
Total operating expenses in each of the six month periods ended June 30,
2002 and June 30, 2001 were comprised of general and administrative expenses,
research and development expenses and consulting and professional costs,
professional salaries and benefits, recruiting fees, office rent and investor
relations expenses. Operating expenses for the six-month periods ended June 30,
2002 and June 30, 2001 were $2,087,777 and $1,096,440, respectively, an increase
of $991,337, or 90%. The increase in operating expenses is attributable to the
general increase in overhead which accompanies the expansion of a business, and
specifically includes an increase in product development, the 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
$1,158,531 for the six months ending June 30, 2002, and was 66% of revenue. This
is compared to $184,783 in the same six-month period in 2001, which was 59% of
revenue. The increase in our gross profit is due to Stronghold's tighter control
and monitoring of the costs associated with the installation of its
DealerAdvance(TM) products.
Stronghold's business operations and financial results for prior periods
were representative of a start-up company in a beta-testing phase and,
therefore, not in a position to generate significant revenue. As Stronghold
moved out of its beta-testing phase and into a marketing and sales position,
revenues increased as the number of dealerships installing Stronghold's
DealerAdvance(TM) suite of products increased. By monitoring costs and through
increased efficiencies, Stronghold has been able to realize an increase in gross
margins. We can make no assurance, however, that revenues in future accounting
periods will increase at the rate that revenues grew during the six months
-21-
ended June 30, 2002 or that gross margins will continue to increase.
Notwithstanding the revenue and gross profit growth, Stronghold has yet to
generate a profit in any accounting period.
Period From Inception in September 2000 through June 30, 2002
-------------------------------------------------------------
We have incurred losses each year since our inception and we have an
accumulated deficit of $4,013,797 at June 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 26 automobile dealerships to use the DealerAdvance Sales
Solution(TM) products, 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.
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 WE MAY NEVER ACHIEVE
PROFITABILITY
We have a history of operating losses and have incurred significant net
losses in each fiscal quarter since our inception. From inception to the quarter
ending June 30, 2002, we incurred net losses totaling $4,013,797 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 and to expand our services. As a result of
this expected increase in operating expenses, we will need to generate
significant additional revenue to achieve profitability. Our ability to generate
and sustain significant additional revenues or achieve profitability will depend
upon the factors discussed elsewhere in this 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.
-22-
It is possible that we may never achieve profitability and, even if we do
achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis in the future. If we do not achieve sustained
profitability, we will be unable to continue our operations.
WE HAVE A LIMITED OPERATING HISTORY
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 23 months of operating history.
We must, therefore, be considered to be subject to all of the risks inherent in
the establishment of a new business enterprise. Our limited operating history
makes it difficult to evaluate our financial performance and prospects. We
cannot assure you at this time that we will operate profitably or that we will
have adequate working capital to meet our obligations as they become due.
Because of our limited financial history, we believe that period-to-period
comparisons of our results of operations will not be meaningful in the short
term and should not be relied upon as indicators of future performance.
IF WE FAIL TO GAIN MARKET ACCEPTANCE OF OUR PRODUCTS, OUR BUSINESS AND RESULTS
OF OPERATIONS WOULD BE HARMED
We are still in the verification and validation stages of our
DealerAdvance(TM) suite of products. Our first pilot system for DealerAdvance
Sales Solution(TM) was installed in April 2001 and our sixth and final pilot
system was installed in September 2001. We implemented a total of 20 additional
sites in the first 6 months of 2002. 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, twenty-six 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 suite of
products. We may experience design, marketing, and other difficulties that could
delay or prevent our development, introduction, or marketing of these and other
new products and enhancements. In addition, the costs of developing and
marketing our products may far outweigh the revenue stream from our products.
Finally, our prospects for success will depend on our ability to successfully
sell our products to key automobile dealerships and distributors who 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 economy may also have an impact on the market acceptance of our
products. Big-ticket consumer purchases are sensitive to broad economic trends.
Therefore, our business could suffer if our customers - automobile dealerships -
are affected by the continuing poor economic conditions. For example, if dealer
sales are trending downward, capital expenditures like those associated without
our DealerAdvance(TM) suite of products may be delayed or abandoned.
IF WE FAIL TO PROPERLY MANAGE OUR GROWTH, OUR BUSINESS AND RESULTS OF OPERATIONS
WOULD BE HARMED
-23-
We have begun expanding our operations in anticipation of an aggressive
rollout of our DealerAdvance(TM) product suite. In the past six months our sales
and marketing team has increased from 7 to 20 employees. We have strategically
hired additional sales representative in 6 more states in the past six months,
expanding into Arizona, Virginia, Southern California, Florida, Illinois, 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.
o 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;
o We may not be able to successfully integrate our internal operations
with the operations of our product manufacturers, distributors and
suppliers to product and market commercially viable products.
If we cannot manage our growth effectively, our business and operating
results will suffer. Additionally, any failure on our part to develop and
maintain our wireless technology products if we experience rapid growth could
significantly adversely affect our reputation and brand name which could reduce
demand for our services and adversely affect our business, financial condition
and operating results.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE DO NOT CONTINUE DEVELOPING OUR
MARKET STRATEGY
Our marketing efforts have expanded as the range of services, which we
offer, has increased. However, 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
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anticipated, our business may be adversely affected. Our inability to recruit,
manage or retain additional experienced salespersons or to provide timely and
cost-effective customer support and service, could materially adversely affect
our business, operating results and financial condition.
IF WE ARE UNABLE TO OBTAIN SUFFICIENT FUNDS, AND INCUR A CASH FLOW DEFICIT, OUR
BUSINESS COULD SUFFER
Although we believe that the funds raised through our recent private
placement offering of Series A Preferred Stock and warrants for common stock to
Stanford Venture Capital Holdings, Inc. will be sufficient for our needs for the
immediate future, we anticipate that we will be required to raise additional
capital by the end of 2002 and over the next several years in order to operate
according to our business plan. If additional funds are needed, we may have
difficulty obtaining them, 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.
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.
Since inception, we have financed all of our operations through private
equity financings. 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 enter into collaborative arrangements for the
development, regulatory approval and commercialization of other
products; and
o The cost of filing, prosecuting, defending and enforcing patent claims
and other intellectual property rights.
RISKS CONCERNING OUR HANDHELD TECHNOLOGY BUSINESS
We are dependent 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.
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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
In designing, developing and supporting our wireless data services, we rely
on mobile device manufacturers, content providers, database providers and
software providers. These suppliers may experience difficulty in supplying us
products or services sufficient to meet our needs or they may terminate or fail
to renew contracts for supplying us these products or services on terms we find
acceptable. Any significant interruption in the supply of any of these products
or services could cause a decline in sales of our products and services, unless
and until we are able to replace the functionality provided by these products
and services. We also depend on third parties to deliver and support reliable
products, enhance their current products, develop new products on a timely and
cost- effective basis and respond to emerging industry standards and other
technological changes.
COMPETITION IN THE WIRELESS TECHNOLOGY INDUSTRY IS INTENSE AND TECHNOLOGY IS
CHANGING RAPIDLY
Many wireless technology and software companies are engaged in research and
development activities relating to our range of products. The market for
handheld wireless technology is intensely competitive, rapidly changing and
undergoing consolidation. We may be unable to compete successfully against our
current and future competitors, which may result in price reductions, reduced
margins and the inability to achieve market acceptance for our products. Our
competitors in the field are companies that include major international car
dealership service companies, specialized technology companies, and,
potentially, our joint venture and strategic alliance partners. Such companies
include: 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.
WE MAY NOT HAVE ADEQUATELY PROTECTED OUR INTELLECTUAL PROPERTY RIGHTS
Our success depends on our ability to sell products and services for which
we may not have intellectual property rights. We currently do not have patents
on any of our intellectual property. We have filed for a patent, which protects
a number of developments pertaining to the management of information flow for
automotive dealer-based software. An additional application is currently being
planned which will address certain proprietary features pertaining to our
systems components, related equipment and software modules. We cannot assure you
we will be successful in protecting our intellectual property through patent
law. In addition, although we have applied for U.S. federal trademark
protection, we do not have any U.S. federal trademark registrations for the
marks "DealerAdvance", "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, and unfair competition law and confidentiality agreements to
protect our intellectual property. To the extent
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that intellectual property law does not adequately protect our technology, other
companies could develop and market similar products or services, which could
adversely affect our business.
WE MAY BE SUED BY THIRD PARTIES FOR INFRINGEMENT OF THEIR PROPRIETARY RIGHTS AND
WE MAY INCUR DEFENSE COSTS AND POSSIBLY ROYALTY OBLIGATIONS OR LOSE THE RIGHT TO
USE TECHNOLOGY IMPORTANT TO OUR BUSINESS
The wireless technology and software industries are characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of participants in our market increases, the possibility
of an intellectual property claim against us could increase. Any intellectual
property claims, with or without merit, could be time consuming and expensive to
litigate or settle and could divert management attention from 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.
WE DEPEND ON ATTRACTING AND RETAINING KEY PERSONNEL
We are highly dependent on the principal members of our management,
research and sales staff. The loss of their services might significantly delay
or prevent the achievement of 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 cannot assure
you that we will be able to retain existing personnel or attract and retain
additional highly qualified employees in the future.
Our subsidiary, Stronghold, has an employment agreement in place with its
President and Chief Executive Officer, Christopher J. Carey, which provides for
vesting of stock options for the purchase of shares of our common stock based on
continued employment and on the achievement of performance objectives defined by
the board of directors. Stronghold does not have similar retention provisions in
employment agreements with its other key personnel. If we are unable to hire and
retain personnel in key positions, our business could be significantly and
adversely affected unless qualified replacements can be found.
Our success is dependent on the vision, technological knowledge, business
relationships and abilities of our current president, Mr. Carey. Any reduction
of Mr. Carey's role in the handheld technology business would have a material
adverse effect on us. Mr. Carey's employment contract expires on December 31,
2004.
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PART II. OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
MODIFICATION OF THE RIGHTS OF COMMON STOCK HOLDERS
On May 15, 2002, we entered into a Securities Purchase Agreement with
Stanford Venture Capital Holdings, Inc. ("Stanford"), pursuant to which we
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 on four separate closing dates: May 16, 2002 and July 3, 11 and 19, 2002.
On May 16, 2002, we filed a Certificate of Designations with the Secretary
of State of the State of Nevada to create 2,017,200 shares of our Series A $1.50
Convertible Preferred Stock. Holders of our Series A shares may convert such
shares into shares of our common stock at the then-existing conversion rate. The
conversion rate is determined by dividing the stated value of the Series A
shares, $1.50, by a conversion price. The conversion price, which is currently
$1.50, may be adjusted in case of certain events. The holders of our Series A
shares have certain rights that are superior to the holders of our common stock,
as set forth below.
In the event of our liquidation, dissolution or winding up, the holders of
our Series A shares are entitled to receive, prior and before any distribution
of assets are made to the holders of our common stock, an amount equal to the
stated value, $1.50, per share of our Series A shares. After all Series A
holders receive their full payment, and all holders of any other preferred stock
are paid, if any, then the holders of our Series A shares may share with the
holders of our common stock for distribution of the assets in proportion to the
number of shares which the holders of Series A shares have the right to acquire
upon conversion of the Series A shares. If upon liquidation, dissolution or
winding up, our net assets are insufficient to pay the holders of our Series A
shares in full, then our assets will be distributed ratably in proportion to the
full amounts to which the Series A holders would otherwise be entitled to
receive among the holders of Series A. A sale of our assets and certain mergers
or acquisitions of us into another corporation will be treated as a liquidation,
dissolution or winding up and will entitle the holders of the Series A shares to
receive at the closing in cash, securities or other property, the amounts set
forth above.
Holders of our Series A shares are entitled to vote at any stockholder
meeting with respect to any matters presented to our stockholders. Each share of
Series A is entitled to such number of votes as is represented by the number of
shares of common stock which such share of Series A would be convertible into at
the record date set for such voting. So long as shares of Series A are
outstanding, we may not, without first obtaining the approval of the holders of
at least a majority of the then outstanding shares of Series A shares, alter or
change the rights and preferences of the Series A shares or create any new class
of stock having preferences over the Series A shares. So long as any shares of
Series A are outstanding and held by Stanford, Stanford has preemptive rights to
maintain its percentage ownership with respect to any additional securities we
may issue, with certain exceptions.
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So long as any shares of Series A are outstanding, we may not, without the
approval of the holders of a majority of the outstanding shares of Series A,
voting as a separate class:
o sell all or substantially all of our assets or take any other action
that will result in the holders of our capital stock prior to the
transaction owning less than 50% of the voting power of our capital
stock after the transaction;
o Amend our charter, by-laws or any certificate of designation;
o Change the nature of our business or the business of our subsidiaries;
o Issue stock, or allow our subsidiaries to issue stock, with preferences
over the Series A shares with respect to voting, dividends or upon
liquidation;
o Make certain capital expenditures in any 12-month period exceeding
$50,000;
o Enter into any credit facility or issue any debt, except for debt
already outstanding, exceeding $50,000;
o Sell our shares in a public offering registered under the Securities
Act of 1933;
o Increase the number of our directors above five;
o Enter into any transaction with any affiliate or modify any existing
agreement with an affiliate; or
o File for, or consent to, bankruptcy or insolvency proceedings.
Pursuant to a Registration Rights Agreement which we entered into with
Stanford, by January 15, 2003, we are required to file a registration statement
to register the shares of our common stock that are issuable upon the conversion
of the warrants and shares Series A $1.50 Convertible Preferred Stock held by
Stanford. Currently, Stanford holds warrants for the purchase of 2,002,750
shares of our common stock and 2,002,750 shares of our Series A stock.
Finally, Stanford has the right to nominate one member to our board of
directors.
OPTION GRANTS
From our inception through May 16, 2002, we did not grant any stock
options. In connection with our acquisition of the Predecessor Entity on May 16,
2002, we assumed the Predecessor Entity's 2000 Stock Option Plan so that all of
its issued and outstanding options would remain intact. No further options will
be issued under the assumed Predecessor Entity's plan. Each outstanding option
was automatically converted into an option to acquire, on the same terms and
conditions as were applicable under the original option, such number of shares
of our common stock as was equal to the number of options outstanding multiplied
by 2.1875. The exercise price was also adjusted to the exercise price that was
equal to the existing exercise price divided by 2.1875. The total number of the
Predecessor Entity's options that we assumed was 543,500 (after cancellations)
at a weighted average exercise price per share of $.78, which
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converted into options to purchase 1,188,907 shares of our common stock at a
weighted average exercise price of $.36. 116,000 of the assumed outstanding
options vest according to a three-year vesting schedule, 417,500 vest according
to the achievement of certain performance goals, and the remaining 10,000
options were fully vested upon grant.
In addition to the above employee options of the Predecessor Entity, we
assumed certain outstanding options that were granted by the Predecessor Entity
to automobile dealerships. On May 16, 2002, we assumed a total of 77,500
options, which had been granted to three automobile dealerships for services
rendered, including providing the Predecessor Entity with consulting services.
These options converted into options for a total of 169,531 shares of our common
stock. The options vest upon the achievement of certain performance goals. Each
of the dealerships is an accredited investor.
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
130,150 options to certain employees and 40,000 options to each of our
non-employee directors, for a total number of options outstanding under our 2002
Stock Incentive Plan of 290,126 options at a weighted average exercise price of
$1.50. Of the employee options, 7,126 were fully vested upon grant, 63,000 vest
according to a three-year vesting schedule, 60,000 vest according to the
achievement of certain performance goals, and 160,000 options vest according to
a two-year vesting schedule.
RECENT SALES OF UNREGISTERED SECURITIES
In September 2000 we issued 5,000,000 shares of our common stock to our
founder and former president, Pietro Bortolatti, in exchange for all of the
outstanding shares of Terre di Toscana, Inc.
From November 2000 to January, 2001 we issued 3,351,000 shares of our
common stock at $.10 per share. This sale was part of a private placement
offering. In October 2000 we issued 30,000 shares of our common stock to KGL
Investments, Ltd, the beneficial owner of which is Kaplan Gottbetter & Levenson,
LLP, our former outside legal counsel, in exchange for legal services rendered.
These shares were valued at $.10 per share. All purchasers represented in
writing that they acquired the securities for their own accounts.
On May 16, 2002, we issued 7,000,000 shares of our common stock to the
stockholders of Stronghold Technologies, Inc., a New Jersey corporation, in
exchange for all of the issued and outstanding shares of such entity. All of the
recipients were either accredited investors or had alone, or together with a
purchaser representative, such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of an
investment in securities in general and of an investment in our company in
particular. Each recipient had sufficient access to information about us
necessary to make an informed investment decision.
On May 16, 2002, we issued 666,667 shares of our common stock to
Christopher J. Carey, our president, for the cancellation in full of $1 million
owed to Mr. Carey by our wholly owned subsidiary, Stronghold. Mr. Carey is an
accredited investor.
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
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common stock, to Stanford Venture Capital Holdings, Inc. for an aggregate
purchase price of $3 million. Stanford 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 on the
stock certificates stating that the securities have not been registered under
the Securities Act and cannot be sold or otherwise transferred without an
effective registration or an exemption therefrom.
ITEM 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 June 30, 2002, we filed one Current Report on Form
8-K, dated May 16, 2002 regarding (i) the merger of Stronghold Technologies,
Inc., a New Jersey corporation, with and into our wholly-owned subsidiary and
the resulting change in control of our company, as required pursuant to Items 1
and 2 of Form 8-K and (ii) the investment in us by Stanford Venture Capital
Holdings, Inc. and our related issuance of securities to Stanford, pursuant to
Item 5 of Form 8-K. No other reports on Form 8-K were filed by us during the
quarter ended June 30, 2002.
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SIGNATURE
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: August 14, 2002 By: /s/ Christopher J. Carey
-----------------------------------
Christopher J. Carey, President
and Chief Executive Officer
(Principal Executive Officer, Principal
Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Title of Document
------ -----------------
3.1 Certificate of Designation filed on May 16, 2002.
3.2 Articles of Incorporation, as amended on July 11, 2002.
10.1 2002 Stock Incentive Plan.
10.2 Form of Incentive Stock Option Agreement to be issued under the
2002 Stock Incentive Plan.
10.3 Form of Nonstatutory Stock Option Agreement to be issued under the
2002 Stock Incentive Plan.
10.4 Executive Employment Agreement by and between Stronghold
Technologies, Inc. and Christopher J. Carey dated May 15, 2002.
10.5 Employment and Non-Competition Agreement by and between Stronghold
Technologies, Inc. and Lenard Berger, dated August 1, 2000.
10.6 Employment and Non-Competition Agreement by and between Stronghold
Technologies, Inc. and Salvatore D'Ambra, dated July 10, 2000.
10.7 Employment and Non-Competition Agreement by and between Stronghold
Technologies, Inc. and James J. Cummiskey, dated August 14, 2000.
10.8 Business Loan Agreement by and between the Registrant and United
Trust Bank, dated June 30, 2002.
10.9 Promissory Note issued to the Registrant by United Trust Bank,
dated June 30, 2002.
10.10 Commercial Security Agreement by and between the Registrant and
United Trust Bank, dated June 30, 2002.
10.11 Promissory Note issued to Christopher J. Carey by Stronghold
Technologies, Inc., dated May 16, 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.