SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] 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: 0-29049
Silverado Financial, Inc.
-----------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 86-0824125
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1475 S. Bascom Avenue, Suite 210
Campbell, CA 95008
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(408) 371-2301
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(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 [ ]
As of September 30, 2003, 14,077,066 shares of the registrant's common stock,
$0.01 par value per share, were issued and outstanding.
1
SILVERADO FINANCIAL, INC.
INDEX TO FORM 10-QSB
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ................................................ 3
Consolidated Balance Sheet as of September 30, 2003 .................... 3
Consolidated Statements of Operation for the nine months
and three months ended September 30, 2003 and 2002 ..................... 4
Consolidated Statements of Changes in Stockholders' Equity for
the nine months ended September 30, 2003 and 2002 ...................... 5
Consolidated Statements of Cash Flow for the nine months and
three months ended September 30, 2003 and 2002 ......................... 6
Notes to Financial Statements .......................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................. 17
Item 3. Controls and Procedures ............................................ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................. 21
Item 2. Changes in Securities .............................................. 21
Item 3. Defaults Upon Senior Securities .................................... 21
Item 4. Submissions of Matters to a Vote of Security Holders ............... 21
Item 5. Other Information .................................................. 21
Item 6. Exhibits and Reports on Form 8-K ................................... 22
SIGNATURES ................................................................. 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILVERADO FINANCIAL, INC.
CONSOLIDATED BALANCE SHEET
(A Development Stage Company)
SEPTEMBER 30, 2003
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 3,277
Receivables 11,405
Marketable securities held for sale 17,775
----------------
Total Current Assets 32,457
OTHER ASSETS
Intellectual property 1,398,020
Furniture, fixtures & equipment-net 124,637
Other 6,900
----------------
Total assets $ 1,562,014
================
LIABILITIES
-----------
CURRENT
Accounts Payable $ 149,954
Accrued interest 21,500
Convertible notes payable 36,000
Due to affiliates 15,000
----------------
222,454
OTHER LIABILITIES
Note payable 275,000
----------------
Total liabilities 497,454
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value,
1,000,000 shares authorized, none issued
Common stock, $.001 par value, 20,000,000 shares 14,077
authorized, 14,077,066 issued and outstanding
Additional paid-in capital 10,332,590
(Deficit) accumulated during the development stage (9,282,107)
----------------
Total stockholders' equity 1,064,560
----------------
Total liabilities and stockholders' equity $ 1,562,014
================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
SILVERADO FINANCIAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATION
(unaudited)
Cumulative from
Nov. 21, 1994
For the nine months ended For the three months ended (Inception) to
September 30, September 30, September 30,
2003 2002 2003 2002 2003
---------------------------------------------------------------------------------
Revenues
Commission & processing revenue $43,823 $0 $25,998 $0 $43,823
Cost of sales (30,152) 0 (20,971) 0 (30,152)
---------------------------------------------------------------------------------
Gross profit 13,671 0 5,027 0 13,671
---------------------------------------------------------------------------------
Operating expenses
Research and development 0 (9,183) 0 0 688,563
Impairment on intellectual property 0 0 0 0 2,168,038
Consulting 394,397 0 222,979 0 3,639,521
General and administrative 241,959 51,293 5,311 12,214 2,703,614
Depreciation 11,538 0 6,809 0 11,538
---------------------------------------------------------------------------------
Total operating expenses 647,894 42,110 235,099 12,214 9,211,274
---------------------------------------------------------------------------------
Other Income and Expense
Interest income 9 0 6,963
Interest (expense) (19,211) (120) (6,917) 0 (26,031)
---------------------------------------------------------------------------------
Total non-operating expense (19,202) (120) (6,917) 0 (19,068)
---------------------------------------------------------------------------------
Net (Loss) from operations (653,425) (42,230) (236,989) (12,214) (9,216,671)
Other revenues and expenses
(Loss) gain on sale of investments (6,201) 0 0 0 (78,665)
Licensing revenue from 0 0 0 0 13,229
intellectual property
---------------------------------------------------------------------------------
Net (Loss) $(659,626) $(42,230) $(236,989) $(12,214) $(9,282,107)
=================================================================================
Net (Loss) per share:
Basic and Diluted $(0.06) $(0.01) $(0.02) $(0.00)
===========================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic & Diluted 11,934,667 5,828,181 13,421,606 6,000,000
===========================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
SILVERADO FINANCIAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Net
(Deficit) Unrealized
Accumulated Holding loss
Common Stock Additional During on available
----------------------- Paid-In Development for sale
Shares Amount Capital Stage securities Total
--------------------------------------------------------------------------------
Balance at December 31, 2001 5,739,408 $5,739 $8,475,587 $(8,219,508) $(7,476) $254,342
Shares issued for services 260,592 261 54,937 55,198
Net loss for quarter ended Sept. 30, 2002 42,230) (42,230)
--------------------------------------------------------------------------------
6,000,000 $6,000 $8,530,524 $(8,261,738) $(7,476) $267,310
================================================================================
Balance at December 31, 2002 10,400,000 $10,400 $9,616,027 $(8,622,481) $7,399 $1,011,345
Net unrealized holding (loss) on
securities available held for sale (7,399) (7,399)
Shares issued for payables 566,365 $566 $170,109 170,675
Shares issued for services 2,214,822 2,215 388,304 390,519
Shares issued for Realty Capital 729,452 730 126,924 127,654
Shares issued for debt 228,372 228 48,848 49,076
Finders fees (1,000) (1,000)
Shares issued for rounding 55 0
Cancellation of shares from sale of intellectual 0
property (62,000) (62) (16,622) (16,684)
Net unrealized holding (loss) on 0
securities available held for sale 0
Net loss for quarter ended September 30, 2003 (659,626) (659,626)
--------------------------------------------------------------------------------
14,077,066 $14,077 $10,332,590 $(9,282,107) $0 $1,064,560
================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
SILVERADO FINANCIAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
Cumulative from
For the nine months ended For the three months ended November 21, 1994
September 30, September 30, (Inception ) to
--------------------------------------------------------------
2003 2002 2003 2002 September 30, 2003
--------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net (loss) income for the period $(659,626) $ (42,230) $(236,989) $ (12,213) $(9,282,107)
Adjustments to reconcile net
cash used by operations:
Depreciation expense 11,538 6,809 11,538
Write down on intellectual property
and patents 2,086,837
Loss (gain) on sale of marketable
securities 6,201 78,665
Rockford shares issued for services 32,275
Common stock issued for services 390,519 26,766 2,174,201
Common stock issued for payables and
debt 218,751 28,432 236,700 410,751
Common stock issued for Financial
Software Inc. 1,089,903
Common stock issued for Realty Capital
Corporation 127,654 127,654
Fair value of options granted 2,082,113
(Increase)/decrease in accounts
receivable 1,222 2,972 (11,405)
(Increase)/decrease in prepaid expenses 300 0
(Increase)/decrease in furniture, fixtures
& equipment (134,271) (134,271)
(Increase)/decrease in other assets (8,803)
Increase/(decrease) in accounts payable 42,045 11,434 5,339 481 151,053
Increase/(decrease) in accrued interest 18,408 6,917 21,500
Increase/(decrease) in due to affiliates (40,000) (28,432) (30,000) 15,000
Increase/(decrease) in convertible notes
payable 10,000 10,000 36,000
Increase/(decrease) in note payable 0 275,000
--------------------------------------------------------------------------------
Net Cash (Used) by Operating Activities (7,559) (3,730) 1,748 (11,732) (844,096)
FINANCING ACTIVITIES
Proceeds from private placements 1,347,830
Proceeds from exercise of stock options 1,006,750
Proceeds from conversion of debenture 200,000
--------------------------------------------------------------------------------
Cash provided from financing activities 0 0 0 0 2,554,580
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6
CONSOLIDATED STATEMENTS OF CASH FLOW - continued
INVESTING ACTIVITIES
Cost of patents (168,430)
Proceeds from sale of marketable securities 10,275 103,774
Acquisition of sotware system (1,398,020)
Investment in Rockford Technologies (207,756)
Investment in marketable securities (36,775)
--------------------------------------------------------------------------------
Cash (used) in investment activities 10,275 0 0 0 (1,707,207)
--------------------------------------------------------------------------------
Increase (decrease) in cash 2,716 (3,730) 1,748 (11,732) 3,277
Cash at beginning of period 561 9,100 1,529 17,102 0
--------------------------------------------------------------------------------
Cash at end of period $ 3,277 $ 5,370 $ 3,277 $ 5,370 $ 3,277
================================================================================
Interest expense $ 19,211 $ 120 $ 6,917 $ - $ 26,031
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Cancellation of 62,000 common shares in sale of
intellectual property and Rockford shares $ 0 $ 0 $ 0 $ 0 $ (16,684)
=================================================================================
Issuance of common stock for licensing agreements
and intellectual property $ 0 $ 0 $ 0 $ 0 $ 2,005,350
==================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
7
SILVERADO FINANCIAL, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2003 and 2002
The unaudited financial statements included herein were prepared from the
records of the Company in accordance with Generally Accepted Accounting
Principles. These financial statements reflect all adjustments which are, in the
opinion of management, necessary to provide a fair statement of the results of
operations and financial position for the interim periods. Such financial
statements generally conform to the presentation reflected in the Company's
Forms 10-QSB and 10-KSB filed under its previous name of Rhombic Corporation
with the Securities and Exchange Commission for the year ended December 31,
2002. The current interim period reported herein should be read in conjunction
with the Company's Form 10-KSB subject to independent audit at the end of the
year.
Note 1 - ORGANIZATION AND BASIS OF PRESENTATION
On November 19th, 2002, the Company acquired all of the issued and outstanding
shares of Financial Software, Inc., (FSI) a New Jersey corporation engaged in
the development of Internet and Intranet financial software in edition to
operating several Financial Industry publishing web-sites. This acquisition was
completed on a share for share exchange basis for 22,000,000 pre reverse split
shares (5,500,000 post reverse split shares) of the Company's common stock. FSI
was acquired in order to gain access to certain proprietary software products
owned by FSI which the Company intends to further develop and extend into
comprehensive mortgage platforms called MortgageCenter and FinanCenter.
A majority of the shareholders of record on February 10, 2003 voted to amend the
Articles of Incorporation of the Registrant to change the name of the Company to
Silverado Financial, Inc. and to change the authorized common shares to
20,000,000 and the authorized preferred shares to 1,000,000 as described in an
information statement filed on Form 14C with the Securities and Exchange
Commission on February 11, 2003. The Registrant filed with the Secretary of
State of Nevada a Certificate of Amended Articles of Incorporation on March 21,
2003.
Effective April 29, 2003 the Company changed its trading name and trading symbol
to "SLVO" on the OTCBB and decreased the number of issued and outstanding shares
of common stock by issuing one new share for each five shares held. This action
was done in conjunction with the shareholder approval of February 10, 2003 to
amend the Articles of Incorporation of the Registrant to change the name of the
Company to Silverado Financial, Inc. and to change the authorized common shares
to 20,000,000 and the authorized preferred shares to 1,000,000.
On May 9, 2003, in a non-arms length transaction with John E. Hartman, the
company's president, the company issued 729,452 shares of restricted common
stock at a purchase price of $0.175 per share, which was based on the prior five
days average trading price, in exchange for all of the outstanding shares of
Realty Capital Corporation. The purchase price of Realty Capital Corporation was
$127,654 and was the net asset value of Realty Capital Corporation, as
determined by an independent, third party valuation. The shares were issued
under Section 4(2) of the 1933 Securities Act.
GOING CONCERN AND PLAN OF OPERATION
As shown in the accompanying financial statements, the Company had a net loss of
$659,626 and $236,989 for the nine months and three months ended September 30,
8
GOING CONCERN AND PLAN OF OPERATION - continued
2003. It has incurred an accumulated deficit of $9,282,107 and has a deficit in
working capital of $189,997 as of September 30, 2003. The ability of the Company
to continue as a going concern is dependent on obtaining additional capital and
financing and operating at a profitable level. The Company intends to seek
additional capital either through debt or equity offerings, or a combination
thereof, and to seek acquisitions which will generate sales volume with
operating margins sufficient to achieve profitability. The financial statements
do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern. The independent auditor's report on the
financial statements for the year ended December 31, 2002 expressed substantial
doubt about the ability of the Company to continue as a going-concern. The
results of operations for the period ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the results of operations, account
balances and cash flows of the Company and its wholly owned subsidiaries after
elimination of inter-company transactions
CASH AND EQUIVALENTS
The Company considers cash to be all short-term, highly liquid investments that
are readily convertible to known amounts of cash and have original maturities of
three months or less.
FINANCIAL INSTRUMENTS
Financial instruments consist primarily of cash, investments in marketable
securities and obligations under accounts payable and accrued expenses. The
carrying amounts of cash, accounts receivable, accounts payable, notes payable
and accrued expenses approximate fair value because of the short term maturity
of those instruments.
INVESTMENTS
Statements of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, ("SFAS 115") requires that all
applicable investments be classified as trading securities, available for sale
securities or held to maturity securities. The Company did not have any
investments classified as trading securities or held-to-maturity securities. The
statement further requires that available for sale securities be reported at
fair value, with unrealized gains and losses excluded from earnings but reported
in a separate component of shareholders' equity (net of the effect of income
taxes) until they are sold. At the time of sale, any gains or losses will be
recognized as a component of operating results.
At September 30, 2003 and 2002, respectively, the Company's investments were
held for sale.
INTELLECTUAL PROPERTY
The Company's intellectual property is comprised of a software platform acquired
with the acquisition of Financial Services Inc. in 2002.
9
The Company periodically evaluates the recoverability of intangible assets and
takes into account events or circumstances that warrant revised estimates of
useful lives or that indicate that an impairment exists. The Company's
intangible assets will be subject to amortization when put into productive use.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of long-lived
assets, primarily intellectual property and patents, may be impaired, the
Company performs a recoverability evaluation. If an evaluation is required, the
discounted estimated future cash flows associated with the assets are compared
to the assets' carrying amount to determine whether a write-down to fair value
is required.
In August 2001, the FASB issued SFAS No. 144 ("SFAS 144") "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 became effective on
January 1, 2002 and supersedes SFAS No. 121 ("SFAS 121"), Accounting for the
Impairment of Long-Lived Assets and for accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. The new standard establishes a single accounting model based on
the framework established in SFAS 121 for long-lived assets classified as held
for sale be presented separately in the consolidated Balance Sheet and
eliminates the requirement to allocate goodwill to long-lived assets to be
tested for impairment.
Effective January 1, 2002, impairment of goodwill and intangible assets with
indefinite lives will be determined under SFAS 142 as discussed above.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123") as amended by SFAS No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure", established
accounting and disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation. The Company periodically
issues options to consultants and members of the Board of Directors. The
estimated value of these options is determined in accordance with SFAS No. 123
and expensed as the granted options vest to the grantees.
INCOME TAXES
The Company accounts for income taxes under the liability method pursuant to the
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, ("SFAS 109"). Deferred taxes arise from temporary differences, due to
differences between accounting methods for tax and financial statement purposes.
LOSS PER SHARE
Net loss per share is calculated using the weighted average number of shares of
common stock outstanding during the year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
10
USE OF ESTIMATES - continued
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NEW TECHNICAL PRONOUNCEMENTS
In May 2003, SFAS 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", was issued. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Generally, a financial instrument, whether
in the form of shares or otherwise, that is mandatorily redeemable, i.e. that
embodies an unconditional obligation requiring the issuer to redeem it by
transferring its shares or assets at a specified or determinable date (or dates)
or upon an event that is certain to occur, must be classified as a liability (or
asset in some circumstances). In some cases, a financial instrument that is
conditionally redeemable may also be subject to the same treatment. This
Statement does not apply to features that are embedded in a financial instrument
that is not a derivative (as defined) in its entirety. For public entities, this
Statement is effective for financial instruments entered into or modified after
May 31, 2003. The adoption of SFAS 150 did not effect the Company's financial
position or results of operations.
Note 3 - INTELLECTUAL PROPERTY
Since its inception, the Company entered into numerous agreements as a result of
having acquired certain rights to various complex intellectual scientific
properties. On November 19, 2002 the Company acquired intellectual property
comprised of a software platform acquired with Financial Services Inc. during
2002.
During the quarter ended June 30, 2003, in a non-arms length transaction with
Robert George Krushnisky, a director of the company, the company received 62,000
shares of its own common stock together with cancellation of an outstanding debt
in the amount of $1,100 in exchange for all of the scientific intellectual
property assets acquired prior to the acquisition of FSI in November of 2002 as
well as all shares of Rockford Technology held for sale by the company.
The Company periodically analyzes its investment in intellectual property for
impairment. The stages of development in which the intellectual property is in
make estimation of value or determination of impairment a difficult task. There
has been no substantive revenues generated or value derived from the technology
since its acquisition. The Company has determined that there is no evidence that
the book value of the intellectual property is impaired until it has been
determined that there is no likely commercial application or one that will
produce adequate cash flow to support those values.
On November 19, 2002, in connection with the acquisition of Financial Software,
Inc., the Company acquired certain software, web sites and intellectual property
which can aggregate financial information from a large number of data sources on
an individual basis, amalgamate the data and provide accurate and detailed
insight into an individual's personal financial picture on a real time basis.
This software can manage a host of disparate objectives as they relate to a
persons financial goals, be they investment or debt related or any combination.
This software suite, together with mortgage generation capabilities can create a
variety of new and different mortgage, investment or insurance products. The
Company recorded the software on its books at the seller's basis of $1,398,020.
11
At September 30, 2003, the Company owned the software platform acquired with
Financial Services Inc. during 2002.
Note 4 - INVESTMENTS
The Company has the following investments at September 30, 2003:
September 30, 2003
-------------------------
Estimated
Cost Fair Value
---- ----------
AVAILABLE FOR SALE SECURITIES
Limelight Media Group Inc., fka
Showintel Networks, Inc. $17,775 $17,775
---------- -----------
Totals $17,775 $17,775
========== ===========
The Company did not acquire or sell any marketable securities during the third
quarter of 2003.
The estimated fair value of the 197,500 shares of Limelight Media Group Inc.
held by the Company was estimated based on the quoted trading price of the
security at September 30, 2003. The security began trading under its new name of
Limelight Media Group Inc. on November 10, 2003.
Note 5 - INCOME TAXES
The Company does not provide any current or deferred income tax provision or
benefit for any period presented because it has experienced operating losses
since inception. At September 30, 2003 and 2002, the Company has approximately
$9,282,107 and $8,254,339 of net operating losses available to offset future
federal income tax liability and $3,647,487 and $2,920,532 of net operating
losses available to offset future state income tax liability. The Company has
provided a full valuation allowance because of the uncertainty regarding the
utilization of the net operating loss carry forwards.
For the nine months ended September 30,
-----------------------------------------
2003 2002
----------------- --------------------
Tax effects of carryforward benefits:
Net operating loss carryforwards $ 3,478,531 $ 3,171,316
----------------- --------------------
Total current and deferred income tax benefit 3,478,531 3,171,316
Valuation allowance (3,478,531) (3,171,316)
----------------- --------------------
Benefit of income taxes $ -0- $ -0-
================= ====================
Income tax components for the nine months ended September 30, 2003 and 2003 are
as follows:
12
Note 5 - INCOME TAXES- continued
For the nine months ended September 30,
-----------------------------------------
2003 2002
----------------- --------------------
Income tax benefit:
Federal $ 224,273 $ 14,358
State 29,155 1,867
----------------- --------------------
Total current and deferred income
tax benefit 253,428 16,225
Valuation allowance (253,428) (16,225)
----------------- --------------------
Benefit of income taxes $-0- $-0-
================= ====================
Income tax expense does not differ from amounts computed by applying the U.S.
Federal income tax rate of 34% and the state rate of 7% at December 31, 2002 and
2001, except for the valuation allowance.
At September 30, 2003, the Company's realized net operating losses expire over
the next 20 years for federal and five years for state income tax purposes.
Future realization of the net deferred tax assets is dependent on generating
sufficient taxable income prior to their expiration. The realized net operating
losses expire, as follows:
Expiration Federal State
----------------- ------------------ --------------
2004 $ 301,975
2005 1,835,135
2006 289,298
2007 63,361
2008 1,159,718
2009 $ 44,994
2010 379,485
2011 461,101
2012 236,028
2018 861,526
2019 603,950
2020 3,670,269
2021 578,596
2022 126,723
2023 2,319,435
-------------------- --------------
Total net operating loss available $ 9,282,107 3,649,487
==================== ==============
Note 6 - NOTES PAYABLE
Note Payable
As part of the acquisition of Financial Services Software, the Company became
obligated under a note for $275,000 at 8% per annum, payable monthly, in arrears
and amortized over eighteen equal installments of $16,258. Principal and
interest payments due under the note will not be paid until the Company has
raised sufficient capital through the sale of stock and /or notes to raise a
minimum of four times the monthly payment due. Further, additional monthly
payments are abated until the Company is able to maintain sufficient capital to
13
Note Payable - continued
allow it to remain cash flow positive and continue making the payments. There
was $18,986 of accrued unpaid interest at September 30, 2003.
Convertible Notes payable
The Company has three convertible notes payable totaling $36,000 at 10% per
annum maturing during the third quarter of 2004 as a result of the Company's
extensions of two convertible notes that were originated during 2002. There was
$1,989 of accrued unpaid interest at September 30, 2003.
Assuming the Company has the ability to make all note payments under their terms
commencing October 1, 2003 and does not convert or extend the convertible notes
payable, the minimum annual payments are as follows:
Year $ Amount
2003 $ 48,774
2004 226,296
2005 48,774
---------
Total $323,844
=========
Note 7 - COMMITMENTS
During May 2003, the Company became responsible for a lease entered into by its
subsidiary, Realty Capital Corporation, during October 2002 for 3,179 square
feet in an office building in Campbell, California. The lease is for a period of
two years ending on October 31, 2004. The base rental under the lease is $80,111
per annum ($6,675.90 per month) during the first twelve month period and $82,514
($6,876.17 per month) during the second twelve month period. The lease provides
for the Company to pay its proportionate share of the landlord's common costs
during second twelve month period.
Rent expenses totaled $40,003 and $2,400 for the nine months ended September
2003 and 2002, respectively and $19,975 and $0 for the three months ended
September 2003 and 2002, respectively.
Minimum future commitments under all operating leases are as follows:
Years Ending Amount
December 31,
-------------------- --------------------
2003 $20,428
2004 68,762
--------------------
$89,190
====================
Note 8 - STOCKHOLDERS' EQUITY
During the first two quarters of 2003 the company issued a total of 2,382,884
common shares at a deemed value of $500,224. A total of 1,090,001 shares were
issued for services at a deemed value of $198,519, 563,376 common shares were
issued for debt and payables at a deemed value of $174,051, 729,452 common
shares were issued to the Company's president John E. Hartman for all of the
outstanding shares of Realty Capital Corporation at a deemed value of $127,654
14
Note 8 - STOCKHOLDERS' EQUITY - continued
and 62,000 common shares were returned to the treasury and cancelled in a
transaction involving the sale of the scientific intellectual property to a
director of the Company at a deemed value of $16,684.
During the quarter ended September 30, 2003, the Company issued 300,000
restricted common shares to an individual for investor relations services valued
at $48,000. The shares were issued under Section 4(2) of the 1933 Securities
Act. The Company also issued 226,363 restricted common shares to the officers of
the Company for accrued compensation of $45,000. The shares were issued under
Section 4(2) of the 1933 Securities Act. The Company also issued 300,000
restricted common shares to a public relations firm at a deemed value of $65,000
for investor relations services and issued 206,200 restricted common shares to
officers of the Company for services rendered during the quarter at a deemed
value of $30,000. All of the shares were issued under Section 4(2) of the 1933
Securities Act.
During the quarter ended September 30, 2003, the Company issued 5,000
unrestricted shares under its S-8 2003 Employees and Compensation Plan to an
individual at a deemed value of $700 for legal services rendered during the
prior quarter ended June 30, 2003.
During the quarter ended September 30, 2003, the Company issued 284,591
unrestricted shares to two consultants under its S-8 2003 Employees and
Compensation Plan at a deemed value of $49,000 for various consulting services
rendered during the current quarter ended September 30, 2003 relating to matters
of corporate governance, software consulting, legal and other services.
Note 9 - STOCK OPTIONS
The Company issues stock options periodically to consultants and members of the
Board of Directors. The Company has adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation". For options
granted in the period ended September 30, 2003, that were granted to individuals
other than employees, the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
does not apply. Accordingly, compensation cost has been recognized for the stock
options granted to other than employees.
Under the provisions of SFAS No. 123, the number of fully vested options granted
of 0 and 100,000 options for the periods ended September 30, 2003 and 2002,
respectively, were used to determine compensation cost. There was no charge to
expense for the value of options during the periods ended September 30, 2003 and
2002.
The Board of Directors authorized the granting of no options during the periods
ended September 30, 2003 and 2002, respectively. The price of any options
granted pursuant to these grants is not to be less than 100 percent of the fair
market value of the shares on the date of grant. The options expire one year
from date of grant and are immediately vested.
Note 10 - COMMON STOCK
At September 30, 2003 and 2002, the Company had 14,077,066 and 6,000,000 shares
outstanding, respectively. The Company has 20,000,000 shares of $0.001 par value
authorized.
15
Note 11 - LOSS PER SHARE
Loss per share of common stock has been computed based on the weighted average
number of shares outstanding. As of September 30, 2003 and 2002, the weighted
average number of shares outstanding for the nine months then ended was
11,934,667 and 5,828,181, respectively. There were no dilutive items
outstanding; therefore, basic and diluted losses per share are the same.
Note 12 - CREDIT RISK AND OTHER CONCENTRATIONS
The Company has historically relied upon cash raised in private placements of
the Company's common stock for working capital. At times, the Company maintains
cash balances at banks that exceed insured limits. At September 30, 2003 and
2002 the Company did not have funds on deposit that exceeded the insured limits.
Note 13 -SUBSEQUENT EVENTS
On November 17, 2003 the Company acquired all of the outstanding common shares
of San Francisco Funding Inc. in exchange for One Hundred, Fifty Thousand
(150,000) shares of the Company's restricted common stock and Twenty Five
Thousand (25,000) shares of the Company's Restricted Series A Secured
Convertible Preferred Stock.
On November 17, 2003, the board of directors of the Company approved the
issuance of 25,000 shares of restricted Series A Convertible Preferred Stock
with a face value of $250,000 and bearing cumulative dividends at six percent
(6%) per year. The Preferred shares shall have a right to convert to ten
restricted common shares, at the option of the holder, per each Preferred share
converted by the holder. The preferred shares may be redeemed by the Company at
its option at any time after their issuance for an amount equal to the face
value of each share plus any unpaid accrued dividends. The Preferred shares have
no right to vote in any shareholder meetings unless converted to Common by the
holder. The Preferred shares are secured against all of the shares of San
Francisco Funding purchased by the Company.
The Company intends to allow San Francisco Funding to continue to operate its
mortgage banking operation with its same management and directors as a wholly
owned subsidiary.
--------------------------------------------------------------------------------
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION,
STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE
STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS",
"BELIEVES", OR SIMILAR LANGUAGE. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT
ARE NOT LIMITED TO, THE SEEKING OF REVENUE PRODUCING ACQUISITIONS, THE
DEVELOPMENT PLANS FOR THE TECHNOLOGIES OF THE COMPANY, TRENDS IN THE RESULTS OF
THE COMPANY'S DEVELOPMENT, ANTICIPATED DEVELOPMENT PLANS, OPERATING EXPENSES AND
THE COMPANY'S ANTICIPATED CAPITAL REQUIREMENTS AND CAPITAL RESOURCES. THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE
HEREOF. THE FACTORS DISCUSSED BELOW UNDER "FORWARD-LOOKING STATEMENTS" AND
ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-QSB ARE AMONG THOSE FACTORS THAT
IN SOME CASES HAVE AFFECTED THE COMPANY'S RESULTS AND COULD CAUSE THE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS. IN ADDITION, THE FOLLOWING DISCUSSION IS INTENDED TO PROVIDE AN
ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND PLAN OF OPERATION AND SHOULD
BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND THE NOTES
THERETO.
GENERAL:
Since its inception during 1994 as Rhombic Corporation, the Company has been in
the development stage and its efforts have been primarily focused on the
acquisition of the rights to innovative technologies that could ultimately be
developed into numerous applications. During the years of 1999 through 2001 it
began to focus on the research and development of its portfolio of acquired
technologies and to develop specific applications in order to make them
commercially marketable. The business strategy of the Company was to develop a
specific application from a technology, then commence or contract for a
marketing effort for the developed application that would generate sales.
In 2002 the Company concluded that it could not raise capital to pursue its
planned efforts for its scientific technology and began seeking potential
acquisition candidates. During the fourth quarter of 2002 the Company appointed
John Hartman as Chief Executive Officer and director and Sean Radetich as a
director.
On November 11, 2002, the board of directors of the Registrant approved the
issuance of 22,000,000 pre reverse split restricted shares (5,500,000 post
reverese split shares)of its common stock for the acquisition of all of the
issued and outstanding shares of Financial Software, Inc. ("FSI"). The
transaction was closed on November 19, 2002. The value of the consideration in
the exchange was determined at arms length by FSI and the registrant. FSI was in
the financial services technology and publishing industry.
A majority of the shareholders of record on February 10, 2003 voted to amend the
Articles of Incorporation of the Registrant to change the name of the Company to
Silverado Financial, Inc. and to change the authorized common shares to
20,000,000 and the authorized preferred shares to 1,000,000 as described in an
information statement filed on Form 14C with the Securities and Exchange
Commission on February 11, 2003. The Registrant filed with the Secretary of
State of Nevada a Certificate of Amended Articles of Incorporation on March 21,
2003.
17
It is the intention of Silverado Financial, Inc. "Silverado" to become a
multifaceted technology and real estate services company. To achieve its new
business plan, Silverado will acquire or modify its current software technology
to target the real estate lending markets and to serve as a parent to companies
that would provide financial publishing, mortgage brokerage and mortgage banking
real estate services to customers through a developed software application.
Silverado is currently considering the acquisition of firms or the establishment
of business lines in the mortgage brokerage, investment advisory, insurance
brokerage and commercial and residential mortgage banking sectors.
On May 9, 2003, in a non-arms length transaction with John E. Hartman, the
company's president, the company issued 729,452 shares of restricted common
stock at a purchase price of $0.175 per share, which was based on the prior five
days average trading price, in exchange for all of the outstanding shares of
Realty Capital Corporation. The purchase price of Realty Capital Corporation was
$127,654 and was the net asset value of Realty Capital Corporation, as
determined by an independent, third party valuation. The shares were issued
under Section 4(2) of the 1933 Securities Act.
The competition in the technology proliferation and transfer market is highly
intense and is based on product and technology recognition and acceptance,
novelty and marketability of an invention, price, and sales expertise. The new
management of the Company is reviewing its intellectual property and patents and
considering seeing potential buyers.
The Company does not have any employees and uses consultants for matters
pertaining to coordinating technology development and administration. The
Company may hire employees during the next twelve months depending upon its
success in developing prototype applications for sale and financing more
development.
RESULTS OF OPERATIONS:
Comparison of Quarter Ended September 30, 2003 and 2002
The Company generated revenues of $25,998 against $20,971 in cost of sales
resulting in a gross profit of $5,027 from operations during the third quarter
of 2003. The Company did not have a revenue generating operation during the
third quarter of 2002 and was seeking investment capital for its scientific
intellectual property along with acquisition candidates.
During the third quarter of 2003 the Company incurred $5,311 in general and
administrative expenses compared to $12,214 during the third quarter ended 2002.
These expenses were comprised of travel, office expenses and transfer agent and
shareholder expenses.
Consulting fees during the third quarter 2003 were $222,979 compared to none
during the third quarter of 2002.
On July 3, 2003, the Company issued 300,000 restricted common shares to an
individual for investor relations services valued at $48,000. The shares were
issued under Section 4(2) of the 1933 Securities Act.
On September 11, 2003, the Company issued 300,000 restricted common shares to a
public relations firm at a deemed value of $65,000 for investor relations
services and issued 206,200 restricted common shares to officers of the Company
for services rendered during the quarter at a deemed value of $30,000. All of
the shares were issued under Section 4(2) of the 1933 Securities Act.
18
During the quarter ended September 30, 2003, the Company issued 284,591
unrestricted shares to two consultants under its S-8 2003 Employees and
Compensation Plan at a deemed value of $49,000 for various consulting services
rendered during the current quarter ended September 30, 2003 relating to matters
of corporate governance, software consulting, legal and other services.
Additional consulting fees during the third quarter of 2003 of approximately
$30,000 was incurred for consulting fees pertaining to increasing the sales
force of Realty Capital Corporation and evaluating potential acquisitions.
LIQUIDITY AND CAPITAL RESOURCES:
Management's objective during the third quarter of 2003 was to acquire an
operating mortgage brokerage company to increase its revenues; thereby enabling
the acquisition of warehouse lines to commence mortgage banking operations.
At September 30, 2002 the Company had $5,370 in cash and $32,094 in current
payables. At September 30, 2003 the Company had approximately $3,277 in cash,
$11,405 in receivables, $17,775 in marketable securities and approximately
$218,954 in current payables.
During the quarter ended September 30, 2003 the Company issued 1,356,182 common
shares valued at $237,000 of which $45,700 was for payables and $191,300 for
services during the period. During the quarter ended September 30, 2002 the
Company issued 50,000 restricted common shares valued at $31,500 for services
during that period.
The Company has warrants outstanding to purchase 65,000 shares of common stock
in the Company for $29,250 expiring October 1, 2005.
The Company believes that it has sufficient capital and resources to support
operations through the remainder of 2003. It anticipates that the capital
requirements for the balance of the period ending December 31, 2003 will require
that additional cash be raised from external sources. It believes that this
requirement will be met by cash equity investments.
SUBSEQUENT EVENTS:
On November 17, 2003 the Company acquired all of the outstanding common shares
of San Francisco Funding Inc. in exchange for One Hundred, Fifty Thousand
(150,000) shares of the Company's restricted common stock and Twenty Five
Thousand (25,000) shares of the Company's Restricted Series A Secured
Convertible Preferred Stock.
On November 17, 2003, the board of directors of the Company approved the
issuance of 25,000 shares of restricted Series A Convertible Preferred Stock
with a face value of $250,000 and bearing cumulative dividends at six percent
(6%) per year. The Preferred shares shall have a right to convert to ten
restricted common shares, at the option of the holder, per each Preferred share
converted by the holder. The preferred shares may be redeemed by the Company at
its option at any time after their issuance for an amount equal to the face
value of each share plus any unpaid accrued dividends. The Preferred shares have
no right to vote in any shareholder meetings unless converted to Common by the
holder. The Preferred shares are secured against all of the shares of San
Francisco Funding purchased by the Company.
The Company intends to allow San Francisco Funding to continue to operate its
mortgage banking operation with its same management and directors as a wholly
owned subsidiary.
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FORWARD LOOKING STATEMENTS:
Certain statements made in this report on Form 10-QSB are "forward looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements involve known and unknown risks, uncertainties and other
factors that may cause actual results, performance or achievements of the
Company to be materially different from any future results implied by such
forward looking statements. Although the Company believes that the expectations
reflected in such forward looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from those set
forth in the forward looking statements. Certain factors that might cause such a
difference might include: the failure of the registrants efforts to secure
additional equity capital, the inability to successfully execute the revised
business plan, the success or failure to implement the management to operate
possible acquisitions profitably, and the registrant's planned marketing, public
relations and promotional campaigns.
RISK FACTORS:
The Company continues to be subject to a number of risk factors, including the
uncertainty of developing a commercial application for its intellectual
property, the ability of management to successfully acquire and manage revenue
generating operating companies profitably, the need for additional funds,
competition, technological obsolescence and the difficulties faced by
development stage companies in general.
ITEM 3: CONTROLS AND PROCEDURES
a) Disclosure controls and procedures. Within 90 days before filing this
report, an evaluation was performed under the supervision and with the
participation of the Company's management, including the CEO and CFO, of
the effectiveness of the design and operation of its disclosure controls
and procedures. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls
and procedures were effective as of the date of the evaluation.
(b) Internal controls. Since the date of the evaluation described above, there
have not been any significant changes in the Company's internal accounting
controls or in other factors that could significantly affect those
controls.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings against the Company. The Company is unaware of
any proceedings contemplated against it.
ITEM 2. CHANGES IN SECURITIES
On July 3, 2003, the Company issued 300,000 restricted common shares to an
individual for investor relations services valued at $48,000. The shares were
issued under Section 4(2) of the 1933 Securities Act.
On July 15, 2003, the Company issued 226,363 restricted common shares to the
officers of the Company for accrued compensation of $45,000. The shares were
issued under Section 4(2) of the 1933 Securities Act.
On September 11, 2003, the Company issued 300,000 restricted common shares to a
public relations firm at a deemed value of $65,000 for investor relations
services and issued 206,200 restricted common shares to officers of the Company
for services rendered during the quarter at a deemed value of $30,000. All of
the shares were issued under Section 4(2) of the 1933 Securities Act.
During the quarter ended September 30, 2003, the Company issued 5,000
unrestricted shares under its S-8 2003 Employees and Compensation Plan to an
individual at a deemed value of $700 for legal services rendered during the
prior quarter ended June 30, 2003.
During the quarter ended September 30, 2003, the Company issued 284,591
unrestricted shares to two consultants under its S-8 2003 Employees and
Compensation Plan at a deemed value of $49,000 for various consulting services
rendered during the current quarter ended September 30, 2003 relating to matters
of corporate governance, software consulting, legal and other services.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.01 Stock Purchase Agreement to purchase San Francisco Funding, Inc. dated
November 17, 2003.
31.1 QUARTERLY CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
31.2 QUARTERLY CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SILVERADO FINANCIAL, INC.
/s/ John E. Hartman
-------------------------------------
Date: November 18, 2003 By: John E. Hartman
President and Chief Executive Officer
/s/ Albert A. Golusin
-------------------------------------
Date: November 18, 2003 By: Albert A. Golusin
Chief Financial Officer
22