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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 September 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 Identification No.)
incorporation or organization)
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
14, 2003 was 41,129,247.
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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
ITEM 3. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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
September 30, 2003
(Unaudited) December 31, 2002
-------------------- -------------------
ASSETS
Current assets:
Cash $ - $ 85,922
Accounts receivable, net 33,902 41,141
Prepaid expenses 82,633 -
Equipment held for sale 40,706 177,080
-------------------- -------------------
Total current assets 157,241 304,143
-------------------- -------------------
Property and equipment, net 1,231,812 1,375,398
Software development costs, net 108,917 131,939
Acquired software, net 244,800 288,000
Acquired intellectual properties, net 1,037,390 -
Deposits and other assets 7,800 7,800
-------------------- -------------------
Total assets $ 2,787,960 $ 2,107,280
==================== ===================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Cash overdraft $ 37,682 $ -
Amount due for acquisition 44,630 288,457
Accounts payable 631,401 646,331
Accrued expenses 31,767 64,783
Loan from shareholders 687,283 795,450
Stock subscriptions payable 237,650 -
Accrued shareholder salaries 1,124,792 854,792
-------------------- -------------------
Total current liabilities 2,795,205 2,649,813
-------------------- -------------------
Long-term debt 1,381,449 1,291,092
-------------------- -------------------
Total liabilities 4,176,654 3,940,905
-------------------- -------------------
Shareholders' deficit:
Common shares 41,328 35,463
Additional Paid-in capital 3,925,031 42,565
Accumulated deficit (5,355,053) (1,911,653)
-------------------- -------------------
Total shareholders' deficit (1,388,694) (1,833,625)
-------------------- -------------------
Total liabilities and shareholders' deficit $ 2,787,960 $ 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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $ 103,859 $ 48,120 $ 337,963 $ 286,435
Costs and expenses:
Software and web development costs 157,403 119,506 436,207 177,979
Cost of BioVault sales 18,963 - 18,963 -
Non-cash compensation - - 1,627,896 -
Selling, general and administrative 443,964 519,305 1,187,589 777,526
Depreciation and amortization 140,649 33,830 338,461 43,761
------------ ------------ ------------ ------------
760,979 672,641 3,609,116 999,266
------------ ------------ ------------ ------------
Loss from operations (657,120) (624,521) (3,271,153) (712,831)
Loss on impairment of equipment held for sale - - (75,000) -
Gain (Loss) on sale of assets 15,855 - (25,584) -
Gain on debt settlement 19,527 - 56,842 -
Interest expense (84,514) (5,880) (128,505) (6,984)
------------ ------------ ------------ ------------
Net loss $ (706,252) $ (630,401) $(3,443,400) $ (719,815)
============ ============ ============ ============
Net loss per common share: Basic and
diluted $ (0.02) $ (0.02) $ (0.09) $ (0.03)
============ ============ ============ ============
Weighted average common shares
outstanding: Basic and diluted 39,819,644 33,547,234 37,471,353 27,371,863
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
5
SEQUIAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Nine months Ended September 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 2,029,167 2,029 658,473 - 660,502
Beneficial conversion features on long-
term debt 150,000 - 150,000
Warrants issued in connection with loan
agreement - - 400,000 - 400,000
Common shares issued for services 1,853,500 1,853 1,626,043 - 1,627,896
Common shares issued for acquisition
of WMW Communications 318,471 318 149,682 - 150,000
Common shares issued for acquisition
of Smart Biometrics 1,500,000 1,500 748,500 - 750,000
Common shares issued for acquisition
of Telepartners 165,000 165 149,768 - 149,933
Net Loss - - - (3,443,400) (3,443,400)
----------- ------- ---------- ------------ ------------
Balance at September 30, 2003 41,328,747 $41,328 $3,925,031 $(5,355,053) $(1,388,694)
=========== ======= ========== ============ ============
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,
2003 2002
------------ -----------
Cash flows from operating activities: $(3,443,400) $ (719,815)
Net loss
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 338,461 43,761
Accretion of debt discount 94,643 -
Issuance of common stock in exchange for services 1,627,896 59,349
Loss on sale of equipment 25,584 -
Loss on impairment of equipment held for sale 75,000 -
Gain on debt settlement (56,842) -
Decrease in accounts receivable 7,240 85,604
Increase in prepaid expenses and other assets (82,636) (1,875)
Increase in bank overdraft 26,777 -
Increase in accounts payable 52,820 57,954
Increase in accrued shareholders salaries 270,000 284,500
Increase (decrease) in other accrued expenses (156,251) 165,111
------------ -----------
Net cash used for operating activities (1,220,708) $ (25,411)
------------ -----------
Cash flows from investing activities:
Equipment purchases - (14,597)
Proceeds from sales of equipment 35,346 -
Cash paid for WMW Communications (93,827) -
Software development costs capitalized (12,949) (39,467)
------------ -----------
Net cash used for investing activities (71,430) (54,064)
------------ -----------
Cash flows from financing activities:
Proceeds from shareholders loans - 348,500
Proceeds from bridge loan 400,000 -
Proceeds from debenture 150,000 -
Sale of common stock 660,502 2,000
Repayment of note payable (4,286) (271,025)
------------ -----------
Net cash provided by financing activities 1,206,216 79,475
------------ -----------
Net change in cash (85,922) -
Cash, beginning of period 85,922 -
------------ -----------
Cash, end of period $ - $ -
============ ===========
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
- -------------------- -------- -----------
Recapitalization of common stock - $ 127,140
Common Stock issued for acquisition of Brekel Group - $10,946,150
Return of leased equipment - $ 1,873,255
Common stock issued for acquisition of WMW Communications $150,000 -
Common Stock issued for acquisition of Smart Biometrics $750,000 -
Common Stock issued for acquisition of Telepartners $149,933 -
Beneficial conversion feature on convertible debt $150,000 -
Warrants issued in connection with loan agreement $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 and Acquisitions
Sequiam Corporation ("Sequiam" or the "Company") through its wholly owned
subsidiaries, 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.
The Company's operations are divided into two distinct operating segments;
Information Management and Safety and Security. The Information Management
segment includes the Company's Internet Remote Print ("IRP") suite of software
products and interactive web-based technologies obtained by the acquisition of
WMW Communications, Inc. and more recently, Telepartners, Inc (see below), as
well as our ASP, ISP and other custom web development and software development
services as described above. The Company's Safety and Security segment was
formed upon the acquisition of the assets of leading biometrics corporations,
Smart Biometrics, Inc. and Fingerprint Detection Technologies, Inc. (see below).
The Company acquired from Smart Biometrics fingerprint biometric access control
systems technology and a secure safe called BioVault(TM). This biometric
technology will be a key feature in the Company's future product offerings. The
"Brite Print" fingerprint detection technology that we acquired from UTEK
provides improved fingerprint detection at dramatic cost savings.
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 production activities. Accordingly, the Company had
not generated any significant revenues, and the Company was considered a
development stage company at December 31, 2001. During 2002, the Company
acquired the Brekel Group, Inc., WMW Communication, Inc.
9
and began offering web development, Internet and web hosting and custom software
development, while continuing its software development activities. Subsequent to
December 31, 2002, the Company acquired the assets of Smart Biometrics Inc.,
Telepartners, Inc. and Fingerprint Detection Technologies, Inc. as more fully
described below.
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 or $750,000 of its common
stock to Smart Biometrics, Inc. valued at the closing market price of its common
stock on the date of acquisition of $.50 per share. Smart Biometrics, Inc. is
engaged in the development of biometric technologies. The assets acquired by
Sequiam Biometrics, Inc. include office equipment and the BioVault(TM)
technology, which is a secure safe that utilizes patent pending technology and
protocols to recognize a person's fingerprint to unlock. The excess of the
purchase price over the fair value of the office equipment acquired of $50,000
was $700,000 and was allocated to the BioVault technology and is being amortized
over its estimated useful life of five years. Sequiam Biometrics, Inc. had no
operating history and had not generated any revenues. Accordingly, the
acquisition was accounted for as a purchase of assets.
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. valued at the closing market price of its common stock on the
date of acquisition of $.97 per share or $149,933. 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) software, 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. The excess of the purchase over the fair value of the net liabilities
is acquired of $10,067 was $160,000 and was allocated to the Extended Classroom
software and is being amortized over its estimated useful life of five years.
Telepartners, Inc. had no operating history and had not generated any revenues.
Accordingly, the acquisition was accounted for as a purchase of it's assets.
On September 11, 2003, Sequiam Corporation acquired 100% of the issued and
outstanding shares of common stock of Fingerprint Detection Technologies, Inc.
("FDTI") a Florida corporation. In consideration for the shares, Sequiam
Corporation issued a total of 485,000 shares of its common stock to UTEK
Corporation ("UTEK"), the parent of FDTI, valued at the closing market price of
its common stock on the date of acquisition of $.49 per share or $237,560. FDTI
has acquired the rights to develop and market a patented and proprietary
technology for fingerprint analysis using an LED intense headband light source.
The purchase price of $237,560 was allocated to acquired intellectual property
and is being amortized over its estimated useful life of five years. FDTI had
no operating history and had not generated any revenues. Accordingly, the
acquisition was accounted for as a purchase of its assets.
10
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.
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 7,650,000 as of September 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., Fingerprint Detection Technologies, Inc., and
Sequiam Communications, Inc (the "Company"). All intercompany transactions and
accounts have been eliminated.
Note 3 - Going Concern and 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 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.
11
The Company is undertaking several initiatives to address its liquidity,
including the following: (1) continued efforts to increase our revenues from
software licenses and the BioVault; (2) proceeds expected to be received from
the convertible debentures and exercise of warrants as described above; (3)
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.
The Company's ability to continue as a going concern remains dependent upon its
ability to receive proceeds from the debenture and exercise of the warrants
issued to the Investor. However, there can be no assurances that this will
occur. In the event that the proceeds from the debenture and exercise of the
warrants is not obtained on a timely basis, the Company will need to seek
additional financing from other sources. The Company believes that revenues
from current operating activities (exclusive of any sales of the BioVault)
during the next 12 months will not be sufficient to support operations during
that period. There can be no assurance that the Company will receive proceeds
from the exercise of the warrants or be able to find alternative financing on a
timely basis, if at all.
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.
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 September 30, 2005, Xerox
agreed to provide equipment and services in accordance with specified
performance standards. Those standards include, among other things,
12
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.
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 Nine months
ended September 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 September 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 31, 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. Sequiam withdrew the registration statement on September 5, 2003 at
the request of the SEC staff pending receipt of their comments.
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
13
determined based upon the market rate of our stock as reported on the OTCBB at
the time the debenture is converted. If the 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 September
30, 2003, the balance of the debenture, net of the unamortized debt discount of
$112,500 was $37,500 and is included in long-term debt.
14
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 September 30, 2003,
Sequiam Corporation had received the entire $400,000 in advances under the Note.
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 remain
15
outstanding and expire in May 2008. The fair value of the attached warrants
exceeded the value of the proceeds received from the Note and has been recorded
as a debt discount of $400,000. The debt discount is being amortized over the
life of the Note of 36 months. As of September 30, 2003, the balance of the
Note, net of the unamortized debt discount of $342,857 was $57,143 and is
included in long-term debt.
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 - Forbearance Agreement
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 September 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 September 30, 2003 was $48,144 and $11,927
for the quarter ended September 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
16
2007 128,214 212,384
Thereafter 339,169 589,965
-------- -----------
$916,751 $ 1,286,806
======== ===========
Note 10 - Capital Stock
During the Nine months ended September 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, June 23, and September 15, 2003, Sequiam Corporation sold an
aggregate of 800,000 shares of its common stock to this same accredited investor
at a price of $0.50 per share for proceeds of $400,000, less a commission of
$40,000 for net proceeds of $360,000. 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;one million shares of its
common stock at $0.75 exercisable through June 23 2007; and two million shares
of its common stock at $0.75 exercisable through September 30, 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.
During the second quarter the Company agreed to issue 1,553,500 shares for
investment banking, investor and public relations, and employee services valued
at $1,366,895. The 1,553,500 shares were issued in July 2003.
The Company also agreed in the second quarter 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. Those shares were all issued in July
2003.
On September 11, 2003, Sequiam agreed to issue 485,000 shares valued at $237,650
for the acquisition of 100% of the issued and outstanding shares of Fingerprint
Detection Technologies, Inc. The value of the shares was included in current
liabilities as stock subscriptions payable at September 30, 2003 and the shares
were issued in November 2003.
During the third quarter 2003 Sequiam sold an aggregate of 327,500 common shares
to four individual accredited investors at a prices ranging from $0.40 to $0.50
per share for net proceeds
17
of $157,500. In connection with such sales, Sequiam Corporation relied on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. These investors represented in writing that the shares were being
acquired for investment and, in addition, the certificates representing the
shares bear a restrictive securities legend.
Note 11 - Operating Segments
Pursuant to FAS 131, we define an operating segment as:
- A business activity from which we may earn revenue and incur expenses;
- Whose operating results are regularly reviewed by the chief operating
decision maker to make decisions about resources to be allocated to
the segment and assess its performance; and
- For which discrete financial information is available.
We have two operating segments, which are defined as each business line that we
operate. This however, excludes corporate headquarters, which does not generate
revenue.
Our operating segments are defined as follows:
The Information Management segment, which provides interactive web-based
technologies, as well as ASP, ISP and other customer web development and
software development services.
The Safety and Security segment, which provides fingerprint biometric access
control systems technology.
The table below presents certain financial information in thousands by business
segment for the three and nine months ended September 30, 2003 and 2002.
Segment Reporting for the Quarter Ended September 30, 2003:
Information Safety and Consolidated
Management Security Segments Total Corporate Total
------------- ------------ ---------------- ------------ --------------
Revenue from
external
customers $ 79,635 $ 24,224 $ 103,859 $ - $ 103,859
Interest
expense 3,750 - 3,750 80,764 84,514
Depreciation
and
amortization 103,863 36,786 140,649 - 140,649
Segment
profit (316,806) (65,669) (382,475) (323,777) (706,252)
Segment
assets(1) 1,802,177 935,783 2,737,960 50,000 2,787,960
18
Segment Reporting for the Nine Months Ended September 30, 2003:
Information Safety and Consolidated
Management Security Segments Total Corporate Total
------------- ------------ ---------------- ------------ --------------
Revenue from
external
customers $ 312,640 $ 25,323 $ 337,963 $ - $ 337,963
Interest
expense 9,848 - 9,848 118,657 128,505
Depreciation
and
amortization 277,151 61,310 338,461 - 338,461
Segment
profit (945,481) (107,444) (1,052,925) (2,390,475) (3,443,400)
Segment
assets(1) 1,802,176 935,783 2,737,960 50,000 2,787,960
<FN>
(1) Segment assets have been adjusted for intercompany accounts to reflect
actual assets for each segment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Recent Developments
- --------------------
On September 11, 2003, we acquired 100% of the issued and outstanding shares of
common stock of Fingerprint Detection Technologies, Inc. ("FDTI") a Florida
corporation. In consideration for the shares, we issued in November 2003 a
total of 485,000 shares of our common stock to UTEK Corporation ("UTEK"), the
parent of FDTI, valued at the closing market price of its common stock on the
date of acquisition of $.49 per share or $237,560. FDTI has acquired the rights
to develop and market a patented and proprietary technology for fingerprint
analysis using an LED intense headband light source. The purchase price of
$237,560 was allocated to acquired intellectual property and is being amortized
over its estimated useful life of five years.
Quarter Ended and Nine Months September 30, 2003 compared to Quarter Ended and
- --------------------------------------------------------------------------------
Nine Months September 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; and (v) sales of the BioVault(TM). We have not yet generated
significant revenues from the sale or licensing of our software products
(excluding custom software projects) or the BioVault(TM). Software license
revenue will be recognized
19
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 increased to $103,859 for the quarter ended
September 30, 2003 from $48,120 for the quarter ended September 30, 2002 an
increase of $55,739 or 116%. Total revenue increased to $337,963 for the nine
months ended September 30, 2003 from $286,435 for the nine months ended
September 30, 2002 an increase of $51,528 or 18%.
Software and license fee revenues were unchanged at $-0- for both 2002 and 2003.
During 2002 and through the first quarter of 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 and The IRP and
IRPlicator software were being redeveloped until the end of the third quarter of
2003. We expect to begin generating revenues from the sale of our combined DMS
and IRP software products now marketed under the brand name Internet Remote
Print during the fourth quarter of 2003.
Other sales for the third quarter of 2003 included consulting, custom software
services and web development services totaling $40,086; and Internet access and
web-hosting services totaling $39,549. All of the foregoing were 65.5%
increases over 2002 third quarter revenues of $48,120. For the nine months ended
September 30, 2003 compared to 2002 other sales were $313,739 compared to
$286,435 and increase of $27,304 or 9.5%
BioVault sales were $24,224 for the third quarter of 2003 compared to $-0- for
the third quarter of 2002.
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 have integrated 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 product
line.
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
20
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 terminated 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 had an agreement with
the WOA to Publish the magazine, and we have an agreement to publish and host
their website. The WOA has terminated Pachyderm's agreement for nonperformance.
We had expected 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
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 have discontinued our assistance to Pachyderm Press with content and other
business services. We continue to perform our duties to the WOA 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
21
Operating expenses increased by $88,338, or 13% from $672,641 for the quarter
ended September 30, 2002 to $760,979 for the quarter ended September 30, 2003.
Operating expenses increased by $2,609,850, or 261% from $999,266 for the nine
months ended September 30, 2002 to $3,609,116 for the nine months ended
September 30, 2003. This increase is explained below.
Software and web development costs increased by $37,897 or 32% from $119,506 in
third quarter 2002 to $157,403 in third quarter 2003, and by $258,228 or 145%
from $177,979 during the nine months ended September 30, 2002 to $436,207 during
the nine months ended September 30, 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.
The cost of BioVault sales increased to $18,963 in the third quarter 2003 from
$0 in the third quarter 2002 as a result of the launch of that new product and
revenues generated this quarter.
Non-cash compensation of $1,627,896 was recognized during the nine months ended
September 30, 2003 due to one-time charges for stock compensation in the second
quarter 2003 related to employment agreements and investment banking services
largely as a result of several acquisitions made during that period.
Selling, general and administrative expenses decreased $75,341 from $519,305 in
third quarter 2002 to $443,964 in third quarter 2003. We decreased 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 consolidating our operations. Selling,
general and administrative expenses increased by $410,063, or 53% from $777,526
for the nine months ended September 30, 2002 to $1,187,589 for the nine months
ended September 30, 2003 because we increased overall expenditures 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. 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. Such
increases were due to acquisitions and the overall expansion of our business
Depreciation and amortization expense increased by $106,819, from $33,830 in
third quarter 2002 to $140,649 in third quarter 2003, and by $294,700 or 673%
from $43,761 during the nine months ended September 30, 2002 to $338,461 during
the nine months ended September 30, 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 September 30, 2002, to 24 employees at
September 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 September 30, 2003. We can further
22
expect that payroll will be a burden for the next 12 months 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 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 Impairment and Sales of Assets 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 and $15,855 was recognized
in the second and third quarter of 2003 respectively, on the actual sale of
certain equipment acquired from Brekel. Gains of $37,315 and $19,527 were
recognized on the settlement of debts owed to former creditors of Brekel the
second and third quarters of 2003, respectively, for a total of $56,842 for the
nine months ended September 30, 2003.
Interest Expense
Interest expense increased by $78,634, from $5,880 in third quarter 2002 to
$84,514 in third quarter 2003, and by $121,521 from $6,984 during the nine
months ended September 30, 2002 to $128,505 during the nine months ended
September 30, 2003 as a result of an increase in loans from shareholders, a note
payable related to leasehold improvements acquired from Brekel Group in July
2002, and the convertible debenture and Corbin loan. Other non-cash increases to
interest expense are due to accretion of the discount on the convertible
debenture of $37,500 and on the loan from Lee Corbin of $57,143. The total
discount that is being amortized of $150,000 for the debenture and $400,000 for
the Corbin loan will increase interest expense by $17,679 per month or $212,148
per year beginning March 2003 through March 2006, 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.
Net Losses
Sequiam Corporation incurred net losses of $706,252 and $630,401 for the
quarters ended September 30, 2003 and 2002, respectively and it incurred net
losses of $3,443,400 and $719,815 for the nine months ended September 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
Net cash used in operating activities was $1,220,708 for the nine months ended
September 30, 2003, as a result of the net loss during the period of $3,443,400,
offset by non-cash compensation of $1,627,896, net decrease in accounts payable
and accrued expenses totaling $103,431, and increases in accrued shareholder
salaries of $270,000 and other non-cash expenses and losses totaling $398,786.
23
Net cash used for investing activities was $71,430 for the nine months ended
September 30, 2003, primarily due to proceeds from the sale of equipment of
$35,346 offset by cash paid for the acquisition of Access Orlando of $93,827 and
software development costs of $12,949 for the Sequiam IRP and Extended
Classroom products.
Net cash provided by financing activities was $1,206,216 for the quarter ended
September 30, 2003. Proceeds from the bridge loan accounted for $400,000 and
sales of common stock accounted for $708,572 and were offset by commissions of
$48,070. During the quarter ended September 30, 2003, a private investor
exercised 625,000 warrants for $6,250.
Current liabilities of $2,795,205 exceed current assets of $157,241 by
$2,637,964. Of that amount, $1,812,075 or 67% 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 $663,168 of accounts payable and accrued expense, most of
which accrue to Brekel Group, Inc. and are the subject of continued workout
arrangements. $237,650 for the purchase of FDTI is also included in current
liabilities and was paid for in common shares of the Company in November 2003.
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 September 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 September 30, 2003 was $48,144 and $11,927
for the quarter ended September 30, 2002. The minimum future rentals required
under the lease and the maturities of the long-term note payable are as follows:
24
Debt
Year Rentals Maturities
- ---------- -------- -----------
2003 $ 86,700 $ 0
2004 117,334 96,429
2005 120,854 188,341
2006 124,480 199,957
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
$666,689. We received $315,437 (approximately one-half) of these proceeds
during the quarter ending September 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 $400,000 of proceeds from a bridge
loan.
We 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 the BioVault; (2) proceeds
expected to be received from the convertible debentures and exercise of warrants
as described above; (3) 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 September 30, 2003.
ITEM 3. CONTROLS AND PROCEDURES
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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
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information is accumulated and communicated to the Company's management. Based
on their most recent evaluation, which was completed during the period covered
by this report, 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
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ITEM 2. CHANGES IN SECURITIES
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(c) Recent Sales of Unregistered Securities
Common Stock. On February 6, 2003, we sold an aggregate of 266,667 shares of
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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 these
transactions, 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, June 23, and September 15, 2003, Sequiam Corporation sold an
aggregate of 800,000 shares of its common stock to Mr. Sullivan at a price of
$0.50 per share for proceeds of $400,000, less a commission of $40,000 paid to
Cane Consulting, for net proceeds of $360,000. In connection with this
transaction, we issued warrants to purchase an additional 4,000,000 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.
During the third quarter 2003 we sold and aggregate of 327,500 common shares to
four individual accredited investors at a prices ranging from $0.40 to $0.50 per
share for net proceeds of $157,500. In connection with such sales, we 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 four individual investors
represented in writing that the shares were being acquired for investment
purposes only and not for resale, and, in
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addition, the certificates representing the shares bear a restrictive legend in
accordance with Rule 144. Prior to closing the transaction, we supplied
information to each investor in compliance with Rule 502(b). We had a prior
business relationship with each investor. We did not publish any advertisement,
article, notice or other communication intended for public distribution
regarding our intent to make this offering. Each 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 the offer was closed upon sale of the stock to each investor.
The Company agreed to issue 485,000 shares for the acquisition of 100% of the
common shares of Fingerprint Detection Technologies, Inc. valued at $237,650 to
UTEK Corporation. The certificates for the 485,000 shares were issued in
November 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 UTEK Corporation. Based upon
information provided to us by UTEK Corporation, we determined that it is an
accredited investor because it is a publicly held company. UTEK Corporation
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 UTEK Corporation in
compliance with Rule 502(b). We had a prior business relationship with UTEK
Corporation. 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 UTEK Corporation on September 11, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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We held our annual meeting of security holders on August 25, 2003. A detailed
description of the matters approved and other actions taken by the stockholders
is set forth in our Form 8-K filed on August 25, 2003, which is hereby
incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
2.1 Agreement and plan of acquisition between Fingerprint Detection Technologies, Inc., a
Florida corporation, ("FDTI"), UTEK Corporation, a Delaware corporation, ("UTEK"),
and Sequiam Corporation, Inc., a California corporation, ("SQUM").
21.1 Subsidiaries
31.1 Section 901 Certification Nicholas VandenBrekel
31.2 Section 901 Certification Mark Mroczkowski
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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 September 30, 2003:
Form 8-K filed on August 25, 2003, regarding its annual shareholder meeting,
election of officers and a change in its bylaws increasing Directors' terms from
one to three years.
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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: November 19, 2003
By: /s/ Nicholas H. VandenBrekel
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Nicholas H. VandenBrekel, Chief Executive Officer
By: /s/ Mark Mroczkowski
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Mark L. Mroczkowski, Chief Financial Officer
Date: November 19, 2003
/s/ Mark L. Mroczkowski
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Mark L. Mroczkowski
Chief Financial Officer
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