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 September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________to _______________. Commission File Number 333-45678 SEQUIAM CORPORATION (Exact name of registrant as specified in its charter) CALIFORNIA 33-0875030 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 300 SUNPORT LANE, ORLANDO, FLORIDA 32809 (Address, including zip code, of principal executive offices) 407-541-0773 (Registrant's telephone number, including area code) (Former name, former address) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for the such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of the Registrant's Common Stock outstanding as of November 14, 2003 was 41,129,247. DOCUMENTS INCORPORATED BY REFERENCE Transitional Small Business Disclosure Format (Check one): Yes [_] No [X] ================================================================================
FORM 10-QSB INDEX Page PART I: FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ITEM 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . 5 Condensed Consolidated Statements of Stockholders' Deficit . . . . . . . . . . . . . . . . . 6 Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . 7 Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19 ITEM 3. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2 SEQUIAM CORPORATION Form 10-QSB PART I: FINANCIAL INFORMATION ----------------------------- This Quarterly Report on Form 10-QSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. These include, among others, the statements about our plans and strategies. When used in this document and the documents incorporated herein by reference, the words "believes," "expects," "anticipates," "intends," "plans," "estimates," or similar expressions are intended to identify, in certain circumstances, forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed in forward-looking statements. Although it is not possible to itemize all of the factors and specific events that could affect the outlook of a technology company like ours operating in a competitive environment, factors that could significantly impact expected results include: the acceptance of our technology; the effect of national and local economic conditions; our outstanding indebtedness; the loss of key employees; competition from technologies developed by other companies; the ability to attract and retain employees; delays in completing the development of our new products caused by a lack of capital or external causes beyond our reasonable control; and the ability to identify and consummate relationships with strategic partners. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure that such plans, intentions or expectations will be achieved. Actual results may differ materially from the forward-looking statements made in this Quarterly Report on Form 10-QSB. We do not intend to update any forward-looking statements, and we hereby disclaim any obligation to update such forward-looking statements. 3
ITEM 1. FINANCIAL STATEMENTS ---------------------------- SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2003 (Unaudited) December 31, 2002 -------------------- ------------------- ASSETS Current assets: Cash $ - $ 85,922 Accounts receivable, net 33,902 41,141 Prepaid expenses 82,633 - Equipment held for sale 40,706 177,080 -------------------- ------------------- Total current assets 157,241 304,143 -------------------- ------------------- Property and equipment, net 1,231,812 1,375,398 Software development costs, net 108,917 131,939 Acquired software, net 244,800 288,000 Acquired intellectual properties, net 1,037,390 - Deposits and other assets 7,800 7,800 -------------------- ------------------- Total assets $ 2,787,960 $ 2,107,280 ==================== =================== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Cash overdraft $ 37,682 $ - Amount due for acquisition 44,630 288,457 Accounts payable 631,401 646,331 Accrued expenses 31,767 64,783 Loan from shareholders 687,283 795,450 Stock subscriptions payable 237,650 - Accrued shareholder salaries 1,124,792 854,792 -------------------- ------------------- Total current liabilities 2,795,205 2,649,813 -------------------- ------------------- Long-term debt 1,381,449 1,291,092 -------------------- ------------------- Total liabilities 4,176,654 3,940,905 -------------------- ------------------- Shareholders' deficit: Common shares 41,328 35,463 Additional Paid-in capital 3,925,031 42,565 Accumulated deficit (5,355,053) (1,911,653) -------------------- ------------------- Total shareholders' deficit (1,388,694) (1,833,625) -------------------- ------------------- Total liabilities and shareholders' deficit $ 2,787,960 $ 2,107,280 ==================== ===================
See accompanying notes to condensed consolidated financial statements. 4
SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net sales $ 103,859 $ 48,120 $ 337,963 $ 286,435 Costs and expenses: Software and web development costs 157,403 119,506 436,207 177,979 Cost of BioVault sales 18,963 - 18,963 - Non-cash compensation - - 1,627,896 - Selling, general and administrative 443,964 519,305 1,187,589 777,526 Depreciation and amortization 140,649 33,830 338,461 43,761 ------------ ------------ ------------ ------------ 760,979 672,641 3,609,116 999,266 ------------ ------------ ------------ ------------ Loss from operations (657,120) (624,521) (3,271,153) (712,831) Loss on impairment of equipment held for sale - - (75,000) - Gain (Loss) on sale of assets 15,855 - (25,584) - Gain on debt settlement 19,527 - 56,842 - Interest expense (84,514) (5,880) (128,505) (6,984) ------------ ------------ ------------ ------------ Net loss $ (706,252) $ (630,401) $(3,443,400) $ (719,815) ============ ============ ============ ============ Net loss per common share: Basic and diluted $ (0.02) $ (0.02) $ (0.09) $ (0.03) ============ ============ ============ ============ Weighted average common shares outstanding: Basic and diluted 39,819,644 33,547,234 37,471,353 27,371,863 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 5
SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT Nine months Ended September 30, 2003 (Unaudited) Common Shares -------------------- Additional Shares Par Paid-in Accumulated Outstanding Value Capital Deficit Total ----------- ------- ---------- ------------ ------------ Balance at December 31, 2002 35,462,609 $35,463 $ 42,565 $(1,911,653) $(1,833,625) Sale of common shares 2,029,167 2,029 658,473 - 660,502 Beneficial conversion features on long- term debt 150,000 - 150,000 Warrants issued in connection with loan agreement - - 400,000 - 400,000 Common shares issued for services 1,853,500 1,853 1,626,043 - 1,627,896 Common shares issued for acquisition of WMW Communications 318,471 318 149,682 - 150,000 Common shares issued for acquisition of Smart Biometrics 1,500,000 1,500 748,500 - 750,000 Common shares issued for acquisition of Telepartners 165,000 165 149,768 - 149,933 Net Loss - - - (3,443,400) (3,443,400) ----------- ------- ---------- ------------ ------------ Balance at September 30, 2003 41,328,747 $41,328 $3,925,031 $(5,355,053) $(1,388,694) =========== ======= ========== ============ ============
See accompanying notes to condensed consolidated financial statements. 6
SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine months Ended September 30, 2003 2002 ------------ ----------- Cash flows from operating activities: $(3,443,400) $ (719,815) Net loss Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 338,461 43,761 Accretion of debt discount 94,643 - Issuance of common stock in exchange for services 1,627,896 59,349 Loss on sale of equipment 25,584 - Loss on impairment of equipment held for sale 75,000 - Gain on debt settlement (56,842) - Decrease in accounts receivable 7,240 85,604 Increase in prepaid expenses and other assets (82,636) (1,875) Increase in bank overdraft 26,777 - Increase in accounts payable 52,820 57,954 Increase in accrued shareholders salaries 270,000 284,500 Increase (decrease) in other accrued expenses (156,251) 165,111 ------------ ----------- Net cash used for operating activities (1,220,708) $ (25,411) ------------ ----------- Cash flows from investing activities: Equipment purchases - (14,597) Proceeds from sales of equipment 35,346 - Cash paid for WMW Communications (93,827) - Software development costs capitalized (12,949) (39,467) ------------ ----------- Net cash used for investing activities (71,430) (54,064) ------------ ----------- Cash flows from financing activities: Proceeds from shareholders loans - 348,500 Proceeds from bridge loan 400,000 - Proceeds from debenture 150,000 - Sale of common stock 660,502 2,000 Repayment of note payable (4,286) (271,025) ------------ ----------- Net cash provided by financing activities 1,206,216 79,475 ------------ ----------- Net change in cash (85,922) - Cash, beginning of period 85,922 - ------------ ----------- Cash, end of period $ - $ - ============ ===========
See accompanying notes to condensed consolidated financial statements. 7
SEQUIAM CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Continued) (Unaudited) Non-cash activities: 2003 2002 -------------------- -------- ----------- Recapitalization of common stock - $ 127,140 Common Stock issued for acquisition of Brekel Group - $10,946,150 Return of leased equipment - $ 1,873,255 Common stock issued for acquisition of WMW Communications $150,000 - Common Stock issued for acquisition of Smart Biometrics $750,000 - Common Stock issued for acquisition of Telepartners $149,933 - Beneficial conversion feature on convertible debt $150,000 - Warrants issued in connection with loan agreement $400,000 -
See accompanying notes to condensed consolidated financial statements. 8 SEQUIAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 -Description of Business and Acquisitions Sequiam Corporation ("Sequiam" or the "Company") through its wholly owned subsidiaries, develops, markets, and supports a portfolio of Internet and print enterprise-wide software products that enable users to acquire, manage, personalize, and present information. In addition, the Company provides application service provider ("ASP") hosting of Internet-enabled solutions, Internet service provider ("ISP") including Internet access and hosting, consulting, application integration, and custom web development and software development services. ASP and ISP hosting is performed using the Company's software and facilities to provide processing, print, mail, archival, and Internet delivery of documents for customers who outsource this activity. The Company's operations are divided into two distinct operating segments; Information Management and Safety and Security. The Information Management segment includes the Company's Internet Remote Print ("IRP") suite of software products and interactive web-based technologies obtained by the acquisition of WMW Communications, Inc. and more recently, Telepartners, Inc (see below), as well as our ASP, ISP and other custom web development and software development services as described above. The Company's Safety and Security segment was formed upon the acquisition of the assets of leading biometrics corporations, Smart Biometrics, Inc. and Fingerprint Detection Technologies, Inc. (see below). The Company acquired from Smart Biometrics fingerprint biometric access control systems technology and a secure safe called BioVault(TM). This biometric technology will be a key feature in the Company's future product offerings. The "Brite Print" fingerprint detection technology that we acquired from UTEK provides improved fingerprint detection at dramatic cost savings. Effective April 1, 2002, Sequiam Corporation (f/k/a Wedge Net Experts, Inc.), through its wholly owned subsidiary, Sequiam Acquisitions, Inc., merged with Sequiam, Inc. and Sequiam Acquisitions, Inc. survived the merger. Sequiam Acquisitions, Inc. changed its name to Sequiam Software, Inc. on May 1, 2002. Pursuant to the merger agreement, Sequiam Corporation issued 20,000,000 shares of common stock in exchange for all of the outstanding shares of common stock of the Company, consisting of 20,000,000 shares. Additionally, pursuant to the merger agreement, 500,000 shares of Sequiam Corporation's common stock were returned to treasury and cancelled. As a result, the former shareholders of the Company obtained 82.53% of the voting rights of Sequiam Corporation. The transaction was accounted for as a recapitalization of Sequiam Corporation and the results of operations and cash flows presented herein prior to the merger are those of Sequiam, Inc. Sequiam, Inc. was incorporated in Delaware on January 23, 2001 (date of inception) to research, develop, produce and market a document management software product. Since inception, the Company's primary activities have consisted of research and development, and software production activities. Accordingly, the Company had not generated any significant revenues, and the Company was considered a development stage company at December 31, 2001. During 2002, the Company acquired the Brekel Group, Inc., WMW Communication, Inc. 9 and began offering web development, Internet and web hosting and custom software development, while continuing its software development activities. Subsequent to December 31, 2002, the Company acquired the assets of Smart Biometrics Inc., Telepartners, Inc. and Fingerprint Detection Technologies, Inc. as more fully described below. On May 9, 2003, Sequiam Biometrics, Inc., a wholly owned subsidiary of Sequiam Corporation formed on April 21, 2003, acquired substantially all of the assets of Smart Biometrics, Inc. of Sanford, Florida. In consideration for the assets, Sequiam Corporation issued a total of 1,500,000 shares or $750,000 of its common stock to Smart Biometrics, Inc. valued at the closing market price of its common stock on the date of acquisition of $.50 per share. Smart Biometrics, Inc. is engaged in the development of biometric technologies. The assets acquired by Sequiam Biometrics, Inc. include office equipment and the BioVault(TM) technology, which is a secure safe that utilizes patent pending technology and protocols to recognize a person's fingerprint to unlock. The excess of the purchase price over the fair value of the office equipment acquired of $50,000 was $700,000 and was allocated to the BioVault technology and is being amortized over its estimated useful life of five years. Sequiam Biometrics, Inc. had no operating history and had not generated any revenues. Accordingly, the acquisition was accounted for as a purchase of assets. On June 1, 2003, Sequiam Education, Inc., a wholly owned subsidiary of Sequiam Corporation formed on May 30, 2003, acquired substantially all of the assets of Telepartners, Inc. of West Palm Beach, Florida. In consideration for the assets, Sequiam Corporation issued a total of 165,000 shares of its common stock to Telepartners, Inc. valued at the closing market price of its common stock on the date of acquisition of $.97 per share or $149,933. Telepartners, Inc. is engaged in the development of supplemental educational products for schoolchildren in grades 1 through 12. The assets acquired by Sequiam Biometrics, Inc. include the Extended Classroom(TM) software, which is a supplemental, educational program consisting of a video lesson library of the very lesson concepts that are taught in our public school classrooms in the United States. Each lesson summary has been produced in high quality and digitally mastered, allowing for Internet and television broadcast distribution as well as being offered in CD and video formats. The excess of the purchase over the fair value of the net liabilities is acquired of $10,067 was $160,000 and was allocated to the Extended Classroom software and is being amortized over its estimated useful life of five years. Telepartners, Inc. had no operating history and had not generated any revenues. Accordingly, the acquisition was accounted for as a purchase of it's assets. On September 11, 2003, Sequiam Corporation acquired 100% of the issued and outstanding shares of common stock of Fingerprint Detection Technologies, Inc. ("FDTI") a Florida corporation. In consideration for the shares, Sequiam Corporation issued a total of 485,000 shares of its common stock to UTEK Corporation ("UTEK"), the parent of FDTI, valued at the closing market price of its common stock on the date of acquisition of $.49 per share or $237,560. FDTI has acquired the rights to develop and market a patented and proprietary technology for fingerprint analysis using an LED intense headband light source. The purchase price of $237,560 was allocated to acquired intellectual property and is being amortized over its estimated useful life of five years. FDTI had no operating history and had not generated any revenues. Accordingly, the acquisition was accounted for as a purchase of its assets. 10 Note 2 - Summary of Significant Accounting Policies Basis of Presentation ----------------------- The Company, under the rules and regulations of the Securities and Exchange Commission, has prepared the unaudited condensed consolidated financial statements. The accompanying condensed consolidated financial statements contain all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of such financial statements. Certain information and disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted under such rules and regulations although the Company believes that the disclosures are adequate to make the information presented not misleading. The year-end balance sheet data was derived from the audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes for Sequiam Corporation included in Form 10-KSB filed for the year ended December 31, 2002. Interim results of operations for the periods presented may not necessarily be indicative of the results to be expected for the full year. Net Loss per Common Share ----------------------------- Basic and diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Common stock warrants are included in the calculation of diluted earnings per common share using the treasury stock method, when the result is dilutive. Common shares underlying the convertible debenture are included in the calculation of diluted earnings per common share using the if-converted method when the result is dilutive. Potential common shares underlying outstanding warrants were 7,650,000 as of September 30, 2003. Potential common shares underlying the convertible debenture are contingent upon certain factors as described in Note 7. Principles of Consolidation ----------------------------- The consolidated financial statements include the accounts of Sequiam Corporation and its subsidiaries Sequiam Software, Inc., Sequiam Biometrics, Inc., Sequiam Education, Inc., Fingerprint Detection Technologies, Inc., and Sequiam Communications, Inc (the "Company"). All intercompany transactions and accounts have been eliminated. Note 3 - Going Concern and Managements' Plan The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Sequiam has accumulated significant operating losses, a working capital deficit and produced minimal revenues since inception. During 2003, the Company obtained financing from La Jolla Cove Investors, Inc. (the "Investor") as well as additional financing from the sale of its common stock and a loan agreement (see Notes 7, 8 and 9). In addition, the Company has begun to generate revenues on a consistent basis. 11 The Company is undertaking several initiatives to address its liquidity, including the following: (1) continued efforts to increase our revenues from software licenses and the BioVault; (2) proceeds expected to be received from the convertible debentures and exercise of warrants as described above; (3) continued efforts to obtain additional debt and/or equity financing. Our management believes that these activities will generate sufficient cash flows to sustain our operations during the next twelve months. The Company's ability to continue as a going concern remains dependent upon its ability to receive proceeds from the debenture and exercise of the warrants issued to the Investor. However, there can be no assurances that this will occur. In the event that the proceeds from the debenture and exercise of the warrants is not obtained on a timely basis, the Company will need to seek additional financing from other sources. The Company believes that revenues from current operating activities (exclusive of any sales of the BioVault) during the next 12 months will not be sufficient to support operations during that period. There can be no assurance that the Company will receive proceeds from the exercise of the warrants or be able to find alternative financing on a timely basis, if at all. Note 4 - Commitments and Contingencies On October 1, 2002, the Companies Chief Executive Officer and Chief Financial Officer entered into amended and restated employment agreements with Sequiam Corporations and its Subsidiaries. The amended agreements replace separate agreements with Sequiam, Inc. and Brekel Group, Inc. The agreements have an initial term of two years with automatic one-year renewals. The agreements provide for compensation in the form of minimum annual salary of $185,000 and $175,000 respectively, and allow for bonuses in cash, stock or stock options and participation in Company benefit plans. Full time employment is a requirement of the contract. In the event that a change in control of the Company occurs without the prior approval of the then existing Board of Directors, then these contracts will be deemed terminated and compensation of $5 million is payable at termination and $1 million annually for five years subsequent to termination will be due and payable to each employee. The Company is involved in various claims and legal actions incidental to the normal conduct of its business. On or about October 3, 2002, General Electric Capital Corporation ("GE") filed a lawsuit against Brekel Group, Inc. ("Brekel"), in the Circuit Court of the 9th Judicial Circuit in and for Orange County, located in Orlando, Florida. GE claims that Brekel owes a deficiency balance in the amount of $93,833 for three digital copiers rented under a lease agreement. Brekel has returned possession of the copiers to GE, but Brekel disputes the claim for damages. The court has entered no decisions to date. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company based upon the value of the equipment returned to GE. Brekel entered into a note payable with Xerox Corporation in November 2000 to finance equipment. Brekel also entered into a Document Services Agreement ("Agreement") with Xerox Corporation on November 1, 1999 commencing April 1, 2000. During the 63-month term of the Agreement ending September 30, 2005, Xerox agreed to provide equipment and services in accordance with specified performance standards. Those standards include, among other things, 12 a performance satisfaction guaranty by Xerox. Under the terms of that guaranty, Brekel may terminate the agreement without incurring any early termination charges. Brekel did in March 2001 give proper notice of such termination. On September 3, 2002 Xerox did, contrary to the contract, assert its claim for early termination charges and for monthly minimum service charges on billings made after the termination date. The Company disputes these claims and believes them to be without merit. Note 5 - Income taxes The Company records income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." The Company has incurred net operating losses since inception resulting in a deferred tax asset, for which a valuation allowance was provided since it is more likely than not that the deferred tax asset will not be realized. Note 6 - Long-lived Assets Held for Disposal The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In connection with the acquisition of Brekel in July 2002, the Company reclassified production equipment acquired from Brekel that is no longer being used for operations to equipment held for disposal. During the Nine months ended September 30, 2003, the Company recorded an impairment loss of $75,000 to reduce the equipment to fair market value. The Company believes that $40,706 as of September 30, 2003, is a reasonable estimate of the current fair market value for the remaining equipment to be disposed. The Company expects to sell this remaining equipment by December 31, 2003. Note 7 - Convertible Debenture Sequiam entered into a Securities Purchase Agreement with La Jolla Cove Investors, Inc. (the "Investor"), dated March 5, 2003, pursuant to which it delivered to Investor an 8% Convertible Debenture in the amount of $300,000, convertible into our common stock, and a Warrant to Purchase Common Stock. Upon closing on March 7, 2003, Sequiam received $150,000 less attorneys fees of $2,500, of the total $300,000 principal amount of the 8% Convertible Debenture. When the Securities and Exchange Commission declares this registration statement filed on April 25, 2003, effective, the Company will receive the balance of $150,000. Sequiam withdrew the registration statement on September 5, 2003 at the request of the SEC staff pending receipt of their comments. On April 16, 2003, the terms of the debenture and warrant agreement were amended, as set forth in separate letter agreement with the Investor. The conversion rate of the debenture is 13 determined based upon the market rate of our stock as reported on the OTCBB at the time the debenture is converted. If the Market Rate is greater than $0.625, then the debenture will be converted into less than 4,600,000, but equal to or greater than 200,000 shares of common stock. If the Market Rate is $0.625, then the debenture will be converted into 600,000 shares of common stock. If the Market Rate is less than $0.625 but equal to or greater than $0.082, then the debenture will be converted into more than 600,000 but less than 4,600,000 shares of common stock. If the Market Rate is less than $0.082, then the debenture will be converted into more than 4,600,000 shares of common stock. In the event that the debenture is converted at a time when the Market Rate is equal to or less than $0.625, then the company has the option of repaying the debenture in lieu of conversion at 150% of the amount being converted. The company intends to prepay the Debenture if it would convert into more than 4,600,000 shares. The Investor may convert a maximum of 10% of the principal into our common stock during any month. Under the terms of the amended warrant, the Investor received a warrant to purchase 2,000,000 shares of our common stock, at an exercise price of $1.50 per share. The warrant will expire in March 2006. As of the date of filing this report, the Investor had not exercised any portion of the warrant or converted any portion of the debenture, and no shares of common stock have been issued relative to these agreements. Sequiam is obligated to register the sale of the underlying common stock to be issued upon conversion of the debenture and the exercise of the warrant. Upon the effective date of the registration statement, we will receive the balance of the principal amount of the debenture. Beginning the second full month following the effectiveness of such registration statement, we have the right to cause the Investor to convert at least 5% of the debenture each month and provided that the market price of the Company's common shares is above $0.625, to exercise a portion of the warrant equal to the product of the dollar amount of the debenture being converted multiplied by ten, divided by 1.5 (which will result in the exercise of at least 5% of the related warrant, per month). In the event the Investor breaches the provision to convert at least 5% of the original principal amount of the debenture and exercise the related warrant, the Investor shall not be entitled to collect interest on the debenture for that month. At the time the debenture has been fully converted and the warrant has been fully exercised, the Company will issue additional warrants to the Investor in an amount equal to 6,600,000 minus the number of shares issued to the Investor pursuant to the conversion of the debenture and exercise of the warrants. The additional warrants will have an exercise price of $1.50 per share and will expire three years from the date of issuance. The 8% Convertible Debenture contains a beneficial conversion feature since the calculated conversion amount is lower than the Company's stock price at the date of the agreement. In accordance with EITF 00-27, since the fair value of the beneficial conversion feature exceeded the amount of the proceeds received from the debenture, the Company recorded the beneficial conversion feature as a debt discount of $150,000, which is equal to the proceeds received. The debt discount is being amortized over the life of the debenture of 24 months. As of September 30, 2003, the balance of the debenture, net of the unamortized debt discount of $112,500 was $37,500 and is included in long-term debt. 14 The number of shares to be issued to the selling security holder upon conversion of the 8% Convertible Debenture depends upon the trading price of our common stock. If the selling security holder receives less than 6,600,000 shares of common stock after conversion of the entire amount of the 8% Convertible Debenture and exercise of the entire amount of the Warrant to Purchase Common Stock, then we have agreed, pursuant to the letter agreement dated April 16, 2003, to issue to the selling security holder the difference between 6,600,000 shares and the number of shares received upon conversion of the debenture and exercise of the warrant, at a purchase price of $1.50 per share (regardless of market rate). This right will expire three years after the conversion of the 8% Convertible Debenture. The excess of the aggregate fair value of the common stock that La Jolla would receive upon conversion of the debenture over the total debenture amount ($300,000) depends on the Company's market price. Assuming conversion of the debenture when market prices are $.10, $.0625, $1.00 and $1.88 and assuming the Company did not elect to prepay the debenture when the market rate was at or below $.625, the aggregate excess fair value of the common stock issued over the debenture amount of $300,000 would be approximately $75,000, $75,000, $1,825,000 and $76,000, respectively. When the market price is above $.625 but below $1.88, the excess fair value of the common stock issued over the loan amount would decrease by approximately $200,000 for each $0.10 increase in the market price. Beginning thirty (30) days after this registration statement is declared effective by the Securities and Exchange Commission, the selling security holder has agreed to convert at least 5% but no more than 10% of the 8% Convertible Debenture and exercise at least 5% but no more than 10% of the related Warrant to Purchase Common Stock, per month. However, the selling stockholder has contractually agreed to restrict its ability to convert or exercise its warrants and receive shares of our common stock such that the number of shares of common stock held by it and its affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. Sequiam has agreed not to pay any accrued salaries or shareholder loans that are presently outstanding until after the 8% Convertible Debenture is paid in full or converted, except to the extent that any such accrued salaries or shareholder loans are used to perform obligations under a Put and Call Agreement between Nick VandenBrekel, Mark Mroczkowski and the Investor, or unless the Company can pay the accrued salaries out of the proceeds of any additional financing we might obtain. Note 8 - Loan Agreement On May 13, 2003, Sequiam Corporation entered into a loan agreement ("Note") with Lee Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John Svenningsen, for a principal loan amount of $400,000 under a promissory note bearing interest at five percent (5%) interest. As of September 30, 2003, Sequiam Corporation had received the entire $400,000 in advances under the Note. In connection with this note, Sequiam Corporation issued two warrants to the holder to purchase 625,000 shares of its common stock at an exercise price of $0.01 per share and 350,000 shares of its common stock at $1.00 per share. The Warrants for 625,000 shares were exercised on June 25, 2003 and the warrants for 350,000 remain 15 outstanding and expire in May 2008. The fair value of the attached warrants exceeded the value of the proceeds received from the Note and has been recorded as a debt discount of $400,000. The debt discount is being amortized over the life of the Note of 36 months. As of September 30, 2003, the balance of the Note, net of the unamortized debt discount of $342,857 was $57,143 and is included in long-term debt. The outstanding principal balance, together with any and all accrued unpaid interest and any other amounts due and owing under this Note, shall be due and payable on the date that is the earlier of (a) the date that the exercise price is paid to Sequiam Corporation for any portion of the warrants by La Jolla Cove Investors, Inc. (see Note 7), or (b) the date the La Jolla Warrant expires in March 2006. The principal payments to the holder will be made in a percentage of the obligation that is equal to the percentage of the total warrants exercised by La Jolla, such that the Note is fully repaid as the Warrants are exercised by La Jolla. Unless otherwise specifically provided for in the Note, all Note payments shall be applied first to interest and then to principal. Note 9 - Forbearance Agreement Effective July 1, 2001, the Brekel Group, Inc., prior to its acquisition by Sequiam, entered into a lease agreement to rent approximately 60,000 square feet of combined office and manufacturing space through June 30, 2011. As a result of the determination to cease Brekel's operations prior to the acquisition of Brekel, effective July 1, 2002, Sequiam entered into a lease forbearance agreement for 10,000 square feet of the same space for the remaining term of the lease. Pursuant to the lease agreement, we make monthly base rent payments including common area maintenance charges of $9,633, with annual increases of approximately 3% per year beginning in July 2004. As part of the lease forbearance agreement, we executed a note payable to the landlord to reimburse them for lost rents on the 50,000 square feet relinquished to them through June 30, 2004; less rents and principal payments received from us; less 75% of any rents received from replacement tenants; plus any leasing commissions or tenant build out costs required for replacement tenants. The note also includes amounts previously owed by Brekel to the landlord for tenant improvements. The outstanding balance on the note of $1,286,806 as of September 30, 2003 represents $893,112 of deferred rent and $393,694 of tenant improvements. Payments on the note commence July 1, 2004 through June 1, 2010 with interest at 6%. Variables that could impact the amount due under the deferred rent portion of the note include changes in estimated rents to be received from replacement tenants, estimated leasing commissions and estimated tenant build out costs required for replacement tenants. Rental expense for the quarter ended September 30, 2003 was $48,144 and $11,927 for the quarter ended September 30, 2002. The minimum future rentals required under the lease and the maturities of the long-term note payable are as follows:
Debt Year Rentals Maturities ---- -------- ----------- 2003 $ 86,700 $ 0 2004 117,334 96,429 2005 120,854 188,341 2006 124,480 199,957 16 2007 128,214 212,384 Thereafter 339,169 589,965 -------- ----------- $916,751 $ 1,286,806 ======== ===========
Note 10 - Capital Stock During the Nine months ended September 30, 2003, the Company issued 210,000 common shares for business advisory services and technology transfer services valued at $171,000 based on the Company's quoted market price on the date of the related agreements. In addition, the Company issued 90,000 shares for investor and public relations services valued at $90,000 in April 2003. On January 2, 2003, Sequiam Corporation sold an aggregate of 10,000 shares of its common stock to two accredited investors at a price of $1.00 per share for proceeds of $10,000. On February 6, 2003, Sequiam Corporation sold an aggregate of 266,667 shares of its common stock to one accredited investor at a price of $0.75 per share for proceeds of $200,002, less a commission of $20,000 for net proceeds of $180,002. On April 25, June 23, and September 15, 2003, Sequiam Corporation sold an aggregate of 800,000 shares of its common stock to this same accredited investor at a price of $0.50 per share for proceeds of $400,000, less a commission of $40,000 for net proceeds of $360,000. Sequiam Corporation also granted warrants to this accredited investor to purchase: 800,000 shares of its common stock at $1.50 exercisable through February 6, 2007; one million shares of its common stock at $0.75 exercisable through April 25, 2007;one million shares of its common stock at $0.75 exercisable through June 23 2007; and two million shares of its common stock at $0.75 exercisable through September 30, 2007. In connection with such sales, Sequiam Corporation relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. This investor represented in writing that the shares were being acquired for investment and, in addition, the certificates representing the shares bear a restrictive securities legend. During the second quarter the Company agreed to issue 1,553,500 shares for investment banking, investor and public relations, and employee services valued at $1,366,895. The 1,553,500 shares were issued in July 2003. The Company also agreed in the second quarter to issue 1,500,000 shares valued at $750,000 for the acquisition of the assets of Smart Biometrics, Inc. on May 9, 2003, and 165,000 shares valued at $149,993 for the acquisition of the assets of Telepartners, Inc. on June 1, 2003. Those shares were all issued in July 2003. On September 11, 2003, Sequiam agreed to issue 485,000 shares valued at $237,650 for the acquisition of 100% of the issued and outstanding shares of Fingerprint Detection Technologies, Inc. The value of the shares was included in current liabilities as stock subscriptions payable at September 30, 2003 and the shares were issued in November 2003. During the third quarter 2003 Sequiam sold an aggregate of 327,500 common shares to four individual accredited investors at a prices ranging from $0.40 to $0.50 per share for net proceeds 17 of $157,500. In connection with such sales, Sequiam Corporation relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. These investors represented in writing that the shares were being acquired for investment and, in addition, the certificates representing the shares bear a restrictive securities legend. Note 11 - Operating Segments Pursuant to FAS 131, we define an operating segment as: - A business activity from which we may earn revenue and incur expenses; - Whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and - For which discrete financial information is available. We have two operating segments, which are defined as each business line that we operate. This however, excludes corporate headquarters, which does not generate revenue. Our operating segments are defined as follows: The Information Management segment, which provides interactive web-based technologies, as well as ASP, ISP and other customer web development and software development services. The Safety and Security segment, which provides fingerprint biometric access control systems technology. The table below presents certain financial information in thousands by business segment for the three and nine months ended September 30, 2003 and 2002. Segment Reporting for the Quarter Ended September 30, 2003:
Information Safety and Consolidated Management Security Segments Total Corporate Total ------------- ------------ ---------------- ------------ -------------- Revenue from external customers $ 79,635 $ 24,224 $ 103,859 $ - $ 103,859 Interest expense 3,750 - 3,750 80,764 84,514 Depreciation and amortization 103,863 36,786 140,649 - 140,649 Segment profit (316,806) (65,669) (382,475) (323,777) (706,252) Segment assets(1) 1,802,177 935,783 2,737,960 50,000 2,787,960 18 Segment Reporting for the Nine Months Ended September 30, 2003: Information Safety and Consolidated Management Security Segments Total Corporate Total ------------- ------------ ---------------- ------------ -------------- Revenue from external customers $ 312,640 $ 25,323 $ 337,963 $ - $ 337,963 Interest expense 9,848 - 9,848 118,657 128,505 Depreciation and amortization 277,151 61,310 338,461 - 338,461 Segment profit (945,481) (107,444) (1,052,925) (2,390,475) (3,443,400) Segment assets(1) 1,802,176 935,783 2,737,960 50,000 2,787,960 (1) Segment assets have been adjusted for intercompany accounts to reflect actual assets for each segment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ------------------------------------------------------------------------------- OF OPERATIONS ------------- Recent Developments -------------------- On September 11, 2003, we acquired 100% of the issued and outstanding shares of common stock of Fingerprint Detection Technologies, Inc. ("FDTI") a Florida corporation. In consideration for the shares, we issued in November 2003 a total of 485,000 shares of our common stock to UTEK Corporation ("UTEK"), the parent of FDTI, valued at the closing market price of its common stock on the date of acquisition of $.49 per share or $237,560. FDTI has acquired the rights to develop and market a patented and proprietary technology for fingerprint analysis using an LED intense headband light source. The purchase price of $237,560 was allocated to acquired intellectual property and is being amortized over its estimated useful life of five years. Quarter Ended and Nine Months September 30, 2003 compared to Quarter Ended and -------------------------------------------------------------------------------- Nine Months September 30, 2002. ----------------------------------- Revenues We derive or plan to derive our revenues from five sources: (i) the sale and licensing of our software products; (ii) consulting, custom software services and web development services; (iii) maintenance agreements in connection with the sale and licensing of software products; (iv) Internet access and web hosting services; and (v) sales of the BioVault(TM). We have not yet generated significant revenues from the sale or licensing of our software products (excluding custom software projects) or the BioVault(TM). Software license revenue will be recognized 19 when all of the following criteria have been met: (a) there is an executed license agreement, and software has been delivered to the customer, (b) the license fee is fixed and payable within twelve months, (c) collection is deemed probable, and (d) product returns are deemed reasonably estimable. Maintenance revenues are recognized ratably over the term of the maintenance contract, typically 12 to 36 months. Custom software services are long-term in nature and revenues are recognized based on a percentage of completion with progress to completion measured based upon later hours incurred. Web development services are performed over a period ranging from a few days to a few weeks and revenues are recognized upon completion of the project. Consulting service revenues are recognized when services are performed. Internet access and web-hosting services are recognized over the period the services are provided, typically month-to-month. Total revenue increased to $103,859 for the quarter ended September 30, 2003 from $48,120 for the quarter ended September 30, 2002 an increase of $55,739 or 116%. Total revenue increased to $337,963 for the nine months ended September 30, 2003 from $286,435 for the nine months ended September 30, 2002 an increase of $51,528 or 18%. Software and license fee revenues were unchanged at $-0- for both 2002 and 2003. During 2002 and through the first quarter of 2003, Sequiam Document Management System was still under development, and we did not acquire Access Orlando and its IRP and IRPlicator software products until November 2002 and The IRP and IRPlicator software were being redeveloped until the end of the third quarter of 2003. We expect to begin generating revenues from the sale of our combined DMS and IRP software products now marketed under the brand name Internet Remote Print during the fourth quarter of 2003. Other sales for the third quarter of 2003 included consulting, custom software services and web development services totaling $40,086; and Internet access and web-hosting services totaling $39,549. All of the foregoing were 65.5% increases over 2002 third quarter revenues of $48,120. For the nine months ended September 30, 2003 compared to 2002 other sales were $313,739 compared to $286,435 and increase of $27,304 or 9.5% BioVault sales were $24,224 for the third quarter of 2003 compared to $-0- for the third quarter of 2002. We observe that large organizations are becoming more interested in warehousing documents for ease of access by its many users. As such, we believe that our DMS product is viable. However we have also observed a number of competing products by companies with greater resources than ours. Our competitors typically add the document management feature into a complimentary suite of software products. As a result, we do not see great market for our Sequiam DMS as a stand-alone product, and in response, we have integrated it into our IRP product line. This is being done by incorporating the document management functions of the DMS product into the remote print software for the IRP product line. We also observe that many large organizations are beginning to analyze the cost of their own printing equipment. The $0.05 to $0.08 cost per page of their own desktop equipment can be far in excess of the $0.01 to $0.02 achievable on high volume digital machines either owned in-house or outsourced. Our IRP software allows users to print directly to remote printers thereby solving the connectivity problem and allowing large organizations to realize savings that run into 20 many thousands of dollars per month. We think that trend will continue, and as a result, more competitors will enter the market. We presently have no direct competition for this product. To date, users of our IRP system sold prior to our acquisition of W.M.W. Communications have realized dramatic print cost savings. In the example of the two school district clients, print volumes of as much as 10,000,000 images per month in over 100 schools and administrative offices have been redirected from desktop printers to the District's central print facility at an average savings of $0.045 per image or $450,000 per month. In one such school district demand exceeded the print facility's capacity such that they were again required to use the IRP software to outsource the overflow to a commercial print company. Each of the four installations was sold prior to our acquisition of W.M.W. Communications at an average price of $40,000 per system with annual support provided at $5,000 per year. Pricing for the Internet product will be based upon usage charges as yet undetermined. Targeted customers are large organizations with in-house print facilities and commercial digital printers who wish to use the technology to drive more customer business to their facility. The trend in Internet access is towards broadband access. Dial up service will eventually become obsolete. As a result, we have seen the revenues from our Access Orlando brand steadily decline. We plan to sell that business to any one of several large Internet access providers. We acquired that business from W.M.W. Communications, but we do not consider it to be a part of our long-term business plan. We expect to concentrate on software, database and web development products. We have terminated an agreement with Pachyderm Press, the publisher of the World Olympian Magazine, to share revenues and expenses of publication and to share with them content from our website production. Pachyderm had an agreement with the WOA to Publish the magazine, and we have an agreement to publish and host their website. The WOA has terminated Pachyderm's agreement for nonperformance. We had expected to earn a 35% share of the merchandising and sponsorship income derived from the website and 50% of the net earnings from the magazine subscriptions and advertising revenue. In the case of the website, the responsibility for revenue generation is with the WOA and in the case of the magazine, the responsibility for revenue generation is with Pachyderm Press. Neither the WOA or Pachyderm Press has been effective at revenue generation and to date, we have not received any revenues from these agreements. Regardless, we continue to provide website development and hosting services to the WOA, and we have discontinued our assistance to Pachyderm Press with content and other business services. We continue to perform our duties to the WOA because we believe that our association with the Olympics will be beneficial to future business and because we believe in the Olympic ideals. Publishing is not a part of our overall business plan, but Internet services to publishers and printers is an integral part of our information management business. Operating Expenses 21 Operating expenses increased by $88,338, or 13% from $672,641 for the quarter ended September 30, 2002 to $760,979 for the quarter ended September 30, 2003. Operating expenses increased by $2,609,850, or 261% from $999,266 for the nine months ended September 30, 2002 to $3,609,116 for the nine months ended September 30, 2003. This increase is explained below. Software and web development costs increased by $37,897 or 32% from $119,506 in third quarter 2002 to $157,403 in third quarter 2003, and by $258,228 or 145% from $177,979 during the nine months ended September 30, 2002 to $436,207 during the nine months ended September 30, 2003, due to the establishment and expansion of the development staff beginning in the second quarter 2002. This expansion of staff was needed to expand our products and services and to keep pace with new industry developments and the continued need to improve features and functionality of the Sequiam software products. The cost of BioVault sales increased to $18,963 in the third quarter 2003 from $0 in the third quarter 2002 as a result of the launch of that new product and revenues generated this quarter. Non-cash compensation of $1,627,896 was recognized during the nine months ended September 30, 2003 due to one-time charges for stock compensation in the second quarter 2003 related to employment agreements and investment banking services largely as a result of several acquisitions made during that period. Selling, general and administrative expenses decreased $75,341 from $519,305 in third quarter 2002 to $443,964 in third quarter 2003. We decreased our selling and overhead expenditures such as salaries, wages and benefits for administrative and marketing personnel, computer maintenance and supplies, professional services such as investor relations, legal and accounting fees, and corporate travel expenses as a result of consolidating our operations. Selling, general and administrative expenses increased by $410,063, or 53% from $777,526 for the nine months ended September 30, 2002 to $1,187,589 for the nine months ended September 30, 2003 because we increased overall expenditures selling and overhead expenditures such as salaries, wages and benefits for administrative and marketing personnel, computer maintenance and supplies, professional services such as investor relations, legal and accounting fees, and corporate travel expenses. We also increased expenditures for marketing including advertising, production of marketing materials, and participation in trade show activities as we completed the development of our software products and introduced web development, web hosting and Internet access services. Such increases were due to acquisitions and the overall expansion of our business Depreciation and amortization expense increased by $106,819, from $33,830 in third quarter 2002 to $140,649 in third quarter 2003, and by $294,700 or 673% from $43,761 during the nine months ended September 30, 2002 to $338,461 during the nine months ended September 30, 2003 as a result of depreciation on assets acquired from Brekel in July 2002, and amortization of intellectual properties acquired from W.M.W. Communications., Smart Biometrics, Inc. and Telepartners, Inc. We have grown from 2 employees at September 30, 2002, to 24 employees at September 30, 2003, largely as a result of the acquisition of Brekel Group, Inc., W.M.W. Communications, Inc., Smart Biometrics, Inc. and Telepartners, Inc. The addition of the employees has negatively impacted liquidity and cash flow for the quarter ended September 30, 2003. We can further 22 expect that payroll will be a burden for the next 12 months as we attempt to raise the additional capital necessary to get our products to market. The payroll burden will diminish dramatically after we establish a regular sales cycle of the software products because our ongoing support costs will be minimal compared to our development costs. We expect to distribute our products through value added resellers and other resellers. As a result, we do not expect to increase personnel and related expenses as we go to market with our software. Loss on Impairment and Sales of Assets and Gain on Debt Settlement A loss on impairment of equipment held for sale of $75,000 was recognized in the first quarter of 2003 based upon the estimated net realizable value of the equipment acquired from Brekel. A net gain of $2,431 and $15,855 was recognized in the second and third quarter of 2003 respectively, on the actual sale of certain equipment acquired from Brekel. Gains of $37,315 and $19,527 were recognized on the settlement of debts owed to former creditors of Brekel the second and third quarters of 2003, respectively, for a total of $56,842 for the nine months ended September 30, 2003. Interest Expense Interest expense increased by $78,634, from $5,880 in third quarter 2002 to $84,514 in third quarter 2003, and by $121,521 from $6,984 during the nine months ended September 30, 2002 to $128,505 during the nine months ended September 30, 2003 as a result of an increase in loans from shareholders, a note payable related to leasehold improvements acquired from Brekel Group in July 2002, and the convertible debenture and Corbin loan. Other non-cash increases to interest expense are due to accretion of the discount on the convertible debenture of $37,500 and on the loan from Lee Corbin of $57,143. The total discount that is being amortized of $150,000 for the debenture and $400,000 for the Corbin loan will increase interest expense by $17,679 per month or $212,148 per year beginning March 2003 through March 2006, unless the debenture is converted prior to the due date of the debenture (March 4, 2005), at which time the entire unamortized discount will be expensed. Net Losses Sequiam Corporation incurred net losses of $706,252 and $630,401 for the quarters ended September 30, 2003 and 2002, respectively and it incurred net losses of $3,443,400 and $719,815 for the nine months ended September 30, 2003 and 2002, respectively. We expect to incur additional net losses throughout 2003 as we introduce our products to the marketplace. Liquidity and Capital Resources Net cash used in operating activities was $1,220,708 for the nine months ended September 30, 2003, as a result of the net loss during the period of $3,443,400, offset by non-cash compensation of $1,627,896, net decrease in accounts payable and accrued expenses totaling $103,431, and increases in accrued shareholder salaries of $270,000 and other non-cash expenses and losses totaling $398,786. 23 Net cash used for investing activities was $71,430 for the nine months ended September 30, 2003, primarily due to proceeds from the sale of equipment of $35,346 offset by cash paid for the acquisition of Access Orlando of $93,827 and software development costs of $12,949 for the Sequiam IRP and Extended Classroom products. Net cash provided by financing activities was $1,206,216 for the quarter ended September 30, 2003. Proceeds from the bridge loan accounted for $400,000 and sales of common stock accounted for $708,572 and were offset by commissions of $48,070. During the quarter ended September 30, 2003, a private investor exercised 625,000 warrants for $6,250. Current liabilities of $2,795,205 exceed current assets of $157,241 by $2,637,964. Of that amount, $1,812,075 or 67% is owed to shareholders as loans and accrued but unpaid salaries under employment agreements. The officers of the company are dedicated to its business plan and will place no undue demands on its working capital. They expect payment from future cash flows, equity capital infusions or possible equity capital conversions. Also included in current liabilities is $44,630 due to W.M.W. Communications for its acquisition. W.M.W. has indicated its willingness to wait for payment until cash flow allows, but we have not reached any formal agreement to defer payment. Also included in current liabilities is $663,168 of accounts payable and accrued expense, most of which accrue to Brekel Group, Inc. and are the subject of continued workout arrangements. $237,650 for the purchase of FDTI is also included in current liabilities and was paid for in common shares of the Company in November 2003. Effective July 1, 2001, the Brekel Group, Inc., prior to its acquisition by Sequiam, entered into a lease agreement to rent approximately 60,000 square feet of combined office and manufacturing space through June 30, 2011. As a result of the determination to cease Brekel's operations prior to the acquisition of Brekel, effective July 1, 2002, Sequiam entered into a lease forbearance agreement for 10,000 square feet of the same space for the remaining term of the lease. Pursuant to the lease agreement, we make monthly base rent payments including common area maintenance charges of $9,633, with annual increases of approximately 3% per year beginning in July 2004. As part of the lease forbearance agreement, we executed a note payable to the landlord to reimburse them for lost rents on the 50,000 square feet relinquished to them through June 30, 2004; less rents and principal payments received from us; less 75% of any rents received from replacement tenants; plus any leasing commissions or tenant build out costs required for replacement tenants. The note also includes amounts previously owed by Brekel to the landlord for tenant improvements. The outstanding balance on the note of $1,286,806 as of September 30, 2003 represents $893,112 of deferred rent and $393,694 of tenant improvements. Payments on the note commence July 1, 2004 through June 1, 2010 with interest at 6%. Variables that could impact the amount due under the deferred rent portion of the note include changes in estimated rents to be received from replacement tenants, estimated leasing commissions and estimated tenant build out costs required for replacement tenants. Rental expense for the quarter ended September 30, 2003 was $48,144 and $11,927 for the quarter ended September 30, 2002. The minimum future rentals required under the lease and the maturities of the long-term note payable are as follows: 24
Debt Year Rentals Maturities ---------- -------- ----------- 2003 $ 86,700 $ 0 2004 117,334 96,429 2005 120,854 188,341 2006 124,480 199,957 2007 128,214 212,384 Thereafter 339,169 589,965 -------- ----------- $916,751 $ 1,286,806 ======== ===========
Since the end of our last fiscal year ending December 31, 2002, we sold securities in four separate private placements, as more fully described in Part II, Item 2, below. As a result, we have received to date total net proceeds of $666,689. We received $315,437 (approximately one-half) of these proceeds during the quarter ending September 30, 2003, and most of this amount is reflected as additional paid-in capital in our financial statements for the period ending June 30, 2003. We also received $400,000 of proceeds from a bridge loan. We estimate that we will need an additional $600,000 of capital to continue operations during the next twelve month due to higher than expected professional fees associated with the registration we are completing regarding the securities issued to La Jolla Cove Investors, Inc., new acquisitions and bringing our products to market. Our management is undertaking several initiatives to address our liquidity, including the following: (1) continued efforts to increase our revenues from software licenses and the BioVault; (2) proceeds expected to be received from the convertible debentures and exercise of warrants as described above; (3) continued efforts to obtain additional debt and/or equity financing. Our management believes that these activities will generate sufficient cash flows to sustain our operations during the next twelve months. If we do not obtain at least $600,000 additional capital in the next twelve months, then we will need to curtail operations and reduce expenses accordingly. Application of Critical Accounting Policies We utilize certain accounting policies and procedures to manage changes that occur in our business environment that may affect accounting estimates made in preparation of our financial statements. These estimates relate primarily to our allowance for doubtful accounts receivable. Our strategy for managing doubtful accounts includes stringent, centralized credit policies and collection procedures for all customer accounts. We utilize a credit risk rating system in order to measure the quality of individual credit transactions. We strive to identify potential problem receivables early, take appropriate collection actions, and maintain adequate reserve levels. Management has determined that the allowance for doubtful accounts is adequate at September 30, 2003. ITEM 3. CONTROLS AND PROCEDURES ------------------------------- The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the periodic reports filed by the Company with the Securities and Exchange Commission (the "SEC") is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such 25 information is accumulated and communicated to the Company's management. Based on their most recent evaluation, which was completed during the period covered by this report, the Company's Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls subsequent to the date of the most recent evaluation. PART II. OTHER INFORMATION --------------------------- 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 these transactions, we issued a warrant to purchase an additional 800,000 shares of common stock at a purchase price of $1.50 per share for a period of four years. On April 25, June 23, and September 15, 2003, Sequiam Corporation sold an aggregate of 800,000 shares of its common stock to Mr. Sullivan at a price of $0.50 per share for proceeds of $400,000, less a commission of $40,000 paid to Cane Consulting, for net proceeds of $360,000. In connection with this transaction, we issued warrants to purchase an additional 4,000,000 shares of common stock at a purchase price of $0.75 per share for a period of four years. In connection with such sales we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506. This offer was made exclusively to Mr. Sullivan. Based upon information provided to us by Mr. Sullivan, we determined that he was an accredited investor because he has a net worth of $1,000,000 or more and an annual income of $200,000 or more. Mr. Sullivan represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the shares bear a restrictive legend in accordance with Rule 144. Prior to closing the transaction, we supplied information to Mr. Sullivan in compliance with Rule 502(b). We had a prior business relationship with Mr. Sullivan. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. Mr. Sullivan represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the securities bear a restrictive legend in accordance with Rule 144. There were no underwriters, and the offer was closed upon sale of the stock to Mr. Sullivan. During the third quarter 2003 we sold and aggregate of 327,500 common shares to four individual accredited investors at a prices ranging from $0.40 to $0.50 per share for net proceeds of $157,500. In connection with such sales, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. This investor represented in writing that the shares were being acquired for investment and, in addition, the certificates representing the shares bear a restrictive securities legend. The four individual investors represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in 26 addition, the certificates representing the shares bear a restrictive legend in accordance with Rule 144. Prior to closing the transaction, we supplied information to each investor in compliance with Rule 502(b). We had a prior business relationship with each investor. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. Each investor represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the securities bear a restrictive legend in accordance with Rule 144. There were no underwriters, and the offer was closed upon sale of the stock to each investor. The Company agreed to issue 485,000 shares for the acquisition of 100% of the common shares of Fingerprint Detection Technologies, Inc. valued at $237,650 to UTEK Corporation. The certificates for the 485,000 shares were issued in November 2003. In connection with such sales we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506. This offer was made exclusively to UTEK Corporation. Based upon information provided to us by UTEK Corporation, we determined that it is an accredited investor because it is a publicly held company. UTEK Corporation represented in writing that the shares were being acquired for investment purposes only and not for resale, and, in addition, the certificates representing the shares bear a restrictive legend in accordance with Rule 144. Prior to closing the transaction, we supplied information to UTEK Corporation in compliance with Rule 502(b). We had a prior business relationship with UTEK Corporation. We did not publish any advertisement, article, notice or other communication intended for public distribution regarding our intent to make this offering. There were no underwriters, and the offer was closed upon sale of the stock to UTEK Corporation on September 11, 2003. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------------------------------------------------------------ We held our annual meeting of security holders on August 25, 2003. A detailed description of the matters approved and other actions taken by the stockholders is set forth in our Form 8-K filed on August 25, 2003, which is hereby incorporated by reference. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ---------------------------------------- (a) Exhibits:
2.1 Agreement and plan of acquisition between Fingerprint Detection Technologies, Inc., a Florida corporation, ("FDTI"), UTEK Corporation, a Delaware corporation, ("UTEK"), and Sequiam Corporation, Inc., a California corporation, ("SQUM"). 21.1 Subsidiaries 31.1 Section 901 Certification Nicholas VandenBrekel 31.2 Section 901 Certification Mark Mroczkowski 27 32.1 Certification Pursuant To Rule 15d-14(B) and 18 U.S.C. Sec.1350 Nicholas VandenBrekel 32.2 Certification Pursuant To Rule 15d-14(B) and 18 U.S.C. Sec.1350 Mark Mroczkowski
(b) Reports on Form 8-K: The following reports on Form 8-K were filed during the quarter ending September 30, 2003: Form 8-K filed on August 25, 2003, regarding its annual shareholder meeting, election of officers and a change in its bylaws increasing Directors' terms from one to three years. 28 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SEQUIAM CORPORATION Date: November 19, 2003 By: /s/ Nicholas H. VandenBrekel ------------------------------------------------- Nicholas H. VandenBrekel, Chief Executive Officer By: /s/ Mark Mroczkowski ------------------------------------------------- Mark L. Mroczkowski, Chief Financial Officer Date: November 19, 2003 /s/ Mark L. Mroczkowski ----------------------- Mark L. Mroczkowski Chief Financial Officer 29