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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
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 of (I.R.S. Employer
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 August
18, 2003 was 40,601,247.
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. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . .4
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . .4
Condensed Consolidated Statements of Operations. . . . . . . . . . . . . .5
Condensed Consolidated Statements of Stockholders' Deficit. . . . . . . .6
Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . .7
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . .9
ITEM 3. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . .22
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .23
ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . .23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a). . . . . . . . . . . . .30
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
2
SEQUIAM CORPORATION
Form 10-QSB
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
June 30, 2003
(Unaudited) December 31, 2002
------------ -------------------
ASSETS
Current assets:
Cash $ 40,210 $ 85,922
Accounts receivable, net 45,958 41,141
Prepaid expenses 84,500 -
Equipment held for sale 40,706 177,080
------------ -------------------
Total current assets 211,374 304,143
------------ -------------------
Property and equipment, net 1,294,637 1,375,398
Software development costs, net 136,145 131,939
Acquired software, net 252,393 288,000
Acquired intellectual properties, net 843,830 -
Deposits and other assets 7,800 7,800
------------ -------------------
Total assets $ 2,746,180 $ 2,107,280
============ ===================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Amount due for acquisition $ 44,630 $ 288,457
Accounts payable 674,337 646,331
Accrued expenses 33,109 64,783
Loan from shareholders 795,450 795,450
Stock subscriptions payable 2,266,828 -
Accrued shareholder salaries 1,034,792 854,792
------------ -------------------
Total current liabilities 5,099,146 2,649,813
------------ -------------------
Long-term debt 1,055,556 1,291,092
------------ -------------------
Total liabilities 6,404,701 3,940,905
------------ -------------------
Shareholders' deficit:
Common shares 37,382 35,463
Additional Paid-in capital 1,202,898 42,565
Accumulated deficit (4,648,801) (1,911,653)
------------ -------------------
Total shareholders' deficit (3,408,521) (1,833,625)
------------ -------------------
Total liabilities and shareholders' deficit $ 2,746,180 $ 2,107,280
============ ===================
See accompanying notes to condensed consolidated financial statements.
4
SEQUIAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------
Net sales $ 110,910 $ 213,315 $ 234,104 $ 238,315
Costs and expenses:
Software and web development costs 136,941 58,473 278,804 58,473
Non-cash compensation 1,486,895 - 1,547,895 -
Selling, general and administrative 394,923 177,295 823,667 258,221
Depreciation and amortization 115,032 5,080 197,871 9,931
------------------------------------------------------
2,133,791 240,848 2,848,237 326,625
------------------------------------------------------
Loss from operations (2,022,881) (27,533) (2,614,133) (88,310)
Gain (Loss) on sale of equipment 2,431 (116,439) -
Gain on debt settlement 37,315 37,315
Interest expense (25,906) (268) (43,890) (1,104)
------------------------------------------------------
Net loss $(2,009,041) $ (27,801) $(2,737,147) $ (89,414)
======================================================
Net loss per common share: Basic and diluted $ (0.06) $ (0.00) $ (0.08) $ (0.01)
======================================================
Weighted average common shares
outstanding: Basic and diluted 36,082,226 24,233,000 36,082,226 14,483,000
======================================================
See accompanying notes to condensed consolidated financial statements.
5
SEQUIAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Six months Ended June 30, 2003
(Unaudited)
Common Shares
-------------------
Additional
Shares Par Paid-in Accumulated
Outstanding Value Capital Deficit Total
------------------------------------------------------------
Balance at December 31, 2002 35,462,609 $35,463 $ 42,565 $(1,911,653) $(1,833,625)
Sale of common shares 1,301,667 1,301 349,951 351,252
Beneficial conversion feature on
convertible debenture 400,000 400,000
Common shares issued for services 300,000 300 260,700 261,000
Common shares issued for acquisition of WMW Communications 318,471 318 149,682 150,000
Net Loss (2,737,147) (2,737,147)
------------------------------------------------------------
Balance at June 30, 2003 37,382,747 $37,382 $1,202,898 $(4,648,801) $(3,408,521)
============================================================
See accompanying notes to condensed consolidated financial statements.
6
SEQUIAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months Ended
June 30,
-------------------------
2003 2002
------------ -----------
Cash flows from operating activities:
Net loss $(2,737,147) $ (63,545)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 197,871 -
Accretion of debt discount 18,750 -
Issuance of common stock in exchange for services 261,000 -
Loss on sale of equipment 41,139 -
Loss on impairment of equipment held for sale 75,000 -
Gain on debt settlement (37,315) -
Increase in accounts receivable (4,817) -
Increase in prepaid expenses and other assets (84,500) -
Increase in accounts payable 20,691 -
Increase in accrued shareholders salaries 180,000 138,000
Decrease in other accrued expenses (2,113) -
Stock subscriptions payable for services 1,366,895 -
------------ -----------
Net cash used for operating activities (704,546) $ 74,455
------------ -----------
Cash flows from investing activities:
Equipment purchases - (2,759)
Proceeds from sales of equipment 19,732 -
Cash paid for WMW Communications (93,827) -
Software development costs capitalized (14,037) (27,021)
------------ -----------
Net cash used for investing activities (88,132) (29,780)
------------ -----------
Cash flows from financing activities:
Proceeds from bridge loan 250,000 -
Proceeds from debenture 150,000 -
Sale of common stock 351,252 2,000
Repayment of note payable (4,286) -
------------ -----------
Net cash provided by financing activities 746,966 2,000
------------ -----------
Net change in cash (45,712) 46,675
Cash, beginning of period 85,922 -
------------ -----------
Cash, end of period $ 40,210 $ 46,675
============ ===========
See accompanying notes to condensed consolidated financial statements.
7
SEQUIAM CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Non-cash activities: 2003 2002
- ------------------- -------- --------
Common Stock issued for acquisition of WMW Communications $150,000 -
Beneficial conversion feature on convertible debt $400,000 -
See accompanying notes to condensed consolidated financial statements.
8
SEQUIAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 -Description of Business
Sequiam Corporation ("Sequiam" or the "Company") through its wholly owned
subsidiaries, Sequiam Software, Inc. and Sequiam Communications, Inc., develops,
markets, and supports a portfolio of Internet and print enterprise-wide software
products that enable users to acquire, manage, personalize, and present
information. In addition, the Company provides application service provider
("ASP") hosting of Internet-enabled solutions, Internet service provider ("ISP")
including Internet access and hosting, consulting, application integration, and
custom web development and software development services. ASP and ISP hosting is
performed using the Company's software and facilities to provide processing,
print, mail, archival, and Internet delivery of documents for customers who
outsource this activity. On May 9, 2003, the Company acquired substantially all
of the assets of Smart Biometrics, Inc. (see Note 9).
Effective April 1, 2002, Sequiam Corporation (f/k/a Wedge Net Experts, Inc.),
through its 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.
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
the Company, 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. As a result, the former shareholders of the
Company obtained 82.53% of the voting rights of Sequiam Corporation. The
transaction 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 incorporated in Delaware on January
23, 2001 (date of inception) to research, develop, produce and market a document
management software product.
Since inception, the Company's primary activities have consisted of research and
development, and software development activities. Accordingly, the Company had
not generated any significant revenues. During 2002, the Company acquired the
Brekel Group, Inc. and WMW Communications, Inc. doing business as Access
Orlando, and began offering web development, Internet and web hosting and custom
software development, while continuing its software development activities.
During the Six months ended June 30, 2003, the Company paid $93,827 in cash and
$150,000 in common shares related to the acquisition of Access Orlando and the
remaining amount due for this acquisition was $44,630 as of June 30, 2003.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
- -----------------------
The Company, under the rules and regulations of the Securities and Exchange
Commission, has prepared the unaudited condensed consolidated financial
statements. 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.
9
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 Corporation
included in Form 10-KSB filed for the year ended December 31, 2002. Interim
results of operations for the periods presented may not necessarily be
indicative of the results to be expected for the full year.
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.
Common stock warrants are included in the calculation of diluted earnings per
common share using the treasury stock method, when the result is dilutive.
Common shares underlying the convertible debenture are included in the
calculation of diluted earnings per common share using the if-converted method
when the result is dilutive. Potential common shares underlying outstanding
warrants were 2,400,000 as of June 30, 2003. Potential common shares underlying
the convertible debenture are contingent upon certain factors as described in
Note 7.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of Sequiam
Corporation and its subsidiaries Sequiam Software, Inc., Sequiam Biometrics,
Inc., Sequiam Education, Inc. and Sequiam Communications, Inc (the "Company").
All intercompany transactions and accounts have been eliminated.
Note 3 -Managements' Plan
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. Sequiam
has accumulated significant operating losses, a working capital deficit and
produced minimal revenues since inception. During the first quarter of 2003
and April 2003, the Company obtained financing from La Jolla Cove Investors,
Inc. (the "Investor") as well as additional financing from the sale of its
common stock and a loan agreement (see Notes 7, 8 and 9). In addition, the
Company has begun to generate revenues on a consistent basis.
With the proceeds expected to be received from the Investor, the Company will
fund continuing product development and the marketing of the products developed
by the Company. The company will also actively seek new acquisitions of proven
products and technologies. Management plans to continue to seek additional
financing in the form of a private placement of common and preferred stock, debt
or some combination thereof to supplement its financing arrangement with the
Investor.
10
With the proceeds from the financings described above along with the expected
increase in revenues from the sale of the Company's existing products and
services, the Company believes there will be sufficient working capital during
the next 12 months to support operations during that period. The Company's
ability to continue as a going concern remains dependent upon its ability to
meet the requirements of its financing agreement with the Investor and execute
its business plan.
Note 4 - Commitments and Contingencies
On October 1, 2002, the Companies Chief Executive Officer and Chief Financial
Officer entered into amended and restated employment agreements with Sequiam
Corporations and its Subsidiaries. The amended agreements replace separate
agreements with Sequiam, Inc. and Brekel Group, Inc. The agreements have an
initial term of two years with automatic one-year renewals. The agreements
provide for compensation in the form of minimum annual salary of $185,000 and
$175,000 respectively, and allow for bonuses in cash, stock or stock options and
participation in Company benefit plans. Full time employment is a requirement
of the contract. In the event that a change in control of the Company occurs
without the prior approval of the then existing Board of Directors, then these
contracts will be deemed terminated and compensation of $5 million is payable at
termination and $1 million annually for five years subsequent to termination
will be due and payable to each employee.
Included in accounts payable and accrued expenses at June 30, 2003 are
un-reimbursed business expenses of $57,624 and $24,890 owed to Nicholas
VandenBrekel and Mark Mroczkowski, respectively.
The Company is involved in various claims and legal actions incidental to the
normal conduct of its business. On or about October 3, 2002, General Electric
Capital Corporation ("GE") filed a lawsuit against Brekel Group, Inc.
("Brekel"), in the Circuit Court of the 9th Judicial Circuit in and for Orange
County, located in Orlando, Florida. GE claims that Brekel owes a deficiency
balance in the amount of $93,833 for three digital copiers rented under a lease
agreement. Brekel has returned possession of the copiers to GE, but Brekel
disputes the claim for damages. The court has entered no decisions to date.
The Company does not believe that the ultimate resolution of these actions will
have a material adverse effect on the Company based upon the value of the
equipment returned to GE.
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. On
September 3, 2002 Xerox did, contrary to the contract, assert 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.
11
A competing web-development company has posted an alternative web site for the
World Olympian Association ("WOA"), claiming such right was granted to it by the
WOA. We are seeking to resolve this conflict with the WOA without resort to
litigation. This dispute will not affect our publication of the print magazine
"World Olympian," but it has the potential to result in the loss of revenue from
the WOA web site. We do not believe the loss of such revenue will have a
material, adverse effect on our overall business.
Note 5 - 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 6 - 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 in July 2002, the Company
reclassified production equipment acquired from Brekel that is no longer being
used for operations to equipment held for disposal. During the Six months ended
June 30, 2003, the Company recorded an impairment loss of $75,000 to reduce the
equipment to fair market value. The Company believes that $40,706 as of June
30, 2003, is a reasonable estimate of the current fair market value for the
remaining equipment to be disposed. The Company expects to sell this remaining
equipment by December 30, 2003.
Note 7 - Convertible Debenture
Sequiam entered into a Securities Purchase Agreement with La Jolla Cove
Investors, Inc. (the "Investor"), dated March 5, 2003, pursuant to which it
delivered to Investor an 8% Convertible Debenture in the amount of $300,000,
convertible into our common stock, and a Warrant to Purchase Common Stock. Upon
closing on March 7, 2003, Sequiam received $150,000 less attorneys fees of
$2,500, of the total $300,000 principal amount of the 8% Convertible Debenture.
When the Securities and Exchange Commission declares this registration statement
filed on April 25, 2003, effective, the Company will receive the balance of
$150,000.
On April 16, 2003, the terms of the debenture and warrant agreement were
amended, as set forth in separate letter agreement with the Investor. The
conversion rate of the debenture is determined based upon the market rate of our
stock as reported on the OTCBB at the time the debenture is converted. If the
12
Market Rate is greater than $0.625, then the debenture will be converted into
less than 4,600,000, but equal to or greater than 200,000 shares of common
stock. If the Market Rate is $0.625, then the debenture will be converted into
600,000 shares of common stock. If the Market Rate is less than $0.625 but
equal to or greater than $0.082, then the debenture will be converted into more
than 600,000 but less than 4,600,000 shares of common stock. If the Market Rate
is less than $0.082, then the debenture will be converted into more than
4,600,000 shares of common stock. In the event that the debenture is converted
at a time when the Market Rate is equal to or less than $0.625, then the company
has the option of repaying the debenture in lieu of conversion at 150% of the
amount being converted. The company intends to prepay the Debenture if it would
convert into more than 4,600,000 shares. The Investor may convert a maximum of
10% of the principal into our common stock during any month.
Under the terms of the amended warrant, the Investor received a warrant to
purchase 2,000,000 shares of our common stock, at an exercise price of $1.50 per
share. The warrant will expire in March 2006. As of the date of filing this
report, the Investor had not exercised any portion of the warrant or converted
any portion of the debenture, and no shares of common stock have been issued
relative to these agreements.
Sequiam is obligated to register the sale of the underlying common stock to be
issued upon conversion of the debenture and the exercise of the warrant. Upon
the effective date of the registration statement, we will receive the balance of
the principal amount of the debenture. Beginning the second full month
following the effectiveness of such registration statement, we have the right to
cause the Investor to convert at least 5% of the debenture each month and
provided that the market price of the Company's common shares is above $0.625,
to exercise a portion of the warrant equal to the product of the dollar amount
of the debenture being converted multiplied by ten, divided by 1.5 (which will
result in the exercise of at least 5% of the related warrant, per month). In
the event the Investor breaches the provision to convert at least 5% of the
original principal amount of the debenture and exercise the related warrant, the
Investor shall not be entitled to collect interest on the debenture for that
month. At the time the debenture has been fully converted and the warrant has
been fully exercised, the Company will issue additional warrants to the Investor
in an amount equal to 6,600,000 minus the number of shares issued to the
Investor pursuant to the conversion of the debenture and exercise of the
warrants. The additional warrants will have an exercise price of $1.50 per
share and will expire three years from the date of issuance.
The 8% Convertible Debenture contains a beneficial conversion feature since the
calculated conversion amount is lower than the Company's stock price at the date
of the agreement. In accordance with EITF 00-27, since the fair value of the
beneficial conversion feature exceeded the amount of the proceeds received from
the debenture, the Company recorded the beneficial conversion feature as a debt
discount of $150,000, which is equal to the proceeds received. The debt discount
is being amortized over the life of the debenture of 24 months. As of June 30,
2003, the balance of the debenture, net of the unamortized debt discount of
$131,250 was $18,750 and is included in long-term debt.
13
The number of shares to be issued to the selling security holder upon conversion
of the 8% Convertible Debenture depends upon the trading price of our common
stock. If the selling security holder receives less than 6,600,000 shares of
common stock after conversion of the entire amount of the 8% Convertible
Debenture and exercise of the entire amount of the Warrant to Purchase Common
Stock, then we have agreed, pursuant to the letter agreement dated April 16,
2003, to issue to the selling security holder the difference between 6,600,000
shares and the number of shares received upon conversion of the debenture and
exercise of the warrant, at a purchase price of $1.50 per share (regardless of
market rate). This right will expire three years after the conversion of the 8%
Convertible Debenture.
The excess of the aggregate fair value of the common stock that La Jolla would
receive upon conversion of the debenture over the total debenture amount
($300,000) depends on the Company's market price. Assuming conversion of the
debenture when market prices are $.10, $.0625, $1.00 and $1.88 and assuming the
Company did not elect to prepay the debenture when the market rate was at or
below $.625, the aggregate excess fair value of the common stock issued over the
debenture amount of $300,000 would be approximately $75,000, $75,000, $1,825,000
and $76,000, respectively. When the market price is above $.625 but below
$1.88, the excess fair value of the common stock issued over the loan amount
would decrease by approximately $200,000 for each $0.10 increase in the market
price.
Beginning thirty (30) days after this registration statement is declared
effective by the Securities and Exchange Commission, the selling security holder
has agreed to convert at least 5% but no more than 10% of the 8% Convertible
Debenture and exercise at least 5% but no more than 10% of the related Warrant
to Purchase Common Stock, per month. However, the selling stockholder has
contractually agreed to restrict its ability to convert or exercise its
warrants and receive shares of our common stock such that the number of shares
of common stock held by it and its affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
Sequiam has agreed not to pay any accrued salaries or shareholder loans that are
presently outstanding until after the 8% Convertible Debenture is paid in full
or converted, except to the extent that any such accrued salaries or shareholder
loans are used to perform obligations under a Put and Call Agreement between
Nick VandenBrekel, Mark Mroczkowski and the Investor, or unless the Company can
pay the accrued salaries out of the proceeds of any additional financing we
might obtain.
Note 8 - Loan Agreement
On May 13, 2003, Sequiam Corporation entered into a loan agreement ("Note") with
Lee Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John
Svenningsen, for a principal loan amount of $400,000 under a promissory note
bearing interest at five percent (5%) interest. As of the date of the Note,
Sequiam Corporation had received $175,000 as advances under the Note. The
remaining loan proceeds were disbursed $100,000 on June 12, 2003 and $50,000 on
July 12, 2003. In connection with this note, Sequiam Corporation issued two
warrants to the holder to purchase 625,000 shares of its common stock at an
exercise price of $0.01 per share and 350,000 shares of its common stock at
$1.00 per share. The Warrants for 625,000 shares were exercised on June 25,
2003 and the warrants for 350,000 expire in May 2008.
14
The outstanding principal balance, together with any and all accrued unpaid
interest and any other amounts due and owing under this Note, shall be due and
payable on the date that is the earlier of (a) the date that the exercise price
is paid to Sequiam Corporation for any portion of the warrants by La Jolla Cove
Investors, Inc. (see Note 7), or (b) the date the La Jolla Warrant expires in
March 2006. The principal payments to the holder will be made in a percentage
of the obligation that is equal to the percentage of the total warrants
exercised by La Jolla, such that the Note is fully repaid as the Warrants are
exercised by La Jolla. Unless otherwise specifically provided for in the Note,
all Note payments shall be applied first to interest and then to principal.
Note 9 - Capital Stock
During the Six months ended June 30, 2003, the Company issued 210,000 common
shares for business advisory services and technology transfer services valued at
$171,000 based on the Company's quoted market price on the date of the related
agreements. In addition, the Company issued 90,000 shares for investor and
public relations services valued at $90,000 in April 2003.
On January 2, 2003, Sequiam Corporation sold an aggregate of 10,000 shares of
its common stock to two accredited investors at a price of $1.00 per share for
proceeds of $10,000.
On February 6, 2003, Sequiam Corporation sold an aggregate of 266,667 shares of
its common stock to one accredited investor at a price of $0.75 per share for
proceeds of $200,002, less a commission of $20,000 for net proceeds of $180,002.
On April 25, and June 23, 2003, Sequiam Corporation sold an aggregate of 400,000
shares of its common stock to that same accredited investor at a price of $0.50
per share for proceeds of $200,000, less a commission of $20,000 for net
proceeds of $180,000. Sequiam Corporation also granted warrants to this
accredited investor to purchase: 800,000 shares of its common stock at $1.50
exercisable through February 6, 2007; one million shares of its common stock at
$0.75 exercisable through April 25, 2007; and one million shares of its common
stock at $0.75 exercisable through June 23 2007 In connection with such sales,
Sequiam Corporation relied on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. This investor represented in
writing that the shares were being acquired for investment and, in addition, the
certificates representing the shares bear a restrictive securities legend.
The Company agreed to issue 1,553,500 shares for investment banking, investor
and public relations, and employee services valued at $1,366,895, which was
included in accrued expenses. The 1,553,500 shares were issued in July 2003.
The Company also agreed to issue 1,500,000 shares valued at $750,000 for the
acquisition of the assets of Smart Biometrics, Inc. on May 9, 2003, and 165,000
shares valued at $149,993 for the acquisition of the assets of Telepartners,
Inc. on June 1, 2003. The $899,993 value of the shares was included in current
liabilities and the shares were issued in July 2003.
Note 10 - Acquisitions
15
On May 9, 2003, Sequiam Biometrics, Inc., a wholly owned subsidiary of Sequiam
Corporation formed on April 21, 2003, acquired substantially all of the assets
of Smart Biometrics, Inc. of Sanford, Florida. In consideration for the assets,
Sequiam Corporation issued a total of 1,500,000 shares of its common stock to
Smart Biometrics, Inc. Smart Biometrics, Inc. is engaged in the development of
biometric technologies. The assets acquired by Sequiam Biometrics, Inc. include
the BioVault(TM), which is a secure safe that utilizes patent pending technology
and protocols to recognize a person's fingerprint to unlock.
On June 1, 2003, Sequiam Education, Inc., a wholly owned subsidiary of Sequiam
Corporation formed on May 30, 2003, acquired substantially all of the assets of
Telepartners, Inc. of West Palm Beach, Florida. In consideration for the
assets, Sequiam Corporation issued a total of 165,000 shares of its common stock
to Telepartners, Inc. Telepartners, Inc. is engaged in the development of
supplemental educational products for schoolchildren in grades 1 through 12.
The assets acquired by Sequiam Biometrics, Inc. include the Extended
Classroom(TM), which is a supplemental, educational program consisting of a
video lesson library of the very lesson concepts that are taught in our public
school classrooms in the United States. Each lesson summary has been produced
in high quality and digitally mastered, allowing for Internet and television
broadcast distribution as well as being offered in CD and video formats
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Recent Developments
- --------------------
On May 9, 2003, we acquired substantially all of the assets of Smart Biometrics,
Inc., a Florida corporation, in exchange for 1,500,000 shares of our common
stock. Smart Biometrics, Inc. developed biometric technology and a product
called "BioVault." The technology uses an electronically read fingerprint as a
key for a secure locking system. The technology is different from currently
existing patented fingerprint-recognition technology because it uses an
electronically read fingerprint entry system with no mechanical over-ride and no
digital photographs that are more susceptible to tampering. The technology is
intended to provide a more secure locking device with faster entry. We acquired
the patent application for the BioVault device. We expect the application
process to take another 18 months. In the meantime, we have been issued a
provisional patent that if the patent is issued, will cause the date of the
issuance of the patent to relate back to the initial filing date of the
application in March 2003.
Smart Biometrics, Inc.'s activities were limited to research and development and
a patent application. We acquired the technology, the BioVault device and the
patent application. Smart Biometrics, Inc. had no operating history, and
therefore, there is no historical financial information regarding our
newly-acquired assets. Accordingly, the acquisition was accounted for as a
purchase of the assets. We intend to use the BioVault device to create safety
locks for guns. We are focusing on refining the prototype for the BioVault
device into a final model. We have received a product endorsement from the
National Rifle Association, establishing a distributor and dealer network and
16
establishing procedures for direct sales. We have begun to receive revenue from
these sales in the third quarter of 2003.
On June 1, 2003, we acquired substantially all of the assets of Telepartners,
Inc. a Florida corporation, in exchange for 165,000 shares of our common stock.
Telepartners, Inc. is engaged in the development of supplemental educational
products for schoolchildren in grades 1 through 12. The assets acquired by
Sequiam Biometrics, Inc. include the Extended Classroom(TM). The Extended
Classroom is a supplemental, educational program consisting of a video lesson
library of the very lesson concepts that are taught in our public school
classrooms in the United States. Each lesson summary has been produced in high
quality and digitally mastered, allowing for Internet and television broadcast
distribution as well as being offered in CD and video formats.
Quarter Ended June 30, 2003 compared to Quarter Ended June 30, 2002.
- --------------------------------------------------------------------
Revenues
We derive or plan to derive our revenues from five sources: (i) the sale and
licensing of our software products; (ii) consulting, custom software services
and web development services; (iii) maintenance agreements in connection with
the sale and licensing of software products; (iv) Internet access and web
hosting services; (v) sales of the BioVault(TM). We have not yet generated
revenues from the sale or licensing of our software products (excluding custom
software projects) or the BioVault(TM). Software license revenue will be
recognized when all of the following criteria have been met: (a) there is an
executed license agreement, and software has been delivered to the customer, (b)
the license fee is fixed and payable within twelve months, (c) collection is
deemed probable, and (d) product returns are deemed reasonably estimable.
Maintenance revenues are recognized ratably over the term of the maintenance
contract, typically 12 to 36 months. Custom software services are long-term in
nature and revenues are recognized based on a percentage of completion with
progress to completion measured based upon later hours incurred. Web
development services are performed over a period ranging from a few days to a
few weeks and revenues are recognized upon completion of the project.
Consulting service revenues are recognized when services are performed.
Internet access and web-hosting services are recognized over the period the
services are provided, typically month-to-month. Total revenue decreased to
$110,910 for the quarter ended June 30, 2003 from $213,315 for the quarter ended
June 30, 2002.
Software and license fee revenues were unchanged at $-0- for both 2002 and 2003.
During second quarter 2002 and 2003, Sequiam Document Management System was
still under development, and we did not acquire Access Orlando and its IRP and
IRPlicator software products until November 2002. We expect to begin generating
revenues from the sale of our DMS and IRP software products in the third quarter
of 2003.
Other sales for 2003 included consulting, custom software services and web
development services totaling $42,398; and Internet access and web-hosting
services totaling $68,512. All of the foregoing were 100% increases over 2002
second quarter revenues of $-0- except for a one-time consulting fee of 213,315
earned in the second Quarter of 2002.
17
We observe that large organizations are becoming more interested in warehousing
documents for ease of access by its many users. As such, we believe that our
DMS product is viable. However we have also observed a number of competing
products by companies with greater resources than ours. Our competitors
typically add the document management feature into a complimentary suite of
software products. As a result, we do not see great market for our Sequiam DMS
as a stand-alone product, and in response, we are integrating it into our IRP
product line. This is being done by incorporating the document management
functions of the DMS product into the remote print software for the IRP line,
and we hope to sell the integrated software as a complete package.
We also observe that many large organizations are beginning to analyze the cost
of their own printing equipment. The $0.05 to $0.08 cost per page of their own
desktop equipment can be far in excess of the $0.01 to $0.02 achievable on high
volume digital machines either owned in-house or outsourced. Our IRP software
allows users to print directly to remote printers thereby solving the
connectivity problem and allowing large organizations to realize savings that
run into many thousands of dollars per month. We think that trend will
continue, and as a result, more competitors will enter the market. We presently
have no direct competition for this product.
To date, users of our IRP system sold prior to our acquisition of W.M.W.
Communications have realized dramatic print cost savings. In the example of the
two school district clients, print volumes of as much as 10,000,000 images per
month in over 100 schools and administrative offices have been redirected from
desktop printers to the District's central print facility at an average savings
of $0.045 per image or $450,000 per month. In one such school district demand
exceeded the print facility's capacity such that they were again required to use
the IRP software to outsource the overflow to a commercial print company.
Each of the four installations was sold prior to our acquisition of W.M.W.
Communications at an average price of $40,000 per system with annual support
provided at $5,000 per year. Pricing for the Internet product will be based
upon usage charges as yet undetermined. Targeted customers are large
organizations with in-house print facilities and commercial digital printers who
wish to use the technology to drive more customer business to their facility.
The trend in Internet access is towards broadband access. Dial up service will
eventually become obsolete. As a result, we have seen the revenues from our
Access Orlando brand steadily decline. We plan to sell that business to any one
of several large Internet access providers. We acquired that business from
W.M.W. Communications, but we do not consider it to be a part of our long-term
business plan. We expect to concentrate on software, database and web
development products.
We have an agreement with Pachyderm Press, the publisher of the World Olympian
Magazine, to share revenues and expenses of publication and to share with them
content from our website production. Pachyderm has an agreement with the WOA to
Publish the magazine, and we have an agreement to publish and host their
website. We expect to earn a 35% share of the merchandising and sponsorship
income derived from the website and 50% of the net earnings from the magazine
subscriptions and advertising revenue. In the case of the website, the
responsibility for revenue generation is with the WOA and in the case of the
18
magazine, the responsibility for revenue generation is with Pachyderm Press.
Neither the WOA or Pachyderm Press has been effective at revenue generation and
to date, we have not received any revenues from these agreements. Regardless,
we continue to provide website development and hosting services to the WOA, and
we continue to assist Pachyderm Press with content and other business services.
We continue to perform our duties because we believe that our association with
the Olympics will be beneficial to future business and because we believe in the
Olympic ideals. Publishing is not a part of our overall business plan, but
Internet services to publishers and printers is an integral part of our
information management business.
Operating Expenses
Operating expenses increased by $1,892,943, from $240,848 for the quarter ended
June 30, 2002 to $2,133,692 for the quarter ended June 30, 2003. This increase
is explained below.
Selling, general and administrative expenses including non-cash compensation
increased $1,704,523 from $177,295 in second quarter 2002 to $1,881,818 in
second quarter 2003. We increased our selling and overhead expenditures such as
salaries, wages and benefits for administrative and marketing personnel,
computer maintenance and supplies, professional services such as investor
relations, legal and accounting fees, and corporate travel expenses as a result
of expanding our operations, our merger with Sequiam Corporation and our
acquisitions of Brekel Group and Access Orlando. We also increased expenditures
for marketing including advertising, production of marketing materials, and
participation in trade show activities as we completed the development of our
software products and introduced web development, web hosting and Internet
access services. We also accrued expenses for investment banking, investor and
public relations, and employee services valued at $1,366,895, and we agreed to
issue 1,553,500 common shares in exchange for those services.
Software and web development costs increased by $78,468 from $58,473 in second
quarter 2002 to $136,941 in second quarter 2003, due to the establishment and
expansion of the development staff beginning in the second quarter 2002. This
expansion of staff was needed to expand our products and services and to keep
pace with new industry developments and the continued need to improve features
and functionality of the Sequiam software products.
Depreciation expense increased by $109,952, from $5,080 in second quarter 2002
to $115,032 in second quarter 2003, as a result of depreciation on assets
acquired from Brekel in July 2002, and amortization of intellectual properties
acquired from W.M.W. Communications., Smart Biometrics, Inc. and Telepartners,
Inc.
We have grown from 2 employees at June 30, 2002, to 27 employees at June 30,
2003, largely as a result of the acquisition of Brekel Group, Inc., W.M.W.
Communications, Inc., Smart Biometrics, Inc. and Telepartners, Inc. The
addition of the employees has negatively impacted liquidity and cash flow for
the quarter ended June 30, 2003. We can further expect that payroll will be a
burden through much of 2003 as we attempt to raise the additional capital
necessary to get our products to market. The payroll burden will diminish
dramatically after we establish a regular sales cycle of the software products
because our ongoing support costs will be minimal compared to our development
costs. We expect to distribute our products through value added resellers and
19
other resellers. As a result, we do not expect to increase personnel and
related expenses as we go to market with our software.
Loss on Sales of Equipment and gain on Debt Settlement
A loss on impairment of equipment held for sale of $75,000 was recognized in the
first quarter of 2003 based upon the estimated net realizable value of the
equipment acquired from Brekel. A net gain of $2,431 was recognized in the
second quarter of 2003 on the actual sale of certain equipment acquired from
Brekel. A gain of $37,315 was recognized on the settlement of a debt owed to a
former creditor of Brekel.
Interest Expense
Interest expense increased by $25,638, from $268 in second quarter 2002 to
$25,906 in second quarter 2003, as a result of an increase in loans from
shareholders and a note payable related to leasehold improvements acquired from
Brekel Group in July 2002 and accretion of the discount on the convertible
debenture of $18,750. The total discount that is being amortized of $150,000
will increase interest expense by $6,250 per month or $75,000 per year beginning
March 2003 through February 2005, unless the debenture is converted prior to the
due date of the debenture (March 4, 2005), at which time the entire unamortized
discount will be expensed. We see only a slight upward trend in our interest
expense as a result of the $400,000 loan we received from Lee Corbin on May 13,
2003. We expect to raise additional equity capital through the sale of common
stock as opposed to convertible debt securities or traditional loans. However,
the debenture issued to La Jolla Cove Investors, Inc., may not be converted to
equity until we have accrued significant interest expense. We intend to pay the
interest expense as opposed to converting the interest accrued to equity. As a
result, we may experience an additional increase in our interest expenses during
the remainder of 2003 and into 2004.
Net Losses
Sequiam Corporation incurred net losses of $2,009,041 and $27,801 for the
quarters ended June 30, 2003 and 2002, respectively. We expect to incur
additional net losses throughout 2003 as we introduce our products to the
marketplace.
Liquidity and Capital Resources
Cash and cash equivalents decreased to $40,210 as of June 30, 2003 from $46,675
as of June 30, 2002. Net cash used in operating activities was $315,706 for the
quarter ended June 30, 2003, as a result of the net loss during the period of
$2,009,041 and increases in accounts payable and accrued expenses totaling
$160,116, and increases in accrued shareholder salaries of $90,000 and other
non-cash expenses and losses totaling $87,484.
Net cash used for investing activities was $55,335 for the quarter ended June
30, 2003, primarily due to proceeds from the sale of equipment of $2,732 offset
by cash paid for the acquisition of Access Orlando of $48,236 and software
development costs of $9,831 for the Sequiam DMS product.
20
Net cash provided by financing activities was $411,251 for the quarter ended
June 30, 2003. Proceeds from the bridge loan accounted for $250,000 and sales of
common stock accounted for $200,000 and was offset by commissions of $45,000.
During the quarter ended June 30, 2003, a private investor exercised 625,000
warrants for $6,250.
Current liabilities of $5,099,146 exceed current assets of $211,374 by
$4,887,772. Of that amount, $1,830,242 or 36.89% is owed to shareholders as
loans and accrued but unpaid salaries under employment agreements. The officers
of the company are dedicated to its business plan and will place no undue
demands on its working capital. They expect payment from future cash flows,
equity capital infusions or possible equity capital conversions. Also included
in current liabilities, is $44,630 due to W.M.W. Communications for its
acquisition. W.M.W. has indicated its willingness to wait for payment until
cash flow allows, but we have not reached any formal agreement to defer payment.
Also included in current liabilities is $707,446 of accounts payable and accrued
expense, most of which accrue to Brekel Group, Inc. and are the subject of
continued workout arrangements.
Effective July 1, 2001, the Brekel Group, Inc., prior to its acquisition by
Sequiam, entered into a lease agreement to rent approximately 60,000 square feet
of combined office and manufacturing space through June 30, 2011. As a result
of the determination to cease Brekel's operations prior to the acquisition of
Brekel, effective July 1, 2002, Sequiam entered into a lease forbearance
agreement for 10,000 square feet of the same space for the remaining term of the
lease. Pursuant to the lease agreement, we make monthly base rent payments
including common area maintenance charges of $9,633, with annual increases of
approximately 3% per year beginning in July 2004. As part of the lease
forbearance agreement, we executed a note payable to the landlord to reimburse
them for lost rents on the 50,000 square feet relinquished to them through June
30, 2004; less rents and principal payments received from us; less 75% of any
rents received from replacement tenants; plus any leasing commissions or tenant
build out costs required for replacement tenants. The note also includes
amounts previously owed by Brekel to the landlord for tenant improvements. The
outstanding balance on the note of $1,286,806 as of June 30, 2003 represents
$893,112 of deferred rent and $393,694 of tenant improvements. Payments on the
note commence July 1, 2004 through June 1, 2010 with interest at 6%. Variables
that could impact the amount due under the deferred rent portion of the note
include changes in estimated rents to be received from replacement tenants,
estimated leasing commissions and estimated tenant build out costs required for
replacement tenants.
Rental expense for the quarter ended June 30, 2003 was $48,144 and $11,927 for
the quarter ended June 30, 2002. The minimum future rentals required under the
lease and the maturities of the long-term note payable are as follows:
Debt
Year Rentals Maturities
- ---- ---------------------
2003 $ 86,700 $ 0
2004 117,334 96,429
2005 120,854 188,341
2006 124,480 199,957
21
2007 128,214 212,384
Thereafter 339,169 589,965
---------------------
$916,751 $ 1,286,806
=====================
Since the end of our last fiscal year ending December 31, 2002, we sold
securities in four separate private placements, as more fully described in Part
II, Item 2, below. As a result, we have received to date total net proceeds of
$351,252. We received $186,250 (approximately one-half) of these proceeds
during the quarter ending June 30, 2003, and most of this amount is reflected as
additional paid-in capital in our financial statements for the period ending
June 30, 2003. We also received $250,000 of proceeds from a bridge loan
commitment of $400,000.
At March 28, 2003, the date we filed our 10-KSB with the SEC, we estimated that
we would need minimal additional capital of approximately $500,000 to continue
operations during the next twelve months without significant new product sales
given that our monthly cash requirements at that time exceeded cash provided by
operations by approximately $40,000 per month. By May 15, 2003, the date our
10-QSB was filed with the SEC, we raised $600,000. We now estimate that we will
need an additional $600,000 of capital to continue operations during the next
twelve month due to higher than expected professional fees associated with the
registration we are completing regarding the securities issued to La Jolla Cove
Investors, Inc., new acquisitions and bringing our products to market. Our
management is undertaking several initiatives to address our liquidity,
including the following: (1) continued efforts to increase our revenues from
software licenses and other revenue sources; (2) proceeds expected to be
received from the convertible debentures and exercise of warrants as described
above; (3) proceeds expected to be received from the promissory note and
exercise of warrants as described above; (4) continued efforts to obtain
additional debt and/or equity financing. Our management believes that these
activities will generate sufficient cash flows to sustain our operations during
the next twelve months. If we do not obtain at least $600,000 additional
capital in the next twelve months, then we will need to curtail operations and
reduce expenses accordingly.
Application of Critical Accounting Policies
We utilize certain accounting policies and procedures to manage changes that
occur in our business environment that may affect accounting estimates made in
preparation of our financial statements. These estimates relate primarily to
our allowance for doubtful accounts receivable. Our strategy for managing
doubtful accounts includes stringent, centralized credit policies and collection
procedures for all customer accounts. We utilize a credit risk rating system in
order to measure the quality of individual credit transactions. We strive to
identify potential problem receivables early, take appropriate collection
actions, and maintain adequate reserve levels. Management has determined that
the allowance for doubtful accounts is adequate at June 30, 2003.
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
22
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 Form 10-QSB, 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 2. CHANGES IN SECURITIES
- ---------------------------------
(c) Recent Sales of Unregistered Securities
Common Stock. On February 6, 2003, we sold an aggregate of 266,667 shares of
- -------------
our common stock to one accredited investor, Mr. Walter H. Sullivan, III, at a
price of $0.75 per share, for proceeds of $200,000, less a commission of $20,000
paid to Cane Consulting, for net proceeds of $180,000. In connection with this
transaction, we issued a warrant to purchase an additional 800,000 shares of
common stock at a purchase price of $1.50 per share for a period of four years.
On April 25, and June 23, 2003, Sequiam Corporation sold an aggregate of 400,000
shares of its common stock to Mr. Sullivan at a price of $0.50 per share for
proceeds of $200,000, less a commission of $20,000 paid to Cane Consulting, for
net proceeds of $180,000. In connection with this transaction, we issued
warrants to purchase an additional 2,000,000 shares of common stock at a
purchase price of $0.75 per share for a period of four years. In connection
with such sales we relied on the exemption from registration provided by Section
4(2) of the Securities Act of 1933 and Rule 506. This offer was made
exclusively to Mr. Sullivan. Based upon information provided to us by Mr.
Sullivan, we determined that he was an accredited investor because he has a net
worth of $1,000,000 or more and an annual income of $200,000 or more. Mr.
Sullivan represented in writing that the shares were being acquired for
investment purposes only and not for resale, and, in addition, the certificates
representing the shares bear a restrictive legend in accordance with Rule 144.
Prior to closing the transaction, we supplied information to Mr. Sullivan in
compliance with Rule 502(b). We had a prior business relationship with Mr.
Sullivan. We did not publish any advertisement, article, notice or other
communication intended for public distribution regarding our intent to make this
offering. Mr. Sullivan represented in writing that the shares were being
acquired for investment purposes only and not for resale, and, in addition, the
certificates representing the securities bear a restrictive legend in accordance
with Rule 144. There were no underwriters, and the offer was closed upon sale
of the stock to Mr. Sullivan.
The Company agreed to issue 750,000 shares for investment banking and advisory
services valued at $825,000 to Quasar Group, Inc. The certificates for the
750,000 shares were issued in July 2003. In connection with such sales we relied
on the exemption from registration provided by Section 4(2) of the Securities
Act of 1933 and Rule 506. This offer was made exclusively to Quasar Group,
Inc. Based upon information provided to us by Quasar Group, Inc, we determined
that its six shareholders were an accredited investor because they have a net
23
worth of $1,000,000 or more and an annual income of $200,000 or more. Quasar
Group, Inc. represented in writing that the shares were being acquired for
investment purposes only and not for resale, and, in addition, the certificates
representing the shares bear a restrictive legend in accordance with Rule 144.
Prior to closing the transaction, we supplied information to Quasar Group, Inc.
in compliance with Rule 502(b). We had a prior business relationship with
Quasar Group, Inc. We did not publish any advertisement, article, notice or
other communication intended for public distribution regarding our intent to
make this offering. There were no underwriters, and the offer was closed upon
sale of the stock to Quasar Group, Inc on May 23, 2003.
The Company agreed to issue 250,000 shares for employment services valued at
$107,500 to Charles Vollmer. The certificates for the 250,000 shares were
issued in July 2003. In connection with such sales we relied on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933 and
Rule 506. This offer was made exclusively to Mr. Vollmer. Based upon
information provided to us by Mr. Vollmer, we determined that he was an
accredited investor because he has a net worth of $1,000,000 or more and an
annual income of $200,000 or more. Mr. Vollmer represented in writing that the
shares were being acquired for investment purposes only and not for resale, and,
in addition, the certificates representing the shares bear a restrictive legend
in accordance with Rule 144. Prior to closing the transaction, we supplied
information to Mr. Vollmer in compliance with Rule 502(b). We had a prior
business relationship with Mr. Vollmer. We did not publish any advertisement,
article, notice or other communication intended for public distribution
regarding our intent to make this offering. There were no underwriters, and the
offer was closed upon sale of the stock to Mr. Vollmer on April 28, 2003.
The Company agreed to issue 250,000 shares for employment services valued at
$140,000 to James Stanley. The certificates for the 250,000 shares were issued
in July 2003. In connection with such sales we relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 and Rule
506. This offer was made exclusively to Mr. Stanley. Based upon information
provided to us by Mr. Stanley, we determined that he was an accredited investor
because he has a net worth of $1,000,000 or more and an annual income of
$200,000 or more. Mr. Stanley represented in writing that the shares were being
acquired for investment purposes only and not for resale, and, in addition, the
certificates representing the shares bear a restrictive legend in accordance
with Rule 144. Prior to closing the transaction, we supplied information to Mr.
Stanley in compliance with Rule 502(b). We had a prior business relationship
with Mr. Stanley. We did not publish any advertisement, article, notice or other
communication intended for public distribution regarding our intent to make this
offering. There were no underwriters, and the offer was closed upon sale of the
stock to Mr. Stanley on April 21, 2003.
The Company agreed to issue 10,000 shares for employment services valued at
$9,700 to Charles Dunn. The certificates for the 10,000 shares were issued in
July 2003. In connection with such sales we relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 and Rule
506. This offer was made exclusively to Mr. Dunn. Based upon information
provided to us by Mr. Dunn, we determined that he was an accredited investor
because he has a net worth of $1,000,000 or more and an annual income of
$200,000 or more. Mr. Dunn represented in writing that the shares were being
acquired for investment purposes only and not for resale, and, in addition, the
24
certificates representing the shares bear a restrictive legend in accordance
with Rule 144. Prior to closing the transaction, we supplied information to Mr.
Dunn in compliance with Rule 502(b). We had a prior business relationship with
Mr. Dunn. We did not publish any advertisement, article, notice or other
communication intended for public distribution regarding our intent to make this
offering. There were no underwriters, and the offer was closed upon sale of the
stock to Mr. Dunn on June 1, 2003.
The Company agreed to issue 43,500 shares for employment services valued at
$42,195 to James Ring. The certificates for the 43,500 shares were issued in
July 2003. In connection with such sales we relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 and Rule
506. This offer was made exclusively to Mr. Ring. Based upon information
provided to us by Mr. Ring, we determined that he was an accredited investor
because he has a net worth of $1,000,000 or more and an annual income of
$200,000 or more. Mr. Ring represented in writing that the shares were being
acquired for investment purposes only and not for resale, and, in addition, the
certificates representing the shares bear a restrictive legend in accordance
with Rule 144. Prior to closing the transaction, we supplied information to Mr.
Ring in compliance with Rule 502(b). We had a prior business relationship with
Mr. Ring. We did not publish any advertisement, article, notice or other
communication intended for public distribution regarding our intent to make this
offering. There were no underwriters, and the offer was closed upon sale of the
stock to Mr. Ring on June 1, 2003.
The Company agreed to issue 250,000 shares for public relations and investor
relations services valued at $242,500 to Kevin Welch. The certificates for the
250,000 shares were issued in July 2003. In connection with such sales we relied
on the exemption from registration provided by Section 4(2) of the Securities
Act of 1933 and Rule 506. This offer was made exclusively to Mr. Welch. Based
upon information provided to us by Mr. Welch, we determined that he was an
accredited investor because he has a net worth of $1,000,000 or more and an
annual income of $200,000 or more. Mr. Welch. represented in writing that the
shares were being acquired for investment purposes only and not for resale, and,
in addition, the certificates representing the shares bear a restrictive legend
in accordance with Rule 144. Prior to closing the transaction, we supplied
information to Mr. Welch. in compliance with Rule 502(b). We had a prior
business relationship with Mr. Welch. We did not publish any advertisement,
article, notice or other communication intended for public distribution
regarding our intent to make this offering. There were no underwriters, and the
offer was closed upon sale of the stock to Mr. Welch on June 1, 2003.
The Company agreed to issue 1,500,000 shares for the acquisition of the assets
of Smart Biometrics, Inc. valued at $750,000 to Smart Biometrics, Inc. The
certificates for the 1,500,000 shares were issued in July 2003. In connection
with such sales we relied on the exemption from registration provided by Section
4(2) of the Securities Act of 1933 and Rule 506. This offer was made
exclusively to Smart Biometrics, Inc. Based upon information provided to us by
Smart Biometrics, Inc, we determined that its twelve shareholders were an
accredited investor because they have a net worth of $1,000,000 or more and an
annual income of $200,000 or more. Smart Biometrics, Inc. represented in
writing that the shares were being acquired for investment purposes only and not
for resale, and, in addition, the certificates representing the shares bear a
restrictive legend in accordance with Rule 144. Prior to closing the
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transaction, we supplied information to Smart Biometrics, Inc. in compliance
with Rule 502(b). We had a prior business relationship with Smart Biometrics,
Inc. We did not publish any advertisement, article, notice or other
communication intended for public distribution regarding our intent to make this
offering. There were no underwriters, and the offer was closed upon sale of
the stock to Smart Biometrics, Inc on May 9, 2003.
The Company agreed to issue 165,000 shares for the acquisition of the assets of
Telepartners, Inc. valued at $149,993 to Telepartners, Inc. The certificates
for the 165,000 shares were issued in July 2003. In connection with such sales
we relied on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 and Rule 506. This offer was made exclusively to
Telepartners, Inc. Based upon information provided to us by Telepartners, Inc,
we determined that its ten shareholders were an accredited investor because they
have a net worth of $1,000,000 or more and an annual income of $200,000 or more.
Telepartners, Inc. represented in writing that the shares were being acquired
for investment purposes only and not for resale, and, in addition, the
certificates representing the shares bear a restrictive legend in accordance
with Rule 144. Prior to closing the transaction, we supplied information to
Telepartners, Inc. in compliance with Rule 502(b). We had a prior business
relationship with Telepartners, Inc. We did not publish any advertisement,
article, notice or other communication intended for public distribution
regarding our intent to make this offering. There were no underwriters, and
the offer was closed upon sale of the stock to Telepartners, Inc on June 1,
2003.
Convertible Debenture and Warrants. We entered into a Securities Purchase
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Agreement with La Jolla Cove Investors, Inc. (the "Investor"), dated March 5,
2003, as amended on April 16, 2003, pursuant to which we delivered to the
Investor an 8% Convertible Debenture in the amount of $300,000, convertible into
our common stock, and a Warrant to Purchase Common Stock that permits the
Investor to purchase up to 2,000,000 shares of common stock at a purchase price
of $1.50 per share. In connection with the sale of the Debenture and Warrant,
we relied on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 and Rule 506. We did not publish any advertisement,
article, notice or other communication intended for public distribution
regarding our intent to make this offering. Based upon information provided to
us by the Investor, we determined that it was an accredited investor because it
had net assets in excess of $5,000,000. Prior to completing the sale, we
supplied information to the Investor in compliance with Rule 502(b). The
Investor represented in writing that the shares were being acquired for
investment purposes only and not for resale, and, in addition, the certificates
representing the securities bear a restrictive legend in accordance with Rule
144. There were no underwriters, and no commissions were paid in connection
with this offering. The offer was closed upon closing the transaction with the
Investor.
We are obligated to register the Investor's sale of the underlying common stock
to be issued upon conversion of the 8% Convertible Debenture and the exercise of
the Warrant to Purchase Common Stock. Upon closing on March 5, 2003, we
received $150,000 of the total $300,000 principal amount of the 8% Convertible
Debenture. When the Securities and Exchange Commission declares our registration
of the sale of the underlying common stock to be issued upon conversion of the
debenture and exercise of the Warrant effective, we will receive the balance of
$150,000, provided the Market Rate at that time is $0.10 or greater.
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The Debenture and Warrant provide for a potential $3,300,000 investment in our
company by the selling security holder. Under the terms of the Debenture, as
amended on April 16, 2003, provided the "Market Rate" (as defined and determined
in accordance with the Debenture) is greater than $0.625, the number of common
shares into which the Debenture may be converted is equal to the dollar amount
of the Debenture being converted multiplied by eleven, minus the product of the
"Conversion Price" multiplied by six and two-thirds times the dollar amount of
the Debenture being converted, and the entire foregoing result shall be divided
by the Conversion Price. The "Conversion Price" is defined as the lesser of
$1.50 per share or 80% of "Market Value" (as defined and determined in
accordance with the Debenture)(the "Discount Multiplier"). If the Market Rate
is equal to or less than $0.625 on the day the Investor elects to convert a
portion of the 8% Convertible Debenture, then we have the right to prepay that
portion of the Debenture in which the Investor had elected to convert, at a rate
of 150% of such amount, provided the Investor may, in lieu of accepting such
prepayment, elect to withdraw its notice of conversion. If the Market Rate is
equal to or less than $0.625 and the company does not prepay the Debenture, then
the Debenture may only be converted into the number of shares equal to the
dollar amount of the Debenture being converted divided by the Conversion Price.
The Investor may convert a maximum of 10% of the principal into our common stock
during any month, and the Investor is required to convert at least 5% of the
Debenture every month, beginning thirty days following effectiveness of the
registration statement covering the resale of the underlying shares of common
stock.
The following chart illustrates the number of shares that will be issued upon
conversion of the entire amount of the Debenture at various Market rates.
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[GRAPHIC OMITTED]
Under the terms of the amended Warrant, the Investor received a Warrant to
purchase 2,000,000 shares of our common stock, at an exercise price of $1.50 per
share. Provided the Market Rate is above $0.625 per share, then the Investor is
required to exercise a portion of the Warrant equal to the amount of the
Debenture being converted multiplied by 10, and the entire result divided by
1.50. Provided the Market Rate is above $0.625, the Investor is required to
exercise at least 5% of the Warrant each month, beginning thirty days following
effectiveness of the registration statement covering the resale of the
underlying shares of common stock. The Warrant will expire in March 2006. As
of the date of filing this report, the Investor had not exercised any portion of
the Warrant or converted any portion of the Debenture, and no shares of common
stock have been issued.
How the Warrant and the Debenture Conversion Formula Work Together.
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Market Rate between $0.626 and $1.88. If the Debenture is converted at a Market
- -------------------------------------
Rate between $0.626 and $1.88, then as the Debenture is converted, a
commensurate amount of the Warrant must be exercised pursuant to paragraph 7 of
the 04-16-03 Letter Agreement with the Investor, resulting in an overall equity
investment equal to 80% of the then Market Rate.
28
Market Rate between $0.082 and $0.625. If the Debenture is converted at a Market
- ---------------------------------------
Rate that is equal to or less than $0.625 but equal to or greater than $0.082,
then (a) we will receive an equity investment from the Debenture equal to 80% of
the then Market Rate, (b) less than 4,600,000 shares would be issued upon
conversion of the Debenture, and (c) the Warrant would not be required to be
exercised at that time (but we would have the option of prepaying the Debenture
at 150% to avoid conversion).
Market Rate less than $0.082. If the Debenture is converted at a Market Rate
- -------------------------------
that is less than $0.082, then we will receive an equity investment that is less
than 80% of the then Market Rate and issue more than 4,600,000 shares of common
stock upon conversion of the Debenture (but we will have the option of prepaying
the Debenture at 150% to avoid conversion).
Market Rate greater than $1.88. If the Debenture is converted at a Market Rate
- -------------------------------
that is greater than $1.88, then we will receive an equity investment that is
less than 80% of the then Market Rate, but we will issue less than 6,600,000
shares of common stock as a result of the Debenture and Warrant (but pursuant to
the 04-16-03 Letter Agreement, we have agreed to issue additional shares at
$1.50 per share up to a total of 6,600,000 shares). The selling security holder
will experience greater returns on its equity investment as the Market Rate of
our common stock increases above $1.88 per share.
The Investor has contractually agreed to restrict its ability to convert or
exercise its warrants and receive shares of our common stock such that the
number of shares of common stock held by it and its affiliates after such
conversion or exercise does not exceed 4.99% of the then issued and outstanding
shares of common stock. This will not prevent the Investor from receiving 4.99%
of our outstanding common stock upon conversion of a portion of the debenture
and exercise of a portion of the Warrant, then selling those shares, then
further converting the debenture and exercising the Warrant in like fashion.
The conversion price of the 8% Convertible Debenture and the exercise price of
the Warrant to Purchase Common Stock may be adjusted in certain circumstances,
such as if we pay a stock dividend, subdivide or combine outstanding shares of
common stock into a greater or lesser number of shares, or take such other
actions as would otherwise result in dilution of the selling security holder's
position prior to conversion.
We have agreed not to pay any accrued salaries or shareholder loans that are
presently outstanding until after the 8% Convertible Debenture is paid in full
or converted, except to the extent that any such accrued salaries or shareholder
loans are used to perform obligations under a Put and Call Agreement between
Nick VandenBrekel, Mark Mroczkowski and the Investor, or unless we can pay the
29
accrued salaries out of the proceeds of any additional financing we might
obtain.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)
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(a) Exhibits:
2.1 Asset Purchase Agreement with Smart Biometrics, Inc. is hereby
incorporated by this reference to our Form 8-K filed with the
Securities and Exchange Commission on May 23, 2003.
2.2 Asset Purchase Agreement with Telepartners, Inc.
4.1 Securities Purchase Agreement dated March 5, 2003, between Sequiam
Corporation and La Jolla Cove Investors, Inc. is hereby incorporated
by this reference to Exhibit 4.1 to our Form 8-K filed with the
Securities and Exchange Commission on March 13, 2003.
4.2 8% Convertible Debenture, dated March 5, 2003, issued to La Jolla Cove
Investors, Inc. is hereby incorporated by this reference to Exhibit
4.2 to our Form 8-K filed with the Securities and Exchange Commission
on March 13, 2003.
4.3 Warrant to Purchase Common Stock, dated March 5, 2003, issued to La
Jolla Cove Investors, Inc. is hereby incorporated by this reference to
Exhibit 4.3 to our Form 8-K filed with the Securities and Exchange
Commission on March 13, 2003.
4.4 Side Letter Agreement, dated March 5, 2003, between Sequiam
Corporation and La Jolla Cove Investors, Inc. is hereby incorporated
by this reference to Exhibit 4.4 to our Form 8-K filed with the
Securities and Exchange Commission on March 13, 2003.
4.5 Registration Rights Agreement dated March 5, 2003, between Sequiam
Corporation and La Jolla Cove Investors, Inc. is hereby incorporated
by this reference to Exhibit 4.5 to our Form 8-K filed with the
Securities and Exchange Commission on March 13, 2003.
4.6 Letter Agreement, dated April 16, 2003, by and between La Jolla Cove
Investors, Inc. and Sequiam Corporation is hereby incorporated by this
reference to Exhibit 4.1 to our Form 8-K filed with the Securities and
Exchange Commission on April 17, 2003.
10.1 Put and Call Agreement by and between La Jolla Cove Investors, Inc.,
Nicholas VandenBrekel and Mark Mroczkowski, dated April 16, 2003, is
hereby incorporated by reference to Exhibit 10.1 our Form 10-KSB/A,
Amendment No. 1, filed with the Securities and Exchange Commission on
April 21, 2003.
10.2 Employment Agreement with Charles Vollmer is hereby incorporated by
this reference to our Form SB-2/A filed with the Securities and
Exchange Commission on June 23, 2003.
10.3 Letter Agreement amending Employment Agreement with Charles Vollmer is
hereby incorporated by this reference to our Form SB-2/A filed with
the Securities and Exchange Commission on June 23, 2003.
30
10.4 Letter Agreement amending a private equity financing with La Jolla
Cove Investors, Inc. is hereby incorporated by this reference to our
Form 8-K filed with the Securities and Exchange Commission on April
16, 2003.
10.5 Employment Agreement with James Ring is hereby incorporated by this
reference to our Form SB-2/A filed with the Securities and Exchange
Commission on June 23, 2003.
10.6 Employment Agreement with Charles Dunn is hereby incorporated by this
reference to our Form SB-2/A filed with the Securities and Exchange
Commission on June 23, 2003.
10.7 Private Placement Agreement with the Quasar Group, Inc.
10.8 Advisory service Agreement with Kevin Welch
21.1 Subsidiaries
31.1 Section 901 Certification Nicholas VandenBrekel
31.2 Section 901 Certification Mark Mroczkowski
32.1 Certification Pursuant To Rule 15d-14(B) and 18 U.S.C. Sec.1350
Nicholas VandenBrekel
32.2 Certification Pursuant To Rule 15d-14(B) and 18 U.S.C. Sec.1350 Mark
Mroczkowski
(b) Reports on Form 8-K: The following reports on Form 8-K were filed during
the quarter ending June 30, 2003:
Form 8-K filed on May 23, 2003, regarding the acquisition of the assets of Smart
Biometrics, Inc.
Form 8-K/A filed on April 17, 2003, regarding an amendment to a private equity
financing with La Jolla Cove Investors, Inc.
31
SIGNATURES
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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: August 19, 2003
By: /s/ Nicholas H. VandenBrekel
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Nicholas H. VandenBrekel, Chief Executive Officer
By: /s/ Mark Mroczkowski
- -------------------------------------------------
Mark L. Mroczkowski, Chief Financial Officer
Date: August , 2003
/s/ Mark L. Mroczkowski
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Mark L. Mroczkowski
Chief Financial Officer
32