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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment #1
(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, 2002
OR
[ ] 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 333-45678
SEQUIAM CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0875030
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 SUNPORT LANE, ORLANDO, FLORIDA 32809
(Address, including zip code, of principal executive offices)
407-541-0773
(Registrant's telephone number, including area code)
(Former name, former address)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for the 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 [ ]
The number of shares of the Registrant's Common Stock outstanding as of November
15, 2002 was 34,831,611.
DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
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FORM 10-QSB
INDEX
Page
Part I - FINANCIAL INFORMATION................................................ 3
Item 1. Condensed Consolidated Financial Statements
Balance Sheets................................................................ 4
Statements of Operations...................................................... 5
Statement of Shareholders' Deficit........................................... 6
Statements of Cash Flows...................................................... 7
Notes to Condensed Consolidated Financial Statements.......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................14
Item 3. Controls and Procedures...............................................18
Part II - OTHER INFORMATION...................................................19
Item 1. Legal Proceedings.....................................................19
Item 6. Exhibits and Reports on Form 8-K......................................19
Signatures....................................................................20
2
PART I: FINANCIAL INFORMATION
This Quarterly Report on Form 10-QSB includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act of 1934, as amended. These include, among
others, the statements about our plans and strategies. When used in this
document and the documents incorporated herein by reference, the words
"believes," "expects," "anticipates," "intends," "plans," "estimates," or
similar expressions are intended to identify, in certain circumstances,
forward-looking statements. Forward-looking statements are not guarantees of
future performance and are subject to certain risks, uncertainties, and other
factors, some of which are beyond our control, are difficult to predict and
could cause actual results to differ materially from those expressed in
forward-looking statements. Although it is not possible to itemize all of the
factors and specific events that could affect the outlook of a technology
company like ours operating in a competitive environment, factors that could
significantly impact expected results include: the acceptance of our technology;
the effect of national and local economic conditions; our outstanding
indebtedness; the loss of key employees; competition from technologies developed
by other companies; the ability to attract and retain employees; delays in
completing the development of our new products caused by a lack of capital or
external causes beyond our reasonable control; and the ability to identify and
consummate relationships with strategic partners. Although we believe that our
plans, intentions and expectations reflected in or suggested by such
forward-looking statements are reasonable, we cannot assure that such plans,
intentions or expectations will be achieved. Actual results may differ
materially from the forward-looking statements made in this Quarterly Report on
Form 10-QSB. We do not intend to update any forward-looking statements, and we
hereby disclaim any obligation to update such forward-looking statements.
3
ITEM 1. FINANCIAL STATEMENTS
Sequiam Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 2002
(Unaudited) December 31, 2001
-------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable 27,845 -
Prepaid expenses 4,500 -
Equipment held for disposal 320,824 -
Total current assets 353,169 -
-------------------- -------------------
Property and equipment, net 1,472,713 69,796
-------------------- -------------------
Capitalized software development costs 119,701 80,234
Deposits and other assets 7,800 -
-------------------- -------------------
Total assets $ 1,953,383 $ 150,030
==================== ===================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 649,477 $ -
Notes payable-current 42,662 -
Shareholder loans 474,450 -
Loan to related party - 627,718
Accrued shareholder salaries 711,333 253,000
Accrued expenses 131,739 -
Deferred rent 114,000 -
-------------------- -------------------
Total current liabilities 2,123,661 880,718
-------------------- -------------------
Long-term liabilities:
Notes payable-long-term 376,880 -
-------------------- -------------------
Total liabilities 2,500,541 880,718
-------------------- -------------------
Shareholders' deficit:
Common stock 35,832 24,233
Additional Paid-in capital 889,746 -
Stock subscriptions receivable - (2,000)
Accumulated deficit (1,578,243) (752,921)
-------------------- -------------------
Total shareholders' deficit (547,158) (730,688)
-------------------- -------------------
Total liabilities and shareholders' deficit $ 1,953,383 $ 150,030
==================== ===================
See accompanying notes to condensed consolidated financial statements.
4
Sequiam Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 48,120 $ - $ 286,435 $ -
Costs and expenses:
Website development cost 119,506 - 177,979 -
Software development costs - 123,994 - 311,222
General and administrative 519,305 133,812 777,526 265,416
Depreciation 33,830 - 43,761 -
------------ ------------ ------------ ------------
672,641 257,806 999,266 576,638
------------ ------------ ------------ ------------
Loss from operations (624,521) (257,806) (712,831) (576,638)
Interest expense (5,880) (306) (6,984) (306)
------------ ------------ ------------ ------------
Net loss $ (630,401) $ (258,112) $ (719,815) $ (576,944)
============ ============ ============ ============
Net loss per common share: Basic and diluted $ (0.32) $ (0.01) $ (0.40) $ (0.02)
============ ============ ============ ============
Weighted average common shares
outstanding: Basic and diluted 33,547,234 23,300,000 27,371,863 23,300,000
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
5
Sequiam Corporation and Subsidiaries
Condensed Consolidated Statements of Stockholders' Deficit
Nine Months Ended September 30, 2002
(Unaudited)
Common Stock
-------------------- Stock
Shares Par Paid-in Subscription Accumulated
Outstanding Value Capital Receivable Deficit Total
----------- ------- ------------ -------------- ------------- ------------
Balance at December 31, 2001, as
previously reported 4,733,000 $ 4,733 $ 123,007 $ - $ (127,740) $ -
Recapitalization 19,500,000 19,500 (123,007) (2,000) (625,181) (730,688)
----------- ------- ------------ -------------- ------------- ------------
Balance at December 31, 2001, as
restated 24,233,000 24,233 (2,000) (752,921) (730,688)
Correction of shares from
recapitalization 17,000 17 (17) - - -
Payment of stock Subscription
receivable - - - 2,000 - 2,000
Common stock issued for acquisition of
Brekel 11,522,263 11,522 10,934,628 - - 10,946,150
Constructive dividend to Brekel - - (10,104,154) - - (10,104,154)
Shareholders
Common stock issued for services 59,438 60 59,289 - - 59,349
Net loss - - - - (719,815) (719,815)
----------- ------- ------------ -------------- ------------- ------------
Balance at September 30, 2002 35,831,611 $35,832 $ 889,746 $ - $ (1,578,243) $ (547,158)
=========== ======= ============ ============== ============= ============
See accompanying notes to condensed consolidated financial statements.
6
Sequiam Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2002 2001
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (719,815) $(576,944)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation 43,761 -
Issuance of common stock in exchange for services 59,349 -
Decrease in accounts receivable 85,604 -
Increase in prepaid expenses (1,875) -
Decrease in accounts payable 57,954 -
Increase in accrued shareholders salaries 284,500 184,000
Increase in other accrued expenses 51,111 -
Increase in deferred rent 114,000 -
------------ ----------
Net cash used for operating activities $ (25,411) $(392,944)
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment purchases (14,597) (81,492)
Software development costs capitalized (39,467) (101,728)
------------ ----------
Net cash used for investing activities (54,064) (183,220)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder loans 348,500 -
Payment of stock subscription receivable 2,000 -
Repayment of note payable (39,465) -
Proceeds (payment) on loan to related party (231,560) 576,164
------------ ----------
Net cash provided by financing activities 79,475 576,164
------------ ----------
Net change in cash - -
Cash, beginning of period - -
------------ ----------
Cash, end of period $ - $ -
============ ==========
Non-cash activities:
- --------------------
Subscription receivable for common stock - $ 2,000
Recapitalization of common stock $ 127,140 -
Common stock issued for acquisition of Brekel Group, Inc. $10,946,150 -
Constructive dividend to Brekel Shareholders $10,104,154 -
Return of leased equipment $ 1,873,255 -
See accompanying notes to condensed consolidated financial statements.
7
Sequiam Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 -Description of Business
Sequiam Effective April 1, 2002, Sequiam Corporation's wholly-owned subsidiary,
Sequiam Acquisitions, Inc., merged with Sequiam, Inc. and Sequiam Acquisitions,
Inc. survived the merger. Sequiam Acquisitions, Inc. changed its name to Sequiam
Software, Inc. on May 1, 2002. The merger transaction was accounted for as a
purchase of Sequiam Corporation by Sequiam, Inc. (a reverse acquisition in which
Sequiam, Inc. is considered the acquirer for accounting purposes), since the
shareholders of Sequiam, Inc. obtained a majority of the voting rights of
Sequiam Corporation as a result of the transaction. Pursuant to the merger
agreement, Sequiam Corporation issued 20,000,000 shares of common stock in
exchange for all of the outstanding shares of common stock of Sequiam, Inc.,
consisting of 20,000,000 shares. Additionally, pursuant to the merger agreement,
500,000 shares of Sequiam Corporation's common stock were returned to treasury
and cancelled. The merger was accounted for as a recapitalization of Sequiam
Corporation and the results of operations and cash flows presented herein prior
to the merger are those of Sequiam Inc. Sequiam, Inc. was formed on February 1,
2001 to research, develop, produce and market a document management software
product.
Sequiam Software, Inc. ("Software") is focused on the following lines of
business:
- Sales of Internet enabled document management, print management and
print on-demand and software under the brand names Sequiam DMS and
SequiamLink. Sales are made through direct sales efforts and in
partnership with major print equipment vendors to medium and large
sized businesses, government agencies and educational institutions.
- Sales of high-end web development projects to medium sized businesses,
local governments and non-profit organizations.
Brekel
Effective July 19, 2002, Sequiam Corporation acquired 94.54% of the issued and
outstanding shares of Brekel Group, Inc., a Delaware corporation ("Brekel"), in
exchange for 11,522,263 shares of Sequiam Corporation common stock, pursuant to
a Stock Exchange Agreement and Plan of Organization, dated June 17, 2002 (the
"Agreement"). The shares exchanged were at an exchange rate of 1:1. In
connection with the merger, the majority shareholder of Brekel returned
9,500,000 shares leaving 12,229,594 common shares of Brekel outstanding before
the exchange with Sequiam Corporation. Sequiam Corporation plans to acquire the
remaining issued and outstanding common shares of Brekel when it obtains
authorization from the remaining Brekel shareholders to exchange such shares.
The acquisition of Brekel was accounted for as a purchase and the results of
operations of Brekel are included in the accompanying financial statements since
the date of acquisition. The excess of the purchase price ($10,946,150) over the
estimated fair value of the net assets acquired ($841,966) of $10,104,154 was
recorded as a constructive dividend to Brekel shareholders since Sequiam
Corporation and Brekel have common majority shareholders. The purchase price was
determined based on the 11,522,263 shares issued times the closing stock price
of Sequiam Corporation common stock on the date of acquisition of $0.95 per
share.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition and includes leased equipment
that was returned to the manufacturers after the acquisition as described below.
8
At July 1, 2002
Current and other assets $ 530,032
Equipment held for disposal 320,824
Property and equipment 3,247,603
Goodwill (Subject to adjustment as described above) 10,104,154
-----------
Total assets acquired 4,098,459
-----------
Current liabilities 2,869,583
Long-term debt 376,880
-----------
Total liabilities assumed 3,246,463
-----------
Net assets acquired $ 841,996
===========
We acquired Brekel for its expertise in digital on-demand publishing and
printing and the innovations that it brings to our document management Internet
remote print and print on-demand software applications. We also acquired Brekel
for its contract with the World Olympians Association ("WOA") and its Internet
and ExtraNet expertise and product development gained from that project (see
below).
One of Brekel Group's primary projects is the development of the Internet site,
Extranet, for the World Olympian Association (WOA) under its BGI Sports division
in connection with a contract entered into on December 5, 2001. The scope of
Extranet is intended to encompass the full digital media program of the WOA,
including the delivery of editorial content, on-line membership services,
support of WOA sponsor/partner programs and electronic commerce. In connection
with that contract, BGI Sports is currently implementing the worldwide database
for the Official Website of the Community of Olympic Athletes. Under the terms
of Brekel's contract with the WOA, BGI Sports is developing Extranet at its own
cost and expense, and receives 35% of all sponsorship revenues in addition to
35% of any merchandizing sales prices less fixed costs. The WOA, in turn, has
committed to provide support in integrating BGI Sports' relationship within the
Olympic family, including the International Olympic Committee (IOC), various
national Olympic committees (NOCs), official sponsors of the Olympic Games, the
IOC and the NOCs, and the WOA membership. As those relationships develop, we
expect to invest more resources into the development of Internet solutions for
these entities. BGI expects to begin receiving revenue under this contract in
2003, and BGI expects to continue to incur expenses related to the development
and ongoing maintenance of Extranet through the duration of the contract.
Brekel's FirstPublish brand represents the niche in short-run publications. It
offers professional and aspiring authors of books and screenplays a web-based,
cost-effective alternative to traditional "vanity press". FirstPublish provides
several turnkey publishing services in an affordable package of bundled services
that enable authors to produce a finished book. Brekel has ceased actively
marketing this product in order to devote its efforts and resources more fully
to its opportunities with the WOA.
9
Brekel had ceased its print on-demand manufacturing operation that it conducted
under the trade name QuestPrint prior to its acquisition by Sequiam Corporation.
As a result, $1,873,255 of leased equipment was returned to the manufacturer on
August 1, 2002 and the related capital leases of $1,695,474 were written off.
The loss on the return of this equipment to the lessor of $177,781 reduced the
amount of equipment recorded in the Brekel acquisition.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
---------------------
The unaudited condensed consolidated financial statements have been
prepared by the Company, under the rules and regulations of the Securities
and Exchange Commission. The accompanying condensed consolidated financial
statements contain all normal recurring adjustments which are, in the
opinion of management, necessary for the fair presentation of such
financial statements. Certain information and disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted under such rules and
regulations although the Company believes that the disclosures are adequate
to make the information presented not misleading. The year-end balance
sheet data was derived from the audited financial statements, but does not
include all disclosures required by accounting principles generally
accepted in the United States of America. These unaudited condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes for Sequiam Software, Inc. included in Form
8-K/A filed on June 14, 2002 and the financial statements and notes for
Brekel Group, Inc. included in Form 8-K/A filed on October 8, 2002. Interim
results of operations for the periods presented may not necessarily be
indicative of the results to be expected for the full year.
Recently Adopted Accounting Pronouncements
---------------------------------------------
The Company adopted the Financial Accounting Standards Board FASB
Statements No. 141, Business Combinations ("SFAS 141"), and No. 142,
Goodwill and Other Intangible Assets ("SFAS 142"), effective January 1,
2002. SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001. SFAS 141 also requires
that the Company recognize acquired intangible assets apart from goodwill
if the acquired intangible assets meet certain criteria. SFAS 141 applies
to all business combinations initiated after June 30, 2001, and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142 that the Company reclassify the
carrying amounts of intangible assets and goodwill based on the criteria in
SFAS 141. The Company currently does not have intangible assets or goodwill
recorded on its books and therefore does not believe SFAS 141 and SFAS 142
will have a significant impact on its financial position or results of
operations.
10
Net Loss per Common Share
-----------------------------
Basic and diluted net loss per share is computed by dividing the net loss
by the weighted average number of shares of common stock outstanding during
the period. The Company did not have any potential common shares
outstanding during the periods presented.
Principles of Consolidation
-----------------------------
The consolidated financial statements include the accounts of Sequiam
Corporation and its subsidiaries Sequiam Software, Inc. and Brekel Group,
Inc (the "Company"). All intercompany transactions and accounts have been
eliminated.
Note 3 - Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business.
Management's plans include the sale of equipment previously acquired from Brekel
for its carrying value of approximately $320,000, refocusing all of its efforts
on its software products, web development and Internet services and its
opportunities with the WOA(see Note 1). Management is also presently seeking
new financing in the form of a private placement of common or preferred stock or
some combination thereof. Once Sequiam Corporation has secured financing; it
will fund the continuing product development and marketing of the Company's
products.
The Company's ability to continue as a going concern remains dependent upon its
ability to secure financing. However, there can be no assurances that this
financing will occur. In the event that the proposed private placement is not
consummated on a timely basis, the Company will need to seek additional
financing from other sources. The Company believes that revenues from operating
activities during the next 12 months will not be sufficient to support
operations during that period. There can be no assurance that the Company will
be able to find alternative financing on a timely basis, if at all. If
financing is not obtained, we may be required to reduce or curtail our
operations even further.
11
Note 4 - Shareholder Loans
A shareholder of Brekel advanced the company a total of $301,000 for working
capital. The advances are represented by a demand promissory note that bears
interest at the Applicable Federal Rate established by the Internal Revenue
Service for short-term loans (2% at September 30, 2002. During the nine months
ended September 30, 2002, a shareholder of the Company loaned the Company a
total of $173,450 for working capital. Total funds advanced by shareholders
total $474,450 at September 30, 2002
Note 5 - Operating Lease Obligation and Notes Payable
In December 2000, the Company entered into an operating lease for a 60,000
square foot facility for 120 months, beginning May 1, 2001 and expiring on April
30, 2011. During the first year of the lease, base monthly payments of $34,873
are due and increase to $37,634 during the second year of the lease and
thereafter. The lease contains an escalation clause, which provides for a 3%
increase in rent each year beginning May 2003. In September 2002, the landlord
agreed to reduce the monthly payments required under the lease to $8,500
beginning July 1, 2002 through July 1, 2004 as the Company only needs 10,000
square feet. However, the Company will still be obligated to pay the entire
monthly lease obligation through July 1, 2004, including any future tenant
improvements and costs to sublease the space. In connection with the
restructuring of the lease obligation, the Company plans to enter into a note
payable with the landlord representing payments to be made under the lease
through July 1, 2004 plus estimated future tenant improvements and costs to
sublease less rent payments received from the Company for any subleasing
activity. The landlord will also have the option to convert the note to common
stock of the Company at $1.00 per share. This note has not yet been executed.
Since the Company has not subleased the facility as of September 20, 2002, the
Company recorded deferred rent of $114,000 representing the monthly base amount
due under the original lease agreement less the restructured monthly base rent.
During 2001, Brekel entered into two notes payable with its landlord (as
addendums to the existing operating lease described above) for the costs of
improvement made to the Company's offices. These notes require total monthly
payments of $5,703, including interest of 10% per annum, through the term of the
lease (April 30, 2011). Amounts due under these notes as of September 30, 2002
were $419,542 of which $42,662 is classified as current.
Note 6 - Commitments and Contingencies
Brekel entered into a note payable with Xerox Corporation in November 2000 to
finance equipment. Brekel also entered into a Document Services Agreement
("Agreement") with Xerox Corporation on November 1, 1999 commencing April 1,
2000. During the 63-month term of the Agreement ending June 30, 2005, Xerox
agreed to provide equipment and services in accordance with specified
performance standards. Those standards include, among other things, a
performance satisfaction guaranty by Xerox. Under the terms of that guaranty,
Brekel may terminate the agreement without incurring any early termination
charges. Brekel did in March 2001 give proper notice of such termination.
Xerox has, contrary to the contract, asserted its claim for early termination
charges and for monthly minimum service charges on billings made after the
termination date. The Company disputes these claims and believes them to be
without merit.
12
On or about October 3, 2002, General Electric Capital Corporation ("GE") filed a
lawsuit against Brekel Group, Inc. ("BGI"), in the Circuit Court of the 9th
Judicial Circuit in and for Orange County, located in Orlando, Florida, Case No.
02CA-9448 #35. GE claims that BGI breached its lease agreement for three
digital copiers by failing to make monthly payments beginning in June 2002 and
continuing thereafter. GE claims the right to accelerate payments due under the
lease and claims damages in the amount of $93,833. GE also seeks to retake
possession of the equipment prior to final determination of the case. BGI has
returned possession of the copiers to GE, but BGI disputes all or a portion of
the claim for damages. The court has entered no decisions to date.
Note 7 - Income taxes
The Company records income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." The Company has incurred net operating losses since
inception resulting in a deferred tax asset, for which a valuation allowance was
provided since it is more likely than not that the deferred tax asset will not
be realized.
Note 8 - Long-lived Assets Held for Disposal
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an investment may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
In connection with the acquisition of Brekel, the Company reclassified $320,824
of equipment acquired from Brekel that is no longer being used to equipment held
for disposal. The Company believes that this is a reasonable value of the
current fair market value for the equipment to be disposed.
Note 9 - Subsequent events
On October 14, 2002, we repurchased 1,000,000 shares of common stock from Brekel
Group, Inc. at par value in accordance with the terms of the Agreement with the
shareholders of Brekel Group, Inc. Following that transaction we had 34,831,611
common shares outstanding.
Effective November 1, 2002, the Company entered into an agreement to acquire all
of the assets of WMW Communications, Inc. ("WMW") for $150,000 in cash and
150,000 shares of common stock. The Company also entered into an employment
agreement with L. Alan McGinn, the CEO of WMW. The Company will employ nine of
the former employees of WMW. Mr. McGinn will serve as the Chief Technology
Officer of Sequiam Software, Inc. The significant assets of WMW include Access
Orlando, a local Internet service provider and "Internet Remote Print," a
software product developed, sold and supported by WMW. The contract to purchase
the assets of WMW is subject to conditions that have not yet been satisfied, and
we are not in a position to make any assurances that the transaction will be
closed.
13
Brekel has agreed to enter into a joint venture with Pachyderm Press, Inc.
("Pachyderm") to publish the World Olympian Magazine. Pachyderm has an
exclusive license agreement with the WOA to publish this magazine. Olympian
Publications, LLC, will manage the joint venture; a Florida limited liability
company owned 50% each by Brekel and Pachyderm. Brekel will provide sales,
marketing administrative and print buying services and Pachyderm will provide
all publishing services to the venture. Net income will be split equally
between Brekel and Pachyderm. The contract to create the joint venture is
subject to conditions that have not yet been satisfied, and we are not in a
position to make any assurances that the transaction will be closed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Recent Developments
- --------------------
Effective April 1, 2002, Sequiam Corporation's wholly-owned subsidiary, Sequiam
Acquisitions, Inc., merged with Sequiam, Inc and Sequiam Acquisitions, Inc.
survived the merger. Sequiam Acquisitions, Inc. changed its name to Sequiam
Software, Inc. on May 1, 2002. The merger transaction was accounted for as a
purchase of Sequiam Corporation by Sequiam, Inc. (a reverse acquisition in which
Sequiam, Inc. is considered the acquirer for accounting purposes), since the
shareholders of Sequiam, Inc. obtained a majority of the voting rights of
Sequiam Corporation as a result of the transaction. Pursuant to the merger
agreement, Sequiam Corporation issued 20,000,000 shares of common stock in
exchange for all of the outstanding shares of common stock of Sequiam, Inc.,
consisting of 20,000,000 shares. Additionally, pursuant to the merger agreement,
500,000 shares of Sequiam Corporation's common stock were returned to treasury
and cancelled. Sequiam, Inc. was formed to research, develop, produce and
market a document management software product.
Effective July 19, 2002, Sequiam Corporation acquired 94.22% of the issued and
outstanding shares of Brekel Group, Inc., a Delaware corporation ("Brekel"), in
exchange for 11,522,263 shares of Sequiam Corporation common stock, pursuant to
a Stock Exchange Agreement and Plan of Organization, dated June 17, 2002 (the
"Agreement"). The shares exchanged were at an exchange rate of 1:1. In
connection with the merger, the majority shareholder of Brekel returned
9,500,000 shares leaving 12,229,594 common shares of Brekel outstanding before
the exchange with Sequiam Corporation. Sequiam Corporation plans to acquire the
remaining issued and outstanding common shares of Brekel when it obtains
authorization from the remaining Brekel shareholders to exchange such shares.
The acquisition of Brekel was accounted for as a purchase and the results of
operations of Brekel are included in the accompanying financial statements since
the date of acquisition. The excess of the purchase price ($10,946,150) over the
estimated fair value of the assets acquired ($841,996) of $10,104,154 was
recorded as a constructive dividend to Brekel shareholders since Sequiam
Corporation and Brekel have common majority shareholders. The purchase price was
determined based on the 11,522,263 shares issued times the closing stock price
of Sequiam Corporation common stock on the date of acquisition of $0.95 per
share.
14
Results of Operations
- -----------------------
Net Sales. For the three and nine months ended September 30, 2002, we had net
revenues of $48,120 and $286,435, respectively, compared to revenues of $-0- for
the three and nine months ended September 30, 2001. The increase in sales was
primarily due to the acquisition of Sequiam, Inc. During the nine months ended
September 30, 2002, we sold web site development and hosting services amounting
to $81,865 and earned consulting fees of $204,570.
Website development cost. Website development costs increased to $119,506 and
$177,979 for the three and nine months ended September 30, 2002, respectively,
compared to $-0- for the three months and nine months ended September 30, 2001.
The increase was a result of several components, including an increase in
salaries and benefits, rents and other infrastructure costs associated with
expanding this service.
Software development costs. Software development costs decreased to $-0- for
the three and nine months ended September 30, 2002, down from $123,994 and
$311,222 for the three and nine months ended September 30, 2001, respectively.
The decrease was a result of completing the development of our software
products.
General and Administrative Expenses. General and administrative expenses
increased to $519,305 for the three months ended September 30, 2002, up from
$133,812 for the three months ended September 30, 2001, an increase of $385,493
or approximately 288%. General and administrative expenses increased to
$777,526 for the nine months ended September 30, 2002 compared to $265,416 for
the same period in the prior year. The increase in these expenses was a result
of several components, including an increase in rent and other infrastructure
costs, consultant fees, legal and accounting fees and other professional
expenses associated with the merger with Sequiam, Inc. and the acquisition of
The Brekel Group, Inc. We also had additional costs associated with the
extensive reporting requirements we had to meet with the SEC.
Depreciation. Depreciation for the three and nine months ended September 30,
2002 was $33,830 and $43,761, respectively, compared to $-0- for the three and
nine months ended September 30, 2001. The increase was primarily due to the
depreciable assets acquired in the merger with Sequiam, Inc. and the acquisition
of The Brekel Group, Inc.
Liquidity and Capital Resources
- ----------------------------------
Operating Activities
Cash used for operating activities during the nine months ended September 30,
2002 was $25,411 compared to cash used for operating activities of $392,944 for
the same period in the prior year. The decrease in cash used for operating
activities during the 2002 period was mainly the result of increases in accrued
salaries, expenses and deferred rent as compared to the prior period.
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Investing Activities
Cash used for investing activities during the nine months ended September 30,
2002 was $54,064 as a result of equipment purchases of $14,597 and
capitalization of software costs of $39,467
Financing Activities
Cash provided by financing activities was $79,475 as a result of payments on
related party loans of $231,560 and payments on notes payable of $39,465 which
were offset by proceeds from shareholder loans of $348,500.
Our plan for Sequiam Software, Inc. includes investment in the research and
development of our software products, Sequiam and SequiamLink. In addition to
our investment in Sequiam's research and development, we plan to devote more
resources to the marketing, sales and distribution of Sequiam's existing
products. We believe that we have the potential to significantly increase
Sequiam's operating revenue by investment in marketing and distribution. We
will require additional equity financing in order to meet our goals with respect
to marketing, sales and distribution. We believe we have the opportunity to
raise such additional capital through equity financing. However, there can be
no assurance that such financing will be raised when needed and upon terms
acceptable to the Company.
We intend to invest in research and development of Brekel's products related to
the BGI Sports division as more fully described below. We believe that we can
significantly increase Brekel's operating revenue by investment in marketing
sales and distribution. However, we will require additional equity financing in
order to meet our goals with respect to marketing, sales and distribution of
Brekel's products.
One of Brekel Group's primary projects is the development of the Internet site,
Extranet, for the World Olympian Association (WOA) under its BGI Sports
division. The scope of Extranet is intended to encompass the full digital media
program of the WOA, including the delivery of editorial content, on-line
membership services, support of WOA sponsor/partner programs and electronic
commerce. In addition, BGI Sports is currently implementing the worldwide
database for the Official Website of the Community of Olympic Athletes. Under
the terms of Brekel Group's contract with the WOA, BGI Sports is developing
Extranet at its own cost and expense, and will receive 35% of all sponsorship
revenues in addition to 35% of any merchandizing sales prices less fixed costs.
The WOA, in turn, has committed to provide support in integrating BGI Sports'
relationship within the Olympic family, including the International Olympic
Committee (IOC), various national Olympic committees (NOCs), official sponsors
of the Olympic Games, the IOC and the NOCs, and the WOA membership. As those
relationships develop, we expect to invest more resources into the development
of Internet solutions for these entities. BGI expects to begin receiving revenue
under this contract in 2003, and BGI expects to continue to incur expenses
related to the development and ongoing maintenance of Extranet through the
duration of the contract.
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Brekel has agreed to enter into a joint venture with Pachyderm Press, Inc.
("Pachyderm") to publish the World Olympian Magazine. Pachyderm has an
exclusive license agreement with the WOA to publish this magazine. The joint
venture will be conducted by Olympian Publications, LLC, a Florida limited
liability company owned 50% each by Brekel and Pachyderm.
The FirstPublish brand represents the niche in short-run publications. It offers
professional and aspiring authors of books and screenplays a web-based,
cost-effective alternative to traditional "vanity press". FirstPublish provides
several turnkey publishing services in an affordable package of bundled services
that enable authors to produce a finished book. Brekel has ceased actively
marketing this product in order to devote its efforts and resources more fully
to its Olympic opportunities. Brekel is in discussions to provide its
publishing services wholesale to another company who wishes to market the
service under its own label.
Brekel had ceased its print on-demand manufacturing operation that it conducted
under the trade name QuestPrint prior to its acquisition by Sequiam Corporation.
However, Brekel will continue to act as a print broker for the Olympian
Publications joint venture with Pachyderm Press's products as discussed above.
We will need additional capital over the next twelve (12) months to continue as
a going concern. We expect to obtain this additional capital through common and
preferred equity financing acquired in private placements of the Company's
shares. We have not entered into any final agreement to obtain additional funds,
and there can be no assurance that we will be able to obtain financing when
needed or on terms that we find acceptable. In addition, any equity financing
that is obtained by us could result in dilution to the shareholders holding the
common stock. Any financing, if available, may be on terms unfavorable to us.
If adequate funds are not obtained, we may be required to reduce or curtail our
operations even further.
The following table summarizes the Company's contractual obligations at
September 30, 2002, and the effect such obligations are expected to have on its
liquidity and cash flow in future periods:
Lease
-----
Year Rentals Debt Maturities
- ---------- --------------- ---------------
2003 $ 115,600 $ -
2004 117,334 31,439
2005 120,854 61,405
2006 124,480 65,193
2007 128,214 69,214
Thereafter 203,147 192,291
--------------- ---------------
$ 809,629 $ 419,542
================================
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Critical Accounting Policies and Estimates
- ------------------------------------------
Recent Accounting Pronouncements
- --------------------------------
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 ("FAS 143"), Accounting for Asset
Retirement Obligations, effective for the fiscal years beginning after June 15,
2002. This statement provides the accounting for the cost of legal obligations
associated with the retirement of long-lived assets. FAS 143 also requires that
companies recognize the fair value of a liability for asset retirement
obligations in the period in which the obligations are incurred and capitalize
that amount as a part of the book value of the long-lived asset. That cost is
then depreciated over the remaining life of the underlying long-lived asset.
The Company does not expect SFAS 143 to have a material impact on its financial
condition and results of operations.
In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective January 1,
2003. SFAS 146 provides than an exit cost liability should not always be
recorded at the date of an entity's commitment to an exit plan, but instead
should be recorded when the obligation is incurred. An entity's commitment to a
plan, by itself, does not create an obligation that meets the definition of a
liability. The Company does not expect SFAS 146 to have a material impact on
its financial condition and results of operations.
ITEM 3. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the periodic reports filed
by the Company with the Securities and Exchange Commission (the "SEC") is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC and that such information is accumulated and
communicated to the Company's management. Based on their most recent evaluation,
which was completed within 90 days of the filing of this Quarterly Report on
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Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer
believe that the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) are
effective. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these internal controls
subsequent to the date of the most recent evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
General Electric Capital Corporation v. Brekel Group, Inc.
On or about October 3, 2002, General Electric Capital Corporation ("GE") filed a
lawsuit against Brekel Group, Inc. ("BGI"), in the Circuit Court of the 9th
Judicial Circuit in and for Orange County, located in Orlando, Florida, Case No.
02CA-9448 #35. GE claims that BGI breached its lease agreement for three
digital copiers by failing to make monthly payments beginning in June 2002 and
continuing thereafter. GE claims the right to accelerate payments due under the
lease and claims damages in the amount of $93,833. GE also seeks to retake
possession of the equipment prior to final determination of the case. BGI has
returned possession of the copiers to GE, but BGI disputes all or a portion of
the claim for damages. The court has entered no decisions to date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)
(a) Exhibits:
2.1 Stock Exchange Agreement and Plan of Reorganization, incorporated herein
by this reference from the Exhibits to Form 8-K filed on August 6, 2002.
3.1 Articles of Incorporation of Wedge Net Experts, Inc., incorporated
herein by this reference from Form SB-2 filed on September 13, 2000.
3.2 Wedge Net Experts, Inc. Bylaws, incorporated herein by this reference
from the Exhibits to Form SB-2 filed on September 13, 2000, as amended on July
18, 2002, by an amendment incorporated herein by this reference from the
Exhibits to Form 10-QSB filed on August 14, 2002.
21.1 Subsidiaries
22.1 Notice of Special Meeting of Shareholders to Be Held July 18, 2002,
incorporated herein by this reference from the Exhibits to Form 10-QSB
filed on August 14, 2002.
99.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350.
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99.2 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 15d-14.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed during
the quarter ending September 30, 2002:
Form 8-K filed on August 6, 2002, regarding acquisition of the Brekel
Group, Inc.
Form 8-K/A filed on October 8, 2002, regarding acquisition of the Brekel
Group, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
SEQUIAM CORPORATION
Date: November 19, 2002
By: /s/ Nicolaas H. Van den Brekel
- -----------------------------------------------
Nicolaas H. Van den Brekel, Chief Executive Officer
By: /s/ Mark Mroczkowski
- -----------------------------------------------
Mark L. Mroczkowski, Chief Financial Officer
20