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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(Amending Part I - Items 1 & 2)
(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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to _______________.
Commission File Number 333-45678
SEQUIAM CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0875030
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 SUNPORT LANE, ORLANDO, FLORIDA 32809
(Address, including zip code, of principal executive offices)
407-541-0773
(Registrant's telephone number, including area code)
(Former name, former address)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for the such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [_]
The number of shares of the Registrant's Common Stock outstanding as of August
11, 2004 was 46,395,313.
DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
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- --------------------------------------------------------------------------------
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-QSB/A is being filed to amend Part I, Items 1
and 2 of the Company's Quarterly Report on Form 10-QSB for the six months ended
June 30, 2004, filed on August 16, 2004 (the "Original 10-QSB"). This Amendment
No. 1 updates only the information regarding the Company's Financial Statements
in Part I, Item 1 and the Company's Management's Discussion and Analysis in Part
I, Item 2. This Amendment No. 1 does not otherwise alter the disclosures set
forth in the Original 10-QSB, and does not reflect events occurring after the
filing of the Original 10-QSB. This Amendment No. 1 is effective for all
purposes as of the date of the filing of the Original 10-QSB.
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2
PART I: FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
SEQUIAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2004
(Unaudited) December 31, 2003
--------------- -------------------
ASSETS
Current assets:
Cash $ 881,356 $ 151,450
Accounts receivable, net 13,812 7,047
Prepaid expenses - 21,067
Equipment held for sale - 40,706
--------------- -------------------
Total current assets 895,168 220,270
Property and equipment, net 1,414,235 1,174,866
Software development costs, net 95,302 108,916
Acquired software, net 192,000 230,400
Intellectual properties, net 879,061 985,645
Deposits and other assets 237,960 22,788
--------------- -------------------
Total assets $ 3,713,726 $ 2,742,885
=============== ===================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Amount due for acquisition $ - $ 70,529
Notes and debentures payable 775,153 592,322
Accounts payable 455,614 573,860
Accrued expenses 53,576 181,301
Current portion of long-term debt 396,544 95,131
Loans from shareholders 371,843 695,300
Accrued shareholder salaries 1,319,792 1,214,792
--------------- -------------------
Total current liabilities 3,372,522 3,423,235
Long-term debt 2,968,776 1,175,933
--------------- -------------------
Total liabilities 6,341,298 4,599,168
--------------- -------------------
Shareholders' deficit:
Common shares 46,396 43,863
Additional paid-in capital 6,020,948 4,701,695
Accumulated deficit (8,694,916) (6,601,841)
--------------- -------------------
Total shareholders' deficit (2,627,572) (1,856,283)
--------------- -------------------
Total liabilities and shareholders' deficit $ 3,713,726 $ 2,742,885
=============== ===================
<FN>
See accompanying notes to condensed consolidated financial statements.
3
SEQUIAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Consolidated Consolidated Consolidated Consolidated
-------------- -------------- -------------- --------------
Revenues
Services $ 24,955 110,910 70,139 234,104
Product sales 33,233 - 63,114 -
-------------- -------------- -------------- --------------
Total Revenues 58,188 110,910 133,253 234,104
-------------- -------------- -------------- --------------
Costs and expenses:
Cost of services 206,582 251,973 423,161 476,675
Cost of product sales 84,023 - 148,146 -
Selling, general and administrative 586,135 1,881,818 1,185,555 2,371,562
Loss (gain) on sale of equipment (146) (2,431) 40,706 41,439
Loss on impairment of equipment held for
sale 40,706 - - 75,000
Loss (gain) on debt settlement - (37,315) 5,492 (37,315)
-------------- -------------- -------------- --------------
Total costs and expenses 917,300 2,094,045 1,803,060 2,927,361
-------------- -------------- -------------- --------------
Loss from operations (859,112) (1,983,135) (1,669,807) (2,693,257)
Interest expense, net (135,228) (25,906) (423,268) (43,890)
-------------- -------------- -------------- --------------
Net loss $ (994,340) (2,009,041) (2,093,075) (2,737,147)
============== ============== ============== ==============
Net loss per common share:
Basic and diluted $ (0.02) (0.06) (0.05) (0.08)
============== ============== ============== ==============
Shares used in computation of net loss per
common share - Basic and diluted weighted
average shares outstanding 46,494,214 36,082,226 45,705,774 36,082,226
============== ============== ============== ==============
<FN>
See accompanying notes to consolidated financial statements
4
Sequiam Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Six Months Ended June 30, 2004
(Unaudited)
Common Shares
--------------------
Additional
Shares Par Paid-in Accumulated
Outstanding Value Capital Deficit Total
---------------------------------------------------------------
Balance at December 31, 2003 43,863,218 $43,863 $ 4,701,695 $ (6,601,841) $(1,856,283)
Sale of common shares 1,993,757 1,994 759,098 - 761,092
Warrants issued in connection with loan
agreement - - 368,365 - 368,365
Common shares issued for services 519,291 520 176,741 - 177,261
Shares issued to correct error 19,047 19 (19) - -
Debt assumed with the acquisition of
Telepartners, Inc. - - 15,068 - 15,068
Net loss - - - (2,093,075) (2,093,075)
---------------------------------------------------------------
Balance at June 30, 2004 46,395,313 $46,396 $ 6,020,948 $ (8,694,916) $(2,627,572)
===============================================================
<FN>
See accompanying notes to condensed consolidated financial statements.
5
SEQUIAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months Ended
June 30,
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $(2,093,075) $(2,737,147)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 282,422 197,871
Accretion of debt discount 237,079 18,750
Issuance of common stock in exchange for services 177,261 261,000
(Gain) loss on sale of equipment (146) 41,139
Loss on impairment of equipment held for sale 40,706 75,000
Loss on debt settlement (5,492) (37,315)
Increase in accounts receivable (6,765) (4,817)
Increase in prepaid expenses and other assets (194,105) (84,500)
(Decrease) increase in accounts payable (112,754) 20,691
Increase in accrued shareholders salaries 105,000 1,800,000
Decrease in other accrued expenses (127,725) (2,113)
Stock subscriptions payable for services - 1,366,895
------------ ------------
Net cash used for operating activities (1,697,594) (704,546)
------------ ------------
Cash flows from investing activities:
Equipment purchases (9,479) -
Proceeds from sales of equipment - 19,732
Cash paid for WMW Communications (70,529) (93,827)
Software development costs capitalized - (14,037)
------------ ------------
Net cash used for investing activities (80,008) (88,132)
------------ ------------
Cash flows from financing activities:
Sale of Common Stock 761,092 351,252
Proceeds from Long-Term Debt 2,000,000 250,000
Payment of Long-Term Debt (9,564) (4,286)
Proceeds from Note Payable 400,000 -
Payment of Notes and Debentures Payable (320,563) 150,000
Repayments of shareholder loans (323,457) -
------------ ------------
Net cash provided by financing activities 2,507,508 746,966
------------ ------------
Net change in cash 729,906 (45,712)
Cash, beginning of period 151,450 85,922
------------ ------------
Cash, end of period $ 881,356 $ 40,210
============ ============
<FN>
See accompanying notes to condensed consolidated financial statements.
6
SEQUIAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Non-cash activities: 2004 2003
- ------------------- ------- --------
Common Stock issued to correct error 19 -
Liabilities assumed with acquisition of Telepartners, Inc. 15,068 -
Warrants issued in connection with loan agreements 368,365 -
Leasehold Improvements financed with long-term debt 338,500 -
Beneficial conversion feature on convertible debt - $400,000
Common stock issued for acquisition of WMW Communications - $150,000
<FN>
See accompanying notes to condensed consolidated financial statements.
7
SEQUIAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -DESCRIPTION OF BUSINESS AND ACQUISITIONS
GENERAL
- -------
The Company was incorporated in California on September 21, 1999 as Wedge
Net Experts, Inc. on or about May 1, 2002, the Company changed its name to
Sequiam Corporation. It also changed its symbol from "WNXP" to "SQUM". On May
24, 2004, the Company's common stock was formally listed on the Frankfurt Stock
Exchange under the symbol RSQ.
From inception of its business through the date the Company acquired Smart
Biometrics, Inc., its management was primarily focused on developing a portfolio
of Internet and print enterprise-wide software products. In addition, we
developed custom software, databases and websites for businesses. Sequiam
operated as an Internet service provider ("ISP") and provided Internet access
and web site hosting for our customers who require those services. The business
was operated under one operating segment through our subsidiaries: Sequiam
Software, Inc. and Sequiam Communications, Inc. Sequiam Software tools consist
primarily of document management and Internet Remote Print ("IRP") software,
more fully described below. These tools allow users to manipulate proof,
manage, organize and publish and print digital content, or scan non-digital
content from remote locations as well as provide secure private storage.
Sequiam Communications (formerly known as Brekel Group, Inc.) operated a digital
publishing business that was ceased prior to its acquisition by Sequiam.
However, Sequiam acquired Brekel Group for: (a) its expertise in digital
on-demand publishing and printing; (b) the innovations that it brings to our
document management, IRP and print on-demand software applications; and (c) its
contract and relationship with the World Olympian Association to exclusively
develop, create, host, and maintain their official Internet site and manage a
database, provide email and an electronic newsletter for all Olympic athletes.
In the fourth quarter of 2003, management divided the Company's business
into two distinct operating segments; Information Management and Safety and
Security. The Information Management segment is built on the Company's custom
software skills, contacts with the world sports communities and interactive
web-based technologies obtained by the acquisition of WMW Communications and
more recently, Telepartners, Inc. The Company's Safety and Security segment was
formed upon our acquisition of the assets of a biometrics corporation, Smart
Biometrics, Inc. and expanded with our acquisition of Fingerprint Detection
Technologies, Inc. ("FDTI"). The Company acquired from Smart Biometrics
fingerprint biometric access control systems that will be a key feature in our
future product offerings. The Company acquired from FDTI a fingerprint
detection system that management believes represents a new advancement in that
science.
The Information Management segment consists of the Company's IRP suite of
software products that includes IRP and IRPlicator, more fully described below.
The Company is also developing the following two new software products to sell
in our Information Management segment: "Book It, Rover!" and the Extended
Classroom, which are more fully described below.
In the Safety and Security segment the Company has focused primarily on
selling the BioVault(TM), a secure access denial device intended for personal
firearms and valuables such as jewelry, stock certificates and other documents
that use fingerprint recognition technology to open instead of a traditional
key. The BioVault(TM) and related technology is more fully described below.
The Company has an agreement with the National Rifle Association (NRA) to
distribute the BioVault(TM). The NRA acts only as a sales agent and will not
purchase any of our products directly. The NRA offers our BioVault(TM) in its
online store and catalog. The NRA estimates that we will be able to sell
approximately 50,000 units over the twelve months following the second quarter
2004. The Company has changed its strategy relative to this segment. Instead
of outsourcing the manufacturing of the BioVault(TM) and related products, and
selling and distributing the products itself, the Company plans to license its
8
technologies to other companies who manufacture, market, sell and distribute.
In 2004 we entered into a license agreement with Security Marketing Group, LLC
("SMG") for the Q300, a redesigned version of the BioVault(TM). SMG is required
to pay to us a license fee of $2,000,000 cash, paid $25,000 upon execution and
delivery of the license agreement, and the balance on or before December 31,
2004. In addition to the license fee, SMG is required to pay us a monthly
royalty of $20.00 for every unit sold. We also received a non-dilutive 8%
interest in Security Marketing Group, LLC as part of the license agreement. The
Company is also in discussions with other companies for the license of the
BioVault(TM) and other applications of our biometrics devices as well as the
BritePrint(TM) fingerprint detection device.
DEVELOPMENT OF THE BUSINESS
- ---------------------------
Three principal shareholders, Nicholas VandenBrekel, Mark Mroczkowski and
James Rooney, formed Sequiam Software, Inc. (formerly Sequiam, Inc.) on January
23, 2001, to research, develop, produce and market a document management
software product. From its inception until April 1, 2002, Sequiam Software,
Inc.'s sole business activity was the development of its software product,
Sequiam DMS.
ACQUISITION OF BREKEL GROUP, INC.
In 2002, the Company acquired 99.38% of the issued and outstanding common
stock of Brekel Group, Inc. ("Brekel"). Sequiam Software, Inc. and Brekel were
entities under common control.
The Company acquired Brekel for its expertise in digital on-demand
publishing and printing and the innovations that it brings to our document
management, Internet remote print and print on-demand software applications.
Sequiam also acquired Brekel for its contract with the World Olympians
Association ("WOA") and its Internet and ExtraNet expertise and product
development gained from that project. On November 14, 2002, management changed
Brekel's name to Sequiam Communications, Inc. and again in April 2004 to Sequiam
Sports, Inc. to better represent its role within the company.
ACQUISITION OF THE ASSETS OF W.M.W. COMMUNICATIONS, INC.
Effective November 1, 2002, the Company acquired all of the assets of
W.M.W. Communication, Inc., doing business as Access Orlando. The Company has
accounted for this as an acquisition of the business of W.M.W. Communications,
Inc. ("WMW"). The major assets of WMW were the software products Internet
Remote Print (IRP) and Internet Remote Print Duplicator ("IRPlicator"). IRP is
a software product that allows computer users to print remotely to any printer
via the Internet. IRP is highly complementary to Sequiam's Document Management
Software, and we have integrated the two products. Like the Company, WMW was
engaged in software development, website development, Internet hosting and
collocation services, and is also an Internet service provider ("ISP"). Through
its Internet hosting and collocation services, the Company hosts third-party web
content on either its server located at its remote network operations center
("NOC"), or on the third party's server that is located at the Company's NOC.
ACQUISITION OF THE ASSETS OF SMART BIOMETRICS, INC.
On May 9, 2003, the Company acquired substantially all of the assets of
Smart Biometrics, Inc. of Sanford, Florida. The Company has accounted for this
as an acquisition of the business of Smart Biometrics, Inc. Smart Biometrics,
Inc. is engaged in the development of biometric technologies. The BioVault(TM)
technology, which is a secure safe that utilizes patent pending technology and
protocols to recognize a person's fingerprint to unlock, was the major asset of
Smart Biometrics, Inc.
ACQUISITION OF THE ASSETS OF TELEPARTNERS, INC.
On June 1, 2003, the Company acquired substantially all of the assets of
Telepartners, Inc. of West Palm Beach, Florida. The Company has accounted for
this as an acquisition of the business of Telepartners, Inc. Telepartners, Inc.
is engaged in the development of supplemental educational products for
schoolchildren in grades
9
1 through 12. The major asset acquired from Telepartners, Inc. was 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.
ACQUISITION OF FINGERPRINT DETECTION TECHNOLOGIES, INC.
On September 11, 2003, the Company acquired 100% of the issued and
outstanding shares of common stock of Fingerprint Detection Technologies, Inc.
("FDTI") a Florida corporation. FDTI has acquired the rights to develop and
market a patented and proprietary technology for fingerprint analysis using a
light emitting diode ("LED") intense headband light source. FDTI had no
operating history and had not generated any revenues, so the Company accounted
for the acquisition as a purchase of its assets.
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 the Company included in
Form 10-KSB filed for the year ended December 31, 2003. 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 loss per common share is computed by dividing net loss available to
common shareholders by the weighted average common shares outstanding for the
period. Diluted loss per common share is computed giving effect to all
potentially dilutive common shares. Potentially dilutive common shares may
consist of incremental shares issuable upon the exercise of stock options,
adjusted for the assumed repurchase of the Company's common stock, at the
average market price, from the exercise proceeds and also may include
incremental shares issuable in connection with convertible securities. In
periods in which a net loss has been incurred, all potentially dilutive common
shares are considered anti-dilutive and thus are excluded from the calculation.
As of June 30 2004, the Company had 25,801,367 potentially dilutive common
shares as a result of warrants and options granted and convertible debt
outstanding.
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of the Company
and its subsidiaries Sequiam Software, Inc., Sequiam Biometrics, Inc., Sequiam
Education, Inc., Fingerprint Detection Technologies, Inc., and Sequiam Sports,
Inc (the "Company"). All intercompany transactions and accounts have been
eliminated.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities
("Interpretation No. 46"). In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either does not have equity investors with voting rights or has
equity investors that do not provide sufficient financial resources for the
entity to support
10
its activities. Interpretation No. 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or is entitled to receive
a majority of the entity's residual returns or both. We do not expect that
Interpretation No. 46 will have a material effect on our results of operations
or financial condition as we do not currently utilize or have interests in any
variable interest entities.
ACCOUNTING FOR STOCK-BASED COMPENSATION
- ----------------------------------------
SFAS No. 123, Accounting for Stock-Based Compensation ("FAS 123"),
encourages the use of a fair-value method of accounting for stock-based awards
under which the fair value of stock options is determined on the date of grant
and expensed over the vesting. As allowed by FAS 123, the Company has elected
to account for stock-based compensation plans under an intrinsic value method
that requires compensation expense to be recorded only if, on the grant date,
the current market price of the Company's common stock exceeds the exercise
price the employee must pay for the stock. The Company's policy is to grant
stock options at the fair market value of the underlying stock at the date of
grant.
The Company has adopted the disclosure-only provisions of FAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. There were no stock options granted during the six months ended June 30,
2004. All stock options issued prior to this year have been fully vested. As
such, pro forma net loss is equal to reported net loss.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
On October 1, 2002, the Company's Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO") entered into amended and restated employment
agreements with the Company 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, these contracts will be deemed terminated and compensation of $5
million each is payable at termination, and $1 million annually for five years
subsequent to termination will be due and payable to the CEO and CFO. For the
years ended December 31, 2003 and 2002 and the six months ended June 30, 2004
and 2003, Sequiam accrued and did not pay the minimum annual salaries payable to
the CEO and CFO until April 30, 2004 when salary payments to them were resumed.
None of the previously accrued salary amounts have been paid to either the CEO
or the CFO.
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. On January 30, 2004 Brekel entered into a
settlement agreement with GE by agreeing to pay $70,000 in 36 monthly
installments of $1,945 without interest.
On February 1, 2004 Brekel entered into a settlement agreement with
Precision Partners, LTD for disputed rents on a facility formerly occupied by
Brekel by agreeing to pay $80,000 in 24 monthly installments of $3,510 including
interest at 5%.
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 ("Xerox") 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 gave proper
11
notice of such termination in March 2001. 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. On
June 29, 2004, Xerox Corporation filed a lawsuit in the Circuit Court in and for
Pinellas County State of Florida. The claim amount in controversy is
approximately $1,574,000. The Company disputes these claims and believes them to
be without merit. Because this matter is in very preliminary stages, management
is unable to determine the likelihood of an unfavorable outcome and,
accordingly, has not accrued any amount for potential losses in connection with
this lawsuit.
On August 19, 2004, the Company entered into an exclusive three-year
agreement with the National Rifle Association of America to deploy and integrate
Book It, Rover! Under the terms of the agreement, the Company will collect
travel operator commissions and provide a quarterly affinity royalty to the
National Rifle Association of America based on the total amount of travel
volume. In addition, the Company must pay the National Rifle Association of
America a minimum royalty of $140,000 per year.
NOTE 4 - 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 5 - INTANGIBLE ASSETS
As of June 30, 2004, intangible assets consist of the following:
GROSS NET
AMORTIZATION CARRYING ACCUMULATED CARRYING
PERIOD AMOUNT AMORTIZATION AMOUNT
---------------------------------------------------
Software Development Costs 5 $ 136,145 $ 40,843 $ 95,302
Acquired Software 5 288,000 96,000 192,000
Intellectual Properties 5 1,112,718 233,657 879,061
-------------------------------------
$1,536,863 $ 370,501 $1,166,362
=====================================
Amortization expense amounted to $173,667 and $68,415 for the six months
ended June 30, 2004 and 2003 and $76,092 and $47,208 for three months ended June
30, 2004 and 2003, respectively.
The estimated future amortization expense for each of the five succeeding
years is as follows:
JUNE 30:
2005 $ 304,359
2006 304,359
2007 304,359
2008 253,285
2009 -
----------
$1,166,362
==========
12
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, 2004 and 2003, the Company recorded impairment losses of $40,706 and
$75,000, respectively, to reduce the equipment to zero.
NOTE 7- NOTES AND DEBENTURES PAYABLE
On March 5, 2003 Sequiam issued to La Jolla Cove Investors, Inc. ("LJCI"),
an 8% Convertible Debenture in the principal amount of $300,000 and a warrant to
purchase 2,000,000 shares of our common stock at $1.50 per share (the "Initial
Financing"). Sequiam received a total of $150,000 of the principal amount of
the debenture, representing the balance due at December 31, 2003.
In connection with the debenture and the warrant, Sequiam was required to
register the resale of common stock to be issued to LJCI upon conversion of the
debenture and exercise of the warrant. To meet this obligation, Sequiam filed a
registration statement on April 27, 2003, an amended registration statement on
May 7, 2003, and a second amended registration statement on June 23, 2003, all
of which were withdrawn on September 5, 2003, prior to being declared effective.
Effective as of January 29, 2004, the Company entered into an Agreement of
Accord and Satisfaction with LJCI pursuant to which LJCI agreed to accept
$200,000 plus 100,000 shares of restricted common stock in accord and
satisfaction of the debenture and warrant and other documents related to the
Initial Financing. As a result, all of our obligations under the Initial
Financing, including the obligation to file a new registration statement, have
been terminated.
Pursuant to the accord and satisfaction, Sequiam issued 100,000 shares of
restricted common stock to LJCI, which, had a fair market value of $51,000,
based on a closing trading price of $0.51 per share on January 29, 2004. In
addition, the Company delivered to LJCI a promissory note in the principal
amount of $200,000 with interest in the amount of 8% per year, plus principal,
due in six installments of $34,017 per month beginning February 1, 2004. On
April 30, 2004, the Company paid the entire remaining principal balance and
accrued interest.
Under the new agreement, LJCI has "piggy-back" registration rights, meaning
Sequiam is obligated to include the resale of the 100,000 shares of restricted
common stock by LJCI in any registered public offering of securities the Company
may make during any time that LJCI still holds such 100,000 shares. Unless the
Company makes a registered public offering, it has no obligation to register the
resale of the 100,000 shares of restricted common stock.
On May 13, 2003, Sequiam entered into a loan agreement 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%). In connection with this loan, the Company 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 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 payment schedule
was originally tied to that of the LJCI Convertible Debenture described above.
However, on January 30, 2004 the Company amended the loan agreement such that
all principal and interest become due on January 30, 2005. The debt discount has
been amortized over the original estimated life of the note of 36 months.
Beginning in January 2004, the remaining unamortized debt discount is being
amortized over twelve months. As of
13
June 30 2004, the balance of the Note, net of the unamortized debt discount of
$154,284 was $245,716 and is included in notes and debentures payable.
On December 18, 2003, the Company entered into a loan agreement with Lee
Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John
Svenningsen, for a principal loan amount of $100,000 under a promissory note
bearing interest at five percent (5%). In connection with this loan, the Company
issued a warrant to the holder to purchase 200,000 shares of its common stock at
an exercise price of $0.25 per share. The principal and accrued interest is due
six months from the date of the loan and was paid on June 18, 2004.
On December 18, 2003, the Company entered into a loan agreement with Lee
Harrison Corbin, for a principal loan amount of $50,000 under a promissory note
bearing interest at five percent (5%). In connection with this loan, the Company
issued one warrant to the holder to purchase 100,000 shares of its common stock
at an exercise price of $0.25 per share. The principal and accrued interest is
due six months from the date of the loan and was paid on June 18, 2004.
On December 26, 2003, the Company entered into a debenture agreement
("Debenture") with Eagle Financial, LLC, for a principal loan amount of $150,000
under a debenture bearing interest at ten percent (10%). The principal and
accrued interest was paid on March 26, 2004. The Debenture also provides for an
unconditional equity provision whereby the Company issued seventy five thousand
(75,000) restricted shares to the Holder as an incentive to lend. The fair value
of the shares has been recorded as a debt discount of $30,000.
On January 30, 2004, the Company entered into a loan agreement 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%). In connection with this loan, the Company
issued one warrant to the holder to purchase 800,000 shares of its common stock
at an exercise price of $0.225 per share. The Warrant was exercised on January
30, 2004. The principal and interest become due on January 30, 2005.
The preceding information is summarized as follows at June 30 2004:
Face Debt Carrying
Amount Discount Amount
-------- ---------- ---------
Promissory
note - Lee
Harrison
Corbin-
Trustee for
John
Svenningsen $400,000 $(154,284) $ 245,716
Promissory
note - Lee
Harrison
Corbin-
Trustee for
John
Svenningsen 400,000 - 400,000
Precision
Partners and
GE Capital 129,437 129,437
-------------------------------
$929,437 $(154,284) $ 775,153
===============================
14
NOTE 8 - LOANS FROM SHAREHOLDERS
On February 1, 2002, Mark Mroczkowski, the Chief Financial Officer and a
shareholder of the Company, loaned Sequiam Communications, Inc. (formerly Brekel
Group, Inc.) $50,000. Interest is payable at 6%. As of June 30, 2004, the
balance due under this loan was $50,000 payable on demand together with accrued
interest of $1,250.
Nicholas VandenBrekel, the President and Chief Executive Officer and
majority shareholder of the Company, has advanced money to the Company and
Sequiam Software, Inc. under demand notes. At June 30, 2004, the Company owed
$270,450 on these notes, including accrued interest of $21,409. The notes bear
interest at 2% per annum and are due on demand.
Alan McGinn, the Chief Technology Officer and a shareholder of the Company,
has advanced money to the Company. At June 30, 2004, the Company owed $12,000
without interest or specific repayment terms.
A shareholder not employed by the Company advanced $75,000 to the Brekel
Group, Inc. on March 1, 2002. The terms of the demand note include interest
payable at 6% and a right to convert the note to common stock at $1.00 per
share. At June 30, 2004 the remaining principal balance was $39,393 and accrued
interest was $-0-.
NOTE 9 - FORBEARANCE AGREEMENT
Prior to our acquisition of the Brekel Group, Inc., effective July 1, 2001,
the Brekel Group, Inc. entered into an operating lease agreement to rent
approximately 60,000 square feet of combined office and manufacturing space
through June 30, 2011. Because we determined to cease Brekel's print and
publishing operations before we acquired it, effective July 1, 2002, Brekel
entered into a lease forbearance agreement for 10,000 square feet of the same
space for the remaining term of the lease. In April 2004, we entered into a new
lease agreement and note payable with the landlord that supercedes and replaces
the lease forbearance agreement entered into by the Brekel Group, Inc. effective
July 1, 2002 prior to its acquisition by us.
The new lease for 24,085 square feet is effective July 1, 2004 for a period
of seventy-two months beginning July 1, 2004 and ending on June 30, 2010. The
note payable was fixed at $1,600,000 together with interest thereon at a simple
interest rate equal to six percent per annum. Commencing on August 1, 2004 and
continuing on the first day of each month thereafter through and including June
1, 2010, we are scheduled to pay to Lender payments consisting of principal and
interest in the amount of $26,517 per month.
Rental expense for the three months ended June 30, 2004 and 2003 was
$29,171 and $48,144, respectively and $62,305 and $74,636 for the six months
ended June 30, 2004 and 2003, respectively. The outstanding balance on the note
of $1,600,000 as of June 30, 2004, represents $893,112 of deferred rent and
$706,888 of tenant improvements. The balance is included $93,514 in current
portion of long-term debt and $1,506,486 in long-term debt. The new minimum
future rentals required under the operating lease and the maturities of the
long-term note payable are as follows beginning July 1, 2004:
Year Rentals Maturities
---------- ---------- -----------
2004 $ 74,848 $ 93,514
2005 190,555 234,181
2006 206,262 248,624
2007 210,483 263,959
2008 214,808 280,239
Thereafter 329,986 479,483
-----------------------
$1,226,942 $ 1,600,000
=======================
15
NOTE 10 - CONVERTIBLE DEBT
On April 27, 2004, the Company closed a convertible debt transaction with
Laurus Master Fund, Ltd. ("Laurus") providing up to $3.0 million in financing.
Under the arrangement, the Company delivered to Laurus a secured convertible
term note, bearing interest at the Wall Street Journal Prime rate plus 2%, in
the initial amount of $2.0 million, convertible into the Company's common stock
(the "Note"), and a warrant to purchase up to 666,666 shares of the Company's
common stock.
The Note has a term of three years. Interest shall be payable monthly in
arrears commencing on June 1, 2004, and on the first day of each consecutive
calendar month thereafter. Monthly amortization payments shall commence on
August 2, 2004, at the rate of $60,606. The balance of the Note at June 30, 2004
is $2,000,000 less debt discount recognized of $234,680 or a net of $1,765,320
and is included $1,462,290 in long-term debt and $303,030 in current portion of
long-term debt.
The interest rate under the Note is subject to adjustment on a month by
month basis if specified conditions are met (including that the common stock
underlying the conversion of the Note and the warrant issued to Laurus are
registered with the U.S. Securities and Exchange Commission and whether and to
what extent the market price of the Company's common stock for the five (5)
trading days preceding a particular determination date exceeds (or is less than)
the fixed conversion price applicable to the Note).
Laurus also has the option to convert all or a portion of the Note into
shares of the Company's common stock at any time, subject to specified
limitations, at a fixed conversion price of $0.66 per share. The Note is secured
by a first lien on all the Company's and its subsidiaries' assets. In connection
with the Note, Laurus was paid a fee of $105,000 which is included in other
assets as deferred loan costs and is being amortized over the life of the loan.
Laurus received a six-year warrant to purchase up to 666,666 shares of the
Company's common stock at prices ranging from $0.83 per share to $1.16 per
share. A discount of $200,000 was recognized on the value of the warrants and is
being amortized as interest expense over the life of the loan. A discount of
$48,485 was allocated to the beneficial conversion feature. All stock conversion
prices and exercise prices are subject to adjustment for stock splits, stock
dividends or similar events. The Company also agreed to file a registration
statement with the U.S. Securities and Exchange Commission covering the shares
issuable upon conversion of the Note and the exercise of the warrant issued to
Laurus.
Laurus has committed to fund to the Company an additional $1.0 million
under the financing arrangement on substantially similar terms as the initial
$2.0 million funding, which additional $1.0 million will become available to the
Company following its completion and/or achievement of certain conditions to
funding, including, without limitation, certain performance benchmarks.
NOTE 11 - CAPITAL STOCK
During the six months ended June 30, 2004, the Company issued 519,291
common shares for business advisory services valued at $177,261 based on the
Company's quoted market price on the date of the related agreements.
During the six months ended June 30, 2004, the Company sold an aggregate of
1,993,757 shares of its common stock to six accredited investors at an average
price of $0.45 per share for net proceeds of $761,092. In connection with such
sales, the Company 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 12 - OPERATING SEGMENTS
During the three month and six month periods ended June 30, 2003, the
Company operated as a single operating segment, the Information Management
Segment, as defined below.
Pursuant to FAS 131, the Company defines an operating segment as:
- A business activity from which the Company may earn revenue and incur
expenses;
16
- 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.
The Company has two operating segments, which are defined as each business
line that it operates. This however, excludes corporate headquarters, which does
not generate revenue.
The Company's operating segments are defined as follows:
The Information Management segment provides interactive web-based
technologies, as well as ASP, ISP and other customer web development and
software development services.
The Safety and Security segment provides fingerprint biometric access
control systems technology and fingerprint identification technology.
The table below presents certain financial information by business segment
for the quarter ended June 30, 2004.
Information Safety and Consolidated
------------- ------------ --------------
Management Security Segments Total Corporate Total
------------- ------------ ---------------- ----------- --------------
Revenue from
external
customers $ 24,955 $ 33,233 $ 58,188 $ - $ 58,188
Interest expense 8,030 - 8,030 127,198 135,228
Depreciation and
amortization 80,784 48,669 129,453 - 129,453
Segment profit (508,205) (61,710) (569,915) (424,425) (994,340)
Segment
assets(1) 2,011,816 747,022 2,758,838 954,888 3,713,726
The table below presents certain financial information by business segment
for the six months ended June 30, 2004.
Information Safety and Consolidated
------------- ------------ --------------
Management Security Segments Total Corporate Total
------------- ------------ --------------- ------------ --------------
Revenue from
external
customers $ 70,139 $ 63,114 $ 133,253 $ - $ 133,253
Interest expense 18,225 - 18,225 405,043 423,268
Depreciation and
amortization 172,996 97,338 270,304 - 270,304
Segment profit (860,288) (100,362) (960,650 (1,132,425) (2,093,075)
<FN>
(1) Segment assets have been adjusted for intercompany accounts to reflect actual assets
for each segment.
NOTE 13 - SUBSEQUENT EVENTS
On August 19, 2004, the Company entered into an exclusive three-year
agreement with the National Rifle Association of America to deploy and integrate
Book It, Rover! Under the terms of the agreement, the Company will collect
travel operator commissions and provide a quarterly affinity royalty to the
National Rifle Association of
17
America based on the total amount of travel volume. In addition, the Company
must pay the National Rifle Association of America a minimum royalty of $140,000
per year.
On September 7, 2004, the Company entered into a loan agreement with Eagle
Funding, LLC of Chattanooga, Tennessee. The terms of the financing are
summarized below.
The Company delivered to Eagle Funding a promissory note, bearing interest
at 8%, in the amount of $200,000. In connection with the promissory note, Eagle
Funding received a warrant to purchase up to 400,000 shares of the Company's
common stock at an exercise price of $0.66 per share. The warrant is
exercisable by Eagle Funding at anytime during the period beginning on September
7, 2004 and expiring on September 7, 2009. As of the date of this registration
statement, Eagle Funding has not exercised its warrant.
Under the terms of the promissory note, the Company is obligated to remit
payment of the outstanding principal balance, any accrued unpaid interest and
other amounts due under the promissory note on the date that is the earlier of:
(a) six months from the date of the promissory note; or (b) the date that the
Company receives $1 million pursuant to that certain incremental funding side
letter with Laurus Master Fund, Ltd. Until the Company pays off the promissory
note, in the event that the Company files a registration statement with the U.S.
Securities and Exchange Commission registering any of its debt or equity
securities in a public offering, it has agreed to include in such registration
statement the shares issuable upon the exercise of the warrant. The principal
balance of the promissory note bears 8% interest from the date received, which
is scheduled to be paid every 30 days until paid in full. The interest will be
calculated on the basis of a 360 day year.
On September 30, 2004, the Company entered into a loan agreement with Lee
Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John
Svenningsen. The terms of the financing are summarized below.
The Company delivered to Lee Harrison Corbin, Attorney-in-Fact For the
Trust Under the Will of John Svenningsen, a promissory note, bearing interest at
5%, in the amount of $500,000. In connection with the promissory note, Lee
Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John
Svenningsen, received a warrant to purchase up to 1,300,000 shares of the
Company's common stock at an exercise price of $0.66 per share. The warrant is
exercisable by Lee Harrison Corbin, Attorney-in-Fact For the Trust Under the
Will of John Svenningsen, at anytime during the period beginning on September
30, 2004 and expiring on September 30, 2009. As of the date of filing this
registration statement, Lee Harrison Corbin, Attorney-in-Fact For the Trust
Under the Will of John Svenningsen, has not exercised its warrant.
Under the terms of the promissory note, the Company is obligated to remit
payment of the outstanding principal balance, any accrued unpaid interest and
other amounts due under the promissory note by March 31, 2005. In the event
that, from the period beginning on September 30, 2004 and continuing for a
period of twelve months thereafter, the Company files a registration statement
with the U.S. Securities and Exchange Commission registering any of its debt or
equity securities in a public offering, it has agreed to include in such
registration statement the shares issuable upon the exercise of the warrant.
The principal balance of the promissory note bears 5% interest from the date
received, which is scheduled to be paid every 30 days until paid in full. The
interest will be calculated on the basis of a 365 day year.
On September 30, 2004, the Company entered into a loan agreement with Lee
Harrison Corbin, directly. The terms of the financing are summarized below.
The Company delivered to Lee Harrison Corbin a promissory note, bearing
interest at 5%, in the amount of $75,000. In connection with the promissory
note, Lee Harrison Corbin received a warrant to purchase up to 195,000 shares of
the Company's common stock at an exercise price of $0.66 per share. The warrant
is exercisable by Lee Harrison Corbin at anytime during the period beginning on
September 30, 2004 and expiring on September 30, 2009. As of the date of filing
this registration statement, Lee Harrison Corbin has not exercised the his
warrant.
Under the terms of the promissory note, the Company is obligated to remit
payment of the outstanding principal balance, any accrued unpaid interest and
other amounts due under the promissory note by March 31, 2005. In the event
that, from the period beginning on September 30, 2004 and continuing for a
period of twelve months thereafter, the Company files a registration statement
with the U.S. Securities and Exchange Commission registering
18
any of its debt or equity securities in a public offering, it has agreed to
include in such registration statement the shares issuable upon the exercise of
the warrant. The principal balance of the promissory note bears 5% interest from
the date received, which is scheduled to be paid every 30 days until paid in
full. Such interest will be calculated on the basis of a 365 day year.
Effective October 27, 2004, the Company entered into an Amendment and
Waiver to Securities Purchase Agreement and Related Agreements (Amendment) with
Laurus amending the following agreements previously entered into by the Company
and Laurus on April 27, 2004: (a) the Securities Purchase Agreement; (b) Secured
Convertible Term Note (the "Note"); (c) the Common Stock Purchase Warrant (the
"Warrant"); and (d) the Registration Rights Agreement.
Pursuant to the Amendment, Laurus also: (a) waived the Company's technical
default of Section 6.12(f) of the Securities Purchase Agreement; and (b) in
satisfaction of due and unpaid fees of approximately $49,000 incurred by the
Company for failing to cause its registration statement registering the shares
underlying the Note and the Warrant to be declared effective by the SEC by
August 30, 2004, the Company issued to Laurus a warrant to purchase 470,000
shares of the common stock of the Company at an exercise price of $0.33 per
share.
Pursuant to the Amendment, Laurus will not require the Company to make
principal or interest payments under the Note until May 2, 2005. Thereafter,
the Company will pay Laurus $75,758 per month, together with any accrued and
unpaid interest, until the Maturity Date of the Note. The Note was further
amended by decreasing the Fixed Conversion Price of the Note from $0.66 per
share to $0.33 per share.
The Securities Purchase Agreement was amended to permit the Company to
incur unsecured subordinated indebtedness in the aggregate principal amount not
to exceed $1,025,000, so long as such indebtedness is subordinated to the
Company's debt to Laurus. The $775,000 in additional financings, as more fully
described in: (a) the Form 8-K filed with the SEC on September 13, 2004; and (b)
the Form 8-K filed with the SEC on October 4, 2004, is included in this amount.
The Warrant was amended by decreasing the Exercise Price of the Warrant as
follows: (a) $0.41 for the first 222,222 shares; (b) $0.50 for the next 222,222
shares; and (c) $0.58 for any additional shares acquired under the Warrant.
The Registration Rights Agreement was amended to lengthen the date that the
Company's registration statement registering the shares underlying the Note and
each of the Warrants must be declared effective by the Securities and Exchange
Commission from August 30, 2004 to December 19, 2004.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis contains "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as well as historical information.
Although we believe that the expectations reflected in these forward-looking
statements are reasonable, we can give no assurance that the expectations
reflected in these forward-looking statements will prove to be correct. Our
actual results could differ materially from those anticipated in forward-looking
statements as a result of certain factors, including matters described in the
section titled "Risk Factors." Forward-looking statements include those that
use forward-looking terminology, such as the words "anticipate," "believe,"
"estimate," "expect," "intend," "may," "project," "plan," "will," "shall,"
"should," and similar expressions, including when used in the negative.
Although we believe that the expectations reflected in these forward-looking
statements are reasonable and achievable, these statements involve risks and
uncertainties and no assurance can be given that actual results will be
consistent with these forward-looking statements. Important factors that could
cause our actual results, performance or achievements to differ from these
forward-looking statements include the factors described in the "Risk Factors"
section and elsewhere in this prospectus.
All forward-looking statements attributable to us are expressly qualified
in their entirety by these and other factors. We undertake no obligation to
update or revise these forward-looking statements, whether to reflect events or
circumstances after the date initially filed or published, to reflect the
occurrence of unanticipated events or otherwise.
INTRODUCTION
The following discussion and analysis summarizes the significant factors
affecting: (i) our consolidated results of operations for the three and six
months ended June 30, 2004 compared to the three and six-months ended June 30,
2003; and (ii) financial liquidity and capital resources. This discussion and
analysis should be read in conjunction with our consolidated financial
statements and notes included in this prospectus.
We are an information management, software and security technology company
specializing in biological identification security systems and web-based
application services for the business, education and travel industries. Our
business is divided into two operating segments: (a) Safety and Security; and
(b) Information Management.
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. We have not yet generated revenue from the sale
and licensing of our software products; and (v) the sale and licensing of our
biometric products. 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.
Internet access and web-hosting services are recognized over the period the
services are provided, typically month-to-month.
The following table shows the proportion of total revenues by segment in
the three and six-month period ended June 30, 2004.
INFORMATION
PERIOD SAFETY AND SECURITY MANAGEMENT TOTAL
- ----------------------- -------------------- ------------ --------
Three Months ended June $ 24,955 $ 33,233 $ 58,188
30, 2004. . . . . . . . -------------------- ------------ --------
Six Months ended June $ 70,139 $ 63,114 $133,253
30, 2004. . . . . . . . -------------------- ------------ --------
20
RESULTS OF OPERATIONS
The following table sets forth information regarding our financial results
for 2004 and 2003.
Six Months Ended June 30, % Three Months Ended June 30, %
-------------------------- - --------------------------- -
2004 2003 Change 2004 2003 Change
------------ ------------ ------- ---------- --------------- -------
Revenue $ 133,253 $ 234,104 (43.1) $ 58,188 $ 110,910 (47.5)
Costs of services and product
sales 571,511 476,675 19.9 290,875 251,973 15.4
Selling, general and
administrative 1,185,497 2,371,562 (50.0) 586,135 1,881,818 (68.9)
Losses on sale of equipment,
impairment of equipment held for
sale and debt settlement 46,052 79,124 (41.8) 40,560 (39,746) (202.0)
Interest Expense 423,268 43,890 864.4 135,228 25,906 422.0
Net Losses $(2,093,075) $(2,737,147) (23.5) $(994,610) $ (2,009,041) (50.5)
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003.
Unless otherwise noted, references to 2004 represent the six-month period ended
June 30, 2004 and references to 2003 represent the six-month period ended June
30, 2003.
REVENUES. Total revenue decreased by $100,851 or 43.1% to $133,253 in
2004, from $234,104 in 2003 because we have discontinued certain ancillary
services such as web development, custom software development and dial up ISP
services so that we may focus entirely on our core products. Software and
license fee revenues were unchanged at $-0- for both 2004 and 2003. Revenues
from consulting, custom software services, web development services and internet
access and web-hosting services totaled $69,328 in 2004 and $234,104 in 2003, a
decrease of 59.7%. Revenues from sales of the BioVaultTM were $38,925 in 2004
compared to $-0- in 2003. Revenues from the licensing of the Q300 (discussed
below) were $25,000 in 2004 compared to $-0- in 2003. Revenues from the
maintenance of our existing IRP customers were $5,200 in 2004 compared to $5,200
in 2003.
During 2003, we spent most of our time acquiring and redeveloping our
products. Sales and marketing efforts did not commence until the fourth quarter
of 2003. We believe that the high cost of the BioVault was an impediment to its
sales. As a result, we developed a less expensive version of the BioVault, the
Q300. Now that our key products such as IRP, IRPlicator and the BioVaultTM are
ready to formally come to market, we expect to begin generating revenues from
these products during 2004.
During 2004, we entered into a pilot program for our IRP products with
AlphaGraphics, Inc., an international chain of 320 print shops and entered into
a trial program with a state community college and county school system. In
addition, in 2004 we entered into a license agreement with Security Marketing
Group, LLC ("SMG") for the Q300. SMG is required to pay to us a license fee of
$2,000,000 cash, payable $25,000 upon execution and delivery of the license
agreement, and the balance on or before December 31, 2004. In addition to the
license fee, SMG is required to pay us a monthly royalty of $20.00 for every
unit sold by them. We also received a non-dilutive 8% interest in Security
Marketing Group, LLC as part of the license agreement. Management is uncertain
as to the collectibility of the $1,975,000 balance of the license fee pertaining
to the license agreement with SMG. Failure to pay amounts due under this
agreement constitutes an event of default. In such circumstance, SMG, after
receiving written notice from us, has 30 days to cure such breach. If the
breach is not cured, we shall have the right to terminate the agreement without
further liability and SMG must return all intellectual properties to us. We are
currently in discussions with other companies for the license of our other
biometric technology products.
As a result of these recent developments, we expect: (a) that consulting,
custom software services, web development and web-hosting activities will make
up a smaller portion of our overall revenues; and (b) that revenues from our
Safety and Security segment will begin to increase in late 2004 and early 2005.
COST OF SERVICES AND PRODUCT SALES. Cost of services and product sales
were $571,307 in 2004 and $476,675 in 2003, an increase of $94,632 or 19.9 %.
This increase was primarily attributable to increased
21
depreciation and amortization expense. Depreciation and amortization expense
were $282,422 in 2004 and $197,871 in 2003, an increase of $84,551 or 29.9 %.
This increase is attributable to the amortization of intellectual properties
from W.M.W. Communications, Inc., Smart Biometrics, Inc., Telepartners, Inc. and
Fingerprint Detection Technologies, Inc.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $1,185,555 in 2004 and $2,371,562 in 2003, a decrease of
$1,186,007 or 50 %. The reduction was due to non-recurring, non-cash charges
for services incurred in 2003 of $1,547,895. We increased our recurring
selling and overhead expenditures such as salaries, wages and benefits for
administrative and marketing personnel, computer maintenance and supplies,
professional services (such as legal and accounting fees), and corporate travel
expenses resulting from the overall growth of our operations.
Our total payroll was $551,512 for 2004 and $174,017 for 2003. This
increase in payroll is attributable to our growth from 17 employees in 2003, to
24 employees in 2004, and the hiring of three new executives. The $377,495
increase in payroll and the partial payment of accrued shareholder salaries has
reduced our liquidity and decreased our cash flow for 2004. We can further
expect that payroll will continue to reduce our liquidity and cash flow for the
next six months as we attempt to bring our products to market. Once we
establish sales for our software and biometric products the payroll burden will
be reduced as a percentage of total revenue. We expect to increase payroll in
the third and fourth quarters as we plan to hire five to seven sales
professionals to sell our products to end users to supplement the distribution
of our products through value-added resellers and other resellers.
LOSSES ON SALE OF EQUIPMENT, IMPAIRMENT OF EQUIPMENT HELD FOR SALE AND DEBT
SETTLEMENT. A loss of $46,198 was recognized on the remaining value of
equipment held for resale.
INTEREST EXPENSE. Interest expense was $423,268 in 2004 and $43,890 in
2003, an increase of $379,378 or 864.4 %. This increase is attributable to the
increase in loans from shareholders, long-term debt, notes payable and debt
discounts recorded on the notes payable.
NET LOSSES. We incurred net losses of $2,093,075 in 2004 and $2,737,147 in
2003, a decrease of $644,072 or 23.5%. The significant decrease was attributed
to non-cash and non-recurring expenses for investment banking, consulting and
other services acquired in exchange for stock totaling $1,759,446 together with
$855,369 of additional losses on debt settlements, sales of assets and debt
discount accretion incurred in 2003. We expect to incur additional net losses
through the third and fourth quarter of 2004 as we introduce our products to the
marketplace. We expect cash flow to increase beginning in the third quarter
using proceeds from sales of our products. The Company presently requires sales
of approximately $300,000 per month to provide a positive cash flow.
QUARTER ENDED JUNE 30, 2004 COMPARED TO QUARTER ENDED JUNE 30, 2003. Unless
otherwise noted, references to 2004 represent the quarter period ended June 30,
2004 and references to 2003 represent the quarter period ended June 30, 2003.
REVENUES. Total revenue decreased by $52,722 or 47.5 % to $58,188 in 2004,
from $110,910 in 2003 because we have discontinued certain ancillary services
such as web development, custom software development and dial up ISP services so
that we may focus entirely on our core products. Software and license fee
revenues were unchanged at $-0- for both 2004 and 2003. Revenues from
consulting, custom software services, web development services and internet
access and web-hosting services totaled $22,834 in 2004 and $110,910 in 2003, a
decrease of 79.4%. Revenues from sales of the BioVaultTM were $35,354 in 2004
compared to $-0- in 2003. Revenues from the licensing of the Q300 (discussed
below) were $25,000 in 2004 compared to $-0- in 2003. Revenues from the
maintenance of our existing IRP customers were $5,200 in 2004 compared to $5,200
in 2003.
During 2003, we spent most of our time acquiring and redeveloping our
products. Sales and marketing efforts did not commence until the fourth quarter
of 2003. We believe that the high cost of the BioVault was an impediment to its
sales. As a result, we developed a less expensive version of the BioVault, the
Q300. Now that our key products such as IRP, IRPlicator and the BioVaultTM are
ready to formally come to market, we expect to begin generating revenues from
these products during 2004.
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As a result of these recent developments, we expect: (a) that consulting,
custom software services, web development and web-hosting activities will make
up a smaller portion of our overall revenues; and (b) that revenues from our
Safety and Security segment will begin to increase in late 2004 and early 2005.
COST OF SERVICES AND PRODUCT SALES. Costs of services and product sales
were $290,605 in 2004 and $251,973 in 2003, an increase of $38,632 or 15.3%.
This increase was primarily attributable to increased depreciation and
amortization expense. Depreciation and amortization expense were $129,453 in
2004 and $115,032 in 2003, an increase of $14,421 or 12.5 %. This increase is
attributable to the amortization of intellectual properties from W.M.W.
Communications, Inc., Smart Biometrics, Inc., Telepartners, Inc. and Fingerprint
Detection Technologies, Inc.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $586,135 in 2004 and $1,881,818 in 2003, a
decrease of $1,295,683 or 68.9 %. The reduction was due to non-recurring,
non-cash charges for services incurred in 2003 of $1,547,895. We increased our
recurring selling and overhead expenditures such as salaries, wages and benefits
for administrative and marketing personnel, computer maintenance and supplies,
professional services (such as legal and accounting fees), and corporate travel
expenses resulting from the overall growth of our operations.
Our total payroll was $342,518 for the quarter ended June 30, 2004 and
$86,917 for the quarter ended June 30, 2003. This increase in payroll is
attributable to our growth from 17 employees in 2003, to 24 employees in 2004,
and the hiring of three new executives. The addition of the employees and the
partial payment of accrued shareholder salaries has negatively impacted
liquidity and cash flow for 2004. We can further expect that payroll will
continue to reduce our liquidity and cash flow for the next six months as we
attempt to bring our products to market. Once we establish sales for our
software and biometric products the payroll burden will be reduced as a
percentage of total revenue. We expect to increase payroll in the third and
fourth quarters as we plan to hire five to seven sales professionals to sell our
products to end users to supplement the distribution of our products through
value-added resellers and other resellers.
LOSSES ON SALE OF EQUIPMENT, IMPAIRMENT OF EQUIPMENT HELD FOR SALE AND DEBT
SETTLEMENT. A loss of $40,560 was recognized on the remaining value of
equipment held for resale.
INTEREST EXPENSE. Interest expense was $135,228 in 2004 and $25,906 in
2003, an increase of $109,322 or 422.0 %. This increase is attributable to the
increase in loans from shareholders, long-term debt, notes payable and debt
discounts recorded on the notes payable.
NET LOSSES. We incurred net losses of $994,340 in 2004 and $2,009,041 in
2003, a decrease of $1,014,701 or 50.5 %. The significant decrease was
attributed to non-cash and non-recurring expenses for investment banking,
consulting and other services acquired in exchange for stock totaling $1,759,446
together with $855,369 of additional losses on debt settlements, sales of assets
and debt discount accretion incurred in 2003. We expect to incur additional net
losses through the third and fourth quarter of 2004 as we introduce our products
to the marketplace. We expect cash flow to increase beginning in the third
quarter using proceeds from sales of our products. The Company presently
requires sales of approximately $300,000 per month to provide a positive cash
flow.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1,697,594 for 2004, as a result
of the net loss during the period of $2,093,075, offset by non-cash expenses of
$723,663, increases in accrued shareholder salaries of $105,000 and net decrease
in working capital items totaling $446,987.
Net cash used for investing activities was $80,008 for 2004, due to
purchases of equipment of $9,479 and cash paid for the acquisition of Access
Orlando of $70,529.
Net cash provided by financing activities was $2,507,508 for 2004. Proceeds
from the notes payable accounted for $400,000, long-term debt $2,000,000 and
sales of common stock accounted for $900,100 and were
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offset by commissions of $139,008 for net proceeds of $761,092. Payments of
long-term debt used cash of $9,564 and repayments of notes and debentures and
repayments of shareholder loans used cash of $644,020.
Current liabilities of $3,372,522 exceed current assets of $895,168 by
$2,477,354. Of that amount, $1,691,635 or 68.3% 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 $358,541 of accounts payable owed by the former
Brekel Group, Inc. We are negotiating to settle these liabilities related to
the former Brekel Group, Inc. at amounts less than the amounts recorded in the
balance sheet. We are unable to estimate an expected settlement below the
carrying amount at this time. We expect that these liabilities will be settled
for cash.
Prior to our acquisition of the Brekel Group, Inc., effective July 1, 2001,
the Brekel Group, Inc. entered into an operating lease agreement to rent
approximately 60,000 square feet of combined office and manufacturing space
through June 30, 2011. Because we determined to cease Brekel's print and
publishing operations before we acquired it, effective July 1, 2002, Brekel
entered into a lease forbearance agreement for 10,000 square feet of the same
space for the remaining term of the lease. In April 2004, we entered into a new
lease agreement and note payable with the landlord that supercedes and replaces
the lease forbearance agreement entered into by the Brekel Group, Inc. effective
July 1, 2002 prior to its acquisition by us.
The new lease for 24,085 square feet is effective July 1, 2004 for a period
of seventy-two months beginning July 1, 2004 and ending on June 30, 2010. The
note payable was fixed at $1,600,000 together with interest thereon at a simple
interest rate equal to six percent per annum. The components of the note
payable is $893,112 of deferred rent and $706,888 of tenant improvements.
Commencing on August 1, 2004 and continuing on the first day of each month
thereafter through and including June 1, 2010, we are scheduled to pay to Lender
payments consisting of principal and interest in the amount of $26,517 per
month.
The new minimum future rentals required under the operating lease and the
maturities of the long-term note payable are as follows beginning July 1, 2004:
Year Rentals Maturities
---- -------- -----------
2004 $ 57,389 $ 93,514
2005 146,107 234,181
2006 158,509 248,624
2007 162,472 263,959
2008 166,534 280,239
Thereafter 257,100 479,483
---------------------
$948,111 $ 1,600,000
=====================
Since December 31, 2003, we sold securities in six separate private
placements. As a result, we have received during the quarter ended June 30,
2004 total net proceeds of $761,092 and most of this amount is reflected as
additional paid-in capital in our financial statements for the period ended June
30, 2004. We also received $400,000 of proceeds from a loan, and $2,000,000 from
a secured convertible term note described below.
On April 27, 2004, pursuant to a Securities Purchase Agreement dated as of
the same date, we completed the sale of a secured convertible term note with
Laurus Master Fund, Ltd. The note has a term of three years and accrues
interest at an annual rate equal to the "prime rate" (4.25% at June 30, 2004)
published in the Wall Street Journal plus 2%. The note is convertible into
shares of our common stock at a conversion price of $0.66 per share.
In connection with the sale of the note, we issued the purchaser a common
stock purchase warrant to purchase up to 666,666 shares of our common stock at
prices ranging from $0.83 per share to $1.16 per share. Also
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in connection with the sale of the note, we agreed to register for resale the
shares of common stock into which the note is convertible and the warrant is
exercisable.
We believe that the proceeds from the Laurus transaction will be adequate
to support our operations while we build sales revenues from our products. Once
the proceeds from the Laurus transaction are used, which we anticipate will
occur in approximately two months, we may need to obtain additional financing to
continue our operations.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
SOFTWARE DEVELOPMENT COSTS
Costs incurred to establish technological feasibility of computer software
products are research and development costs and are charged to expense as
incurred. Costs of producing product masters subsequent to technological
feasibility are capitalized. Capitalization of computer software costs ceases
when the product is available for general release to the customers. Capitalized
software costs are amortized using the straight-line method over the estimated
useful life of the products or the gross revenue ratio method, whichever results
in the greater amount of amortization.
ACQUIRED SOFTWARE
In connection with the acquisition of Access Orlando, the Company acquired
Internet Remote Print software that was assigned a value of $288,000,
representing the excess of the purchase price over the fair value of the
tangible assets acquired. The acquired software is being amortized over its
expected useful life of five years.
INTELLECTUAL PROPERTIES
In connection with the acquisitions of Smart Biometrics, Inc, Telepartners,
Inc. and Fingerprint Detection Technologies, Inc., the Company acquired
intellectual properties including patents, trademarks, technical drawings,
proprietary software and other knowledge based assets that were assigned values
of $700,000, $160,000 and $237,650, respectively, for a total of $1,097,650
representing the excess of the purchase price over the fair value of the
tangible assets acquired. The acquired intellectual properties are being
amortized over their expected useful life of five years.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities
("Interpretation No. 46"). In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either does not have equity investors with voting rights or has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. Interpretation No. 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
is entitled to receive a majority of the entity's residual returns or both. We
do not expect that Interpretation No. 46 will have a material effect on our
results of operations or financial condition as we do not currently utilize or
have interests in any variable interest entities.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to our stockholders.
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SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SEQUIAM CORPORATION
Date: November 5, 2004
By: /s/ Nicholas H. VandenBrekel
- -----------------------------------------------------------
Nicholas H. VandenBrekel, Chief Executive Officer and President
Date: November 5, 2004
By: /s/ Mark L. Mroczkowski
- -----------------------------------------------------------
Mark L. Mroczkowski, Senior Vice President and Chief Financial Officer
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