UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission File Number: 000-30872
TRYCERA FINANCIAL, INC.
(Exact name of Registrant as specified in charter)
Nevada 33-0910363
State or other jurisdiction of I.R.S. Employer I.D. No.
incorporation or organization
170 Newport Center Drive, Suite 210, Newport Beach, CA 92660
Address of principal executive offices Zip Code
Issuer's telephone number, including area code: (949) 273-4300
Check whether the Issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. (1) Yes [X] No [ ] (2) Yes [X] No [ ]
State the number of shares outstanding of each of the Issuer's classes of
common equity as of the latest practicable date: At November 12, 2004,
there were 5,887,500 shares of the Registrant's Common Stock outstanding.
Table of Contents
Page
PART I 3
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 14
ITEM 3. CONTROLS AND PROCEDURES 32
PART II 33
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES 33
ITEM 6. EXHIBITS 34
SIGNATURES 35
PART I
ITEM 1. FINANCIAL STATEMENTS
The condensed financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading.
In the opinion of the Company, all adjustments, consisting of only
normal recurring adjustments, necessary to present fairly the financial
position of the Company as of September 30, 2004, and the results of its
operations and changes in its financial position from May 10, 2000,
through September 30, 2004, have been made. The results of its operations
for such interim period are not necessarily indicative of the results to
be expected for the entire year. These condensed financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's annual report on Form 10-KSB for the
year ended December 31, 2003.
3
Trycera Financial, Inc.
(A Development Stage Company)
Balance Sheets
September December
30, 2004 31, 2003
----------- -----------
(Unaudited)
Assets
Current Assets
Cash $ 967,180 $ -
Prepaid Expenses 14,759 -
Interest Receivable - 360
Note Receivable - Related Party - 1,200
---------- ----------
Total Current Assets 981,939 1,560
Property & Equipment, Net 4,838 -
---------- ----------
Other Assets
Deposits 9,207 -
---------- ----------
Total Other Assets 9,207 -
---------- ----------
Total Assets $ 995,984 $ 1,560
========== ==========
Liabilities & Stockholders' Equity
Current Liabilities
Accounts Payable $ 790 $ 11,323
Accrued Expenses 4,860 -
Interest Payable 7,726 7,004
Convertible Debenture 200,000 -
Note Payable - Related Party - 23,906
---------- ----------
Total Current Liabilities 213,376 42,233
Stockholders' Equity
Preferred Stock, 20,000,000 Shares Authorized,
$.001 Par Value; None Issued and Outstanding - -
Common Stock, 100,000,000 Shares Authorized at
$.001 Par Value; 5,481,234 and 1,100,000 Shares
Issued and Outstanding, Respectively 5,481 1,100
Additional Paid In Capital 1,222,532 9,900
Deficit Accumulated in the Development Stage (445,405) (51,673)
---------- ----------
Total Stockholders' Equity 782,608 (40,673)
---------- ----------
Total Liabilities & Stockholders' Equity $ 995,984 $ 1,560
========== ==========
See accompanying notes to the financial statements.
4
Trycera Financial, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
For the
Period
May 10,2001
For the Three Months Ended For the Nine Months Ended (Inception) to
September September September September September
30, 2004 30, 2003 30, 2004 30, 2003 30, 2004
----------- ----------- ----------- ----------- -----------
Revenues $ 1,114 $ - $ 15,114 $ - $ 15,114
---------- ---------- ---------- ---------- ----------
Cost of Sales 37,998 - 37,998 - 37,998
---------- ---------- ---------- ---------- ----------
Gross Profit (36,884) - (22,884) - (22,884)
Expenses
Technology Costs 12,030 - 20,711 - 20,711
Salaries and Wages 88,439 - 115,541 - 115,541
Professional Fees 65,589 - 133,111 - 133,111
General & Administrative 67,612 2,408 90,817 6,778 135,847
Option Expense 2,687 - 2,687 - 2,687
---------- ---------- ---------- ---------- ----------
Total Expenses 236,357 2,408 362,867 6,778 407,897
Income (Loss)
from Operations (273,241) (2,408) (385,751) (6,778) (430,781)
---------- ---------- ---------- ---------- ----------
Other Income (Expenses)
Interest Income 2,035 30 2,192 90 2,552
Interest Expense (4,340) (593) (7,726) (1,787) (14,730)
---------- ---------- ---------- ---------- ----------
Total Other Income
(Expenses) (2,305) (568) (5,534) (1,697) (12,173)
---------- ---------- ---------- ---------- ----------
Income (Loss)
Before Taxes (275,546) (2,976) (391,285) (8,457) (442,959)
Taxes (2,446) - (2,446) (1,646) (2,446)
---------- ---------- ---------- ---------- ----------
Net Income (Loss) $ (277,992) $ (2,976) $ (393,731) $ (10,121) $ (445,405)
========== ========== ========== ========== ==========
Loss Per
Common Share $ (.06) $ - $ (.14) $ (.01) $ (.40)
Weighted Average
Outstanding Shares,
Retroactively Restated 5,023,558 1,100,000 2,909,689 1,100,000 1,112,960
See accompanying notes to the financial statements.
5
Trycera Financial, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
For the Period
May 10, 2000
For the Nine Months Ended (Inception) to
September September September
30, 2004 30, 2003 30, 2004
----------- ----------- -------------
Cash Flows from Operating Activities
Net Income (Loss) $ (393,731) $ (10,121) $ (445,405)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations;
Stock Issued for Services 33,000 - 38,600
Forgiveness of Related Party Interest 7,705 - 7,705
Change in Assets and Liabilities:
(Increase) Decrease in Accounts/Interest Receivable 360 (90) -
(Increase) Decrease in Prepaid Expenses (14,759) - (14,759)
(Increase) Decrease in Deposits (9,207) - (9,207)
Increase (Decrease) in Accounts Payable (10,533) 10,211 790
Increase (Decrease) in Interest Payable 3,408 - 10,413
Increase (Decrease) in Accrued Expenses 4,860 - 4,860
---------- ---------- ----------
Net Cash Provided (Used) by Operating Activities (378,897) - (407,003)
---------- ---------- ----------
Cash Flows from Investing Activities
Acquisition of Property & Equipment (4,838) - (4,838)
Proceeds received from Notes Receivable 1,200 - -
---------- ---------- ----------
Net Cash Provided (Used) by Investing Activities (3,638) - (4,838)
---------- ---------- ----------
Cash Flows from Financing Activities
Proceeds from Issuance of Common Stock 1,173,621 - 1,179,021
Proceeds from Convertible Debenture 200,000 - 200,000
Proceeds from Issuance of Related Party Note - - 23,906
Payments made on Related Party Notes (23,906) - (23,906)
---------- ---------- ----------
Net Cash Provided (Used) by Financing Activities 1,349,715 - 1,379,021
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 967,180 - 967,180
Cash and Cash Equivalents at Beginning of Period - - -
---------- ---------- ----------
Cash and Cash Equivalents at End of Period $ 967,180 $ - $ 967,180
========== ========== ==========
Cash Paid for:
Interest $ - $ - $ -
========== ========== ==========
Income Taxes - - -
========== ========== ==========
See accompanying notes to the financial statements.
6
Trycera Financial, Inc.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2004
NOTE 1 - CORPORATE HISTORY
Trycera Financial, Inc., (the "Company") was incorporated in Nevada on
May 10, 2000, under the name Whitelight Technologies, Inc., for the
purpose of seeking and consummating a merger or acquisition with a
business entity organized as a private corporation, partnership, or
sole proprietorship. On July 16, 2004, the Company filed a
certificate of amendment with the state of Nevada changing the name to
Trycera Financial, Inc.
The Company has yet to fully develop any material income from its
stated primary objective and it is classified as a development stage
company. All income, expenses, cash flows and stock transactions are
reported since the beginning of development stage.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Accounting
The Company uses the accrual method of accounting.
B. Revenue Recognition
The Company applies the provisions of SEC Staff Accounting
Bulletin ("SAB") No. 104, Revenue Recognition in Financial
Statements ("SAB 104"), which provides guidance on the
recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. The SAB 104 outlines the basic
criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies.
In general, the Company recognizes revenue related to monthly
contracted amounts for services provided when (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the fee is fixed or
determinable and (iv) collectibility is reasonably assured.
C. Cash Equivalents
The Company considers all short term, highly liquid investments
that are readily convertible, within three months, to known
amounts as cash equivalents. The Company currently has no cash
equivalents.
D. Net Earnings (Loss) Per Share
Primary Earnings Per: Share amounts are based on the weighted
average number of shares outstanding at the dates of the
financial statements. Fully Diluted Earnings Per Share shall be
shown on stock options and other convertible issues that may be
exercised within ten years of the financial statement dates.
7
Trycera Financial, Inc.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2004
NOTE 2 - Significant Accounting Policies (continued)
E. Depreciation
The cost of property and equipment is depreciated over the
estimated useful lives of the related assets. The cost of
leasehold improvements is depreciated over the lesser of the
length of the lease of the related assets for the estimated lives
of the assets. Depreciation is computed on the straight line
method.
F. Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles, in the United States of
America, require management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
G. Fair Value of Financial Instruments
The fair value of the Company's cash and cash equivalents,
receivables, accounts payable and accrued liabilities approximate
carrying value based on their effective interest rates compared
to current market prices.
H. General and Administrative Costs
General and administrative expenses include fees for office
space, insurance, compensated absences, travel and entertainment
costs.
I. Income Taxes
The Company utilizes the liability method of accounting of income
taxes. Under the liability method, deferred income tax assets
and liabilities are provided based on the difference between the
financial statements and tax basis of assets and liabilities
measured by the currently enacted tax rates in effect for the
years in which these differences are expected to reverse.
Deferred tax expense or benefit is the result of changes in
deferred tax assets and liabilities.
8
Trycera Financial, Inc.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2004
NOTE 3 - New Technical Pronouncements
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure an amendment of FAS
123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS No. 123 to require prominent disclosure
about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation.
This Statement also amends APB Opinion No. 28, Interim Financial
Reporting, to require disclosure about those effects in interim
financial information. SFAS No. 148 is effective for annual and
interim periods beginning after December 15, 2002. The adoption of
the interim disclosure provisions of SFAS No. 148 did not have an
impact on the Company's financial position, results of operations or
cash flows. The Company is currently evaluating whether to adopt the
fair value based method of accounting for stock-based employee
compensation in accordance with SFAS No. 148 and its resulting impact
on the Company's financial statements.
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. This consensus addresses certain aspects of accounting
by a vendor for arrangements under which it will perform multiple
revenue-generating activities, specifically, how to determine whether
an arrangement involving multiple deliverables contains more than one
unit of accounting. EITF Issue No. 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15,
2003, or entities may elect to report the change in accounting as a
cumulative-effect adjustment. The adoption of EITF Issue No. 00-21
did not have a material impact on the Company's financial
statements.
In January 2003, the FASB issued Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities. Until this
interpretation, a company generally included another entity in its
consolidated financial statements only if it controlled the entity
through voting interests. FIN No. 46 requires a variable interest
entity, as defined, to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's
residual returns. FIN No. 46 is effective for reporting periods
ending after December 15, 2003. The adoption of FIN No. 46 did not
have an impact on the Company's financial statements.
9
Trycera Financial, Inc.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2004
NOTE 3 - New Technical Pronouncements (continued)
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities, which amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for
contracts entered into or modified after September 30, 2003 and for
hedging relationships designated after September 30, 2003. The
adoption of SFAS No. 149 will not have an impact on the Company's
financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 changes the accounting guidance for certain
financial instruments that, under previous guidance, could be
classified as equity or "mezzanine" equity by now requiring those
instruments to be reported as liabilities. SFAS No. 150 also requires
disclosure relating to the terms of those instruments and settlement
alternatives. SFAS No. 150 is generally effective for all financial
instruments entered into or modified after May 31, 2003, and is
otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not
have an impact on the Company's financial statements.
In December 2003, the SEC issued SAB No. 104. SAB No. 104 revises or
rescinds portions of the interpretative guidance included in Topic 13
of the codification of staff accounting bulletins in order to make
this interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. It
also rescinds the Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers document issued in conjunction
with Topic 13. Selected portions of that document have been
incorporated into Topic 13. The adoption of SAB No. 104 in December
2003 did not have an impact on the Company's financial position,
results of operations or cash flows.
NOTE 4 - RELATED PARTY TRANSACTIONS
During 2001, the Company loaned $1,200 to a corporation whose
president is a shareholder of the Company. The receivable was
unsecured, bore interest at the rate of 10% per annum and was due on
demand. On May 19, 2004, the Company received a total of $1,539
in full satisfaction of the principal and interest of the related
party note.
On May 10, 2004, the Company entered into a contract with Cygni
Capital, LLC ("Cygni") to provide management and consultation
services. The contract became effective May 15, 2004, and will
continue for one year. The contract will automatically renew for an
additional six (6) month term, unless otherwise notified. Cygni will
provide ongoing consulting services for $10,000 per month throughout
the contract term.
10
Trycera Financial, Inc.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2004
NOTE 5 - NOTE PAYABLE RELATED PARTY
The Company had issued several promissory notes to various
corporations whose officers and/or directors are shareholders of the
Company. The notes were unsecured, bore an interest rate of 10% per
annum and were due and payable on demand. On May 19, 2004, the Company
paid a total of $23,906 in satisfaction of all related party notes.
Accrued interest of $7,705 was forgiven by the note holders. Accordingly,
this amount has been charged against additional paid-in-capital.
September 30, December 31,
The Company has the following note payable obligations: 2004 2003
------------ -----------
(Unaudited)
Related party notes payable due on demand
accrued interest at a rate of 10% per annum $ - $ 23,906
--------- ---------
Totals $ - $ 23,906
Less Current Maturities - (23,906)
--------- ---------
Total Long-Term Notes Payable $ - $ -
========= =========
NOTE 6 - STOCKHOLDERS' EQUITY
On May 4, 2004, the board of directors approved a reverse stock split
at the rate of one share for each two (1:2) shares outstanding held by
shareholder at the effective time of the reverse split. The Company
did not issue any fractional shares due to reverse split. The effect
of the reverse split was retroactively applied to all prior issuances.
During the quarter ended September 30, 2004, the Company issued
1,264,167 shares of common stock pursuant to the private offering.
Accordingly, common stock and additional paid in capital have been
charged $1,264 and $897,057, respectively.
During the quarter ended June 30, 2004, the Company issued a total of
3,300,000 shares of common stock to several individuals for services
rendered on behalf of the Company. Accordingly, common stock and
additional paid in capital have been charged $3,300 and $29,700,
respectively.
During the quarter ended June 30, 2004, the Company issued 367,067
shares of common stock pursuant to the private offering. Accordingly,
common stock and additional paid-in-capital have been charged $367 and
$274,933, respectively.
On June 4, 2004, the board of directors authorized to undertake a
non-public offering of 2,000,000 shares of common stock at $.75 per
share to be sold pursuant to Rule 506 of Regulation D promulgated by
the Securities and Exchange Commission.
11
Trycera Financial, Inc.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2004
NOTE 7 - STOCK OPTION PLAN
On May 4, 2004, the Company approved and adopted the 2004 Stock
Option/Stock Issuance Plan, which allows for the Company to issue
stock or grant options to purchase or receive shares of the Company's
common stock. The maximum number of shares that may be optioned and
sold under the plan is 5,000,000. The plan became effective with its
adoption and remains in effect for ten years, however, options expire
five years from grant, unless terminated earlier. Options granted
under the plan vest according to terms imposed by the Plan
Administrator. The Administrator may not impose a vesting schedule
upon any option grant which is more restrictive than twenty percent
(20%) per year vesting with the initial vesting to occur not later
than one (1) year after the option grant date. The following schedule
summarizes the activity during the nine month period ending September 30,
2004:
2004 Stock Plan
-------------------
Weighted
Average
Amount of Exercise
Shares Price
--------- --------
Outstanding at January 1, 2004 - -
Options Granted 2,215,000 $ .53
Options Exercised - -
Options Canceled - -
--------- -------
Options Outstanding at September 30, 2004 2,215,000 $ .53
========= =======
Options Exercisable at September 30, 2004 390,002 $ .24
========= =======
In accordance with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation", $2,687 was recognized
for the period ended September 30, 2004. The fair value of the option
grant was established at the date of grant using the Black-Scholes
option pricing model with the following assumptions:
September 30, 2004
------------------
Five Year Risk Free Interest Rate 3.625
Dividend Yield 0%
Volatility .001%
Average Expected Term (Years to Exercise) 11
Weighted Average Weighted
Number of Average Remaining Number Average
Range of Options Exercise Contractual of Options Exercise
Exercise Price Granted Price Life (Years) Vested Price
-------------- --------- -------- ------------ ---------- --------
$.001-$.85 2,215,000 $ .53 4.6 390,002 $ .24
12
Trycera Financial, Inc.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2004
NOTE 8 - CONVERTIBLE DEBENTURE
On May 12, 2004, the Company issued a convertible debenture note to a
corporation that is a shareholder of the Company. The note is
unsecured, bears an interest rate of 10% per annum and is due and
payable on November 12, 2004. At September 30, 2004, the accrued
interest associated with the note is $7,726.
September 30, December 31,
The Company has the following convertible debenture obligations: 2004 2003
------------ ------------
(Unaudited)
Related party convertible debentures due November 12, 2004
accruing interest at a rate of 10% per annum $ 200,000 $ -
--------- ---------
Totals $ 200,000 $ -
Less Current Maturities (200,000) -
--------- ---------
Total Long-Term Notes Payable $ - $ -
========= =========
NOTE 9 - SUBSEQUENT EVENTS
On November 2, 2004, the Company entered into an Asset Purchase
Agreement with Signature Credit Corporation ("SCC"), a California
corporation. The Agreement states that the Company will acquire all
of the fixed assets, rights under leases of equipment and all rights
related to the business of SCC for $100,000 in cash and 150,000 shares
of the Company's common stock. The terms of the Agreement state that
the Company will pay SCC $85,000 in cash and Sunbelt Business
Brokers $5,000 in cash and issue 33,750 shares of common stock to
SCC and 3,750 shares of common stock to Victor Lee upon execution of
the agreement, issue an additional 75,000 shares of common stock to
SCC six months after execution of the agreement and an additional
37,500 shares of common stock to SCC one year after the execution of
the agreement. On the sixty-first day after the agreement, the Company
will pay SCC $10,000 less any lagging pre-close expenses paid by the
Company plus 95% of all cash receipts received by that date from SCC
mailings during the thirty days prior to the purchase agreement.
The Company's private offering of up to 2,000,000 shares common stock
at $0.75 per share closed subsequent to the quarter ended September 30,
2004. The Company sold all of the shares offered and raised total
gross proceeds of $1,500,000.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Introduction
Trycera Financial is a development stage company. Prior to May 2004,
we had no operating history. In May 2004 we retained the services of new
management and commenced our financial services and stored value products
business. Our operations are in the startup phase of development.
Based in Newport Beach, California, our charter is (1) to develop and
market a turnkey suite of financial products with a stored value emphasis,
and (2) to acquire and grow micro cap companies in the stored value and
financial services sectors. Subsequent to the quarter ended September 30,
2004, we closed our initial round of funding and intend to apply for
quotation on the OTC Bulletin Board during the fourth quarter of 2004.
We sold a total of 2,000,000 common shares and raised gross proceeds
totaling $1,500,000. We have agreed to register the resale of the
shares sold in our initial round of funding, as well as certain shares
held by existing shareholders.
We are in the business of developing and marketing a suite of stored
value and financial products and services. Stored value products are
broadly defined as financial instruments where the value on the card has
been prepaid, and where subsequent transactions decrease the value against
the balance originally loaded onto the instrument. Our core operating
business is centered upon developing and marketing a broad array of stored
value products and services for persons without banking relationships and
persons who are underserved by existing banking facilities. These stored
value products and services include:
* Association-branded (MasterCard, Visa) prepaid debit cards;
* Co-branded prepaid debit products;
* Private label credit products;
* Online payment solutions;
* Financial management tools and support; and
* Credit improvement programs and strategies.
We are developing stored value products and services to deliver
prepaid financial tools, online payment solutions, financial management
services, and credit improvement strategies and programs. These services
will be delivered through the use of business partner infrastructure and
distribution partner systems. Our stored value products and services can
be customized to meet the changing requirements for specific customer
demands.
In addition to our core operations, we intend to actively target
additional financial services-related companies for acquisition.
Management anticipates that such acquisitions would be funded primarily
using our authorized, but unissued shares of common stock. We believe
such acquisitions would provide additional stored value products or
financial services, and/or augment our current staff. Our strategy is to
acquire mature, quality companies with sound financials, intriguing
products and/or position, a loyal customer base, and talented management
teams that
14
have a passion for what they are doing and want to continue to run and
grow their companies. We intend to seek companies that would be
strategically diversified across service channels to reduce the potential
impact of a downturn in any specific channel. It is anticipated that each
acquired business would remain a separate, self-funding unit with minimal
overhead. We have unrestricted discretion in seeking and participating in
a business opportunity.
While our strategy is to acquire mature, cash flow positive,
profitable companies, we are also interested in identifying additional
growth opportunities that are not currently being addressed within the
individual company's business plan. These growth opportunities will be
evaluated for the potential to infuse additional capital to fund selected
growth opportunities.
Stored Value and Financial Products and Services
Overview
Our business model has been developed primarily to serve the needs of
self-banked consumers. Self-banked is a general term that describes a
broad base of consumers, who for one reason or another do not maintain
bank accounts and/or credit card accounts. For example, such consumers
may have experienced credit problems in the past, they may just have come
of age and never had credit before, or they may not feel comfortable
working with banks and credit card companies and choose to use cash for
their everyday purchases. Given that we live in a credit card dominated
society where cards are needed for everything from hotel reservations to
online shopping, we have chosen to focus on building products and services
to meet the needs of consumers who want and need the functionality of
credit cards but who are unable to acquire the cards through the
traditional application process. Within the confines of our core business
model, we are focused on three business components:
* Consumer based stored value products;
* Catalog shopping cards; and
* Customized stored value program management.
Consumer Based Stored Value Products. A stored value card, also
commonly referred to as a prepaid card, is typically a credit card-sized
piece of plastic that contains or represents an amount of pre-loaded
value. Unlike credit cards, which draw their value from a line of credit,
or debit cards, which draw their value from a checking account, the value
on a prepaid card typically comes from money given to the company who
markets and/or issues the card prior to its use. Prepaid cards take many
forms, including gift cards that can be used at a specific merchant or
mall (Starbucks gift card), travel cards that can be used in the same way
as travelers' checks (American Express Travel Funds Card), payroll cards
that can be used to access one's wages, and "teen cards" that are marketed
to those under 18 years to access funds their parents load onto the card
(Visa Buxx from Bank of America).
15
We are currently in development of several MasterCard branded stored
value cards. We have selected and contracted with the key business
partners to bring the branded stored value products into the marketplace.
We selected a platform processor which is the organization required to
authorize and settle the transactions. As a result of selecting the
business partners, we can actively pursue a variety of stored value
product distribution strategies including retail sales and bundled product
offerings.
Within our business model, retail distribution involves the sale of
the stored value cards by us to a distributor, who in turn, will place the
cards in a retail store for sale to the end consumer. The end user, the
consumer in this case, would be able to purchase the product in a retail
establishment, and upon completion of the card activation process, be
entitled to receive his stored value MasterCard in the mail within 7-10
business days. Upon receipt, the consumer can use the card anywhere
MasterCard is accepted and they can add more funds at anytime either
through the retailer or a variety of other methods including direct
deposit. Our role in this business cycle is that of a traditional
wholesale company where we provide products to a distribution channel that
are ultimately sold to a consumer. Once the consumer activates the stored
value product, we begin a service relationship with that consumer where we
ensure the cardholders account is managed correctly. At this time, we
have elected to outsource the ongoing customer service of the consumer and
their credit card to our processor.
A bundled product offering is a sales method where we package a
stored value card with another product the consumer is purchasing. An
example of this might be including a prepaid MasterCard with the purchase
of a prepaid cellular phone. This type of offering provides enhanced
convenience for the consumer as he or she can add more minutes to their
cellular phone through the MasterCard that has been included. To date,
we have held executive level discussions with several product distributors
regarding a product relationship in which a Trycera-branded stored value
card would be included with a complimentary retail product. As of the
date of this filing, we have not signed any distribution agreements
because our stored value products are not ready for distribution.
In addition to the stored value MasterCard products, we are in the
early stages of development of a collection of proprietary stored value
cards designed to enable consumers to access specific web based content
through the use of a prepaid card. This product is still in the design
stage and distribution has not been secured as of the date of this filing.
Once the product is fully developed, we intend to distribute the product
through the retail channel and through bundled product offerings as
previously described. The end user of these products will be a consumer
who upon purchase of the card will use the prepaid value to purchase
content from a website. An example of a similar product is the Disney
Blast prepaid card which can be purchased at most convenience stores and
used to purchase and download content from the Disney Blast website.
16
Catalog Shopping Cards. A second aspect of our business model is the
catalog shopping card marketed through direct mail and online advertising.
We began generating revenue from this channel in the quarter ended
September 30, 2004 and are actively involved in the further development of
this product and business segment. Unlike a Visa or MasterCard credit
card, the catalog shopping card is a private purchasing card that is
issued to a consumer and allows them to buy products from a specific
catalog at agreed upon terms.
Under the current catalog shopping card operations, the target market
is consumers with below average credit ratings. Upon acceptance of a card
offer from Trycera, the consumer pays a membership acceptance fee and
receives a private name brand catalog shopping card along with the catalog
or catalogs and/or website from which an individual can purchase products.
In most cases, the consumer is required to provide a down payment of
between 20% and 50% of the purchase price, with the balance due in
installments at an agreed upon interest rate. Upon receipt of the down
payment, we authorize the merchandise to be shipped to the consumer. On a
monthly basis, we send a bill to the consumer for that month's portion of
the balance that is due. This process is very similar to purchasing
merchandise through any store catalog, with the primary difference being
that a down payment is required prior to shipment of the merchandise, and
the catalog through which the consumer can shop is provided by us. We
would actively manage the direct mail and customer solicitation process,
including fulfillment, printing, and payment processing. To service these
consumers on an ongoing basis, we plan to partner with third party catalog
companies who could provide the catalog and drop ship the merchandise to
the consumer.
Customized Stored Value Program Management. The third component of
our business model includes the management of customized stored value
programs on behalf of other companies. This business involves the same
stored value MasterCard products as previously described, with the
primary difference being that we would act as an OEM supplier while the
corporate client who contracts with us would be responsible for sales,
marketing, distribution, and payment for all products and services.
Within this model, we intend to utilize the industry expertise of our
management coupled with the processor, banking and MasterCard
relationships that we have developed to facilitate the sale of a
co-branded product in conjunction with the client. This business model is
similar to American Airlines and the AAdvantage MasterCard issued by
Citibank. In that case, Citibank is responsible for issuing the cards and
supporting the end user of the card, but American Airlines is responsible
for customer acquisition, distribution, and in some cases, product
development costs. In this model, we hope to generate revenue from
consulting fees charged to the client and card usage fees incurred by the
cardholder for use of the card. We are not currently managing any stored
value programs, but we are in advanced stage discussions with perspective
clients who are considering using us as the stored value program manager.
17
Competition
Although the retail based stored value industry is still in its
infancy, considerable specialization has begun to occur with the end
result delivering a competitive landscape that can be broken into three
primary segments: open, PIN-based semi-open, and closed loop product
offerings. Most segments are filled with unique competitors and an equally
divergent collection of product offerings.
The open segment of the market consists of a fragmented collection of
association branded prepaid debit card products. The common trait within
this product segment is that all products carry the Visa, MasterCard,
American Express, or Discover brand on the front of the card giving the
product category unparalleled payment acceptance. Examples of companies
who compete within the space are Next Estate Communications, Net Spend,
One Global Finance, and ITC Financial Services. Many of these companies
share common traits including: well-developed proprietary infrastructure,
substantial investment in internal IT resources, significant and/or
continual venture capital backing, profitability, and direct relationships
with the associations, such as Visa and MasterCard.
Within the context of the stored value space, "PIN-based or semi-open
loop" traditionally refers to a category of products that do not carry a
major association branded (Visa, MasterCard, American Express, Discover)
on the front of the card. These cards are affiliated with the Cirrus,
Maestro, or Plus networks and are accepted as payment at debit-enabled
merchant locations. Unlike an open loop product, a PIN-based product cannot
be used for online commerce. Several dozen small companies have emerged in
this semi-open segment, evolving from the precursor industry of prepaid phone
cards. Included on the list would be companies such as Air Time Technologies,
I2C, and Morgan Beaumont, among others.
Closed-loop product offerings make up the largest collective segment
of the stored value industry in terms of cards issued and transactional
volume. Cards within this segment tend to be focused on specific use
applications within a single organization or structure. The common trait
among these products is that they carry no direct payment affiliation to
the debit or credit network, and typically are designed as a replacement
for paper gift certificates or in limited cases to access merchant
specific online content. Common examples include: the Starbucks gift card
and Dave & Busters game card. There are several entrants within this
space, most of which are competing only for their own gift card business.
Notable providers within the space are Stored Value Systems, Value Link,
AT&T, and others.
There is a growing degree of competition among companies seeking to
acquire interests in stored value and financial services companies such as
those we may target for acquisition. A large number of established and
well-financed entities, including large banking and financial
institutions, stored value distributors and aggregators and venture
capital firms, are active in acquiring interests in companies that we may
find to be desirable acquisition candidates. Many of these
18
entities have significantly greater financial resources, industry
expertise and managerial capabilities than do we. Consequently, we may be
at a competitive disadvantage in negotiating and executing possible
acquisitions of these entities as competitors may have easier access to
capital than do we. Although entrepreneur-founders of privately held
stored value and financial services companies may place greater emphasis
on the ease of access to capital than on obtaining the management skills
and industry expertise that we can provide, management believes that it
offers unique and attractive set of benefits, including the ability of the
founders and management to preserve their business culture and identity
while leveraging the strengths of an acquired company.
In addition, each of the prospective acquired companies will
undoubtedly face significant competition in their individual markets. We
believe competition will continue to grow both from new entrants to the
market as well as from existing participants, such as banks expanding the
breadth of their services into the markets currently underserved.
We believe that competition in the stored value products and services
market is based upon the following factors:
* Addressing the needs of underserved and unbanked customers;
* Program flexibility for user-specific needs;
* Responsiveness to customer demands;
* Easy product distribution access and usage (i.e. online, telephone,
retail, etc);
* Stored value expertise;
* Brand recognition and geographic presence; and
* Price.
It can be assumed that we and any acquired company will compete with
numerous large companies that have substantially greater market presence
and financial, technical, marketing and other resources than we have, such
as Next Estate Communications, Net Spend, One Global Finance, WildCard
Systems and ITC Financial Services. These competitors include (i) large
stored value product and service providers; (ii) national, regional and
local networked retail prepaid service providers who have stored value
services divisions; (iii) fully integrated on-line services companies; and
(iv) major venture-backed stored value firms. Many of our competitors
expanded their product and/or service offerings over the past year and
increased their focus on new product development and delivery, thus
increasing the number of organizations that are providing products and
services similar to ours.
As a result of continued competition, we expect to encounter product
or pricing pressure, which in turn could result in reductions in the
average selling price of our products and services. There can be no
assurance that we will be able to offset the effects of any such price
reductions through an increase in the volume of product sales, higher
revenue from new products or services, cost reductions or otherwise. In
addition, we believe that continuing awareness and expansion in the stored
value products and services industry could result in increased price
pressure and other competition in the industry.
19
Regulatory Environment
As the stored value industry continues to grow, we can expect
regulatory oversight to expand accordingly. Currently, various states are
investigating the feasibility of clarifying existing regulations for
stored value products. Although there may be additional regulations at
both the state and federal level, outlined below are the key risks
associated with the stored value industry:
* State laws: States such as Pennsylvania and Maryland are proactive
in defining and regulating the stored value industry and serve as
benchmarks for other states currently in the process of defining the
regulatory aspects of the emerging industry. These laws are designed
to protect consumers and regulate the legitimate businesses in
conducting business in the stored value space. On a state-by-state
basis, each state may elect to further refine the regulatory scope
and enact new laws to manage stricter compliance in the growing
stored value arena.
* Money transmitter laws: Many states engage in the regulation of the
transfer or transmittal of money. Oftentimes this type of
transaction is regulated by the state banking authorities to ensure
consumer protection. As stored value makes an increased presence in
the transactional marketplace, it could be expected that further
regulatory guidelines will be established to monitor industry
compliance.
* Patriot Act: This law was enacted by the United States' government
to provide further investigative tools to Justice Department
authorities attempting to prevent acts of terrorism. This
legislative action is a potential risk for the stored value industry
as new laws governing information collection could be further
changed. Under the auspices of current law, the Patriot Act
regulates the submission of appropriate personal identification for
applications on all non-anonymous stored value products. As an
extension of the Patriot Act, there is a subsequent Bank Secrecy Act,
which may pose a future risk as the regulatory climate changes in
response to further refining the existing laws.
Intellectual Property
We are committed to protecting our interests through the application
of appropriate trademarks, patents or rights. Though we currently do not
have any of the aforementioned protections, we are seeking such
protections with regard to newly developed products in our consumer-based
stored value and catalog shopping card business segments. As we further
develop products, processes or methods, we will continue to actively
pursue the necessary protections.
20
Strategic Acquisitions
Management is seeking potential acquisition candidates. We have
recently closed an asset purchase agreement with a direct mail
organization and continue to court potential acquisition targets based on
the criteria outlined below. In addition to the current asset purchase,
we currently have no other binding agreements.
Selection Criteria for Acquisition Targets
Prospective acquisitions will be selected for their profitability,
product synergy, market position, and customer base and for their
experienced management teams. We will attempt to negotiate acquisition
terms which will limit financial risk to our shareholders by setting
specific performance milestones in order for the target company's owners
to receive full purchase consideration.
Management intends to consider a number of factors prior to making
any final decision as to whether to purchase a company or to participate
in any specific business endeavor, none of which may be determinative or
provide any assurance of success.
Selection Process for Acquisitions
The selection of a business opportunity in which to participate is
complex and risky. Additionally, as we have only limited resources
available to us, it may be difficult to find good opportunities. There
can be no assurance that we will be able to identify and acquire any
additional business opportunity based on management's business judgment.
We are unable to predict the time as to when and if we may actually
participate in any specific business endeavor. We anticipate that
proposed business ventures will be made available to us through personal
contacts of directors, executive officers and stockholders, professional
advisors, broker dealers in securities, venture capital personnel, members
of the financial community, attorneys, and others who may present
unsolicited proposals. In certain cases, the Company may agree to pay a
finder's fee or to otherwise compensate the persons who submit a potential
business endeavor in which the Company eventually participates. Such
persons may include our directors, executive officers, beneficial owners
or our affiliates. In this event, such fees may become a factor in
negotiations regarding a potential acquisition and, accordingly, may
present a conflict of interest for such individuals. Our directors and
executive officer have not used any particular consultants, advisors or
finders on a regular basis to locate potential business opportunities.
The possibility exists that we may acquire or merge with a business
or company in which our executive officers, directors, beneficial owners
or our affiliates may have an ownership interest. Our current policy does
not prohibit such transactions. Because no such transaction is
21
currently contemplated, it is impossible to estimate the potential
pecuniary benefits to these persons.
Recent Developments
During the quarter ended September 30, 2004, we solidified business
relationships with our key stored value platform business partners. These
relationships play an integral part in executing operations with regard to
our core business model. Through the recent execution of service
agreements and long-term contracts with these key partners, we may now
prepare to launch our suite of products in support of the core model,
including: consumer based stored value products, catalog shopping cards
and customized stored value program management. These new stored value
alliances include a provider of stored value processing platforms, a large
banking institution who is a leading provider of banking and program
management in the stored value space, and MasterCard, the currently
selected Association-branded partner for the Trycera Financial product
offerings.
In addition to executing these service agreements and contracts, the
quarter ended September 30, 2004, welcomed the launch of our catalog
shopping card business segment. Under the brand name Tru Platinum Card,
we launched a catalog shopping card that is marketed through direct mail
and online advertising. Unlike an association branded Visa or
MasterCard credit card, our Tru Platinum Card is a private purchasing
card that is issued to the consumer and allows them to buy products from
specific catalogs at agreed upon terms. The Tru Platinum Card is marketed
to consumers with below average credit ratings. Upon acceptance of a card
offer from Tru Platinum Card, the consumer pays an acceptance fee and
receives the catalog shopping card along with the catalog or catalogs
and/or website from which the cardholder may purchase products. Tru
Platinum Card actively manages the direct mail and customer solicitation
process, including fulfillment, printing, and payment processing. To
service these consumers on an ongoing basis, we have partnered with third
party catalog companies who provide a broad array of products and services
that can be purchased by the catalog cardholder and drop shipped to their
selected destination.
Our revenues for the third quarter were primarily a result of the
initial and successful launch of Tru Platinum Card. Through the launch of
this business segment and product offering, we anticipate and have already
started work on significant additional revenues from this product channel
for subsequent quarters.
Beyond the catalog shopping card business, we have been in
discussions to provide consulting services with a large telecommunications
company. Traditionally, there has been a migration of telecommunications
organizations moving into the stored value area and with limited market
intelligence, they seek industry expertise. With our key management team
and through discussions and meetings, we have been able to provide them
with a compelling foundation to compensate us for our knowledge within the
stored value space. Our organization has a long-
22
term view to expanding that consulting relationship to help meet their
major corporate initiative to move forward in the stored value space. If
successful, we could expand our services to include building a stored
value implementation team on their behalf. Our time horizon in
consummating this deal is currently one month.
We continue to develop other relationships with national, regional
and local stored value card marketers. We have been discussing several
venture partnerships and alliance opportunities, including long term
contracts that may require us to provide significant capital and human
resources. Each relationship is being closely evaluated for strategic fit
and seamless integration within our core business model. Besides these
nationwide prospects and customers, we are also actively pursuing several
program management opportunities. At present we are in discussions with
other card marketing companies who have expressed an interest in
partnering with us to develop, launch and manage their retail-based stored
value product offerings. As we continue to develop and deploy unique
stored value programs, we stand to develop recurrent revenue opportunities
that would allow us to establish longer term and more predictable revenue
streams.
In other developments, we have agreed to cash compensation for office
space for the Chairman of the Board of Directors. The current expense
amount represents $650.00 per month expense for space in close proximity
to our headquarters location.
Employees
We currently employ four full time individuals. As we continue to
develop our products and services, our headcount will expand accordingly.
It is anticipated that in the coming months we will add an additional four
to five employees.
Facilities
We sublease approximately 1,478 square feet of office space in
Newport Beach, California, for $3,695 per month. The sublease expires on
September 8, 2007.
Management's Discussion and Analysis and Plan of Operation
The following discussion should be read in conjunction with our
financial statements and related notes thereto as filed with the
Securities and Exchange Commission.
23
Key Accounting Policies
Key accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in
materially different results under different assumptions and conditions.
There were no changes to our key accounting policies for the quarter ended
September 30, 2004.
Results of Operations
During the second quarter ending September 30, 2004, we generated
revenues of $1,114 and incurred operating expenses of $279,106. For the
nine months ended September 30, 2004, we generated revenues of $15,114 and
incurred operating expenses of $408,845. Since operations commenced in
May 2004, there is no comparable data for the same period in the prior
year. Management has not yet determined the amount of revenues and
expenses estimated for the remainder of 2004, but anticipates that they
will increase progressively based upon the expansion of operations during
the third quarter of 2004.
Liquidity and Capital Resources
A primary source of operating capital for the quarter ended September 30,
2004, was from the sale of stock. On June 7, 2004, we commenced an
offering of up to 2,000,000 shares of our common stock at $.75 per share
to investors for maximum gross proceeds of $1,500,000. At September 30,
2004, we had sold 1,628,145 shares in this offering and collected gross
proceeds of $1,221,109. This offering is now closed. The shares offered
will not be and have not been registered under the Securities Act and may not
be offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
A second principal source of our operating capital for the quarter
was furnished through the issuance of a convertible debenture and the
receipt of $200,000 for the debenture. This six-month 10% convertible
debenture was issued on May 12, 2004, upon receipt of the $200,000. The
debenture is convertible at the rate of $0.75 per share. Likewise,
neither the debenture nor the shares issuable upon conversion of the
debenture, will not be and have not been registered under the Securities
Act and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements.
As of September 30, 2004, cash totaled $967,180 as compared with
$356,684 of cash at June 30, 2004, resulting in an increase of $610,496 in
cash and cash equivalents for the quarter ended September 30, 2004. The
increase in cash and cash equivalents consists of $610,496 provided by the
$200,000 loan in exchange for a six-month convertible debenture with the
balance of the increase attributed to proceeds of the private common stock
offering, with cash used in
24
operations of $311,584. There were no comparable operations or financing
activities for the same period last year.
Working capital was $768,563 at September 30, 2004, as compared with
working capital of $362,277 at June 30, 2004. This increase in working
capital was a result of the contribution of funds provided by both the new
debt and private offering proceeds to support the business during its
startup and growth phase.
Proceeds from the private stock offering continued into the fourth
quarter 2004 to support the startup phase. Management believes
that with funds from the offering, together with revenues generated from
operations, we will have sufficient cash to satisfy existing operating
cash needs and working capital requirements during 2004 and through at
least 2005. Our monthly cash requirements have increased to $74,924 per
month as we continue to expand headcount and operations. Management
estimates that future monthly cash requirements will rise to approximately
$82,000. Without generating any additional revenues, we estimate that
cash from our private offering and anticipated revenues generated from
operations would meet our cash flow requirements through at least December 31,
2005. Any additional funds from operations would likely extend this
estimated period. With the closing of our stock offering, we would not
anticipate the need for additional funding from investors.
Additionally, we may elect to compensate employees with equity
incentives where possible and continue to utilize equity instruments to
compensate all associates in efforts to minimize cash outlays. Management
believes this strategy provides the ability to increase stockholder value
as well as utilize cash resources more effectively.
During future quarters we may seek additional funding to finance
future acquisitions and growth. The amount and timing of such capital
transactions is not yet known and will depend largely on our operating
needs and the cost to acquire financial services and products companies.
Our ability to secure this additional funding given present market
conditions is uncertain, as is the financial effect any such funding may
have on our capital structure or operating results.
Off-Balance Sheet Arrangements
During the quarter ended September 30, 2004, we did not engage in any
off-balance sheet arrangements.
Stock-Based Compensation
We account for employee stock-based compensation under the "intrinsic
value" method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), as opposed to the
"fair value" method prescribed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
25
123"). Pursuant to the provisions of APB 25, we generally do not record
an expense for the value of stock-based awards granted to employees. If
proposals currently under consideration by various accounting standard
organizations are adopted, such as the Financial Accounting Standards
Board Proposed Statement of Financial Accounting Standard, "Share-Based
Payment, an amendment of FASB Statements No. 123 and 95," we may be
required to treat the value of stock-based awards granted to employees as
compensation expense in the future, which could have a material adverse
effect on our reported operating results and could negatively affect the
price of our common stock. If these proposals are adopted, we could
decide to reduce the number of stock-based awards granted to employees in
the future, which could adversely impact our ability to attract qualified
candidates or retain existing employees without increasing their cash
compensation and, therefore, have material adverse effect on our business,
results of operations and financial condition.
Subsequent Events
The following events occurred subsequent to the quarter ended
September 30, 2004:
Asset Purchase Agreement
We have closed an asset purchase agreement with Signature
Credit Corporation effective November 2, 2004. Trycera Financial will
deploy the assets purchased to complement the recently launched in-house
catalog shopping card program marketed under the Tru Platinum Card brand.
In addition, Trycera will continue to market Signature Credit Corporation's
catalog card marketed under the Classic Advantage Card brand. The
Signature Credit assets will also allow us to integrate proprietary
technology and management solutions serving as the basis for management
of both the Tru Platinum and Classic Advantage catalog shopping card
programs. On November 12, 2004, we filed with the SEC a current report
on Form 8-K describing the acquisition of the assets of Signature Credit
Corporation and included financial statements of Signature Credit.
Consulting Agreement
We have entered into a consulting agreement with a key
telecommunications customer effective October 22, 2004. The scope of the
engagement is one month for the initial phase and may expand according to
mutually agreed upon terms.
Employees
We added a key employee on October 20, 2004. The position, Director
of Programs and Compliance, is responsible for the ongoing management of
relationships with regard to all Trycera Financial banking and regulatory
environments.
As a result of the asset purchase agreement with Signature Credit
Corporation, we added two customer service employees to maintain the
current service levels for all Signature Credit customers.
26
Forward-Looking Statements
This report contains certain forward-looking statements and
information that are based on assumptions made by management and on
information currently available. When used in this report, the words
"anticipate," "believe," "estimate," "expect," "intend," "plan," and
similar expressions, as they relate to our company or its management, are
intended to identify forward-looking statements. These statements reflect
management's current view of the company concerning future events and are
subject to certain risks, uncertainties and assumptions, including among
many others the following: changes in federal, state or municipal laws
governing the distribution and performance of financial services; a
general economic downturn; our startup phase of operations; reliance on
third party processors and product suppliers; the inability to locate
suitable acquisition targets; and other risks and uncertainties. Should
any of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this report as anticipated, estimated or expected.
Risk Factors
Our company is subject to a number of material risks, of which those
known to management are set forth below:
* We are Engaged in a New Business Venture and are Subject to all of
the Risks of a Start-Up Venture. Because we recently commenced
operations, our business is subject to all of the risks inherent in a
new enterprise, including the absence of a profitable operating
history, potential undercapitalization, and expense of new product
development and research and development. Various problems,
expenses, complications and delays may be encountered in connection
with the development of our business. Future growth will require
significant expenditures for expansion, marketing, research and
development. Traditional sources of funding from lending
institutions will likely not be available to us. These expenses must
either be paid out of future earnings or future offerings of equity
or debt instruments. The availability of funds from either of these
sources cannot be assured. In addition, we have no definitive
agreements or arrangements for the implementation of our business
plan, and there is no assurance that management will be able to enter
into such agreements or arrangements which would reasonably support
our proposed operations.
* We have not Performed any Market Studies or Retained any Independent
Market Study of Our Proposed Products or Services, and there is no
Assurance that these Products and Services will be Accepted in the
Marketplace. Our business plan is to introduce prepaid or stored
value cards to the public. There is no assurance that these services
and products will be accepted in the marketplace. We have not
allocated any
27
funds to performing any in-house or independent marketing studies to
confirm or estimate market acceptance of our proposed services and
products.
* We may Encounter Unknown Risks of New Ventures. As a part of our
overall business model, we intend to seek potential acquisition
targets. These acquisitions may involve risks which we are unable to
predict at this time. The results of operations of any specific
entity may not necessarily be indicative of what may occur in the
future, by reason of changing market strategies, product expansion,
changes in product emphasis, future management personnel and changes
in innumerable other factors. Further, in the case of a new business
venture or one that is in a research and development stage, the risks
will be substantial, and there will be no objective criteria to
examine the effectiveness or the abilities of its management or its
business objectives. Also, a firm market for its products or
services may yet need to be established, and with no past track
record, the profitability of any such entity will be unproven and
cannot be predicted with any certainty.
* The Acquisition of Existing Businesses could result in the Dilution
of the Percentage Ownership of Existing Shareholders. As part of our
business plan, we intend to seek and acquire related businesses or
operations using shares of our common stock. For example, on
November 2, 2004, we acquired certain assets of Signature Credit
Corporation and agreed to issue a total of 150,000 shares in
connection with the acquisition. The issuance of these shares and
shares in future acquisitions could materially reduce the percentage
ownership interest in the company of existing shareholders. There is
no assurance that any acquired businesses or operations would be
successful or that if unsuccessful, such acquisitions could be
rescinded and the issued shares returned to us.
* We have had a Number of Related Party Transactions. As a start-up
venture, we have engaged in a significant number of transactions with
related parties that may not be deemed to have been at arm's length,
including the following:
- On May 12, 2004, we borrowed $200,000 from Trymetris Capital Fund
I, LLC pursuant to the terms of a six-month 10% convertible
debenture which we issued for the loan. The debenture is
convertible at $0.75 per share. We also issued 100,000 shares of
common stock as additional consideration for the loan and granted
demand registration rights for the shares. The Fund is managed
by Trymetris Capital Management, LLC. Alan S. Knitowski, our
Chairman, is one of two managing members of this entity and holds
an ownership interest in the Fund. Jason Daggett, a member of
our advisory committee, is the other managing member of this
entity. Eric Chess Bronk, the former sole officer and director
of our company, is a non-managing member of this entity.
- On May 12, 2004, we entered into a renewable one-year consulting
agreement with Cygni Capital LLC and Ecewa Capital LLC in which
we agreed to pay $10,000 every thirty days for the services and,
during the initial term, a finder's fee equal to 8% of any
transaction plus five-year warrants to purchase shares equal to
28
8% of the securities subject to the transaction. On May 18,
2004, we repaid $8,731 of loans made to us by Cygni Capital. On
May 24, 2004, Cygni Capital leased approximately 1,478 square
feet of office space and sublet the space to us for $3,695 per
month. In addition, Mr. Bronk personally guaranteed the lease,
for which we granted him five-year options to purchase 50,000
shares. These options are exercisable at $0.25 for the first
12,500, $0.45 for the next 12,500, $0.65 for the next 12,500, and
$0.85 for the next 12,500. On May 27, 2004, we granted to Cygni
Capital options to purchase 125,000 shares for prior consulting
services. These options are exercisable at $0.25 for the first
31,250, $0.45 for the next 31,250, $0.65 for the next 31,250, and
$0.85 for the next 31,250. Mr. Bronk is the president of Cygni
Capital. Mr. Knitowski is the owner and manager of Ecewa
Capital.
- On May 18, 2004, we repaid $19,295 of loans made to us by Rigel
Funds Management, Ltd., of which Mr. Bronk is a director.
These transactions may not be on terms as beneficial as could be
obtained from unrelated parties. In addition, the related parties may
have interests that differ from those of other investors.
* The Loss of the Services of Current Management would have a Material
Negative Impact on Our Operations. We will be dependent on Matthew
S. Kerper, our CEO and President, and Bryan W. Kenyon, our CFO, as
our current management for the foreseeable future. The loss of the
services of any member of this management group could have a material
adverse effect on our operations and prospects. We have not obtained
"key man" insurance policies on any member of management, including
these individuals.
* We will be in Competition with a Number of Other Companies, Most of
which are Better Financed than is Our Company. The dominant player
in the prepaid stored value space is Next Estate Communications,
America's leading provider of prepaid MasterCard cards. Next Estate
boasts strong venture backing from numerous companies and currently
sells products in over 35,000 retail stores nationally. Austin,
Texas, based NetSpend Corporation is also a well-capitalized leader
within prepaid stored value platforms, offering a turnkey, retail
based stored value solution to the check cashing industry. NetSpend
is buoyed by venture funding from a broad cross-section of technology
and banking firms. ITC Financial Services specializes in electronic
payment solutions for a multitude of business pursuits, primarily
focusing on retail based stored value and payroll products. ITCFS
was founded by Cam Lanier III and funded by ITC holdings with an
initial equity infusion of $54 million dollars in September 2003.
WildCard Systems is another stored value provider with access to
large amounts of capital and an established track record as the
originator of Visa Buxx. Backed by GE Technology Finance and other
private equity stakeholders, the company has developed a secure
technology and services platform. This platform supports client
configurable
29
program management, cardholder account management, card distribution
and other essential services for banks and business partners on a
global scale. Each of these companies has a longer operating history
and is better financed than our company. There is no assurance that
as a startup company, we will be able to compete successfully with
these other entities or that we will be able to capture a significant
segment of the market share from these competitors.
* All of Our Outstanding Shares are Classified as Restricted Securities
or May Require Registration for Resale. In connection with the
organization of our company we issued 550,000 shares without
registration and at a time when our company would have been
designated as a blank-check company. In May 2004 we issued an
additional 3,300,000 shares to management, consultants, and others.
In November 2004 we completed our unregistered private offering in
which we sold 2,000,000 shares. Management believes that the holders
of the 550,000 shares issued in the organization of our company would
not qualify to rely on Section 4(1) of the Securities Act or Rule 144
promulgated by the SEC under the Act. Therefore, these shares may
only be sold through a registration statement filed by us registering
the resale of these shares. In addition, management believes that
the balance of the outstanding shares would not qualify for resale
under Rule 144 until at least May 2005. Thus, it is unlikely that a
market for our stock could be established until at least May 2005, or
until we file a registration statement to register the resale of our
outstanding shares. Management has agreed to file a registration
statement to register all of the outstanding shares, but there is no
assurance how long the registration process would take, or if the
registration statement would be declared effective for use by these
persons.
* There is No Public Market for the Common Stock which significantly
Limits the ability to Sell our Outstanding Shares. There is
currently no public market for our common stock and no assurance that
one will develop in the future. Management intends to apply for
quotation of our common stock in the "Pink Sheets" or the OTC
Bulletin Board in the future, but there is no assurance such
application process will be successful. Prior to making application
to the Bulletin Board, we would be required to file a registration
statement with the SEC and become subject to the reporting
requirements of the Exchange Act. The process of registering the
shares and making application for trading is extremely
time-consuming. The process could take several months. And, there
is no assurance that a registration statement would be declared
effective by the SEC or that an application for trading would be
approved.
* Our Shares are Designated as Penny Stock which could Decrease the
Liquidity of the Shares in any future Public Market. Our outstanding
shares are designated as "penny stock" and thus may be more illiquid,
if a market for the stock is established in the future. The SEC has
adopted rules (Rules 15g-2 through l5g-6 of the Securities Exchange
Act of 1934) which regulate broker-dealer practices in connection
with transactions in
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"penny stocks." Penny stocks generally are any non-NASDAQ equity
securities with a price of less than $5.00, subject to certain
exceptions. The penny stock rules require a broker-dealer to deliver
a standardized risk disclosure document prepared by the SEC, to
provide the customer with current bid and offer quotations for the
penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, monthly account statements showing
the market value of each penny stock held in the customers account,
to make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity, if
any, in the secondary market for a stock that becomes subject to the
penny stock rules. Since our shares are subject to the penny stock
rules, shareholders or investors may find it more difficult to sell
their securities. The market liquidity for our shares could be
severely and adversely affected by limiting the ability of
broker-dealers to sell the shares.
* Any Market which Develops for our Shares would likely be a Volatile
One. The over-the-counter market for securities, such as the one
which could develop for our common stock, has historically
experienced extreme price and volume fluctuations during certain
periods. These broad market fluctuations and other factors, such as
acceptance of our products and services, and trends in the stored
value industry, and the investment markets generally, as well as
economic conditions and quarterly variations in our results of
operations, may adversely affect the market price of our common
stock, if a public trading market should develop in the future.
* Our Board of Directors can, without Stockholder Approval, Cause
Preferred Stock to be Issued on Terms that Adversely Affect Common
Stockholders. Under our articles of incorporation our board of
directors is authorized to issue up to 20,000,000 shares of preferred
stock, none of which are issued and outstanding as of the date of
this report, and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares
without any further vote or action by our stockholders. If the board
causes any preferred stock to be issued, the rights of the holders of
our common stock could be adversely affected. The board's ability to
determine the terms of preferred stock and to cause its issuance,
while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of
our outstanding voting stock. Preferred shares issued by the board
of directors could include voting rights, or even super voting
rights, which could shift the ability to control the company to the
holders of the preferred stock. Preferred shares could also have
conversion rights into shares of common stock at a discount to the
market price of the common stock which could negatively affect the
market for our common stock. In addition, preferred shares would
have preference in the event of liquidation of the corporation, which
means that the holders of preferred shares would be entitled to
receive the net assets of the corporation
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distributed in liquidation before the common stock holders receive
any distribution of the liquidated assets. We have no current plans
to issue any shares of preferred stock.
* We have not Paid, and do not Intend to Pay, Dividends and therefore,
unless our Common Stock Appreciates in Value, our Investors may not
Benefit from Holding our Common Stock. We have not paid any cash
dividends since inception. We do not anticipate paying any cash
dividends in the foreseeable future. As a result, our investors will
not be able to benefit from owning our common stock unless the market
price of our common stock becomes greater than the price paid for the
stock by these investors.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of disclosure and controls and procedure
With the participation of management our chief executive officer and
chief financial officer have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this quarterly report.
Based on that evaluation the chief executive officer and chief financial
officer have concluded that our disclosure controls and procedures are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
the SEC's rules and forms, and are operating in an effective manner.
Changes in internal controls
There were no changes in our internal control over financial
reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
It should be noted that any system of controls, however well designed
and operated, can provide only reasonable and not absolute assurance that
the objectives of the system will be met. In addition, the design of any
control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent
limitations of control systems, there is only reasonable assurance that
our controls will succeed in achieving their stated goals under all
potential future conditions.
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PART II
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
During the quarter ended June 30, 2004, the following securities were
sold by Trycera without registering the securities under the Securities
Act, except as otherwise previously reported:
* On July 26, 2004, we granted a total of 50,000 options to our new
channel manager, Alex McClure. These five-year options were granted
under our 2004 Stock Option/Stock Issuance Plan. The options are
exercisable at $.75 per share. The options were granted without
registration under the Securities Act by reason of the exemption from
registration afforded by the provisions of Section 4(6) and/or
Section 4(2) thereof, and Rule 506 promulgated thereunder, as a
transaction by an issuer not involving any public offering. Mr. McClure
acknowledged he had access to the books and records, including filings
made by us with the SEC. Mr. McClure delivered appropriate investment
representations with respect to the grant and consented to the imposition
of restrictive legends upon the certificate representing the option.
He represented that he had not entered into the transaction with us as a
result of or subsequent to any advertisement, article, notice, or other
communication published in any newspaper, magazine, or similar media
or broadcast on television or radio, or presented at any seminar or
meeting. He represented that he had been afforded the opportunity to
ask questions of our management and to receive answers concerning the
terms and conditions of the option grants. No underwriting discounts
or commissions were paid in connection with the transaction.
* On September 14, 2004, we granted a total of 50,000 options to our
new director, Randy Cherkas. These five-year options were granted
under our 2004 Stock Option/Stock Issuance Plan. The options are
exercisable at $.75 per share. The options were granted without
registration under the Securities Act by reason of the exemption from
registration afforded by the provisions of Section 4(6) and/or
Section 4(2) thereof, and Rule 506 promulgated thereunder, as a
transaction by an issuer not involving any public offering.
Mr. Cherkas represented that he was an accredited investor as defined in
Rule 501 of Regulation D at the time of the grant. Mr. Cherkas
delivered appropriate investment representations with respect to the
grant and consented to the imposition of restrictive legends upon the
certificate representing the option. He represented that he had not
entered into the transaction with us as a result of or subsequent to
any advertisement, article, notice, or other communication published
in any newspaper, magazine, or similar media or broadcast on
television or radio, or presented at any seminar or meeting. He
represented that he had been afforded the opportunity to ask
questions of our management
33
and to receive answers concerning the terms and conditions of the
option grants. No underwriting discounts or commissions were paid in
connection with the transaction.
* On June 7, 2004, we commenced a non-public offering of up to
2,000,000 shares of our common stock at $0.75 per share for maximum
gross proceeds of $1,500,000. As reported in our current report on
Form 8-K filed with the SEC on November 8, 2004, we had sold
1,832,168 shares through the date of that filing. Since that date
we have sold the final 167,832 shares to five accredited investors and
two non-accredited investors. The offering is now closed after being
completely sold. The shares were offered and sold without registration
under the Securities Act by reason of the exemption from registration
afforded by the provisions of Section 4(2) thereof, and Rule 506
promulgated thereunder, as a transaction by an issuer not involving any
public offering. Each of the investors was furnished with a confidential
private offering term sheet which contained the same type of information
as would be contained in a prospectus. Each investor delivered appropriate
investment representations with respect to this issuance and consented
to the imposition of restrictive legends upon the stock certificates
evidencing the shares. Each investor represented that he had not
entered into the transaction with us as a result of or subsequent to
any advertisement, article, notice, or other communication published
in any newspaper, magazine, or similar media or broadcast on television
or radio, or presented at any seminar or meeting. Each investor
represented that he had been afforded the opportunity to ask questions
of our management and to receive answers concerning the terms and
conditions of the sale of the shares. No underwriting discounts or
commissions were paid in connection with the sales of the shares.
ITEM 6. EXHIBITS
(a) Exhibits.
31.1 Rule 13a-14(a) Certification by Principal Executive Officer
31.2 Rule 13a-14(a) Certification by Chief Financial Officer
32.1 Section 1350 Certification of Principal Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
Trycera Financial, Inc.
Date: November 15, 2004 By: /s/ Matthew S. Kerper
Matthew S. Kerper, President
(Principal Executive Officer)
Date: November 15, 2004 By: /s/ Bryan Kenyon
Bryan Kenyon, Treasurer and
Chief Financial Officer
35