10QSB 1 doc1.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________to _______________. Commission File Number 333-45678 SEQUIAM CORPORATION (Exact name of registrant as specified in its charter) CALIFORNIA 33-0875030 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 SUNPORT LANE, ORLANDO, FLORIDA 32809 (Address, including zip code, of principal executive offices) 407-541-0773 (Registrant's telephone number, including area code) (Former name, former address) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for the such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of the Registrant's Common Stock outstanding as of August 18, 2003 was 40,601,247. DOCUMENTS INCORPORATED BY REFERENCE Transitional Small Business Disclosure Format (Check one): Yes [_] No [X] ================================================================================ FORM 10-QSB INDEX Page PART I: FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . .3 ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . .4 Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . .4 Condensed Consolidated Statements of Operations. . . . . . . . . . . . . .5 Condensed Consolidated Statements of Stockholders' Deficit. . . . . . . .6 Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . .7 Notes to Condensed Consolidated Financial Statements. . . . . . . . . . .9 ITEM 3. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . .22 PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .23 ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . .23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a). . . . . . . . . . . . .30 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 2 SEQUIAM CORPORATION Form 10-QSB PART I: FINANCIAL INFORMATION ----------------------------- This Quarterly Report on Form 10-QSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. These include, among others, the statements about our plans and strategies. When used in this document and the documents incorporated herein by reference, the words "believes," "expects," "anticipates," "intends," "plans," "estimates," or similar expressions are intended to identify, in certain circumstances, forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed in forward-looking statements. Although it is not possible to itemize all of the factors and specific events that could affect the outlook of a technology company like ours operating in a competitive environment, factors that could significantly impact expected results include: the acceptance of our technology; the effect of national and local economic conditions; our outstanding indebtedness; the loss of key employees; competition from technologies developed by other companies; the ability to attract and retain employees; delays in completing the development of our new products caused by a lack of capital or external causes beyond our reasonable control; and the ability to identify and consummate relationships with strategic partners. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure that such plans, intentions or expectations will be achieved. Actual results may differ materially from the forward-looking statements made in this Quarterly Report on Form 10-QSB. We do not intend to update any forward-looking statements, and we hereby disclaim any obligation to update such forward-looking statements. 3
ITEM 1. FINANCIAL STATEMENTS ------------------------------- SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2003 (Unaudited) December 31, 2002 ------------ ------------------- ASSETS Current assets: Cash $ 40,210 $ 85,922 Accounts receivable, net 45,958 41,141 Prepaid expenses 84,500 - Equipment held for sale 40,706 177,080 ------------ ------------------- Total current assets 211,374 304,143 ------------ ------------------- Property and equipment, net 1,294,637 1,375,398 Software development costs, net 136,145 131,939 Acquired software, net 252,393 288,000 Acquired intellectual properties, net 843,830 - Deposits and other assets 7,800 7,800 ------------ ------------------- Total assets $ 2,746,180 $ 2,107,280 ============ =================== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Amount due for acquisition $ 44,630 $ 288,457 Accounts payable 674,337 646,331 Accrued expenses 33,109 64,783 Loan from shareholders 795,450 795,450 Stock subscriptions payable 2,266,828 - Accrued shareholder salaries 1,034,792 854,792 ------------ ------------------- Total current liabilities 5,099,146 2,649,813 ------------ ------------------- Long-term debt 1,055,556 1,291,092 ------------ ------------------- Total liabilities 6,404,701 3,940,905 ------------ ------------------- Shareholders' deficit: Common shares 37,382 35,463 Additional Paid-in capital 1,202,898 42,565 Accumulated deficit (4,648,801) (1,911,653) ------------ ------------------- Total shareholders' deficit (3,408,521) (1,833,625) ------------ ------------------- Total liabilities and shareholders' deficit $ 2,746,180 $ 2,107,280 ============ ===================
See accompanying notes to condensed consolidated financial statements. 4
SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------------ 2003 2002 2003 2002 ------------------------------------------------------ Net sales $ 110,910 $ 213,315 $ 234,104 $ 238,315 Costs and expenses: Software and web development costs 136,941 58,473 278,804 58,473 Non-cash compensation 1,486,895 - 1,547,895 - Selling, general and administrative 394,923 177,295 823,667 258,221 Depreciation and amortization 115,032 5,080 197,871 9,931 ------------------------------------------------------ 2,133,791 240,848 2,848,237 326,625 ------------------------------------------------------ Loss from operations (2,022,881) (27,533) (2,614,133) (88,310) Gain (Loss) on sale of equipment 2,431 (116,439) - Gain on debt settlement 37,315 37,315 Interest expense (25,906) (268) (43,890) (1,104) ------------------------------------------------------ Net loss $(2,009,041) $ (27,801) $(2,737,147) $ (89,414) ====================================================== Net loss per common share: Basic and diluted $ (0.06) $ (0.00) $ (0.08) $ (0.01) ====================================================== Weighted average common shares outstanding: Basic and diluted 36,082,226 24,233,000 36,082,226 14,483,000 ======================================================
See accompanying notes to condensed consolidated financial statements. 5
SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT Six months Ended June 30, 2003 (Unaudited) Common Shares ------------------- Additional Shares Par Paid-in Accumulated Outstanding Value Capital Deficit Total ------------------------------------------------------------ Balance at December 31, 2002 35,462,609 $35,463 $ 42,565 $(1,911,653) $(1,833,625) Sale of common shares 1,301,667 1,301 349,951 351,252 Beneficial conversion feature on convertible debenture 400,000 400,000 Common shares issued for services 300,000 300 260,700 261,000 Common shares issued for acquisition of WMW Communications 318,471 318 149,682 150,000 Net Loss (2,737,147) (2,737,147) ------------------------------------------------------------ Balance at June 30, 2003 37,382,747 $37,382 $1,202,898 $(4,648,801) $(3,408,521) ============================================================
See accompanying notes to condensed consolidated financial statements. 6
SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six months Ended June 30, ------------------------- 2003 2002 ------------ ----------- Cash flows from operating activities: Net loss $(2,737,147) $ (63,545) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 197,871 - Accretion of debt discount 18,750 - Issuance of common stock in exchange for services 261,000 - Loss on sale of equipment 41,139 - Loss on impairment of equipment held for sale 75,000 - Gain on debt settlement (37,315) - Increase in accounts receivable (4,817) - Increase in prepaid expenses and other assets (84,500) - Increase in accounts payable 20,691 - Increase in accrued shareholders salaries 180,000 138,000 Decrease in other accrued expenses (2,113) - Stock subscriptions payable for services 1,366,895 - ------------ ----------- Net cash used for operating activities (704,546) $ 74,455 ------------ ----------- Cash flows from investing activities: Equipment purchases - (2,759) Proceeds from sales of equipment 19,732 - Cash paid for WMW Communications (93,827) - Software development costs capitalized (14,037) (27,021) ------------ ----------- Net cash used for investing activities (88,132) (29,780) ------------ ----------- Cash flows from financing activities: Proceeds from bridge loan 250,000 - Proceeds from debenture 150,000 - Sale of common stock 351,252 2,000 Repayment of note payable (4,286) - ------------ ----------- Net cash provided by financing activities 746,966 2,000 ------------ ----------- Net change in cash (45,712) 46,675 Cash, beginning of period 85,922 - ------------ ----------- Cash, end of period $ 40,210 $ 46,675 ============ ===========
See accompanying notes to condensed consolidated financial statements. 7
SEQUIAM CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Continued) (Unaudited) Non-cash activities: 2003 2002 ------------------- -------- -------- Common Stock issued for acquisition of WMW Communications $150,000 - Beneficial conversion feature on convertible debt $400,000 -
See accompanying notes to condensed consolidated financial statements. 8 SEQUIAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 -Description of Business Sequiam Corporation ("Sequiam" or the "Company") through its wholly owned subsidiaries, Sequiam Software, Inc. and Sequiam Communications, Inc., develops, markets, and supports a portfolio of Internet and print enterprise-wide software products that enable users to acquire, manage, personalize, and present information. In addition, the Company provides application service provider ("ASP") hosting of Internet-enabled solutions, Internet service provider ("ISP") including Internet access and hosting, consulting, application integration, and custom web development and software development services. ASP and ISP hosting is performed using the Company's software and facilities to provide processing, print, mail, archival, and Internet delivery of documents for customers who outsource this activity. On May 9, 2003, the Company acquired substantially all of the assets of Smart Biometrics, Inc. (see Note 9). Effective April 1, 2002, Sequiam Corporation (f/k/a Wedge Net Experts, Inc.), through its wholly owned subsidiary, Sequiam Acquisitions, Inc., merged with Sequiam, Inc. and Sequiam Acquisitions, Inc. survived the merger. Sequiam Acquisitions, Inc. changed its name to Sequiam Software, Inc. on May 1, 2002. Pursuant to the merger agreement, Sequiam Corporation issued 20,000,000 shares of common stock in exchange for all of the outstanding shares of common stock of the Company, consisting of 20,000,000 shares. Additionally, pursuant to the merger agreement, 500,000 shares of Sequiam Corporation's common stock were returned to treasury and cancelled. As a result, the former shareholders of the Company obtained 82.53% of the voting rights of Sequiam Corporation. The transaction was accounted for as a recapitalization of Sequiam Corporation and the results of operations and cash flows presented herein prior to the merger are those of Sequiam, Inc. Sequiam, Inc. was incorporated in Delaware on January 23, 2001 (date of inception) to research, develop, produce and market a document management software product. Since inception, the Company's primary activities have consisted of research and development, and software development activities. Accordingly, the Company had not generated any significant revenues. During 2002, the Company acquired the Brekel Group, Inc. and WMW Communications, Inc. doing business as Access Orlando, and began offering web development, Internet and web hosting and custom software development, while continuing its software development activities. During the Six months ended June 30, 2003, the Company paid $93,827 in cash and $150,000 in common shares related to the acquisition of Access Orlando and the remaining amount due for this acquisition was $44,630 as of June 30, 2003. Note 2 - Summary of Significant Accounting Policies Basis of Presentation ----------------------- The Company, under the rules and regulations of the Securities and Exchange Commission, has prepared the unaudited condensed consolidated financial statements. The accompanying condensed consolidated financial statements contain all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of such financial statements. 9 Certain information and disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted under such rules and regulations although the Company believes that the disclosures are adequate to make the information presented not misleading. The year-end balance sheet data was derived from the audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes for Sequiam Corporation included in Form 10-KSB filed for the year ended December 31, 2002. Interim results of operations for the periods presented may not necessarily be indicative of the results to be expected for the full year. Net Loss per Common Share ----------------------------- Basic and diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Common stock warrants are included in the calculation of diluted earnings per common share using the treasury stock method, when the result is dilutive. Common shares underlying the convertible debenture are included in the calculation of diluted earnings per common share using the if-converted method when the result is dilutive. Potential common shares underlying outstanding warrants were 2,400,000 as of June 30, 2003. Potential common shares underlying the convertible debenture are contingent upon certain factors as described in Note 7. Principles of Consolidation ----------------------------- The consolidated financial statements include the accounts of Sequiam Corporation and its subsidiaries Sequiam Software, Inc., Sequiam Biometrics, Inc., Sequiam Education, Inc. and Sequiam Communications, Inc (the "Company"). All intercompany transactions and accounts have been eliminated. Note 3 -Managements' Plan The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Sequiam has accumulated significant operating losses, a working capital deficit and produced minimal revenues since inception. During the first quarter of 2003 and April 2003, the Company obtained financing from La Jolla Cove Investors, Inc. (the "Investor") as well as additional financing from the sale of its common stock and a loan agreement (see Notes 7, 8 and 9). In addition, the Company has begun to generate revenues on a consistent basis. With the proceeds expected to be received from the Investor, the Company will fund continuing product development and the marketing of the products developed by the Company. The company will also actively seek new acquisitions of proven products and technologies. Management plans to continue to seek additional financing in the form of a private placement of common and preferred stock, debt or some combination thereof to supplement its financing arrangement with the Investor. 10 With the proceeds from the financings described above along with the expected increase in revenues from the sale of the Company's existing products and services, the Company believes there will be sufficient working capital during the next 12 months to support operations during that period. The Company's ability to continue as a going concern remains dependent upon its ability to meet the requirements of its financing agreement with the Investor and execute its business plan. Note 4 - Commitments and Contingencies On October 1, 2002, the Companies Chief Executive Officer and Chief Financial Officer entered into amended and restated employment agreements with Sequiam Corporations and its Subsidiaries. The amended agreements replace separate agreements with Sequiam, Inc. and Brekel Group, Inc. The agreements have an initial term of two years with automatic one-year renewals. The agreements provide for compensation in the form of minimum annual salary of $185,000 and $175,000 respectively, and allow for bonuses in cash, stock or stock options and participation in Company benefit plans. Full time employment is a requirement of the contract. In the event that a change in control of the Company occurs without the prior approval of the then existing Board of Directors, then these contracts will be deemed terminated and compensation of $5 million is payable at termination and $1 million annually for five years subsequent to termination will be due and payable to each employee. Included in accounts payable and accrued expenses at June 30, 2003 are un-reimbursed business expenses of $57,624 and $24,890 owed to Nicholas VandenBrekel and Mark Mroczkowski, respectively. The Company is involved in various claims and legal actions incidental to the normal conduct of its business. On or about October 3, 2002, General Electric Capital Corporation ("GE") filed a lawsuit against Brekel Group, Inc. ("Brekel"), in the Circuit Court of the 9th Judicial Circuit in and for Orange County, located in Orlando, Florida. GE claims that Brekel owes a deficiency balance in the amount of $93,833 for three digital copiers rented under a lease agreement. Brekel has returned possession of the copiers to GE, but Brekel disputes the claim for damages. The court has entered no decisions to date. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company based upon the value of the equipment returned to GE. Brekel entered into a note payable with Xerox Corporation in November 2000 to finance equipment. Brekel also entered into a Document Services Agreement ("Agreement") with Xerox Corporation on November 1, 1999 commencing April 1, 2000. During the 63-month term of the Agreement ending June 30, 2005, Xerox agreed to provide equipment and services in accordance with specified performance standards. Those standards include, among other things, a performance satisfaction guaranty by Xerox. Under the terms of that guaranty, Brekel may terminate the agreement without incurring any early termination charges. Brekel did in March 2001 give proper notice of such termination. On September 3, 2002 Xerox did, contrary to the contract, assert its claim for early termination charges and for monthly minimum service charges on billings made after the termination date. The Company disputes these claims and believes them to be without merit. 11 A competing web-development company has posted an alternative web site for the World Olympian Association ("WOA"), claiming such right was granted to it by the WOA. We are seeking to resolve this conflict with the WOA without resort to litigation. This dispute will not affect our publication of the print magazine "World Olympian," but it has the potential to result in the loss of revenue from the WOA web site. We do not believe the loss of such revenue will have a material, adverse effect on our overall business. Note 5 - Income taxes The Company records income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." The Company has incurred net operating losses since inception resulting in a deferred tax asset, for which a valuation allowance was provided since it is more likely than not that the deferred tax asset will not be realized. Note 6 - Long-lived Assets Held for Disposal The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In connection with the acquisition of Brekel in July 2002, the Company reclassified production equipment acquired from Brekel that is no longer being used for operations to equipment held for disposal. During the Six months ended June 30, 2003, the Company recorded an impairment loss of $75,000 to reduce the equipment to fair market value. The Company believes that $40,706 as of June 30, 2003, is a reasonable estimate of the current fair market value for the remaining equipment to be disposed. The Company expects to sell this remaining equipment by December 30, 2003. Note 7 - Convertible Debenture Sequiam entered into a Securities Purchase Agreement with La Jolla Cove Investors, Inc. (the "Investor"), dated March 5, 2003, pursuant to which it delivered to Investor an 8% Convertible Debenture in the amount of $300,000, convertible into our common stock, and a Warrant to Purchase Common Stock. Upon closing on March 7, 2003, Sequiam received $150,000 less attorneys fees of $2,500, of the total $300,000 principal amount of the 8% Convertible Debenture. When the Securities and Exchange Commission declares this registration statement filed on April 25, 2003, effective, the Company will receive the balance of $150,000. On April 16, 2003, the terms of the debenture and warrant agreement were amended, as set forth in separate letter agreement with the Investor. The conversion rate of the debenture is determined based upon the market rate of our stock as reported on the OTCBB at the time the debenture is converted. If the 12 Market Rate is greater than $0.625, then the debenture will be converted into less than 4,600,000, but equal to or greater than 200,000 shares of common stock. If the Market Rate is $0.625, then the debenture will be converted into 600,000 shares of common stock. If the Market Rate is less than $0.625 but equal to or greater than $0.082, then the debenture will be converted into more than 600,000 but less than 4,600,000 shares of common stock. If the Market Rate is less than $0.082, then the debenture will be converted into more than 4,600,000 shares of common stock. In the event that the debenture is converted at a time when the Market Rate is equal to or less than $0.625, then the company has the option of repaying the debenture in lieu of conversion at 150% of the amount being converted. The company intends to prepay the Debenture if it would convert into more than 4,600,000 shares. The Investor may convert a maximum of 10% of the principal into our common stock during any month. Under the terms of the amended warrant, the Investor received a warrant to purchase 2,000,000 shares of our common stock, at an exercise price of $1.50 per share. The warrant will expire in March 2006. As of the date of filing this report, the Investor had not exercised any portion of the warrant or converted any portion of the debenture, and no shares of common stock have been issued relative to these agreements. Sequiam is obligated to register the sale of the underlying common stock to be issued upon conversion of the debenture and the exercise of the warrant. Upon the effective date of the registration statement, we will receive the balance of the principal amount of the debenture. Beginning the second full month following the effectiveness of such registration statement, we have the right to cause the Investor to convert at least 5% of the debenture each month and provided that the market price of the Company's common shares is above $0.625, to exercise a portion of the warrant equal to the product of the dollar amount of the debenture being converted multiplied by ten, divided by 1.5 (which will result in the exercise of at least 5% of the related warrant, per month). In the event the Investor breaches the provision to convert at least 5% of the original principal amount of the debenture and exercise the related warrant, the Investor shall not be entitled to collect interest on the debenture for that month. At the time the debenture has been fully converted and the warrant has been fully exercised, the Company will issue additional warrants to the Investor in an amount equal to 6,600,000 minus the number of shares issued to the Investor pursuant to the conversion of the debenture and exercise of the warrants. The additional warrants will have an exercise price of $1.50 per share and will expire three years from the date of issuance. The 8% Convertible Debenture contains a beneficial conversion feature since the calculated conversion amount is lower than the Company's stock price at the date of the agreement. In accordance with EITF 00-27, since the fair value of the beneficial conversion feature exceeded the amount of the proceeds received from the debenture, the Company recorded the beneficial conversion feature as a debt discount of $150,000, which is equal to the proceeds received. The debt discount is being amortized over the life of the debenture of 24 months. As of June 30, 2003, the balance of the debenture, net of the unamortized debt discount of $131,250 was $18,750 and is included in long-term debt. 13 The number of shares to be issued to the selling security holder upon conversion of the 8% Convertible Debenture depends upon the trading price of our common stock. If the selling security holder receives less than 6,600,000 shares of common stock after conversion of the entire amount of the 8% Convertible Debenture and exercise of the entire amount of the Warrant to Purchase Common Stock, then we have agreed, pursuant to the letter agreement dated April 16, 2003, to issue to the selling security holder the difference between 6,600,000 shares and the number of shares received upon conversion of the debenture and exercise of the warrant, at a purchase price of $1.50 per share (regardless of market rate). This right will expire three years after the conversion of the 8% Convertible Debenture. The excess of the aggregate fair value of the common stock that La Jolla would receive upon conversion of the debenture over the total debenture amount ($300,000) depends on the Company's market price. Assuming conversion of the debenture when market prices are $.10, $.0625, $1.00 and $1.88 and assuming the Company did not elect to prepay the debenture when the market rate was at or below $.625, the aggregate excess fair value of the common stock issued over the debenture amount of $300,000 would be approximately $75,000, $75,000, $1,825,000 and $76,000, respectively. When the market price is above $.625 but below $1.88, the excess fair value of the common stock issued over the loan amount would decrease by approximately $200,000 for each $0.10 increase in the market price. Beginning thirty (30) days after this registration statement is declared effective by the Securities and Exchange Commission, the selling security holder has agreed to convert at least 5% but no more than 10% of the 8% Convertible Debenture and exercise at least 5% but no more than 10% of the related Warrant to Purchase Common Stock, per month. However, the selling stockholder has contractually agreed to restrict its ability to convert or exercise its warrants and receive shares of our common stock such that the number of shares of common stock held by it and its affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. Sequiam has agreed not to pay any accrued salaries or shareholder loans that are presently outstanding until after the 8% Convertible Debenture is paid in full or converted, except to the extent that any such accrued salaries or shareholder loans are used to perform obligations under a Put and Call Agreement between Nick VandenBrekel, Mark Mroczkowski and the Investor, or unless the Company can pay the accrued salaries out of the proceeds of any additional financing we might obtain. Note 8 - Loan Agreement On May 13, 2003, Sequiam Corporation entered into a loan agreement ("Note") with Lee Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John Svenningsen, for a principal loan amount of $400,000 under a promissory note bearing interest at five percent (5%) interest. As of the date of the Note, Sequiam Corporation had received $175,000 as advances under the Note. The remaining loan proceeds were disbursed $100,000 on June 12, 2003 and $50,000 on July 12, 2003. In connection with this note, Sequiam Corporation issued two warrants to the holder to purchase 625,000 shares of its common stock at an exercise price of $0.01 per share and 350,000 shares of its common stock at $1.00 per share. The Warrants for 625,000 shares were exercised on June 25, 2003 and the warrants for 350,000 expire in May 2008. 14 The outstanding principal balance, together with any and all accrued unpaid interest and any other amounts due and owing under this Note, shall be due and payable on the date that is the earlier of (a) the date that the exercise price is paid to Sequiam Corporation for any portion of the warrants by La Jolla Cove Investors, Inc. (see Note 7), or (b) the date the La Jolla Warrant expires in March 2006. The principal payments to the holder will be made in a percentage of the obligation that is equal to the percentage of the total warrants exercised by La Jolla, such that the Note is fully repaid as the Warrants are exercised by La Jolla. Unless otherwise specifically provided for in the Note, all Note payments shall be applied first to interest and then to principal. Note 9 - Capital Stock During the Six months ended June 30, 2003, the Company issued 210,000 common shares for business advisory services and technology transfer services valued at $171,000 based on the Company's quoted market price on the date of the related agreements. In addition, the Company issued 90,000 shares for investor and public relations services valued at $90,000 in April 2003. On January 2, 2003, Sequiam Corporation sold an aggregate of 10,000 shares of its common stock to two accredited investors at a price of $1.00 per share for proceeds of $10,000. On February 6, 2003, Sequiam Corporation sold an aggregate of 266,667 shares of its common stock to one accredited investor at a price of $0.75 per share for proceeds of $200,002, less a commission of $20,000 for net proceeds of $180,002. On April 25, and June 23, 2003, Sequiam Corporation sold an aggregate of 400,000 shares of its common stock to that same accredited investor at a price of $0.50 per share for proceeds of $200,000, less a commission of $20,000 for net proceeds of $180,000. Sequiam Corporation also granted warrants to this accredited investor to purchase: 800,000 shares of its common stock at $1.50 exercisable through February 6, 2007; one million shares of its common stock at $0.75 exercisable through April 25, 2007; and one million shares of its common stock at $0.75 exercisable through June 23 2007 In connection with such sales, Sequiam Corporation relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. This investor represented in writing that the shares were being acquired for investment and, in addition, the certificates representing the shares bear a restrictive securities legend. The Company agreed to issue 1,553,500 shares for investment banking, investor and public relations, and employee services valued at $1,366,895, which was included in accrued expenses. The 1,553,500 shares were issued in July 2003. The Company also agreed to issue 1,500,000 shares valued at $750,000 for the acquisition of the assets of Smart Biometrics, Inc. on May 9, 2003, and 165,000 shares valued at $149,993 for the acquisition of the assets of Telepartners, Inc. on June 1, 2003. The $899,993 value of the shares was included in current liabilities and the shares were issued in July 2003. Note 10 - Acquisitions 15 On May 9, 2003, Sequiam Biometrics, Inc., a wholly owned subsidiary of Sequiam Corporation formed on April 21, 2003, acquired substantially all of the assets of Smart Biometrics, Inc. of Sanford, Florida. In consideration for the assets, Sequiam Corporation issued a total of 1,500,000 shares of its common stock to Smart Biometrics, Inc. Smart Biometrics, Inc. is engaged in the development of biometric technologies. The assets acquired by Sequiam Biometrics, Inc. include the BioVault(TM), which is a secure safe that utilizes patent pending technology and protocols to recognize a person's fingerprint to unlock. On June 1, 2003, Sequiam Education, Inc., a wholly owned subsidiary of Sequiam Corporation formed on May 30, 2003, acquired substantially all of the assets of Telepartners, Inc. of West Palm Beach, Florida. In consideration for the assets, Sequiam Corporation issued a total of 165,000 shares of its common stock to Telepartners, Inc. Telepartners, Inc. is engaged in the development of supplemental educational products for schoolchildren in grades 1 through 12. The assets acquired by Sequiam Biometrics, Inc. include the Extended Classroom(TM), which is a supplemental, educational program consisting of a video lesson library of the very lesson concepts that are taught in our public school classrooms in the United States. Each lesson summary has been produced in high quality and digitally mastered, allowing for Internet and television broadcast distribution as well as being offered in CD and video formats ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Developments -------------------- On May 9, 2003, we acquired substantially all of the assets of Smart Biometrics, Inc., a Florida corporation, in exchange for 1,500,000 shares of our common stock. Smart Biometrics, Inc. developed biometric technology and a product called "BioVault." The technology uses an electronically read fingerprint as a key for a secure locking system. The technology is different from currently existing patented fingerprint-recognition technology because it uses an electronically read fingerprint entry system with no mechanical over-ride and no digital photographs that are more susceptible to tampering. The technology is intended to provide a more secure locking device with faster entry. We acquired the patent application for the BioVault device. We expect the application process to take another 18 months. In the meantime, we have been issued a provisional patent that if the patent is issued, will cause the date of the issuance of the patent to relate back to the initial filing date of the application in March 2003. Smart Biometrics, Inc.'s activities were limited to research and development and a patent application. We acquired the technology, the BioVault device and the patent application. Smart Biometrics, Inc. had no operating history, and therefore, there is no historical financial information regarding our newly-acquired assets. Accordingly, the acquisition was accounted for as a purchase of the assets. We intend to use the BioVault device to create safety locks for guns. We are focusing on refining the prototype for the BioVault device into a final model. We have received a product endorsement from the National Rifle Association, establishing a distributor and dealer network and 16 establishing procedures for direct sales. We have begun to receive revenue from these sales in the third quarter of 2003. On June 1, 2003, we acquired substantially all of the assets of Telepartners, Inc. a Florida corporation, in exchange for 165,000 shares of our common stock. Telepartners, Inc. is engaged in the development of supplemental educational products for schoolchildren in grades 1 through 12. The assets acquired by Sequiam Biometrics, Inc. include the Extended Classroom(TM). The Extended Classroom is a supplemental, educational program consisting of a video lesson library of the very lesson concepts that are taught in our public school classrooms in the United States. Each lesson summary has been produced in high quality and digitally mastered, allowing for Internet and television broadcast distribution as well as being offered in CD and video formats. Quarter Ended June 30, 2003 compared to Quarter Ended June 30, 2002. -------------------------------------------------------------------- Revenues We derive or plan to derive our revenues from five sources: (i) the sale and licensing of our software products; (ii) consulting, custom software services and web development services; (iii) maintenance agreements in connection with the sale and licensing of software products; (iv) Internet access and web hosting services; (v) sales of the BioVault(TM). We have not yet generated revenues from the sale or licensing of our software products (excluding custom software projects) or the BioVault(TM). Software license revenue will be recognized when all of the following criteria have been met: (a) there is an executed license agreement, and software has been delivered to the customer, (b) the license fee is fixed and payable within twelve months, (c) collection is deemed probable, and (d) product returns are deemed reasonably estimable. Maintenance revenues are recognized ratably over the term of the maintenance contract, typically 12 to 36 months. Custom software services are long-term in nature and revenues are recognized based on a percentage of completion with progress to completion measured based upon later hours incurred. Web development services are performed over a period ranging from a few days to a few weeks and revenues are recognized upon completion of the project. Consulting service revenues are recognized when services are performed. Internet access and web-hosting services are recognized over the period the services are provided, typically month-to-month. Total revenue decreased to $110,910 for the quarter ended June 30, 2003 from $213,315 for the quarter ended June 30, 2002. Software and license fee revenues were unchanged at $-0- for both 2002 and 2003. During second quarter 2002 and 2003, Sequiam Document Management System was still under development, and we did not acquire Access Orlando and its IRP and IRPlicator software products until November 2002. We expect to begin generating revenues from the sale of our DMS and IRP software products in the third quarter of 2003. Other sales for 2003 included consulting, custom software services and web development services totaling $42,398; and Internet access and web-hosting services totaling $68,512. All of the foregoing were 100% increases over 2002 second quarter revenues of $-0- except for a one-time consulting fee of 213,315 earned in the second Quarter of 2002. 17 We observe that large organizations are becoming more interested in warehousing documents for ease of access by its many users. As such, we believe that our DMS product is viable. However we have also observed a number of competing products by companies with greater resources than ours. Our competitors typically add the document management feature into a complimentary suite of software products. As a result, we do not see great market for our Sequiam DMS as a stand-alone product, and in response, we are integrating it into our IRP product line. This is being done by incorporating the document management functions of the DMS product into the remote print software for the IRP line, and we hope to sell the integrated software as a complete package. We also observe that many large organizations are beginning to analyze the cost of their own printing equipment. The $0.05 to $0.08 cost per page of their own desktop equipment can be far in excess of the $0.01 to $0.02 achievable on high volume digital machines either owned in-house or outsourced. Our IRP software allows users to print directly to remote printers thereby solving the connectivity problem and allowing large organizations to realize savings that run into many thousands of dollars per month. We think that trend will continue, and as a result, more competitors will enter the market. We presently have no direct competition for this product. To date, users of our IRP system sold prior to our acquisition of W.M.W. Communications have realized dramatic print cost savings. In the example of the two school district clients, print volumes of as much as 10,000,000 images per month in over 100 schools and administrative offices have been redirected from desktop printers to the District's central print facility at an average savings of $0.045 per image or $450,000 per month. In one such school district demand exceeded the print facility's capacity such that they were again required to use the IRP software to outsource the overflow to a commercial print company. Each of the four installations was sold prior to our acquisition of W.M.W. Communications at an average price of $40,000 per system with annual support provided at $5,000 per year. Pricing for the Internet product will be based upon usage charges as yet undetermined. Targeted customers are large organizations with in-house print facilities and commercial digital printers who wish to use the technology to drive more customer business to their facility. The trend in Internet access is towards broadband access. Dial up service will eventually become obsolete. As a result, we have seen the revenues from our Access Orlando brand steadily decline. We plan to sell that business to any one of several large Internet access providers. We acquired that business from W.M.W. Communications, but we do not consider it to be a part of our long-term business plan. We expect to concentrate on software, database and web development products. We have an agreement with Pachyderm Press, the publisher of the World Olympian Magazine, to share revenues and expenses of publication and to share with them content from our website production. Pachyderm has an agreement with the WOA to Publish the magazine, and we have an agreement to publish and host their website. We expect to earn a 35% share of the merchandising and sponsorship income derived from the website and 50% of the net earnings from the magazine subscriptions and advertising revenue. In the case of the website, the responsibility for revenue generation is with the WOA and in the case of the 18 magazine, the responsibility for revenue generation is with Pachyderm Press. Neither the WOA or Pachyderm Press has been effective at revenue generation and to date, we have not received any revenues from these agreements. Regardless, we continue to provide website development and hosting services to the WOA, and we continue to assist Pachyderm Press with content and other business services. We continue to perform our duties because we believe that our association with the Olympics will be beneficial to future business and because we believe in the Olympic ideals. Publishing is not a part of our overall business plan, but Internet services to publishers and printers is an integral part of our information management business. Operating Expenses Operating expenses increased by $1,892,943, from $240,848 for the quarter ended June 30, 2002 to $2,133,692 for the quarter ended June 30, 2003. This increase is explained below. Selling, general and administrative expenses including non-cash compensation increased $1,704,523 from $177,295 in second quarter 2002 to $1,881,818 in second quarter 2003. We increased our selling and overhead expenditures such as salaries, wages and benefits for administrative and marketing personnel, computer maintenance and supplies, professional services such as investor relations, legal and accounting fees, and corporate travel expenses as a result of expanding our operations, our merger with Sequiam Corporation and our acquisitions of Brekel Group and Access Orlando. We also increased expenditures for marketing including advertising, production of marketing materials, and participation in trade show activities as we completed the development of our software products and introduced web development, web hosting and Internet access services. We also accrued expenses for investment banking, investor and public relations, and employee services valued at $1,366,895, and we agreed to issue 1,553,500 common shares in exchange for those services. Software and web development costs increased by $78,468 from $58,473 in second quarter 2002 to $136,941 in second quarter 2003, due to the establishment and expansion of the development staff beginning in the second quarter 2002. This expansion of staff was needed to expand our products and services and to keep pace with new industry developments and the continued need to improve features and functionality of the Sequiam software products. Depreciation expense increased by $109,952, from $5,080 in second quarter 2002 to $115,032 in second quarter 2003, as a result of depreciation on assets acquired from Brekel in July 2002, and amortization of intellectual properties acquired from W.M.W. Communications., Smart Biometrics, Inc. and Telepartners, Inc. We have grown from 2 employees at June 30, 2002, to 27 employees at June 30, 2003, largely as a result of the acquisition of Brekel Group, Inc., W.M.W. Communications, Inc., Smart Biometrics, Inc. and Telepartners, Inc. The addition of the employees has negatively impacted liquidity and cash flow for the quarter ended June 30, 2003. We can further expect that payroll will be a burden through much of 2003 as we attempt to raise the additional capital necessary to get our products to market. The payroll burden will diminish dramatically after we establish a regular sales cycle of the software products because our ongoing support costs will be minimal compared to our development costs. We expect to distribute our products through value added resellers and 19 other resellers. As a result, we do not expect to increase personnel and related expenses as we go to market with our software. Loss on Sales of Equipment and gain on Debt Settlement A loss on impairment of equipment held for sale of $75,000 was recognized in the first quarter of 2003 based upon the estimated net realizable value of the equipment acquired from Brekel. A net gain of $2,431 was recognized in the second quarter of 2003 on the actual sale of certain equipment acquired from Brekel. A gain of $37,315 was recognized on the settlement of a debt owed to a former creditor of Brekel. Interest Expense Interest expense increased by $25,638, from $268 in second quarter 2002 to $25,906 in second quarter 2003, as a result of an increase in loans from shareholders and a note payable related to leasehold improvements acquired from Brekel Group in July 2002 and accretion of the discount on the convertible debenture of $18,750. The total discount that is being amortized of $150,000 will increase interest expense by $6,250 per month or $75,000 per year beginning March 2003 through February 2005, unless the debenture is converted prior to the due date of the debenture (March 4, 2005), at which time the entire unamortized discount will be expensed. We see only a slight upward trend in our interest expense as a result of the $400,000 loan we received from Lee Corbin on May 13, 2003. We expect to raise additional equity capital through the sale of common stock as opposed to convertible debt securities or traditional loans. However, the debenture issued to La Jolla Cove Investors, Inc., may not be converted to equity until we have accrued significant interest expense. We intend to pay the interest expense as opposed to converting the interest accrued to equity. As a result, we may experience an additional increase in our interest expenses during the remainder of 2003 and into 2004. Net Losses Sequiam Corporation incurred net losses of $2,009,041 and $27,801 for the quarters ended June 30, 2003 and 2002, respectively. We expect to incur additional net losses throughout 2003 as we introduce our products to the marketplace. Liquidity and Capital Resources Cash and cash equivalents decreased to $40,210 as of June 30, 2003 from $46,675 as of June 30, 2002. Net cash used in operating activities was $315,706 for the quarter ended June 30, 2003, as a result of the net loss during the period of $2,009,041 and increases in accounts payable and accrued expenses totaling $160,116, and increases in accrued shareholder salaries of $90,000 and other non-cash expenses and losses totaling $87,484. Net cash used for investing activities was $55,335 for the quarter ended June 30, 2003, primarily due to proceeds from the sale of equipment of $2,732 offset by cash paid for the acquisition of Access Orlando of $48,236 and software development costs of $9,831 for the Sequiam DMS product. 20 Net cash provided by financing activities was $411,251 for the quarter ended June 30, 2003. Proceeds from the bridge loan accounted for $250,000 and sales of common stock accounted for $200,000 and was offset by commissions of $45,000. During the quarter ended June 30, 2003, a private investor exercised 625,000 warrants for $6,250. Current liabilities of $5,099,146 exceed current assets of $211,374 by $4,887,772. Of that amount, $1,830,242 or 36.89% is owed to shareholders as loans and accrued but unpaid salaries under employment agreements. The officers of the company are dedicated to its business plan and will place no undue demands on its working capital. They expect payment from future cash flows, equity capital infusions or possible equity capital conversions. Also included in current liabilities, is $44,630 due to W.M.W. Communications for its acquisition. W.M.W. has indicated its willingness to wait for payment until cash flow allows, but we have not reached any formal agreement to defer payment. Also included in current liabilities is $707,446 of accounts payable and accrued expense, most of which accrue to Brekel Group, Inc. and are the subject of continued workout arrangements. Effective July 1, 2001, the Brekel Group, Inc., prior to its acquisition by Sequiam, entered into a lease agreement to rent approximately 60,000 square feet of combined office and manufacturing space through June 30, 2011. As a result of the determination to cease Brekel's operations prior to the acquisition of Brekel, effective July 1, 2002, Sequiam entered into a lease forbearance agreement for 10,000 square feet of the same space for the remaining term of the lease. Pursuant to the lease agreement, we make monthly base rent payments including common area maintenance charges of $9,633, with annual increases of approximately 3% per year beginning in July 2004. As part of the lease forbearance agreement, we executed a note payable to the landlord to reimburse them for lost rents on the 50,000 square feet relinquished to them through June 30, 2004; less rents and principal payments received from us; less 75% of any rents received from replacement tenants; plus any leasing commissions or tenant build out costs required for replacement tenants. The note also includes amounts previously owed by Brekel to the landlord for tenant improvements. The outstanding balance on the note of $1,286,806 as of June 30, 2003 represents $893,112 of deferred rent and $393,694 of tenant improvements. Payments on the note commence July 1, 2004 through June 1, 2010 with interest at 6%. Variables that could impact the amount due under the deferred rent portion of the note include changes in estimated rents to be received from replacement tenants, estimated leasing commissions and estimated tenant build out costs required for replacement tenants. Rental expense for the quarter ended June 30, 2003 was $48,144 and $11,927 for the quarter ended June 30, 2002. The minimum future rentals required under the lease and the maturities of the long-term note payable are as follows:
Debt Year Rentals Maturities ---- --------------------- 2003 $ 86,700 $ 0 2004 117,334 96,429 2005 120,854 188,341 2006 124,480 199,957 21 2007 128,214 212,384 Thereafter 339,169 589,965 --------------------- $916,751 $ 1,286,806 =====================
Since the end of our last fiscal year ending December 31, 2002, we sold securities in four separate private placements, as more fully described in Part II, Item 2, below. As a result, we have received to date total net proceeds of $351,252. We received $186,250 (approximately one-half) of these proceeds during the quarter ending June 30, 2003, and most of this amount is reflected as additional paid-in capital in our financial statements for the period ending June 30, 2003. We also received $250,000 of proceeds from a bridge loan commitment of $400,000. At March 28, 2003, the date we filed our 10-KSB with the SEC, we estimated that we would need minimal additional capital of approximately $500,000 to continue operations during the next twelve months without significant new product sales given that our monthly cash requirements at that time exceeded cash provided by operations by approximately $40,000 per month. By May 15, 2003, the date our 10-QSB was filed with the SEC, we raised $600,000. We now estimate that we will need an additional $600,000 of capital to continue operations during the next twelve month due to higher than expected professional fees associated with the registration we are completing regarding the securities issued to La Jolla Cove Investors, Inc., new acquisitions and bringing our products to market. Our management is undertaking several initiatives to address our liquidity, including the following: (1) continued efforts to increase our revenues from software licenses and other revenue sources; (2) proceeds expected to be received from the convertible debentures and exercise of warrants as described above; (3) proceeds expected to be received from the promissory note and exercise of warrants as described above; (4) continued efforts to obtain additional debt and/or equity financing. Our management believes that these activities will generate sufficient cash flows to sustain our operations during the next twelve months. If we do not obtain at least $600,000 additional capital in the next twelve months, then we will need to curtail operations and reduce expenses accordingly. Application of Critical Accounting Policies We utilize certain accounting policies and procedures to manage changes that occur in our business environment that may affect accounting estimates made in preparation of our financial statements. These estimates relate primarily to our allowance for doubtful accounts receivable. Our strategy for managing doubtful accounts includes stringent, centralized credit policies and collection procedures for all customer accounts. We utilize a credit risk rating system in order to measure the quality of individual credit transactions. We strive to identify potential problem receivables early, take appropriate collection actions, and maintain adequate reserve levels. Management has determined that the allowance for doubtful accounts is adequate at June 30, 2003. ITEM 3. CONTROLS AND PROCEDURES ----------------------------------- The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the periodic reports filed by the Company with the Securities and Exchange Commission (the "SEC") is recorded, processed, summarized and reported within the time periods specified 22 in the rules and forms of the SEC and that such information is accumulated and communicated to the Company's management. Based on their most recent evaluation, which was completed within 90 days of the filing of this Quarterly Report on Form 10-QSB, the Company's Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls subsequent to the date of the most recent evaluation. PART II. OTHER INFORMATION ----------------------------- ITEM 2. CHANGES IN SECURITIES --------------------------------- (c) Recent Sales of Unregistered Securities Common Stock. On February 6, 2003, we sold an aggregate of 266,667 shares of ------------- our common stock to one accredited investor, Mr. Walter H. Sullivan, III, at a price of $0.75 per share, for proceeds of $200,000, less a commission of $20,000 paid to Cane Consulting, for net proceeds of $180,000. In connection with this transaction, we issued a warrant to purchase an additional 800,000 shares of common stock at a purchase price of $1.50 per share for a period of four years. On April 25, and June 23, 2003, Sequiam Corporation sold an aggregate of 400,000 shares of its common stock to Mr. Sullivan at a price of $0.50 per share for proceeds of $200,000, less a commission of $20,000 paid to Cane Consulting, for net proceeds of $180,000. In connection with this transaction, we issued warrants to purchase an additional 2,000,000 shares of common stock at a purchase price of $0.75 per share for a period of four years. In connection with such sales we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506. This offer was made exclusively to Mr. Sullivan. Based upon information provided to us by Mr. Sullivan, we determined that he was an accredited investor because he has a net worth of $1,000,000 or more and an annual income of $200,000 or more. Mr. Sullivan represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the shares bear a restrictive legend in accordance with Rule 144. Prior to closing the transaction, we supplied information to Mr. Sullivan in compliance with Rule 502(b). We had a prior business relationship with Mr. Sullivan. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. Mr. Sullivan represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the securities bear a restrictive legend in accordance with Rule 144. There were no underwriters, and the offer was closed upon sale of the stock to Mr. Sullivan. The Company agreed to issue 750,000 shares for investment banking and advisory services valued at $825,000 to Quasar Group, Inc. The certificates for the 750,000 shares were issued in July 2003. In connection with such sales we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506. This offer was made exclusively to Quasar Group, Inc. Based upon information provided to us by Quasar Group, Inc, we determined that its six shareholders were an accredited investor because they have a net 23 worth of $1,000,000 or more and an annual income of $200,000 or more. Quasar Group, Inc. represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the shares bear a restrictive legend in accordance with Rule 144. Prior to closing the transaction, we supplied information to Quasar Group, Inc. in compliance with Rule 502(b). We had a prior business relationship with Quasar Group, Inc. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. There were no underwriters, and the offer was closed upon sale of the stock to Quasar Group, Inc on May 23, 2003. The Company agreed to issue 250,000 shares for employment services valued at $107,500 to Charles Vollmer. The certificates for the 250,000 shares were issued in July 2003. In connection with such sales we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506. This offer was made exclusively to Mr. Vollmer. Based upon information provided to us by Mr. Vollmer, we determined that he was an accredited investor because he has a net worth of $1,000,000 or more and an annual income of $200,000 or more. Mr. Vollmer represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the shares bear a restrictive legend in accordance with Rule 144. Prior to closing the transaction, we supplied information to Mr. Vollmer in compliance with Rule 502(b). We had a prior business relationship with Mr. Vollmer. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. There were no underwriters, and the offer was closed upon sale of the stock to Mr. Vollmer on April 28, 2003. The Company agreed to issue 250,000 shares for employment services valued at $140,000 to James Stanley. The certificates for the 250,000 shares were issued in July 2003. In connection with such sales we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506. This offer was made exclusively to Mr. Stanley. Based upon information provided to us by Mr. Stanley, we determined that he was an accredited investor because he has a net worth of $1,000,000 or more and an annual income of $200,000 or more. Mr. Stanley represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the shares bear a restrictive legend in accordance with Rule 144. Prior to closing the transaction, we supplied information to Mr. Stanley in compliance with Rule 502(b). We had a prior business relationship with Mr. Stanley. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. There were no underwriters, and the offer was closed upon sale of the stock to Mr. Stanley on April 21, 2003. The Company agreed to issue 10,000 shares for employment services valued at $9,700 to Charles Dunn. The certificates for the 10,000 shares were issued in July 2003. In connection with such sales we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506. This offer was made exclusively to Mr. Dunn. Based upon information provided to us by Mr. Dunn, we determined that he was an accredited investor because he has a net worth of $1,000,000 or more and an annual income of $200,000 or more. Mr. Dunn represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the 24 certificates representing the shares bear a restrictive legend in accordance with Rule 144. Prior to closing the transaction, we supplied information to Mr. Dunn in compliance with Rule 502(b). We had a prior business relationship with Mr. Dunn. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. There were no underwriters, and the offer was closed upon sale of the stock to Mr. Dunn on June 1, 2003. The Company agreed to issue 43,500 shares for employment services valued at $42,195 to James Ring. The certificates for the 43,500 shares were issued in July 2003. In connection with such sales we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506. This offer was made exclusively to Mr. Ring. Based upon information provided to us by Mr. Ring, we determined that he was an accredited investor because he has a net worth of $1,000,000 or more and an annual income of $200,000 or more. Mr. Ring represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the shares bear a restrictive legend in accordance with Rule 144. Prior to closing the transaction, we supplied information to Mr. Ring in compliance with Rule 502(b). We had a prior business relationship with Mr. Ring. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. There were no underwriters, and the offer was closed upon sale of the stock to Mr. Ring on June 1, 2003. The Company agreed to issue 250,000 shares for public relations and investor relations services valued at $242,500 to Kevin Welch. The certificates for the 250,000 shares were issued in July 2003. In connection with such sales we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506. This offer was made exclusively to Mr. Welch. Based upon information provided to us by Mr. Welch, we determined that he was an accredited investor because he has a net worth of $1,000,000 or more and an annual income of $200,000 or more. Mr. Welch. represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the shares bear a restrictive legend in accordance with Rule 144. Prior to closing the transaction, we supplied information to Mr. Welch. in compliance with Rule 502(b). We had a prior business relationship with Mr. Welch. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. There were no underwriters, and the offer was closed upon sale of the stock to Mr. Welch on June 1, 2003. The Company agreed to issue 1,500,000 shares for the acquisition of the assets of Smart Biometrics, Inc. valued at $750,000 to Smart Biometrics, Inc. The certificates for the 1,500,000 shares were issued in July 2003. In connection with such sales we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506. This offer was made exclusively to Smart Biometrics, Inc. Based upon information provided to us by Smart Biometrics, Inc, we determined that its twelve shareholders were an accredited investor because they have a net worth of $1,000,000 or more and an annual income of $200,000 or more. Smart Biometrics, Inc. represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the shares bear a restrictive legend in accordance with Rule 144. Prior to closing the 25 transaction, we supplied information to Smart Biometrics, Inc. in compliance with Rule 502(b). We had a prior business relationship with Smart Biometrics, Inc. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. There were no underwriters, and the offer was closed upon sale of the stock to Smart Biometrics, Inc on May 9, 2003. The Company agreed to issue 165,000 shares for the acquisition of the assets of Telepartners, Inc. valued at $149,993 to Telepartners, Inc. The certificates for the 165,000 shares were issued in July 2003. In connection with such sales we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506. This offer was made exclusively to Telepartners, Inc. Based upon information provided to us by Telepartners, Inc, we determined that its ten shareholders were an accredited investor because they have a net worth of $1,000,000 or more and an annual income of $200,000 or more. Telepartners, Inc. represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the shares bear a restrictive legend in accordance with Rule 144. Prior to closing the transaction, we supplied information to Telepartners, Inc. in compliance with Rule 502(b). We had a prior business relationship with Telepartners, Inc. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. There were no underwriters, and the offer was closed upon sale of the stock to Telepartners, Inc on June 1, 2003. Convertible Debenture and Warrants. We entered into a Securities Purchase ------------------------------------- Agreement with La Jolla Cove Investors, Inc. (the "Investor"), dated March 5, 2003, as amended on April 16, 2003, pursuant to which we delivered to the Investor an 8% Convertible Debenture in the amount of $300,000, convertible into our common stock, and a Warrant to Purchase Common Stock that permits the Investor to purchase up to 2,000,000 shares of common stock at a purchase price of $1.50 per share. In connection with the sale of the Debenture and Warrant, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. Based upon information provided to us by the Investor, we determined that it was an accredited investor because it had net assets in excess of $5,000,000. Prior to completing the sale, we supplied information to the Investor in compliance with Rule 502(b). The Investor represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the securities bear a restrictive legend in accordance with Rule 144. There were no underwriters, and no commissions were paid in connection with this offering. The offer was closed upon closing the transaction with the Investor. We are obligated to register the Investor's sale of the underlying common stock to be issued upon conversion of the 8% Convertible Debenture and the exercise of the Warrant to Purchase Common Stock. Upon closing on March 5, 2003, we received $150,000 of the total $300,000 principal amount of the 8% Convertible Debenture. When the Securities and Exchange Commission declares our registration of the sale of the underlying common stock to be issued upon conversion of the debenture and exercise of the Warrant effective, we will receive the balance of $150,000, provided the Market Rate at that time is $0.10 or greater. 26 The Debenture and Warrant provide for a potential $3,300,000 investment in our company by the selling security holder. Under the terms of the Debenture, as amended on April 16, 2003, provided the "Market Rate" (as defined and determined in accordance with the Debenture) is greater than $0.625, the number of common shares into which the Debenture may be converted is equal to the dollar amount of the Debenture being converted multiplied by eleven, minus the product of the "Conversion Price" multiplied by six and two-thirds times the dollar amount of the Debenture being converted, and the entire foregoing result shall be divided by the Conversion Price. The "Conversion Price" is defined as the lesser of $1.50 per share or 80% of "Market Value" (as defined and determined in accordance with the Debenture)(the "Discount Multiplier"). If the Market Rate is equal to or less than $0.625 on the day the Investor elects to convert a portion of the 8% Convertible Debenture, then we have the right to prepay that portion of the Debenture in which the Investor had elected to convert, at a rate of 150% of such amount, provided the Investor may, in lieu of accepting such prepayment, elect to withdraw its notice of conversion. If the Market Rate is equal to or less than $0.625 and the company does not prepay the Debenture, then the Debenture may only be converted into the number of shares equal to the dollar amount of the Debenture being converted divided by the Conversion Price. The Investor may convert a maximum of 10% of the principal into our common stock during any month, and the Investor is required to convert at least 5% of the Debenture every month, beginning thirty days following effectiveness of the registration statement covering the resale of the underlying shares of common stock. The following chart illustrates the number of shares that will be issued upon conversion of the entire amount of the Debenture at various Market rates. 27 [GRAPHIC OMITTED] Under the terms of the amended Warrant, the Investor received a Warrant to purchase 2,000,000 shares of our common stock, at an exercise price of $1.50 per share. Provided the Market Rate is above $0.625 per share, then the Investor is required to exercise a portion of the Warrant equal to the amount of the Debenture being converted multiplied by 10, and the entire result divided by 1.50. Provided the Market Rate is above $0.625, the Investor is required to exercise at least 5% of the Warrant each month, beginning thirty days following effectiveness of the registration statement covering the resale of the underlying shares of common stock. The Warrant will expire in March 2006. As of the date of filing this report, the Investor had not exercised any portion of the Warrant or converted any portion of the Debenture, and no shares of common stock have been issued. How the Warrant and the Debenture Conversion Formula Work Together. ------------------------------------------------------------------ Market Rate between $0.626 and $1.88. If the Debenture is converted at a Market ------------------------------------- Rate between $0.626 and $1.88, then as the Debenture is converted, a commensurate amount of the Warrant must be exercised pursuant to paragraph 7 of the 04-16-03 Letter Agreement with the Investor, resulting in an overall equity investment equal to 80% of the then Market Rate. 28 Market Rate between $0.082 and $0.625. If the Debenture is converted at a Market --------------------------------------- Rate that is equal to or less than $0.625 but equal to or greater than $0.082, then (a) we will receive an equity investment from the Debenture equal to 80% of the then Market Rate, (b) less than 4,600,000 shares would be issued upon conversion of the Debenture, and (c) the Warrant would not be required to be exercised at that time (but we would have the option of prepaying the Debenture at 150% to avoid conversion). Market Rate less than $0.082. If the Debenture is converted at a Market Rate ------------------------------- that is less than $0.082, then we will receive an equity investment that is less than 80% of the then Market Rate and issue more than 4,600,000 shares of common stock upon conversion of the Debenture (but we will have the option of prepaying the Debenture at 150% to avoid conversion). Market Rate greater than $1.88. If the Debenture is converted at a Market Rate ------------------------------- that is greater than $1.88, then we will receive an equity investment that is less than 80% of the then Market Rate, but we will issue less than 6,600,000 shares of common stock as a result of the Debenture and Warrant (but pursuant to the 04-16-03 Letter Agreement, we have agreed to issue additional shares at $1.50 per share up to a total of 6,600,000 shares). The selling security holder will experience greater returns on its equity investment as the Market Rate of our common stock increases above $1.88 per share. The Investor has contractually agreed to restrict its ability to convert or exercise its warrants and receive shares of our common stock such that the number of shares of common stock held by it and its affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. This will not prevent the Investor from receiving 4.99% of our outstanding common stock upon conversion of a portion of the debenture and exercise of a portion of the Warrant, then selling those shares, then further converting the debenture and exercising the Warrant in like fashion. The conversion price of the 8% Convertible Debenture and the exercise price of the Warrant to Purchase Common Stock may be adjusted in certain circumstances, such as if we pay a stock dividend, subdivide or combine outstanding shares of common stock into a greater or lesser number of shares, or take such other actions as would otherwise result in dilution of the selling security holder's position prior to conversion. We have agreed not to pay any accrued salaries or shareholder loans that are presently outstanding until after the 8% Convertible Debenture is paid in full or converted, except to the extent that any such accrued salaries or shareholder loans are used to perform obligations under a Put and Call Agreement between Nick VandenBrekel, Mark Mroczkowski and the Investor, or unless we can pay the 29 accrued salaries out of the proceeds of any additional financing we might obtain. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) ---------------------------------------------------- (a) Exhibits: 2.1 Asset Purchase Agreement with Smart Biometrics, Inc. is hereby incorporated by this reference to our Form 8-K filed with the Securities and Exchange Commission on May 23, 2003. 2.2 Asset Purchase Agreement with Telepartners, Inc. 4.1 Securities Purchase Agreement dated March 5, 2003, between Sequiam Corporation and La Jolla Cove Investors, Inc. is hereby incorporated by this reference to Exhibit 4.1 to our Form 8-K filed with the Securities and Exchange Commission on March 13, 2003. 4.2 8% Convertible Debenture, dated March 5, 2003, issued to La Jolla Cove Investors, Inc. is hereby incorporated by this reference to Exhibit 4.2 to our Form 8-K filed with the Securities and Exchange Commission on March 13, 2003. 4.3 Warrant to Purchase Common Stock, dated March 5, 2003, issued to La Jolla Cove Investors, Inc. is hereby incorporated by this reference to Exhibit 4.3 to our Form 8-K filed with the Securities and Exchange Commission on March 13, 2003. 4.4 Side Letter Agreement, dated March 5, 2003, between Sequiam Corporation and La Jolla Cove Investors, Inc. is hereby incorporated by this reference to Exhibit 4.4 to our Form 8-K filed with the Securities and Exchange Commission on March 13, 2003. 4.5 Registration Rights Agreement dated March 5, 2003, between Sequiam Corporation and La Jolla Cove Investors, Inc. is hereby incorporated by this reference to Exhibit 4.5 to our Form 8-K filed with the Securities and Exchange Commission on March 13, 2003. 4.6 Letter Agreement, dated April 16, 2003, by and between La Jolla Cove Investors, Inc. and Sequiam Corporation is hereby incorporated by this reference to Exhibit 4.1 to our Form 8-K filed with the Securities and Exchange Commission on April 17, 2003. 10.1 Put and Call Agreement by and between La Jolla Cove Investors, Inc., Nicholas VandenBrekel and Mark Mroczkowski, dated April 16, 2003, is hereby incorporated by reference to Exhibit 10.1 our Form 10-KSB/A, Amendment No. 1, filed with the Securities and Exchange Commission on April 21, 2003. 10.2 Employment Agreement with Charles Vollmer is hereby incorporated by this reference to our Form SB-2/A filed with the Securities and Exchange Commission on June 23, 2003. 10.3 Letter Agreement amending Employment Agreement with Charles Vollmer is hereby incorporated by this reference to our Form SB-2/A filed with the Securities and Exchange Commission on June 23, 2003. 30 10.4 Letter Agreement amending a private equity financing with La Jolla Cove Investors, Inc. is hereby incorporated by this reference to our Form 8-K filed with the Securities and Exchange Commission on April 16, 2003. 10.5 Employment Agreement with James Ring is hereby incorporated by this reference to our Form SB-2/A filed with the Securities and Exchange Commission on June 23, 2003. 10.6 Employment Agreement with Charles Dunn is hereby incorporated by this reference to our Form SB-2/A filed with the Securities and Exchange Commission on June 23, 2003. 10.7 Private Placement Agreement with the Quasar Group, Inc. 10.8 Advisory service Agreement with Kevin Welch 21.1 Subsidiaries 31.1 Section 901 Certification Nicholas VandenBrekel 31.2 Section 901 Certification Mark Mroczkowski 32.1 Certification Pursuant To Rule 15d-14(B) and 18 U.S.C. Sec.1350 Nicholas VandenBrekel 32.2 Certification Pursuant To Rule 15d-14(B) and 18 U.S.C. Sec.1350 Mark Mroczkowski (b) Reports on Form 8-K: The following reports on Form 8-K were filed during the quarter ending June 30, 2003: Form 8-K filed on May 23, 2003, regarding the acquisition of the assets of Smart Biometrics, Inc. Form 8-K/A filed on April 17, 2003, regarding an amendment to a private equity financing with La Jolla Cove Investors, Inc. 31 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SEQUIAM CORPORATION Date: August 19, 2003 By: /s/ Nicholas H. VandenBrekel ------------------------------------------------- Nicholas H. VandenBrekel, Chief Executive Officer By: /s/ Mark Mroczkowski ------------------------------------------------- Mark L. Mroczkowski, Chief Financial Officer Date: August , 2003 /s/ Mark L. Mroczkowski ------------------------ Mark L. Mroczkowski Chief Financial Officer 32