-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TRJaTVKXo7qtuZZ4Sz41Yb3o+RiOFlYe/EzLjUvSrWL93uqQbg3a6ueQqbsMFUt2 c/Ma4kbUU5KKGabhwVXYKw== 0001015402-04-003457.txt : 20040816 0001015402-04-003457.hdr.sgml : 20040816 20040816161927 ACCESSION NUMBER: 0001015402-04-003457 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEQUIAM CORP CENTRAL INDEX KEY: 0001123606 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 330875030 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 333-45678 FILM NUMBER: 04978970 BUSINESS ADDRESS: STREET 1: 300 SUNPORT LANE CITY: ORLANDO STATE: FL ZIP: 32809 BUSINESS PHONE: 4075410774 MAIL ADDRESS: STREET 1: 300 SUNPORT LANE CITY: ORLANDO STATE: FL ZIP: 32809 FORMER COMPANY: FORMER CONFORMED NAME: WEDGE NET EXPERTS INC DATE OF NAME CHANGE: 20000912 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, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________to _______________. Commission File Number 333-45678 SEQUIAM CORPORATION (Exact name of registrant as specified in its charter) CALIFORNIA 33-0875030 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 300 SUNPORT LANE, ORLANDO, FLORIDA 32809 (Address, including zip code, of principal executive offices) 407-541-0773 (Registrant's telephone number, including area code) (Former name, former address) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for the such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of the Registrant's Common Stock outstanding as of August 11, 2004 was 46,395,313. DOCUMENTS INCORPORATED BY REFERENCE Transitional Small Business Disclosure Format (Check one): Yes [_] No [X] ================================================================================
FORM 10-QSB INDEX Page PART I: FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 3 ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations. . . . . . . . . . . . . 4 Condensed Consolidated Statements of Stockholders' Deficit . . . . . . . 5 Condensed Consolidated Statements of Cash Flows. . . . . . . . . . . . . 6 Notes to Condensed Consolidated Financial Statements . . . . . . . . . . 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . 17 ITEM 3. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . 23 PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 23 ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . 23 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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SEQUIAM CORPORATION Form 10-QSB PART I: FINANCIAL INFORMATION - ----------------------------- ITEM 1. FINANCIAL STATEMENTS - ----------------------------- SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2004 (Unaudited) December 31, 2003 --------------- ------------------- ASSETS Current assets: Cash $ 881,356 $ 151,450 Accounts receivable, net 13,812 7,047 Prepaid expenses - 21,067 Equipment held for sale - 40,706 --------------- ------------------- Total current assets 895,168 220,270 Property and equipment, net 1,414,235 1,174,866 Software development costs, net 95,302 108,916 Acquired software, net 192,000 230,400 Intellectual properties, net 879,061 985,645 Deposits and other assets 237,960 22,788 --------------- ------------------- Total assets $ 3,713,726 $ 2,742,885 =============== =================== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Amount due for acquisition $ - $ 70,529 Notes and debentures payable 775,153 592,322 Accounts payable 455,614 573,860 Accrued expenses 53,576 181,301 Current portion of long-term debt 396,544 95,131 Loans from shareholders 371,843 695,300 Accrued shareholder salaries 1,319,792 1,214,792 --------------- ------------------- Total current liabilities 3,372,522 3,423,235 Long-term debt 2,968,776 1,175,933 --------------- ------------------- Total liabilities 6,341,298 4,599,168 --------------- ------------------- Shareholders' deficit: Common shares 46,396 43,863 Additional paid-in capital 6,020,948 4,701,695 Accumulated deficit (8,694,916) (6,601,841) --------------- ------------------- Total shareholders' deficit (2,627,572) (1,856,283) --------------- ------------------- Total liabilities and shareholders' deficit $ 3,713,726 $ 2,742,885 =============== =================== See accompanying notes to condensed consolidated financial statements.
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SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Net sales $ 58,188 $ 110,910 133,253 234,104 Costs and expenses: Operating expenses 125,798 136,941 250,164 278,804 Cost of BioVault sales 35,354 - 38,925 - Selling, general and administrative 586,135 1,881,818 1,185,497 2,371,562 Depreciation and amortization 129,453 115,032 282,422 197,871 (Gain) loss on sale of assets (146) (2,431) (146) 41,439 Loss on impairment of equipment held for sale 40,706 - 40,706 75,000 ---------------------------------------------------------- 917,300 2,131,360 1,797,568 2,964,676 ---------------------------------------------------------- Loss from operations (859,112) (2,020,450) (1,664,315) (2,730,572) Gain (loss) on debt settlement - 37,315 (5,492) 37,315 Interest expense net (135,228) (25,906) (423,268) (43,890) ---------------------------------------------------------- Net loss $ (994,340) $ (2,009,041) $ (2,093,075) $ (2,737,147) ========================================================== Net loss per common share: basic and diluted $ (0.02) $ (0.06) $ (0.05) $ (0.08) ========================================================== Weighted average common shares outstanding: basic and diluted 46,494,214 36,082,226 45,705,774 36,082,226 ========================================================== See accompanying notes to condensed consolidated financial statements.
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SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT Six Months Ended June 30, 2004 (Unaudited) Common Shares ------------------- Additional Shares Par Paid-in Accumulated Outstanding Value Capital Deficit Total -------------------------------------------------------------- Balance at December 31, 2003 43,863,218 $43,863 $4,701,695 $ (6,601,841) $(1,856,283) Sale of common shares 1,993,757 1,994 759,098 - 761,092 Warrants issued in connection with loan agreement - - 368,365 - 368,365 Common shares issued for services 519,291 520 176,741 - 177,261 Shares issued to correct error 19,047 19 (19) - - Debt assumed with the acquisition of Telepartners, Inc. - - 15,068 - 15,068 Net loss - - - (2,093,075) (2,093,075) -------------------------------------------------------------- Balance at June 30, 2004 46,395,313 $46,396 $6,020,948 $ (8,694,916) $(2,627,572) ============================================================== See accompanying notes to condensed consolidated financial statements.
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SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six months Ended June 30, ------------ ------------ 2004 2003 Cash flows from operating activities: Net loss $(2,093,075) $(2,737,147) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 282,422 197,871 Accretion of debt discount 237,079 18,750 Issuance of common stock in exchange for services 177,261 261,000 (Gain) loss on sale of equipment (146) 41,139 Loss on impairment of equipment held for sale 40,706 75,000 Loss on debt settlement (5,492) (37,315) Increase in accounts receivable (6,765) (4,817) Increase in prepaid expenses and other assets (194,105) (84,500) (Decrease) increase in accounts payable (112,754) 20,691 Increase in accrued shareholders salaries 105,000 1,800,000 Decrease in other accrued expenses (127,725) (2,113) Stock subscriptions payable for services - 1,366,895 ------------ ------------ Net cash used for operating activities (1,697,594) (704,546) ------------ ------------ Cash flows from investing activities: Equipment purchases (9,479) - Proceeds from sales of equipment - 19,732 Cash paid for WMW Communications (70,529) (93,827) Software development costs capitalized - (14,037) ------------ ------------ Net cash used for investing activities (80,008) (88,132) ------------ ------------ Cash flows from financing activities: Sale of Common Stock 761,092 351,252 Proceeds from Long-Term Debt 2,000,000 250,000 Payment of Long-Term Debt (9,564) (4,286) Proceeds from Note Payable 400,000 - Payment of Notes and Debentures Payable (320,563) 150,000 Repayments of shareholder loans (323,457) - ------------ ------------ Net cash provided by financing activities 2,507,508 746,966 ------------ ------------ Net change in cash 729,906 (45,712) Cash, beginning of period 151,450 85,922 ------------ ------------ Cash, end of period $ 881,356 $ 40,210 ============ ============ See accompanying notes to condensed consolidated financial statements.
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SEQUIAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) Non-cash activities: 2004 2003 - ------------------- ------- -------- Common Stock issued to correct error 19 - Liabilities assumed with acquisition of Telepartners, Inc. 15,068 - Warrants issued in connection with loan agreements 368,365 - Leasehold Improvements financed with long-term debt 338,500 - Beneficial conversion feature on convertible debt - $400,000 Common stock issued for acquisition of WMW Communications - $150,000 See accompanying notes to condensed consolidated financial statements.
7 SEQUIAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -DESCRIPTION OF BUSINESS AND ACQUISITIONS GENERAL - ------- The Company was incorporated in California on September 21, 1999 as Wedge Net Experts, Inc. on or about May 1, 2002, the Company changed its name to Sequiam Corporation. It also changed its symbol from "WNXP" to "SQUM". On May 24, 2004, the Company's common stock was formally listed on the Frankfurt Stock Exchange under the symbol RSQ. From inception of its business through the date the Company acquired Smart Biometrics, Inc., its management was primarily focused on developing a portfolio of Internet and print enterprise-wide software products. In addition, we developed custom software, databases and websites for businesses. Sequiam operated as an Internet service provider ("ISP") and provided Internet access and web site hosting for our customers who require those services. The business was operated under one operating segment through our subsidiaries: Sequiam Software, Inc. and Sequiam Communications, Inc. Sequiam Software tools consist primarily of document management and Internet Remote Print ("IRP") software, more fully described below. These tools allow users to manipulate proof, manage, organize and publish and print digital content, or scan non-digital content from remote locations as well as provide secure private storage. Sequiam Communications (formerly known as Brekel Group, Inc.) operated a digital publishing business that was ceased prior to its acquisition by Sequiam. However, Sequiam acquired Brekel Group for: (a) its expertise in digital on-demand publishing and printing; (b) the innovations that it brings to our document management, IRP and print on-demand software applications; and (c) its contract and relationship with the World Olympian Association to exclusively develop, create, host, and maintain their official Internet site and manage a database, provide email and an electronic newsletter for all Olympic athletes. In the fourth quarter of 2003, management divided the Company's business into two distinct operating segments; Information Management and Safety and Security. The Information Management segment is built on the Company's custom software skills, contacts with the world sports communities and interactive web-based technologies obtained by the acquisition of WMW Communications and more recently, Telepartners, Inc. The Company's Safety and Security segment was formed upon our acquisition of the assets of a biometrics corporation, Smart Biometrics, Inc. and expanded with our acquisition of Fingerprint Detection Technologies, Inc. ("FDTI"). The Company acquired from Smart Biometrics fingerprint biometric access control systems that will be a key feature in our future product offerings. The Company acquired from FDTI a fingerprint detection system that management believes represents a new advancement in that science. The Information Management segment consists of the Company's IRP suite of software products that includes IRP and IRPlicator, more fully described below. The Company is also developing the following two new software products to sell in our Information Management segment: "Book It, Rover!" and the Extended Classroom, which are more fully described below. In the Safety and Security segment the Company has focused primarily on selling the BioVault(TM), a secure access denial device intended for personal firearms and valuables such as jewelry, stock certificates and other documents that use fingerprint recognition technology to open instead of a traditional key. The BioVault(TM) and related technology is more fully described below. The Company has an agreement with the National Rifle Association (NRA) to distribute the BioVault(TM). The NRA acts only as a sales agent and will not purchase any of our products directly. The NRA offers our BioVault(TM) in its online store and catalog. The NRA estimates that we will be able to sell approximately 50,000 units over the twelve months following the second quarter 2004. The Company has changed its strategy relative to this segment. Instead of outsourcing the manufacturing of the BioVault(TM) and related products, and selling and distributing the products itself, the Company plans to license its 8 technologies to other companies who manufacture, market, sell and distribute. In 2004 we entered into a license agreement with Security Marketing Group, LLC ("SMG") for the Q300, a redesigned version of the BioVault(TM). SMG is required to pay to us a license fee of $2,000,000 cash, paid $25,000 upon execution and delivery of the license agreement, and the balance on or before December 31, 2004. In addition to the license fee, SMG is required to pay us a monthly royalty of $20.00 for every unit sold. We also received a non-dilutive 8% interest in Security Marketing Group, LLC as part of the license agreement. The Company is also in discussions with other companies for the license of the BioVault(TM) and other applications of our biometrics devices as well as the BritePrint(TM) fingerprint detection device. DEVELOPMENT OF THE BUSINESS - --------------------------- Three principal shareholders, Nicholas VandenBrekel, Mark Mroczkowski and James Rooney, formed Sequiam Software, Inc. (formerly Sequiam, Inc.) on January 23, 2001, to research, develop, produce and market a document management software product. From its inception until April 1, 2002, Sequiam Software, Inc.'s sole business activity was the development of its software product, Sequiam DMS. ACQUISITION OF BREKEL GROUP, INC. In 2002, the Company acquired 99.38% of the issued and outstanding common stock of Brekel Group, Inc. ("Brekel"). Sequiam Software, Inc. and Brekel were entities under common control. The Company acquired Brekel for its expertise in digital on-demand publishing and printing and the innovations that it brings to our document management, Internet remote print and print on-demand software applications. Sequiam also acquired Brekel for its contract with the World Olympians Association ("WOA") and its Internet and ExtraNet expertise and product development gained from that project. On November 14, 2002, management changed Brekel's name to Sequiam Communications, Inc. and again in April 2004 to Sequiam Sports, Inc. to better represent its role within the company. ACQUISITION OF THE ASSETS OF W.M.W. COMMUNICATIONS, INC. Effective November 1, 2002, the Company acquired all of the assets of W.M.W. Communication, Inc., doing business as Access Orlando. The Company has accounted for this as an acquisition of the business of W.M.W. Communications, Inc. ("WMW"). The major assets of WMW were the software products Internet Remote Print (IRP) and Internet Remote Print Duplicator ("IRPlicator"). IRP is a software product that allows computer users to print remotely to any printer via the Internet. IRP is highly complementary to Sequiam's Document Management Software, and we have integrated the two products. Like the Company, WMW was engaged in software development, website development, Internet hosting and collocation services, and is also an Internet service provider ("ISP"). Through its Internet hosting and collocation services, the Company hosts third-party web content on either its server located at its remote network operations center ("NOC"), or on the third party's server that is located at the Company's NOC. ACQUISITION OF THE ASSETS OF SMART BIOMETRICS, INC. On May 9, 2003, the Company acquired substantially all of the assets of Smart Biometrics, Inc. of Sanford, Florida. The Company has accounted for this as an acquisition of the business of Smart Biometrics, Inc. Smart Biometrics, Inc. is engaged in the development of biometric technologies. The BioVault(TM) technology, which is a secure safe that utilizes patent pending technology and protocols to recognize a person's fingerprint to unlock, was the major asset of Smart Biometrics, Inc. 9 ACQUISITION OF THE ASSETS OF TELEPARTNERS, INC. On June 1, 2003, the Company acquired substantially all of the assets of Telepartners, Inc. of West Palm Beach, Florida. The Company has accounted for this as an acquisition of the business of Telepartners, Inc. Telepartners, Inc. is engaged in the development of supplemental educational products for schoolchildren in grades 1 through 12. The major asset acquired from Telepartners, Inc. was the Extended Classroom(TM) software, which is a supplemental, educational program consisting of a video lesson library of the very lesson concepts that are taught in our public school classrooms in the United States. Each lesson summary has been produced in high quality and digitally mastered, allowing for Internet and television broadcast distribution as well as being offered in CD and video formats. ACQUISITION OF FINGERPRINT DETECTION TECHNOLOGIES, INC. On September 11, 2003, the Company acquired 100% of the issued and outstanding shares of common stock of Fingerprint Detection Technologies, Inc. ("FDTI") a Florida corporation. FDTI has acquired the rights to develop and market a patented and proprietary technology for fingerprint analysis using a light emitting diode ("LED") intense headband light source. FDTI had no operating history and had not generated any revenues, so the Company accounted for the acquisition as a purchase of its assets. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - --------------------- The Company, under the rules and regulations of the Securities and Exchange Commission, has prepared the unaudited condensed consolidated financial statements. The accompanying condensed consolidated financial statements contain all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of such financial statements. Certain information and disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted under such rules and regulations although the Company believes that the disclosures are adequate to make the information presented not misleading. The year-end balance sheet data was derived from the audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes for the Company included in Form 10-KSB filed for the year ended December 31, 2003. Interim results of operations for the periods presented may not necessarily be indicative of the results to be expected for the full year. NET LOSS PER COMMON SHARE - ------------------------- Basic loss per common share is computed by dividing net loss available to common shareholders by the weighted average common shares outstanding for the period. Diluted loss per common share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options, adjusted for the assumed repurchase of the Company's common stock, at the average market price, from the exercise proceeds and also may include incremental shares issuable in connection with convertible securities. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation. As of June 30 2004, the Company had 25,801,367 potentially dilutive common shares as a result of warrants and options granted and convertible debt outstanding. PRINCIPLES OF CONSOLIDATION - --------------------------- The consolidated financial statements include the accounts of the Company and its subsidiaries Sequiam Software, Inc., Sequiam Biometrics, Inc., Sequiam Education, Inc., Fingerprint Detection Technologies, Inc., and Sequiam Sports, Inc (the "Company"). All intercompany transactions and accounts have been eliminated. 10 RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------- In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities ("Interpretation No. 46"). In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. Interpretation No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. We do not expect that Interpretation No. 46 will have a material effect on our results of operations or financial condition as we do not currently utilize or have interests in any variable interest entities. ACCOUNTING FOR STOCK-BASED COMPENSATION - --------------------------------------- SFAS No. 123, Accounting for Stock-Based Compensation ("FAS 123"), encourages the use of a fair-value method of accounting for stock-based awards under which the fair value of stock options is determined on the date of grant and expensed over the vesting. As allowed by FAS 123, the Company has elected to account for stock-based compensation plans under an intrinsic value method that requires compensation expense to be recorded only if, on the grant date, the current market price of the Company's common stock exceeds the exercise price the employee must pay for the stock. The Company's policy is to grant stock options at the fair market value of the underlying stock at the date of grant. The Company has adopted the disclosure-only provisions of FAS 123. Accordingly, no compensation cost has been recognized for the stock option plans. There were no stock options granted during the six months ended June 30, 2004. All stock options issued prior to this year have been fully vested. As such, pro forma net loss is equal to reported net loss. NOTE 3 - COMMITMENTS AND CONTINGENCIES On October 1, 2002, the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") entered into amended and restated employment agreements with the Company and its Subsidiaries. The amended agreements replace separate agreements with Sequiam, Inc. and Brekel Group, Inc. The agreements have an initial term of two years with automatic one-year renewals. The agreements provide for compensation in the form of minimum annual salary of $185,000 and $175,000 respectively, and allow for bonuses in cash, stock or stock options and participation in Company benefit plans. Full-time employment is a requirement of the contract. In the event that a change in control of the Company occurs without the prior approval of the then existing Board of Directors, these contracts will be deemed terminated and compensation of $5 million each is payable at termination, and $1 million annually for five years subsequent to termination will be due and payable to the CEO and CFO. For the years ended December 31, 2003 and 2002 and the six months ended June 30, 2004 and 2003, Sequiam accrued and did not pay the minimum annual salaries payable to the CEO and CFO until April 30, 2004 when salary payments to them were resumed. None of the previously accrued salary amounts have been paid to either the CEO or the CFO. The Company is involved in various claims and legal actions incidental to the normal conduct of its business. On or about October 3, 2002, General Electric Capital Corporation ("GE") filed a lawsuit against Brekel Group, Inc. ("Brekel"), in the Circuit Court of the 9th Judicial Circuit in and for Orange County, located in Orlando, Florida. GE claims that Brekel owes a deficiency balance in the amount of $93,833 for three digital copiers rented under a lease agreement. Brekel has returned possession of the copiers to GE, but Brekel disputes the claim for damages. On January 30, 2004 Brekel entered into a settlement agreement with GE by agreeing to pay $70,000 in 36 monthly installments of $1,945 without interest. On February 1, 2004 Brekel entered into a settlement agreement with Precision Partners, LTD for disputed rents on a facility formerly occupied by Brekel by agreeing to pay $80,000 in 24 monthly installments of $3,510 including interest at 5%. 11 Brekel entered into a note payable with Xerox Corporation in November 2000 to finance equipment. Brekel also entered into a Document Services Agreement ("Agreement") with Xerox Corporation ("Xerox") on November 1, 1999 commencing April 1, 2000. During the 63-month term of the Agreement ending June 30, 2005, Xerox agreed to provide equipment and services in accordance with specified performance standards. Those standards include, among other things, a performance satisfaction guaranty by Xerox. Under the terms of that guaranty, Brekel may terminate the agreement without incurring any early termination charges. Brekel gave proper notice of such termination in March 2001. On September 3, 2002 Xerox did, contrary to the contract, assert its claim for early termination charges and for monthly minimum service charges on billings made after the termination date. On June 29, 2004, Xerox Corporation filed a lawsuit in the Circuit Court in and for Pinellas County State of Florida. The claim amount in controversy is approximately $1,574,000. The Company disputes these claims and believes them to be without merit. Because this matter is in very preliminary stages, management is unable to determine the likelihood of an unfavorable outcome and, accordingly, has not accrued any amount for potential losses in connection with this lawsuit. NOTE 4 - INCOME TAXES The Company records income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." The Company has incurred net operating losses since inception resulting in a deferred tax asset, for which a valuation allowance was provided since it is more likely than not that the deferred tax asset will not be realized. NOTE 5 - LONG-LIVED ASSETS HELD FOR DISPOSAL The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In connection with the acquisition of Brekel in July 2002, the Company reclassified production equipment acquired from Brekel that is no longer being used for operations to equipment held for disposal. During the six months ended June 30, 2004 and 2003, the Company recorded impairment losses of $40,706 and $75,000, respectively, to reduce the equipment to zero. NOTE 6 - NOTES AND DEBENTURES PAYABLE On March 5, 2003 Sequiam issued to La Jolla Cove Investors, Inc. ("LJCI"), an 8% Convertible Debenture in the principal amount of $300,000 and a warrant to purchase 2,000,000 shares of our common stock at $1.50 per share (the "Initial Financing"). Sequiam received a total of $150,000 of the principal amount of the debenture, representing the balance due at December 31, 2003. In connection with the debenture and the warrant, Sequiam was required to register the resale of common stock to be issued to LJCI upon conversion of the debenture and exercise of the warrant. To meet this obligation, Sequiam filed a registration statement on April 27, 2003, an amended registration statement on May 7, 2003, and a second amended registration statement on June 23, 2003, all of which were withdrawn on September 5, 2003, prior to being declared effective. Effective as of January 29, 2004, the Company entered into an Agreement of Accord and Satisfaction with LJCI pursuant to which LJCI agreed to accept $200,000 plus 100,000 shares of restricted common stock in accord and satisfaction of the debenture and warrant and other documents related to the Initial Financing. As a result, all of our obligations under the Initial Financing, including the obligation to file a new registration statement, have been terminated. Pursuant to the accord and satisfaction, Sequiam issued 100,000 shares of restricted common stock to LJCI, which, had a fair market value of $51,000, based on a closing trading price of $0.51 per share on January 29, 2004. 12 In addition, the Company delivered to LJCI a promissory note in the principal amount of $200,000 with interest in the amount of 8% per year, plus principal, due in six installments of $34,017 per month beginning February 1, 2004. On April 30, 2004, the Company paid the entire remaining principal balance and accrued interest. Under the new agreement, LJCI has "piggy-back" registration rights, meaning Sequiam is obligated to include the resale of the 100,000 shares of restricted common stock by LJCI in any registered public offering of securities the Company may make during any time that LJCI still holds such 100,000 shares. Unless the Company makes a registered public offering, it has no obligation to register the resale of the 100,000 shares of restricted common stock. On May 13, 2003, Sequiam entered into a loan agreement with Lee Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John Svenningsen, for a principal loan amount of $400,000 under a promissory note bearing interest at five percent (5%). In connection with this loan, the Company issued two warrants to the holder to purchase 625,000 shares of its common stock at an exercise price of $0.01 per share and 350,000 shares of its common stock at $1.00 per share. The Warrants for 625,000 shares were exercised on June 25, 2003 and the warrants for 350,000 remain outstanding and expire in May 2008. The fair value of the attached warrants exceeded the value of the proceeds received from the Note and has been recorded as a debt discount of $400,000. The payment schedule was originally tied to that of the LJCI Convertible Debenture described above. However, on January 30, 2004 the Company amended the loan agreement such that all principal and interest become due on January 30, 2005. The debt discount has been amortized over the original estimated life of the note of 36 months. Beginning in January 2004, the remaining unamortized debt discount is being amortized over twelve months. As of June 30 2004, the balance of the Note, net of the unamortized debt discount of $154,284 was $245,716 and is included in notes and debentures payable. On December 18, 2003, the Company entered into a loan agreement with Lee Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John Svenningsen, for a principal loan amount of $100,000 under a promissory note bearing interest at five percent (5%). In connection with this loan, the Company issued a warrant to the holder to purchase 200,000 shares of its common stock at an exercise price of $0.25 per share. The principal and accrued interest is due six months from the date of the loan and was paid on June 18, 2004. On December 18, 2003, the Company entered into a loan agreement with Lee Harrison Corbin, for a principal loan amount of $50,000 under a promissory note bearing interest at five percent (5%). In connection with this loan, the Company issued one warrant to the holder to purchase 100,000 shares of its common stock at an exercise price of $0.25 per share. The principal and accrued interest is due six months from the date of the loan and was paid on June 18, 2004. On December 26, 2003, the Company entered into a debenture agreement ("Debenture") with Eagle Financial, LLC, for a principal loan amount of $150,000 under a debenture bearing interest at ten percent (10%). The principal and accrued interest was paid on March 26, 2004. The Debenture also provides for an unconditional equity provision whereby the Company issued seventy five thousand (75,000) restricted shares to the Holder as an incentive to lend. The fair value of the shares has been recorded as a debt discount of $30,000. On January 30, 2004, the Company entered into a loan agreement with Lee Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John Svenningsen, for a principal loan amount of $400,000 under a promissory note bearing interest at five percent (5%). In connection with this loan, the Company issued one warrant to the holder to purchase 800,000 shares of its common stock at an exercise price of $0.225 per share. The Warrant was exercised on January 30, 2004. The principal and interest become due on January 30, 2005. 13 The preceding information is summarized as follows at June 30 2004:
Face Debt Carrying Amount Discount Amount -------- ---------- --------- Promissory note - Lee Harrison Corbin-Trustee for John Svenningsen $400,000 $(154,284) $ 245,716 Promissory note - Lee Harrison Corbin-Trustee for John Svenningsen 400,000 - 400,000 Precision Partners and GE Capital 129,437 129,437 ------------------------------- $929,437 $(154,284) $ 775,153 ===============================
NOTE 7 - LOANS FROM SHAREHOLDERS On February 1, 2002, Mark Mroczkowski, the Chief Financial Officer and a shareholder of the Company, loaned Sequiam Communications, Inc. (formerly Brekel Group, Inc.) $50,000. Interest is payable at 6%. As of June 30, 2004, the balance due under this loan was $50,000 payable on demand together with accrued interest of $1,250. Nicholas VandenBrekel, the President and Chief Executive Officer and majority shareholder of the Company, has advanced money to the Company and Sequiam Software, Inc. under demand notes. At June 30, 2004, the Company owed $270,450 on these notes, including accrued interest of $21,409. The notes bear interest at 2% per annum and are due on demand. Alan McGinn, the Chief Technology Officer and a shareholder of the Company, has advanced money to the Company. At June 30, 2004, the Company owed $12,000 without interest or specific repayment terms. A shareholder not employed by the Company advanced $75,000 to the Brekel Group, Inc. on March 1, 2002. The terms of the demand note include interest payable at 6% and a right to convert the note to common stock at $1.00 per share. At June 30, 2004 the remaining principal balance was $39,393 and accrued interest was $-0-. NOTE 8 - FORBEARANCE AGREEMENT Prior to our acquisition of the Brekel Group, Inc., effective July 1, 2001, the Brekel Group, Inc. entered into an operating lease agreement to rent approximately 60,000 square feet of combined office and manufacturing space through June 30, 2011. Because we determined to cease Brekel's print and publishing operations before we acquired it, effective July 1, 2002, Brekel entered into a lease forbearance agreement for 10,000 square feet of the same space for the remaining term of the lease. In April 2004, we entered into a new lease agreement and note payable with the landlord that supercedes and replaces the lease forbearance agreement entered into by the Brekel Group, Inc. effective July 1, 2002 prior to its acquisition by us. The new lease for 24,085 square feet is effective July 1, 2004 for a period of seventy-two months beginning July 1, 2004 and ending on June 30, 2010. The note payable was fixed at $1,600,000 together with interest thereon at a simple interest rate equal to six percent per annum. Commencing on August 1, 2004 and continuing on the first day of each month thereafter through and including June 1, 2010, we are scheduled to pay to Lender payments consisting of principal and interest in the amount of $26,517 per month. Rental expense for the three months ended June 30, 2004 and 2003 was $29,171 and $48,144, respectively and $62,305 and $74,636 for the six months ended June 30, 2004 and 2003, respectively. The new minimum future rentals required under the operating lease and the maturities of the long-term note payable are as follows beginning July 1, 2004: 14
Year Rentals Maturities ---------- ---------- ----------- 2004 $ 74,848 $ 93,514 2005 190,555 234,181 2006 206,262 248,624 2007 210,483 263,959 2008 214,808 280,239 Thereafter 329,986 479,483 ----------------------- $1,226,942 $ 1,600,000 =======================
NOTE 9 - CONVERTIBLE DEBT On April 27, 2004, the Company closed a convertible debt transaction with Laurus Master Fund, Ltd. ("Laurus") providing up to $3.0 million in financing. Under the arrangement, the Company delivered to Laurus a secured convertible term note, bearing interest at the Wall Street Journal Prime rate plus 2%, in the initial amount of $2.0 million, convertible into the Company's common stock (the "Note"), and a warrant to purchase up to 666,666 shares of the Company's common stock. The Note has a term of three years. Interest shall be payable monthly in arrears commencing on June 1, 2004, and on the first day of each consecutive calendar month thereafter. Monthly amortization payments shall commence on August 2, 2004, at the rate of $60,606. The interest rate under the Note is subject to adjustment on a month by month basis if specified conditions are met (including that the common stock underlying the conversion of the Note and the warrant issued to Laurus are registered with the U.S. Securities and Exchange Commission and whether and to what extent the market price of the Company's common stock for the five (5) trading days preceding a particular determination date exceeds (or is less than) the fixed conversion price applicable to the Note). Laurus also has the option to convert all or a portion of the Note into shares of the Company's common stock at any time, subject to specified limitations, at a fixed conversion price of $0.66 per share. The Note is secured by a first lien on all the Company's and its subsidiaries' assets. In connection with the Note, Laurus was paid a fee of $105,000 which is included in other assets as deferred loan costs and is being amortized over the life of the loan. Laurus received a six-year warrant to purchase up to 666,666 shares of the Company's common stock at prices ranging from $0.83 per share to $1.16 per share. A discount of $248,485 was recognized on the value of the warrants and is being amortized as interest expense over the life of the loan. All stock conversion prices and exercise prices are subject to adjustment for stock splits, stock dividends or similar events. The Company also agreed to file a registration statement with the U.S. Securities and Exchange Commission covering the shares issuable upon conversion of the Note and the exercise of the warrant issued to Laurus. Laurus has committed to fund to the Company an additional $1.0 million under the financing arrangement on substantially similar terms as the initial $2.0 million funding, which additional $1.0 million will become available to the Company following its completion and/or achievement of certain conditions to funding, including, without limitation, certain performance benchmarks. NOTE 10 - CAPITAL STOCK During the six months ended June 30, 2004, the Company issued 519,291 common shares for business advisory services valued at $177,261 based on the Company's quoted market price on the date of the related agreements. During the six months ended June 30, 2004, the Company sold an aggregate of 1,993,757 shares of its common stock to six accredited investors at an average price of $0.45 per share for net proceeds of $761,092. In connection with such sales, the Company relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. These investors represented in writing that the shares were being acquired for investment and, in addition, the certificates representing the shares bear a restrictive securities legend. 15 NOTE 11 - OPERATING SEGMENTS During the three month and six month periods ended June 30, 2003, the Company operated as a single operating segment, the Information Management Segment, as defined below. Pursuant to FAS 131, the Company defines an operating segment as: - A business activity from which the Company may earn revenue and incur expenses; - Whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and - For which discrete financial information is available. The Company has two operating segments, which are defined as each business line that it operates. This however, excludes corporate headquarters, which does not generate revenue. The Company's operating segments are defined as follows: The Information Management segment provides interactive web-based technologies, as well as ASP, ISP and other customer web development and software development services. The Safety and Security segment provides fingerprint biometric access control systems technology and fingerprint identification technology. The table below presents certain financial information by business segment for the quarter ended June 30, 2004.
Information Safety and Consolidated ----------- ---------- ------------ Management Security Segments Total Corporate Total ---------- -------- -------------- --------- ------ Revenue from external customers $ 24,955 $ 33,233 $ 58,188 $ - $ 58,188 Interest expense 8,030 - 8,030 127,198 135,228 Depreciation and amortization 80,784 48,669 129,453 - 129,453 Segment profit (508,205) (61,710) (569,915) (424,425) (994,340) Segment assets(1) 2,011,816 747,022 2,758,838 954,888 3,713,726
The table below presents certain financial information by business segment for the six months ended June 30, 2004.
Information Safety and Consolidated ----------- ---------- ------------ Management Security Segments Total Corporate Total ---------- -------- -------------- --------- ----- Revenue from external customers $ 70,139 $ 63,114 $ 133,253 $ - $ 133,253 Interest expense 18,225 - 18,225 405,043 423,268 Depreciation and amortization 172,996 97,338 270,304 - 270,304 Segment profit (860,288) (100,362) (960,650 (1,132,425) (2,093,075) (1) Segment assets have been adjusted for intercompany accounts to reflect actual assets for each segment.
16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - -------------- FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis contains "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 our operating in a competitive environment, factors that could significantly impact expected results include: the acceptance of the 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 the our reasonable control; the unfavorable outcome of litigation; 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 Management's Discussion and Analysis. We do not intend to update any forward-looking statements, and we hereby disclaim any obligation to update such forward-looking statements. INTRODUCTION The following discussion and analysis summarizes the significant factors affecting: (i) our consolidated results of operations for the three and six months ended June 30, 2004 compared to the three and six months ended June 30, 2003; and (ii) financial liquidity and capital resources for six months ended June 30 2004. This discussion and analysis should be read in conjunction with our consolidated financial statements and notes included in this report. We are an information management, software and security technology company specializing in biological identification security systems and web-based application services for the business, education and travel industries. We report our operating results in two operating segments: (a) Safety and Security; and (b) Information Management. We derive or plan to derive our revenues from four 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; and (iv) Internet access and web hosting services. We have not yet generated revenue from the sale and licensing of our software products. Software license revenue will be recognized when all of the following criteria have been met: (a) there is an executed license agreement and software has been delivered to the customer, (b) the license fee is fixed and payable within twelve months, (c) collection is deemed probable, and (d) product returns are deemed reasonably estimable. Maintenance revenues are recognized ratably over the term of the maintenance contract, typically 12 to 36 months. Internet access and web-hosting services are recognized over the period the services are provided, typically month-to-month. 17 The following table shows the proportion of total revenues by segment in the three and six-month period ended June 30 2004.
Period Safety and Security Information Management Total ------ -------------------- ----------------------- -------- Three Months ended June 30, 2004 $ 24,955 $ 33,233 $ 58,188 -------------------- ----------------------- -------- Six Months ended June 30, 2004 $ 70,139 $ 63,114 $133,253 -------------------- ----------------------- --------
RESULTS OF OPERATIONS The following table sets forth information regarding our financial results for 2004 and 2003.
Six Months Ended June 30, % Three Months Ended June 30, % ------------------------------- ------- -------------------------------- -------- 2004 2003 Change 2004 2003 Change --------------- -------------- ------- -------------- ---------------- -------- Revenue $ 133,253 $ 234,104 (43.1) $ 58,188 $ 110,910 (47.5) Operating Expenses 250,164 278,804 (10.3) 125,798 136,941 (8.1) Cost of BioVault sales 38,925 - - 35,354 - - Selling, general and administrative 1,185,497 2,371,562 (50.0) 586,135 1,881,818 (68.9) Depreciation and Amortization Expense 282,422 197,871 42.7 129,453 115,032 12.5 (Gain) Loss on sale of assets and Loss on impairment of equipment held for sale 40,560 116,439 (65.2) 40,560 (2,431) (1768.4) Interest Expense 423,268 43,890 864.4 135,228 25,906 422.0 (Loss) Gain on Debt Settlement (5,492) 37,315 (114.7) - 37,315 - Net Losses $ (2,093,075) $ (2,737,147) (23.5) $ (994,340) $ (2,009,041) (50.5)
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003. Unless otherwise noted, references to 2004 represent the six-month period ended June 30, 2004 and references to 2003 represent the six-month period ended June 30, 2003. REVENUES. Total revenue decreased by $100,851 or 43.1% to $133,253 in 2004, from $234,104 in 2003 because we have discontinued certain ancillary services such as web development, custom software development and dial up ISP services so that we may focus entirely on our core products. Software and license fee revenues were unchanged at $-0- for both 2004 and 2003. Revenues from consulting, custom software services, web development services and internet access and web-hosting services totaled $69,328 in 2004 and $234,104 in 2003, a decrease of 70.4%. Revenues from sales of the BioVaultTM were $38,925 in 2004 compared to $-0- in 2003. Revenues from the licensing of the Q300 (discussed below) were $25,000 in 2004 compared to $-0- in 2003. Revenues from the maintenance of our existing IRP customers were $5,200 in 2004 compared to $5,200 in 2003. During 2003, we spent most of our time acquiring and redeveloping our products. Sales and marketing efforts did not commence until the fourth quarter of 2003. We believe that the high cost of the BioVault was an impediment to its sales. As a result, we developed a less expensive version of the BioVault, the Q300. Now that our key products such as IRP, IRPlicator and the BioVaultTM are ready to formally come to market, we expect to begin generating revenues from these products during 2004. During 2004, we entered into a pilot program for our IRP products with AlphaGraphics, Inc., an international chain of 320 print shops and entered into a trial program with a state community college and county school system. In addition, in 2004 we entered into a license agreement with Security Marketing Group, LLC ("SMG") for the Q300. SMG is required to pay to us a license fee of $2,000,000 cash, payable $25,000 upon execution and delivery of the license agreement, and the balance on or before December 31, 2004. In addition to the license fee, SMG is required to pay us a monthly royalty of $20.00 for every unit sold by them. We also received a 18 non-dilutive 8% interest in Security Marketing Group, LLC as part of the license agreement. We are currently in discussions with other companies for the license of our other biometric technology products. As a result of these recent developments, we expect: (a) that consulting, custom software services, web development and web-hosting activities will make up a smaller portion of our overall revenues; and (b) that revenues from our Safety and Security segment will begin to increase in late 2004 and early 2005. OPERATING EXPENSES. Operating expenses were $250,164 in 2004 and $278,804 in 2003, a decrease of $28,640 or 10.3 %. This decrease was primarily attributable to decreased expenses related to the Internet Service Provider operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $1,185,497 in 2004 and $2,371,562 in 2003, a decrease of $1,186,065 or 50 %. The reduction was due to non-recurring, non-cash charges for services incurred in 2003 of $1,547,895. We increased our recurring selling and overhead expenditures such as salaries, wages and benefits for administrative and marketing personnel, computer maintenance and supplies, professional services (such as legal and accounting fees), and corporate travel expenses resulting from the overall growth of our operations. Our total payroll was $551,512 for 2004 and $174,017 for 2003. This increase in payroll is attributable to our growth from 17 employees in 2003, to 24 employees in 2004, the return of corporate officers to the payroll in April 2004, and the hiring of three new executives. The addition of the employees has negatively impacted liquidity and cash flow for 2004. We can further expect that payroll will continue to negatively impact our liquidity and cash flow for the next six months as we attempt to bring our products to market. Once we establish a regular sales cycle for our software and biometric products we expect that the overall effect of payroll on our liquidity and cash flow will be minor because our ongoing support costs will be minimal compared to our development costs. Because we expect to distribute our products through value-added resellers and other resellers, we do not expect to increase personnel and related expenses as we go to market with our software. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense was $282,422 in 2004 and $197,871 in 2003, an increase of $84,551 or 42.7 %. This increase is attributable to the amortization of intellectual properties from W.M.W. Communications, Inc., Smart Biometrics, Inc., Telepartners, Inc. and Fingerprint Detection Technologies, Inc. INTEREST EXPENSE. Interest expense was $423,468 in 2004 and $43,890 in 2003, an increase of $379,378 or 864.4 %. This increase is attributable to the increase in loans from shareholders, long-term debt, notes payable and debt discounts recorded on the notes payable. LOSS ON IMPAIRMENT AND SALES OF ASSETS AND GAIN ON DEBT SETTLEMENT. A loss of $40,706 was recognized on the remaining value of equipment held for resale. NET LOSSES. We incurred net losses of $2,093,075 in 2004 and $2,737,147 in 2003, a decrease of $644,072 or 23.5 %. The significant decrease was attributed to non-cash and non-recurring expenses for investment banking, consulting and other services acquired in exchange for stock totaling $1,759,446 together with $855,369 of additional losses on debt settlements, sales of assets and debt discount accretion incurred in 2003. We expect to incur additional net losses through the third and fourth quarter of 2004 as we introduce our products to the marketplace. We expect cash flow to increase beginning in the third quarter using proceeds from sales of our products. The Company presently requires sales of approximately $300,000 per month to provide a positive cash flow. QUARTER ENDED JUNE 30, 2004 COMPARED TO QUARTER ENDED JUNE 30, 2003. Unless otherwise noted, references to 2004 represent the quarter period ended June 30, 2004 and references to 2003 represent the quarter period ended June 30, 2003. REVENUES. Total revenue decreased by $52,722 or 47.5 % to $58,188 in 2004, from $110,910 in 2003 because we have discontinued certain ancillary services such as web development, custom software development and dial up ISP services so that we may focus entirely on our core products. Software and license fee revenues were 19 unchanged at $-0- for both 2004 and 2003. Revenues from consulting, custom software services, web development services and internet access and web-hosting services totaled $22,834 in 2004 and $110,910 in 2003, a decrease of 79.4%. Revenues from sales of the BioVaultTM were $35,354 in 2004 compared to $-0- in 2003. Revenues from the licensing of the Q300 (discussed below) were $25,000 in 2004 compared to $-0- in 2003. Revenues from the maintenance of our existing IRP customers were $5,200 in 2004 compared to $5,200 in 2003. During 2003, we spent most of our time acquiring and redeveloping our products. Sales and marketing efforts did not commence until the fourth quarter of 2003. We believe that the high cost of the BioVault was an impediment to its sales. As a result, we developed a less expensive version of the BioVault, the Q300. Now that our key products such as IRP, IRPlicator and the BioVaultTM are ready to formally come to market, we expect to begin generating revenues from these products during 2004. As a result of these recent developments, we expect: (a) that consulting, custom software services, web development and web-hosting activities will make up a smaller portion of our overall revenues; and (b) that revenues from our Safety and Security segment will begin to increase in late 2004 and early 2005 OPERATING EXPENSES. Operating expenses were $125,798 in 2004 and $136,941 in 2003, a decrease of $11,143 or 8.1 %. This decrease was primarily attributable to decreased expenses related to the Internet Service Provider operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $586,135 in 2004 and $1,881,818 in 2003, a decrease of $1,295,683 or 68.9 %. The reduction was due to non-recurring, non-cash charges for services incurred in 2003 of $1,547,895. We increased our recurring selling and overhead expenditures such as salaries, wages and benefits for administrative and marketing personnel, computer maintenance and supplies, professional services (such as legal and accounting fees), and corporate travel expenses resulting from the overall growth of our operations. Our total payroll was $342,518 for the quarter ended June 30, 2004 and $86,917 for the quarter ended June 30, 2003. This increase in payroll is attributable to our growth from 17 employees in 2003, to 24 employees in 2004, the return of corporate officers to the payroll in April 2004, and the hiring of three new executives. The addition of the employees has negatively impacted liquidity and cash flow for 2004. We can further expect that payroll will continue to negatively impact our liquidity and cash flow for the next six months as we attempt to bring our products to market. Once we establish a regular sales cycle for our software and biometric products we expect that the overall effect of payroll on our liquidity and cash flow will be minor because our ongoing support costs will be minimal compared to our development costs. Because we expect to distribute our products through value-added resellers and other resellers, we do not expect to increase personnel and related expenses as we go to market with our software. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense was $129,453 in 2004 and $115,032 in 2003, an increase of $14,421 or 12.5 %. This increase is attributable to the amortization of intellectual properties from W.M.W. Communications, Inc., Smart Biometrics, Inc., Telepartners, Inc. and Fingerprint Detection Technologies, Inc. INTEREST EXPENSE. Interest expense was $135,228 in 2004 and $25,906 in 2003, an increase of $109,322 or 422.0 %. This increase is attributable to the increase in loans from shareholders, long-term debt, notes payable and debt discounts recorded on the notes payable. LOSS ON IMPAIRMENT AND SALES OF ASSETS AND GAIN ON DEBT SETTLEMENT. A loss of $40,706 was recognized on the remaining value of equipment held for resale. NET LOSSES. We incurred net losses of $994,340 in 2004 and $2,009,041 in 2003, a decrease of $1,014,701 or 50.5 %. The significant decrease was attributed to non-cash and non-recurring expenses for investment banking, consulting and other services acquired in exchange for stock totaling $1,759,446 together with $855,369 of additional losses on debt settlements, sales of assets and debt discount accretion incurred in 2003. We expect to incur additional net losses through the third and fourth quarter of 2004 as we introduce our products to the 20 marketplace. We expect cash flow to increase beginning in the third quarter using proceeds from sales of our products. The Company presently requires sales of approximately $300,000 per month to provide a positive cash flow. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $1,697,594 for 2004, as a result of the net loss during the period of $2,093,075, offset by non-cash expenses of $737,468, increases in accrued shareholder salaries of $105,000 and net decrease in working capital items totaling $446,987. Net cash used for investing activities was $80,008 for 2004, due to purchases of equipment of $9,479 and cash paid for the acquisition of Access Orlando of $70,529. Net cash provided by financing activities was $2,507,508 for 2004. Proceeds from the notes payable accounted for $400,000, long-term debt $2,000,000 and sales of common stock accounted for $900,100 and were offset by commissions of $139,008 for net proceeds of $761,092. Payments of long-term debt used cash of $9,564 and repayments of notes and debentures and repayments of shareholder loans used cash of $644,020. Current liabilities of $3,372,522 exceed current assets of $895,168 by $2,477,354. Of that amount, $1,691,635 or 68.3% is owed to shareholders as loans and accrued but unpaid salaries under employment agreements. The officers of the company are dedicated to its business plan and will place no undue demands on its working capital. They expect payment from future cash flows, equity capital infusions or possible equity capital conversions. Also included in current liabilities is $358,541 of accounts payable owed by the former Brekel Group, Inc. and are the subject of continued workout arrangements. Prior to our acquisition of the Brekel Group, Inc., effective July 1, 2001, the Brekel Group, Inc. entered into an operating lease agreement to rent approximately 60,000 square feet of combined office and manufacturing space through June 30, 2011. Because we determined to cease Brekel's print and publishing operations before we acquired it, effective July 1, 2002, Brekel entered into a lease forbearance agreement for 10,000 square feet of the same space for the remaining term of the lease. In April 2004, we entered into a new lease agreement and note payable with the landlord that supercedes and replaces the lease forbearance agreement entered into by the Brekel Group, Inc. effective July 1, 2002 prior to its acquisition by us. The new lease for 24,085 square feet is effective July 1, 2004 for a period of seventy-two months beginning July 1, 2004 and ending on June 30, 2010. The note payable was fixed at $1,600,000 together with interest thereon at a simple interest rate equal to six percent per annum. Commencing on August 1, 2004 and continuing on the first day of each month thereafter through and including June 1, 2010, we are scheduled to pay to Lender payments consisting of principal and interest in the amount of $26,517 per month. The new minimum future rentals required under the operating lease and the maturities of the long-term note payable are as follows beginning July 1, 2004: Year Rentals Maturities ---------- ---------- ----------- 2004 $ 74,848 $ 93,514 2005 190,555 234,181 2006 206,262 248,624 2007 210,483 263,959 2008 214,808 280,239 Thereafter 329,986 479,483 ----------------------- $1,226,942 $ 1,600,000 ======================= 21 Since December 31, 2003, we sold securities in six separate private placements. As a result, we have received during the quarter ended June 30, 2004 total net proceeds of $761,092 and most of this amount is reflected as additional paid-in capital in our financial statements for the period ended June 30, 2004. We also received $400,000 of proceeds from a loan, and $2,000,000 from a secured convertible term note described below. On April 27, 2004, pursuant to a Securities Purchase Agreement dated as of the same date, we completed the sale of a secured convertible term note with Laurus Master Fund, Ltd. The note has a term of three years and accrues interest at an annual rate equal to the "prime rate" (4.25% at June 30, 2004) published in the Wall Street Journal plus 2%. The note is convertible into shares of our common stock at a conversion price of $0.66 per share. In connection with the sale of the note, we issued the purchaser a common stock purchase warrant to purchase up to 666,666 shares of our common stock at prices ranging from $0.83 per share to $1.16 per share. Also in connection with the sale of the note, we agreed to register for resale the shares of common stock into which the note is convertible and the warrant is exercisable. We believe that the proceeds from the Laurus transaction will be adequate to support our operations while we build sales revenues from our products. Our management is expanding its efforts to increase our revenues from software licenses and the BioVaultTM. APPLICATION OF CRITICAL ACCOUNTING POLICIES SOFTWARE DEVELOPMENT COSTS Costs incurred to establish technological feasibility of computer software products are research and development costs and are charged to expense as incurred. Costs of producing product masters subsequent to technological feasibility are capitalized. Capitalization of computer software costs ceases when the product is available for general release to the customers. Capitalized software costs are amortized using the straight-line method over the estimated useful life of the products or the gross revenue ratio method, whichever results in the greater amount of amortization. ACQUIRED SOFTWARE In connection with the acquisition of Access Orlando, the Company acquired Internet Remote Print software that was assigned a value of $288,000, representing the excess of the purchase price over the fair value of the tangible assets acquired. The acquired software is being amortized over its expected useful life of five years. INTELLECTUAL PROPERTIES In connection with the acquisitions of Smart Biometrics, Inc, Telepartners, Inc. and Fingerprint Detection Technologies, Inc., the Company acquired intellectual properties including patents, trademarks, technical drawings, proprietary software and other knowledge based assets that were assigned values of $700,000, $160,000 and $237,650, respectively, for a total of $1,097,650 representing the excess of the purchase price over the fair value of the tangible assets acquired. The acquired intellectual properties are being amortized over their expected useful life of five years. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities ("Interpretation No. 46"). In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. Interpretation No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. We do not expect that Interpretation No. 46 will have a 22 material effect on our results of operations or financial condition as we do not currently utilize or have interests in any variable interest entities. OFF-BALANCE SHEET ARRANGEMENTS We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders. ITEM 3. CONTROLS AND PROCEDURES - ------------------------------- EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures (as defined by Rules 15d-15(e) of the Securities Exchange Act of 1934, as amended) (the "Exchange Act") 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 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 provide reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING In addition, management, including the Company's Chief Executive Officer and Chief Financial Officer, reviewed the Company's internal control over financial reporting (as defined by Rules 13(a)-15(f) and 15(d)-15(f) of the Exchange Act), and there have been no significant changes in the Company's internal control or in other factors that could significantly affect the Company's internal control over financial reporting during the period covered by this report. PART II. OTHER INFORMATION - -------------------------- ITEM 1. LEGAL PROCEEDINGS - ------------------------- Sequiam Sports, Inc. entered into a note payable with Xerox Corporation in November 2000 to finance equipment. Sequiam Sports, Inc. 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, Sequiam Sports, Inc. may terminate the agreement without incurring any early termination charges. Brekel Group, Inc. gave proper notice of such termination in March 2001. On September 3, 2002, Xerox did, contrary to the contract, assert its claim for early termination charges and for monthly minimum service charges on billings made after the termination date. On June 29, 2004, Xerox Corporation filed a lawsuit in Pinellas County Circuit Court, Civil Division. The amount in controversy is $1,573,668.85. We dispute these claims and believe them to be without merit. No other legal proceedings are currently pending or threatened against us. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ---------------------------------------- (a) EXHIBITS: 23
2.1 Agreement and Plan of Merger.1 2.2 Stock Exchange Agreement and Plan of Reorganization.2 2.3 Asset Purchase Agreement.3 Agreement and plan of acquisition between Fingerprint Detection Technologies, Inc., a Florida corporation, 2.4 UTEK Corporation, a Delaware corporation, and Sequiam Corporation, Inc., a California corporation.4 2.5 Asset Purchase Agreement with Smart Biometrics, Inc.5 2.6 Asset Purchase Agreement with Telepartners, Inc.6 Stock Exchange Agreement and Plan of Reorganization among Sequiam Corporation and the 2.7 Shareholders of Brekel Group, Inc., dated June 17,20027 3.1 Articles of Incorporation (Charter Document).8 3.2 Certificate of Amendment to Articles of Incorporation of Wedge Net Experts, Inc., dated April 29, 2002.9 3.3 Bylaws.8 3.4 Amendment to our Bylaws, dated July 18, 2002.10 Developer's License Agreement, dated as of July 15, 2004, by and between Sequiam Corporation and 10.1 Blackboard, Inc. 11 21.1 Subsidiaries* 31.1 Certification of Nicholas H. VandenBrekel, Chief Executive Officer and President of Sequiam Corporation, pursuant to Rule 15d-14(a) of the Securities and Exchange Act of 1934.* 31.2 Certification of Mark L. Mroczkowski, Senior Vice President and Chief Financial Officer of Sequiam Corporation, pursuant to Rule 15d-14(a) of the Securities and Exchange Act of 1934.* 32.1 Certification of Nicholas H. VandenBrekel, Chief Executive Officer and President of Sequiam Corporation, pursuant to 18 U.S.C. Section 1350.* 32.2 Certification of Mark L. Mroczkowski, Senior Vice President and Chief Financial Officer of Sequiam Corporation, pursuant to 18 U.S.C. Section 1350.*
(b) REPORTS ON FORM 8-K: THE FOLLOWING REPORTS ON FORM 8-K WERE FILED DURING THE QUARTER ENDING JUNE 30 2004: Form 8-K filed on May 6, 2004, regarding a convertible debt transaction with Laurus Master Fund, Ltd. ("Laurus") providing up to $3.0 million in financing. Form 8-K filed on May 27, 2004, regarding a listing for trading on the Frankfurt Stock Exchange under the symbol RSQ. * Filed herewith 1 Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 16, 2002. 2 Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 6, 2002. 3 Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 23, 2003. 4 Incorporated by reference from our Quarterly Report on Form 10-QSB, filed with the Securities and Exchange Commission on November 19, 2003. 5 Incorporated by this reference to our Form 8-K filed with the Securities and Exchange Commission on May 23, 2003. 6 Incorporated by reference from our Quarterly Report on Form 10-QSB/A, filed with the Securities and Exchange Commission on October 3, 2003. 7 Incorporated by reference from our Form 8-K filed with the Securities and Exchange Commission on August 6, 2002. 24 8 Incorporated by reference from our Registration Statement on Form SB-2, filed with the Securities and Exchange Commission on September 13, 2000. 9 Incorporated by reference from our Quarterly Report on Form 10-QSB, filed with the Securities and Exchange Commission on May 20, 2002. 10 Incorporated by reference from our Quarterly Report on Form 10-QSB, filed with the Securities and Exchange Commission on August 14, 2002. 11 Incorporated by reference from our Form SB-2/A, filed with the Securities and Exchange Commission on July 29, 2004. 25 SIGNATURES - ---------- In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SEQUIAM CORPORATION Date: August 16, 2004 By: /s/ Nicholas H. VandenBrekel - ---------------------------------------------------------------------- Nicholas H. VandenBrekel, Chief Executive Officer and President By: /s/ Mark L. Mroczkowski - ---------------------------------------------------------------------- Mark L. Mroczkowski, Senior Vice President and Chief Financial Officer 26 EX-21.1 2 doc2.txt EXHIBIT 21.1 Exhibit 21.1 Subsidiaries ------------ Sequiam Software, Inc., a California corporation, doing business as Sequiam and Sequiam, Inc. Sequiam Sports, Inc., a Delaware corporation Sequiam Biometrics, Inc., a Florida corporation. Sequiam Education, Inc., a Florida corporation Fingerprint Detection Technologies, Inc., a Florida corporation EX-31.1 3 doc3.txt EXHIBIT 31.1 Exhibit 31.1 Certification ------------- I, Nicholas VandenBrekel, certify that: I have reviewed this Quarterly Report on Form 10-QSB of Sequiam Corporation; 1. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 2. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 3. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [intentionally omitted]; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 4. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 16, 2004 /s/ Nicholas H. VandenBrekel Nicholas H. VandenBrekel President & Chief Executive Officer EX-31.2 4 doc4.txt EXHIBIT 31.2 Exhibit 31.2 Certification ------------- I, Mark Mroczkowski, certify that: I have reviewed this Quarterly Report on Form 10-QSB of Sequiam Corporation; 1. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 2. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 3. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [intentionally omitted]; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 4. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 16, 2004 /s/ Mark L. Mroczkowski Mark L. Mroczkowski Senior Vice President, Secretary, Chief Financial Officer & Principal Financial Officer EX-32.1 5 doc5.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO RULE 15d-14(b) and 18 U.S.C. Sec.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Sequiam Corporation (the "Company") on Form 10-QSB for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Nicholas H. VandenBrekel, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered therein. /s/ Nicholas H. VandenBrekel Nicholas H. VandenBrekel President and Chief Executive Officer August 16, 2004 EX-32.2 6 doc6.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO RULE 15d-14(b) and 18 U.S.C. Sec.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Sequiam Corporation (the "Company") on Form 10-QSB for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark L. Mroczkowski, Senior Vice President, Secretary, Chief Financial Officer and Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered therein. /s/ Mark L. Mroczkowski Mark L. Mroczkowski Senior Vice President, Secretary, Chief Financial Officer & Principal Financial Officer August 16, 2004 -----END PRIVACY-ENHANCED MESSAGE-----