UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A-1
(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 . . 16
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 6. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
EXPLANATORY NOTE
This quarterly report on Form 10-QSB/A-1 is being filed to revise the
financial statements and amend the section on Management's Discussion and
Analysis or Plan of Operation. Pursuant to Rule 12b-15 under the
Securities Exchange Act of 1934, as amended, only Items 1 and 2 of Part I
and Exhibits 31.1 and 31.2 are included in this amendment.
2
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 550,000 Shares
Issued and Outstanding, Respectively 5,481 550
Additional Paid In Capital 1,222,532 10,450
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)
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.
Within the Company's business, there are two key events that allow it
to recognize revenue. The first event is when a consumer purchases a
catalog shopping card, and the second event is when a consumer
purchases a prepaid or stored value product. With regard to the
Company's catalog shopping business, it fulfills the first aspect of
SAB 104 when a customer signs and returns one of the Company's
membership offerings with the appropriate payment for membership. The
second aspect of the SAB 104 is met when the Company delivers the
catalog shopping card to the consumer. This takes place when the
Company fulfills the membership agreement by sending the customer an
enrollment package containing the catalog shopping card and a select
number of product catalogs for future order placement. The third and
fourth criteria are satisfied because the membership price is fixed
and known to the customer and payment for membership is collected in
advance of issuing the membership package. An alternative
justification for criteria four exists by virtue of the fact that the
Company's fulfillment begins only after funds are verified by its
bank, thus collectibility is reasonably assured. In the case of
7
Trycera Financial, Inc.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2004
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
purchases, sales are booked for the entire amount and the offset is to
the accounts receivable, where the Company takes a reserve for bad
debt.
The merchandise portion of the Company's catalog business represents a
portion of the sales that are booked for the catalog shopping line.
In terms of the Signature line, the membership income is based off a
yearly membership fee and accordingly the Company books the entire
amount of sales into a deferred revenue account and on a monthly basis
the Company recognizes one month of revenue for each of twelve months
until the entire membership is realized and satisfied.
With regard to events related to purchases of stored value or prepaid
card products, the Company has sold no such goods at this time. When
products are sold, they will be recognized immediately as the card is
prepaid and funds are assured to have been collected.
The consulting revenue the Company received was billed after
satisfying the customers' requirement, and which follows the criteria
of SAB 104 more specifically relating to the delivery of services
rendered as outlined in criteria (ii).
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. The Company operates under a simple capital
structure. 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.
For the Nine Months Ended 09-30-04
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Income before extraordinary item
and accounting change ($393,731)
Less: Preferred stock dividends (0)
---------
Basic EPS
Income available to common
stockholders ($393,731) 2,909,689 ($0.14)
========= ========= ======
8
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.
9
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.
10
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.
11
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 $ - $ -
========= =========
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
In September 2000, the FASB issued SFAS 140, which revises the standards
set forth in SFAS 125 for the accounting of securitizations and other
transfers of financial assets and collateral. SFAS 140 modifies the criteria
for determining whether the transferor has relinquished control of assets and,
therefore, whether the transfer may be accounted for as a sale. The provisions
of SFAS 140 are effective for transfers and servicing of financial assets and
extinguishments of liabilities after March 31, 2001. The Company cites
paragraph 16 of SFAS 140 "Extinguishment of Liabilities." The adoption of
SFAS No. 140 will not have an impact on the Company's financial statements.
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.
The effect of the reverse split was the resulted in the 2:1 division of
shares in which the remainder was subsequently booked into additional paid
in capital
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.
12
Trycera Financial, Inc.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2004
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.
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
========= =======
13
Trycera Financial, Inc.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2004
NOTE 7 - STOCK OPTION PLAN (continued)
The Company has elected to use Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." In accordance with
SFAS No. 123, $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
For our assumptions within the Black-Scholes model, we obtained the
interest rate for the calculation from the five-year Treasury Bill found
at Bloomberg.com. We do not issue dividends so this had no practical use
in our calculation. With no trading history due to limited marketability
of our shares, we did not assume volatility in our calculations and we
used the Average Expected Term (Years to Exercise) as 1.
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
The estimated fair value of the common stock was determined using the
Company's net assets per common share: ($995,984/5,481,234) to equal a fair
market value of $.18 per share. The grant date of May 26, 2004, confirmed a
prior agreement earlier in May 2004 to grant these options to the individuals.
This grant preceeded the determination of the offering price or any sales
under the Company's first offering at $.75 per share. Management believed
that the amount of the option price was appropriate at the time, since it did
not have enough information to determine how the initial price of $.75 would
be received. The Company's private placement offering did not commence until
third quarter of 2004. Management believes the option price was fair based
upon the fair value of the common stock at the time of the grant.
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.
14
Trycera Financial, Inc.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2004
NOTE 8 - CONVERTIBLE DEBENTURE (continued)
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.
15
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.
Currently, we have not produced material amounts of revenue to
develeop a trend or trends. As such we believe at this time, it is
inappropriate and uncertain to discuss the possible impact of any
short-term or long-term operational revenue trends. Alternatively, we can
discuss that absent revenue due to the new nature of our growth and
development, we have certain financial commitments in the form of a
property sublease. It is agreed that the minimal obligation will not
materially change our financial position or have an adverse impact on our
credit rating, earnings or cash flow.
Aside of a long-term inability to produce revenue and offset ongoing
costs including payroll, banking, marketing and advertising expenses, the
loss of our membership service provider (MSP) status with MasterCard could
impair our ability to continue to engage in business and stored value
transactions that are an integral component of our current operations.
Such a loss of the membership service could render our card commercially
impractical, as cardholders would be unable to utilize the products for
basic commerce and purchase transactions. In order to safeguard the
MasterCard relationship, we partner with MasterCard to conduct quarterly
reviews of the MasterCard authorized procedures that verify our compliance
with the bylaws and guidelines as established to participate as a
membership service provider (MSP).
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:
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* 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 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
Trycera Financial is engaged in, or is in the process of developing, in two
areas of focus, the first of which is to develop and implement programs
either internally or for outside customers to market, service, and support
stored value MasterCard and Visa branded debit and ATM cards. Our second
core function is to develop and implement programs to market and service
catalog shopping cards for our customers.
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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 encoded with certain
consumer information and pre-loaded with a particular monetary 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,
travel cards that can be used in the same way as travelers' checks, 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. We intend to concentrate our efforts on developing customized
programs and brands for clients who want to distribute prepaid cards
through direct, non-retail channels or developing our own prepaid card
programs which can likewise be marketed through direct, non-retail channels
such as direct mail advertising or online advertising. We have developed
and are marketing one prepaid card with our own branding and intend to
launce a second card with our own brand during first quarter 2005.
Although we have marketed our services to outside customers, we have not
yet engaged any outside customers.
Our services consist of the development of stored value products and
include brand creation, consumer fees structuring, securing bank approvals,
marketing materials production, and web site creation. Some of these
services are performed by us in-house and some are outsourced to others.
We will not provide card processing services which generally consist of
set-up and maintenance of the card and cardholder funds, transaction
authorization, processing, clearing and settlement of transactions,
cardholder dispute resolution, regulatory compliance, security and fraud
control, and activity reporting. These services will be performed for us
by contract with a processing company. The prepaid cards will be issued by
a financial institution authorized to issue Visa or MasterCards.
Our first prepaid card product, the Trycera Financial MasterCard, was
launched in February 2005, and is being marketed by us through online
channels. This card was developed internally by us and not for an outside
customer. Our second card, which we intend to launch during first quarter
2005, is the Mi Dinero Y Mis Suenos prepaid MasterCard, which will be a
stored valued MasterCard that will be marketed to the Hispanic community
online, through retail, and through consumer direct advertising. The Mi
Dinero product card website has been built, marketing materials, such as
posters, sticker and tri-fold handouts are in production, and the actual
cards will be ready for sale before the end of the first quarter.
We are also marketing our services to prospective customers which are
located through leads generated from trade shows and conferences or from
personal contacts of management, or through contacts made by management to
selected companies. However, we have not entered into any arrangements or
agreements with these potential customers for our services.
We have entered into an exclusive, renewable service agreement with
Galileo Processing, Inc. in which they have agreed to process all of our
authorization and settlement transactions for
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our prepaid cards and to handle payments and adjustments to the cards.
They will also maintain cardholder information, provide customer service,
implement fraud control processes and procedures, and provide related
services in connection with the prepaid cards. We are obligated to pay a
minimum monthly fee for these services which is credited against the fees
payable to them by us for each processing transaction. During the term of
the agreement, Galileo is required to maintain in effect errors and omissions
insurance in the aggregate amount of $2,000,000. The agreement may be
terminated by either party if the other party becomes insolvent, if any of
the representations or warranties made by the other party in the agreement
are inaccurate, if new legal requirements are imposed on cards, if the
issuing bank ceases to issue the pre-paid cards, or if Galileo loses its
sponsorship to MasterCard as a certified third-party processor. In addition,
Galileo may terminate the agreement if we fail to make our monthly minimum
our customer accounts.
In connection with our processing agreement with Galileo, we have
entered into a non-exclusive agreement with First Federal Savings Bank of
Midwest, doing business as Meta Payment Systems, to issue to our customers
the stored value Visa or MasterCards marketed by us. This agreement
permits us to offer the prepaid cards which are issued by the bank. The
design of the prepaid cards will be developed by us but will be subject to
the bank's prior written approval. In addition to issuing the prepaid
cards, the bank will be responsible for holding and retaining cardholder
funds until the funds are used by the cardholders. The bank is also
responsible for maintaining at its own expense a principal license with
MasterCard, Visa, or any other card network system for which it issues
prepaid cards. We have agreed to pay the bank a monthly minimum fee or a
fee based on the monthly gross dollar value of card transactions, as well
as transaction fees for PIN-based or ATM transactions. In return, the bank
will distribute to us a percentage of the transaction fees collected from
the card holders. The agreement requires us to maintain appropriate
comprehensive general liability insurance, errors and omissions, and
employee theft and dishonesty insurance policies with a limit of not less
than $1,000,000 per occurrence. Either party may terminate the agreement
for cause.
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. Currently, we are
seeking distributors for our products and have secured a contract from one
distributor, MRG Communications. MRG Communications has agreed to represent
our prepaid products to consumers by distributing product to retail
channels that are represented by convenience stores and small chain grocery
outlets with less than 100 locations nationwide. 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
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stored value product, we begin a service relationship with that consumer where
we ensure the cardholders account is adequately managed.
We manage our customer accounts through a combination of daily
electronic reporting and transaction monitoring, reviewing the card
spending patterns, load volumes and spending frequency reports. We
maintain a fully redundant dataset on a daily basis to ensure the storage
and availability of data retrieval. Moreover, these reports outline fraud
scenarios and report suspicious activity such as high dollar load
transactions. In addition, we are beginning to subcontract personnel from
our processor to review fraud transactions and cross check our internal
controls and management systems to be certain that the maintenance of the
cardholder accounts continues to be administered to the documented
guidelines. As the number of outstanding cards increases, we anticipate
that these functions would be outsourced to our processor.
Catalog Shopping Cards.
With respect to our second core business, we own, distribute, and
service two catalog shopping card portfolios under the brand names of
Signature Credit and Tru Platinum. Both of our catalog shopping cards
offer consumers an opportunity to buy goods and services out of designated
catalogs without paying in full at the time of purchase. Consumers receive
various catalogs from which they may elect to purchase products, or they
may shop from one of our two web sites. In our catalog card sales cycle, a
cardholder will purchase merchandise from a catalog by completing the
required order forms and mailing in the down payment. This initial deposit
covers the cost of goods, while future payments pay down the outstanding
receivable balances for the catalog shopping cardholder and provide a
profit source for our company. 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. These cards are marketed directly to
consumers via direct mail and will be offered as a cross promotional
offering to customers of our stored value products. We manage the
marketing and design, customer service, and billing internally while we
outsource the direct mail advertising and the fulfillment of products
purchased by cardholders. In the first quarter of 2005, we plan to launch
multiple direct mail campaigns to expand the reach of our catalog shopping
card network and grow the size of our customer base.
We generated $1,114 in 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. To date we have purchased mail lists
from individual list brokers who specifically target niche market segments.
We have then mailed customized offers through the US Postal Service to each
individual on the list supplied by the brokers. Those individuals who
favorably respond to the offers are then shipped a personalized catalog
shopping card. In addition to the direct mail offerings, we have also
developed and launched a website on the world wide web that specifically
markets the catalog shopping card and the catalog products. The website is
not currently marketed through postings on web traffic sites such as
Google, Yahoo, or Excite. In fulfilling the orders associated with the
revenues, we have spent approximately $20,000 to fulfill the membership
acceptances and purchase orders through our mailings. In addition, we
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have spent an additional $74,000 in the direct mail marketing and online
website placement for the support of the memberships.
Under the current catalog shopping card operations, the target market
consists of consumers with below average credit ratings. Upon acceptance
of a catalog shopping card offer from us, 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. The membership acceptance fees vary by the
specifics of a given offer, but typically range from $49 to $79. In
addition, the individual may elect to pay an expedited delivery fee, which
is above the cost of the membership acceptance fee and is always offered at
$15.
As a feature of our catalog shopping products, we do not charge any
interest rates to our customers on purchases from either the Tru Platinum
Card or the Signature Credit Classic Advantage Card. Any outstanding
balances carried forward by our cardholders are done so on a principal only
basis.
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.
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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 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
22
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.
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
23
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.
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
24
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 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,
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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-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.
26
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.
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 third 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. Revenue in the third quarter
trailed the revenue earned during the prior six months due to a one-time
non-recurring consulting agreement executed in May of 2004. The value of
the engagement, $14,000, represented all of the revenue generated in the
second quarter, while no revenue was generated in the first quarter.
During the third quarter we continued to execute our planned business
strategy and focus on growing our revenue through our prepaid product and
catalog card programs. 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 in 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.
27
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 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.
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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 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.
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Employees
We added a key employee on October 20, 2004. The position, Director
of Programs and Compliance, is responsible for the ongoing relationships of
management 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.
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:
* 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 and Expenses of New Product
Development for our Prepaid and Stored Value MasterCard Products and
Catalog Shopping Cards. Since inception we generated total revenues
of only $15,144, while incurring a net loss of ($445,450). Also,
future growth will require significant expenditures for expansion,
marketing, research and development as we expand our offering of
stored value products and catalog shopping cards. 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. Potential
investors in the shares in this offering will likely suffer
significant dilution if we are able to raise additional money through
a future equity offering. In addition, we have no definitive
marketing agreements or arrangements for
30
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.
* Because we have Not Performed any Market Studies or Obtained any
Independent Market Study of our Products or Services, 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. Rather than conducting extensive internal
or independent marketing studies relating to these products, we will
be relying upon the prior experience of our management in this
industry as to the anticipated market acceptance of our products and
services. Because we have conducted no formal marketing studies or
other similar analysis, there is no assurance that these services and
products will be accepted in the marketplace. Since commencing
operations in May 2004, we have generated only $15,114 in gross
revenue from these operations through September 30, 2004, and have
incurred net losses of ($445,450) during the same period. We have not
allocated any funds to performing any in-house or independent
marketing studies to confirm or estimate market acceptance of our
proposed services and products.
* If Persons Using our Catalog Shopping Cards Fail to Pay the Balance on
their Cards, we may Encounter a Bad Debt Write-off which could
Adversely Affect our Business. Although our catalog shopping card
business does not extend credit, it does provide a spending limit to
all active cardholders. Our consumers are provided catalog shopping
cards which allow them to purchase products through our website or
associated catalogs. Each purchase requires the consumer to pay a 25
percent down payment as a deposit, which covers the cost of the
merchandise. However, there is no certainty that the cardholder will
pay the remaining receivable balance, and thus we are at risk of
needing to write down accounts receivable that cannot be collected.
* As we Attempt to Acquire New Business Ventures or Products, we may
Incur Significant Costs in the Process and may Allocate Significant
Time from our Core Business, all of which Could Adversely Affect our
Operating Results and Stock Price. As a part of our overall business
plan, we intend to seek potential acquisition targets. As we do so,
we will incur legal, accounting, and other costs associated with
performing our due diligence on the proposed acquisition. If the
acquisition is not completed, we may not be able to recoup these
expenses from the target venture. Even if the acquisition is
successful, the costs associated with the transaction could be
significant and could cause funds to be reallocated from our core
business to satisfy these expenses. Also, management may devote
significant time to a proposed acquisition or new business venture
which would distract the individual from his or her focus on
developing our core business and which could adversely affect our
operating results and stock price. The integration of divergent
business operations may require significant time commitment on
management which may also distract management from operating our core
business. The business activities of these acquisitions may also
involve risks which we are unable to predict at this time. The
results of operations of any specific entity may not necessarily
31
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 Which May Not Have
Been on Terms as Favorable as with Unrelated Parties. 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
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
32
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. We may
engage in additional related party transactions in the future on less
favorable terms than those offered by unrelated parties. These
related party transactions would favor the interests of the related
parties over those of the other stockholders, including persons who
purchase shares in this offering.
* 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.
* Because we are in Competition with a Number of Other Companies, Most
of Which are Better Financed Than is Our Company, There is no
Assurance we will be able to Compete Successfully with These Companies
which could Adversely Affect Our Business. 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 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
33
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.
* 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 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.
* Because our Shares will be Designated as Penny Stock, the Market Price
of our Stock will likely be Adversely Affected. 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 "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. These penny stock regulations, and the restrictions
imposed on resales of penny stocks by these regulations, will likely
adversely affect our stock price.
* If a Public Trading Market for our Common Stock Develops, it will
likely be a Volatile One and will likely Result in Higher Spreads in
Stock Prices. We intend to seek quotation of our stock on the OTC
Bulletin Board, which is part of the over-the-counter market. The
over-the-counter market for securities has historically experienced
extreme price and volume fluctuations during certain periods,
especially during the initial period after the stock is approved for
quotation. 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
34
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. In addition, the spreads on stock traded through
the over-the-counter market are generally unregulated on the
over-the-counter market and higher than on the NASDAQ or the national
exchanges, which means that the price at which shares could be purchased
by investors on the over-the-counter market compared to the price at
which they could be subsequently sold would be greater than on these
exchanges. This is especially true of stocks traded in the over-the-counter
market during the period immediately after the stock is approved for
quotation through the over-the-counter quotation service such as the OTC
Bulletin Board. Significant spreads between the bid and asked prices of
the stock could continue until a sufficient volume of trading is reached
and the stock is quoted by a significant number of market makers. We
cannot predict when, if ever, the trading volume will be sufficient to
significantly reduce this spread, or if we will ever have sufficient
market makers to affect this spread. These higher spreads could
adversely affect investors who purchase the shares at the higher price
at which the broker sells the shares, but subsequently sell the shares
at the lower bid prices quoted by the brokers. Unless the bid price
for the stock increases and exceeds the price paid for the shares by
the investor, plus brokerage commissions or charges, the investor
could lose money on the sale. For higher spreads such as those on
over-the-counter stocks, this is likely a much greater percentage of
the price of the stock than for exchange listed stocks. There is no
assurance that at the time the investor wishes to sell the shares, the
bid price will have sufficiently increased to provide a profit on the
sale.
* 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 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.
35
* 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 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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this amended report to be signed
on its behalf by the undersigned hereunto duly authorized.
Trycera Financial, Inc.
Date: February 25, 2005 By: /s/ Matthew S. Kerper
Matthew S. Kerper, President
(Principal Executive Officer)
Date: February 25, 2005 By: /s/ Bryan Kenyon
Bryan Kenyon, Chief Financial
Officer (Principal Financial
and Accounting Officer)
36