UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended September 30, 2004.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required) for the transition period from ____________________ to
___________________.
Commission file number: 0-32455
TRICELL, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0504530
--------- ------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
39 Uttoxeter Road, Longton, Stoke-on-Trent, ST3 1NT United Kingdom
-------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
011 44 1782 339 130
---------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of Registrant's common stock, par value $0.001
("Common Stock") as of November 12, 2004 was 123,295,877.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements.........................................3
Item 2. Management's Discussion And Analysis of Financial Condition
and Results of Operations....................................4
Item 3. Quantitative and Qualitative Disclosures About Market Risk..10
Item 4. Controls and Procedures.....................................10
PART II - OTHER INFORMATION...................................................10
Item 1. Legal Proceedings...........................................10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.10
Item 6. Exhibits and Reports on Form 8-K............................10
INDEX TO EXHIBITS.............................................................12
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
TRICELL, INC.
--------------
CONDENSED CONSOLIDATED BALANCE SHEETS
---------------------------------------
September 30, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $196,347 $183,241
VAT receivable, net 21,713 1,371,634
Notes and loans receivable 4,643,049 4,963,519
Accounts receivable, net 126,575 125,262
Receivable from shareholder - 271,123
Prepaid expenses and other current assets 400,162 116,344
------------- ------------
Total current assets 5,387,846 7,031,123
MACHINERY AND EQUIPMENT, NET 243,218 473,757
INTELLECTUAL PROPERTY, NET 76,476 -
------------- ------------
TOTAL ASSETS $5,707,540 $7,504,880
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Income taxes payable $2,806,773 $2,890,939
Accounts payable and accrued expenses 1,735,469 962,011
VAT payable - 190,143
Other current liabilities 64,505 -
Current portion of long-term debt 18,062 24,191
------------- ------------
Total current liabilities 4,624,809 4,067,284
LONG-TERM DEBT 161,946 221,441
C0MMITMENT AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock 93,753 93,500
Additional paid-in capital 314,757 -
Retained earnings 271,210 2,690,254
Accumulated other comprehensive income 477,323 432,401
Deferred compensation (236,258) -
------------- ------------
Total stockholders' equity 920,785 3,216,155
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,707,540 $7,504,880
============= ============
See accompanying notes to condensed consolidated financial statements.
F-1
TRICELL, INC.
-----------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
------------------------------------------------
(Unaudited)
-------------
2004 2003
---------------- -------------
SALES $3,996,543 $10,124,765
COST OF SALES 3,971,499 9,809,726
----------------- -------------
GROSS PROFIT 25,044 315,039
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 681,395 472,553
----------------- -------------
LOSS FROM OPERATIONS (656,351) (157,514)
OTHER EXPENSES:
Interest expense and other financing costs (43,462) (3,923)
----------------- -------------
LOSS BEFORE INCOME TAXES (699,813) (161,437)
INCOME TAX (EXPENSE) BENEFIT (177,368) 31,367
----------------- -------------
NET LOSS $(877,181) $(130,070)
================= =============
LOSS PER SHARE - BASIC AND DILUTED $(0.01) $ -
================= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 93,753,020 82,416,667
================= =============
See accompanying notes to condensed consolidated financial statements.
F-2
TRICELL, INC.
-----------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
----------------------------------------------
(Unaudited)
-------------
2004 2003
------------------ ------------------
SALES $12,772,449 $95,093,502
COST OF SALES 12,468,730 92,026,980
------------------ ------------------
GROSS PROFIT 303,719 3,066,522
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,670,479 2,353,742
------------------ ------------------
INCOME (LOSS) FROM OPERATIONS (2,366,760) 712,780
OTHER EXPENSES:
Interest expense
and other financing costs (155,666) (88,135)
------------------ ------------------
INCOME (LOSS) BEFORE INCOME TAXES (2,522,426) 624,645
INCOME TAX (EXPENSE) BENEFIT 103,382 (204,458)
------------------ ------------------
NET INCOME (LOSS) $(2,419,044) $420,187
================== ==================
EARNING (LOSS) PER SHARE - BASIC AND DILUTED $(0.03) $0.01
================== ==================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 93,707,102 58,138,889
================== ==================
See accompanying notes to condensed consolidated financial statements.
F-3
TRICELL , INC.
-----------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
-----------------------------------------------
(Unaudited)
--------------
2004 2003
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,419,044) $420,187
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 135,735 27,888
Amortization of deferred compensation 78,752
Changes in operating assets and liabilities:
(Increase) decrease in:
VAT receivable 1,382,817 7,970,403
Accounts receivable 18,375 (1,635,274)
Prepaid and other current assets 97,538 (93,039)
Increase (decrease) in:
Accounts payable and accrued expenses 753,901 20,571
Other current liabilities (129,443) -
Income taxes payable (119,591) 204,462
----------------- ----------------
Net Cash Provided By (Used in) Operating Activities (200,960) 6,915,198
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of machinery and equipment - (52,856)
Proceeds from sale of machinery and equipment 144,248 25,893
Cash paid in acquisition of ACL Distribution (136,613) -
Loans to shareholder - (276,584)
Loans to third-parties - (3,227,315)
------------------ -----------------
Net Cash Provided By (Used) in Investing Activities 7,635 (3,530,862)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowing from factor company - (4,862,109)
Repayment of loans to third-party - 644,580
Repayment of loans to shareholder 277,679 -
Repayment of loans from shareholder - (1,650,616)
Repayment of long-term debt (69,350) (1,638,827)
------------------ ------------------
Net Cash Provided by (Used in) Financing Activities 208,329 (7,506,972)
------------------ ------------------
NET INCREASE (DECREASE) IN CASH 15,004 (4,122,636)
EFFECT OF EXCHANGE RATE ON CASH (1,898) 31,132
CASH, BEGINNING OF PERIOD 183,241 4,501,208
------------------ ------------------
CASH, END OF PERIOD $196,347 $409,704
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOWS INFORMATION:
Interest paid during the period $155,860 $88,135
================== ===================
Income taxes paid during the period $ - $ 283,878
================== ===================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
253,020 shares issued for deferred compensation $ 315,010 $ -
================== ===================
See accompanying notes to condensed consolidatedfinancial statements.
F-4
TRICELL, INC.
----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
SEPTEMBER 30, 2004
-------------------
(Unaudited)
-------------
NOTE 1 - BASIS OF PRESENTATION
---------------------
The condensed consolidated balance sheet as of September 30, 2004, the
condensed consolidated statements of operations for the three months
and nine months ended September 30, 2004 and 2003, and the condensed
consolidated statements of cash flows for the nine months ended
September 30, 2004 and 2003 are unaudited. However, in the opinion of
management, all adjustments (which include reclassifications and normal
recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 2004
and for all periods presented, have been made. The results of
operations for the three-month and nine-month period ended September
30, 2004 are not necessarily indicative of the operating results for
the full year.
These condensed consolidated financial statements and notes are
presented in accordance with rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted. It is suggested that
these condensed consolidated financial statements be read in
conjunction with the Company's consolidated financial statements and
notes thereto included in the Company's December 31, 2003 Form 10-K.
PRINCIPLES OF CONSOLIDATION
---------------------------
The condensed consolidated financial statements include the accounts of
Tricell, Inc. (the "Company") and its wholly-owned subsidiaries,
Tricell UK LTD, Tricell International LTD (formerly Tricell Limited),
and Tricell Distribution Limited. All significant intercompany balances
and transactions have been eliminated.
REPORTING PERIOD
-----------------
As further explained in Note 2, the acquisition of Tricell UK LTD and
Tricell International LTD on July 21, 2003 was accounted for as a
reverse acquisition. Tricell UK LTD and Tricell International LTD were
deemed to be the accounting acquirers and the Company was deemed the
legal acquirer. The accompanying condensed consolidated financial
statements for the three months and nine months ended September 30,
2004 depict the results of operations and cash flows of Tricell, Inc.
and all subsidiaries. The accompanying condensed consolidated financial
statements for the three months and nine months ended September 30,
2003 depict the results of operations and cash flows of Tricell UK LTD
and Tricell International LTD only.
F-5
TRICELL, INC.
----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
SEPTEMBER 30, 2004
-------------------
(Unaudited)
-------------
NOTE 2 - ACQUISITIONS
-------------
ACQUISTIONS OF TRICELL UK LTD AND TRICELL INTERNATIONAL LTD
------------------------------------------------------------
On July 21, 2003, Tricell, Inc., formally 4ForGolf, Inc., executed a
Stock Exchange Agreement with Tricell UK LTD and Tricell Limited (which
subsequently changed its name to Tricell International LTD on March 29,
2004). Pursuant to the Agreement, the Company acquired all of the
issued and outstanding capital stock of Tricell UK LTD and Tricell
International LTD, in aggregate, in exchange for 47,500,000
post-forward stock split shares of the Company's common stock. As a
result of the Agreement, Tricell UK LTD and Tricell International LTD
became wholly owned subsidiaries of the Company, and their former
shareholders became the collective owners of 51% of the Company.
Prior to the acquisitions, the Company was a non-operating entity, with
minimal net assets (approximately $54,000 at June 30, 2003). As a
result of Tricell UK LTD and Tricell International LTD shareholders
owning the majority of the stock of the combined company, and as a
result of the Company having minimal net assets, the acquisition was
accounted for as a "reverse recapitalization" with no goodwill or
intangible assets recognition. Tricell UK LTD and Tricell International
LTD were deemed the accounting acquirers.
PRO-FORMA RESULTS OF OPERATIONS
--------------------------------
No pro-forma results of operations is provided as the results of
operations for Tricell, Inc., the accounting acquiree, for the nine
months ended June 30, 2003 were not material. Tricell, Inc.'s net loss
for the nine months ended September 30, 2003 was approximately $37,000.
ACQUISTION OF ACL DISTRIBUTION LIMITED AND FORMATION OF TRICELL
---------------------------------------------------------------
DISTRIBUTION LIMITED
--------------------
On February 9, 2004, the Company purchased certain assets of ACL
Distribution Limited, a United Kingdom limited partnership, for a total
consideration of approximately $139,000.
The following table sets forth the preliminary allocation of the
purchase price of ACL's tangible and intangible assets acquired:
Intellectual property $ 92,425
Computer equipment 18,485
Furniture and fixtures 9,237
Accounts receivable 18,485
Other 6
-----------------
Total $ 138,638
=================
F-6
TRICELL, INC.
----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
SEPTEMBER 30, 2004
-------------------
(Unaudited)
-------------
The ACL assets have been contributed to and form the basis of a new
wholly-owned subsidiary, Tricell Distribution Limited, incorporated in
the United Kingdom on November 14, 2003 as Yulestar Limited. Its name
was changed to Tricell Distribution Limited on January 20, 2004.
On February 19, 2004, the Company issued 253,020 shares of restricted
common stock to former management of Tricell Distribution Limited to
secure their services. Those employees became employees of the Company,
with 2-year employment contracts. The shares were valued at the closing
price of the Company's common stock on that date, less a 25% discount
for restriction, for a total of $315,010. This amount has been recorded
as deferred compensation, and is being amortized over 2 years.
NOTE 3 - NOTES AND LOANS RECEIVABLE
---------------------------
On May 21, 2003, the Company entered into a loan facility agreement
with a third party, whereas the Company was to lend up to $3,470,000 to
the third party. The loan bears interest at 2% above the Base Rate of
Barclays Bank plc and was due on October 31, 2003. The facility was
subsequently increased to up to $4,383,000 and the maturity was
extended to December 31, 2003.
On December 5, 2003, the maturity of the loan was further extended to
April 30, 2004.
The loan provides for an additional fee of approximately $409,000 to be
collected at maturity. This amount, along with accrued interest on the
loan of $77,194, was included in the December 31, 2003 statement of
operations as interest income.
As of March 31, 2004, the balance of the loan (including accrued
interest and fees, as discussed above) was $4,712,202. On April 14,
2004, approximately $3,735,000 was to have been repaid. The debtor made
representation and gave written notice that they would pay the above
balance via a wire transfer. The transfer was never consummated and
upon discovery of this fact, the Company took action to recover and
secured its position with a security agreement on equipment. A portion
of the receivable (approximately $903,700) was received in September of
2004. Management believes that the balance is fully collectible and
accordingly, no reserve has been provided.
NOTE 4- COMMITMENTS AND CONTINGENCIES
-------------------------------
In the ordinary course of business, the Company filed monthly claims
for refund of VAT (Value-Added-Tax) of approximately $14,230,000 for
November 2002 through February 2003. The VAT authorities determined
that $1,650,000 of this VAT was associated with particular transactions
involved in "Carousel" and/or "Missing Trader" fraud and therefore, the
refund of the VAT was denied. The Company referred the matter to the
Tribunal which upon review concluded that there was no wrongdoing by
the Company, however, they concluded that these transactions had no
economic substance, since the VAT had not been previously paid by a
trader up the supply chain, and therefore as the VAT was not held by
the VAT authorities, no refund was available.
While the Company continues to seek recovery of this VAT, based upon
the Tribunal findings, recovery of the VAT associated with these
transactions is uncertain and therefore the Company has provided for an
allowance of $942,000 against VAT receivable as of December 31, 2002
and an allowance of $708,000 against VAT receivable as of December 31,
2003.
F-7
TRICELL, INC.
----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
SEPTEMBER 30, 2004
-------------------
(Unaudited)
-------------
NOTE 5 - RELATED PARTY TRANSACTIONS
---------------------------
As of December 31, 2002, the Company owed $1,643,395 to one of its
shareholder. During 2003, the Company made several payments to the
shareholder in repayment of the loan and inadvertently overpaid him,
resulting in a receivable of $303,100 from the shareholder as of March
31, 2004. The loan was repaid during the quarter ended June 30, 2004.
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
---------------------------
Comprehensive income (loss) includes net income (loss) and foreign
currency translation adjustments, which are reported separately on the
consolidated statements of stockholders' equity in the Company Form
10-K.
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
-------------
2004 2003 2004 2003
---------- --------- -------- -------
Net Income (Loss)
$(877,181) $(130,070) $(2,419,044) $420,187
Foreign currency
translation adjustments,
net of tax (1,500) 21,494 44,922 96,767
----------- ----------- ------------ -------
Comprehensive income
(loss) $(878,681) $(108,576) $(2,374,122) $516,954
=========== ========== ============ ========
NOTE 7 - SEGMENT REPORTING
-------------------
The Company has only one reportable segment.
Net sales to customers in excess of 10% of net sales approximated the
following during the three months and nine ended September 30, 2004 and
2003:
3 Months Ended September 30, 9 Months Ended September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
---- ---- ---- ----
35% 46% 14% 17%
33% 36% 14% 11%
20% 10% 11% -
- - 11% -
- - 10% -
Net purchases from vendors in excess of 10% of total purchases
approximated the following during the three months and nine months ended
September 30, 2004 and 2003:
3 Months Ended September 30, 9 Months Ended September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
---- ---- ---- ----
67% 81% 21% 17%
11% 11% 14% 15%
- - 13% -
F-8
TRICELL, INC.
----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
SEPTEMBER 30, 2004
-------------------
(Unaudited)
-------------
NOTE 7 - SEGMENT REPORTING (CONTINUED)
------------------------------
Revenues from the United Kingdom and other countries were as follows
during the three months and nine months ended September 30, 2004 and 2003:
3 Months Ended September 30,
2004 2003
---- ----
UK $1,308,720 $ 773,880
Belgium - 4,691,624
Germany 1,304,223 -
France 1,383,600 1,059,508
Hong Kong - 3,599,753
--------- -----------
Total Other countries 2,687,823 9,350,885
---------- -----------
Total $3,996,543 $10,124,765
========= ===========
9 Months Ended September 30,
2004 2003
---- ----
UK $ 5,224,345 $16,025,673
Republic of Ireland 297,484 1,165,530
Denmark 1,787,653 -
Netherlands 1,348,406 19,783,701
Germany 2,062,255 -
Luxemburg 296,165 -
United Arab Emirates 372,541 -
Belgium - 23,704,943
France 1,383,600 17,189,421
Hong Kong - 15,575,683
Canada - 719,872
Spain - 928,679
----------- -----------
Total Other countries 7,548,104 79,067,829
----------- -----------
Total $12,772,449 $95,093,502
============ ===========
The company has no long-lived assets outside of the United Kingdom.
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In January 2003, the FASB issued Interpretations No. 46, "Consolidation
of Variable Interest Entities". FIN No. 46 addresses consolidation by
business enterprises of variable interest entities (formerly special
purpose entities or "SPEs"). The Company does not have any variable
interest entities as defined by FIN No. 46.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities". This
statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under Statement No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." The
provisions of this statement are effective for all derivatives and
hedging activities entered into after June 30, 2003. The Company does not
expect SFAS No. 149 to have a material effect on its 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 establishes standards on the classification and
measurement of certain instruments with characteristics of both
liabilities and equity. The provisions of SFAS No. 150 are effective for
financial instruments entered into or modified after May 31, 2002 and to
all other instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003. The Company
does not expect SFAS No. 150 to have a material effect on its financial
statements.
F-9
TRICELL, INC.
----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
SEPTEMBER 30, 2004
-------------------
(Unaudited)
-------------
NOTE 9 - PENDING ACQUISITION
--------------------
On October 19, 2004, The Company announced that it had acquired
Discount-Intranet Supply Channel (D-ISC), an online discounted shopping
service for employee and affinity member benefits for a combination of
cash and restricted stock. The agreement provides for $250,000 to be paid
to D-ISC and $14,750,000 to be satisfied by the issue of the Company's
common stock. Such shares shall be issued under Rule 144 and restricted
for a period of one year. The agreement also provides for an additional
consideration of $10,000,000 to be satisfied by the issue of 10,000,000
shares of the Company's common stock, such shares to be issued under Rule
144 and restricted for a period of one year. This additional
consideration is contingent upon D-ISC attaining certain profits level.
As of the date of this filing, the Company has not yet paid the $250,000
to D-ISC and as a result, does not consider the acquisition to be
completed.
F-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Forward-looking Information
This report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. These statements relate to future
events or to our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "should," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue" or the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
There are a number of factors that could cause our actual results to differ
materially from those indicated by such forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, we do not assume
responsibility for the accuracy and completeness of such forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this information statement to conform such statements to
actual results. The foregoing management's discussion and analysis should be
read in conjunction with our financial statements and the notes herein.
Corporate History
As used herein, the terms "Company", "we", "our" or "us" refer to Tricell,
Inc., a Nevada corporation, and its subsidiaries and predecessors, unless the
context indicates otherwise. We were incorporated to engage in an online golf
tee-time reservation service and golfing resource website, which we operated
since our inception. As a result of 4ForGolf's lack of profitability and our
receipt of numerous inquires from entities seeking to merge with us, we decided
to change our operational focus in July, 2003 by executing a Stock Exchange
Agreement ("Agreement") with Tricell UK Limited and Tricell Limited, two United
Kingdom corporations (collectively referred to as "Tricell"). As a result of the
Agreement, Tricell UK Limited and Tricell Limited became our wholly-owned
subsidiaries and the Tricell shareholders became the collective owners of
approximately 51% of our outstanding common stock.
Business Overview
Our operations now consist of supplying and distributing mobile telephones,
telephone accessories and electronic commodities in Europe and Asia. We attempt
to obtain our products at the best prices available and distribute these
products to markets at varying levels of maturity in Europe and Asia. With
regard to distribution of our products, we have been able to vastly improve our
distribution capabilities as a result of new business arrangements we have
cultivated with call centers throughout Europe. These distribution arrangements
allow for improved profitability as we now are acquiring many of our products
from manufacturers directly allowing us to realize lower costs on the products
we sell.
4
We experienced a sharp decline in our revenue and in our trading of mobile
telephones and related accessories in 2004 as compared to 2003, and in 2003 as
compared to 2002 due primarily to a change in the regulatory regime involving
VAT refunds. Specifically, the regime changed to avail any participant in the
purchase and sale of products to liability for any wrongdoing by any upstream
and downstream purchaser. This regime caused a near standstill in our industry.
However, based on recent regulatory developments involving the UK's government
tax authority, HM Customs & Excise, we anticipate that the regulatory regime
involving VAT funds will become more favorable and, subsequently, we have
renewed trading in mid-August and anticipate increasing our trading of mobile
telephones and related accessories in the near future. While although these
regulatory developments did not positively impact our revenues for the quarter
ended September 30, 2004, when we analyzed these in combination with certain of
our operational improvements, discussed below, we decided to renew our trading
in mid-August and anticipate increasing our trading of mobile telephones and
related accessories in the near future. We are of the opinion that revenues will
significantly increase as we accelerate our trading. We are now optimistic that
by the end of the first quarter of 2005, we will return to our 2002 turnover
sales and revenue levels. We expect to see a significant reduction in the number
of competitors in our industry, even as the regulatory regime is clarified
because the majority of competitors have not conducted operations recently, and
are not expected to recommence trading. This expected decrease in competition is
also expected to allow us to regain market share and provide significant growth
opportunities. In addition to the regulatory environment, we are also optimistic
that we will experience increased revenues as we anticipate only 25% of our
former competitors, who have also been at a trading standstill the past two
years, will re-commence trading as a result of the current VAT regulatory
environment.
Our confidence in returning to 2002 operational levels stems from the
continued growth in the market, demand for our services, advantageous regulatory
regime and our improved contacts with manufacturers. This will be and has been
complimented by developing improved relationships with the wireless
manufacturers and the expansion of our integrated logistics services. In
addition, we believe that the revised VAT regulatory environment will decrease
the number of participants in the distribution of our products, which we believe
will consequently and thus, decrease our potential VAT liability.
Tricell's strategy is two fold. First, we seek to grow our current business
through acquisition to deliver diversification in products and geography.
Additionally, we will continue to attempt to identify business development
opportunities in the wireless communications and associated sectors that offer
high revenues and sustain or improve current margins. Additionally, we will be
looking to expand our product offering.
One opportunity we have recently begun pursuing is the maintenance and
handling of retail mobile phone accounts. We entered into a virtual service
agreement that allows us to bill mobile phone customers directly. This will
significantly improve our margins in this market. Although we anticipate
managing 30,000 mobile service accounts, we will only realize revenue on the
accounts upon renewal, which occurs annually. We believe the majority of those
accounts will renew with us, and that each of our new customers will sign up for
our service upon the expiration of their current one-year contract with another
mobile service provider. We estimate this new arrangement will increase
profitability for these services by 22-24%. We are also attempting to expand the
number of accounts we manage.
5
We have established a web-based technical department to assist companies
with the creation and maintenance of their websites. As a result of this
endeavor, we have procured contracts to develop the website for two health
providers, including British Health & Safety Executive, who is partially
responsible, along with the British Health and Safety Commission, for the
regulation of almost all the risks to health and safety arising from work
activity in Britain. While this endeavor is not expected to have a material
impact on our revenues, the uniqueness of the opportunity with the British
government is expected to lead to other similar agreements, as well as
substantial contacts, with other agencies of the British government as well as
with private businesses.
Our strategy for growth and increasing shareholder value includes the
development and expansion of our product and service offerings and geographic
expansion to address the new markets. This is driven by the continuing growth in
handset sales (new and replacement), the growing convergence between voice and
data, the introduction of UMTS and the increasing focus of network operators on
the expansion of their service offering upon proprietary handsets. We also
believe our existing distribution channels are well suited to accommodate our
sale and distribution of many new products. Pursuing new products had thus
become one of our goals.
To deliver our strategy we will seek to:
o Continue to build our relationships with wireless manufacturers,
broadening our portfolio with these manufacturers and expanding
the number of customer to whom we supply;
o Expand the geographic coverage of our operations to cover Eastern
Europe, Asia and North America; and
o Develop and expand our service offering to deliver integrated
logistics services to the handset manufacturers and network
operators, enabling them to more effectively address their
markets, including the distribution, marketing and selling of
airtime services.
We plan to deliver the growth in our business through a combination of
expansion, acquisitions and joint ventures.
On October 19, 2004, The Company announced that it had acquired
Discount Intranet Supply Channel Limited (D-ISC), an online discounted shopping
service for employee and affinity member benefits for a combination of cash and
restricted stock. The agreement provides for $250,000 to be paid to D-ISC and
$14,750,000 to be satisfied by the issue of the Company's common stock. Such
shares shall be issued under Rule 144 and restricted for a period of one year.
The agreement also provides for an additional consideration of $10,000,000 to be
satisfied by the issue of 10,000,000 shares of the Company's common stock, such
shares to be issued under Rule 144 and restricted for a period of one year. This
additional consideration is contingent upon D-ISC attaining certain profits
level.
6
As of the date of this filing, the Company has not yet paid the $250,000 to
D-ISC and as a result, does not consider the acquisition to be completed.
Results of Operations
Three-Month Results of Operations
The following discussion should be read in conjunction with the audited
financial statements and notes thereto included in our annual report on Form
10-K for the fiscal year ended December 31, 2003. Comparisons made between
reporting periods herein are for the three-month period ended September 30, 2004
as compared to the same period in 2003.
We had a net loss of $877,181 for the quarter ended September 30, 2004
as compared to $130,070 for the same quarter in 2003. Our sales revenue
decreased from $10,124,765for the three months ended September 30, 2003 to
$3,996,543 for the same period in 2004. The decrease in sales revenue is due to
our suspension of business activities in the first quarter of 2004 while we
awaited the outcome of a Customs & Excise ruling on the treatment of liability
for Value-Added-Tax ("VAT") upon intra-European transactions.
-------------------------- ------------------- -------------------
2004 2003
-------------------------- ------------------- -------------------
-------------------------- ------------------- -------------------
Net Income (Loss) $ (877,181) $ (130,070)
-------------------------- ------------------- -------------------
-------------------------- ------------------- -------------------
Sales Revenue $ 3,996,543 $ 10,124,765
-------------------------- ------------------- -------------------
-------------------------- ------------------- -------------------
Cost of Sales $3,971,499 $9,809,726
-------------------------- ------------------- -------------------
Additionally, our selling, general and administrative expenses increased to
$681,395 for the three months ended September 30, 2004 from $472,553 for the
same period in 2003. This increase is primarily due to restarting of business
activities. Additional reasons for the increase in selling, general and
administrative expenses from 2003 to 2004 include the weakening of the US Dollar
relative to the British Pound, and an increase in the number of salaried
employees. Also, our cost of sales decreased to $3,971,499 for the three months
ended September 30, 2004 from $9,809,726 for the same period in 2003, with our
consistent margins accounting for this decrease.
--------------------------------------- ----------------- ----------------
Expenses 2004 2003
--------------------------------------- ----------------- ----------------
--------------------------------------- ----------------- ----------------
Selling, General & Administrative Expenses $ 681,395 $ 472,553
--------------------------------------- ----------------- ----------------
--------------------------------------- ----------------- ----------------
Interest Expense $ (43,462) $ (3,923)
--------------------------------------- ----------------- ----------------
Nine-Month Results of Operations
The following discussion should be read in conjunction with the audited
financial statements and notes thereto included in our annual report on Form
10-K for the fiscal year ended December 31, 2003. Comparisons made between
reporting periods herein are for the nine month period ended September 30, 2004
as compared to the same period in 2003.
7
We had a net loss of $2,419,044 for the quarter ended September 30, 2004 as
compared to $420,187 in net income for the same quarter in 2003. Our sales
revenue decreased from $95,093,502 for the nine months ended September 30, 2003
to $12,772,449 for the same period in 2004. The decrease in sales revenue is due
to our suspension of business activities in the first quarter of 2004 while we
awaited the outcome of a Customs & Excise ruling on the treatment of liability
for Value-Added-Tax ("VAT") upon intra-European transactions.
---------------------------- ----------------- -------------------
2004 2003
---------------------------- ----------------- -------------------
---------------------------- ----------------- -------------------
Net Income (Loss) $(2,419,044) $420,187
---------------------------- ----------------- -------------------
---------------------------- ----------------- -------------------
Sales Revenue $12,772,449 $95,093,502
---------------------------- ----------------- -------------------
---------------------------- ----------------- -------------------
Cost of Sales $12,468,730 $92,026,980
---------------------------- ----------------- -------------------
Additionally, our selling, general and administrative expenses increased to
$2,670,479 for the nine months ended September 30, 2004 from $2,353,742 for the
same period in 2003. This increase is due in large part to the increased
expenses for the quarter ended September 30, 2004, but also includes expenses of
Tricell Distribution (approximately $455,289 for the nine months ended September
30, 2004).
--------------------------------------- ----------------- ----------------
Expenses 2004 2003
--------------------------------------- ----------------- ----------------
--------------------------------------- ----------------- ----------------
Selling, General & Administrative Expenses $2,670,479 $2,353,742
--------------------------------------- ----------------- ----------------
--------------------------------------- ----------------- ----------------
Interest Expense $(155,666) $(88,135)
--------------------------------------- ----------------- ----------------
--------------------------------------- ----------------- ----------------
--------------------------------------- ----------------- ----------------
--------------------------------------- ----------------- ----------------
Total $2,826,145 $2,441,877
--------------------------------------- ----------------- ----------------
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the nine months ended September 30,
2004 was $ 200,960 as compared to cash provided by operating activities for
the same period of 2003 of $6,915,198. This change is mainly attributable to a
decrease in our VAT receivable to $1,382,817 as of September 30, 2004 compared
to $7,970,403 as of September 30, 2003. This is due to decreased revenues and
decrease VAT taxes. For example, our VAT receivable typically averages
approximately 17.5% of our sales revenues, so as revenue decreased, the VAT
receivable decreased proportionately.
------------------------------------------------------------------
Nine Months Nine Months
ended ended
September September
30, 2004 30, 2003
------------------------------------------------------------------
------------------------------------------------------------------
Cash Provided By/(Used In) Operating $ (200,960) $ 6,915,198
Activities
------------------------------------------------------------------
Cash provided by investing activity increased to $7,635 for the nine months
ended September 30, 2004 as compared to cash used in investing activities of
$3,530,862 for the same period in 2003. The difference in cash flows from
investing activities is primarily due to repayment of our 2003 loans,
specifically $276,584 to a shareholder and $3,227,315 to a third party.
8
----------------------------------------------------------------------
Nine Months ended Nine Months ended
September 30, 2004 September 30, 2003
----------------------------------------------------------------------
----------------------------------------------------------------------
Cash Provided By/(Used In)
Investing Activity $ 7,635 $ (3,530,862)
----------------------------------------------------------------------
Cash provided by financing activities was $ 208,329 for the nine months
ended September 30, 2004 compared to cash used in financing activities of
$7,506,972 for the nine months ended September 30, 2003. The decreased financing
activity resulted from our 2003 repayment of loans totaling $7,506,972, whereas
we had very little such activity in 2004.
------------------------------------------------------------------
Nine Months ended Nine Months ended
September 30, 2004 September 30, 2003
------------------------------------------------------------------
------------------------------------------------------------------
Cash Provided By/(Used In)
Financing Activity $ 208,329 $ (7,506,972)
------------------------------------------------------------------
We believe we have sufficient cash to satisfy our operating
requirements for twelve months. We have the ability to restrict our expenditures
to the extent cash is not available to purchase our goods, which we then attempt
to resell. If the cash reserves are not enough to satisfy our operating needs
and we are unable to generate revenues, we will seek bank loans on favorable
terms and/or sell debt or equity securities to secure the cash required.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and results
of operations are based on our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP). GAAP represents a comprehensive set of
accounting and disclosure rules and requirements, the application of which
requires management judgments and estimates including, in certain circumstances,
choices between acceptable GAAP alternatives. The preparation of these
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. We base our estimates on historical experience and various
other assumptions that are believed to be reasonable under the circumstances.
Actual results could differ from these estimates under different assumptions or
conditions. Note 1 to our consolidated financial statements included elsewhere
in our Form 10-K for the year ended December 31, 2003, contains a comprehensive
summary of our significant accounting policies.
9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our major market risk is to changes in foreign currency exchange rates
in the British Pound, which could impact our results of operations and financial
condition. Foreign exchange risk arises from our exposure to fluctuations in
foreign currency exchange rates because our reporting currency is the United
States dollar. Management seeks to minimize the exposure to foreign currency
fluctuations through natural internal offsets to the fullest extent possible. As
of September 30, 2004, we had not engaged in any currency arbitrage or hedging
activities, although we may in the future. Our debt is not subject to one
measure of interest, therefore, the debt is somewhat diversified against
interest rate increases.
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of its
management, including the Chief Executive Officer and the Principal Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of
the period covered by this report. Based on that evaluation, the Chief Executive
Officer and the Principal Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely making known to them
material information relating to the Company and the Company's consolidated
subsidiaries required to be disclosed in the Company's reports filed or
submitted under the Exchange Act. There has been no change in the Company's
internal control over financial reporting during the quarter ended September 30,
2004 that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings and is unaware of any
pending or threatened legal proceedings. However, we are involved in a dispute
over how much VAT tax refund we are entitled to, as more fully described herein.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In October 2004, we announced that we acquired Discount Intranet Supply
Channel Limited (D-ISC), an online discounted shopping service. As
consideration, we agreed to issue 29,500,000 shares of the Company's common
stock, such shares to be issued under Rule 144 and restricted for a period of
one year. All of the shares were issued pursuant to exemptions from registration
under Sections 3(b) and 4(2) of the Securities Act of 1933. We did not receive
proceeds from this issuance of restricted stock, as the stock was issued as
consideration for the acquisition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibits required to be attached by Item 601 of
Regulation S-K are listed in the Index to Exhibits beginning on page 12
of this Form 10-Q, which is incorporated herein by reference.
(b) Reports on Form 8-K. No reports were filed on Form 8-K during
the third quarter of 2004.
10
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized this 15th day of November, 2004.
Tricell, Inc.
/s/ Andre Salt
----------------------------------------
By: Andre Salt, Chief Executive Officer
11
INDEX TO EXHIBITS
EXHIBIT PAGE
NO. NO. DESCRIPTION
- ---------- ----- --------------
3(i) * Articles of Incorporation of the Company.
(Incorporated by reference from the Company's
Form 10-SB12G, file number 000-50036, filed on
October 11, 2002.)
3(ii) * Bylaws of the Company. (Incorporated by
reference from the Company's Form 10-SB12G, file
number 000-50036, filed on October 11, 2002.)
31(i) 13 Certification of Chief Executive Officer and
Principal Financial Officer of Tricell, Inc.
under Section 302 of the Sarbanes-Oxley Act of
2002.
32(i) 14 Certification of Chief Executive Officer and
Principal Financial Officer of Tricell, Inc.
pursuant to 18 U.S.C. ss.1350
* Previously filed as indicated and incorporated herein by reference from the
referenced filings previously made by the Company.
12
EXHIBIT 31(i)
CERTIFICATION
I, Andre Salt, as Chief Executive Officer and the person performing
functions similar to that of a Principal Financial Officer of Tricell, Inc. (the
"Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
issuer as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the issuer and have:
(a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under my supervision,
to ensure that material information relating to the issuer, including its
consolidated subsidiaries, is made known to myself by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under my
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) evaluated the effectiveness of the issuer's disclosure controls and
procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the issuer's internal controls
over financial reporting that occurred during the issuer's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially effect, the issuer's internal controls over financial reporting;
and
5. I have disclosed, based on my most recent evaluation of internal control
over financial reporting, to the issuer's auditors and the audit committee of
the issuer's board of directors;
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonable
likely to adversely affect the issuer's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal control
over financial reporting.
Date: November 15, 2004
/s/ Andre Salt
- -------------------------------------------------------
Andre Salt,
Chief Executive Officer and Principal Financial Officer
13
EXHIBIT 32(i)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Tricell, Inc. (the "Company") on
Form 10-Q for the quarter ended September 30, 2004 (the "Report"), as filed with
the Securities and Exchange Commission, on the date hereof, the undersigned,
Andre Salt, Chief Executive Officer and the person performing functions similar
to that of a Principal Financial Officer of the Company, hereby certifies,
pursuant to 18 U.S.C. 1350, as adopted pursuant to 18 U.S.C., Section 1350,
that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Dated: November 15, 2004
/s/ Andre Salt
- -------------------------------------------------------
Andre Salt,
Chief Executive Officer and Principal Financial Officer
14