Sequiam Corporation 424(b)(3) 4-11-2006
Filed
Pursuant to Rule 424(b)(3)
Registration
No. 333-130806
PROSPECTUS
SEQUIAM
CORPORATION
32,104,723
Shares
of Common Stock
TO
BE OFFERED BY CERTAIN HOLDERS OF SECURITIES OF
SEQUIAM
CORPORATION
This
prospectus relates to the sale of up to 32,104,723 shares of our common stock
by
the selling stockholders listed in this prospectus. The shares offered by this
prospectus include 7,500,000 shares of our common stock issuable upon the
conversion of the Series A preferred stock, 17,472,222 shares of our common
stock issuable upon exercise of outstanding common stock purchase warrants
and
up to 7,132,501 shares of our common stock issuable on account of dividends
relating to the Series A preferred stock and any possible penalties or
anti-dilution adjustment relating to the Series A preferred stock. These shares
may be sold by the selling stockholders from time to time in the
over-the-counter market or other national securities exchange or automated
interdealer quotation system on which our common stock is then listed or quoted,
through negotiated transactions or otherwise at market prices prevailing at
the
time of sale or at negotiated prices.
Pursuant
to registration rights granted to the selling stockholders, we are obligated
to
register the shares which may be acquired upon conversion of the Series A
preferred stock and exercise of common stock purchase warrants by the selling
stockholders. We will receive none of the proceeds from the sale of the shares
by the selling stockholders, except upon exercise of the common stock purchase
warrants. We will bear all expenses of registration incurred in connection
with
this offering, but all selling and other expenses incurred by the selling
stockholders will be borne by them.
Our
common stock is quoted on the OTC Bulletin Board under the symbol “SQUM.OB.” The
high and low bid prices for shares of our common stock on March 14 , 2006,
were
$0.32 and $0.31, respectively, based upon bids that represent prices quoted
by
broker-dealers on the OTC Bulletin Board. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not represent
actual transactions.
Any
broker-dealer executing sell orders on behalf of the selling stockholders may
be
deemed to be “underwriters” within the meaning of the Securities Act of 1933.
Commissions received by any broker-dealer may be deemed to be underwriting
commissions under the Securities Act of 1933.
THESE
SECURITIES INVOLVE A HIGH DEGREE OF RISK.
PLEASE
CAREFULLY REVIEW THE SECTION TITLED “RISK FACTORS” BEGINNING ON PAGE
4.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date of this prospectus is April 11, 2006
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. This prospectus is not an offer to sell, or a solicitation
of an offer to buy, shares of common stock in any jurisdiction where offers
and
sales would be unlawful. The information contained in this prospectus is
complete and accurate only as of the date on the front cover of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
shares of common stock.
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You
should read the following summary together with the more detailed information
contained elsewhere in this prospectus, including the section titled “Risk
Factors,” regarding our company and the common stock being sold in this
offering. Unless the context otherwise requires, “we,” “our,” “us” and similar
phrases refer, collectively, to Sequiam Corporation and its
subsidiaries.
Financial
Information
We
have
incurred net losses each year since our inception. As of September 30, 2005,
we
had an accumulated deficit of $15,990,495 and for the nine months ended
September 30, 2005, we incurred a net loss of $3,541,637.
A
more
detailed discussion regarding our financial condition can be found under
the
heading “Management’s Discussion and Analysis.”
Our
Business
We
are a
biometric technology company specialized in developing fingerprint biometric
identification products. Through our subsidiaries, we develop, market and
support a portfolio of biometric technology products. We also develop web-based
applications for the business, education and travel industries. Our operations
are divided into two distinct operating segments: (a) Safety and Security;
and
(b) Information Management.
Our
Safety and Security segment develops biotechnology products. Our main products
are: (a) the BioLock, a biometric door locking technology which we hope to
begin
marketing in 2005; (b) the BioVault 2.0™,
an access
denial device used to securely store personal firearms, jewelry and important
documents by utilizing fingerprint recognition technology to control access
to
the contents of the access denial device; (c) a suite of biometric software
products; and (d) BritePrint, a light-emitting, diode-based, headband-mounted
light source developed to enhance the detection of dusted latent fingerprints.
Our
Information Management segment develops web-based applications for the business,
education and travel industries. Our major products are: (a) Sequiam IRP
(sometimes marketed as Print It, 123!), an Internet Remote Print software
that
enables users to print or copy documents from their computer to printers
at
local or other sites; (b) Sequiam IRPlicator (sometimes marketed as Scan
It,
123!), an Internet Remote Print Duplicator that scans documents and transmits
the scanned documents to a central print manager; (c) Book It, Rover!, a
web-based application service that allows destination promotion agencies
(such
as a local chamber of commerce) to permit its web-site visitors to purchase
hotel reservations and attraction tickets, and make transportation arrangements;
and (d) the Extended Classroom, a series of 300 internet-based educational
supplement videos for grades 1-12 students and their parents. Our Information
Management segment also provides custom software and database development.
We
are negotiating to license IRP and IRPlicator to a software marketing firm
and
we have stopped all activity on Book it Rover! and the Extended Classroom
as
part of our plan to concentrate solely on biometrics and our Safety and Security
segment.
Our
Information Management segment consists of the following subsidiaries: (a)
Sequiam Software, Inc.; (b) Sequiam Sports, Inc.; and (c) Sequiam Education,
Inc. Our Safety and Security segment consists of the following subsidiaries:
(a)
Sequiam Biometrics, Inc.; (b) Fingerprint Detection Technologies, Inc.; and
(c)
Constellation Biometrics, Inc. Constellation Biometrics, Inc. is the parent
company of a wholly owned subsidiary: Biometric Security (PTY) LTD. (a/k/a
Secure Biometrics.co.za), a South African company.
A
more
detailed discussion regarding our business can be found under the heading
“Business.”
Corporate
Structure
The
following chart reflects an overview of our corporate organization (including
jurisdictions of incorporation and percentage owned by the parent corporation)
as of December 31, 2005.
Corporate
Information
Our
principal executive offices are located at 300 Sunport Lane, Orlando, Florida
32809, and our telephone number is (407) 541-0773. Our website is located
at
www.sequiam.com. Information on our website is not part of this
prospectus.
The
Offering
Common
stock offered by the selling stockholders:
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Number
of shares that may be issued upon exercise of outstanding common
stock
purchase warrants
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17,472,222
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shares
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Number
of shares that may be issued upon conversion of outstanding Series
A
preferred stock
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14,632,501
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shares
(1)
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Total
shares offered
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32,104,723
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shares
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Common
stock outstanding
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64,458,321
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shares
(2)
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Use
of proceeds
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We
will receive none of the proceeds from the sale of the shares by
the
selling stockholders, except upon exercise of the common stock
purchase
warrants.
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OTC
Bulletin Board symbol
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SQUM.OB
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Risk
Factors
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This
securities offering involves a high degree of risk. See “Risk Factors” on
page 4.
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(1)
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Includes
7,500,000 shares of our common stock issuable upon the conversion
of the
Series A preferred stock, and up to 7,132,501 shares of our common
stock
issuable on account of dividends relating to the Series A preferred
stock
and any possible penalties or anti-dilution adjustment relating
to the
Series A preferred stock.
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(2)
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As
of March 14, 2006. Does not include shares of our common stock
that are
reserved for issuance pursuant to existing Series A preferred stock
and
common stock purchase warrants, and shares available for future
issuance
under our 2003 Employee Stock Incentive Plan and the 2003 Non-Employee
Directors and Consultants Stock
Plan.
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Summary
Financial Data
The
following table shows the proportion of total revenues by segment in each
of the
last two fiscal years and the nine-month period ended September 30,
2005.
Period
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Safety
and Security
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Information
Management
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Fiscal
year ended December 31, 2003
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$
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47,620
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$
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338,550
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Fiscal
year ended December 31, 2004
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$
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99,765
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$
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165,729
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Nine
Months ended September 30, 2005
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$
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209,972
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$
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311,247
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An
investment in our common stock involves a high degree of risk. You should
carefully consider the following material risks, together with the other
information contained in this prospectus, before you decide to buy our common
stock. If any of the following risks actually occur, our business, results
of
operations and financial condition would likely suffer. In these circumstances
the market price of our common stock could decline, and you may lose all or
part
of your investment.
RISKS
RELATED TO OUR BUSINESS AND INDUSTRY
WE
HAVE LIMITED OPERATING FUNDS, AND OUR ABILITY TO CONTINUE AS A GOING CONCERN
IS
DEPENDENT UPON OUR ABILITY TO OBTAIN ADDITIONAL CAPITAL TO OPERATE THE
BUSINESS.
We
have
incurred net losses and negative cash flows from operations since our inception.
Our lack of sufficient financing to implement our business plan, and our
expectation of continued operating losses for the foreseeable future raises
doubt about our ability to continue as a going concern. Our ability to continue
as a going concern is heavily dependant upon our ability to obtain additional
capital to sustain operations. Although we are presently attempting to secure
additional financing to continue our operations, there is no assurance
additional capital will be available on acceptable terms, if at
all.
WE
HAVE INCURRED OPERATING LOSSES IN THE PAST AND MAY INCUR SIGNIFICANT OPERATING
LOSSES IN THE FUTURE.
We
have
incurred net losses each year since our inception. Our business has no record
of
profitability and it may never become profitable. As of September 30, 2005,
we
had an accumulated deficit of $15,990,495 and total stockholders deficit of
$5,134,615. Our ability to obtain profitability on a quarterly or annual basis
in the future depends in part on the rate of growth of our target markets,
the
acceptance of our products and services, the competitive position of our
products and services, our ability to develop new products and our ability
to
manage expenses.
WE
NEED TO OBTAIN ADDITIONAL FINANCING BECAUSE WE MAY NOT HAVE ADEQUATE FUNDING
TO
CONTINUE OPERATIONS.
Although
we received a $3,650,000 term note from Lee Harrison Corbin, Attorney-in-Fact
for the Trust Under the Will of John Svenningsen, now known as Stephen A. Ross,
Attorney-in-Fact for the Trust Under the Will of John Svenningsen, and
$1,575,000 from the sale of the Series A preferred stock, the proceeds from
the
Trust and Series A transactions may not be adequate to support our operations
while we build sales revenues from our products. As of the date of this
registration statement, the proceeds from the Trust transaction have been
completely exhausted and the proceeds from the Series A transaction should
be
sufficient to sustain our operations for approximately the next two to three
months.
If
we are
unable to obtain the additional financing, our business prospects, operating
results and financial condition may be materially and adversely affected to
such
an extent that we are forced to restructure, sell some of our assets or curtail
our operations, any of which would have a detrimental effect on the value of
our
common stock.
SINCE
WE HAVE A LIMITED OPERATING HISTORY, IT MAY BE DIFFICULT FOR YOU TO ASSESS
OUR
BUSINESS AND FUTURE PROSPECTS.
We
did
not launch our Information Management segment until 2002 or our Safety and
Security segment until 2003, and most of our operating subsidiaries were formed
as a result of various acquisitions with development stage companies. As a
consequence, we have a limited operating history available to evaluate our
business and prospects. You should consider our prospects in light of the
following risks, expenses and uncertainties, particularly those that rely,
in
part, on the technology market:
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management
of an expanding business in a rapidly changing
market;
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attracting
new customers and maintaining customer satisfaction;
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introducing
new and enhanced services, products and alliances;
and
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maintaining
profit margins, notwithstanding price competition or rising wholesale
prices.
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To
address these risks we must successfully:
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develop
and extend relationships with manufacturers, distributors, alliance
partners and value added resellers;
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implement
an evolving and unproven business model;
and
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We
have
incurred net losses and negative cash flows from operations since our inception.
We do not have sufficient funds to follow through on these initiatives and
may
find that these initiatives are more expensive than anticipated. As of September
30, 2005, we had an accumulated deficit of $15,990,495 and for the nine months
ended September 30, 2005, we incurred a net loss of $3,541,637. Increases in
expenses would further increase our operating losses. Moreover, the timing
of
such expenses can contribute to fluctuations in our quarterly operating results.
If we cannot generate sufficient funds to successfully manage these risks,
our
business will suffer. We cannot assure you that we will successfully address
these risks or that our business strategy will be successful.
WE
ARE DEPENDENT ON OUR INFORMATION MANAGEMENT SEGMENT’S PRODUCTS AND SERVICES, AND
THE ABSENCE OF CONTINUED MARKET ACCEPTANCE OF THESE PRODUCTS OR SERVICES COULD
HARM OUR BUSINESS.
We
derive
a substantial portion of our revenue from a limited number of our Information
Management segment’s products and services. Although in 2006 we plan to focus
solely on our Safety and Security segment which we believe will in 2006 and
beyond provide increased revenues, we expect to derive a substantial portion
of
our revenue from our Information Management segment and related products and
services for the remainder of 2005. We are particularly dependent on our custom
software, web development, web hosting services and consulting services. These
services constituted a substantial portion of our total revenue in 2004 and
the
first nine months of 2005. Continued market acceptance of these products and
services is critical to our future success. We expect that our Information
Management segment will begin to make up less of our total revenues as we
continue to market and develop our biometric products.
OUR
BRAND MAY NOT ATTAIN SUFFICIENT RECOGNITION.
We
believe that establishing, maintaining and enhancing our brand is a critical
aspect of our efforts to develop and expand our operations. The number of
Internet service providers and software developers that offer competing
services, many of which already have well-established brands, increases the
importance of establishing and maintaining brand name recognition. To attract
and retain customers, and to promote and maintain our operations in response
to
competitive pressures, we may find it necessary to increase substantially our
financial commitment to creating and maintaining a strong brand loyalty among
customers. This will require significant expenditures on advertising and
marketing. If we incur excessive expenses in an attempt to promote and maintain
our products and services, our business prospects, operating results and
financial condition would be materially and adversely affected to such an extent
that we are forced to restructure, sell some of our assets or curtail our
operations, any of which would have a detrimental effect on the value of our
common stock. For example, although we have expended considerable time and
energy in developing a relationship with the National Rifle Association to
market and advertise the BioVault™,
to
date, we have not derived significant revenue from this relationship nor can
we
assure that we ever will.
OUR
MANAGEMENT MAY BE UNABLE TO EFFECTIVELY INTEGRATE OUR ACQUISITIONS AND TO MANAGE
OUR GROWTH AND WE MAY BE UNABLE TO FULLY REALIZE ANY ANTICIPATED BENEFITS OF
THESE ACQUISITIONS.
Our
future results will depend in part on our success in implementing our
acquisition strategy. This strategy is limited to effecting acquisitions of
companies with complementary technology and supplier relationships. Our ability
to implement this strategy will be dependent on our ability to identify,
consummate and successfully assimilate acquisitions on economically favorable
terms. In addition, acquisitions involve a number of special risks that could
adversely effect our operating results, including the diversion of management’s
attention, failure to retain key acquired personnel, risks associated with
unanticipated events or liabilities, legal, accounting and other expenses
associated with any acquisition, some or all of which could increase our
operating costs, reduce our revenues and cause a material adverse effect on
our
business, financial condition and results of operations to such an extent that
we are forced to restructure, sell some of our assets or curtail our operations,
any of which would have a detrimental effect on the value of our common
stock.
WE
OPERATE IN A HIGHLY COMPETITIVE MARKET AND COMPETE WITH COMPANIES THAT HAVE
SIGNIFICANTLY LARGER OPERATIONS AND GREATER FINANCIAL RESOURCES; WE MAY NOT
BE
ABLE TO COMPETE EFFECTIVELY AGAINST SUCH COMPANIES, WHICH COULD RESULT IN
ADDITIONAL LOSSES.
We
are
subject to extensive competition from numerous competitors. We cannot assure
you
that we will be able to compete successfully or that competitive pressures
will
not damage our business.
Our
competition includes:
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internet
service providers and developers;
and
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biometric
companies such as 9g Products.
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Many
of
our competitors are larger and have substantially greater financial,
distribution and marketing resources. If we cannot compete successfully against
such competitors, it will impair our ability to maintain our market position.
For
example, the biometric technology industry is highly competitive and rapidly
changing. Many companies are currently exploiting the benefits of fingerprint
recognition technologies. As a result, competing biometric technology companies
could develop products substantially similar or superior to the BioVault™,
BritePrint or the BioLock. In addition, our Safety and Security segment could
be
adversely affected if other forms of biometric identification technologies
(such
as retinal, iris or face recognition) are utilized to develop superior
products.
WE
RELY ON THE SERVICES OF OUR KEY PERSONNEL, AND IF WE ARE UNABLE TO RETAIN OUR
CURRENT PERSONNEL AND HIRE ADDITIONAL PERSONNEL, OUR ABILITY TO DEVELOP AND
SUCCESSFULLY MARKET OUR PRODUCTS AND SERVICES COULD BE HARMED.
We
rely
upon the continued service and performance of a relatively small number of
key
technical and senior management personnel. If we lose any of our key technical
or senior management personnel, or are unable to fill key positions, our
business could be harmed. As a result, our future success depends on our
retention of key employees, such as Nicholas H. VandenBrekel, our Chief
Executive Officer, Mark L. Mroczkowski, our Chief Financial Officer, and Alan
McGinn, our Chief Technology Officer. We rely on these individuals for the
management of our company, development of our business strategy and management
of our strategic relationships. Any of these employees could leave our company
with little or no prior notice. We do not have “key person” life insurance
policies covering any of our employees. Additionally, there is a limited number
of qualified technical personnel with significant experience in the design,
development, manufacture, and sale of biometric devices using fingerprint
recognition technology, and we may face challenges hiring and retaining these
types of employees.
OUR
ABILITY TO COMPETE WILL BE HARMED IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY.
We
rely
primarily on a combination of trademark, trade secret and copyright law and
contractual restrictions to protect our intellectual property. These afford
only
limited protection. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to obtain, copy or use information that we
regard as proprietary, such as product design and manufacturing process
expertise. As of September 30, 2005, we had two U.S. patent applications
pending. Our pending patent applications and any future applications may not
result in issued patents or may not be sufficiently broad to protect our
proprietary technologies. The patent pending for BritePrint was issued in 2005.
Moreover, policing any unauthorized use of our products is difficult and costly,
and we cannot be certain that the measures we have implemented will prevent
misappropriation or unauthorized use of our technologies, particularly in
foreign jurisdictions where the laws may not protect our proprietary rights
as
fully as the laws of the United States. The enforcement of patents by others
may
harm our ability to conduct our business. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to
our
trade secrets or intellectual property. Our failure to effectively protect
our
intellectual property could harm our business.
ASSERTIONS
BY THIRD PARTIES OF INFRINGEMENT BY US OF THEIR INTELLECTUAL PROPERTY RIGHTS
COULD RESULT IN SIGNIFICANT COSTS AND CAUSE OUR OPERATING RESULTS TO SUFFER.
The
software and biometric technology industries are characterized by vigorous
protection and pursuit of intellectual property rights and positions, which
has
resulted in protracted and expensive litigation for many companies. Although
we
are not currently a party to legal action alleging our infringement of
third-party intellectual property rights, in the future we may receive letters
from various industry participants alleging infringement of patents, trade
secrets or other intellectual property rights. Any lawsuits resulting from
such
allegations could subject us to significant liability for damages and invalidate
our proprietary rights. These lawsuits, regardless of their success, would
likely be time-consuming and expensive to resolve and would divert management
time and attention. Any potential intellectual property litigation also could
force us to do one or more of the following:
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stop
selling products or using technology that contain the allegedly infringing
intellectual property;
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pay
damages to the party claiming infringement;
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attempt
to obtain a license to the relevant intellectual property, which
may not
be available on reasonable terms or at all; and
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attempt
to redesign those products that contain the allegedly infringing
intellectual property.
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In
the
future, the outcome of a dispute may be that we would need to develop
non-infringing technology or enter into royalty or licensing agreements. We
may
also initiate claims or litigation against third parties for infringement of
our
proprietary rights or to establish the validity of our proprietary rights.
WE
MAY UNDERTAKE ACQUISITIONS TO EXPAND OUR BUSINESS THAT MAY POSE RISKS TO OUR
BUSINESS AND DILUTE THE OWNERSHIP OF OUR EXISTING STOCKHOLDERS.
As
part
of our growth and product diversification strategy, we will continue to evaluate
opportunities to acquire other businesses, intellectual property or technologies
that would complement our current offerings, expand the breadth of markets
we
can address or enhance our technical capabilities. Acquisitions that we may
potentially make in the future entail a number of risks that could materially
and adversely affect our business, operating and financial results, including:
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problems
integrating the acquired operations, technologies or products with
our
existing business and products;
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diversion
of management’s time and attention from our core business;
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need
for financial resources above our planned investment levels;
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difficulties
in retaining business relationships with suppliers and customers
of the
acquired company;
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risks
associated with entering markets in which we lack prior experience;
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potential
loss of key employees of the acquired company; and
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potential
requirement to amortize intangible assets.
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Future
acquisitions also could cause us to incur debt or contingent liabilities or
cause us to issue equity securities that would reduce the ownership percentages
of existing stockholders.
WE
RELY ON THIRD PARTIES TO MAKE OUR PRODUCTS, LEAVING US POTENTIALLY VULNERABLE
TO
SUBSTANTIAL COST INCREASES AND DELAYS.
We
do not
manufacture or distribute the BioVault 2.0™
or our
BritePrint products. If one or more of our current manufacturers were no longer
able to manufacture our products, we would be required to negotiate arrangements
with alternate manufacturers, which would likely include some cost or delay,
which could be substantial. In addition, no assurance can be given that any
alternative arrangements would be on terms as favorable as our current
arrangements.
IF
OUR STRATEGIC PARTNERS DO NOT EFFECTIVELY MARKET OUR PRODUCTS, WE MAY NOT
GENERATE SIGNIFICANT SALES OR PROFITS.
We
utilize third parties to assist in marketing, selling and distributing our
products. We believe that the establishment of a network of third-party
strategic partners, particularly abroad, with extensive and specific knowledge
of the various applications in the software and biometric industry,
respectively, is important for us to succeed in these sectors. We cannot assure
you that our current or future strategic partners, such as the National Rifle
Association, will market our products and services at sufficient levels or
provide us with adequate support. If one or more of our partners under-performs
or if any of our strategic relationships are terminated or otherwise disrupted,
our operating performance, results of operations and financial condition will
be
adversely affected to such an extent that we are forced to restructure, sell
some of our assets or curtail our operations, any of which would have a
detrimental effect on the value of our common stock.
WE
HAVE BEEN SUED BY XEROX CORPORATION; IF XEROX CORPORATION IS SUCCESSFUL IN
ITS
LAWSUIT, IT MAY BE AWARDED $1,573,668, WHICH WOULD NEGATIVELY AND MATERIALLY
IMPACT OUR OPERATING RESULTS.
Sequiam
Sports, Inc. (formerly known as Brekel Group, 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 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. Sequiam Sports, 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 the Circuit Court in and for Pinellas
County, State of Florida. The amount in controversy is $1,573,668. Although
we
dispute these claims and believe them to be without merit, if Xerox Corporation
is successful, it may be awarded $1,573,668. If we are required to pay Xerox
Corporation $1,573,668, we may not be able to implement our business plan and
may be forced to cease operations.
WE
HAVE BEEN SUED BY CHAPMAN SPIRA & CARSON, LLC; IF CHAPMAN SPIRA &
CARSON, LLC IS SUCCESSFUL IN ITS LAWSUIT, IT MAY BE AWARDED $1,019,060 AND
OTHER
DAMAGES, WHICH WOULD NEGATIVELY AND MATERIALLY IMPACT OUR OPERATING
RESULTS.
On
December 21, 2004, we entered into a Letter Agreement with Chapman Spira &
Carson, LLC, pursuant to which Chapman agreed to provide us with various
consulting, investment banking and business development services. On or
about September 28, 2005, Chapman filed a complaint in United States District
Court for the Southern District of New York, asserting claims for breach of
contract and unjust enrichment. Chapman alleges that, notwithstanding its
purported provision of services under the Letter Agreement between it and us,
we
failed to properly compensate Chapman for those services. We claim that none
of
those services were actually provided by Chapman. Chapman is seeking
compensatory damages of $1,019,060,
costs,
including attorney's fees, 500,000 shares of common stock and a
warrant to
purchase 6,195,000 shares of stock at $0.26 per share.
We believe that Chapman's claims are without merit and intend to vigorously
defend ourselves against these allegations. If we are required to pay Chapman
$1,019,060 and the other damages described above, we may not be able to
implement our business plan and may be forced to cease operations.
RISKS
RELATED TO OUR COMMON STOCK
IF
AN EVENT OF DEFAULT OCCURS UNDER THE SECURED TERM NOTE ISSUED TO THE LEE
HARRISON CORBIN, ATTORNEY-IN-FACT FOR THE TRUST UNDER THE WILL OF JOHN
SVENNINGSEN, NOW KNOWN AS STEPHEN A. ROSS, ATTORNEY-IN-FACT FOR THE TRUST UNDER
THE WILL OF JOHN SVENNINGSEN, IT COULD RESULT IN A SERIOUS PROBLEM FOR US AND
CAUSE US TO CURTAIL OUR OPERATIONS OR SELL SOME OF OUR ASSETS TO REPAY THE
NOTE.
On
May
18, 2005, we issued a $3,650,000 secured term note to the Lee Harrison Corbin,
Attorney-in-Fact for the Trust Under the Will of John Svenningsen, now known
as
Stephen A. Ross, Attorney-in-Fact for the Trust Under the Will of John
Svenningsen. That note provides for the following events of
default.
|
·
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failure
to pay interest and principal payments when due;
|
|
·
|
a
breach by us of any material covenant, term or condition of the note
or in
any related agreement;
|
|
·
|
a
breach by us in any material respect of material representation or
warranty made in the note or in any related
agreement;
|
|
·
|
we
make an assignment for the benefit of our creditors, or a receiver
or
trustee is appointed for us;
|
|
·
|
any
money judgment or similar final process filed against us for more
than
$50,000, which remains unvacated, unbonded or unstayed for a period
of 30
days;
|
|
·
|
any
form of bankruptcy or insolvency proceeding is instituted by or against
us, which is not vacated within 45 days;
|
|
·
|
our
common stock is suspended for five consecutive days or five days
during
any ten consecutive days from our principal trading market;
|
|
·
|
our
failure to timely deliver shares of our common stock when due upon
conversion of the note;
|
|
·
|
the
occurrence and continuance of an event of default under any related
agreement or the default under any other agreement of indebtedness
which
exceeds $50,000; and
|
|
·
|
any
change in the controlling ownership of
us.
|
If
we
default on the note and the holder demands all payments due and payable, we
will
be required to pay 130% of the outstanding principal amount of the note and
any
accrued interest. The cash required to pay those amounts will most likely come
out of our working capital. Since we rely on our working capital for our
day-to-day operations, a default on the note could have a serious and adverse
effect on our business, operating results and financial condition to such an
extent that we are forced to restructure, sell some of our assets or curtail
our
operations, any of which would have a detrimental effect on the value of our
common stock.
IF
AN EVENT OF DEFAULT OCCURS UNDER THE TERMS OF THE SERIES A PREFERRED STOCK,
IT
COULD RESULT IN A SERIOUS PROBLEM FOR US AND CAUSE US TO CURTAIL OUR OPERATIONS
OR SELL SOME OF OUR ASSETS TO FINANCE THE REDEMPTION OF THE SERIES A PREFERRED
STOCK.
On
December 9, 2005, we issued 1,575 shares of Series A preferred stock to certain
of the selling shareholders. The Certificate of Determination of Preferences,
Rights and Limitations of Series A 9% Convertible Preferred Stock provides
for
the following events of default.
|
·
|
this
registration statement is not declared effective by the Securities
and
Exchange Commission on or prior to May 29,
2006;
|
|
·
|
the
effectiveness of this registration statement lapses for any reason
or if
the holders of the Series A preferred stock cannot use this registration
statement for more than an aggregate of 60 calendar days (which need
not
be consecutive days) during any 12 month
period;
|
|
·
|
we
provide notice of our inability to comply with a conversion
request;
|
|
·
|
failure
to comply with certain provisions of the Registration Rights
Agreement;
|
|
·
|
we
fail for any reason to pay in full any amounts due to the holder
of the
Series A preferred stock within five days of the date
due;
|
|
·
|
we
fail to have available a sufficient number of authorized and unreserved
shares of common stock to issue to the holders of the Series A preferred
stock upon a conversion hereunder;
|
|
·
|
we
breach any covenant, agreement or warranty and such failure or breach
shall not, and such breach has not been cured within 30 calendar
days
after the date on which written notice of such breach shall have
been
given;
|
|
·
|
we
redeem more than a de minimis number of securities junior to the
Series A
preferred stock;
|
|
·
|
any
change in our controlling ownership;
|
|
·
|
any
form of bankruptcy or insolvency proceeding is instituted by or against
us, which is not vacated within 60 days;
|
|
·
|
our
common stock fails to be listed or quoted for trading on the OTCBB
for
more than five trading days;
|
|
·
|
any
monetary judgment, writ or similar final process shall be entered
or filed
against us, any of out subsidiaries or any of their respective property
or
other assets for more than $50,000, and shall remain unvacated, unbonded
or unstayed for a period of 45 calendar
days.
|
If
we
default on the Series A preferred stock, we may be required to redeem all of
the
Series A preferred stock for a total amount equal to the sum of (i) the greater
of (A) $2,047,500 and (B) the product of (a) the VWAP (with “VWAP” defined as
the price determined by the OTCBB) on the trading day immediately preceding
the
date of default and (b) $1,575,000 divided by the then conversion price (which
is $0.21 per share as of the date of this registration statement), (ii) accrued
but unpaid dividends and (iii) all liquidated damages and other amounts due
in
respect of the Series A preferred stock.
The
cash
required to pay those amounts will most likely come out of our working capital.
Since we rely on our working capital for our day-to-day operations, a default
on
the note could have a serious and adverse effect on our business, operating
results and financial condition to such an extent that we are forced to
restructure, sell some of our assets or curtail our operations, any of which
would have a detrimental effect on the value of our common stock.
WE
WILL BE REQUIRED TO REDEEM ALL OF THE OUTSTANDING SERIES A PREFERRED STOCK
ON
DECEMBER 9, 2008, WHICH COULD RESULT IN A SERIOUS PROBLEM FOR US AND CAUSE
US TO
CURTAIL OUR OPERATIONS OR SELL SOME OF OUR ASSETS TO FINANCE THE REDEMPTION
OF
THE SERIES A PREFERRED STOCK.
On
December 9, 2008, we must redeem all of the outstanding Series A preferred
stock
for a total amount equal to $1,575,000 plus accrued but unpaid dividends and
all
liquidated damages and other amounts due in respect of the Series A preferred
stock. The cash required to pay those amounts will most likely come out of
our
working capital. Since we rely on our working capital for our day-to-day
operations, a default on the note could have a serious and adverse effect on
our
business, operating results and financial condition to such an extent that
we
are forced to restructure, sell some of our assets or curtail our operations,
any of which would have a detrimental effect on the value of our common
stock.
OUR
PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS THAT
MAY NOT BE IN THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS.
Upon
completion of this offering, our executive officers, directors and principal
stockholders, which includes Walter H. Sullivan, III, will, in the aggregate,
beneficially own approximately 45.7% of our outstanding common stock. As a
result, these stockholders, acting together, will have the ability to exert
substantial influence over all matters requiring approval of our stockholders,
including the election and removal of directors and the approval of mergers
or
other business combinations. This concentration of control could be
disadvantageous to other stockholders whose interests are different from those
of our officers, directors and principal stockholders.
THE
LARGE NUMBER OF SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALES MAY DEPRESS
THE
PRICE OF OUR STOCK.
Our
Articles of Incorporation authorize the issuance of 200,000,000 shares of common
stock, $.001 par value per share, and 50,000,000 shares of preferred stock,
$.001 par value per share. As of March 14, 2006, we had outstanding 64,458,321
shares of common stock. Also as of March 14, 2006, we had outstanding a total
of
1,575 shares of Series A preferred stock which are convertible into a total
of
7,500,000 shares of common stock. We have reserved 15,000,000 shares of common
stock for issuance in respect of option grants under our stock option plan.
From
those available shares, options have been granted for 9,423,000 shares of common
stock, and there remain available for options under the plan 5,577,000 shares
of
common stock. There are 29,824,423 shares that are issuable upon exercise of
outstanding warrants and up to 7,132,501 shares that may be issued under the
Series A preferred stock on account of dividends or anti-dilution
adjustments.
Our
board
of directors has the authority to issue additional shares of common stock and
preferred stock up to the authorized amount stated in our Articles of
Incorporation. Our board of directors may choose to issue some or all of such
shares to acquire one or more businesses or other types of property, or to
provide additional financing in the future. The issuance of any such shares
may
result in a reduction of the book value or market price of the outstanding
shares of our common stock. If we do issue any such additional shares, such
issuance also will cause a reduction in the proportionate ownership and voting
power of all other shareholders. Further, any such issuance may result in a
change of control of the company.
Holders
of our securities have registration rights for 7,500,000 shares of common stock
issuable upon conversion of outstanding Series A preferred stock, up to
7,132,501 shares that may be issued under the Series A preferred stock on
account of dividends or anti-dilution adjustments, and up to 17,472,222 shares
that may be issued upon exercise of outstanding Common Stock Purchase Warrants,
all of which are included in the registration statement of which this prospectus
is a part. Sales of substantial amounts of our common stock in the open market,
including sales of the shares offered for resale in this prospectus, could
adversely affect the market price of our common stock.
ADDITIONAL
FINANCINGS MAY DILUTE THE HOLDINGS OF CURRENT STOCKHOLDERS.
In
order
to provide capital for the operation of the business, we may enter into
additional financing arrangements. These arrangements may involve the issuance
of new shares of common stock, preferred stock that is convertible into common
stock, debt securities that are convertible into common stock or warrants for
the purchase of common stock. Any of these items could result in a material
increase in the number of shares of common stock outstanding, which would in
turn result in a dilution of the ownership interests of existing common
stockholders. In addition, these new securities could contain provisions, such
as priorities on distributions and voting rights, which could affect the value
of our existing common stock.
THERE
ARE CURRENTLY OPTIONS AND WARRANTS OUTSTANDING TO PURCHASE UP TO 29,824,423
SHARES OF OUR COMMON STOCK, WHICH IF EXERCISED, WOULD CAUSE A SIGNIFICANT
DILUTION TO EXISTING STOCKHOLDERS
We
have
issued options, warrants or similar rights to purchase up to 29,824,423 shares
of our common stock. Of that amount, Walter H. Sullivan, III is the beneficial
owner of warrants to purchase up to 8,784,201 shares of our common stock. If
all
the foregoing warrants and options were exercised as of March 14, 2006, our
issued and outstanding shares of common stock would have increased from
64,458,321 to 94,282,744, an increase of approximately 46%. Such exercise would
cause a stockholder holding 1,000,000 shares of our common stock prior to such
exercise to immediately drop from holding approximately 1.55% of our common
stock to holding approximately 1.06% of our common stock. In addition, the
value
of our common stock as traded on the OTC Bulletin Board may experience a
significant drop as a result of the exercise of all or a portion of the
outstanding options and warrants.
OUR
COMMON STOCK IS CONSIDERED A “PENNY STOCK” AND MAY BE DIFFICULT TO SELL WHEN
DESIRED.
The
SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific exemptions. The market
price of our common stock has been less than $5.00 per share. This designation
requires any broker or dealer selling these securities to disclose specified
information concerning the transaction, obtain a written agreement from the
purchaser and determine that the purchaser is reasonably suitable to purchase
the securities. These rules may restrict the ability of brokers or dealers
to
sell our common stock and may affect the ability of stockholders to sell their
shares. In addition, since our common stock is currently quoted on the OTC
Bulletin Board, stockholders may find it difficult to obtain accurate quotations
of our common stock and may experience a lack of buyers to purchase our shares
or a lack of market makers to support the stock price.
OUR
PREFERRED STOCK MAY CAUSE DILUTION.
Our
Articles of Incorporation authorize the issuance of up to 50,000,000 shares
of
“blank check” preferred stock with such rights and preferences as our board of
directors, without further shareholder approval, may determine from time to
time. Of these preferred shares, 1,575 shares are designated as Series A
preferred stock. On March 14, 2006, we had 1,575 shares of outstanding Series
A
preferred stock. All Series A preferred stock ranks senior to common stock
as to
payment of dividends and distribution of assets. The Series A preferred stock
is
non-voting and entitles the Series A purchasers to receive a 9% cumulative
dividend payable semiannually. The Series A preferred stock is convertible
into
7,500,000 of our common shares at a fixed price of $0.21 per share. On the
third
anniversary of the issuance of the Series A preferred stock, we must redeem
all
of the Series A preferred stock for a total amount equal to $1,575,000, accrued
but unpaid dividends and all liquidated damages and other amounts due in respect
of the Series A preferred stock. As of March 14, 2006, there remained 49,998,425
shares of authorized but undesignated and unissued shares of preferred stock
that may be sold in the future and that can, at the discretion of our board
of
directors, be designated as another series of preferred stock with dividend,
liquidation, conversion, voting or other rights and preferences that are senior,
and not available, to the holders of our common stock. Thus, issuances of new
series of preferred stock could adversely affect the relative voting power,
distributions and other rights of the common stock. Holders of our common stock
could realize less than the amount of dividends and/or distributions to which
they would otherwise be entitled.
Further,
preferred stock could be used as a method of discouraging, delaying, or
preventing a take-over of our company. If we issue “blank check” preferred
stock, it could have a dilutive effect upon our common stock. This would
decrease the chance that our shareholders would realize a premium over market
price for their shares of common stock as a result of a takeover
bid.
WE
DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE
AND THEREFORE YOU SHOULD NOT BUY THIS STOCK IF YOU WISH TO RECEIVE CASH
DIVIDENDS.
We
currently intend to retain our future earnings to support operations and to
finance expansion and therefore do not anticipate paying any cash dividends
on
our common stock in the foreseeable future.
THE
PUBLIC MARKET FOR OUR COMMON STOCK HAS BEEN CHARACTERIZED BY A LOW VOLUME OF
TRADING AND OUR STOCKHOLDERS MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE
THE PRICE AT WHICH THEY PURCHASED THEIR SHARES, IF AT ALL.
Historically,
the volume of trading in our common stock has been low. A more active public
market for our common stock may not develop or be sustained. The market price
of
our common stock may fluctuate significantly in response to factors, some of
which are beyond our control. These factors include:
|
·
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product
liability claims or other
litigation;
|
|
·
|
the
announcement of new products or product enhancements by us or our
competitors;
|
|
·
|
developments
concerning intellectual property rights and regulatory
approvals;
|
|
·
|
quarterly
variations in our or our competitors’ results of
operations;
|
|
·
|
developments
in our industry; and
|
|
·
|
general
market conditions and other factors, including factors unrelated
to our
own operating performance.
|
The
stock
market in general has recently experienced extreme price and volume
fluctuations. In particular, market prices of securities of technology companies
have experienced fluctuations that often have been unrelated or disproportionate
to the operating results of these companies. Continued market fluctuations
could
result in extreme volatility in the price of shares of our common stock, which
could cause a decline in the value of our shares. Price volatility may be worse
if the trading volume of our common stock is low.
THE
EMPLOYMENT AGREEMENTS OF NICHOLAS H. VANDENBREKEL AND MARK L. MROCZKOWSKI
CONTAIN SEVERANCE AGREEMENTS PROVIDING FOR UP TO $10,000,000 IN TERMINATION
PAYMENTS TO EACH OF THEM, AND SUCH TERMINATION PAYMENTS COULD DETER ANY
POTENTIAL ACQUISITION OR CHANGE IN CONTROL OF OUR COMPANY.
Each
of
our employment agreements with Nicholas H. VandenBrekel and Mark L. Mroczkowski
contains provisions for severance payments in the event a change of control
occurs without the prior approval of the then existing Board of Directors,
whether by proxy contest, or as the result of a tender offer made without the
approval of the then existing Board of Directors, or by any other means. In
the
event of such a change in control, each officer would receive a lump sum payment
of $5,000,000, plus $1,000,000 each year thereafter for five years, for a total
of $10,000,000 per person. This has the effect of deterring any potential
acquisition or change in control of our company without the prior consent of
our
Board of Directors.
SPECIAL
NOTE
REGARDING FORWARD-LOOKING
STATEMENTS
Included
in this prospectus, exhibits and associated documents are “forward-looking”
statements within the meaning of Section 27A of the Securities Act of 1933
and
Section 21E of the Securities Exchange Act of 1934, as well as historical
information. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we can give no assurance that the
expectations reflected in these forward-looking statements will prove to be
correct. Our actual results could differ materially from those anticipated
in
forward-looking statements as a result of certain factors, including matters
described in the section titled “Risk Factors.” Forward-looking statements
include those that use forward-looking terminology, such as the words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,”
“plan,” “will,” “shall,” “should,” and similar expressions, including when used
in the negative. Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, these statements
involve risks and uncertainties and no assurance can be given that actual
results will be consistent with these forward-looking statements. Important
factors that could cause our actual results, performance or achievements to
differ from these forward-looking statements include the factors described
in
the “Risk Factors” section and elsewhere in this prospectus.
All
forward-looking statements attributable to us are expressly qualified in their
entirety by these and other factors. We undertake no obligation to update or
revise these forward-looking statements, whether to reflect events or
circumstances after the date initially filed or published, to reflect the
occurrence of unanticipated events or otherwise.
WHERE
YOU
CAN FIND MORE INFORMATION
We
have
filed a registration statement with the U.S. Securities and Exchange Commission,
or the SEC, on Form SB-2 to register the shares of our common stock being
offered by this prospectus. In addition, we file annual, quarterly and current
reports and other information with the SEC. You may read and copy any reports,
statements or other information that we file at the SEC’s public reference
facilities at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information regarding the public reference
facilities. The SEC maintains a website, http://www.sec.gov
that
contains reports and other information regarding registrants that file
electronically with the SEC, including us. Information contained on our website
should not be considered part of this prospectus.
You
may
also request a copy of our filings at no cost by writing or telephoning us
at:
Sequiam
Corporation
300
Sunport Lane
Orlando,
Florida 32809
Attention:
Mark
L.
Mroczkowski
(407)
541-0773
The
selling stockholders will receive all of the proceeds from the sale of the
shares offered for sale by it under this prospectus. We will receive none of
the
proceeds from the sale of the shares by the selling stockholders, except upon
exercise of the outstanding common stock purchase warrants. In that case, we
would receive up to $5,056,388.76.
We will
bear all expenses incident to the registration of the shares of our common
stock
under federal and state securities laws other than expenses incident to the
delivery of the shares to be sold by the selling stockholders. Any transfer
taxes payable on these shares and any commissions and discounts payable to
underwriters, agents, brokers or dealers will be paid by the selling
stockholders.
MARKET
FOR
OUR COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
As
of
March 14, 2006, there were approximately 1086 holders of record of our common
stock and 64,458,321 shares outstanding. We have not previously declared or
paid
any dividends on our common stock and do not anticipate declaring any dividends
on our common stock in the foreseeable future. The following table shows the
high and low bid prices of our common stock as quoted on the OTC Bulletin Board,
by quarter during each of our last two fiscal years ended December 31, 2005
and
2004. These quotes reflect inter-dealer prices, without retail markup, markdown
or commissions and may not represent actual transactions. The information below
was obtained from the OTC Bulletin Board, for the respective periods.
Quarter
|
|
Market
Prices
|
|
|
|
2004
|
|
2005
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First
quarter
|
|
$
|
0.85
|
|
$
|
0.30
|
|
$
|
0.30
|
|
$
|
0.12
|
|
Second
quarter
|
|
|
0.74
|
|
|
0.27
|
|
|
0.29
|
|
|
0.06
|
|
Third
quarter
|
|
|
0.54
|
|
|
0.22
|
|
|
0.77
|
|
|
0.06
|
|
Fourth
quarter
|
|
|
0.44
|
|
|
0.23
|
|
|
0.53
|
|
|
0.23
|
|
The
high
and low bid prices for shares of our common stock on March 14, 2006, were
$0.32
and
$0.31,
respectively, based upon bids that represent prices quoted by broker-dealers
on
the OTC Bulletin Board. These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions, and may not represent actual
transactions. For information concerning principal shareholders, see “Security
Ownership of Certain Beneficial Owners and Management.”
On
May
24, 2004, we were formally listed on the Frankfurt Stock Exchange under the
symbol RSQ. The high and low bid prices for shares of our common stock on March
14, 2006, were €0.27 and €0.26, respectively, based upon bids that represent
prices quoted on the Frankfurt Stock Exchange. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions, and
may
not represent actual transactions.
The
shares offered by this prospectus include 7,500,000 shares of our common stock
issuable upon the conversion of the Series A preferred stock, 17,472,222 shares
of our common stock issuable upon exercise of outstanding common stock purchase
warrants and up to 7,132,501 shares of our common stock issuable on account
of
dividends relating to the Series A preferred stock and any possible penalties
or
anti-dilution adjustment relating to the Series A preferred stock. See
“Principal and Selling Stockholders.”
Dividend
Policy
While
there are no restrictions on the payment of dividends, we have not declared
or
paid any cash or other dividends on shares of our common stock in the last
two
years, and we presently have no intention of paying any cash dividends on shares
of our common stock in the foreseeable future. Our
current policy is to retain earnings, if any, to finance the expansion of our
business. The future payment of dividends on shares of our common stock will
depend on the results of operations, financial condition, capital expenditure
plans and other factors that we deem relevant and will be at the sole discretion
of our board of directors.
Equity
Compensation Plan Information
The
following table provides information regarding the status of our existing equity
compensation plans at September 30, 2005:
Equity
Compensation Plan Information
|
Plan
category
|
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for future issuance under equity compensation plans (excluding
securities reflected in the second column)
|
Equity
compensation
plans
approved by
security
holders
|
0
|
0
|
0
|
Equity
compensation
plans
not approved by
security
holders (1)
|
9,423,000
|
$0.186
|
5,577,000
|
Total
|
9,423,000
|
$0.186
|
5,577,000
|
Footnotes:
(1) On
September 23, 2003, we adopted the Sequiam Corporation 2003 Employee Stock
Incentive Plan and the Sequiam Corporation 2003 Non-Employee Directors and
Consultants Stock Plan, both subject to stockholder approval at our next annual
meeting. The Stock Incentive Plan is intended to allow designated officers,
directors (including non-employee directors), employees and certain
non-employees, including any independent contractor or consultant providing
services to our companies to receive certain options to purchase our common
stock and to receive grants of our common stock, subject to certain
restrictions. The
maximum number of shares of our common stock that may be issued pursuant to
these plans shall be 10,000,000 and 5,000,000, respectively.
We
may
grant stock options in such amounts, at such times, and to the employees
nominated by our management and as they may determine in their discretion.
Stock
options granted under this plan may qualify as “incentive stock options” within
the meaning of Section 422 of the Internal Revenue Code of 1986.
The
exercise prices of the stock options are the fair market value of the common
stock on the date the stock option is granted; provided,
however,
for
designated non-statutory stock options, we may determine an exercise price
at,
above or below fair market value. If an employee holds greater than ten percent
of the total voting power of either our common stock or preferred stock, then
we
may set the exercise price for any incentive stock options granted to such
person to at least 110 percent of the fair market value of the common stock
on
the date of the grant of the option. Stock options have a term of 10 years or
such shorter period as we may determine.
Forward
Looking Statements
Management’s
Discussion and Analysis contains “forward-looking” statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as well as historical information. Although we believe
that the expectations reflected in these forward-looking statements are
reasonable, we can give no assurance that the expectations reflected in these
forward-looking statements will prove to be correct. Our actual results could
differ materially from those anticipated in forward-looking statements as a
result of certain factors, including matters described in the section titled
“Risk Factors.” Forward-looking statements include those that use
forward-looking terminology, such as the words “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “may,” “project,” “plan,” “will,” “shall,”
“should,” and similar expressions, including when used in the negative. Although
we believe that the expectations reflected in these forward-looking statements
are reasonable and achievable, these statements involve risks and uncertainties
and no assurance can be given that actual results will be consistent with these
forward-looking statements. Important factors that could cause our actual
results, performance or achievements to differ from these forward-looking
statements include the factors described in the “Risk Factors” section and
elsewhere in this prospectus.
All
forward-looking statements attributable to us are expressly qualified in their
entirety by these and other factors. We undertake no obligation to update or
revise these forward-looking statements, whether to reflect events or
circumstances after the date initially filed or published, to reflect the
occurrence of unanticipated events or otherwise.
Introduction
The
following discussion and analysis summarizes the significant factors affecting:
(i) our consolidated results of operations for Fiscal 2004 compared to Fiscal
2003; (ii) our consolidated results of operations for the nine-months ended
September 30, 2005 compared to the nine-months ended September 30, 2004; and
(iii) financial liquidity and capital resources. This discussion and
analysis should be read in conjunction with our consolidated financial
statements and notes included in this prospectus.
We
are a
biometric technology company specializing in biological identification security
systems and web-based application services. Our business is divided into two
operating segments: (a) Safety and Security; and (b) Information
Management.
We
derive
or plan to derive our revenues from five sources: (i) the sale and licensing
of
our software products; (ii) consulting, custom software services and web
development services; (iii) maintenance agreements in connection with the sale
and licensing of software products; (iv) Internet access and web hosting
services; and (v) the sale and licensing of our biometric products. Software
license revenue will be recognized when all of the following criteria have
been
met: (a) there is an executed license agreement and software has been delivered
to the customer, (b) the license fee is fixed and payable within twelve months,
(c) collection is deemed probable, and (d) product returns are deemed reasonably
estimable. Maintenance revenues are recognized ratably over the term of the
maintenance contract, typically 12 to 36 months. Internet access and web-hosting
services are recognized over the period the services are provided, typically
month-to-month. Sales of biometrics products are recognized upon delivery and
completion of the sale.
The
following table shows the proportion of total revenues by segment in each of
the
last two fiscal years and the nine-month period ended September 30,
2005.
Period
|
|
Safety
and Security
|
|
Information
Management
|
|
|
|
|
|
|
|
Fiscal
year ended December 31, 2003
|
|
|
$47,620
|
|
|
$358,550
|
|
|
|
|
|
|
|
|
|
Fiscal
year ended December 31, 2004
|
|
|
$99,765
|
|
|
$165,729
|
|
|
|
|
|
|
|
|
|
Nine
Months ended September 30, 2005
|
|
|
$209,972
|
|
|
$311,247
|
|
Results
of Operations
Fiscal
2004 compared to Fiscal 2003. Unless
otherwise noted, references to 2004 represent the year ended December 31,
2004 and references to 2003 represent the year ended December 31,
2003.
The
following table sets forth information regarding our financial results for
2004
and 2003.
|
|
2004
Amount
|
|
2003
Amount
|
|
Revenue
|
|
$
|
265,494
|
|
$
|
386,170
|
|
Costs
of services and product sales
|
|
$
|
1,173,354
|
|
$
|
1,072,731
|
|
Selling,
general and administrative
|
|
$
|
3,230,937
|
|
$
|
3,448,502
|
|
Interest
expense
|
|
$
|
1,349,836
|
|
$
|
368,663
|
|
Net
losses
|
|
$
|
5,847,017
|
|
$
|
4,690,188
|
|
Revenues.
Total
revenue decreased by $120,676 or 31% to $265,494 for the year ended December
31,
2004, from $386,170 for the year ended December 31, 2003.
Sales
of
biometric products were $99,765 in 2004 an increase of $52,145 (110%) over
2003
sales of $47,620. Included in those sales were $37,500 in license fees and
BioVault product sales of $62,265 in 2004 compared to $47,620 in 2003 an
increase of $14,645 (31%). BioVault sales are described below. Biometric and
software and license fee revenues were unchanged at $-0- for both 2004 and
2003.
During 2004 and 2003 we re-developed IRP and IRPlicator from server based
products into an ASP model for use over the Internet and for marketing purposes
we renamed the products PrintIt 123! and ScanIt 123!, respectively. We began
generating revenues from the sale of our IRP suite of software products in
the
second quarter of 2004 and recorded $36,200 in ASP service fees in 2004 compared
to none in 2003.
Other
sales for 2004 and 2003 included consulting, custom software services and web
development services totaling $41,821 and $138,512 a decrease of $96,691 or
70%;
maintenance agreements in connection with the sale and licensing of software
products, sold by WMW prior to our purchase of the software on November 1,
2002,
were unchanged at $5,200 for both 2004 and 2003; and Internet access and
web-hosting services totaling $82,508 and $182,408 for 2004 and 2003
respectively, a decrease of $99,900 or 55%.
Sales
of
the BioVault have been less than our original estimates for several reasons.
The
National Rifle Association (“NRA”) with whom we have a marketing agreement did
launch an Internet and email-marketing campaign for the product as agreed.
The
feedback we received from consumers was that the product was priced too
expensively, was not attractive and lacked certain functions that users wanted
in the electronics. As a result, we have redesigned the product as the BioVault
2.0 with improved features, more attractive styling and we reduced the selling
price from $599 to $299. In exchange the NRA has agreed to use a more proactive
marketing approach by selling the product directly to their membership through
their 52,000 firearms instructors many of whom will act as sales agents. The
first deliveries of that product are expected to begin late in the second
quarter of 2005 when the design and tooling process is complete and
manufacturing can begin. The NRA estimates a backlog of demand at around 10,000
units.
Sales
of
the BioLock, a residential biometric door lock will begin in the third quarter
of 2005 when the design and tooling process is complete and manufacturing can
begin. We have backorders for approximately 15,000 units of that
product.
Our
IRP
software allows users to print directly to remote printers thereby solving
the
connectivity problem and allowing large organizations to realize savings that
run into many thousands of dollars per month by moving printing from convenience
printers that cost $0.05 to $0.08 cost to high volume digital machines either
owned in-house or outsourced that cost $0.01 to $0.02 per page. We think that
trend will continue, and as a result, more competitors will enter the
market.
To
date,
users of our IRP system sold prior to our acquisition of W.M.W. Communications
have realized significant 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 and as a result, they were 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 $5,200 per year. Pricing for the Internet product PrintIt 123!
and
ScanIt 123! is based upon usage charges ranging from $0.0025 to $0.01 per image
processed depending upon volume and application. 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.
In
2004 we entered into an agreement with AlphaGraphics, Inc., and Sir Speedy/PIP
leading global suppliers of strategic sourcing for business copying and printing
services, to test IRP in a pilot programs in a select number of its print shops
and with certain of its commercial clients. We also signed reseller agreement
with Danka Office Systems and Blackboard, Inc. in 2004 and IKON Office Solutions
in 2005.
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 sold the dial-up portion of that business to a large
Internet access provider. We acquired that business from W.M.W. Communications,
but we did not consider it to be a part of our long-term business plan. In
the
information Management segment of the business, we expect to concentrate on
the
ASP products PrintIt 123! and ScanIt 123!, software, database and web
development products.
Operating
Expenses. Cost
of
services increased by $22,557 (2.4%), from $935,184 for the year ended December
31, 2003 to $957,741 for the year ended December 31, 2004. This increase is
due
to a full year’s amortization of intellectual properties acquired during 2003.
Actual expenditures to deliver the cost of services decreased $106,659 (18%)
from $580,412 in 2003 to $473,753 in 2004, largely due to staff reduction and
related personnel costs. Depreciation and amortization included in cost of
services increased $277,208 (78%) from $354,772 in 2003 to $631,980 in 2004.
We
see no upward trend in this cost as we have the infrastructure needed to carry
on our business.
Cost
of
product sales increased $78,066 (57%) from $137,547 in 2003 to $215,613 in
2004
due to the increase sales of product.
Selling,
general and administrative expenses decreased $217,565 (6%) from $3,448,502
in
2003 to $3,230,937 in 2004. We decreased our overhead expenditures such as
salaries, wages and benefits for administrative and, computer maintenance and
supplies. We maintained professional services such as legal and accounting
fees,
and corporate travel expenses at constant levels. We increased expenditures
for
sales and marketing including advertising, production of marketing materials,
and participation in trade show activities as we completed the development
of
our software products. Also included in selling general and administrative
expenses in 2004 is $570,450 and in 2003 is $1,759,445 of non-cash expenses
related to investment banking, investor relations, consulting, legal and
research and development expenses.
We
had
grown from twelve employees at December 31, 2002 to seventeen at December 31,
2003, largely as a result of the acquisition of W.M.W. Communications, Smart
Biometrics, and Telepartners. During 2004 we consolidated the operations of
those companies with ours and made certain reductions in personnel as a result.
After we received the loan from Laurus, we increased our sales and marketing
staff in an attempt to get our ASP service launched and generate sales. We
hired
two executives, four salespersons and two technical support field
representatives. We could not generate sales rapidly enough to cover the
additional expenses before our cash reserves were depleted. At the end of
November we laid off seven of the eight new hires, two administrative staff,
and
three technical staff members reducing our numbers to eight full time and one
part-time staff. We retain some of the former staff as contractors, on an as
needed basis. The addition of the employees has negatively impacted liquidity
and cash flow for the year ended December 31, 2004 and 2003. We can further
expect that payroll will be a burden through 2005 as we attempt to raise the
additional capital necessary to get our products to market. Payroll expense
as a
percentage of revenue will diminish dramatically after we establish a regular
sales cycle of our products because our ongoing support costs will be minimal
compared to our original development costs. We expect to distribute our products
through channel sales and other resellers. As a result, we do not expect large
increases in personnel and related expenses as we go to market with our
products.
We
currently operate without directors’ and officers’ insurance and we are at risk
for those types of losses.
Interest
Expense. Interest
expense increased by $981,173, from $368,663 in 2003 to $1,349,836 in 2004,
as a
result of an increase in loans from shareholders, a note payable related to
leasehold improvements acquired from Brekel Group in July 2002 the debenture
issued to La Jolla Cove Investors, four loan agreements with Lee Harrison
Corbin, Attorney-in-Fact for the Trust Under the Will of John Svenningsen,
now
known as Stephen A. Ross, Attorney-in-Fact for the Trust Under the Will of
John
Svenningsen, a loan agreement with Eagle Financial, LLC and the $2 million
loan
agreement with Laurus Master Fund. Included in interest expense is a non-cash
charge of $1,156,996 for accretion of debt discount as a result of capitalizing,
and then amortizing over the life of the loan the fair value of warrants for
common stock issued in connection with the various loan agreements and the
beneficial conversion feature of convertible notes. We expect to see a decrease
in interest expense as we convert or replace debt with equity and accrete or
write off the remaining debt discount of $332,633.
Net
Losses. We
incurred net losses of $5,847,017 and $4,690,188 for the years ended December
31, 2004 and 2003, respectively, an increase of $1,156,829 (25%). The
significant increase was due largely to the increase in interest expense and
non-cash and non-recurring expenses for investment banking, consulting and
other
services acquired in exchange for stock totaling $570,450 together with $206,082
of additional losses on impairment of intangible assets, and debt restructure
charges of $111,742 and increases in depreciation and amortization of $107,781.
We expect to incur additional net losses through the second quarter of 2005
as
we continue to get our biometrics products into production and continue to
introduce our software products to the marketplace. We presently require sales
of approximately $200,000 per month to provide a positive cash flow.
Results
of Operations
The
following table sets forth information regarding our financial results for
the
nine and three-month periods ended September 30, 2005 and 2004.
|
|
Three
Months Ended
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
September
30,
|
|
%
|
|
September
30,
|
|
%
|
|
|
|
2005
|
|
2004
|
|
Change
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
322,843
|
|
$
|
46,921
|
|
|
588
|
%
|
$
|
521,219
|
|
$
|
180,174
|
|
|
189
|
%
|
Costs
of services and product sales
|
|
|
284,741
|
|
|
282,366
|
|
|
1
|
%
|
|
685,850
|
|
|
853,878
|
|
|
-19
|
%
|
Selling,
general and administrative
|
|
|
511,488
|
|
|
818,247
|
|
|
-37
|
%
|
|
2,321,548
|
|
|
2,003,743
|
|
|
16
|
%
|
Losses
on Impairment of Intellectual Property
|
|
|
154,469
|
|
|
-
|
|
|
100
|
%
|
|
154,099
|
|
|
46,052
|
|
|
1
|
%
|
Interest
, net
|
|
|
181,985
|
|
|
167,464
|
|
|
-7
|
%
|
|
901,359
|
|
|
590,732
|
|
|
-85
|
%
|
Net
Losses
|
|
$
|
(809,840
|
)
|
$
|
(1,221,156
|
)
|
|
34
|
%
|
$
|
(3,541,637
|
)
|
$
|
(3,314,231
|
)
|
|
-7
|
%
|
Quarter
Ended September 30, 2005 compared to Quarter Ended September 30, 2004.
Unless
otherwise noted, references to 2005 represent the three-month period ended
September 30, 2005 and references to 2004 represent the three-month period
ended
September 30, 2004.
Revenues.
Total
revenue increased by $275,922 or 588% to $322,843 in 2005, from $46,921 in
2004.
This occurred because we completed certain web development, custom software
development and engineering services engagements. Software and license fee
revenues were unchanged at $-0- for both 2005 and 2004. Revenues from
consulting, custom software services, web development services and Internet
access and web-hosting services totaled $206,143 in 2005 and $28,252 in 2004,
an
increase of $177,890 or 630%. Revenues from sales of the BioVault™ were
$1,995 in 2005 compared to $18,669 in 2004 a decrease of $16,674 or 90%.
Revenues from the maintenance of our existing IRP customers were $-0- in 2005
compared to $5,200- in 2004. During 2004 and 2003 we re-developed IRP and
IRPlicator from server based products into an ASP model for use over the
Internet and for marketing purposes we renamed the products PrintIt 123! and
ScanIt 123!, respectively. We began generating revenues from the sale of our
IRP
suite of software products in the second quarter of 2004 and recorded $15,200
in
ASP service fees in 2005 compared to none in 2004. Included in biometric sales
for the first time in 2005 are Third quarter sales of Constellation Biometrics’
products totaling $70,226.
During
2004 and 2003, we spent most of our time acquiring and redeveloping our
products. Sales and marketing efforts did not commence until the third quarter
of 2004. We believe that the high cost of the BioVault™
was an
impediment to its sales and so we discontinued that product after selling the
last of the inventory in the second quarter 2005. As a result, we developed
a
less expensive version 2.0 of the BioVault. The BioVault 2.0 is out of design
and is now in the molding and casting process. We expect to begin selling
BioVault 2.0 in the first quarter of 2006. In addition to our own sales efforts
we are looking for other companies in the industry to whom we can license the
product. Additionally we are now in negotiations to license our PrintIt123
product line (formerly IRP), ScanIt123 (formerly IRPlicator) to a software
marketing company and we expect to complete that transaction in
2006.
On
September 13, 2005, We entered into a five-year, Exclusive Co-Operative
Development and Supply Agreement with Black & Decker’s subsidiary, Kwikset
Corporation. The purpose of this agreement is to establish the business
relationship between Kwikset and us in respect to the development, marketing
and
sales of biometric enabled security door hardware and systems.
Additionally,
we are currently in discussions with other companies for the license of our
other biometric technology products and we are also working with other
resellers.
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 2005 and throughout 2006
as
we refocus our efforts on our biometric products.
Cost
of Services and Product Sales. Cost
of
services and product sales were $284,741 in 2005 and $282,366 in 2004, an
increase of $2,375 or 1 %. This increase was primarily attributable to
increasing the sales of our ASP, software products and other biometric
products.
Selling,
General and Administrative.
Selling,
general and administrative expenses were $511,488 in 2005 and $818,247 in 2004,
a decrease of $306,759 or 37%. The significant decrease was attributed to
non-cash and non-recurring expenses for investment banking, consulting and
other
services acquired in exchange for stock incurred in 2004 but not recurring
in
2005. The overall decrease was offset in part by increases in 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.
Our
total
payroll was $270,614 for 2005 and $427,847 for 2004. This decrease in payroll
is
attributable an overall reduction in workforce in the Information Management
segment, offset by the addition of Constellation employees and one time
severance payments given to certain employees. We expect that payroll will
increase during the fourth quarter in the safety and security segment as we
have
hired additional engineers and programmers to support our biometrics projects.
Once we establish continued sales for our software and biometric products,
we
expect that the payroll burden will be reduced as a percentage of total
revenue.
Losses
on Impairment of Intellectual Property.
A loss
of $154,469 and $-0- was recognized on the impairment of intellectual properties
in 2005 and 2004.
Interest
Expense. Interest
expense was $181,985 in 2005 and $167,464 in 2004, an increase of $12,620 or
7
%. This increase is due to write-offs of loan costs and debt discounts as a
result of the refinancing of the Laurus, Corbin and Sullivan loans, which is
more fully described under the caption “Liquidity and Capital
Resources.”
Net
Losses. We
incurred net losses of $809,840 in 2005 and $1,221,156 in 2004, a decrease
of
$411,316 or 34%. The significant decrease was attributed to non-cash and
non-recurring expenses for investment banking, consulting and other services
acquired in exchange for stock incurred in 2004 but not recurring in 2005.
We
expect to incur additional net losses through the fourth quarter of 2005 as
we
continue to introduce our products to the marketplace. We expect cash flow
to
increase beginning in the first quarter of 2006 using proceeds from sales of
our
products. We presently estimate required sales of approximately $185,000 per
month to provide a positive cash flow.
Nine
Months Ended September 30, 2005 compared to Nine Months Ended September 30,
2004. Unless
otherwise noted, references to 2005 represent the nine-month period ended
September 30, 2005 and references to 2004 represent the nine-month period ended
September 30, 2004.
Revenues.
Total
revenue increased by $341,046 or 189% to $521,219 in 2005, from $180,174 in
2004. This occurred because we completed certain web development, custom
software development and engineering services engagements. Software and license
fee revenues were unchanged at $-0- for both 2005 and 2004. Revenues from
consulting, custom software services, web development services and Internet
access and web-hosting services totaled $242,747 in 2005 and $98,391 in 2004,
an
increase of $144,356 or 147%. Revenues from sales of the BioVault™ were
$9,771 in 2005 compared to $81,783 in 2004, a decrease of $72,012 or 88%.
Revenues from the maintenance of our existing IRP customers were $4,300 in
2005
compared to $5,200 in 2004. During 2004 and 2003 we re-developed IRP and
IRPlicator from server based products into an ASP model for use over the
Internet and for marketing purposes we renamed the products PrintIt 123! and
ScanIt 123!, respectively. We began generating revenues from the sale of our
IRP
suite of software products in the second quarter of 2004 and recorded $64,200
in
ASP service fees in 2005 compared to none in 2004. Included in biometric sales
for the first time in 2005 are sales of Constellation Biometrics’ products
totaling $97,682.
During
2004 and 2003, we spent most of our time acquiring and redeveloping our
products. Sales and marketing efforts did not commence until the third quarter
of 2004. We believe that the high cost of the BioVault™ was
an
impediment to its sales and so we discontinued that product after selling the
last of the inventory in the second quarter 2005. As a result, we developed
a
less expensive version 2.0 of the BioVault. The BioVault 2.0 is out of design
and is now in the molding and casting process. We expect to begin selling
BioVault 2.0 in the first quarter of 2006. In addition to our own sales efforts
we are looking for other companies in the industry to whom we can license the
product. Additionally we are now in negotiations to license our PrintIt123
product line (formerly IRP), ScanIt123 (formerly IRPlicator) to a software
marketing company and we expect to complete that transaction in
2006.
On
September 13, 2005, we entered into a five-year, Exclusive Co-Operative
Development and Supply Agreement with Black & Decker’s subsidiary Kwikset
Corporation. The purpose of this agreement is to establish the business
relationship between Kwikset and us in respect to the development, marketing
and
sales of biometric enabled security door hardware and systems.
Additionally,
we are currently in discussions with other companies for the license of our
other biometric technology products and we are also working with other
resellers.
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 2006 as we refocus our efforts
on
Biometrics.
Cost
of Services and Product Sales. Cost
of
services and product sales were $685,850 in 2005 and $853,878 in 2004, a
decrease of $168,028 or 20%. This decrease was primarily attributable to
discontinuing the original BioVault, which had a relatively high cost of sales
and increasing the sales of our ASP other biometric products that have a much
lower cost of sales.
Selling,
General and Administrative.
Selling,
general and administrative expenses were $2,321,548 in 2005 and $2,003,743
in
2004, a increase of $317,805 or 16%. The significant increase was attributed
to
non-cash and non-recurring expenses for investment banking, consulting and
other
services acquired in exchange for stock totaling $865,187. The acquisition
of
Constellation added another $63,120 to selling, general and administrative
expenses. The overall increase was offset in part by decreases in 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.
Our
total
payroll was $1,473,839 for 2005 and $979,360 for 2004. This increase in payroll
is attributable to one time severance payments given to certain employees and
the addition of Constellation employees. We expect that payroll will increase
during the fourth quarter in the safety and security segment as we have hired
additional engineers and programmers to support our biometrics projects. Once
we
establish continued sales for our software and biometric products, we expect
that the payroll burden will be reduced as a percentage of total
revenue.
Losses
on Impairment of Intellectual Property.
A loss
of $154,099 was recognized on the impairment of intellectual properties in
2005
and $46,052 was recognized on the impairment of equipment in 2004.
Interest
Expense. Interest
expense was $901,359 in 2005 and $590,732 in 2004, an increase of $416,877
or
86%. This increase is due to write-offs of loan costs and debt discounts as
a
result of the refinancing of the Laurus, Corbin and Sullivan loans, which is
more fully described under the caption “Liquidity and Capital
Resources.”
Net
Losses. We
incurred net losses of $3,541,637 in 2005 and $3,314,231 in 2004, a increase
of
$227,406 or 7%. The increase was primarily attributed to non-cash and
non-recurring expenses for investment banking, consulting and other services
acquired in exchange for stock totaling $865,187 and increases in interest
expense of $335,717 due to write-offs of loan costs and debt discounts as a
result of the refinancing of the Laurus, Corbin and Sullivan loans. The overall
increase was offset by increases in sales of $341,046. We expect to incur
additional net losses through the fourth quarter of 2005 as we continue to
introduce our products to the marketplace. We expect cash flow to increase
beginning in the first quarter of 2006 using proceeds from sales of our
products. We presently estimate required sales of approximately $185,000 per
month to provide a positive cash flow.
Liquidity
and Capital Resources
General
Our
principal use of cash in our operating activities is for selling general and
administrative expenses. Our principal source of liquidity has
historically been from financing activities. We believe that cash provided
by our operating and financing activities should provide adequate resources
to
satisfy our working capital, liquidity and anticipated capital expenditure
requirements for approximately the twelve month period ending on December 31,
2006. Before such time, we expect to have sufficient cash flow to continue
our
operations.
Operating
Activities
Net
cash
used in operating activities was $1,324,530 for 2005, as a result of the net
loss during the period of $3,541,637, offset by non-cash expenses of $1,964,997,
increases in accrued shareholder salaries of $170,000 and net decrease in other
working capital items totaling $72,361.
Investing
and Financing Activities
Net
cash
used for investing activities for 2005 was $159,246, which includes $158,308
of
product development costs for the BioVault 2.0 that we capitalized.
Net
cash
provided by financing activities was $1,786,075 for 2005. Proceeds from the
Svenningsen Trust loan accounted for $2,100,000; proceeds from the sale of
common stock and the exercise of warrants accounted for: (a) $436,619; plus
(b)
proceeds from shareholder loans of $323,465 less (c) payments of notes payable
and long-term debt that used cash of $1,102,802.
Current
liabilities of $3,935,065 exceed current assets of $585,907 by $3,349,158.
Of
that amount, $2,004,242 is owed to shareholders as loans and accrued but unpaid
salaries under employment agreements. Our officers are dedicated to our business
plan and will place no undue demands on its working capital. They expect payment
from future cash flows and equity capital infusions. Also included in current
liabilities is $358,541 of accounts payable owed by the former Brekel Group,
Inc. We are negotiating to settle these liabilities related to the former Brekel
Group, Inc. at amounts less than the amounts recorded in the balance sheet.
We
are unable to estimate an expected settlement below the carrying amount at
this
time. We expect that these liabilities will be settled for cash on a reduced
basis.
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 nine 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.
On
May
17, 2005, EastGroup Properties, LP agreed to an additional six (6) month
deferment of our Promissory note payments until December 1, 2005, contingent
upon the payment of the April and May 2005 rent payments prior to May 31, 2005,
and that all rental payments between now and December 2005 are kept current.
EastGroup Properties, LP also agreed to extend the note by twelve (12) months
to
represent the twelve (12) total deferred payments from December 2004 to November
2005.
Rental
expense for the three months ended September 30, 2005 and 2004 was $48,049
and
$37,425, respectively. Rental expense for the nine months ended September 30,
2005 and 2004 was $133,702 and $99,730, respectively. The original amount of
the
note of $1,600,000 represents $893,112 of deferred rent and $706,888 of tenant
improvements. The September 30, 2005 balance of $ 1,544,266 included $193,205
in
current portion of long-term debt and $1,351,061 in long-term debt. The new
minimum future rentals required under the operating lease and the maturities
of
the long-term note payable are as follows:
Year
|
|
Rentals
|
|
Maturities
|
|
2005
|
|
$
|
193,175
|
|
$
|
193,205
|
|
2006
|
|
|
197,113
|
|
|
244,932
|
|
2007
|
|
|
201,150
|
|
|
260,039
|
|
2008
|
|
|
205,287
|
|
|
276,078
|
|
2009
|
|
|
156,336
|
|
|
293,105
|
|
Thereafter
|
|
|
-
|
|
|
276,907
|
|
|
|
$
|
953,061
|
|
$
|
1,544,266
|
|
On
May
18, 2005, we closed a debt transaction with Lee Harrison Corbin,
Attorney-in-Fact for the Trust Under the Will of John Svenningsen, now known
as
Stephen A. Ross, Attorney-in-Fact for the Trust Under the Will of John
Svenningsen, pursuant to which the Trust consolidated $1.55 million in existing
unsecured debt owed by us to the Trust and provided $2.1 million in additional
financing for a total of $3,650,000.
The
$3,650,000 promissory note issued to the Trust has a term of two years. Eight
percent (8%) interest shall be payable monthly in arrears commencing on November
10, 2005, and on the first day of each consecutive calendar month thereafter.
Monthly amortization payments shall commence on May 10, 2006, at the rate of
$75,000. The Trust’s promissory note is secured by all of our
assets.
In
connection with the loan: (a) the Trust delivered $1,000,000 of the above loan
to Laurus Master Fund, Ltd., a Cayman Islands company in full settlement of
an
outstanding secured convertible term note; and (b) we issued a warrant to Laurus
exercisable into 1,500,000 shares of our common stock at an exercise price
of
$0.23 per share. In return for receiving the $1,000,000 and the warrant, Laurus,
the Trust and we entered into that certain Assignment, Assumption and Release,
dated as of May 18, 2005, pursuant to which, Laurus assigned all of its rights,
liabilities and obligations under our original financing arrangement with
Laurus, and all documents related thereto, to the Trust. In addition, Laurus
released us from all liability whatsoever under our previous financing
arrangement, and all documents related to that transaction, except for any
terms
which may survive the assignment.
In
connection with the loan, the Trust received a warrant to purchase up to
6,000,000 shares of our common stock at prices ranging from $0.20 per share
to
$0.30 per share. All stock conversion prices and exercise prices are subject
to
adjustment for stock splits, stock dividends or similar events. We also agreed
to file a registration statement with the U.S. Securities and Exchange
Commission covering the shares issuable upon the exercise of each of the
warrants issued to the Trust and Laurus.
We
received approximately $1.1 million in cash after payment to Laurus of
$1,000,000 (described above). The remaining principal balance under our
financing arrangement with Laurus after such payment was $818,182, which balance
was converted into 5,454,547 shares of our common stock by Laurus at the reduced
conversion rate of $0.15 per share, reduced in accordance with Section 3(a)(9)
of the Securities Act of 1933, as amended.
The
proceeds from the Loan will not be adequate to support our operations while
we
build sales revenues from our products. As a result, we now need to obtain
additional financing to continue our operations. We have engaged investment
bankers to raise additional capital, and we expect to secure such additional
capital in a timely manner.
Recent
Events
On
September 13, 2005, we entered into a five-year, Exclusive Co-Operative
Development and Supply Agreement with Black & Decker’s subsidiary Kwikset
Corporation. The purpose of this agreement is to establish the business
relationship between Kwikset and us in respect to the development, marketing
and
sales of biometric enabled security door hardware and systems.
On
December 21, 2004, we entered into a Letter Agreement with Chapman Spira &
Carson, LLC, pursuant to which Chapman agreed to provide us with various
consulting, investment banking and business development services. On or
about September 28, 2005, Chapman filed a complaint in United States District
Court for the Southern District of New York, asserting claims for breach of
contract and unjust enrichment. Chapman alleges that, notwithstanding its
purported provision of services under the Letter Agreement between it and us,
we
failed to properly compensate Chapman for those services. We claim
that none of those services were actually provided by Chapman. Chapman is
seeking compensatory damages of $1,019,060,
costs,
including attorney's fees, 500,000 shares of common stock and a
warrant to
purchase 6,195,000 shares of stock at $0.26 per share.
We believe that Chapman's claims are without merit and intend to vigorously
defend ourselves against these allegations.
On
November 30, 2005, we closed a preferred stock transaction with seven
institutional investors, pursuant to which the Company issued 1,575 shares
of
its Series A preferred stock, par value $0.001 per share with a stated per
share
value of $1,000 for total proceeds of $1,575,000. We also issued to the Series
A
purchasers warrants exercisable into an aggregate of 7,500,000 shares of our
common stock.
The
Series A preferred stock is non-voting and entitles the Series A purchasers
to
receive a 9% cumulative dividend payable semiannually. The Series A preferred
stock is convertible into 7,500,000 of our common shares at a fixed price of
$0.21 per share. The Series A preferred stock contains anti-dilution provisions
under which the number of shares issuable upon conversion of the Series A
preferred stock and the conversion price will be adjusted upon the issuance
of
common stock or securities convertible into or exercisable for common stock
at
prices lower than the then effective exercise price of the Series A preferred
stock, the occurrence of stock splits, stock distributions, and other corporate
events
On
December 9, 2008, we must redeem all of the Series A preferred stock for a
total
amount equal to $1,575,000, accrued but unpaid dividends and all liquidated
damages and other amounts due in respect of the Series A preferred stock.
In
connection with the Series A transaction, the Series A purchasers received
warrants to purchase up to an aggregate of 7,500,000 shares of our common stock
at $0.33 per share. All stock conversion prices and exercise prices are subject
to adjustment for stock splits, stock dividends or similar events. We also
agreed to file a registration statement with the U.S. Securities and Exchange
Commission covering the shares issuable upon the conversion of the Series A
preferred stock and exercise of the warrants. We paid a commission of $181,125
to our placement agent in connection with the Series A transaction and issued
warrants to our placement agent exercisable into an aggregate of 2,250,000
shares.
The
Series A transaction, together with projected cash from operations, should
be
sufficient to sustain our operations for approximately the next two to three
months. As a result, we now need to obtain additional financing to continue
our
operations. We have engaged investment bankers to raise additional capital,
and
we expect to secure such additional capital in a timely manner.
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, we 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.,
Fingerprint Detection Technologies, Inc. and Constellation Biometrics
Corporation, we 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, $575,000 respectively,
for a total of $1,672,650 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. During the
third quarter, we wrote off the remaining balance of $154,469 of the Fingerprint
Detection Technologies, Inc. patent. We consider the asset to be impaired due
to
a patent infringement by a larger company.
Recent
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (FASB) revised Statement
of Financial Accounting Standard No. 123 "Share-Based Payment" (SFAS 123R).
SFAS
123R requires companies to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award. The cost will be recognized over the period during which an
employee is required to provide service in exchange for the award (usually
the
vesting period). Changes in fair value during the requisite service period
will
be recognized as compensation cost over that period. The grant date fair value
of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those
instruments (unless observable market prices for the same or similar instruments
are available). If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification This statement is effective for the first
reporting period beginning after December 15, 2005. In the opinion of
management, the adoption of this statement will not have a significant impact
on
our consolidated financial statements.
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.
Overview
We
were
incorporated in California on September 21, 1999 as Wedge Net Experts, Inc.
On
or about May 1, 2002, we changed our name to Sequiam Corporation and changed
our
stock symbol from “WNXP” to “SQUM.OB”. On May 19, 2004, our common stock was
formally listed on the Frankfurt Stock Exchange under the symbol RSQ. We believe
that listing our shares of common stock on the Frankfurt Stock Exchange will
increase our profile with investors, both institutional and retail, in Germany
and across Europe.
Until
the
acquisition of Smart Biometrics, Inc. in 2003, we were primarily focused on
developing a portfolio of Internet and print enterprise-wide software products
and developing custom software, databases and websites for businesses. We also
operated as an Internet Service Provider and provided Internet access and web
site hosting for our customers who required those services. During this period,
our business was operated under one operating segment through our subsidiaries:
Sequiam Software, Inc. and Sequiam Communications, Inc.
In
2003,
we decided to expand our portfolio of product offerings to include biometric
technology products. The expansion into the biometric technology industry was
based on our belief that the terrorist events of September 11, 2001 and the
increased focus on national and personal security created an increased demand
for biometric technology solutions. Because of these national and global issues,
and because of our existing expertise in software design and development, we
believed that we were uniquely positioned to enter the biometric industry.
Furthermore, our Chief Technology Officer, Alan McGinn, played an instrumental
role in connection with the research and development of the BioVault™ while
associated with Smart Biometrics, Inc.
Today,
our operations are divided into two distinct operating segments: Information
Management and Safety and Security. Our Information Management segment utilizes
our custom software skills, our contacts with the world sports communities
and
interactive web-based technologies. We formed our Safety and Security segment
after our acquisition of Smart Biometrics, Inc. and Fingerprint Detection
Technologies, Inc. Through these acquisitions, we acquired: (a) a fingerprint
biometric access control system, which will be a key feature in our future
product offerings; and (b) a fingerprint detection system which we believe
represents a new advancement in that science. Since the implementation of our
Safety and Security segment, we have focused most of our attention to developing
a portfolio of biometric products.
Our
Information Management segment consists of the following subsidiaries: (a)
Sequiam Software, Inc.; (b) Sequiam Sports, Inc.; and (c) Sequiam Education,
Inc. Our Safety and Security segment consists of the following subsidiaries:
(a)
Sequiam Biometrics, Inc.; (b) Fingerprint Detection Technologies, Inc.; and
(c)
Constellation Biometrics Corporation. Constellation is the parent company of
a
wholly owned subsidiary, Biometric Security (PTY) LTD. (a/k/a Secure Biometrics
or Biometrics.co.za), a South African company, engaged in the development,
marketing and sale of biometric technology products.
Development
of the Business
Information
Management Segment
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 Document
Management System, also referred to as Sequiam DMS.
Acquisition
of Brekel Group, Inc. In
2002,
we acquired 99.38% of the issued and outstanding common stock of Brekel Group,
Inc. We acquired Brekel Group, Inc. 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.
We
also acquired Brekel Group, Inc. for its contract with the World Olympians
Association and its Internet and ExtraNet expertise and product development
gained from that project (as more fully described below under the heading
“Sequiam Communications, Inc.”). Today, the business of Brekel Group, Inc. is
conducted by our subsidiary Sequiam Sports, Inc., which is part of our
Information Management segment.
Acquisition
of the Assets of W.M.W. Communications, Inc. Effective
November 1, 2002, we acquired all of the assets of W.M.W. Communication, Inc.,
doing business as Access Orlando. We accounted for this transaction as an
acquisition of the business of W.M.W. Communications, Inc. We acquired W.M.W.
Communications, Inc. for its Internet Remote Print, commonly referred to as
“IRP” and Internet Remote Print Duplicator, commonly referred to as
“IRPlicator,” software products. IRP is a software product that allows computer
users to print remotely to any printer via the Internet. Because IRP is highly
complementary to the Sequiam DMS product, we have integrated the two products.
W.M.W. Communications, Inc. also acted as an Internet Service Provider, which
we
incorporated into our business. Through our Internet hosting and collocation
services, we host third-party web content on either our server located at our
remote network operations center, or on the third party’s server that is located
at our remote network operations center. Today, our subsidiary Sequiam Software,
Inc. conducts the business of W.M.W. Communication, Inc. which is part of our
Information Management segment.
Acquisition
of the Assets of Telepartners, Inc. On
June
1, 2003, we acquired substantially all of the assets of Telepartners, Inc.
located in West Palm Beach, Florida. We accounted this transaction as an
acquisition of the business of Telepartners, Inc. Telepartners, Inc. developed
supplemental educational products for schoolchildren in grades 1 through 12.
The
major asset acquired from Telepartners, Inc. was the Extended Classroom™ software,
which
is a supplemental, educational program consisting of a video lesson library
containing the same 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. Today, our
subsidiary Sequiam Education, Inc., conducts the business of Telepartners,
Inc.
which is
part of our Information Management segment.
Safety
and Security Segment
Acquisition
of the Assets of Smart Biometrics, Inc. On
May 9,
2003, we acquired substantially all of the assets of Smart Biometrics, Inc.
located in Sanford, Florida. We accounted for this transaction as an acquisition
of the business of Smart Biometrics, Inc. Smart Biometrics, Inc. is engaged
in
the development of biometric technologies. The BioVault™ technology,
which
is a secure access denial device that utilizes biometric technology and
protocols to recognize a person’s fingerprint to unlock, was the major asset of
Smart Biometrics, Inc. Today, our subsidiary Sequiam Biometrics, Inc., conducts
the business of Smart Biometrics, Inc. which is a part of our Safety and
Security segment.
Acquisition
of Fingerprint Detection Technologies, Inc. On
September 11, 2003, we acquired 100% of the issued and outstanding shares of
common stock of Fingerprint Detection Technologies, Inc., a Florida corporation.
Fingerprint Detection Technologies, Inc. has the rights to develop and market
a
patented and proprietary technology for fingerprint analysis using a
light-emitting diode, or LED, intense headband light source. Because Fingerprint
Detection Technologies, Inc. had no operating history and had not generated
any
revenues, we accounted for the acquisition as a purchase of its assets. Today,
Fingerprint Detection Technologies, Inc. is one of our subsidiaries and is
part
of our Safety and Security segment.
Acquisition
of Constellation Biometrics Corporation. On
June
7, 2005, we acquired 100% of Constellation Biometrics Corporation, a Florida
corporation, effective May 31, 2005, pursuant to a stock purchase agreement
dated May 31, 2005 by and among us, Constellation and the shareholders of
Constellation. We accounted for this transaction as a purchase. Constellation
is
the parent company of a wholly owned subsidiary Biometric Security (PTY) LTD.
(a/k/a Secure Biometrics or Biometrics.co.za), a South African company, engaged
in the development, marketing and sale of biometric technology products.
The
following chart reflects an overview of our corporate organization (including
jurisdictions of incorporation and percentages owned by the parent corporation)
as of December 31, 2005.
Products
Safety
and Security Segment
A.
|
Sequiam
Biometrics, Inc.
|
Sequiam
Biometrics, Inc. focuses on the BioVault™,
and the
BioLock.
BioVault™
We
market
a personal access denial device called BioVault™
that
uses patent-pending fingerprint recognition technology as the sole means to
control access, and requires no key, card or combination. The BioVault™
is
constructed of heavy-duty 12-gauge steel. The BioVault™
can be
plugged into a house AC current or run independently on three D-cell batteries
for up to one year, and is the only access denial device currently on the market
with no manual override system. The BioVault™
uses the
same non-volatile memory as cell phones to retain fingerprint information in
the
absence of any power source. When power is low, the BioVault™
signals
the user like a smoke detector.
The
BioVault™
measures
12.5 inches wide, by 17 inches long, by 3.5 inches deep, and provides room
for
two handguns plus ammunition, or valuables such as jewelry, stock certificates
and other documents. The BioVault™
is easy
to program and stores up to 15 authorized fingerprints. We believe that handgun
owners are the largest market for this product. Through our agreement with
T&N Enterprises, we have developed a relationship with the National Rifle
Association for the sale of the BioVault™
through
the National Rifle Association web site. As of September 30, 2005, we have
generated $10,321 in revenues from sales of the BioVault™.
We
have
re-designed, re-engineered and re-tooled the BioVault and we are preparing
to
introduce it as the Bio Vault 2.0. In addition to our partnership with the
National Rifle Association, we are in discussions with several distributors
who
wish to sell the new and improved version. Henyue Manufacturing of Guangzhou,
China, a leading manufacturer of consumer products for the U.S. market will
manufacture the Sequiam BioVault 2.0 and expects to make initial deliveries
in
March 2006.
BioLock
On
September 13, 2005, Sequiam entered into a five-year, Exclusive Co-Operative
Development and Supply Agreement with Black & Decker’s subsidiary, Kwikset
Corporation. The purpose of this agreement is to establish the business
relationship between Kwikset and us in respect to the development, marketing
and
sales of biometric enabled security door hardware and systems.
We,
together with Kwikset Corporation, have recently developed the BioLock: a
biometrically accessible door lock system to be applied to external and internal
doors.
The
system uses a Kwikset deadbolt and a biometric sensor with matcher developed
at
our laboratories in Orlando, Florida. When a valid finger is detected on the
biometric sensor, it activates the remote control accessory module to open
the
lock.
The
BioLock biometric module communicates with the lock via Anti-theft Rolling
Code
Security with over 4.3 billion access combinations. The access code
automatically changes with each use - it never uses the same code twice, so
signals copied from the remote are useless. The user interface is a simple
membrane switch located on the bottom right side of the unit. It has a range
of
up to 30 feet from the location of the sensor. The Biolock features a simple
3-step enrollment of fingerprints on the sensor and no computers or servers
are
required. The BioLock can hold up to 15 fingerprints and operates using either
battery power or house low voltage power. The Biolock features an auto relock
feature that activates after 30 seconds. The BioLock also features “Lockminder”
- - a light to signal you from across a room that it's locked or unlocked with
both audible and visual indicators of the bolt position. The BioLock also comes
with 2 keys for backup in case of battery failure, a low battery warning
indicator and a lifetime finish warranty. As of September 30, 2005, we have
not
generated any revenue from the development of the Biolock. We intend to begin
marketing the Biolock in March 2006.
OEM
Kits 1 and 2
OEM
1 is
intended for customers who want to quickly develop products that incorporate
biometric lock actuation for a very low cost. Products that range from opening
safes, garage doors, cabinets—anything that would normally require a key. Even a
television remote control could be biometrically enabled with OEM 1 technology.
OEM
2 is
a biometric board assembly that can be used in a wide variety of biometric
devices. Unlike OEM 1, OEM 2 provides a feature set that allows OEMs to develop
products such as time and attendance boxes, biometric medical devices, access
control devices, governmental related access projects and biometric video
time-stamping products. OEM 2 is designed for any product that needs memory
and
processing power on a biometric OEM device.
Both
products will have full support from our easy to use suite of developers’ kits
allowing any home computer to manage or develop new applications using these
products. As of September 30, 2005, we have not generated any revenue from
the
development of either OEM Kits 1 or 2.
B.
|
Fingerprint
Detection Technologies,
Inc.
|
Fingerprint
Detection Technologies, Inc. is focused on our BritePrint technology.
BritePrint
The
BritePrint technology is a light-emitting, diode-based, headband-mounted light
source developed to enhance the detection of dusted latent fingerprints. The
BritePrint system offers a low-cost, hands-free device to be used during the
investigative process by law enforcement. This technology, when used in
conjunction with traditional dust detection methods, reveals otherwise invisible
fingerprints, footprints, and other latent markings at crime scenes and may
save
valuable time in the investigative process.
Using
an
array of light emitting diodes, or LED, the BritePrint device emits
wavelength-specific light of sufficient intensity to cause areas brushed with
a
dye to visibly fluoresce. Wearing light-filtering goggles to make the markings
easily detectable to the human eye (orange goggles in the case where rhodamine
6G dye is used), an analyst can quickly proceed with the on-site identification
and analysis of the markings. Video cameras can be fitted with specially colored
lenses or other optical scanning devices to provide additional possibilities
for
recording critical crime scene evidence.
We
acquired the BritePrint technology from the Westinghouse Savannah River Company
under the terms of a license agreement. Westinghouse Savannah River Company
is
recognized as a world-class center of excellence for the development and
application of unique and innovative science and technology solutions.
Westinghouse Savannah River Company is the applied research and development
laboratory for the U.S. Department of Energy. The inventor of the BritePrint
technology is Eliel Villa-Aleman. As of September 30, 2005, we have not
generated any revenue from sales of the BritePrint and are currently looking
to
license this product. On March 8, 2005 Westinghouse Savannah River Company
was
granted patent number 6,685,285 B1 for the BritePrint technology.
C.
|
Constellation
Biometrics Corporation
|
BioTime
BioTime
is our fraud-free, easy-to-use computerized access control, attendance and
recording tool. All staff activity is recorded automatically at the points
of
entry and exit. Upon arrival at work, employees login quickly and easily. Upon
exiting the premises at the end of the working day, this process is repeated.
Because the system accurately and instantly identifies each employee, no
unauthorized people can enter the facility, and all staff movement is fully
recorded. BioTime is a software program that can work with a variety of
biometric and other devices.
BioTime
automatically eradicates time disputes, or "buddy clocking" by other staff
members. These records can then be saved or printed, and analyzed at any time.
Also, the figures can be integrated with the most popular payroll packages,
allowing for the complete automation of the entire payroll calculation process.
BioTime
is a complete ready-to-use system that includes software, a clocking-in
terminal, communications cables, a "Getting Started" guide, and a full
installation manual. Since the software is completely menu-driven and
exceptionally easy to use, it can be quickly installed and operated by a person
with little computer experience. A typical installation takes less than one
hour
and Individuals can be added to the system in a matter of minutes. As of
September 30, 2005, we have generated $73,261 in revenues from sales of
BioTime.
BioTools
BioTools
consists of an ActiveX controls toolkit that can be used by developers, OEM's
and system integrators as a biometric "front-end" to any commercial or
custom-written software package. The toolkit considerably decreases (from weeks
to minutes) the process of adding biometric security, and it comes complete
with
sample code to facilitate quick, smooth, trouble-free integration. The toolkit
supports Windows 95, 98, NT, 2000, XP, IIS 4 & 5 and the Microsoft Access
and SQL Server databases. It is also ODBC-compliant, enabling it to integrate
with most database systems.
Biometric
devices supported include: Authentec, BioLink, Digent, Digital Persona,
Ethentica, Kingston Technology, Lifeview, Microsoft, Nitgen, Precise Biometrics,
Sagem, Secugen, Sony, Suprema, Tacoma, Tai-Hao and Targus.
The
toolkit is available in two versions - Standard and Professional. The BioTools
Professional Toolkit extends the Standard Toolkit by adding web server samples
and support tools, web-cam support, and Smart Card (chip card) support. As
of
September 30, 2005, we have generated $24,421 in revenues from sales of the
BioTools.
BioWeb
BioWeb
is
our state-of-the-art Internet Security system with no PIN's, passwords or
possibility of fraud. BioWeb offers the ability to identify and authorize all
communication over the Internet and networks, completely protecting your money
and information from fraud or hacking.
BioWeb
is
an easily installed, ready-to-use software package that allows the instant
biometric enabling of any website. It is ideal for secure business-to-business
sites, payment authentication and general website access security. As of
September 30, 2005, BioWeb has not yet generated any revenue from
sales.
BioAccess
BioAccess
is our fraud-free, easy-to-use computerized access control and recording tool
used to track who went where, and when. Activity in and out of buildings, strong
rooms, server rooms, and rooms housing sensitive documents, etc., can be 100%
securely controlled. Printed reports can then be generated about this traffic.
BioAccess
is a complete ready-to-use system that includes software, a clocking-in
terminal, communications cables, a "Getting Started" guide, and a full
installation manual. Since the software is completely menu-driven and
exceptionally easy to use, it can be quickly installed and operated by a person
with little computer experience. As of September 30, 2005, BioAccess has not
yet
generated any revenue from sales.
BioSmartCard
BioSmartCard
is a totally secure, biometrically locked Smartcard that allows only the
rightful owner to access and use the card. Smartcards are credit-card sized
cards with processing chips embedded into them. This technology is on the verge
of revolutionizing remote transactions. Because the use of the card relies
on
people interacting based on what they have, and what they know, i.e. a card
and
a PIN, the technology remains almost as flawed as regular credit card
systems.
People
lose cards. They lose them through theft, by accident, or even by hiding them
"too well". Moreover, if they do manage to keep the card, they invariably forget
the PIN. BioSmartCards allow users to rely instead on who they are, which is
something that cannot be lost, forgotten or copied.
BioSmartCards
rely on the unique characteristics of a person's fingerprint. To register,
the
owner's fingerprint is digitally embedded into the card. When the owner needs
to
use the card, instead of entering a PIN he/she simply presses a finger onto
a
scanner. The fingerprint is scanned and compared with that embedded in the
card.
If the scanned fingerprint does not match the embedded fingerprint in the card,
the card remains un-usable. If they match, the bona fide ownership is
established beyond doubt, thus eliminating fraud, rendering stolen or lost
cards
useless and protecting the vital information belonging to the owner.
Without
the rightful owner's body being present, the information remains hidden and
totally secure. Only the correct fingerprint can unlock the BioSmartCard. As
of
September 30, 2005, we have not generated any revenues from sales of the
BioSmartCard because the product is not sold separately, it is included in
BioTools Professional.
BioRegister
The
BioRegister system quickly, easily, and securely registers and administers
all
necessary group information.
The
system has the following features: Track
and
store up-to-date information on all group members, no false identities or
membership frauds, add or restrict members instantly from anywhere in the world,
no lost or stolen Personal Identification Numbers, cards or ID’s, remote
updating and management of entire database, manages groups of all sizes. As
of
September 30, 2005, we have not generated any revenues from sales of the
BioRegister.
BioRollCall
BioRollCall
is designed for monitoring the movements of your employees. The software
includes a built in Export module. BioRollCall is a Time & Attendance
solution that uses fingerprint biometrics for authentication. It is very easy
to
use and intuitive and can be used for church, school or club attendance
tracking. Records are stored in a standard Microsoft Access database for ease
of
use. BioRollCall is ideal for small to medium installations requiring a
roll-call function only. As of September 30, 2005, we have not generated any
revenues from sales of the BioRollCall.
BioCareTrack
BioCareTrack
was specifically developed for the home healthcare market and allows providers
to verify health care visits, track treatments and eliminate fraud. The system
functions as described below, however, it can easily be modified to accommodate
specific procedures and work flows. The system is entirely automatic and only
requires the caregiver to enter a code and touch the sensor, once the patient
touches the sensor confirming that care was given, the transaction is
completed.
According
to the National Association of Home Health Care, there were over 7.6 million
Americans requiring home healthcare in 2005. This is a large market and growing
larger each day as the baby boomer generation grows older. As of September
30,
2005, we have not generated any revenues from sales of the BioCareTrack. We
estimate the product will be ready for sale in January 2006. On September 13,
2005, Sequiam Biometrics, Inc. signed an exclusive distribution agreement with
Kelimo Incorporated for BioCareTrack.
BioMail
BioMail’s
combination of fingerprint biometric security and encryption brings you secure
email management. With BioMail, no one gets to see your private communication.
BioMail works by sending your fingerprint template to your intended confidential
correspondent as a standard email attachment in Outlook. This template is stored
in his/her address book under your contact details. Whenever he/she wants to
send you a confidential email, the contents are encrypted automatically when
she
adds your name to the "To" field at the top of the email and by clicking on
the
encrypt icon.
In
transit and on arrival, the documents remain encrypted until your fingerprint
is
read on a biometric fingerprint scanner. This means that no one other than
the
intended recipient can open, view, or copy the document. As of September 30,
2005, we have not generated any in revenues from sales of BioMail.
Information
Management Segment
A.
|
Sequiam
Software, Inc.
|
Sequiam
Software, Inc. is focused on the following products:
Sequiam
IRP
The
IRP
software (sometimes marketed as Print It, 123!) enables users to print or copy
documents from their computer or scanner to printers at remote sites using
the
Internet with a simple “point and click” procedure. Although the software is
highly complex in its construction, it is very simple to use. Computer users
are
generally able to point and click to print a document to their desktop or
network printer. IRP allows computer users to point and click to print a
document to a printer at a remote location such as a corporate high-speed print
facility, a commercial printer at another office, a hotel, a convention center,
or to any other location that has a printer.
IRP
allows users to manage incoming print jobs and provide for easy account
reporting. IRP also works with any MS Office or other Windows program just
like
any other printer on a Windows 95/98/NT/2000/XP computer. Because IRP documents
use standard PostScript language, documents submitted to the server may be
sent
to any compatible print or output device. Documents may be sorted and grouped
by
features in the Java based Print Manager to allow maximum efficiency when
printing. Also, IRP can extract raw print data from a printed document for
import into other existing applications.
Sequiam
IRPlicator
IRPlicator
(sometimes marketed as Scan It, 123!) is a software system used to scan
documents from a variety of scanning devices and send the scanned documents
to
the IRP Document Manager. The IRPlicator software runs on any Windows 95, 98,
NT, 2000 or XP based computer. The IRPlicator software interfaces to the
scanning device through the commonly used Twain or ISIS software interface.
The
IRPlicator software may use the scanning device’s user interface or in most
cases will allow operation of the scanning device without the use of the
scanning device’s user interface. The IRPlicator’s output postscript contains no
other formatting commands other than the data itself to allow for commands
to be
sent to the output device independent of, and not in conflict with, the
postscript data.
There
are
currently two versions of the IRPlicator: (a) IRPlicator Print Shop; and (b)
IRP
Remote Copy. IRPlicator Print Shop uses a custom print spooler to send document
data to the IRP Document Manager simultaneously while other documents are
continuously being scanned. This high-volume approach is designed for the busy
print shop. The IRP Remote Copy software is usually located at a remote location
along with the remote scanning device(s). Documents scanned using this version
of IRPlicator are sent immediately after scanning from the remote location
to
the IRP Document Manager.
Four
customers (two county school districts and two state universities) currently
use
the IRP and IRPlicator software products. We have not recognized any revenue
from these sales because they were all made prior to our acquisition of the
IRP
and IRPlicator software from W.M.W. Communications, Inc. In each of these cases,
the software was deployed together with a dedicated server and backup systems
for the installation. Since acquisition, we have focused on making improvements
to the product and creating another version of the software that is deployed
entirely through the Internet. This version of the software is designed for
smaller users who do not have sufficient volume to require on site
servers.
To
date,
users of the system have realized dramatic print cost savings. In the example
of
the school districts, 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.
We
began
receiving annual support revenue from these installations in the first quarter
of 2003. Pricing for the Internet product will be based upon usage charges.
Our
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.
We
have
focused on refining the IRP and IRPlicator software products, including the
development of an internet-only enabled version that does not require an on-site
server installation. We have also focused on integrating Sequiam DMS into the
IRP products by incorporating both software programs into one product working
together. We have done this by integrating the document management aspects
of
Sequiam DMS into the unique print capabilities of our IRP products.
Additionally, we have allowed Danka Corporation to extensively test the product
and we have expended additional effort to incorporate certain changes suggested
by them. We are now in discussions with an independent print software marketing
firm to license both products to them on an exclusive basis. We prefer to sell
the sales and marketing rights to this product to a third party so that we
may
focus all of our resources on the development and sales of our biometric
products. As of September 30, 2005, we have not received any revenue from the
sale of IRP or IRPlicator as we discontinued outright sales of the product
in
favor of service fees earned from online delivery of the product. We did receive
$5,200 for the continued maintenance of products sold to our existing IRP and
IRPlicator customers in prior years. We had revenues from user fees of $64,200
from our web based IRP products delivered on line.
Book
It, ROVER!
Book
It,
ROVER! is a web-based application service that provides destination promotion
agencies (e.g. chambers of commerce and convention and visitor bureaus) with
a
tool that is capable of providing full booking service to visitors exploring
their websites. Convention and visitor bureaus, tourist development boards
and
other destination promotion entities are discovering the opportunity and
advantages of providing a booking service creating revenue from their existing
web site.
Book
It,
ROVER! allows organizations to turn their “billboard” website into an open
ticket window, offering a revenue source not available in the past, while
providing members a tool to increase sales without giving up control of their
inventory or diluting their price structure. Book
it, ROVER!
allows one-stop shopping and immediate buying opportunities for interested
visitors right from the existing website. We are expending no additional
resources on this product at this time nor do we plan to in the foreseeable
future as we are focusing all of our resources on the development and sales
of
our biometric products.
Access
Orlando
We
provide web-hosting services to more than 90 customers in the Central Florida
area using the Access Orlando trade name at www.ao.net. As of September 30,
2005, we have generated revenues of $82,508 from our web-hosting services.
We
continue to support this product as we require a Network Operations Center
(“NOC”)
to
support our on-line hosted products including IRP, IRPlicator, and various
of
the Biometric software products.
Sequiam
Software
We
also
provide high-end web development and custom software and database development
to
medium-sized businesses, local governments and non-profit organizations under
the Sequiam Software brand name. Currently, our custom software is focused
on
information management. As of September 30, 2005, we have generated revenues
of
$41,821 from our custom software and web development services. After September
30, 2005 we ceased offering such services so that we could focus on
Biometrics.
Sequiam
Sports, Inc. is focused on the following web development products and
services:
World
Olympians Association
We
developed the Internet site and Extranet for the World Olympians Association
in
connection with a contract entered into on December 5, 2001. IOC President,
Juan
Antonio Samaranch, created the World Olympians Association following the
Centennial Olympic Congress, Congress of Unity, held in Paris in 1994. It is
a
global organization representing Olympians. The World Olympians Association
was
founded to involve the nearly 100,000 Olympians around the world in the
activities of the Olympic Movement. The World Olympians Association is the
“Fourth Pillar” of the Olympic Community and is supported by the IOC Athletes’
Advisory Commission.
In
connection with our contract, we implemented the worldwide database for the
official website of the Community of Olympic Athletes. Under the terms of our
contract with the World Olympians Association, we developed the Extranet at
our
own cost and expense, and will receive 35% of all sponsorship revenues in
addition to 35% of any merchandising sales prices less fixed costs.
The
World
Olympians Association has not been effective at generating any revenue. As
a
result, we have not derived any revenue from our relationship with the World
Olympians Association. Regardless, we continue to provide email services for
the
electronic newsletters “Olympian
Insight,”
a
weekly electronic publication sent to Olympic athletes and “Olympian
Roundup,”
a
monthly electronic publication sent to Olympic athletes, because we believe
that
our association with the Olympics will be beneficial to future business and
we
believe in the Olympic ideals. In addition, we believe our relationship with
the
World Olympians Association will generate new business for us and the cost
of
our continuing support is nominal compared to the goodwill that it
generates.
C.
|
Sequiam
Education, Inc.
|
Extended
Classroom
Sequiam
Education, Inc. is focused on the Extended Classroom educational product. The
Extended Classroom is a series of 300 internet-based educational supplement
videos for grades 1-12 students and their parents. Written and delivered by
full-time teachers, these Lesson Concept Summaries cover language arts, math,
science and social studies. Furthermore, the Extended Classroom is designed
to
meet curriculum standards and correspond to homework assignments. The videos
average two minutes in length, and include test preparation tools and quizzes
that help parents and teachers assess students’ progress and achievement levels.
These results are accessed via a unique data retrieval system. The Lesson
Concept Summaries are delivered via the Internet, and are available on a compact
disc form for homes without broadband access. The videos are digitally mastered
and also available for television broadcast. As of September 30, 2005, we have
not generated any revenue from the sale of the Extended Classroom. We are
expending no additional resources on this product at this time nor do we plan
to
in the foreseeable future as we are focusing all of our resources on the
development and sales of our biometric products.
Market
for our Products and Services
We
have
had no significant sales from our primary products during 2005 as much of the
year was spent acquiring, redeveloping and preparing our products for sale.
Sales and marketing efforts began in the fourth quarter of 2004. Sales for
most
of 2005 were derived from secondary services such as our Internet Service
Provider, web development and custom software development. We did sell one-time
web development and custom software development services to various customers
during 2005, for total sales of $186,910. As of September 30, 2005, the
BioVault™
generated sales of $10,321. This is attributable to our marketing efforts with
the National Rifle Association. These sales totals were far less than expected
in spite of very favorable feedback from the National Rifle Association email
campaigns conducted during 2004. We believe that the high retail price of the
BioVault™
was an
impediment to its sales. As a result we have changed our marketing strategy
regarding the BioVault™.
We also
redesigned and reduced the cost of the original BioVault™
and we
have re-introduced it as the BioVault 2.0. The NRA has agreed to actively market
the product through its firearms instruction program.
As
of
September 30, 2005, we had sales of $37,525 from
our
redesigned IRP products available over the Internet on a transaction fee basis.
We also entered into reseller agreements with Danka Office Imaging Company
and
IKON Office Products for our IRP products.
We
have
no historical financial or market information regarding potential sales for
the
assets acquired from Smart Biometrics, Inc. and Telepartners, Inc. because
both
companies were development stage companies and neither company had any operating
revenue. Furthermore, we only began to receive operating revenue from our IRP
software products in the fourth quarter of 2004. Our market estimates for our
products and services are based primarily on our own market research, market
estimates provided to us by Danka and IKON, and market estimates for the sale
of
the BioVault™
provided to us by the National Rifle Association.
Our
management believes that the market for our IRP products and services includes
small, medium and large corporations across all industry segments and non-profit
and governmental entities.
We
are
targeting our sales of Biometric products primarily to leading suppliers in
manufacturing and distribution of safety and security products.
Distribution
of our Products and Services
Our
products and services are just now coming to market after a lengthy development
period and, to date, have been sold directly by us and, prior to its
acquisition, W.M.W. Communications, Inc. We intend to sell our IRP and
IRPlicator products to an independent print software-marketing firm. We are
making no further attempts to sell Book It Rover or Extended Classroom as we
plan to focus all of our efforts on our Biometrics products. We intend to sell
our biometric products through “Value Added Resellers,” distributors and
marketing alliances and through our own direct sales efforts. We will also
license our technology to manufacturers who wish to incorporate biometric
technologies into the products they make as we did with Black and Decker’s
Kwikset Corporation. On September 13, 2005, we entered into a five-year,
Exclusive Co-operative Development and Supply Agreement with Black &
Decker’s subsidiary, Kwikset Corporation. The purpose of this agreement is to
establish the business relationship between Kwikset and us in respect to the
development, marketing and sales of biometric enabled security door hardware
and
systems.
Value
Added Resellers.
We plan
to form additional relationships with Value Added Resellers that are software
companies and print equipment manufacturers and distributors. Under a typical
agreement, the Value Added Reseller will sell our software products in
conjunction with their own products. In some instances, a Value Added
Reseller might convert our products to their own private-label. Hectrix
Limited has private labeled our software BioTime, Biometric Time and Attendance
software. The re-branded edition was delivered to them to their specifications
on November 29, 2005 and sales are expected to commence in January 2006. BioTime
was redesigned to interface with the ActaTek line of wall hang biometric time
and attendance hardware. The ActaTek device won the 2004 Biometritech product
of
the year in 2004. This edition of BioTime is a new product and has generated
no
revenue at this time. Hectrix Limited will bundle BioTime “trial editions” with
about 80% of all their hardware sold in North America.
Distributors.
We plan
to form relationships with distributors that have experience selling technology
products in geographic areas where we do not have a physical presence. We
currently have one distributor, BioMet Access Company, LLC in Missouri, that
markets and sells biometric products, including the BioVault 2™, through
a
network of approximately 240 dealers, partners and consultants. BioMet is
committed to selling our entire biometric product line and have included them
in
their 2006 product catalog. We intend to grant our distributors a non-exclusive
license to sell certain of our software products in these geographic areas.
We
will also permit the distributor to grant sublicenses to use our software
products. The distributor will earn revenue from the sublicenses it
grants. As of March 14, 2006, we have received $2,880 in revenue from BioMet
Access Company, LLC for sales of the BioVault™. BioMet
has
provided us with a purchase order for 1,000 BioVault 2 units in
2006.
We
have
an agreement with the National Rifle Association to help distribute the
BioVault™.
The National Rifle Association acts only as a sales agent and will not purchase
any of our products directly. The original BioVault™ price
points were
too high for the National Rifle Association to commit to selling the
BioVault™ to
the desired degree. BioVault 2™ includes
a 52%
reduction in the cost to manufacture the product. This allows us to set the
MSRP
of the Biovault 2™ to the level desired by the National Rifle Association. Small
quantities of the Biovault 2™ will commence
in
March 2006 with large shipments occurring in April. Currently
we are selling the remaining inventory of original BioVaults. The National
Rifle
Association will offer our BioVault 2™ in its
online
store and catalog and maintain the estimate that via the new price points we
will be able to sell approximately 50,000 units over the twelve months following
the second quarter 2006. As of September 30, 2005, we have generated little
revenue from this relationship because the National Rifle Association had not
completed or commenced its overall marketing plan. The National Rifle
Association expects to accelerate its marketing efforts in 2005 when we
introduce a new version of the BioVault which will be redesigned to their
specifications.
We
are
currently in negotiations with five other distributors to carry our lines of
products. We believe that these distributors should be in place via agreements
by the end of the second quarter of 2006.
Alliance
Partners.
Our
“Alliance Partners” will be companies that partner with us on hardware and
software. We will not maintain a formal financial relationship with our
Alliance Partners nor will our Alliance Partners receive fees in exchange for
recommending our products. In return for these referrals, we will, if the
occasion arises, refer management consulting services to our Alliance Partners.
Analog Devices, an Alliance Partner, has included us in its press and marketing
endeavors that include articles in EE Times and other publications. Another
alliance partner is Authentec who provided millions of fingerprint sensor
devices in 2005. Authentec is recommending us as a premier provider of biometric
hardware and technology to facilitate their customers needs for advanced
biometric hardware designs that include the Authentec biometric sensor. We
are
actively pursuing other Fortune 500 alliance partners. As of September 30,
2005,
we have not received significant revenues from our Alliance Partners, but we
have contracts and commitments from two state universities and school systems
as
a result of their referrals.
Competition
Sequiam
IRP and IRPlicator. We
are
unaware of competitors whose products perform all of the functions performed
by
our software products. We compete in the market for integrated document
management and Internet remote print software with numerous other software
companies whose products are used to image, print and manage documents. Our
management believes that our products are competitive due to features such
as
ease of deployment, low overhead and administration, ease of use, integrated
application suite, and appeal to broad user requirements.
Book
It, ROVER! We
are
aware of only one company, TravelHero, which directly competes with us in
offering reservation systems directly to Convention and Visitors Bureaus. The
competing product only provides for hotel reservations and does not include
restaurants, attractions, events, sports facilities and entertainment, as does
Book It, ROVER! Additionally, Book It, ROVER! has a built-in web wizard
developer. We also provide hosting for those business members of the Convention
and Visitors Bureau wishing to participate in the system but who are not yet
online. Established in 1995, TravelHero is a content and technology provider
for
the travel industry, offering turnkey reservation solutions for destination
marketing organizations. TravelHero claims to be the online reservation partner
for www.NASCAR.com,
as
well as over 85 official visitor bureaus and lodging associations.
Access
Orlando. We
are
not concerned with competition for our managed hosting services and Internet
access services. Competitors in Orlando are largely small to mid-sized (6 to
20
staff) companies including: Sales & Marketing Technologies, Xenedev
Development Services, Web-Solvers, Digital Planet, Bridgemore Technologies
and
Atlantic.net. We do not plan to grow this product offering as we do not consider
it part of our core business. We use these revenues to offset our own web
hosting and Internet access costs for internal use, and in support of IRP,
IRPlicator and our biometric products that are delivered over the
web.
Sequiam
Software. Our
competition with custom software development business is from a variety of
small, medium-sized and large competitors. We do not actively compete in this
market but rather provide custom software applications to our existing customers
as an accommodation when it benefits our relationship with them or otherwise
presents an opportunity to develop new applications with greater market
potential.
Extended
Classroom. Numerous
companies compete in this market. The top four successful companies with similar
goals and markets are Riverdeep, Brainpop, Testbuddy, and Esylvan. Their
programs are content rich, very well researched and designed with maximum
student interaction in mind. The Brainpop model seems to be the most effective
and possibly the most successful with a low-priced model of only $34.95 per
year
for a family and less than $200 per year for a school. Brainpop appears to
be used in 15% of America’s schools and used by approximately two million
children. We do not plan to compete in the open market with these firms but
are
searching instead for a strategic partner who can deploy our product as part
of
a broader program. As of September 30, 2005, we have not found such a strategic
partner for our Extended Classroom product.
BioVault™.
The
single competitor for the BioVault™ is 9g
Products’
flagship product, the INPRINT™. Using
fingerprint technology, the INPRINT™ securely
stores
jewelry, handguns, valuables, important documents, medications, and personal
information and is similar in purpose and operation to the BioVault™.
INPRINT™ is
less expensive than the BioVaultÔ
and, in
our opinion is also less well constructed and a less substantial product in
general. The INPRINT™ is constructed
of
aluminum, while the BioVault™
uses all
steel construction. 9g Products Inc. was founded in 2002 and its only product
is
the INPRINT™.
BritePrint.
SceneScope, first marketed by SPEX in 1997, has been sold to dozens of U.S.
law
enforcement agencies at all levels. It has been sold worldwide to most national
police agencies. The SceneScope Imager uses intensified ultra violet reflectance
instead of fluorescence as in Forensic Light Sources. The System can detect
fingerprints on most non-porous surfaces prior to any treatment or after a
cyanoacrylate (Superglue) fuming. Fuming
is
required when preliminary examination yields no results. The most direct
competitor is Blue Lightning Head Lamp offering by Lightning Powder Company,
Inc., a subsidiary of Armor Holdings, Inc. This blue LED head lamp provides
hands-free lighting for crime scene processing using fluorescent powders like
Redwop®. This head lamp has settings for white light only, blue light only, or
full power white and blue light. The blue LED’s emit light in the 470nm
range.
Our
patented BritePrint technology is a light-emitting, diode-based,
headband-mounted, light source developed to enhance the detection of dusted
latent fingerprints. The BritePrint system offers the potential of a low-cost,
hands-free device to be used during the investigative process. This technology,
when used in conjunction with traditional dust detection methods, reveals
otherwise invisible fingerprints, footprints, and other latent markings at
crime
scenes and may save valuable time in the investigative process and is less
expensive than competing methods.
Advantages
of the BritePrint
technology over competing methods are as follows:
|
·
|
Enables
advanced real-time field detection and
analysis
|
|
·
|
Light-emitting
diode technology for brighter
illumination
|
|
·
|
Self-powered
and easily portable
|
Biometric
Industry
Each
of
the following biometric companies generally has a biometric product or service
that they market into a specific field or to a specific customer. Our market
method is to sell or license our technology to other biometric companies. We
believe that our major competitors include the following companies:
Sagem
Morpho
- Sagem
Morpho is the largest competitor in the biometric field. Currently Sagem has
over 38,000 employees and market a diverse range of biometric products directly
to the government security market and to integrators and developers that serve
that market. One of their primary products is called the MorphoTouch - a
hand-held device that can read fingerprints, smart cards, bar codes and more.
Our
hardware products are expected to have a vastly superior price/performance
ratio
over Sagem Morpho. The current product is called the OEM 2 that competes with
the MorphoTouch. OEM 2 has generally all the capabilities of the MorphoTouch
and
unlike the MorphoTouch can be integrated in a wide variety of biometric
products.
Digital
Persona, Authentec, Secugen
- These
companies are all fingerprint sensor manufacturers who market integration of
their biometric technologies to electronics groups. They actively foster
development of products that contain their sensor hardware. Their competitive
products include their software development kits and reference designs. For
example, Authentec markets both software development kits and embedded software
development kits.
Neurotechnologija
- this
company develops matching systems for numerous sensor manufacturers. Their
products allow customers to add biometric capability to any software
application. The application they most commonly sell is called VeriFinger.
They
also sell an embedded development kit called FingerCell that gives embedded
devices fingerprint stand-alone matching capability.
Sequiam
Biometrics development kits are very similar to VeriFinger and FingerCell but
have a price point about 40% lower, support twice as many devices and are judged
by many easier to use and implement. The market segment this product line is
engaged in is large at about 5.5 million devices per year and increasing
significantly each year.
Our
Customers
Information
Management
We
provide internet access and web-hosting services for over 700 customers.
In the past, several of our customers have ordered additional software and
services, occurring within a non-predictable time frame, that is, from a few
months of the original order up to a year or more after that order. The
additional orders typically have been either custom programming projects or
the
purchase of new products as these become available. No single customer
accounted for more than 10% of our revenues during 2005.
Safety
and Security
Most
of
the customers for our biometric products are in South Africa and are new or
existing customers of our wholly owned subsidiary Biometric Security (PTY)
Ltd.
The customers in South Africa include Ford Motor Company, South Africa; Wimpy,
South Africa; Pick 'n Pay, South Africa; Receiver of Revenue, Cape Town, South
Africa; Provincial Administration, Western Cape, South Africa; Santam; Royal
Dutch Shell; South African Police; Free State; South Africa Hewlett Packard
and
others. In the US, we are starting to market the products of our South African
company as well as our own technology.
On
September 13, 2005, we entered into a five-year, Exclusive Co-Operative
Development and Supply Agreement with Black & Decker’s subsidiary Kwikset
Corporation. The purpose of this agreement is to establish the business
relationship between Kwikset and us in respect to the development, marketing
and
sales of biometric enabled security door hardware and systems.
Intellectual
Property
Our
patent pending for “BioVault™”
was
recently denied. We have resubmitted our patent application with the United
States Patent Office. We have not sought patent protection for any of our
software products due to the length of the patent application procedure and
the
necessity to continually develop and improve our software products. We feel
the
risk of loss due to piracy is somewhat mitigated because our software is only
offered as an application service provider via the Internet. We plan to make
patent applications in 2005 for some of the software. We plan to register our
intellectual property whose patentability time bar has expired as prior art
with
the Software Patent Institute database to prevent anyone else from patenting
such intellectual property. United States Patent No. 6,865,285 B1 relating
to
“BritePrint” was issued on March 8, 2005. We
do not
anticipate that we will file any additional patents on our existing biometric
products at this time. We have registered “Sequiam”, “IRP”, “Book It, ROVER!”,
“Smart Biometrics”, “BioVault” and “QuestPrint” (as trademarks) with the U.S.
Patent and Trademark Office.
Contracts
under which we license the use and/or sale of our products include
confidentiality clauses to protect our products and any information in
connection with them.
Despite
these precautions, it may be possible for unauthorized third parties to copy
certain portions of our products or to obtain and use information that we regard
as proprietary. There can be no assurance that our efforts will provide
meaningful protection for our proprietary technology against others who
independently develop or otherwise acquire substantially equivalent techniques
or gain access to, misappropriate, or disclose our proprietary
technology.
Research
and Development Activities
Sequiam
Software. We
incurred and capitalized software development costs in 2004 and 2003, a total
of
$-0- and $4,206, respectively. None of these costs were borne directly by
any customer. With respect to IRP, we do not expect to continue to maintain
our
prior level of investment in developmental activities consistent with our 2002
or 2003 research and development expenses, as the product is complete and
marketable.
Sequiam
Biometric, Inc. and Constellation Biometrics
Corporation. We
acquired both the “BioVault™”
and “BritePrint”
technology. Accordingly, we had no significant research and development costs
associated with these products other than normal adaptations for alternate
uses
of the biometrics. We do not expect research and development costs for these
products to be significant during 2005 and the foreseeable future. We have
discontinued the BioVault™ in favor
of the
BioVault™
2.0. We are more focused on licensing BritePrint product to companies who
manufacture and sell products that will employ our technologies.
As
of
September 30, 2005, we did capitalize $192,817 in product development costs
related to the redesign of the BioVault 2.0, development of the BioLock and
OEM
Kits 1 and 2.
Our
Employees
As
of
September 30, 2005, we employed 12 full-time employees in the United States
and
6 in South Africa for a total of 18. Three of these employees worked in sales
and marketing; 12 worked in product development and support; and three provided
general administrative services. No employees are represented by a labor union,
and we consider our relations with employees to be good.
Dependence
on Key Management Personnel
We
believe that our continued success depends to a significant extent upon the
efforts and abilities of its senior management. In particular, the loss of
Nicholas H. VandenBrekel, our President and Chief Executive Officer, Mark L.
Mroczkowski, our Senior Vice President and Chief Financial Officer, Alan McGinn,
the Chief Technology Officer of Sequiam Software, Inc., or Kevin Henderson,
President of Sequiam Biometrics, Inc. could have a material adverse effect
on
our business. We have employment contracts with each of these officers, which
are more fully described under the heading “Management.”
Properties
Our
corporate headquarters are located at 300 Sunport Lane, Orlando, Florida
32809. On July 1, 2001, the Brekel Group, Inc., prior to our acquisition,
entered into a lease agreement to rent approximately 60,000 square feet of
combined office and manufacturing space through June 30, 2011. Effective July
1,
2002, we entered into a lease forbearance agreement for 10,000 square feet
of
the same space for the remaining term of the lease. 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 signed a new lease agreement and note payable with the landlord
that supercedes and replaces the lease forbearance agreement described
above.
The
lease
is for 24,085 square feet and is effective July 1, 2004 for a period of
seventy-two (72) 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 (6%) per annum. Commencing on August 1,
2004
and continuing on the first (1st) 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. Payments on the
note
commence July 1, 2004, through June 1, 2010.
On
May
17, 2005, EastGroup Properties, LP agreed to an additional six (6) month
deferment of the Company’s Promissory Note payments until December 1, 2005,
contingent upon the payment of April and May 2005 prior to May 31, 2005, and
that all rental payments between now and December 2005 are kept current.
EastGroup Properties, LP also agreed to extend the Note by twelve (12) months
to
represent the twelve (12) total deferred payments from December 2004 to November
2005.
Legal
Proceedings
Sequiam
Sports, Inc. (formerly known as Brekel Group, 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 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. Sequiam Sports, 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 the Circuit Court in and for Pinellas
County, State of Florida. The amount in controversy is $1,573,669. We dispute
these claims and believe them to be without merit.
On
December 21, 2004, we entered into a Letter Agreement with Chapman Spira &
Carson, LLC, pursuant to which Chapman agreed to provide us with various
consulting, investment banking and business development services. On or
about September 28, 2005, Chapman filed a complaint in United States District
Court for the Southern District of New York, asserting claims for breach of
contract and unjust enrichment. Chapman alleges that, notwithstanding its
purported provision of services under the Letter Agreement between it and us,
we
failed to properly compensate Chapman for those services. We claim
that none of those services were actually provided by Chapman. Chapman is
seeking compensatory damages of $1,019,060,
costs,
including attorney's fees, 500,000 shares of common stock and a
warrant to
purchase 6,195,000 shares of stock at $0.26 per share.
We believe that Chapman's claims are without merit and intend to vigorously
defend ourselves against these allegations.
No
other
material legal proceedings are currently pending or threatened against
us.
Executive
Officers and Directors
The
following table shows the positions held by our current board of directors
and
executive officers. Our directors serve for a three-year term that expires
at
every third regular annual meeting of our shareholders, and until such
directors’ successors are elected and qualified.
Name
|
|
Age
|
|
Position
|
Nicholas
H. VandenBrekel
|
|
41
|
|
Chairman,
President and CEO; Director
|
Mark
L. Mroczkowski
|
|
52
|
|
Senior
Vice President and CFO; Director
|
James
C. Stanley
|
|
67
|
|
Director
|
Alan
McGinn
|
|
45
|
|
Vice
President and CTO
|
Kevin
Henderson
|
|
36
|
|
President
of Sequiam Biometrics, Inc. and Constellation Biometrics
Corporation
|
Nicholas
H. VandenBrekel.
Mr.
VandenBrekel is our founder and has served as our President, Chief Executive
Officer and Chairman of the Board since our inception in 1999. Mr. VandenBrekel
served as a consultant from 1997 to 1999. Mr. VandenBrekel has an extensive
background in both military service as well as entrepreneurial venues. He is
a
native of the Netherlands and a permanent resident of the United States. Mr.
VandenBrekel has been the President and Chief Executive Officer of Brekel Group,
Inc. for the last two years and was the President of Sequiam, Inc. In the course
of his assignments, Mr. VandenBrekel has been responsible for all aspects of,
business development, teaching and operations, including strategic planning,
product and service development, marketing, and sales and staff development.
Mr.
VandenBrekel speaks
several languages and has been a public speaker for many years. Mr. VandenBrekel
continuously displays a strong ability to merge both North American business
culture with that of Europe and the Far East. Mr. VandenBrekel has a degree
in
communications from the OPS Academy Royal Netherlands Navy and is a licensed
Helicopter Aviator. Mr. VandenBrekel also holds degrees and diplomas in
electronics and the martial arts. Mr. VandenBrekel received the 2001 businessman
of the year award from the National Republican Congressional Committee’s
Business Advisory Council.
Mark
L. Mroczkowski.
Mr.
Mroczkowski has
served as our Senior Vice President, Chief Financial Officer and as one of
our
directors since our inception in 2001 and as Chief Financial Officer for Brekel
Group, Inc. since June 2000. Mr. Mroczkowski
has an
extensive business background. Mr. Mroczkowski was the Chief Financial Officer
of GeoStar Corporation from 1994 until 2000. From 1975 until 1994, Mr.
Mroczkowski practiced public accounting with several large accounting firms
and
ultimately formed his own successful firm. Mr. Mroczkowski holds a B.S. degree
in Accounting from Florida State University, he is a Certified Public Accountant
licensed in Florida and a licensed commercial pilot. Mr. Mroczkowski has
a
strong background in finance and financial management from his twenty-five
years
of practice. Mr. Mroczkowski managed
private placements, debt financing and Initial Public Offering preparations
for
a number of firms. Mr. Mroczkowski has also managed audit, tax and consulting
engagements for a variety of organizations.
James
C. Stanley.
Mr.
Stanley served as President of Sequiam Biometrics, Inc. from April 21, 2003
until April 21, 2005 and has served as a one of our directors since May 21,
2003. Since 2001, Mr. Stanley also serves as the Vice President of Finance
for
Quasar Group, Inc. Prior to joining the Quasar Group, Inc., Mr. Stanley worked
with J.C. Stanley and Associates from 1997 to 2001. Mr. Stanley has held many
important management positions as well as owned and operated his own businesses.
Among his accomplishments is the formation of an investment advisory firm that
was sold to Bache & Company. He also owned an advertising agency in New
York, whose clients included Citicorp, Penske Racing, Hilton International,
Holland American Lines and Banco Popular. Mr. Stanley built, owned and operated
Hilton Ski Resort in Breckenridge, Colorado. Currently, Mr. Stanley is the
founder of Concord Communications, Inc. which is a joint venture with AT &
T. Mr. Stanley serves on numerous boards, including Vice Chairman of the
International Center for Religion and Diplomacy, Washington, DC. Mr. Stanley
is
a well-versed and sought after consultant on business development, mergers
and
acquisitions. During the last five years, Mr. Stanley has served as a Director
and a principal in the Quasar Group, Inc., and prior to our acquisition of
Smart
Biometrics, Inc, Mr. Stanley served as Chairman of that company. Mr.
Stanley has a BA and an MBA from the University of Virginia.
Alan
McGinn. Mr.
McGinn has served as our Chief Technology Officer since March 1, 2003.
Previously, Mr. McGinn had been President of W.M.W. Communications, Inc., d/b/a
Access Orlando since 1995. During that time, he also served as a consultant
to
SMART Biometrics. From 1984 to 1995, Mr. McGinn was a Senior Design Engineer
at
Lockheed Martin. While at Lockheed Martin, Mr. McGinn designed the night vision
system for the Apache Helicopter. Mr. McGinn’s other significant designs
included: Microcontroller-based servo control system; Laser tracker controller
with a 1553 bus interface; Microcontroller based control panel for helicopter
navigation; CCD camera with real time image processing; and Fiber Optic
communications link and tracker interface. Mr. McGinn has a B.S. Degree in
Electrical Engineering from the University of Tennessee and an M.S. Degree
in
Electrical Engineering from the University of Central Florida.
Kevin
Henderson.
Mr.
Henderson is the former President of Bioidentix, Inc. and has accepted the
position of Vice President for Sequiam Corporation and President of Sequiam
Biometrics, Inc. and Constellation Biometrics, Inc. effective March 1, 2005.
Mr.
Henderson will handle business development and product development. Previously,
Mr. henderson has developed numerous biometric, smart card and software products
and operated a large IT firm in Houston, Texas. Kevin has also held positions
as
US territorial representative for Inmos Semiconductor, CTO of the PAR Worldwide
Group and appeared as guest host on the syndicated radio show 'CPU' for NBC
radio.
Committees
of the Board
We
do not
currently have any formal board committees.
Director
Compensation
None
of
our current directors receive compensation for their service as
directors.
Family
Relationships
There
are
no family relationships among our executive officers and directors.
Legal
Proceedings
During
the past five years, none of our executive officers, directors, promoters or
control persons have been involved in a legal proceeding material to an
evaluation of the ability or integrity of such person.
Executive
Compensation
The
following Summary Compensation Table sets forth, for the years indicated, all
cash compensation paid, distributed or accrued for services, including salary
and bonus amounts, rendered in all capacities by our chief executive officer
and
all other executive officers who received or are entitled to receive
remuneration in excess of $100,000 during the stated periods.
|
|
SUMMARY
COMPENSATION TABLE
|
|
|
|
|
|
ANNUAL
COMPENSATION
|
|
LONG-TERM
COMPENSATION
|
|
|
|
|
|
|
|
|
|
|
|
AWARDS
|
|
|
|
|
|
Name
&
Principal
Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Other
Annual
Compensation
(2)
|
|
Restricted
Stock
Awards
|
|
Securities
Underlying
Options/SARs
(3)
|
|
LTIP
Payouts
|
|
All
Other
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas
VandenBrekel,
|
|
|
2005
|
|
$
|
195,000
|
|
|
|
|
$
|
14,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President,
CEO,
|
|
|
2004
|
|
$
|
194,375
|
|
|
|
|
$
|
14,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman
(1)
|
|
|
2003
|
|
$
|
185,000
|
|
|
|
|
$
|
14,400
|
|
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
Mark
Mroczkowski,
Corporate
Secretary,
|
|
|
2005
|
|
$
|
185,000
|
|
|
|
|
$
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Vice President,
|
|
|
2004
|
|
$
|
184,375
|
|
|
|
|
$
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasurer
and CFO (1)
|
|
|
2003
|
|
$
|
175,000
|
|
|
|
|
$
|
12,000
|
|
|
|
|
|
4,000,000
|
|
|
|
|
|
|
|
Footnotes:
(1) None
of the annual salary amounts shown were paid in 2003 and remained accrued at
December 31, 2003. In 2004 $125,000 was paid and $69,375 was accrued to Nicholas
VandenBrekel and $118,750 was paid and $65,625 was accrued to Mark Mroczkowski.
In 2005 $96,667 was paid and $98,333 was accrued to Nicholas VandenBrekel and
$95,833 was paid and $89,167 was accrued to Mark Mroczkowski.
(2) Compensation
shown in this column was earned by accruing the automobile allowances provided
in the employment agreements.
(3) Shares
shown in this column represent options granted under the Sequiam Corporation
2003 Employee Stock Incentive Plan.
Long
Term
Incentive Plan Awards
No
long-term incentive plan awards have been made by the Company to
date.
Defined
Benefit
or Actuarial Plan
Disclosure
We
do not
provide retirement benefits for the directors or officers.
None
of
our directors received compensation for their service as directors during the
fiscal year ended December 31, 2005.
Employment
Contracts and Change-In-Control Arrangements
On
October 1, 2002, Mr. VandenBrekel and Mr. Mroczkowski entered into amended
and
restated employment agreements with us and our 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 our benefit plans. No bonuses have
been paid and no criteria for determining bonuses has been established by our
directors. We do not intend to pay bonuses for the calendar year 2004. Full
time
employment is a requirement of the contract. In the event that a change in
control of any related company occurs without the prior approval of our then
existing Board of Directors, then these contracts will be deemed terminated
and
we will owe termination compensation to each employee consisting of a $5 million
lump sum cash payment plus five annual payments of $1 million, each. Each of
Mr.
VandenBrekel and Mr. Mroczkowski may terminate their respective employment
agreement without cause upon 30-day advance written notice.
Mr.
Alan
McGinn was hired as our CTO, pursuant to an employment agreement dated as of
December 1, 2002. Mr. McGinn did not begin to earn compensation until March
1,
2003. Pursuant to our agreement with Mr. McGinn, he will earn a base salary
of
$75,000, and we are obligated to adopt a qualified stock option plan for our
senior executive officers that will include the following stock options to
Mr.
McGinn: 500,000 shares of our common stock, to be vested one-third (1/3) at
the
end of twelve (12) months, and one-third (1/3) at the end of each subsequent
twelve-month period. Each option will expire five (5) years after we adopt
the
plan. The option price per share will equal the average closing trading price
per share for the ten (10) day trading period immediately preceding the granting
of the options. If we do not adopt a qualified stock option plan by June 30,
2003, the employee may elect to participate in a plan adopted after June 30,
2003, or, receive a cash compensation payment intended to similarly compensate
Mr. McGinn as if the stock option plan had been adopted. Mr. McGinn may
terminate his employment agreement without cause upon 30-day advance written
notice.
Section
16(A) Beneficial Ownership Reporting Compliance
Not
applicable.
Compensation
Committee
We
currently do not have a compensation committee of the Board of Directors. The
Board of Directors as a whole determines executive compensation.
Security
Ownership of Management and Certain Beneficial Owners
The
table
below sets forth, as of March 14, 2006, certain information with respect to
the
beneficial ownership of our common stock by each person whom we know to be
beneficial owner of more than 5% of any class or series of our capital stock,
each of the directors and executive officers individually, and all directors
and
executive officers as a group. Except as otherwise set forth below, the address
of each of the persons listed below is 300 Sunport Lane, Orlando, Florida 32809.
Name
|
|
Shares
Beneficially
Owned
|
|
Percentage
of Shares
Beneficially
Owned
|
|
Nicholas
H. VandenBrekel
|
|
|
23,472,523(1)
|
|
|
36.42%
|
|
Mark
L. Mroczkowski
|
|
|
9,104,523(2)
|
|
|
14.12%
|
|
Officers
and Directors as a group (three persons)
|
|
|
33,120,517
|
|
|
51.38%
|
|
Walter
H. Sullivan, III
|
|
|
|
|
|
|
|
4
Embarcabero Center Suite 1570
|
|
|
|
|
|
|
|
San
Francisco, California 94111
|
|
|
12,431,202(3)
|
|
|
19.29%
|
|
Lee
Harrison Corbin, Attorney-in-Fact for the Trust Under
the
Will of John Svenningsen, now known as Stephen A. Ross,
Attorney-in-Fact
for the Trust Under the Will of John Svenningsen
|
|
|
|
|
|
|
|
33
Whitney Avenue
|
|
|
|
|
|
|
|
Lower
Level
|
|
|
|
|
|
|
|
New
Haven, CT 06510
|
|
|
10,028,388(4)
|
|
|
15.56%
|
|
(1)
|
Includes
5,000,000 shares that may be acquired upon exercise of stock
options.
|
(2)
|
Includes:
(a) 4,000,000 shares that may be acquired upon exercise of stock
options;
and (b) 294,118 shares owned by Mr. Mroczkowski’s former wife, of which he
disclaims beneficial ownership.
|
(3)
|
Includes
8,784,201 shares of common stock which may be issued upon exercise
of
outstanding warrants and 3,647,001 that are held of record.
|
(4)
|
Includes:
(a) 2,028,388 shares of common stock that are held of record and
(b)
8,000,000 shares that may be acquired upon the exercise of outstanding
common stock purchase warrants. Although 6,000,000 shares may be
acquired
upon the exercise of a common stock purchase warrant, such warrant
contains a provision which restricts the Trust from beneficially
owning in
excess of 4.99% of our outstanding shares of common stock provided
that
the Trust can waive this restriction on 75 days notice to the Company.
See
“Principal and Selling Shareholders” and “Description of Securities.”
|
Nicholas
H. VandenBrekel and Mark L. Mroczkowski may be considered our founders or
promoters. The consideration paid to Messrs. VandenBrekel and Mroczkowski is
discussed elsewhere in this prospectus.
CERTAIN
RELATIONSHIPS
AND RELATED
TRANSACTIONS
Indebtedness
On
February 1, 2002, and again in February 2005, Mark L. Mroczkowski, our Chief
Financial Officer and a shareholder, loaned Sequiam Software, Inc.
$50,000. Interest is payable at 6%. As of September 30, 2005, the
balance due under this loan was $100,000 payable on demand together with accrued
interest of $7,000.
Nicholas
H. VandenBrekel, our President, Chief Executive Officer and majority
shareholder, has advanced money to us and Sequiam Software, Inc. under demand
notes. At September 30, 2005, we owed $371,650 on these notes, including
accrued interest of $17,507. The notes bear interest at 2% per annum and
are due on demand.
On
May
18, 2005, we closed a debt transaction with Lee Harrison Corbin,
Attorney-in-Fact for the Trust Under the Will of John Svenningsen, now known
as
Stephen A. Ross, Attorney-in-Fact for the Trust Under the Will of John
Svenningsen, pursuant to which the Trust consolidated $1.55 million in existing
unsecured debt owed by us to the Trust and provided $2.1 million in additional
financing for a total of $3,650,000 (as consolidated with the $200,000
promissory note described below). The Trust is one of our principal
shareholders. See the section entitled “Stock Ownership.”
The
$3,650,000 promissory note issued to the Trust has a term of two years. Eight
percent (8%) interest shall be payable monthly in arrears commencing on November
10, 2005, and on the first day of each consecutive calendar month thereafter.
Monthly amortization payments shall commence on May 10, 2006, at the rate of
$75,000. The Trust’s promissory note is secured by all of our
assets.
In
connection with the loan: (a) the Trust delivered $1,000,000 of the above loan
to Laurus Master Fund, Ltd., a Cayman Islands company in full settlement of
an
outstanding secured convertible term note; and (b) we issued a warrant to Laurus
exercisable into 1,500,000 shares of our common stock at an exercise price
of
$0.23 per share. In return for receiving the $1,000,000 and the warrant, Laurus,
the Trust and we entered into that certain Assignment, Assumption and Release,
dated as of May 18, 2005, pursuant to which, Laurus assigned all of its rights,
liabilities and obligations under our original financing arrangement with
Laurus, and all documents related thereto, to the Trust. In addition, Laurus
released us from all liability whatsoever under our previous financing
arrangement, and all documents related to that transaction, except for any
terms
which may survive the assignment.
In
connection with the loan, the Trust received a warrant to purchase up to
6,000,000 shares of our common stock at prices ranging from $0.20 per share
to
$0.30 per share. All stock conversion prices and exercise prices are subject
to
adjustment for stock splits, stock dividends or similar events. We also agreed
to file a registration statement with the U.S. Securities and Exchange
Commission covering the shares issuable upon the exercise of each of the
warrants issued to the Trust and Laurus.
Concurrently
with the Constellation acquisition (described below), we assumed an outstanding
promissory note made by Constellation in favor of the Lee Harrison Corbin,
Attorney-in-Fact for the Trust under the Will of John Svenningsen, now known
as
Stephen A. Ross, Attorney-in-Fact for the Trust Under the Will of John
Svenningsen in the principal amount of $200,000 and dated March 23, 2005, a
majority of the proceeds of which had been loaned to us by Constellation. The
$200,000 Note was consolidated with the $3,450,000 promissory note made by
us in
favor of the Trust on May 18, 2005, and will be subject to the same terms and
conditions as the $3,450,000 Note, including without limitation, the security
provisions of the $3,450,000 Note inclusive of the Master Security Agreement
dated May 18, 2005, the Stock Pledge Agreement dated May 18, 2005, a Subsidiary
Guaranty to be executed by Constellation, and any and all other documents
executed in connection with the $3,450,000 refinancing described
above.
In
accordance with the terms of the $200,000 Note, we also issued to the Trust
a
common stock purchase warrant for 600,000 shares of our common stock at an
exercise price of $0.14 per share, which warrant has a term commencing as of
March 24, 2005 and expiring on March 24, 2010.
Acquisitions
On
June
7, 2005, we acquired Constellation Biometrics Corporation, effective May 31,
2005, pursuant to a stock purchase agreement dated May 31, 2005 by and among
us,
Constellation and the shareholders of Constellation. Constellation is the parent
company for a wholly owned subsidiary: Biometrics Security (PTY) LTD. (a/k/a
Secure Biometrics or Biometrics.co.za), a South African Company engaged in
the
development, marketing and sale of biometric technology products. As a result,
Constellation's results of operations may be negatively affected by events
which
may occur in South Africa, including wars, political upheaval, terrorism,
general economic conditions and changes in applicable law, changes in currency
exchange rates may also affect the results of Constellation's operations. We
acquired Constellation for its intellectual property and products presently
in
the marketplace including: BioWeb, BioTools, BioTag, BioRegister, BioAccess
Server and Bio Access Door Controller. We also acquired them for their technical
expertise, existing revenues and for their customer base in South Africa that
includes: Ford Motor Company, ActivCard, Receiver of Revenue - South Africa,
Shell Oil, Hewlett Packard, Rhodes University, Stellnbosh University and others.
We believe that Constellation will increase our existing revenue and customer
base in the current and subsequent years.
By
way of
background information leading up to the Constellation acquisition,
Constellation was formed in December 2004 by certain of our principal equity
holders for the specific purpose of acquiring, for our benefit, all of the
assets of Biometric Security (PTY) LTD. (a/k/a Secure Biometrics or
Biometrics.co.za), a South African company, engaged in the development,
marketing and sale of biometric technology products. Biometric Security is
now a
wholly-owned subsidiary of Constellation as a result of the asset acquisition
which was effected in February 2005. The purchase price for the assets of
Biometric Security was effectively $585,000, paid by Constellation as follows:
(a) $100,000 cash, (b) promissory note made by Constellation to Biometric
Security in the principal amount of $440,000, and (c) 250,000 shares of Sequiam
common stock valued at $45,000 or $0.18 per share, the closing sale price of
our
common stock on the date of closing the Biometric asset acquisition.
We
viewed
the purchase of assets from Biometric Security as a necessary and strategic
acquisition. However, due to cash constraints, we did not have the ability
to
acquire Biometric Security at that time. It was therefore determined by our
management to be in our best interests that they and certain other of our
beneficial owners form and fund Constellation for the purpose of executing
the
Biometric asset acquisition. At such time as we had obtained additional funding
or refinanced our existing loan with Laurus Master Fund, we would purchase
Constellation from our shareholders and management at a purchase price that
was
the equivalent value of the cash and Sequiam common stock they advanced to
or
for the benefit of Constellation. The shareholders of Constellation were
Nicholas VandenBrekel and Mark Mroczkowski (each of whom is an officer, director
and a principal shareholder of us); and Walter H. Sullivan III, Lee Harrison
Corbin, and Lee Harrison Corbin, Attorney-in-Fact for the Trust under the Will
of John Svenningsen, now known as Stephen A. Ross, Attorney-in-Fact for the
Trust Under the Will of John Svenningsen (each of whom is a beneficial owner
of
our common stock).
Certain
Equity Holdings
On
April
1, 2002, we acquired Sequiam Software, Inc. (formerly known as Sequiam, Inc.).
This transaction was accounted for as a recapitalization of Sequiam Corporation
and the results of operations and cash flows presented in our financial
statements prior to the acquisition are those of Sequiam, Inc. The following
table shows the number of shares received by our directors and executive
officers as a result of this transaction.
Name
|
Common
Stock
Before
Closing
|
Percent
of
Class
|
Common
Stock
After
Closing
|
Percent
of
Class
|
Nicholas
H. VandenBrekel
|
0
|
0%
|
15,000,000(1)
|
61.90%
|
Mark
L. Mroczkowski
|
0
|
0%
|
5,500,000(2)
|
22.70%
|
James
Rooney
|
0
|
0%
|
500,000
|
2.06%
|
Brekel
Group, Inc.
|
0
|
0%
|
1,000,000
|
4.13%
|
(1)
|
At
the time of the transaction, Mr. VandenBrekel served as an officer
and
director of Brekel Group, Inc., and therefore 15,000,000 shares includes
1,000,000 shares issued to Brekel Group, Inc. The 1,000,000 shares
held by
Brekel Group, Inc. were returned to treasury and cancelled upon our
acquisition of Brekel Group, Inc. in July
2002.
|
(2)
|
At
the time of the transaction, Mr. Mroczkowski served as an officer
and
director of Brekel Group, Inc., and therefore 5,500,000 shares includes
1,000,000 shares issued to Brekel Group, Inc. The 1,000,000 shares
held by
Brekel Group, Inc. were returned to treasury and cancelled upon our
acquisition of Brekel Group, Inc. in July
2002.
|
In
July
2002, we acquired Sequiam Sports, Inc. (formerly known as Brekel Group, Inc.)
in
a tax-free exchange of stock. The following table shows the number of shares
received by our directors and executive officers as a result of this
transaction.
Name
|
Common
Stock
Before
Closing
|
Percent
of
Class(1)
|
Common
Stock
After
Closing
|
Percent
of
Class(2)
|
Nicholas
H. VandenBrekel
|
15,000,000(3)
|
61.90%
|
18,500,000
|
76.37%
|
Mark
L. Mroczkowski
|
5,500,000(4)
|
22.70%
|
4,957,000
|
20.46%
|
James
W. Rooney
|
500,000
|
2.06%
|
526,666
|
2.17%
|
Brekel
Group, Inc.
|
1,000,000
|
4.13%
|
0
|
0%
|
(1)
|
Based
upon 24,223,000 shares issued and outstanding prior to closing.
|
(2)
|
Based
upon 24,224,172 shares issued and outstanding after closing.
|
(3)
|
At
the time of the transaction, Nicholas H. VandenBrekel served as an
officer
and director of Brekel Group, Inc., and therefore 15,000,000 shares
includes 1,000,000 shares issued to Brekel Group, Inc. The 1,000,000
shares held by Brekel Group, Inc. were returned to treasury and cancelled
upon our acquisition of Brekel Group, Inc. in July
2002.
|
(4)
|
At
the time of the transaction, Mark L. Mroczkowski served as an officer
and
director of Brekel Group, Inc., and therefore 5,500,000 shares includes
1,000,000 shares issued to Brekel Group, Inc. The 1,000,000 shares
held by
Brekel Group, Inc. were returned to treasury and cancelled upon our
acquisition of Brekel Group, Inc. in July
2002.
|
The
following table sets forth:
|
·
|
the
name of the selling stockholders;
|
|
·
|
the
number of shares of common stock beneficially owned by the selling
stockholders as of March 14, 2006;
|
|
·
|
the
maximum number of shares of common stock that may be offered for
the
account of the selling stockholders under this prospectus;
and
|
|
·
|
the
amount and percentage of common stock that would be owned by the
selling
stockholders after completion of the offering, assuming a sale of
all of
the common stock that may be offered by this
prospectus.
|
Except
as
otherwise noted below and elsewhere in this prospectus, the selling stockholders
have not, within the past three years, had any position, office or other
material relationship with us.
Beneficial
ownership is determined under the rules of the U.S. Securities and Exchange
Commission. The number of shares beneficially owned by a person includes shares
of common stock underlying warrants, stock options and other derivative
securities to acquire our common stock held by that person that are currently
exercisable or convertible within 60 days after March 14, 2006. The shares
issuable under these securities are treated as if outstanding for computing
the
percentage ownership of the person holding these securities, but are not treated
as if outstanding for the purposes of computing the percentage ownership of
any
other person.
|
|
|
|
|
|
Beneficial
Ownership
After
this Offering(2)
|
|
Name
|
|
Beneficial
Ownership
Prior to
this
Offering(1)
|
|
Shares
Registered
in
this
Offering
|
|
Number
of
Shares
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
Laurus
Master Fund, Ltd. (3)
|
|
|
1,722,222(4)
|
|
|
1,722,222
|
|
|
0
|
|
|
0
|
|
Lee
Harrison Corbin, Attorney-in-Fact for the Trust Under the Will of
John
Svenningsen, now known as Stephen A. Ross, Attorney-in-Fact for the
Trust
Under the Will of John Svenningsen (5)
|
|
|
6,000,000(6)
|
|
|
6,000,000
|
|
|
4,028,388
|
|
|
4.17%
|
|
DKR
Soundshore Oasis Holding Fund Ltd.(7)
|
|
|
3,333,333.34(8)
|
|
|
4,918,333.00(9)
|
|
|
0
|
|
|
0
|
|
Double
U Master Fund LP(10)
|
|
|
809,523.80(11)
|
|
|
1,194,452.00(12)
|
|
|
0
|
|
|
0
|
|
Harborview
Master Fund LP(13)
|
|
|
1,047,619.04(14)
|
|
|
1,545,762(15)
|
|
|
0
|
|
|
0
|
|
Alpha
Capital(16)
|
|
|
4,761,904.76(17)
|
|
|
7,026,191(18)
|
|
|
0
|
|
|
0
|
|
Monarch
Capital Fund Ltd.(19)
|
|
|
1,000,000.00(20)
|
|
|
1,475,500(21)
|
|
|
0
|
|
|
0
|
|
Nite
Capital LP(22)
|
|
|
1,190,476.20(23)
|
|
|
1,756,548(24)
|
|
|
0
|
|
|
0
|
|
Whalehaven
Capital Fund Limited(25)
|
|
|
2,857,142.86(26)
|
|
|
4,215,715(27)
|
|
|
0
|
|
|
0
|
|
Vince
Calicchia
|
|
|
32,062.00(28)
|
|
|
32,062
|
|
|
0
|
|
|
0
|
|
Carmelo
Troccoli
|
|
|
75,001.00(29)
|
|
|
75,001
|
|
|
0
|
|
|
0
|
|
Harborview
Capital Management LLC(30)
|
|
|
693,000.00(31)
|
|
|
693,000
|
|
|
0
|
|
|
0
|
|
Jonathan
Rich
|
|
|
10,172.00(32)
|
|
|
10,172
|
|
|
0
|
|
|
0
|
|
Jody
Giraldo
|
|
|
15,000.00(33)
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
Brad
Barnard
|
|
|
15,000.00(34)
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
vFinance
Investments, Inc.(35)
|
|
|
659,765.00(36)
|
|
|
659,765
|
|
|
0
|
|
|
0
|
|
Nico
Pronk
|
|
|
750,000.00(37)
|
|
|
750,000
|
|
|
0
|
|
|
0
|
|
(1)
|
Beneficial
ownership as of March 14, 2006, for the selling stockholders based
upon
information provided by the selling stockholders or known to
us.
|
(2)
|
Assumes
the sale of all shares of common stock registered pursuant to this
prospectus, although the selling stockholders are under no obligation
known to us to sell any shares of common stock at this
time.
|
(3)
|
Laurus
Master Fund, Ltd. is managed by Laurus Capital Management, LLC. Eugene
Grin and David Grin, through other entities, are the controlling
principals of Laurus Capital Management, LLC and share sole voting
and
investment power over the securities owned by Laurus Master Fund,
Ltd. The
address for Messrs. Grin is c/o Laurus Capital Management, LLC, 825
Third
Avenue, 14th Floor, New York, New York
10022.
|
(4)
|
Represents
1,500,000 shares of common stock that may be acquired immediately
upon
exercise of an outstanding common stock purchase warrant at an exercise
price of $0.23 per share. Also represents 222,222 shares of common
stock
that may be acquired immediately upon exercise of an outstanding
common
stock purchase warrant at an exercise price of $0.58 per
share
|
(5)
|
Stephen
A. Ross is the Attorney-in-Fact for the Trust Under the Will of John
Svenningsen. Christine Svenningsen and Fannie Warren have the authority
to
exercise voting and dispositive powers with respect to the
Trust.
|
(6)
|
Represents
6,000,000 shares of common stock that may be acquired immediately
upon
exercise of an outstanding common stock purchase warrant. The exercise
price per share for the Trust warrant is as follows: (i) $0.20 for
the
first 2,000,000 shares; (ii) $0.25 for the next 2,000,000 shares;
and
(iii) $0.30 for the next 2,000,000 shares of common stock.
|
(7)
|
DKR
Soundshore Oasis Holding Fund Ltd. is a master fund in a master-feeder
structure. The fund’s investment manager is DKR Oasis Management Company
LP. Pursuant to an investment management agreement among the fund,
the
feeder funds and the investment manager, the investment manager has
the
authority to do any and all acts on behalf of the fund, including
voting
for any shares held by the fund. Mr. Seth Fischer is the managing
partner
of Oasis Management Holdings LLC, one of the general partners of
the
investment manager. Mr. Fischer has ultimate responsibility for trading
with respect to the fund. Mr. Fischer disclaims beneficial ownership
of
the shares.
|
(8)
|
Represents
1,666,666.67 shares of common stock that may be acquired immediately
upon
conversion of Series A preferred stock at a conversion rate of $0.21
per
share and 1,666,666.67 shares of common stock that may be acquired
immediately upon exercise of an outstanding common stock purchase
warrant
at an exercise price of $0.33 per share.
|
(9)
|
This
number includes 1,666,666.67 shares of common stock that may be acquired
immediately upon conversion of Series A preferred stock, 1,666,666.67
shares of common stock that may be acquired immediately upon exercise
of
an outstanding common stock purchase warrant, and 1,584,999.66 shares
of
our common stock issuable on account of any possible penalties or
anti-dilution adjustments relating to the Series A preferred stock
and the
common stock purchase warrant.
|
(10)
|
Double
U Master Fund L.P. is a master fund in a master-feeder
structure whose general partner is B & W Equities
LLC. Isaac Winehouse is the manager of B & W
Equities LLC and has ultimate responsibility for trading and
voting with respect to Double U Master Fund L.P. Mr. Winehouse
disclaims beneficial ownership of the shares being registered
hereunder.
|
(11)
|
Represents
404,761.90 shares of common stock that may be acquired immediately
upon
conversion of Series A preferred stock at a conversion rate of $0.21
per
share and 404,761.90 shares of common stock that may be acquired
immediately upon exercise of an outstanding common stock purchase
warrant
at an exercise price of $0.33 per
share.
|
(12)
|
This
number includes 404,761.90 shares of common stock that may be acquired
immediately upon conversion of Series A preferred stock, 404,761.90
shares
of common stock that may be acquired immediately upon exercise of
an
outstanding common stock purchase warrant, and 384,928.20 shares
of our
common stock issuable on account of any possible penalties or
anti-dilution adjustments relating to the Series A preferred stock
and the
common stock purchase warrant.
|
(13)
|
Harborview
Master Fund L.P. is a master fund in a master-feeder structure whose
general partner is Harborview Advisors LLC.
Richard Rosenblum and David Stefansky are the managers of Harborview
Advisors LLC and have ultimate responsibility for trading and
voting with respect to Harborview Master Fund L.P.
Messrs. Rosenblum and Stefansky disclaim beneficial ownership
of the shares being registered
hereunder.
|
(14)
|
Represents
523,809.52 shares of common stock that may be acquired immediately
upon
conversion of Series A preferred stock at a conversion rate of $0.21
per
share and 523,809.52 shares of common stock that may be acquired
immediately upon exercise of an outstanding common stock purchase
warrant
at an exercise price of $0.33 per
share.
|
(15)
|
This
number includes 523,809.52 shares of common stock that may be acquired
immediately upon conversion of Series A preferred stock, 523,809.52
shares
of common stock that may be acquired immediately upon exercise of
an
outstanding common stock purchase warrant, and 498,142.96 shares
of our
common stock issuable on account of any possible penalties or
anti-dilution adjustments relating to the Series A preferred stock
and the
common stock purchase warrant.
|
(16)
|
Konrad
Ackerman is a control person of the shares owned by Alpha Capital
and
Konrad Ackerman and Rainer Posch have the authority to exercise voting
and
dispositive powers with respect to Alpha Capital.
|
(17)
|
Represents
2,380,952.38 shares of common stock that may be acquired immediately
upon
conversion of Series A preferred stock at a conversion rate of $0.21
per
share and 2,380,952.38 shares of common stock that may be acquired
immediately upon exercise of an outstanding common stock purchase
warrant
at an exercise price of $0.33 per
share.
|
(18)
|
This
number includes 2,380,952.38 shares of common stock that may be acquired
immediately upon conversion of Series A preferred stock, 2,380,952.38
shares of common stock that may be acquired immediately upon exercise
of
an outstanding common stock purchase warrant, and 2,264,286.24 shares
of
our common stock issuable on account of any possible penalties or
anti-dilution adjustments relating to the Series A preferred stock
and the
common stock purchase warrant.
|
(19)
|
Monarch
Capital Fund Ltd. is a BVI Investment Fund whose Manager is
Monarch Manager Ltd. Joseph Franck has voting and
investment control with respect to the Fund. Mr. Franck
disclaims beneficial ownership of the shares being registered
hereunder.
|
(20)
|
Represents
500,000 shares of common stock that may be acquired immediately upon
conversion of Series A preferred stock at a conversion rate of $0.21
per
share and 500,000 shares of common stock that may be acquired immediately
upon exercise of an outstanding common stock purchase warrant at
an
exercise price of $0.33 per share.
|
(21)
|
This
number includes 500,000 shares of common stock that may be acquired
immediately upon conversion of Series A preferred stock, 500,000
shares of
common stock that may be acquired immediately upon exercise of an
outstanding common stock purchase warrant, and 475,500 shares of
our
common stock issuable on account of any possible penalties or
anti-dilution adjustments relating to the Series A preferred stock
and the
common stock purchase warrant.
|
(22)
|
Keith
Goodman, who is the manager of the general partner of Nite Capital
LP is a
control person of the shares owned by Nite Capital LP and has the
authority to exercise voting and dispositive powers with respect
to Nite
Capital LP.
|
(23)
|
Represents
595,238.10 shares of common stock that may be acquired immediately
upon
conversion of Series A preferred stock at a conversion rate of $0.21
per
share and 595,238.10 shares of common stock that may be acquired
immediately upon exercise of an outstanding common stock purchase
warrant
at an exercise price of $0.33 per
share.
|
(24)
|
This
number includes 595,238.10 shares of common stock that may be acquired
immediately upon conversion of Series A preferred stock, 595,238.10
shares
of common stock that may be acquired immediately upon exercise of
an
outstanding common stock purchase warrant, and 566,071.80 shares
of our
common stock issuable on account of any possible penalties or
anti-dilution adjustments relating to the Series A preferred stock
and the
common stock purchase warrant.
|
(25)
|
Evan
Schemenauer, Arthur Jones and Jennifer Kelly are control persons
of the
shares owned by Whalehaven Capital Fund Limited and also have the
authority to exercise voting and dispositive powers with respect
to
Whalehaven Capital Fund Limited.
|
(26)
|
Represents
1,428,571.43 shares of common stock that may be acquired immediately
upon
conversion of Series A preferred stock at a conversion rate of $0.21
per
share and 1,428,571.43 shares of common stock that may be acquired
immediately upon exercise of an outstanding common stock purchase
warrant
at an exercise price of $0.33 per
share.
|
(27)
|
This
number includes 1,428,571.43 shares of common stock that may be acquired
immediately upon conversion of Series A preferred stock, 1,428,571.43
shares of common stock that may be acquired immediately upon exercise
of
an outstanding common stock purchase warrant, and 1,358,572.14 shares
of
our common stock issuable on account of any possible penalties or
anti-dilution adjustments relating to the Series A preferred stock
and the
common stock purchase warrant.
|
(28)
|
Represents
16,031 shares of common stock that may be acquired immediately upon
exercise of an outstanding common stock purchase warrant at an exercise
price of $0.21 per share and 16,031 shares of common stock that may
be
acquired immediately upon exercise of an outstanding common stock
purchase
warrant at an exercise price of $0.33 per
share.
|
(29)
|
Represents
37,501 shares of common stock that may be acquired immediately upon
exercise of an outstanding common stock purchase warrant at an exercise
price of $0.21 per share and 37,500 shares of common stock that may
be
acquired immediately upon exercise of an outstanding common stock
purchase
warrant at an exercise price of $0.33 per
share.
|
(30)
|
Richard
Rosenblum and David Stefonsky are control persons of the shares owned
by
Harborview Capital Management LLC and Richard Rosenblum has the authority
to exercise voting and dispositive powers with respect to Harborview
Capital Management LLC.
|
(31)
|
Represents
346,500 shares of common stock that may be acquired immediately upon
exercise of an outstanding common stock purchase warrant at an exercise
price of $0.21 per share and 346,500 shares of common stock that
may be
acquired immediately upon exercise of an outstanding common stock
purchase
warrant at an exercise price of $0.33 per
share.
|
(32)
|
Represents
5,086 shares of common stock that may be acquired immediately upon
exercise of an outstanding common stock purchase warrant at an exercise
price of $0.21 per share and 5,086 shares of common stock that may
be
acquired immediately upon exercise of an outstanding common stock
purchase
warrant at an exercise price of $0.33 per
share.
|
(33)
|
Represents
7,500 shares of common stock that may be acquired immediately upon
exercise of an outstanding common stock purchase warrant at an exercise
price of $0.21 per share and 7,500 shares of common stock that may
be
acquired immediately upon exercise of an outstanding common stock
purchase
warrant at an exercise price of $0.33 per
share.
|
(34)
|
Represents
7,500 shares of common stock that may be acquired immediately upon
exercise of an outstanding common stock purchase warrant at an exercise
price of $0.21 per share and 7,500 shares of common stock that may
be
acquired immediately upon exercise of an outstanding common stock
purchase
warrant at an exercise price of $0.33 per
share.
|
(35)
|
Leonard
Sokolow is a control person of the shares owned by vFinance Investments,
Inc. and has the authority to exercise voting and dispositive powers
with
respect to vFinance Investments, Inc.
|
(36)
|
Represents
329,882 shares of common stock that may be acquired immediately upon
exercise of an outstanding common stock purchase warrant at an exercise
price of $0.21 per share and 329,883 shares of common stock that
may be
acquired immediately upon exercise of an outstanding common stock
purchase
warrant at an exercise price of $0.33 per
share.
|
(37)
|
Represents
375,000 shares of common stock that may be acquired immediately upon
exercise of an outstanding common stock purchase warrant at an exercise
price of $0.21 per share and 375,000 shares of common stock that
may be
acquired immediately upon exercise of an outstanding common stock
purchase
warrant at an exercise price of $0.33 per
share.
|
Laurus
Master Fund, Ltd. and Lee Harrison Corbin, Attorney-in-Fact for the Trust Under
the Will of John Svenningsen, now known as Stephen A. Ross, Attorney-in-Fact
for
the Trust Under the Will of John Svenningsen.
By
way of
background information, on April 27, 2004, we closed a convertible debt
transaction with Laurus Master Fund, Ltd. providing up to $3.0 million in
financing. Under the arrangement, we 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 our common stock, and
a
warrant to purchase up to 666,666 shares of our common stock. Laurus also
committed to fund an additional $1.0 million under the financing arrangement
on
substantially similar terms as the initial $2.0 million funding described above,
which additional $1.0 million would become available to us following our
completion and/or achievement of certain conditions to funding, including,
without limitation, certain performance benchmarks.
The
note
had a term of three years. Interest was payable monthly in arrears commencing
on
June 1, 2004, and on the first day of each consecutive calendar month
thereafter. Monthly amortization payments were to commence on August 2, 2004,
at
the rate of $60,606.
The
interest rate under the note was subject to adjustment on a month by month
basis
if specified conditions were met (including that the common stock underlying
of
the note and the warrant issued to Laurus were registered with the U.S.
Securities and Exchange Commission and whether and to what extent the market
price of our 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 had the option to convert all or a portion of the note into shares of
our
common stock at any time, subject to specified limitations, at a fixed
conversion price of $0.66 per share. The note was secured by a first lien on
all
of our and our subsidiaries’ assets. Laurus received a six-year warrant to
purchase up to 666,666 shares of the our common stock at prices ranging from
$0.83 per share to $1.16 per share. All stock conversion prices and exercise
prices were subject to adjustment for stock splits, stock dividends or similar
events. We 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.
On
October 27, 2004, we entered into that certain Amendment and Waiver to
Securities Purchase Agreement and Related Agreements with Laurus amending
certain terms of the April 27, 2004 financing arrangement with Laurus. This
agreement was entered into in reliance upon exemption from registration pursuant
to Section 3(a)(9) of the Securities Act of 1933, as amended.
Pursuant
to the Amendment and Waiver to Securities Purchase Agreement and Related
Agreements: (a) Laurus waived our technical default of Section 6.12(f) of the
Securities Purchase Agreement entered into with Laurus in connection with the
April 27, 2004 arrangement for failing to obtain their approval of a financing
transaction; and (b) we issued to Laurus a warrant to purchase 470,000 shares
of
our common stock at an exercise price of $0.33 per share in satisfaction of
due
and unpaid fees of $49,333 (incurred by us for failing to cause its registration
statement registering the shares underlying the note and the warrant to be
declared effective by the Securities and Exchange Commission by August 30,
2004).
Pursuant
to the Amendment and Waiver to Securities Purchase Agreement and Related
Agreements, Laurus agreed to not require the Company to make principal or
interest payments under the note until May 2, 2005. Thereafter, we promised
to
pay Laurus $75,758 per month, together with any accrued and unpaid interest,
until the Maturity Date of the note. The note was further amended by decreasing
the Fixed Conversion Price of the Note from $0.66 per share to $0.33 per share.
Laurus also agreed to allow us to incur unsecured subordinated indebtedness
in
the aggregate principal amount not to exceed $1,025,000, so long as such
indebtedness was subordinated to our debt to Laurus. The warrant was amended
by
decreasing the Exercise Price of the warrant to equal as follows: (a) $0.41
for
the first 222,222 shares; (b) $0.50 for the next 222,222 shares; and (c) $0.58
for any additional shares acquired under the warrant.
The
Company’s registration statement covering the shares of common stock underlying
the note and each of the warrants owned by Laurus was declared effective by
the
U.S. Securities and Exchange Commission in December of 2004.
In
May of
2005, we required additional financing but, because we did not meet the
performance benchmarks set by Laurus (described above), we were unable to raise
the additional $1.0 million from Laurus. As a result, Lee Harrison Corbin,
Attorney-in-Fact for the Trust Under the Will of John Svenningsen, now known
as
Stephen A. Ross, Attorney-in-Fact for the Trust Under the Will of John
Svenningsen, offered to provide us with additional debt financing to sustain
our
operations. The Trust is one of our principal shareholders. See the section
entitled “Stock Ownership.” Because Laurus held a first-priority security
interest in our assets, in order for the Trust to provide us with additional
debt financing, it needed to ensure that Laurus’ debt financing arrangement
(described above) was fully satisfied. With these objectives in mind, we entered
into negotiations with both Laurus and the Trust to determine how best to
satisfy our outstanding debt obligations to Laurus.
As
a
result of these negotiations, on May 18, 2005, we entered into that certain
Assignment, Assumption and Release with Laurus and the Trust, pursuant to which,
Laurus assigned all of its rights, liabilities and obligations under our
original financing arrangement with Laurus (described above), and all documents
related thereto, to the Trust. In addition, Laurus released us from all
liability whatsoever under our previous financing arrangement, and all documents
related to that transaction, except for any terms which may survive the
assignment.
Simultaneously
with the execution and delivery of the Assignment, Assumption and Release,
the
Trust consolidated $1.55 million in existing unsecured debt owed by us to the
Trust and provided us with an additional $2.1 million in secured debt financing
for a total of $3,650,000 (as consolidated with the $200,000 promissory note
described under the heading “Certain Relationships and Related Transactions” on
page 45).
In
connection with the loan and in compliance with the Assignment, Assumption
and
Release: (a) the Trust delivered, on our behalf, $1,000,000 of the above loan
proceeds to Laurus, in full settlement of the outstanding secured convertible
term note described above; and (b) we issued a warrant to Laurus exercisable
into 1,500,000 shares of our common stock at an exercise price of $0.23 per
share.
The
$3,650,000 promissory note issued to the Trust has a term of two years. Eight
percent (8%) interest shall be payable monthly in arrears commencing on November
10, 2005, and on the first day of each consecutive calendar month thereafter.
Monthly amortization payments shall commence on May 10, 2006, at the rate of
$75,000. The Trust’s promissory note is secured by all of our
assets.
In
connection with the loan, the Trust received a warrant to purchase up to
6,000,000 shares of our common stock at prices ranging from $0.20 per share
to
$0.30 per share. All stock conversion prices and exercise prices are subject
to
adjustment for stock splits, stock dividends or similar events. We also agreed
to file a registration statement with the U.S. Securities and Exchange
Commission covering the shares issuable upon the exercise of each of the
warrants issued to the Trust and Laurus in connection with the execution and
delivery of the Assignment, Assumption and Release.
The
terms
of the warrants held by Laurus and the Trust, under which the shares of common
stock are included for resale under this prospectus, prohibit the exercise
of
the warrants to the extent that the exercise of the warrants would result in
Laurus or the Trust, together with their affiliates, beneficially owning in
excess of 4.99% of our outstanding shares of common stock. Laurus and the Trust
may waive the 4.99% limitation upon 75 days’ prior written notice to us. This
limitation does not preclude Laurus or the Trust from exercising the warrants
in
stages over time, where each stage does not leave it and its affiliates to
beneficially own shares in excess of this limitation percentage.
Laurus
and the Trust: (a) are not registered broker-dealers and (b) acquired the
securities for their own accounts and not with a view towards distribution.
The
principal documents involved in the May 18, 2005 transaction are a Securities
Purchase Agreement, an Amended and Restated Master Security Agreement, an
Amended, Restated and Consolidated Senior Secured Term Note, a Common Stock
Purchase Warrant issued to the Trust, a Common Stock Purchase Warrant issued
to
Laurus, a Registration Rights Agreement, an Amended and Restated Stock Pledge
Agreement, an Amended and Restated Grant of Security Interest in Patents and
Trademarks for the Company and certain of its subsidiaries, a Subsidiary
Guaranty a Subordination Agreement from Mark Mroczkowski and Nick VandenBrekel
to the Trust, a Subordination Agreement from Eagle Funding, LLC to the Trust,
and an Assignment, Assumption and Release, each of which is dated as of May
18,
2005 and a copy of which is attached as an exhibit to the current report on
Form
8-K filed with the Securities and Exchange Commission on May 24,
2005.
DKR
Soundshore Oasis Holding Fund Ltd, Double U Master Fund LP, Harborview Master
Fund LP, Alpha Capital, Monarch Capital Fund Ltd., Nite Capital LP and
Whalehaven Capital Fund Limited.
On
November 30, 2005, we closed a preferred stock transaction with seven
institutional investors, pursuant to which the Company issued 1,575 shares
of
its Series A preferred stock, par value $0.001 per share with a stated per
share
value of $1,000 for total proceeds of $1,575,000. We also issued to the Series
A
purchasers warrants exercisable into an aggregate of 7,500,000 shares of our
common stock. The seven investors include the following entities: DKR Soundshore
Oasis Holding Fund Ltd, Double U Master Fund LP, Harborview Master Fund LP,
Alpha Capital, Monarch Capital Fund Ltd., Nite Capital LP and Whalehaven Capital
Fund Limited.
Although
DKR Soundshore Oasis Holding Fund Ltd, Double U Master Fund LP, Harborview
Master Fund LP, Alpha Capital, Monarch Capital Fund Ltd., Nite Capital LP and
Whalehaven Capital Fund Limited may be affiliated with registered broker
-dealers, such parties acquired the Series A preferred stock and the warrants
for their own accounts, not with a view to or for distribution and in the
ordinary course of their business. None of the Series A purchasers have any
agreement or understanding with any person to distribute any of the
securities.
The
Series A preferred stock is non-voting and entitles the Series A purchasers
to
receive a 9% cumulative dividend payable semiannually. The Series A preferred
stock is convertible into 7,500,000 of our common shares at a fixed price of
$0.21 per share. The Series A preferred stock contains anti-dilution provisions
under which the number of shares issuable upon conversion of the Series A
preferred stock and the conversion price will be adjusted upon the issuance
of
common stock or securities convertible into or exercisable for common stock
at
prices lower than the then effective exercise price of the Series A preferred
stock, the occurrence of stock splits, stock distributions, and other corporate
events.
On
December 9, 2008, we must redeem all of the Series A preferred stock for a
total
amount equal to $1,575,000, accrued but unpaid dividends and all liquidated
damages and other amounts due in respect of the Series A preferred stock.
In
connection with the Series A transaction, the Series A purchasers received
warrants to purchase up to an aggregate of 7,500,000 shares of our common stock
at $0.33 per share. All stock conversion prices and exercise prices are subject
to adjustment for stock splits, stock dividends or similar events. We also
agreed to file a registration statement with the Securities and Exchange
Commission covering the shares issuable upon the conversion of the Series A
preferred stock and exercise of the warrants. We paid a commission of $181,125
to our placement agent in connection with the Series A transaction and issued
warrants to our placement agent and certain of its registered representatives
exercisable into an aggregate of 2,250,000 shares at $0.33 per
share.
The
terms
of the Series A preferred stock and warrants held by the Series A stockholders,
under which the shares of common stock are included for resale under this
prospectus, prohibit the conversion of the Series A preferred stock and the
exercise of the warrants to the extent that the conversion of the Series A
preferred stock or the exercise of the warrants would result in any of the
Series A preferred stockholders, together with their affiliates, beneficially
owning in excess of 4.99% of our outstanding shares of common stock. Each of
the
Series A preferred stockholders may waive the 4.99% limitation upon 61 days’
prior written notice to us. This limitation does not preclude the Series A
preferred stockholders from converting the Series A preferred stock or
exercising the warrants in stages over time, where each stage does not leave
it
and its affiliates to beneficially own shares in excess of this limitation
percentage.
The
principal documents involved in the transaction are a Securities Purchase
Agreement, a certificate of Determination of Preferences, Rights and Limitations
of Series A Convertible Preferred Stock, a Registration Rights Agreement, a
Common Stock Purchase Warrant, and an Escrow Deposit Agreement, each of which
is
dated as of November 30, 2005 and a copy of which is attached as an exhibit
to
the current report on Form 8-K filed with the Securities and Exchange Commission
on December 2, 2005. An amended Certificate of Determination of Preferences,
Rights and Limitations of Series A Convertible Preferred Stock is attached
as an
exhibit to the current report on Form 8-K filed with the Securities and Exchange
Commission on December 19, 2005.
vFinance
Investments, Inc., Vince Calicchia, Carmello Troccoli, Harborview Capital
Management LLC, Jonathan Rich, Jody Giraldo, Brad Barnard and Nico
Pronk.
In
connection with the Series A transaction, we paid a commission of $181,125
to
our placement agent (vFinance Investments, Inc.) in connection with the Series
A
transaction and issued warrants to our placement agent and certain of its
registered representatives exercisable into an aggregate of 2,250,000 shares
at
$0.33 per share as part of the total compensation for their services. We also
agreed to file a registration statement with the Securities and Exchange
Commission covering the shares issuable upon the exercise of the warrants.
These
warrants were issued to the following: vFinance Investments, Inc., Vince
Calicchia, Carmello Troccoli, Harborview Capital Management LLC, Jonathan Rich,
Jody Giraldo, Brad Barnard and Nico Pronk.
Although
vFinance Investments, Inc. is a registered broker-dealer and Vince Calicchia,
Carmello Troccoli, Harborview Capital Management LLC, Jonathan Rich, Jody
Giraldo, Brad Barnard and Nico Pronk are each registered representatives of
vFinance Investments, Inc., they each acquired the securities: (a) as
compensation for services performed to us and (b) for their own account and
not
with a view towards distribution. None of these parties have any agreement
or
understanding with any person to distribute any of the securities.
The
terms
of the warrants held by vFinance Investments, Inc., Vince Calicchia, Carmello
Troccoli, Harborview Capital Management LLC, Jonathan Rich, Jody Giraldo, Brad
Barnard and Nico Pronk, under which the shares of common stock are included
for
resale under this prospectus, prohibit the exercise of the warrants to the
extent that the exercise of the warrants would result in any of the warrant
holders, together with their affiliates, beneficially owning in excess of 4.99%
of our outstanding shares of common stock. Each of these warrant holders may
waive the 4.99% limitation upon 61 days’ prior written notice to us. This
limitation does not preclude these warrant holders from exercising the warrants
in stages over time, where each stage does not leave it and its affiliates
to
beneficially own shares in excess of this limitation percentage.
The
principal documents involved in the transaction are a Registration Rights
Agreement, which also covers the shares underlying the Series A purchasers
described above and a Common Stock Purchase Warrant, which contains the same
terms and conditions as the Common Stock Purchase Warrant issued to the Series
A
purchasers described above. Each of these documents were attached as an exhibit
to the current report on Form 8-K filed with the Securities and Exchange
Commission on December 2, 2005.
Distribution
by Selling Stockholders
We
are
registering the shares of our common stock covered by this prospectus for the
selling stockholders.
Each
selling stockholder of our common stock and any of their pledgees, assignees
and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the OTCBB or any other stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. A selling stockholder may use any one
or
more of the following methods when selling shares:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a
part;
|
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of
sale;
|
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
or
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended, if available, rather than under this
prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance
with
NASDR Rule 2440; and in the case of a principal transaction a markup or markdown
in compliance with NASDR IM-2440.
In
connection with the sale of the common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of the common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act of 1933, as amended, in connection with such sales. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act of 1933, as amended. Each
selling stockholder has informed us that it does not have any written or oral
agreement or understanding, directly or indirectly, with any person to
distribute the common stock. In no event shall any broker-dealer receive fees,
commissions and markups which, in the aggregate, would exceed eight percent
(8%).
We
are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act of 1933, as amended.
Because
selling stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act of 1933, as amended, they will be subject to the prospectus
delivery requirements of the Securities Act of 1933, as amended. In addition,
any securities covered by this prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act of 1933, as amended, may be sold under Rule
144 rather than under this prospectus. Each selling stockholder has advised
us
that they have not entered into any written or oral agreements, understandings
or arrangements with any underwriter or broker-dealer regarding the sale of
the
resale shares. There is no underwriter or coordinating broker acting in
connection with the proposed sale of the resale shares by the selling
stockholders.
We
agreed
to keep this prospectus effective until the earlier of (i) the date on which
the
shares may be resold by the selling stockholders without registration and
without regard to any volume limitations by reason of Rule 144(e) under the
Securities Act of 1933, as amended, or any other rule of similar effect or
(ii)
all of the shares have been sold pursuant to the prospectus or Rule 144 under
the Securities Act of 1933, as amended, or any other rule of similar effect.
The
resale shares will be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in
certain states, the resale shares may not be sold unless they have been
registered or qualified for sale in the applicable state or an exemption from
the registration or qualification requirement is available and is complied
with.
Under
applicable rules and regulations under the Securities Exchange Act of 1934,
as
amended, any person engaged in the distribution of the resale shares may not
simultaneously engage in market making activities with respect to the common
stock for the applicable restricted period, as defined in Regulation M, prior
to
the commencement of the distribution. In addition, the selling stockholders
will
be subject to applicable provisions of the Securities Exchange Act of 1934,
as
amended, and the rules and regulations thereunder, including Regulation M,
which
may limit the timing of purchases and sales of shares of the common stock by
the
selling stockholders or any other person. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time
of
the sale.
Because
it is possible that a significant number of shares could be sold at the same
time under this prospectus, these sales, or that possibility, may have a
depressive effect on the market price of our common stock.
We
will
receive none of the proceeds from the sale of the shares of common stock by the
selling stockholders, except upon exercise of the outstanding common stock
purchase warrant.
We
will
pay all costs and expenses incurred in connection with the registration under
the Securities Act of 1933, as amended, of the shares of common stock offered
by
the selling stockholders, including all registration and filing fees, listing
fees, printing expenses, and our legal and accounting fees. The selling
stockholders will pay all of its own brokerage fees and commissions, if any,
incurred in connection with the sale of its shares of common stock.
We
cannot
assure you, however, that the selling stockholders will sell any of the shares
of common stock it may offer.
Our
authorized capitalization consists of 200,000,000 shares of common stock, par
value $.001 per share, and 50,000,000 shares of preferred stock, par value
$.001
per share. As of March 14, 2006, there were issued and outstanding 64,458,321
shares of common stock and 1,575 shares of Series A preferred
stock.
The
following summary of the important provisions of our common stock, preferred
stock, common stock purchase warrants, articles of incorporation and by-laws
is
qualified by reference to the provisions of our articles of incorporation and
by-laws and the forms of warrants incorporated by reference as exhibits to
the
registration statement of which this prospectus is a part.
Common
Stock
Holders
of our common stock are entitled to one vote for each share held on all matters
submitted to a vote of stockholders and do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of our common stock entitled
to
vote in any election of directors may elect all of the directors standing for
election. Holders of our common stock are entitled to receive dividends ratably,
if any, as may be declared from time to time by our board of directors out
of
funds legally available therefor. Upon the liquidation, dissolution or winding
up of the company, the holders of our common stock are entitled ratably to
our
net assets available after the payment of all liabilities. Holders of our common
stock have no preemptive, subscription, redemption or conversion rights, and
there are no redemption or sinking fund provisions applicable to the common
stock. The outstanding shares of our common stock are validly issued, duly
authorized, fully paid and non-assessable.
Preferred
Stock
Our
Articles of Incorporation authorize the issuance of up to 50,000,000 shares
of
“blank check” preferred stock with such rights and preferences as our board of
directors, without further shareholder approval, may determine from time to
time. Of these authorized preferred shares, we have designated 1,575 shares
as
Series A preferred stock. There are 1,575 shares of Series A preferred stock
outstanding, as of March 14, 2006. All Series A preferred stock ranks senior
to
common stock as to payment of dividends and distribution of assets. The Series
A
preferred stock is non-voting and entitles the Series A purchasers to receive
a
9% cumulative dividend payable semiannually. The Series A preferred stock is
convertible into 7,500,000 of our common shares at a fixed price of $0.21 per
share. The Series A preferred stock contain anti-dilution provisions under
which
the number of shares issuable upon conversion of the Series A preferred stock
and the conversion price will be adjusted upon the issuance of common stock
or
securities convertible into or exercisable for common stock at prices lower
than
the then effective exercise price of the Series A preferred stock, the
occurrence of stock splits, stock distributions, and other corporate
events
On
December 9, 2008, we must redeem all of the Series A preferred stock for a
total
amount equal to $1,575,000, accrued but unpaid dividends and all liquidated
damages and other amounts due in respect of the Series A preferred stock.
We
will
be subject to significant liquidated damages if we default under the terms
of
the Certificate of Determination of Preferences, Rights and Limitations of
Series A 9% Convertible Preferred Stock if any of the following occurs: this
registration statement is not declared effective by the Securities and Exchange
Commission on or prior to May 29, 2006; the effectiveness of this registration
statement lapses for any reason or if the holders of the Series A preferred
stock cannot use this registration statement for more than an aggregate of
60
calendar days (which need not be consecutive days) during any 12 month period;
we provide notice of our inability to comply with a conversion request; failure
to comply with certain provisions of the registration rights agreement with
respect to the Series A preferred stock; we fail for any reason to pay in full
any amounts due to the holder of the Series A preferred stock within five days
of the date due; we fail to have available a sufficient number of authorized
and
unreserved shares of common stock to issue to the holders of the Series A
preferred stock upon a conversion hereunder; we breach any covenant, agreement
or warranty and such failure or breach shall not, and such breach has not been
cured within 30 calendar days after the date on which written notice of such
breach shall have been given; we redeem more than a de minimis number of
securities junior to the Series A preferred stock; any change in our controlling
ownership; any form of bankruptcy or insolvency proceeding is instituted by
or
against us, which is not vacated within 60 days; our common stock fails to
be
listed or quoted for trading on the OTCBB for more than five trading days;
any
monetary judgment, writ or similar final process shall be entered or filed
against us, any of out subsidiaries or any of their respective property or
other
assets for more than $50,000, and shall remain unvacated, unbonded or unstayed
for a period of 45 calendar days.
If
we
default on the Series A preferred stock, we may be required to redeem all of
the
Series A preferred stock for a total amount equal to the sum of (i) the greater
of (A) $2,047,500 and (B) the product of (a) the VWAP (with “VWAP” defined as
the price determined by the OTCBB) on the trading day immediately preceding
the
date of default and (b) $1,575,000 divided by the then conversion price (which
is $0.21 per share as of the date of this registration statement), (ii) accrued
but unpaid dividends and (iii) all liquidated damages and other amounts due
in
respect of the Series A preferred stock.
The
7,500,000 shares of common stock issuable upon conversion of the Series A
preferred stock are included for resale in this prospectus pursuant to
registration rights agreements. We are obligated to keep the registration
statement effective until the earlier of the sale of all of the warrant stock
and the date on which such stock may be publicly resold under Rule 144(k).
In
addition, none of the Series a Stock holders may convert the Series A preferred
stock if, as a result of the conversion, the holder would beneficially own
more
than 4.99% of the outstanding shares of Common Stock. The holder is entitled
to
revoke these restrictions if it provides us with 61 days prior written notice.
Common
Stock Purchase Warrants
Warrants
Issued In Connection with the Series A Preferred Stock Financing.
In
connection with the Series A preferred stock financing, we issued to each of
the
Series A stockholders and to the placement agent and its affiliates, warrants
to
purchase 7,500,000 and 2,250,000 shares of common stock, respectively. The
warrants held by the Series A purchasers have an exercise price of $0.33 per
share, seven of the warrants held by the placement agent and its affiliates
have
an exercise price of $0.21 per share and seven of the warrants held by the
placement agent and its affiliates have an exercise price of $0.33 per share.
All of the warrants issued in connection with the Series A preferred stock
transaction expire on November 30, 2010. If the resale of the shares of common
stock is not registered for resale pursuant to an effective registration
statement, all of the warrants may be exercised by a cashless procedure whereby,
in lieu of paying for the shares in cash, the holder may pay for shares
purchased by surrendering the warrant for a number of shares of common stock
determined in accordance with a specified formula. The warrants contain
anti-dilution provisions under which the number of shares issuable upon exercise
of the warrants and the exercise price will be adjusted upon the issuance of
common stock or securities convertible into or exercisable for common stock
at
prices lower than the then effective exercise price of the warrants, the
occurrence of stock splits, stock distributions, and other corporate events.
The
7,500,000 and 2,250,000 shares of common stock issuable upon exercise of the
warrants are included for resale in this prospectus pursuant to registration
rights agreements. We are obligated to keep the registration statement effective
until the earlier of the sale of all of the warrant stock and the date on which
such stock may be publicly resold under Rule 144(k). The holders of the warrants
may not exercise the warrants if, as a result of the exercise, such holder
would
beneficially own more than 4.99% of the outstanding shares of common stock.
Each
holder is entitled to revoke these restrictions if it provides us with 61 days
prior written notice.
Warrants
issued to the Trust and Laurus Master Fund, Ltd. The
common stock purchase warrant issued to Lee Harrison Corbin, Attorney-in-Fact
for the Trust Under the Will of John Svenningsen, now known as Stephen A. Ross,
Attorney-in-Fact for the Trust Under the Will of John Svenningsen entitles
the
holder of the warrant to purchase up to 6,000,000 shares of our common stock.
The warrant issued to the Trust expires on May 17, 2011. The exercise price
per
share for the Trust warrant is as follows: (i) $0.20 for the first 2,000,000
shares; (ii) $0.25 for the next 2,000,000 shares; and (iii) $0.30 for the next
2,000,000 shares of common stock. The common stock purchase warrants issued
to
Laurus Master Fund, Ltd. entitles the holder of the warrants to purchase up
to
an aggregate of 1,722,222 shares of our common stock. A warrant issued to the
Laurus, which is exercisable into 1,500,000 shares of our common stock expires
on May 17, 2011. The exercise price per share for this Laurus warrant is $0.23
per share. A warrant issued to the Laurus, which is exercisable into 222,222
shares of our common stock expires on April 27, 2010. The exercise price per
share for this Laurus warrant is $0.58 per share.
The
Trust
and the Laurus warrants may be exercised upon surrender of the warrant
certificates on or prior to the expiration date at our offices with the “Form of
Subscription” on the reverse side of the warrant certificates filled out and
executed as indicated, accompanied by payment of the full exercise price for
the
number of shares being exercised under the warrants. In addition to the use
of
cash, certified or official bank check as payment for the exercise of the
warrants, the warrant holder may also exercise the warrants by surrendering
that
number of shares of common stock issuable under the warrants with a fair market
value equal to the exercise price of the portion of the warrants to be
exercised.
The
Trust
and Laurus warrants contains provisions that protect the holder against dilution
by adjustment of the purchase price in specified events, such as stock
dividends, stock splits and other similar events. The holder of the warrants
will not possess any rights as a stockholder unless and until the holder
exercises the warrants.
The
6,000,000 shares of common stock issuable upon exercise of the common stock
purchase warrant held by the Trust and the 1,722,222 shares of common stock
issuable upon exercise of the common stock purchase warrants held by Laurus
are
included for resale in this prospectus pursuant to registration rights
agreements. We are obligated to keep the registration statement effective until
the earlier of the sale of all of the warrant stock and the date on which such
stock may be publicly resold under Rule 144(k).
In
addition, neither the Trust nor Laurus may exercise the warrants if, as a result
of the exercise, the holder would beneficially own more than 4.99% of the
outstanding shares of common stock. The holder is entitled to revoke these
restrictions if it provides us with 75 days prior written notice.
Registration
Rights
We
have
registration rights agreements with the
selling
stockholders. All of the stock subject to the registration rights agreements
is
being registered in this prospectus in accordance with the terms of those
agreements.
Registration
Rights of the Holders of the Series A Preferred Stock and Related Warrants.
We
entered into a registration rights agreement with the holders of the Series
A
preferred stock and related warrants pursuant to which we are including in
this
registration statement a total of 14,532,499 shares of common stock issuable
upon conversion of the Series A preferred stock and that may be issuable to
the
Series A preferred stockholders on account of dividend payments and certain
anti-dilution adjustments, and 17,472,222 shares of common stock that are
issuable upon the exercise of the related warrants.
If:
(i)
the registration statement is not filed on or prior to December 30, 2005, or
(ii) we fail to file with the Securities and Exchange Commission a request
for
acceleration in accordance with Rule 461 promulgated under the Securities Act
of
1933, as amended, within five trading days of the date that we are notified
(orally or in writing, whichever is earlier) by the Securities and Exchange
Commission that a registration statement will not be “reviewed,” or not subject
to further review, or (iii) prior to its Effectiveness Date (defined below),
we
fail to file a pre-effective amendment and otherwise respond in writing to
comments made by the Securities and Exchange Commission in respect of such
registration statement within 25 calendar days after the receipt of comments
by
or notice from the Securities and Exchange Commission that such amendment is
required in order for the registration statement to be declared effective,
or
(iv) the registration statement filed or required to be filed under the
registration rights agreement is not declared effective by the Securities and
Exchange Commission by the 30th
day
following the Effectiveness Date (defined below), or (v) after the Effectiveness
Date (defined below), the registration statement ceases for any reason to remain
continuously effective, or the prospectus cannot be used for 10 consecutive
calendar days but no more than an aggregate of 15 calendar days during any
12-month period (which need not be consecutive trading days), then on upon
each
default and on each monthly anniversary of each such default (if the applicable
default has not have been cured by such date) until the applicable default
is
cured, we shall pay to each of the Series A stockholders and the holders of
the
related warrants an amount in cash, as partial liquidated damages and not as
a
penalty, equal to 1.5% of the aggregate purchase price paid by such holders
for
any securities required to be registered by us, up to a maximum of 9% per annum
of the aggregate purchase price paid. If we fail to pay any partial liquidated
damages pursuant to the registration rights agreement in full within seven
days
after the date payable, we will pay interest thereon at a rate of 18% per annum
(or such lesser maximum amount that is permitted to be paid by applicable law)
to each holder, accruing daily from the date such partial liquidated damages
are
due until such amounts, plus all such interest thereon, are paid in full. The
partial liquidated damages pursuant to the terms of the registration rights
agreement will apply on a daily pro-rata basis for any portion of a month prior
to the cure of a default.
“Effectiveness
Date” means, with respect to the registration statement required to be filed by
the registration rights agreement, March 30, 2006 (April 29, 2006 in the case
of
a review by the Securities and Exchange Commission).
We
are
obligated to keep the registration statement effective until the earlier of
the
sale of all of the common shares underlying the Series A preferred stock and
all
of the warrants and the date on which such stock may be publicly resold under
Rule 144(k). We and the holders of the Series A preferred stock and the related
warrants have agreed to indemnify each other for certain acts or omissions
of
the indemnifying party in connection with the registration of the registered
shares.
Other
Registration Rights.
We have
included in this registration statement 6,000,000 shares of common stock
issuable upon the exercise of an outstanding warrant held by the Lee Harrison
Corbin, Attorney-in-Fact for the Trust Under the Will of John Svenningsen,
now
known as Stephen A. Ross, Attorney-in-Fact for the Trust Under the Will of
John
Svenningsen and 1,722,222 shares of common stock issuable upon the exercise
of
outstanding warrants held by Laurus Master Fund, Ltd., pursuant to related
registration rights agreements. The Trust registration rights agreement does
not
contain damage provisions or other penalties for failure to obtain or maintain
the effectiveness of the registration statement.
We
are
obligated to keep the registration statement effective until the earlier of
the
sale of all of the common stock underlying the Trust warrant and the Laurus
warrant and the date on which such stock may be publicly resold under Rule
144(k).
We
and
the Trust have agreed to indemnify each other for certain acts or omissions
of
the indemnifying party in connection with the registration of the registered
shares. We and Laurus have agreed to indemnify each other for certain acts
or
omissions of the indemnifying party in connection with the registration of
the
registered shares.
Indemnification
and Limited Liability Provisions
Limited
Liability
Our
articles of incorporation provides that the liability of our directors for
monetary damages shall be eliminated to the fullest extent permissible
under
California law. Under California law, a director may be subject to liability
for:
|
·
|
Any
breach of such director’s duty of loyalty to us or our
stockholders;
|
|
·
|
Acts
or omissions not in good faith or which involve intentional misconduct
or
a knowing violation of law;
|
|
·
|
Making
unlawful payments of dividends or unlawful stock purchase or redemption
by
us; or
|
|
·
|
transactions
from which such director derived any improper personal
benefit.
|
Accordingly,
our officers or directors may have no liability to our shareholders for any
mistakes or errors of judgment or for any act of omission, unless such act
or
omission involves intentional misconduct, fraud, or a knowing violation of
law
or results in unlawful distributions to our shareholders.
Indemnification
We
have
authority under Section 317 of the California General Corporation Law to
indemnify our directors and officers to the extent provided in such statute.
Our
bylaws provide that we shall indemnify our executive officers and directors.
Under Section 317 of the California General Corporation Law, a corporation
may
indemnify a director or officer if: (a) such person acted in good faith and
in a
manner reasonably believed by such person to be in the best interests of the
corporation; or (b) with respect to criminal proceedings, such person had no
reasonable cause to believe that his or her conduct was unlawful.
Our
employment agreements with Mr. VandenBrekel, Mr. Mroczkowski and Mr. McGinn,
each contain indemnification obligations pursuant to which we have agreed to
indemnify each such person for all expenses and liabilities, including criminal
monetary judgments, penalties and fines, incurred by such person in connection
with any criminal or civil action brought or threatened against such person
by
reason of such person being or having been our officer or director or employee.
In order to be entitled to indemnification by us, such person must have acted
in
good faith and in a manner such person believed to be in our best interests
and,
with respect to criminal actions, such person must have had no reasonable cause
to believe his or her conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to our directors, officers and controlling persons pursuant to
the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Pacific Stock Transfer
Company, 500 E. Warm Springs Rd., Suite 240, Las Vegas, NV 89119.
Market
Information
Our
common stock is quoted on the OTC Bulletin Board under the symbol “SQUM.OB.”
The
validity of the shares of common stock offered in this prospectus will be passed
upon for us by our counsel, Greenberg Traurig, P.A.
The
financial statements as of and for the years ended December 31, 2004 and
December 31, 2003 included in this prospectus have been so included in reliance
on the report of Tedder, James, Worden & Associates, P.A., independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
CHANGES
IN
AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
On
January 19, 2004, we terminated Gallogly, Fernandez & Riley, LLP as our
independent auditor. Our Board of Directors approved the termination of
Gallogly, Fernandez & Riley, LLP. Gallogly, Fernandez & Riley, LLP
audited our financial statements for the fiscal years ended December 31, 2002
and 2001.
Gallogly,
Fernandez & Riley, LLP ‘s report on our financial statements for the fiscal
years ended December 31, 2002 and 2001 did not contain any adverse opinion
or
disclaimer of opinion and were not qualified as to uncertainty, audit scope
or
accounting principles. During the recent fiscal year ended December 31, 2003,
(i) there were no disagreements between us and Gallogly, Fernandez & Riley,
LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, if not resolved to the
satisfaction of Gallogly, Fernandez & Riley, LLP, would have caused
Gallogly, Fernandez & Riley, LLP to make reference to the subject matter of
the disagreement in connection with its reports and (ii) there were no
“reportable events,” as defined in Item 304(a)(1)(v) of Regulation S-K of the
SEC. The decision to replace Gallogly, Fernandez & Riley, LLP was not the
result of any disagreement between Gallogly, Fernandez & Riley, LLP and us
on any matter of accounting principle or practice, financial statement
disclosure or audit procedure.
Concurrently,
on January 19, 2004, our Board of Directors approved the appointment of Tedder,
James, Worden & Associates, P.A. as our new independent accountant and
auditor. We did not consult with Tedder, James, Worden & Associates, P.A. on
any matters related to accounting principles or practice, financial statement
disclosures or audit procedures prior to selecting and appointing Tedder, James,
Worden & Associates, P.A. as our auditor.
INDEX
TO
CONSOLIDATED FINANCIAL STATEMENTS
Reports
of Independent Registered Certified Public Accounting Firm
|
F-2
|
|
|
Consolidated
Financial Statements for the Years Ended December 31, 2004 and
2003:
|
|
Balance
Sheets
|
F-3
|
Statements
of Operations
|
F-4
|
Statements
of Shareholders’ Deficit
|
F-5
|
Statements
of Cash Flows
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
|
|
Unaudited
Condensed Financial Statements for the Three and Nine Months Ended
September 30, 2005 and 2004:
|
Balance
Sheets
|
F-25
|
Statements
of Operations
|
F-26
|
Statements
of Stockholders’ Deficit
|
F-27
|
Statements
of Cash Flows
|
F-28
|
Notes
to Consolidated Financial Statements
|
F-30
|
REPORT
OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
FIRM
The
Board
of
Directors
and
Shareholders
Sequiam
Corporation
We
have
audited the accompanying consolidated balance sheets of Sequiam Corporation
and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of operations, shareholders’ deficit, and cash flows for the years
then ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis,
evidence supporting the amounts and disclosures in the financial statements.
An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2004 and 2003, and the results of their operations and their cash flows
for
the years then ended in conformity with U.S. generally accepted accounting
principles.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations, has
a
working capital deficit and its total liabilities exceed its total assets.
This
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
TEDDER, JAMES, WORDEN & ASSOCIATES, P.A.
Orlando,
Florida
April
8,
2005
Sequiam
Corporation
and Subsidiaries
Consolidated
Balance Sheets
|
|
December
31,
|
|
|
|
2004
|
|
2003
|
|
Assets:
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
$
|
151,450
|
|
Receivables,
net of allowance for bad debts of $3,390 and $3,000
|
|
|
39,111
|
|
|
7,047
|
|
Prepaid
expenses
|
|
|
97,125
|
|
|
21,067
|
|
Equipment
held for sale
|
|
|
-
|
|
|
40,706
|
|
Total
current assets
|
|
|
136,236
|
|
|
220,270
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,303,757
|
|
|
1,174,866
|
|
Software
development costs, net
|
|
|
-
|
|
|
108,916
|
|
Acquired
software, net
|
|
|
163,200
|
|
|
230,400
|
|
Intellectual
properties, net
|
|
|
644,896
|
|
|
985,645
|
|
Product
development costs
|
|
|
34,509
|
|
|
-
|
|
Loan
costs, net
|
|
|
224,252
|
|
|
-
|
|
Deposits
and other assets
|
|
|
8,805
|
|
|
22,788
|
|
Total
assets
|
|
$
|
2,515,655
|
|
$
|
2,742,885
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders’ deficit
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
$
|
24,165
|
|
$
|
-
|
|
Amount
due for acquisition
|
|
|
-
|
|
|
70,529
|
|
Notes
and debentures payable
|
|
|
1,692,077
|
|
|
592,322
|
|
Accounts
payable
|
|
|
706,966
|
|
|
573,860
|
|
Accrued
expenses
|
|
|
96,299
|
|
|
181,301
|
|
Deferred
revenue
|
|
|
6,000
|
|
|
-
|
|
Deferred
rents
|
|
|
26,141
|
|
|
-
|
|
Current
portion of long-term debt
|
|
|
840,245
|
|
|
95,131
|
|
Loans
from shareholders
|
|
|
348,951
|
|
|
695,300
|
|
Accrued
shareholders’ salaries
|
|
|
1,349,792
|
|
|
1,214,792
|
|
Total
current liabilities
|
|
|
5,090,636
|
|
|
3,423,235
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,301,793
|
|
|
1,175,933
|
|
Total
liabilities
|
|
|
7,392,429
|
|
|
4,599,168
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
deficit:
|
|
|
|
|
|
|
|
Preferred
shares, par value $.001;
|
|
|
|
|
|
|
|
50,000,000
shares authorized; none issued
|
|
|
-
|
|
|
-
|
|
Common
shares, par value $.001;
|
|
|
|
|
|
|
|
100,000,000
shares authorized; 47,965,604
|
|
|
|
|
|
|
|
and
43,863,218 shares issued and outstanding
|
|
|
47,966
|
|
|
43,863
|
|
Additional
paid-in capital
|
|
|
7,524,118
|
|
|
4,701,695
|
|
Accumulated
deficit
|
|
|
(12,448,858
|
)
|
|
(6,601,841
|
)
|
Total
shareholders’ deficit
|
|
|
(4,876,774
|
)
|
|
(1,856,283
|
)
|
Total
liabilities and shareholders’ deficit
|
|
$
|
2,515,655
|
|
$
|
2,742,885
|
|
See
accompanying notes to consolidated financial statements
Sequiam
Corporation
and Subsidiaries
Consolidated
Statements of Operations
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2003
|
|
Revenues
|
|
|
|
|
|
Services
|
|
$
|
165,729
|
|
$
|
338,550
|
|
Product
sales
|
|
|
99,765
|
|
|
47,620
|
|
Total
revenues
|
|
|
265,494
|
|
|
386,170
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
957,741
|
|
|
935,184
|
|
Cost
of product sales
|
|
|
215,613
|
|
|
137,547
|
|
Selling,
general and administrative
|
|
|
3,230,937
|
|
|
3,448,502
|
|
(Gain)
loss on sale of equipment
|
|
|
(146
|
)
|
|
18,304
|
|
Loss
on impairment of equipment
held for sale
|
|
|
40,706
|
|
|
75,000
|
|
Loss
on impairment of intangible assets
|
|
|
206,082
|
|
|
-
|
|
Loss
on debt settlement
|
|
|
111,742
|
|
|
93,158
|
|
|
|
|
4,762,675
|
|
|
4,707,695
|
|
Loss
from operations
|
|
|
(4,497,181
|
)
|
|
(4,321,525
|
)
|
Interest
expense
|
|
|
(1,349,836
|
)
|
|
(368,663
|
)
|
Net
loss
|
|
$
|
(5,847,017
|
)
|
$
|
(4,690,188
|
)
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.13
|
)
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
Shares
used in computation of net loss per common share -
|
|
|
|
|
|
|
|
Basic
and diluted weighted average shares outstanding
|
|
|
46,271,637
|
|
|
38,285,976
|
|
See
accompanying notes to consolidated financial statements
Sequiam
Corporation
and Subsidiaries
Consolidated
Statements of Shareholders’ Deficit
Years
Ended December 31, 2004 and 2003
|
|
Common
Shares
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
Par
Value
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Total
|
|
Balance
at December 31, 2002
|
|
|
35,462,609
|
|
$
|
35,463
|
|
$
|
42,565
|
|
$
|
(1,911,653
|
)
|
$
|
(1,833,625
|
)
|
Correction
of transfer agent error
|
|
|
(17,000
|
)
|
|
(17
|
)
|
|
17
|
|
|
-
|
|
|
-
|
|
Sale
of common shares
|
|
|
3,555,638
|
|
|
3,555
|
|
|
1,036,946
|
|
|
-
|
|
|
1,040,501
|
|
Common
shares issued for services
|
|
|
2,318,500
|
|
|
2,319
|
|
|
1,757,127
|
|
|
-
|
|
|
1,759,446
|
|
Warrants
issued in connection with loan agreement
|
|
|
-
|
|
|
-
|
|
|
550,000
|
|
|
-
|
|
|
550,000
|
|
Common
shares issued in connection with loan agreement
|
|
|
75,000
|
|
|
75
|
|
|
29,925
|
|
|
-
|
|
|
30,000
|
|
Common
shares issued for acquisition of WMW Communications, Inc.
|
|
|
318,471
|
|
|
318
|
|
|
149,682
|
|
|
-
|
|
|
150,000
|
|
Common
shares issued for acquisition of Smart Biometrics, Inc.
|
|
|
1,500,000
|
|
|
1,500
|
|
|
748,500
|
|
|
-
|
|
|
750,000
|
|
Common
shares issued for acquisition of Telepartners, Inc.
|
|
|
165,000
|
|
|
165
|
|
|
149,768
|
|
|
-
|
|
|
149,933
|
|
Common
shares issued for acquisition of Fingerprint Detection Technologies,
Inc
|
|
|
485,000
|
|
|
485
|
|
|
237,165
|
|
|
-
|
|
|
237,650
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,690,188
|
)
|
|
(4,690,188
|
)
|
Balance
at December 31, 2003
|
|
|
43,863,218
|
|
|
43,863
|
|
|
4,701,695
|
|
|
(6,601,841
|
)
|
|
(1,856,283
|
)
|
Shares
issued to correct error
|
|
|
19,047
|
|
|
19
|
|
|
(19
|
)
|
|
-
|
|
|
-
|
|
Sale
of common shares
|
|
|
1,993,757
|
|
|
1,994
|
|
|
759,098
|
|
|
-
|
|
|
761,092
|
|
Stock
options exercised
|
|
|
237,500
|
|
|
238
|
|
|
40,137
|
|
|
-
|
|
|
40,375
|
|
Common
shares issued for services
|
|
|
1,752,082
|
|
|
1,752
|
|
|
568,698
|
|
|
-
|
|
|
570,450
|
|
Debt
settlement
|
|
|
100,000
|
|
|
100
|
|
|
50,900
|
|
|
-
|
|
|
51,000
|
|
Warrants
issued in connection with loan agreements
|
|
|
-
|
|
|
-
|
|
|
1,339,208
|
|
|
-
|
|
|
1,339,208
|
|
Warrants
issued for loan costs
|
|
|
-
|
|
|
-
|
|
|
49,333
|
|
|
-
|
|
|
49,333
|
|
Debt
assumed with the Acquisition of Telepartners
|
|
|
-
|
|
|
-
|
|
|
15,068
|
|
|
-
|
|
|
15,068
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,847,017
|
)
|
|
(5,847,017
|
)
|
Balance
at December 31, 2004
|
|
|
47,965,604
|
|
$
|
47,966
|
|
$
|
7,524,118
|
|
$
|
(12,448,858
|
)
|
$
|
(4,876,774
|
)
|
See
accompanying notes to consolidated financial statements
Sequiam
Corporation
and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
Years
ended December 31,
|
|
Cash
flows from operating activities:
|
|
2004
|
|
2003
|
|
Net
loss
|
|
$
|
(5,847,017
|
)
|
$
|
(4,690,188
|
)
|
Adjustments
to reconcile net loss to net cash used for operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
560,649
|
|
|
452,868
|
|
Accretion
of debt discount
|
|
|
627,326
|
|
|
322,322
|
|
Accretion
of beneficial conversion feature
|
|
|
458,339
|
|
|
-
|
|
Stock
options granted to non-employees
|
|
|
122,338
|
|
|
-
|
|
Amortization
of loan costs
|
|
|
71,331
|
|
|
-
|
|
(Gain)
loss on sale of equipment
|
|
|
(146
|
)
|
|
18,304
|
|
Loss
on impairment of equipment held for sale
|
|
|
40,706
|
|
|
75,000
|
|
Loss
on impairment of intangible assets
|
|
|
206,082
|
|
|
-
|
|
Loss
on debt settlement
|
|
|
56,250
|
|
|
93,158
|
|
Issuance
of common stock in exchange for services
|
|
|
570,450
|
|
|
1,759,446
|
|
Stock
issued in debt settlement
|
|
|
51,000
|
|
|
-
|
|
(Increase)
Decrease in receivables
|
|
|
(32,454
|
)
|
|
36,094
|
|
(Decrease)
increase in allowance for bad debts
|
|
|
390
|
|
|
(2,000
|
)
|
(Increase)
decrease in prepaid expenses, deposits and other assets
|
|
|
(62,075
|
)
|
|
(36,055
|
)
|
Increase
in bank overdraft
|
|
|
24,165
|
|
|
-
|
|
(Decrease)
increase in accounts payable
|
|
|
133,106
|
|
|
(15,628
|
)
|
(Decrease)
increase in other accrued expenses
|
|
|
64,998
|
|
|
(48,700
|
)
|
Increase
in deferred revenue
|
|
|
6,000
|
|
|
-
|
|
Increase
in deferred rents
|
|
|
26,141
|
|
|
-
|
|
Increase
in accrued shareholders salaries
|
|
|
135,000
|
|
|
360,000
|
|
Net
cash used for operating activities
|
|
|
(2,787,421
|
)
|
|
(1,675,379
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Equipment
purchases
|
|
|
(25,042
|
)
|
|
-
|
|
Proceeds
from sale of equipment
|
|
|
-
|
|
|
42,568
|
|
Payment
for acquisition of WMW Communications
|
|
|
(70,529
|
)
|
|
(67,928
|
)
|
Product
development costs capitalized
|
|
|
(34,509
|
)
|
|
(4,206
|
)
|
Net
cash used for investing activities
|
|
|
(130,080
|
)
|
|
(29,566
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from sales of common stock
|
|
|
801,467
|
|
|
1,040,501
|
|
Proceeds
from notes and debentures payable
|
|
|
1,325,000
|
|
|
750,000
|
|
Repayment
of notes and debentures payable
|
|
|
(501,810
|
)
|
|
-
|
|
Proceeds
from long-term debt
|
|
|
2,000,000
|
|
|
-
|
|
Repayment
of long-term debt
|
|
|
(266,007
|
)
|
|
(20,028
|
)
|
Loan
costs capitalized
|
|
|
(246,250
|
)
|
|
-
|
|
Payments
on shareholder loans
|
|
|
(346,349
|
)
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
2,766,051
|
|
|
1,770,473
|
|
(Decrease)
Increase in cash
|
|
|
(151,450
|
)
|
|
65,528
|
|
Cash,
beginning of period
|
|
|
151,450
|
|
|
85,922
|
|
Cash,
end of period
|
|
$
|
-
|
|
$
|
151,450
|
|
See
accompanying notes to consolidated financial statements
Sequiam
Corporation
and Subsidiaries
Notes
to Consolidated Financial Statements
For
the
years ended December 31, 2004 and 2003
1.
Summary of Business and Significant Accounting Policies
Description
of Business and Acquisitions
Sequiam
Corporation ("Sequiam" or the "Company") through its wholly owned subsidiaries,
develops, markets, and supports a portfolio of Biometric fingerprint unlocking
devices that enable users to gain access to using their personal identity and
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 Telepartners, Inc (see below), as well as its
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 Smart Biometrics, Inc. and Fingerprint Detection
Technologies, Inc. (see below). The Company acquired from Smart Biometrics,
Inc.
fingerprint biometric access control systems technology and a secure safe called
BioVault™.
This biometric technology will be a key feature in the Company's future product
offerings. The “BritePrint” fingerprint detection technology that the Company
acquired from UTEK Corporation (“UTEK”) provides improved fingerprint
detection.
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 Sequiam
Software, Inc. 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.
During
2002, the Company acquired Brekel Group, Inc. and WMW Communication, Inc. and
began offering web development, Internet and web hosting and custom software
development, while continuing its software development activities. During 2003,
the Company acquired the assets of Smart Biometrics Inc., Telepartners, Inc.
and
Fingerprint Detection Technologies, Inc. as more fully described
below.
Effective
July 19, 2002 (“date of acquisition”), Sequiam Corporation acquired 94.54% of
the issued and outstanding shares of Brekel Group, Inc., a Delaware corporation
("Brekel"), in exchange for 11,522,263 shares of Sequiam Corporation common
stock, pursuant to a Stock Exchange Agreement and Plan of Organization, dated
June 17, 2002 (the “Agreement”). The shares exchanged were at an exchange rate
of 1:1. In connection with the merger, the majority shareholder of Brekel
returned 9,500,000 shares leaving 12,229,594 common shares of Brekel outstanding
before the exchange with Sequiam Corporation. Sequiam Corporation acquired
630,998 or 4.84% of the remaining issued and outstanding common shares of Brekel
on December 16, 2002 for a total of 12,153,261 shares or 99.38% of Brekel’s
issued and outstanding common shares. The acquisition of Brekel was accounted
for as a purchase of the assets and the results of operations of Brekel are
included in the accompanying financial statements since the date of acquisition.
The excess of the purchase price ($13,575,193) over the carrying value of the
net liabilities acquired ($4,554) of $13,579,747 was accounted for as a
constructive dividend to the Brekel shareholders. Goodwill was not recognized
on
the transaction because Sequiam and Brekel were under common control. The
purchase was determined based on the 12,153,261 shares issued times $1.12,
the
average closing stock price of Sequiam Corporation common stock on and around
June 17, 2002, the date the agreement was signed and agreed to by the majority
shareholders. Under the terms of the agreement, Sequiam repurchased and retired
one million of its common shares from Brekel at par value.
The
following table summarizes the estimated carrying values of the assets acquired
and liabilities assumed at the date of acquisition.
Current
and other assets
|
|
$
|
520,032
|
|
Equipment
held for disposal
|
|
|
268,456
|
|
Equipment
under capital leases held for disposal
|
|
|
1,656,009
|
|
Property
and equipment
|
|
|
1,643,962
|
|
Total
assets acquired
|
|
|
4,088,459
|
|
Current
liabilities
|
|
|
2,869,583
|
|
Long-term
debt
|
|
|
1,223,430
|
|
Total
liabilities assumed
|
|
|
4,093,013
|
|
Net
liabilities acquired
|
|
$
|
(4,554
|
)
|
Sequiam
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 Sequiam changed Brekel’s name to Sequiam Communications, Inc.
to better represent its role within the Sequiam group.
Brekel
had ceased its print on-demand manufacturing operation that it conducted under
the trade name QuestPrint and publishing operations under the trade name
FirstPublish prior to its acquisition by Sequiam Corporation. As a result
$1,885,936 of equipment was returned to the manufacturer on August 1, 2002
and
the related capital leases of $1,656,009 were written off. The loss on the
return of this equipment to the lessor of $229,927 reduced equipment under
capital leases held for disposal in the Brekel acquisition since the assets
were
impaired prior to the acquisition. In addition, Brekel entered into a lease
forbearance agreement and a liability of $893,112 was recognized in accordance
with EITF 95-3 upon the acquisition of Brekel’s assets for lost rents to be paid
to the landlord in the form of a note payable as a result of ceasing Brekel’s
operations (see Note 7).
Effective
November 1, 2002 Sequiam Software, Inc., acquired all of the assets of W.M.W.
Communication, Inc. ("WMW"), doing business as Access Orlando. The purchase
price of $300,000 was to be paid $150,000 in cash and $150,000 in Sequiam common
shares valued at the date of closing, on February 13, 2003. The cash was paid
$55,000 on or before closing ($11,542 prior to December 31, 2002) and
installments of $45,000 and $50,000 were due fifteen and ninety days after
the
February 13, 2003 closing date. At December 31, 2003, $70,529 was due to WMW
in
connection with this acquisition and was recorded as a current liability in
the
accompanying balance sheet. The remaining liability of $70,529 was paid during
2004. The acquisition was accounted for as a purchase of the business of WMW
and
the excess of the purchase price over the fair value of the assets acquired
of
$288,000 was allocated to 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.
Sequiam
acquired Access Orlando because IRP is highly complementary to DMS and Sequiam
has integrated the two products. Like Sequiam, Access Orlando was engaged in
software development, website development, Internet hosting and collocation
services, and is also an Internet service provider (ISP).
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 $.50 per share. Smart Biometrics, Inc.
was
engaged in the development of biometric technologies. The assets acquired by
Sequiam Biometrics, Inc. include office equipment and the BioVault™ technology.
The
BioVault 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. Smart 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 $160,000. Telepartners, Inc. was
engaged in the development of supplemental educational products for
schoolchildren in grades 1 through 12. The assets acquired by Sequiam Education,
Inc. include the Extended Classroom™ 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 is produced in high quality and digitally
mastered, allowing for Internet and television broadcast distribution as well
as
CD and video formats. The excess of the purchase price over the fair value
of
the net liabilities acquired of $10,067 was $149,933 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 its assets.
On
September 11, 2003, Sequiam Corporation acquired 100% of the issued and
outstanding shares of common stock of Fingerprint Detection Technologies, Inc.,
a Florida corporation (“FDTI”). 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 $237,650.
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 $237,650 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.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Sequiam Corporation
and its subsidiaries. All intercompany transactions and accounts have been
eliminated.
Allowance
for Doubtful Accounts
The
Company records an allowance for doubtful accounts based on specifically
identified amounts that it believes to be uncollectible. The Company also
records additional allowance based on certain percentages of its aged
receivables, which are determined based on historical experience and our
assessment of the general financial conditions affecting our customer base.
If
the Company’s actual collections experience changes, revisions to its allowance
may be required. The Company has a limited number of customers with individually
large amounts due at any given balance sheet date. Any unanticipated change
in
one of those customer's credit worthiness or other matters affecting the
collectibility of amounts due from such customers, could have a material affect
on the Company’s results of operations in the period in which such changes or
events occur. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Expenditures for maintenance and repairs
are
charged to expense as incurred. Leasehold improvements are recorded at cost.
Depreciation on leasehold improvements is computed using the straight-line
method over the original term of the lease.
Intangible
Assets
In
June
2001, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 142, "Goodwill and Intangible Assets". SFAS
No.
142 requires recognized intangible assets determined to have a finite useful
life be amortized over their respectful estimated useful lives and reviewed
for
impairment in accordance with SFAS 144, "Accounting for the Impairment and
Disposal of Long-Lived Assets". Any recognized intangible asset determined
to
have an indefinite useful life will not be amortized, but instead tested for
impairment in accordance with the Standard until its life is determined to
no
longer be indefinite.
Intangible
assets are stated at cost and consist of Software Development Costs, Acquired
Software, and Intellectual Properties and are being amortized over their
estimated useful lives of five years.
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.
No
such costs were expensed during the years ended December 31, 2004 and 2003.
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. Amortization expense of $27,228 and $27,229 was recorded
for the years ended December 31, 2004 and 2003, respectively. The unamortized
balance of $81,682 was written off as an impairment loss during
2004.
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. Amortization expense was $67,200 and $57,600 for the years ended
December 31, 2004 and 2003, respectively.
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 lives of five years. Amortization expense was $231,423 and
$112,005 for the years ended December 31, 2004 and 2003, respectively. The
unamortized balance of $124,400 of the Telepartners, Inc. Intellectual Property
was written off as an impairment loss during 2004.
Product
Development Costs
The
Company capitalizes product development costs when the projects under
development reach technological feasibility. Capitalization ends when the
product is available for general release to our customers, at which time the
amortization of the capitalized cost begins. Product development costs are
amortized using the straight-line method over the estimated useful life of
the
product.
Revenue
Recognition
We
derive
or plan to derive our revenues from five sources: (i) the sale and licensing
of
our biometric and software products; (ii) user fees for online Application
Service Provider (“ASP”) services; (iii) consulting, custom software and web
development services; (iv) maintenance agreements in connection with the sale
and licensing of software products; and (v) Internet access and web hosting
services. Biometric and Software license revenue will be recognized when all
of
the following criteria have been met: (a) there is an executed license agreement
and the technology or the 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. Revenues
from
ASP services will be recognized as the transactions are processed by the system.
Maintenance revenues are recognized ratably over the term of the maintenance
contract, typically 12 months. Custom software development and web development
services are typically performed over a period ranging from a few days to a
few
weeks and revenue is 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. Cash received from the customers in advance of amounts
earned will be deferred and recorded as a liability.
Accounting
for Stock Compensation Plan
The
Company accounts for its stock option plan using the intrinsic value based
method of accounting, under which no compensation expense is recognized for
stock option awards granted at fair market value. For purposes of pro forma
disclosures under Statement of Financial Accounting Standards No. (“SFAS”) 123,
Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting
for
Stock-Based Compensation - Transition and Disclosure, the estimated fair value
of the stock options is amortized to compensation expense over the options’
vesting period. The following table illustrates the effect on net loss and
loss
per share if the fair value based method had been applied to all outstanding
awards for the years ended December 31:
|
|
2004
|
|
2003
|
|
Net
loss, as reported
|
|
$
|
(5,847,017
|
)
|
$
|
(4,690,188
|
)
|
Add:
stock-based employee compensation expense included in reported net
loss
net of related tax effects
|
|
|
-
|
|
|
-
|
|
Deduct:
total stock-based employee compensation expense determined under
the fair
value method for all awards, net of related tax effects
|
|
$
|
(360,150
|
)
|
$
|
(1,642,276
|
)
|
Pro
forma net loss
|
|
$
|
(6,207,167
|
)
|
$
|
(6,332,464
|
)
|
Basic
and diluted loss per common share, as reported
|
|
$
|
(.13
|
)
|
$
|
(.12
|
)
|
Basic
and diluted loss per common share, pro forma
|
|
$
|
(.13
|
)
|
$
|
(.17
|
)
|
Income
Taxes
Income
taxes are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes resulting
from
temporary differences. Such temporary differences result from differences in
the
carrying value of assets and liabilities for tax and financial reporting
purposes. The deferred tax assets and liabilities represent the future tax
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Net
Loss Per Common Share
Basic
income (loss) per common share is computed by dividing net income (loss)
available to common shareholders by the weighted average common shares
outstanding for the period. Diluted income (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 December 31, 2004 and 2003, the Company had respectively,
30,338,867 and 20,334,701 potentially dilutive common shares as a result of
warrants and options granted.
Fair
Value of Financial Instruments
Fair
value estimates discussed herein are based upon certain market assumptions
and
pertinent information available to management as of December 31, 2004 and 2003.
The respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash,
receivables, accounts payable, accrued expenses and loans from shareholders.
The
fair value of our long-term debt is estimated based on the current rates offered
to us for debt of similar terms and maturities. Under this method the fair
value
of long-term debt was not significantly different from the stated value at
December 31, 2004 and 2003.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Management’s
Plans
As
of
December 31, 2004, the Company has a working capital deficit and has incurred
significant losses from operations since its inception. Senior management
together with other shareholders of the Company, owning approximately 74% of
the
outstanding shares of common stock of the Company as of December 31, 2004,
has
represented its positive intent and ability to fund the operations, including
debt service payments, of Sequiam Corporation and Subsidiaries on an as needed
basis through January 1, 2006.
Reclassification
Certain
reclassifications have been made to the 2003 financial statements to conform
to
the 2004 presentation.
Recent
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (FASB) revised Statement
of Financial Accounting Standard No. 123 "Share-Based Payment" (SFAS 123R).
SFAS
123R requires Companies to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award. The cost will be recognized over the period during which an
employee is required to provide service in exchange for the award (usually
the
vesting period). Changes in fair value during the requisite service period
will
be recognized as compensation cost over that period. The grant date fair value
of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those
instruments (unless observable market prices for the same or similar instruments
are available). If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification This statement is effective for the first
reporting period beginning after December 15, 2005. In the opinion of
management, the adoption of this statement will not have a significant impact
on
the Company's consolidated financial statements.
2.
Property and Equipment
Property
and equipment consist of the following at December 31:
|
|
2004
|
|
2003
|
|
Leasehold
improvements
|
|
$
|
1,465,270
|
|
$
|
1,126,769
|
|
Office
furniture and fixtures
|
|
|
451,984
|
|
|
450,398
|
|
Computer
equipment
|
|
|
150,749
|
|
|
127,293
|
|
Purchased
software
|
|
|
192,212
|
|
|
192,212
|
|
|
|
|
2,260,215
|
|
|
1,896,672
|
|
Less
accumulated depreciation
|
|
|
956,458
|
|
|
721,806
|
|
|
|
$
|
1,303,757
|
|
$
|
1,174,866
|
|
Depreciation
expense totaled $234,798 and $256,034 during 2004 and 2003, respectively.
Included in current assets are $-0- and $40,706 of equipment held for resale,
net of a $40,706 impairment loss recognized in 2004 on that equipment. The
equipment was written down to its estimated liquidation value based upon
information obtained from dealers. This equipment remains from operations
discontinued by Brekel prior to its acquisition by Sequiam.
3.
Intangible Assets
Intangible
assets consist of the following as of December 31, 2004:
Amortized
Intangible Assets
|
|
Weighted-average
Amortization Period
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization & Impairment Allowance
|
|
Net
Carrying Amount
|
|
Acquired
software
|
|
|
5
|
|
|
288,000
|
|
|
124,800
|
|
|
163,200
|
|
Intellectual
properties
|
|
|
5
|
|
|
1,112,718
|
|
|
467,822
|
|
|
644,896
|
|
|
|
|
|
|
$
|
1,536,863
|
|
$
|
728,767
|
|
$
|
808,096
|
|
Intangible
assets consist of the following as of December 31, 2003:
Amortized
Intangible Assets
|
|
Weighted-average
Amortization Period
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying Amount
|
|
Software
Development costs
|
|
|
5
|
|
$
|
136,145
|
|
$
|
27,229
|
|
$
|
108,916
|
|
Acquired
software
|
|
|
5
|
|
|
288,000
|
|
|
57,600
|
|
|
230,400
|
|
Intellectual
properties
|
|
|
5
|
|
|
1,097,650
|
|
|
112,005
|
|
|
985,645
|
|
|
|
|
|
|
$
|
1,521,795
|
|
$
|
196,834
|
|
$
|
1,324,961
|
|
Amortization
expense totaled $325,851 and $196,834 during 2004 and 2003,
respectively.
The
estimated future amortization expense for each of the five succeeding years
is
as follows:
|
|
Year
ending December
31,
|
|
2005
|
|
|
245,130
|
|
2006
|
|
|
245,130
|
|
2007
|
|
|
235,530
|
|
2008
|
|
|
82,306
|
|
4.
Notes and Debentures Payable
On
March
5, 2003 Sequiam issued to La Jolla Cove Investors, Inc. ("LJCI"), an 8%
Convertible Debenture in the principal amount of $300,000 and a warrant to
purchase 2,000,000 shares of our common stock at $1.50 per share (the "Initial
Financing"). Sequiam received a total of $150,000 of the principal amount of
the
debenture, representing the balance due at December 31, 2003.
In
connection with the debenture and the warrant, Sequiam was required to register
the resale of common stock to be issued to LJCI upon conversion of the debenture
and exercise of the warrant. To meet this obligation, Sequiam filed a
registration statement on April 27, 2003, an amended registration statement
on
May 7, 2003, and a second amended registration statement on June 23, 2003,
all
of which were withdrawn on September 5, 2003, prior to being declared effective.
Effective
as of January 29, 2004, the Company entered into an Agreement of Accord and
Satisfaction with LJCI pursuant to which LJCI agreed to accept $200,000 plus
100,000 shares of restricted common stock in accord and satisfaction of the
debenture and warrant and other documents related to the Initial Financing.
As a
result, all of our obligations under the Initial Financing, including the
obligation to file a new registration statement, have been
terminated.
Pursuant
to the accord and satisfaction, Sequiam issued 100,000 shares of restricted
common stock to LJCI, which, had a fair market value of $51,000, based on a
closing trading price of $0.51 per share on January 29, 2004. In addition,
the
Company delivered to LJCI a promissory note in the principal amount of $200,000
with interest in the amount of 8% per year, plus principal, due in six
installments of $34,017 per month beginning February 1, 2004. The Company has
paid the note in full.
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 offering of securities the Company may make during
any
time that LJCI still holds such 100,000 shares. Unless the Company makes a
registered 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, 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 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 became due on January 30, 2005. The debt
discount was originally amortized over the original estimated life of the
Note of 36 months. Beginning in January 2004, the remaining unamortized debt
discount will be amortized over twelve months. As of December 31, 2003, the
balance of the Note, net of the unamortized debt discount of $133,928 was
$266,072 and is included in Notes Payable.
On
December 18, 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 $100,000 under a promissory note bearing interest
at
five percent (5%). In connection with this loan, Sequiam Corporation issued
one
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 were
paid
in full during 2004.
On
December 18, 2003, Sequiam 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, Sequiam Corporation
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
were
paid in full during 2004.
On
December 26, 2003, Sequiam 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 were
paid in full during 2004. The Debenture also provided for an unconditional
equity provision whereby the Corporation issued seventy five thousand (75,000)
restricted shares to the Holder as an incentive to lend. The fair value of
the
shares was recorded as a debt discount of $30,000.
The
preceding information is summarized as follows at December 31,
2003:
|
|
Face
Amount
|
|
Debt
Discount
|
|
Carrying
Amount
|
|
Promissory
note - Lee Harrison Corbin
|
|
|
50,000
|
|
|
-
|
|
|
50,000
|
|
Promissory
note - Lee Harrison Corbin-Trustee for John Svenningsen
|
|
|
100,000
|
|
|
-
|
|
|
100,000
|
|
10%
Convertible Debenture-Eagle Funding, LLC, 10%
|
|
|
150,000
|
|
|
(30,000
|
)
|
|
120,000
|
|
Promissory
note - Lee Harrison Corbin-Trustee for John Svenningsen
|
|
|
400,000
|
|
|
(133,928
|
)
|
|
266,072
|
|
8%
Convertible Debenture-La Jolla Cove Investors
|
|
|
150,000
|
|
|
(93,750
|
)
|
|
56,250
|
|
|
|
|
850,000
|
|
|
(257,678
|
)
|
|
592,322
|
|
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%.
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 became due on January 30, 2005.
On
September 7, 2004, the Company entered into an unsecured loan agreement with
Eagle Funding, LLC, for a principal loan amount of $200,000 under a promissory
note bearing interest at eight percent (8%). The principal became due on March
7, 2005 and the interest is due monthly. In connection with this loan, the
Company issued one warrant to the holder to purchase 400,000 shares of its
common stock at an exercise price of $0.66 per share.
On
September 30, 2004, the Company entered into an unsecured loan agreement with
Lee Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John
Svenningsen, for a principal loan amount of $500,000 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 1,300,000 shares of its common
stock at an exercise price of $0.66 per share. The principal and interest became
due on March 30, 2005.
On
September 30, 2004, the Company entered into an unsecured loan agreement with
Lee Harrison Corbin for a principal loan amount of $75,000 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 195,000 shares of its
common stock at an exercise price of $0.66 per share. The principal and interest
became due on March 30, 2005.
On
November 19, 2004, the Company entered into an unsecured loan agreement with
Walter H. Sullivan III, 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 one warrant to the holder to purchase 260,000 shares
of
its common stock at an exercise price of $0.66 per share. The principal and
interest became due on February 19, 2005.
On
December 16, 2004, the Company entered into an unsecured loan agreement with
Lee
Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John
Svenningsen, 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 150,000 shares of its common stock
at an exercise price of $0.33 per share. The principal and interest became
due
on January 31, 2005.
The
preceding information is summarized as follows at December 31,
2004:
|
|
Face
Amount
|
|
Debt
Discount
|
|
Carrying
Amount
|
|
Notes
payable - Precision
|
|
$
|
47,634
|
|
|
|
|
$
|
47,634
|
|
Notes
payable - GE
|
|
|
50,556
|
|
|
|
|
|
50,556
|
|
Promissory
note - Lee Harrison Corbin-Trustee for John Svenningsen
|
|
|
400,000
|
|
|
-
|
|
|
400,000
|
|
Promissory
note - Lee Harrison Corbin-Trustee for John Svenningsen
|
|
|
400,000
|
|
|
-
|
|
|
400,000
|
|
Promissory
note - Eagle Funding, LLC
|
|
|
200,000
|
|
|
(24,018
|
)
|
|
175,982
|
|
Promissory
note - Lee Harrison Corbin-Trustee for John Svenningsen
|
|
|
500,000
|
|
|
(71,342
|
)
|
|
428,658
|
|
Promissory
note - Lee Harrison Corbin
|
|
|
75,000
|
|
|
(10,701
|
)
|
|
64,299
|
|
Promissory
note - Walter Sullivan
|
|
|
100,000
|
|
|
(15,272
|
)
|
|
84,728
|
|
Promissory
note - Lee Harrison Corbin-Trustee for John Svenningsen
|
|
|
50,000
|
|
|
(9,780
|
)
|
|
40,220
|
|
|
|
$
|
1,823,190
|
|
$
|
(131,113
|
)
|
$
|
1,692,077
|
|
Each
of
the Notes payable to the Svenningsen trust, Walter Sullivan and Eagle Funding
are delinquent as to their due dates. The company is in discussions with each
of
the lenders to either extend the terms, or convert the loans to
equity.
5.
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 December 31,
2004 and 2003, the balance due under this loan was $50,000 payable on demand
together with accrued interest of $2,750 and $5,250, respectively.
Nicholas
VandenBrekel, the President and Chief Executive Officer and majority shareholder
of the Company, has advanced money to Sequiam Corporation and Sequiam Software,
Inc. under demand notes. At December 31, 2004 and 2003, Sequiam owed
$271,650 and $570,450 on these notes, including accrued interest of $24,106
and
$15,316, respectively. 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 Sequiam Corporation. At December 31, 2004 and 2003,
Sequiam owed approximately $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
December 31, 2004 and 2003 the remaining principal balance was $15,301 and
$62,850 and accrued interest was $-0- and $735, respectively.
Included
in accounts payable and accrued expenses at December 31, 2004 and 2003 are
un-reimbursed business expenses of $2,324 and $2,244 owed to Nicholas
VandenBrekel and $1,000 and $10,000 owed to Mark Mroczkowski,
respectively.
6.
Income Taxes
The
Company has estimated net operating loss carryforwards (“NOLs”) for federal
income tax purposes of approximately $16,464,000 and $12,785,000 at December
31,
2004 and 2003, respectively. These net operating losses can be carried forward
and applied against future taxable income, if any, and expire in the years
2020
through 2024. However, as a result of certain acquisitions, the use of these
NOLs may be limited under the provisions of section 382 of the Internal Revenue
Code. Treasury Regulation 1.1502-21 regarding separate return limitation years
may further limit these NOLs.
The
following is a reconciliation of income taxes at the federal statutory rate
of
34% to the provision for income taxes as reported in the accompanying
consolidated statements of operations. The temporary differences between net
income and taxable income result from the accrual of officers’ salaries of
$1,349,792 that are expensed in the financial statements, but are not deductible
for tax purposes until paid:
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2003
|
|
Income
tax benefit computed at the federal statutory rate
|
|
$
|
(1,998100
|
)
|
$
|
(1,594,800
|
)
|
Deferred
tax asset, NOL acquired from Brekel
|
|
|
630,800
|
|
|
204,700
|
|
State
income tax benefit, net of federal benefit
|
|
|
(144,800
|
)
|
|
(148,300
|
)
|
Increase
in valuation allowance
|
|
|
1,502,100
|
|
|
1,538,400
|
|
Income
tax expense (benefit)
|
|
$
|
-
|
|
$
|
-
|
|
The
components of the deferred income tax asset are as follows at December 31,
Deferred
tax assets:
|
|
2004
|
|
2003
|
|
Accrued
shareholder salaries
|
|
$
|
603,100
|
|
$
|
457,100
|
|
Deferred
lease obligation
|
|
|
-
|
|
|
336,100
|
|
Net
operating loss carryforward
|
|
|
6,427,700
|
|
|
4,704,800
|
|
Valuation
allowance
|
|
|
(7,030,800
|
)
|
|
(5,498,000
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
|
Valuation
allowances are provided against deferred tax assets if, based on the weight
of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The Company has evaluated the realizability
of
the deferred tax assets on its balance sheets and has established a valuation
allowance in the amount of $7,030,800 and $5,498,000 against its net deferred
tax assets at December 31, 2004 and 2003, respectively. The valuation allowance
increased $1,502,100 and $1,538,400 during the years ended December 31, 2004
and
2003, respectively.
7.
Lease Agreement and Note Payable
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 years ended December 31, 2004 and 2003 was $137,903 and
$125,508, respectively. The original amount of the note of $1,600,000 represents
$893,112 of deferred rent and $706,888 of tenant improvements. The December
31,
2004 balance of $ 1,525,376 included $234,181 in current portion of long-term
debt and $1,291,195 in long-term debt. The new minimum future rentals required
under the operating lease and the maturities of the long-term note payable
are
as follows:
Year
|
|
Rentals
|
|
Maturities
|
|
2005
|
|
$
|
193,564
|
|
$
|
234,181
|
|
2006
|
|
|
206,773
|
|
|
248,624
|
|
2007
|
|
|
210,993
|
|
|
263,959
|
|
2008
|
|
|
215,319
|
|
|
280,239
|
|
2009
|
|
|
219,753
|
|
|
297,524
|
|
Thereafter
|
|
|
110,999
|
|
|
200,849
|
|
|
|
$
|
1,157,401
|
|
$
|
1,525,376
|
|
8.
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% (7.25% at
December 31, 2004), 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 principal payments shall commence on August 2, 2004,
at the rate of $60,606. The balance of the Note at December 31, 2004 is
$1,818,182 less debt discount recognized of $201,520 or a net of $1,616,562
and
is included $1,010,598 in long-term debt and $606,064 in current portion of
long-term debt. The maturities of the Note as of December 31, 2004 are as
follows:
Year
|
|
Maturities
|
|
2005
|
|
$
|
606,064
|
|
2006
|
|
|
909,096
|
|
2007
|
|
|
303,022
|
|
|
|
$
|
1,818,182
|
|
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
$215,915 was recognized on the value of the warrants and is being amortized
as
interest expense over the life of the loan. A discount of $458,339 was allocated
to the beneficial conversion feature. All stock conversion prices and exercise
prices are subject to adjustment for stock splits, stock dividends or similar
events. The Company also agreed to file a registration statement with the U.S.
Securities and Exchange Commission covering the shares issuable upon conversion
of the Note and the exercise of the warrant issued to Laurus.
Laurus
has committed to fund to the Company an additional $1.0 million under the
financing arrangement on substantially similar terms as the initial $2.0 million
funding, which additional $1.0 million will become available to the Company
following its completion and/or achievement of certain conditions to funding,
including, without limitation, certain performance benchmarks.
On
October 27, 2004, the Company amended the terms of its agreements with Laurus
by
reducing the fixed conversion price of $0.66 per share to $0.33 per share;
amending the principal amortization from $60,606 per month beginning August
2,
2004 to $75,758 beginning May 2, 2005; amending the six-year warrant to purchase
up to 666,666 shares of the Company’s common stock at prices ranging from $0.41
per share to $0.58 per share; and granting a new six-year warrant to purchase
up
to 470,000 shares of the Company’s common stock at a price of $0.33 per
share in
satisfaction of due and unpaid fees in the aggregate amount of $49,333. In
addition Laurus agreed to release the Company from a technical default of the
Securities Purchase Agreement with respect to the creation of the certain debt
obligations.
9.
Capital Stock
During
the year ended December 31, 2004, the Company issued 1,752,082 common shares
for
business advisory services valued at $570,450 based on the Company’s quoted
market price on the date of the related agreements.
During
the year ended December 31, 2004, the Company sold an aggregate of 1,993,757
shares of its common stock to six accredited investors at an average price
of
$0.38 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.
10.
Employee Stock Incentive Plan
On
September 23, 2003 Sequiam executed the Sequiam Corporation 2003 Employee Stock
Incentive Plan and the Sequiam Corporation 2003 Non-Employee Directors And
Consultants Stock Plan. This Stock Incentive Plan is intended to allow
designated officers, directors (including non-employee directors), employees
and
certain non-employees, including any independent contractor or consultant
providing services to the Company and its Subsidiaries to receive certain
options (the "Stock Options") to purchase Sequiam common stock, par value $0.001
per share, and to receive grants of the Common Stock subject to certain
restrictions (the "Awards"). The
maximum number of shares of the Common Stock that may be issued pursuant to
these plans shall be 14,000,000 and 1,000,000, respectively at December 31,
2004, amended from 10,000,000 and 5,000,000 at December 31, 2003.
The
Company may grant Stock Options in such amounts, at such times, and to the
Employees nominated by the management of the Company in its discretion. Stock
Options granted under this Plan shall constitute "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986 as
amended.
The
purchase price (the "Exercise Price") of shares of the Common Stock subject
to
each Stock Option shall be the Fair Market Value of the Common Stock on the
date
the Stock Option is granted; provided, however, for designated non-statutory
stock options, the Board of Directors may determine an Exercise Price at, above
or below Fair Market Value. For an Employee holding greater than 10 percent
of
the total voting power of all stock of the Company, either common or preferred,
the Exercise Price of an incentive stock option shall be at least 110 percent
of
the Fair Market Value of the Common Stock on the date of the grant of the
option.
The
Stock
Option term will begin on the date of grant of the Stock Option and shall be
10
years or such shorter period as is determined by the Company.
On
November 28, 2003 the Company granted options for 9,660,500 shares to its
employees at an exercise price of $0.17 the fair market value of the stock
on
that date. Officers and Employee Directors were granted options for nine million
of the total granted. On April 1, 2004 and July 26, 2004 the Company granted
options for 2,000,000 and 300,000 shares to two employees at exercise prices
of
$0.70 and $0.33, the fair market value of the stock on those dates,
respectively.
|
|
2004
|
|
2003
|
|
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
beginning of year
|
|
|
9,660,500
|
|
$
|
0.186
|
|
|
-0-
|
|
$
|
0.186
|
|
Granted
|
|
|
2,300,000
|
|
$
|
0.652
|
|
|
9,660,500
|
|
$
|
0.186
|
|
Exercised
|
|
|
(237,500
|
)
|
$
|
0.170
|
|
|
-0-
|
|
|
-0-
|
|
Canceled
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
Outstanding
end of year
|
|
|
11,723,000
|
|
$
|
0.278
|
|
|
9,660,500
|
|
$
|
0.186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31
|
|
|
9,423,000
|
|
$
|
0.186
|
|
|
9,660,500
|
|
$
|
0.186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for grant at December 31
|
|
|
3,277,000
|
|
|
|
|
|
339,500
|
|
|
|
|
The
following table summarizes the stock options outstanding and exercisable at
December 31, 2004:
|
|
Outstanding
|
|
Exercisable
|
|
Exercise
Price
|
|
Number
of
Options
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Weighted-
Average
Exercise
Price
|
|
Number
of
Options
|
|
Weighted-
Average
Exercise
Price
|
|
$0.186
|
|
|
9,423,000
|
|
|
9
Years
|
|
$
|
0.186
|
|
|
9,423,000
|
|
$
|
0.186
|
|
$0.70
|
|
|
2,000,000
|
|
|
10
Years
|
|
$
|
0.70
|
|
|
-0-
|
|
$
|
0.70
|
|
$0.33
|
|
|
300,000
|
|
|
10
Years
|
|
$
|
0.33
|
|
|
-0-
|
|
$
|
0.33
|
|
The
fair
value of options granted during 2004 were calculated utilizing the following
weighted-average assumptions: no dividend yield; expected volatility of 200.0%;
risk-free interest rate of 3.91%; and expected lives of 10 years. The fair
value
of each option is estimated on the date of grant using the Black-Scholes
option-pricing model. The
fair
value of options granted during 2003 were calculated utilizing the following
weighted-average assumptions: no dividend yield; expected volatility of 284.89%;
risk free interest rate of 4.32%; and expected lives of 10
years.
As of
December 31, 2004 and 2003, no stock options had been granted under the Sequiam
Corporation 2003 Non-Employee Directors and Consultants Stock Plan.
11.
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 Sequiam Corporation 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, 2004 and 2003, Sequiam accrued and did not pay the
minimum annual salaries payable to the CEO and CFO.
On
November 1, 2002, the Company’s Chief Technology Officer (“CTO”) entered into an
employment agreement with Sequiam Software. The agreement has an initial term
of
two years with automatic one-year renewals. The agreements provide for
compensation in the form of minimum annual salary of $75,000 and allows for
bonuses in cash, stock or stock options and participation in Company benefit
plans. Full-time employment is a requirement of the contract.
Mr.
David
Dobkin was hired as the President of Sequiam Software, Inc. pursuant to an
employment agreement dated as of April 1, 2004 and extends for a term of two
years. Mr. Dobkin earns annual compensation of $150,000 until the Company
acquires at least $3 million in new equity capital. After the Company acquires
$3 million in new equity capital, Mr. Dobkin’s annual compensation will increase
to $175,000. Upon the commencement of employment, Mr. Dobkin earned 50,000
shares of restricted common stock which we have not issued as of the date of
this report In addition, we will pay Mr. Dobkin a sign-on bonus of $50,000,
net
of taxes, once we acquire $3 million in new equity capital. We granted Mr.
Dobkin stock options exercisable into two million shares of common stock at
an
exercise price equal to the market price as of the date of
employment.
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. Xerox had taken no action since its September 3, 2002 demand letter until
June 29, 2004, when 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.
The
Company currently operates without directors’ and officers’ insurance and
property, casualty and general liability insurance and is at risk for those
types of losses.
12.
Supplemental Cash Flow Information
|
|
Year
ended December 31,
|
|
|
|
2004
|
|
2003
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
124,358
|
|
$
|
33,446
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable converted to notes payable
|
|
$
|
150,000
|
|
|
-
|
|
Leasehold
improvements financed
|
|
$
|
338,501
|
|
|
-
|
|
Original
issue discount on debt
|
|
$
|
1,216,868
|
|
$
|
580,000
|
|
Loan
costs paid with warrants
|
|
$
|
49,333
|
|
|
|
|
Common
shares issued for acquisition of WMW Communications, Inc.
assets
|
|
|
-
|
|
$
|
150,000
|
|
Common
shares issued for acquisition of Smart Biometrics, Inc.
assets
|
|
|
-
|
|
$
|
750,000
|
|
Common
shares issued for acquisition of Telepartners, Inc. assets and liabilities
assumed
|
|
$
|
15,068
|
|
$
|
149,933
|
|
Common
shares issued for acquisition of Fingerprint Detection Technologies,
Inc.
|
|
|
-
|
|
$
|
237,650
|
|
13.
Operating Segments
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.
|
Sequiam
has two operating segments, which are defined as each business line that it
operates. This however, excludes corporate headquarters, which does not generate
revenue.
Our
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 year
ended December 31, 2004.
|
|
Information
Management
|
|
Safety
and Security
|
|
Segments
Total
|
|
Corporate
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
165,729
|
|
$
|
99,765
|
|
|
265,494
|
|
$
|
-
|
|
|
265,494
|
|
Interest
expense
|
|
|
(61,154
|
)
|
|
-
|
|
|
(61,154
|
)
|
|
(1,288,683
|
)
|
|
(1,349,836
|
)
|
Depreciation
and amortization
|
|
|
353,241
|
|
|
207,407
|
|
|
560,649
|
|
|
71,331
|
|
|
631,980
|
|
Segment
loss
|
|
|
(2,486,939
|
)
|
|
(409,682
|
)
|
|
(2,896,621
|
)
|
|
643,021
|
|
|
(5,847,017
|
)
|
Segment
assets (1)
|
|
|
1,403,164
|
|
|
469,470
|
|
|
1,872,634
|
|
|
(2,950,396
|
)
|
|
2,515,655
|
|
The
table
below presents certain financial information by business segment for the year
ended December 31, 2003.
|
|
Information
Management
|
|
Safety
and Security
|
|
Segments
Total
|
|
Corporate
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
338,549
|
|
$
|
47,620
|
|
$
|
386,170
|
|
$
|
-
|
|
$
|
386,170
|
|
Interest
expense
|
|
|
(31,426
|
)
|
|
-
|
|
|
(31,426
|
)
|
|
(337,237
|
)
|
|
(368,663
|
)
|
Depreciation
and amortization
|
|
|
354,772
|
|
|
98,096
|
|
|
452,868
|
|
|
-
|
|
|
452,868
|
|
Segment
loss
|
|
|
(1,531,676
|
)
|
|
(158,202
|
)
|
|
(1,689,878
|
)
|
|
(3,000,310
|
)
|
|
(4,690,188
|
)
|
Segment
assets (1)
|
|
|
1,594,176
|
|
|
876,427
|
|
|
2,470,603
|
|
|
272,282
|
|
|
2,742,885
|
|
Segment
assets have been adjusted for intercompany accounts to reflect actual assets
for
each segment.
14.
Subsequent Events (Unaudited)
On
December 21, 2004, we entered into a Letter Agreement with Chapman Spira &
Carson, LLC, pursuant to which Chapman agreed to provide us with various
consulting, investment banking and business development services. On or
about September 28, 2005, Chapman filed a complaint in United States District
Court for the Southern District of New York, asserting claims for breach of
contract and unjust enrichment. Chapman alleges that, notwithstanding its
purported provision of services under the Letter Agreement between it and us,
we
failed to properly compensate Chapman for those services. We claim
that none of those services were actually provided by Chapman. Chapman is
seeking compensatory damages of $1,019,060,
costs,
including attorney's fees, 500,000 shares of common stock and a
warrant
to
purchase 6,195,000 shares of stock at $0.26 per share.
We believe that Chapman's claims are without merit and intend to vigorously
defend ourselves against these allegations. If we are required to pay Chapman
$1,019,060 and the other damages described above, we may not be able to
implement our business plan and may be forced to cease operations.
On
May
18, 2005, the Company closed a debt transaction with Lee Harrison Corbin,
Attorney in-Fact for the Trust Under the Will of John Svenningsen (the “Trust”)
pursuant to which the Trust consolidated $1.35 million in existing unsecured
debt owed by the Company to the Trust and provided $2.1 million in additional
financing (the “Additional Financing”) for a total of $3,450,000 (the “Loan”).
The Company also issued to the Trust a warrant exercisable into 6,000,000 shares
of the Company’s common stock (the “Trust Warrant”).
In
connection with the Loan: (a) the Trust delivered $1,000,000 of the Additional
Financing to Laurus Master Fund, Ltd., a Cayman Islands company (“Laurus”);
and
(b) the Company (i) reduced the conversion price of that certain secured
convertible term note, dated as of April 27, 2004, made by the Company in favor
of Laurus to $0.15 per share pursuant to Rule 3(a)(9) of the Securities Act
of
1933, as amended (the “Securities Act”) (the “Laurus Note”), and (ii) issued a
warrant to Laurus exercisable into 1,500,000 shares of the Company’s common
stock at an exercise price of $0.23 per share (the “Laurus Warrant”) (the
“Payoff Consideration”). In return for receiving the Payoff Consideration,
Laurus, the Trust and the Borrower entered into that certain Assignment,
Assumption and Release, dated as of May 18, 2005, pursuant to which, Laurus
assigned (the “Assignment”) all of its rights, liabilities and obligations under
the Laurus Note, and all documents related thereto (collectively with the Laurus
Note, the “Laurus Loan Documents”), to the Trust. In addition, Laurus released
the Company from all liability whatsoever under the Laurus Loan Documents,
except for any terms therein which may survive the assignment.
The
$3,450,000 promissory note issued to the Trust (the “Trust Note”) has a term of
two years. Eight percent (8%) interest shall be payable monthly in arrears
commencing on November 10, 2005, and on the first day of each consecutive
calendar month thereafter. Monthly amortization payments shall commence on
May
10, 2006, at the rate of $75,000. The trust Note is secured by all of the
Company’s assets.
In
connection with the Loan, the Trust received the Trust Warrant to purchase
up to
6,000,000 shares of the Company’s common stock at prices ranging from $0.20 per
share to $0.30 per share. 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 the exercise of the
Trust Warrant and the Laurus Warrant.
Of
the
Loan amount, the Company received approximately $1.1 million in cash after
payment to Laurus of $1,000,000 toward reduction of the Laurus Note (described
above). The remaining principal balance of the Laurus Note after such payment
was $818,182, which balance was converted into 5,454,547 shares of common stock
by Laurus at the reduced conversion rate of $0.15 per share.
In
the
Company’s opinion, the issuance and sale of the Trust Warrant and the Laurus
Warrant described above was exempt from registration under the Securities Act
in
reliance upon Section 4(2) of the Securities Act. The Trust and Laurus are
accredited investors. The securities are not subject to resale except pursuant
to registration under the Securities Act or pursuant to an available exemption
from registration under the Securities Act. The Trust and Laurus had an
opportunity to ask management questions about the Company and had adequate
access to information about the Company. No sales of securities involved the
use
of an underwriter and no commissions were paid in connection with the issuance
or sale of any securities.
The
principal documents involved in the transaction are a Securities Purchase
Agreement, an Amended and Restated Master Security Agreement, an Amended,
Restated and Consolidated Senior Secured Term Note, a Common Stock Purchase
Warrant issued to the Trust, a Common Stock Purchase Warrant issued to Laurus,
a
Registration Rights Agreement, an Amended and Restated Stock Pledge Agreement,
an Amended and Restated Grant of Security Interest in Patents and Trademarks
for
the Company and certain of its subsidiaries, a Subsidiary Guaranty, a
Subordination Agreement from Mark Mroczkowski and Nick VandenBrekel to the
Trust, a Subordination Agreement from Eagle Funding, LLC to the Trust, and
an
Assignment, Assumption and Release, each of which is dated as of May 18,
2005.
On
November 30, 2005, we closed a preferred stock transaction with seven
institutional investors, pursuant to which the Company issued 1,575 shares
of
its Series A preferred stock, par value $0.001 per share with a stated per
share
value of $1,000 for total proceeds of $1,575,000. We also issued to the Series
A
purchasers warrants exercisable into an aggregate of 7,500,000 shares of our
common stock.
The
Series A preferred stock is non-voting and entitles the Series A purchasers
to
receive a 9% cumulative dividend payable semiannually. The Series A preferred
stock is convertible into 7,500,000 of our common shares at a fixed price of
$0.21 per share. The Series A preferred stock contain anti-dilution provisions
under which the number of shares issuable upon conversion of the Series A
preferred stock and the conversion price will be adjusted upon the issuance
of
common stock or securities convertible into or exercisable for common stock
at
prices lower than the then effective exercise price of the Series A preferred
stock, the occurrence of stock splits, stock distributions, and other corporate
events
On
December 9, 2008, we must redeem all of the Series A preferred stock for a
total
amount equal to $1,575,000, accrued but unpaid dividends and all liquidated
damages and other amounts due in respect of the Series A preferred stock.
In
connection with the Series A transaction, the Series A purchasers received
warrants to purchase up to an aggregate of 7,500,000 shares of our common stock
at $0.33 per share. All stock conversion prices and exercise prices are subject
to adjustment for stock splits, stock dividends or similar events. We also
agreed to file a registration statement with the U.S. Securities and Exchange
Commission covering the shares issuable upon the conversion of the Series A
preferred stock and exercise of the warrants. We paid a commission of $181,125
to our placement agent in connection with the Series A transaction and issued
warrants to our placement agent exercisable into an aggregate of 2,250,000
shares.
Sequiam
Corporation
and
Subsidiaries
Condensed
Consolidated Balance Sheets
|
|
September
30, 2005
|
|
|
|
|
|
(Unaudited)
|
|
December
31, 2004
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
|
|
$
|
302,299
|
|
$
|
-
|
|
Accounts
receivable, net
|
|
|
273,181
|
|
|
39,111
|
|
Prepaid
expenses
|
|
|
10,427
|
|
|
97,125
|
|
Total
current assets
|
|
|
585,907
|
|
|
136,236
|
|
Property
and equipment, net
|
|
|
1,135,938
|
|
|
1,303,757
|
|
Acquired
software, net
|
|
|
120,001
|
|
|
163,200
|
|
Intellectual
properties, net
|
|
|
870,224
|
|
|
644,896
|
|
Product
development costs
|
|
|
192,817
|
|
|
34,509
|
|
Loan
costs, net
|
|
|
-
|
|
|
224,252
|
|
Deposits
and other assets
|
|
|
25,381
|
|
|
8,805
|
|
Total
assets
|
|
$
|
2,930,268
|
|
$
|
2,515,655
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders’ deficit
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
$
|
-
|
|
$
|
24,165
|
|
Notes
payable
|
|
|
250,387
|
|
|
1,692,077
|
|
Accounts
payable
|
|
|
575,520
|
|
|
706,966
|
|
Accrued
interest
|
|
|
223,256
|
|
|
96,299
|
|
Accrued
expenses
|
|
|
56,385
|
|
|
-
|
|
Current
portion of long-term debt
|
|
|
788,205
|
|
|
840,245
|
|
Deferred
revenue
|
|
|
-
|
|
|
6,000
|
|
Deferred
rents
|
|
|
37,070
|
|
|
26,141
|
|
Loans
from shareholders
|
|
|
484,450
|
|
|
348,951
|
|
Accrued
shareholder salaries
|
|
|
1,519,792
|
|
|
1,349,792
|
|
Total
current liabilities
|
|
|
3,935,065
|
|
|
5,090,636
|
|
Long-term
debt
|
|
|
4,129,818
|
|
|
2,301,793
|
|
Total
liabilities
|
|
|
8,064,883
|
|
|
7,392,429
|
|
Shareholders’
deficit:
|
|
|
|
|
|
|
|
Common
shares
|
|
|
63,839
|
|
|
47,966
|
|
Additional
paid-in capital
|
|
|
10,792,041
|
|
|
7,524,118
|
|
Accumulated
deficit
|
|
|
(15,990,495
|
)
|
|
(12,448,858
|
)
|
Total
shareholders’ deficit
|
|
|
(5,134,615
|
)
|
|
(4,876,774
|
)
|
Total
liabilities and shareholders’ deficit
|
|
$
|
2,930,268
|
|
$
|
2,515,655
|
|
See
accompanying notes to condensed consolidated financial
statements.
Sequiam
Corporation
and Subsidiaries
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
For
the Three Months Ended
September
30,
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
206,143
|
|
$
|
28,252
|
|
$
|
368,747
|
|
$
|
98,391
|
|
Product
sales
|
|
|
116,700
|
|
|
18,669
|
|
|
152,472
|
|
|
81,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
|
322,843
|
|
|
46,921
|
|
|
521,219
|
|
|
180,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
154,577
|
|
|
221,200
|
|
|
450,928
|
|
|
680,215
|
|
Cost
of product sales
|
|
|
130,164
|
|
|
61,166
|
|
|
234,922
|
|
|
173,663
|
|
Selling,
general and administrative
|
|
|
511,488
|
|
|
818,247
|
|
|
2,321,548
|
|
|
2,003,743
|
|
Gain
on sale of equipment
|
|
|
-
|
|
|
-
|
|
|
(370
|
)
|
|
(146
|
)
|
Loss
on impairment of equipment held for resale
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
40,706
|
|
Loss
on impairment of intellectual properties
|
|
|
154,469
|
|
|
|
|
|
154,469
|
|
|
-
|
|
Loss
on debt settlement
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,492
|
|
Total
costs and expenses
|
|
|
950,698
|
|
|
1,100,613
|
|
|
3,161,497
|
|
|
2,903,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(627,855
|
)
|
|
(1,053,692
|
)
|
|
(2,640,278
|
)
|
|
(2,723,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(181,985
|
)
|
|
(167,464
|
)
|
|
(901,359
|
)
|
|
(590,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(809,840
|
)
|
$
|
(1,221,156
|
)
|
$
|
(3,541,637
|
)
|
$
|
(3,314,231
|
)
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computation of net loss per common share - Basic and diluted
weighted average shares outstanding
|
|
|
62,337,353
|
|
|
46,506,905
|
|
|
55,823,443
|
|
|
45,974,767
|
|
See
accompanying notes to condensed consolidated financial
statements
Sequiam
Corporation
and Subsidiaries
Condensed
Consolidated Statements of Shareholders’ Deficit
Nine
months ended September 30, 2005
(Unaudited)
|
|
Common
Shares
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
Par
Value
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
47,965,604
|
|
$
|
47,966
|
|
$
|
7,524,118
|
|
$
|
(12,448,858
|
)
|
$
|
(4,876,774
|
)
|
Private
placements of common shares
|
|
|
417,358
|
|
|
417
|
|
|
78,880
|
|
|
-
|
|
|
79,297
|
|
Common
share warrants exercised
|
|
|
914,444
|
|
|
914
|
|
|
356,408
|
|
|
-
|
|
|
357,322
|
|
Common
shares issued for services
|
|
|
3,793,238
|
|
|
3,793
|
|
|
516,829
|
|
|
-
|
|
|
520,622
|
|
Common
shares issued for salaries
|
|
|
2,373,772
|
|
|
2,375
|
|
|
342,161
|
|
|
-
|
|
|
344,536
|
|
Acquisition
of Constellation Biometrics Corporation
|
|
|
1,635,513
|
|
|
1,636
|
|
|
173,364
|
|
|
-
|
|
|
175,000
|
|
Common
shares issued for debt conversions
|
|
|
6,738,392
|
|
|
6,738
|
|
|
986,444
|
|
|
-
|
|
|
993,182
|
|
Warrants
issued in connection with long-term debt
|
|
|
-
|
|
|
-
|
|
|
813,837
|
|
|
-
|
|
|
813,837
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,541,637
|
)
|
|
(3,541,637
|
)
|
Balance
at September 30, 2005
|
|
|
63,838,321
|
|
$
|
63,839
|
|
$
|
10,792,041
|
|
$
|
(15,990,495
|
)
|
$
|
(5,134,615
|
)
|
See
accompanying notes to condensed consolidated financial
statements.
Sequiam
Corporation
and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine
months ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,541,637
|
)
|
$
|
(3,314,231
|
)
|
Adjustments
to reconcile net loss to net cash used for operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
390,361
|
|
|
422,449
|
|
Accretion
of debt discount
|
|
|
485,228
|
|
|
334,928
|
|
Amortization
of loan costs
|
|
|
224,252
|
|
|
-
|
|
Issuance
of common stock in exchange for services
|
|
|
520,622
|
|
|
232,542
|
|
Issuance
of common stock in exchange for salaries
|
|
|
344,536
|
|
|
-
|
|
Gain
on sale of equipment
|
|
|
-
|
|
|
(146
|
)
|
Loss
on impairment of equipment held for sale
|
|
|
-
|
|
|
40,706
|
|
Loss
on impairment of intellectual properties
|
|
|
154,469
|
|
|
-
|
|
Loss
on debt settlement
|
|
|
-
|
|
|
5,492
|
|
Decrease
(Increase) in accounts receivable
|
|
|
(140,952
|
)
|
|
7,047
|
|
Decrease
(Increase) in prepaid expenses and other assets
|
|
|
70,122
|
|
|
(188,699
|
)
|
Decrease
in bank overdraft
|
|
|
(24,165
|
)
|
|
-
|
|
Decrease
in accounts payable
|
|
|
(162,626
|
)
|
|
(32,816
|
)
|
Increase
in accrued shareholders salaries
|
|
|
170,000
|
|
|
105,000
|
|
Increase
in other accrued expenses
|
|
|
180,331
|
|
|
31,438
|
|
Decrease
in deferred revenues
|
|
|
(6,000
|
)
|
|
-
|
|
Increase
in deferred rents
|
|
|
10,929
|
|
|
-
|
|
Net
cash used for operating activities
|
|
|
(1,324,530
|
)
|
|
(2,356,290
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Leasehold
improvements
|
|
|
-
|
|
|
(338,501
|
)
|
Equipment
purchases
|
|
|
(288
|
)
|
|
(25,575
|
)
|
Purchase
of intellectual properties
|
|
|
(650
|
)
|
|
-
|
|
Cash
paid for WMW Communications
|
|
|
-
|
|
|
(70,529
|
)
|
Product
development costs capitalized
|
|
|
(158,308
|
)
|
|
-
|
|
Net
cash used for investing activities
|
|
|
(159,246
|
)
|
|
(434,605
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock and exercise of warrants
|
|
|
436,619
|
|
|
793,817
|
|
Proceeds
from long-term debt
|
|
|
2,100,000
|
|
|
2,328,936
|
|
Repayment
of long-term debt
|
|
|
(1,055,000
|
)
|
|
(218,944
|
)
|
Proceeds
from note payable
|
|
|
-
|
|
|
1,175,000
|
|
Payment
of notes payable
|
|
|
(47,804
|
)
|
|
(486,126
|
)
|
Proceeds
from shareholder loans
|
|
|
366,761
|
|
|
-
|
|
Repayments
of shareholder loans
|
|
|
(14,501
|
)
|
|
(337,851
|
)
|
Net
cash provided by financing activities
|
|
|
1,786,075
|
|
|
3,254,832
|
|
Net
change in cash
|
|
|
302,299
|
|
|
463,937
|
|
Cash,
beginning of period
|
|
|
-
|
|
|
151,450
|
|
Cash,
end of period
|
|
$
|
302,299
|
|
$
|
615,387
|
|
See
accompanying notes to condensed consolidated financial
statements.
Sequiam
Corporation and Subsidiaries
Condensed
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Non-cash
activities:
|
|
2005
|
|
2004
|
|
Debt
conversions
|
|
$
|
993,182
|
|
|
-
|
|
Warrants
issued in connection with long-term debt
|
|
$
|
813,837
|
|
|
-
|
|
Acquire
Constellation Biometrics, Inc.
|
|
$
|
175,000
|
|
|
-
|
|
Common
Stock issued to correct error
|
|
|
-
|
|
$
|
19
|
|
Liabilities
assumed with acquisition of Telepartners, Inc.
|
|
|
-
|
|
$
|
15,068
|
|
Warrants
issued in connection with loan agreement
|
|
|
-
|
|
$
|
691,420
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
77,670
|
|
$
|
86,704
|
|
See
accompanying notes to condensed consolidated financial
statements.
Sequiam
Corporation
and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 -Description of Business and Acquisitions
General
We
were
incorporated in California on September 21, 1999 as Wedge Net Experts, Inc.
On
or about May 1, 2002, we changed our name to Sequiam Corporation and changed
our
stock symbol from “WNXP” to “SQUM.OB”. On May 19, 2004, our common stock was
formally listed on the Frankfurt Stock Exchange under the symbol RSQ. We believe
that listing our shares of common stock on the Frankfurt Stock Exchange will
increase our profile with investors, both institutional and retail, in Germany
and across Europe.
Until
the
acquisition of Smart Biometrics, Inc. in 2003, we were primarily focused on
developing a portfolio of Internet and print enterprise-wide software products
and developing custom software, databases and websites for businesses. We also
operated as an Internet Service Provider and provided Internet access and
website hosting for our customers who required those services. During this
period, our business was operated under one operating segment through our
subsidiaries: Sequiam Software, Inc. and Sequiam Communications, Inc.
In
2003,
we decided to expand our portfolio of product offerings to include biometric
technology products. The expansion into the biometric technology industry was
based on our belief that the terrorist events of September 11, 2001 and the
increased focus on national and personal security created an increased demand
for biometric technology solutions. Because of these national and global issues,
and because of our existing expertise in software design and development, we
believed that we were uniquely positioned to enter the biometric industry.
Furthermore, our Chief Technology Officer, Alan McGinn, played an instrumental
role in connection with the research and development of the BioVault™ while
associated
with Smart Biometrics, Inc.
Today,
our operations are divided into two distinct operating segments: Information
Management and Safety and Security. Our Information Management segment utilizes
our custom software skills, our contacts with the world sports communities
and
interactive web-based technologies. We formed our Safety and Security segment
after our acquisition of Smart Biometrics, Inc. and Fingerprint Detection
Technologies, Inc. Through these acquisitions, we acquired: (a) a fingerprint
biometric access control system, which will be a key feature in our future
product offerings; and (b) a fingerprint detection system which we believe
to be
value impaired due to a patent infringement by a larger company.
Our
Information Management segment consists of the following subsidiaries: (a)
Sequiam Software, Inc.; (b) Sequiam Sports, Inc.; and (c) Sequiam Education,
Inc. Our Safety and Security segment consists of the following subsidiaries:
(a)
Sequiam Biometrics, Inc.; (b) Fingerprint Detection Technologies, Inc.; and
(c)
Constellation Biometrics, Inc.
Development
of the Business
Information
Management Segment
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 Document
Management System, also referred to as Sequiam DMS.
Acquisition
of Brekel Group, Inc. In 2002, we acquired 99.38% of the issued and outstanding
common stock of Brekel Group, Inc. We acquired Brekel Group, Inc. 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. We also acquired Brekel Group, Inc. for its contract
with
the World Olympians Association and its Internet and ExtraNet expertise and
product development gained from that project. Today, the business of Brekel
Group, Inc. is conducted by our subsidiary Sequiam Sports, Inc., which is part
of our Information Management segment.
Acquisition
of the Assets of W.M.W. Communications, Inc. Effective November 1, 2002, we
acquired all of the assets of W.M.W. Communication, Inc., doing business as
Access Orlando. We accounted for this transaction as an acquisition of the
business of W.M.W. Communications, Inc. We acquired W.M.W. Communications,
Inc.
for its Internet Remote Print, commonly referred to as “IRP” and Internet Remote
Print Duplicator, commonly referred to as “IRPlicator,” software products. IRP
is a software product that allows computer users to print remotely to any
printer via the Internet. Because IRP is highly complementary to the Sequiam
DMS
product, we have integrated the two products. W.M.W. Communications, Inc. also
acted as an Internet Service Provider, which we incorporated into our business.
Through our Internet hosting and collocation services, we host third-party
web
content on either our server located at our remote network operations center,
or
on the third party’s server that is located at our remote network operations
center. Today, our subsidiary Sequiam Software, Inc. conducts the business
of
W.M.W. Communication, Inc. which is part of our Information Management
segment.
Acquisition
of the Assets of Telepartners, Inc. On June 1, 2003, we acquired substantially
all of the assets of Telepartners, Inc. located in West Palm Beach, Florida.
We
accounted for this transaction as an acquisition of the business of
Telepartners, Inc. Telepartners, Inc. developed supplemental educational
products for schoolchildren in grades 1 through 12. The major asset acquired
from Telepartners, Inc. was the Extended Classroom™ software,
which
is a supplemental educational program consisting of a video lesson library
containing the same 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. Today, our
subsidiary Sequiam Education, Inc. holds the assets of Telepartners, Inc. that
we are attempting to sell, which is part of our Information Management
segment.
Safety
and Security Segment
Acquisition
of the Assets of Smart Biometrics, Inc. On May 9, 2003, we acquired
substantially all of the assets of Smart Biometrics, Inc. located in Sanford,
Florida. We accounted for this transaction as an acquisition of the business
of
Smart Biometrics, Inc. Smart Biometrics, Inc. is engaged in the development
of
biometric technologies. The BioVault™ technology,
which
is a secure access denial device that utilizes biometric technology and
protocols to recognize a person’s fingerprint to unlock, was the major asset of
Smart Biometrics, Inc. Today, our subsidiary Sequiam Biometrics, Inc., conducts
the business of Smart Biometrics, Inc. which is a part of our Safety and
Security segment.
Acquisition
of Fingerprint Detection Technologies, Inc. On September 11, 2003, we acquired
100% of the issued and outstanding shares of common stock of Fingerprint
Detection Technologies, Inc., a Florida corporation. Fingerprint Detection
Technologies, Inc. has the rights to develop and market a patented and
proprietary technology for fingerprint analysis using a light-emitting diode,
or
LED, intense headband light source. Because Fingerprint Detection Technologies,
Inc. had no operating history and had not generated any revenues, we accounted
for the acquisition as a purchase of its assets. Today, Fingerprint Detection
Technologies, Inc. is one of our subsidiaries and is part of our Safety and
Security segment.
Acquisition
of Constellation Biometrics, Inc. On June 7, 2005, we acquired 100% of
Constellation Biometrics Corporation, a Florida corporation (“Constellation”),
effective May 31, 2005, pursuant to a stock purchase agreement dated May 31,
2005 by and among Sequiam, Constellation and the shareholders of Constellation.
We accounted for this transaction as a purchase. Constellation is the parent
company for a wholly owned subsidiary Biometric Security (PTY) LTD. (a/k/a
Secure Biometrics or Biometrics.co.za), a South African company (“Biometric
Security”),
engaged in the development, marketing and sale of biometric technology products.
The results of operations for the three and nine months ended September 30,
2005
include three months and four months of operations, respectively.
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, 2004. 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 September 30, 2005, the
Company had 29,824,423 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., Constellation
Biometrics Corporation and Sequiam Sports, Inc. (the “Company”). All
intercompany transactions and accounts have been eliminated.
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. The following
table illustrates the effect on net loss and loss per share if the fair-value
based method had been applied to all outstanding awards for the nine months
ended September 30:
|
|
2005
|
|
2004
|
|
Net
loss, as reported
|
|
$
|
(3,541,637
|
)
|
$
|
(3,314,231
|
)
|
Add:
stock-based employee compensation expense included in reported net
loss
net of related tax effects
|
|
|
-
|
|
|
-
|
|
Deduct:
total stock-based employee compensation expense determined under
the fair
value method for all awards, net of related tax effects
|
|
|
-
|
|
$
|
(360,150
|
)
|
Pro
forma net loss
|
|
$
|
(3,541,637
|
)
|
$
|
(3,674,381
|
)
|
Basic
and diluted loss per common share, as reported
|
|
$
|
(0.06
|
)
|
$
|
(0.07
|
)
|
Basic
and diluted loss per common share, pro forma
|
|
$
|
(0.06
|
)
|
$
|
(0.08
|
)
|
The
following table illustrates the effect on net loss and loss per share if the
fair-value based method had been applied to all outstanding awards for the
three
months ended September 30:
|
|
2005
|
|
2004
|
|
Net
loss, as reported
|
|
$
|
(809,840
|
)
|
$
|
(1,221,156
|
)
|
Add:
stock-based employee compensation expense included in reported net
loss
net of related tax effects
|
|
|
-
|
|
|
-
|
|
Deduct:
total stock-based employee compensation expense determined under
the fair
value method for all awards, net of related tax effects
|
|
|
-
|
|
$
|
(10,611
|
)
|
Pro
forma net loss
|
|
$
|
(809,840
|
)
|
$
|
(1,231,767
|
)
|
Basic
and diluted loss per common share, as reported
|
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
Basic
and diluted loss per common share, pro forma
|
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
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 Sequiam Corporation and its Subsidiaries. The amended agreements
replaced 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
three and nine months ended September 30, 2005 and 2004, Sequiam accrued and
did
not pay the minimum annual salaries payable to the CEO and CFO.
On
November 1, 2002, the Company’s Chief Technology Officer (“CTO”) entered into an
employment agreement with Sequiam Software. The agreement has an initial term
of
two years with automatic one-year renewals. The agreements provide for
compensation in the form of minimum annual salary of $75,000 and allows for
bonuses in cash, stock or stock options and participation in Company benefit
plans. Full-time employment is a requirement of the contract.
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 September 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. Xerox had taken no action since its September
3, 2002 demand letter until June 29, 2004, when Xerox Corporation filed a
lawsuit in the Circuit Court in Pinellas County State of Florida. The claim
amount in controversy is approximately $1,574,000. The Company disputes these
claims and believes them to be without merit. Because this matter is in very
preliminary stages, management is unable to determine the likelihood of an
unfavorable outcome and, accordingly, has not accrued any amount for potential
losses in connection with this lawsuit.
On
December 21, 2004, the Company entered into a Letter Agreement with Chapman
Spira & Carson, LLC ("Chapman"), pursuant to which Chapman agreed to provide
various consulting, investment banking and business development services for
the
Company. On or about September 28, 2005, Chapman filed a complaint in
United States District Court for the Southern District of New York, asserting
claims for breach of contract and unjust enrichment. Chapman alleges that,
notwithstanding its purported provision of services under the Letter Agreement
between it and the Company, the Company failed to properly compensate Chapman
for those services. The Company claims that none of those services
were actually provided by Chapman. Chapman is seeking compensatory damages
of $1,019,060,
costs,
including attorney's fees, 500,000 shares of common stock and a
warrant to
purchase 6,195,000 shares of stock at $0.26 per share.
The Company believes that Chapman's claims are without merit and intends to
vigorously defend itself against these allegations.
The
Company currently operates without directors’ and officers’ insurance and is at
risk for those types of losses.
Note
4 - Income taxes
The
Company records income taxes in accordance with SFAS No. 109, “Accounting for
Income Taxes.” The Company has incurred net operating losses since inception
resulting in a deferred tax asset, for which a valuation allowance was provided
since it is more likely than not that the deferred tax asset will not be
realized.
Note
5 -
Intangible
Assets
As
of
September 30, 2005, intangible assets consist of the following:
|
|
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Acquired
Software
|
|
|
5
|
|
$
|
288,000
|
|
$
|
167,999
|
|
$
|
120,001
|
|
Intellectual
Properties
|
|
|
5
|
|
|
1,246,900
|
|
|
376,676
|
|
|
870,224
|
|
Product
Development Costs
|
|
|
5
|
|
|
192,817
|
|
|
-0-
|
|
|
192,817
|
|
|
|
|
|
|
$
|
1,727,717
|
|
$
|
544,675
|
|
$
|
1,183,042
|
|
Amortization
expense amounted to $78,151 and $76,092 for the three months ended September
30,
2005 and 2004 and $210,302 and $249,759 for the nine months ended September
30,
2005 and 2004.
The
estimated future amortization expense for each of the five succeeding years
is
as follows:
September
30:
|
|
|
|
2006
|
|
$
|
306,980
|
|
2007
|
|
|
306,980
|
|
2008
|
|
|
306,980
|
|
2009
|
|
|
262,102
|
|
|
|
$
|
1,183,042
|
|
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 amounts 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. Impairment losses of $154,099 and $40,706 were charged to expense
during the three and nine months ended September 30, 2005 and 2004,
respectively.
Note
7- Notes and Debentures Payable
On
March
5, 2003 Sequiam issued to La Jolla Cove Investors, Inc. ("LJCI"), an 8%
Convertible Debenture in the principal amount of $300,000 and a warrant to
purchase 2,000,000 shares of our common stock at $1.50 per share (the "Initial
Financing"). Sequiam received a total of $150,000 of the principal amount of
the
debenture, representing the balance due at December 31, 2003.
In
connection with the debenture and the warrant, Sequiam was required to register
the resale of common stock to be issued to LJCI upon conversion of the debenture
and exercise of the warrant. To meet this obligation, Sequiam filed a
registration statement on April 27, 2003, an amended registration statement
on
May 7, 2003, and a second amended registration statement on June 23, 2003,
all
of which were withdrawn on September 5, 2003, prior to being declared effective.
Effective
as of January 29, 2004, the Company entered into an Agreement of Accord and
Satisfaction with LJCI pursuant to which LJCI agreed to accept $200,000 plus
100,000 shares of restricted common stock in accord and satisfaction of the
debenture and warrant and other documents related to the Initial Financing.
As a
result, all of our obligations under the Initial Financing, including the
obligation to file a new registration statement, have been
terminated.
Pursuant
to the accord and satisfaction, Sequiam issued 100,000 shares of restricted
common stock to LJCI, which, had a fair market value of $51,000, based on a
closing trading price of $0.51 per share on January 29, 2004. In addition,
the
Company delivered to LJCI a promissory note in the principal amount of $200,000
with interest in the amount of 8% per year, plus principal, due in Nine
installments of $34,017 per month beginning February 1, 2004. The Company has
paid the note in full.
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 offering of securities the Company may make during
any
time that LJCI still holds such 100,000 shares. Unless the Company makes a
registered 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, 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 September
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 became due on January 30, 2005. The debt
discount was originally amortized over the original estimated life of the
Note of 36 months. Beginning in January 2004, the remaining unamortized debt
discount will be amortized over twelve months. As of September 30, 2005, the
principal and interest were paid in full.
On
December 18, 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 $100,000 under a promissory note bearing interest
at
five percent (5%). In connection with this loan, Sequiam Corporation issued
one
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 were
paid
in full during 2004.
On
December 18, 2003, Sequiam 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, Sequiam Corporation
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
were
paid in full during 2004.
On
December 26, 2003, Sequiam 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 were
paid in full during 2004. The Debenture also provided for an unconditional
equity provision whereby the Corporation issued seventy five thousand (75,000)
restricted shares to the Holder as an incentive to lend. The fair value of
the
shares was recorded as a debt discount of $30,000.
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. The balance of the note
as
of September 30, 2005 is $33,055.
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%. The balance of the note as of September 30, 2005 is $17,332.
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 became due on January 30, 2005. The principal and
interest were paid in full.
On
September 7, 2004, the Company entered into an unsecured loan agreement with
Eagle Funding, LLC, for a principal loan amount of $200,000 under a promissory
note bearing interest at eight percent (8%). The principal became due on March
7, 2005 and the interest is due monthly. Eagle extended the term of their loan
to November 7, 2005. In connection with this loan, the Company issued one
warrant to the holder to purchase 400,000 shares of its common stock at an
exercise price of $0.66 per share.
On
September 30, 2004, the Company entered into an unsecured loan agreement with
Lee Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John
Svenningsen, for a principal loan amount of $500,000 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 1,300,000 shares of its common
stock at an exercise price of $0.66 per share. The principal and interest became
due on March 30, 2005. The principal and interest were paid in
full.
On
September 30, 2004, the Company entered into an unsecured loan agreement with
Lee Harrison Corbin for a principal loan amount of $75,000 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 195,000 shares of its
common stock at an exercise price of $0.66 per share. The principal and interest
became due on March 30, 2005. The principal and interest were converted to
equity.
On
November 19, 2004, the Company entered into an unsecured loan agreement with
Walter H. Sullivan III, 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 one warrant to the holder to purchase 260,000 shares
of
its common stock at an exercise price of $0.66 per share. The principal and
interest became due on February 19, 2005. The principal and interest were
converted to equity.
On
December 16, 2004, the Company entered into an unsecured loan agreement with
Lee
Harrison Corbin, Attorney-in-Fact For the Trust Under the Will of John
Svenningsen, 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 150,000 shares of its common stock
at an exercise price of $0.33 per share. The principal and interest became
due
on January 31, 2005. The principal and interest were paid in full.
On
May
18, 2005, Sequiam Corporation (the “Company”) closed a debt transaction with Lee
Harrison Corbin, Attorney in-Fact for the Trust Under the Will of John
Svenningsen (the “Trust”) pursuant to which the Trust consolidated $1.35 million
in existing unsecured debt owed by the Company to the Trust and provided $2.1
million in additional financing (the “Additional Financing”) for a total of
$3,450,000 (the “Loan”). The Company also issued to the Trust a warrant
exercisable into 6,000,000 shares of the Company’s common stock (the
“Trust Warrant”).
In
connection with the Loan: (a) the Trust delivered $1,000,000 of the Additional
Financing to Laurus Master Fund, Ltd., a Cayman Islands company (“Laurus”);
and
(b) the Company (i) reduced the conversion price of that certain secured
convertible term note, dated as of April 27, 2004, made by the Company in favor
of Laurus to $0.15 per share pursuant to Rule 3(a)(9) of the Securities Act
of
1933, as amended (the “Securities Act”) (the “Laurus Note”), and (ii) issued a
warrant to Laurus exercisable into 1,500,000 shares of the Company’s common
stock at an exercise price of $0.23 per share (the “Laurus Warrant”) (the
“Payoff Consideration”). In return for receiving the Payoff Consideration,
Laurus, the Trust and the Borrower entered into that certain Assignment,
Assumption and Release, dated as of May 18, 2005, pursuant to which, Laurus
assigned (the “Assignment”) all of its rights, liabilities and obligations under
the Laurus Note, and all documents related thereto (collectively with the Laurus
Note, the “Laurus Loan Documents”), to the Trust. In addition, Laurus released
the Company from all liability whatsoever under the Laurus Loan Documents,
except for any terms therein which may survive the assignment.
The
$3,450,000 promissory note issued to the Trust (the “Trust Note”) has a term of
two years. Eight percent (8%) interest shall be payable monthly in arrears
commencing on November 10, 2005, and on the first day of each consecutive
calendar month thereafter. Monthly amortization payments shall commence on
May
10, 2006, at the rate of $75,000. The trust Note is secured by all of the
Company’s assets.
In
connection with the Loan, the Trust received the Trust Warrant to purchase
up to
6,000,000 shares of the Company’s common stock at prices ranging from $0.20 per
share to $0.30 per share. 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 the exercise of the
Trust Warrant and the Laurus Warrant.
Of
the
Loan amount, the Company received approximately $1.1 million in cash after
payment to Laurus of $1,000,000 toward reduction of the Laurus Note (described
above). The remaining principal balance of the Laurus Note after such payment
was $818,182, which balance was converted into 5,454,547 shares of common stock
by Laurus at the reduced conversion rate of $0.15 per share.
In
the
Company’s opinion, the issuance and sale of the Trust Warrant and the Laurus
Warrant described above was exempt from registration under the Securities Act
in
reliance upon Section 4(2) of the Securities Act. The Trust and Laurus are
accredited investors. The securities are not subject to resale except pursuant
to registration under the Securities Act or pursuant to an available exemption
from registration under the Securities Act. The Trust and Laurus had an
opportunity to ask management questions about the Company and had adequate
access to information about the Company. No sales of securities involved the
use
of an underwriter and no commissions were paid in connection with the issuance
or sale of any securities.
The
principal documents involved in the transaction are a Securities Purchase
Agreement, an Amended and Restated Master Security Agreement, an Amended,
Restated and Consolidated Senior Secured Term Note, a Common Stock Purchase
Warrant issued to the Trust, a Common Stock Purchase Warrant issued to Laurus,
a
Registration Rights Agreement, an Amended and Restated Stock Pledge Agreement,
an Amended and Restated Grant of Security Interest in Patents and Trademarks
for
the Company and certain of its subsidiaries, a Subsidiary Guaranty, a
Subordination Agreement from Mark Mroczkowski and Nick VandenBrekel to the
Trust, a Subordination Agreement from Eagle Funding, LLC to the Trust, and
an
Assignment, Assumption and Release, each of which is dated as of May 18,
2005.
On
May
11, 2005 Walter Sullivan converted his $100,000 loan and $2,375 of accrued
interest into 731,252 common shares of Sequiam Corporation at $0.14 per share.
On
May
17, 2005, effective April 7, 2005, Eagle Funding LLC extended the term of their
loan to November 7, 2005.
On
May
17, 2005, EastGroup Properties, LP agreed to an additional six (6) month
deferment of the Company’s Promissory Note payments until December 1, 2005,
contingent upon the payment of April and May 2005 prior to May 31, 2005, and
that all rental payments between now and December 2005 are kept current.
EastGroup Properties, LP also agreed to extend the Note by twelve (12) months
to
represent the twelve (12) total deferred payments from December 2004 to November
2005.
On
May
18, 2005 Lee Corbin converted his $75,000 loan and $2,363 of accrued interest
into 552,593
common
shares of Sequiam Corporation at $0.14 per share. The agreement included
piggyback registration rights for all shares and warrants owned by Mr.
Corbin.
On
February 28, 2005 as part of the acquisition of Biometric Security (PTY) LTD,
Constellation Biometrics Corporation entered into a note payable with Aregee
Investments No. 105 for $440,000 payable in quarterly payments of $55,000
without interest. The note matures on April 1, 2007 and is secured by all the
assets of Biometric Security (PTY) LTD.
The
preceding information is summarized as follows at September 30,
2005:
Included
in Notes Payable:
|
|
Face
Amount
|
|
Debt
Discount
|
|
Carrying
Amount
|
|
Notes
payable - Precision
|
|
$
|
17,332
|
|
$
|
-
|
|
$
|
17,332
|
|
Notes
payable - GE
|
|
|
33,055
|
|
|
-
|
|
|
33,055
|
|
Promissory
note - Eagle Funding, LLC
|
|
|
200,000
|
|
|
-
|
|
|
200,000
|
|
|
|
$
|
250,387
|
|
$
|
-
|
|
$
|
250,387
|
|
Included
in Long-Term Debt:
|
|
|
|
|
|
|
|
|
|
|
East
Group Properties
|
|
$
|
1,544,266
|
|
$
|
-
|
|
$
|
1,544,266
|
|
Svenningsen
Trust
|
|
|
3,650,000
|
|
|
(661,243
|
)
|
|
2,988,757
|
|
Aregee
Investments No. 105
|
|
|
385,000
|
|
|
-
|
|
|
385,000
|
|
Total
|
|
|
5,579,266
|
|
|
(661,243
|
)
|
|
4,918,023
|
|
Less
Current Portion
|
|
|
(788,205
|
)
|
|
-
|
|
|
(788,205
|
)
|
|
|
$
|
4,791,061
|
|
$
|
(661,243
|
)
|
$
|
4,129,818
|
|
Note
8 - Loans From Shareholders
On
February 1, 2002, Mark Mroczkowski, the Chief Financial Officer and a
shareholder of the Company, loaned Sequiam Software, Inc. $50,000. On
February 15, 2005 his wife Cynthia Mroczkowski loaned Sequiam Corporation
$50,000. Interest is payable at 6%. As of September 30, 2005, the balance
due under these loans was $100,000 payable on demand together with accrued
interest of $7,000.
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 September 30, 2005, the Company owed $371,650 on
these notes, plus accrued interest of $29,500. 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 September 30, 2005, the Company owed
$12,000 without interest or specific repayment terms.
Note
9 - Lease
Agreement and Note Payable
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 Nine 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.
On
May
17, 2005, EastGroup Properties, LP agreed to an additional six (6) month
deferment of the Company’s Promissory Note payments until December 1, 2005,
contingent upon the payment of April and May 2005 prior to May 31, 2005, and
that all rental payments between now and December 2005 are kept current.
EastGroup Properties, LP also agreed to extend the Note by twelve (12) months
to
represent the twelve (12) total deferred payments from December 2004 to November
2005.
Rental
expense for the three months ended September 30, 2005 and 2004 was $48,049
and
$37,425, respectively. Rental expense for the nine months ended September 30,
2005 and 2004 was $133,702 and $99,730, respectively. The original amount of
the
note of $1,600,000 represents $893,112 of deferred rent and $706,888 of tenant
improvements. The September 30, 2005 balance of $ 1,544,266 included $193,205
in
current portion of long-term debt and $1,351,061 in long-term debt. The new
minimum future rentals required under the operating lease and the maturities
of
the long-term note payable are as follows:
Year
|
|
Rentals
|
|
Maturities
|
|
2005
|
|
$
|
193,175
|
|
$
|
193,205
|
|
2006
|
|
|
197,113
|
|
|
244,932
|
|
2007
|
|
|
201,150
|
|
|
260,039
|
|
2008
|
|
|
205,287
|
|
|
276,078
|
|
2009
|
|
|
156,336
|
|
|
293,105
|
|
Thereafter
|
|
|
-
|
|
|
276,907
|
|
|
|
$
|
953,061
|
|
$
|
1,544,266
|
|
Note
10 - Long-Term Debt
On
May
18, 2005, Sequiam Corporation (the “Company”) closed a debt transaction with Lee
Harrison Corbin, Attorney in-Fact for the Trust Under the Will of John
Svenningsen (the “Trust”) pursuant to which the Trust consolidated $1.35 million
in existing unsecured debt owed by the Company to the Trust and provided $2.1
million in additional financing (the “Additional Financing”) for a total of
$3,450,000 (the “Loan”). Subsequently, after its acquisition of Constellation
Biometrics, it consolidated into this loan a $200,000 loan from the Trust to
Constellation, bringing the total to $3,650,000.
The
$3,650,000 promissory note issued to the Trust (the “Trust Note”) has a term of
two years. 8% interest shall be payable monthly in arrears commencing on
November 10, 2005, and on the first day of each consecutive calendar month
thereafter. Monthly principal payments shall commence on May 10, 2006, at the
rate of $75,000. The trust Note is secured by all of the Company’s assets and
matures May 17, 2007.
The
maturities of the Note as of September 30, 2005 are as follows:
Year
|
|
Maturities
|
|
2006
|
|
$
|
375,000
|
|
2007
|
|
|
3,275,000
|
|
|
|
$
|
3,650,000
|
|
Note
11 - Capital Stock
During
the Nine months ended September 30, 2005, the Company issued 3,793,238 and
2,373,772 common shares for business advisory, marketing services and payroll
valued at $520,622 and $344,536, respectively based on the Company’s quoted
market price on the date of the related agreements.
Note
12 - Operating Segments
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 September 30, 2005.
|
|
Information
Management
|
|
Safety
and
Security
|
|
Segments
Total
|
|
Corporate
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
206,143
|
|
$
|
116,700
|
|
$
|
322,843
|
|
|
|
|
$
|
322,843
|
|
Interest
expense, net
|
|
|
(1,850
|
)
|
|
|
|
|
(1,850
|
)
|
|
(180,135
|
)
|
|
(181,985
|
)
|
Depreciation
and amortization
|
|
|
73,620
|
|
|
66,863
|
|
|
140,483
|
|
|
-
|
|
|
140,483
|
|
Segment
loss
|
|
|
(87,823
|
)
|
|
(302,831
|
)
|
|
(390,654
|
)
|
|
(419,186
|
)
|
|
(809,840
|
)
|
Segment
assets (1)
|
|
|
1,413,772
|
|
|
234,793
|
|
|
1,648,565
|
|
|
1,281,703
|
|
|
2,930,268
|
|
(1) Segment
assets have been adjusted for intercompany accounts to reflect actual assets
for
each segment.
The
table
below presents certain financial information by business segment for the Nine
months ended September 30, 2005.
|
|
Information
Management
|
|
Safety
and
Security
|
|
Segments
Total
|
|
Corporate
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
311,247
|
|
$
|
209,972
|
|
$
|
521,219
|
|
|
|
|
$
|
$521,219
|
|
Interest
expense, net
|
|
|
(20,492
|
)
|
|
|
|
|
(20,492
|
)
|
|
(880,867
|
)
|
|
(901,359
|
)
|
Depreciation
and amortization
|
|
|
214,928
|
|
|
175,432
|
|
|
390,360
|
|
|
-
|
|
|
390,360
|
|
Segment
loss
|
|
|
(760,964
|
)
|
|
(882,839
|
)
|
|
(1,643,803
|
)
|
|
(1,897,834
|
)
|
|
(3,541,637
|
)
|
The
table
below presents certain financial information by business segment for the quarter
ended September 30, 2004.
|
|
Information
Management
|
|
Safety
and
Security
|
|
Segments
Total
|
|
Corporate
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
28,252
|
|
$
|
18,669
|
|
$
|
46,921
|
|
$
|
-
|
|
$
|
46,921
|
|
Interest
expense
|
|
|
(18,106
|
)
|
|
-
|
|
|
(18,106
|
)
|
|
(149,358
|
)
|
|
(167,464
|
)
|
Depreciation
and amortization
|
|
|
91,057
|
|
|
48,968
|
|
|
140,025
|
|
|
-
|
|
|
140,025
|
|
Segment
loss
|
|
|
(521,131
|
)
|
|
(124,073
|
)
|
|
(645,204
|
)
|
|
(575,952
|
)
|
|
(1,221,156
|
)
|
Segment
assets(1)
|
|
|
1,706,479
|
|
|
637,272
|
|
|
2,343,751
|
|
|
960,858
|
|
|
3,304,609
|
|
The
table
below presents certain financial information by business segment for the Nine
months ended September 30, 2004.
|
|
Information
Management
|
|
Safety
and
Security
|
|
Segments
Total
|
|
Corporate
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
98,391
|
|
$
|
81,783
|
|
$
|
180,174
|
|
$
|
-
|
|
$
|
180,174
|
|
Interest
expense
|
|
|
(36,320
|
)
|
|
-
|
|
|
(36,320
|
)
|
|
(554,412
|
)
|
|
(590,732
|
)
|
Depreciation
and amortization
|
|
|
264,260
|
|
|
158,189
|
|
|
422,449
|
|
|
-
|
|
|
422,449
|
|
Segment
loss
|
|
|
(1,381,419
|
)
|
|
(236,318
|
)
|
|
(1,617,737
|
)
|
|
(1,696,494
|
)
|
|
(3,314,231
|
)
|
|
(1)
|
Segment
assets have been adjusted for intercompany accounts to reflect actual
assets for each segment.
|
SEQUIAM
CORPORATION
32,104,723Shares
of Common Stock
April
11, 2006
TABLE
OF CONTENTS
SUMMARY
|
4
|
|
|
RISK
FACTORS
|
7
|
|
|
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
15
|
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
15
|
|
|
USE
OF PROCEEDS
|
15
|
|
|
MARKET
FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
|
15
|
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS
|
17
|
|
|
BUSINESS
|
26
|
|
|
MANAGEMENT
|
39
|
|
|
LONG
TERM INCENTIVE PLAN AWARDS
|
41
|
|
|
DEFINED
BENEFIT OR ACTUARIAL PLAN DISCLOSURE
|
41
|
|
|
COMPENSATION
OF DIRECTORS
|
41
|
|
|
STOCK
OWNERSHIP
|
41
|
|
|
ORGANIZATION
WITHIN LAST FIVE YEARS
|
42
|
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
42
|
|
|
PRINCIPAL
AND SELLING STOCKHOLDERS
|
44
|
|
|
PLAN
OF DISTRIBUTION
|
52
|
|
|
DESCRIPTION
OF SECURITIES
|
53
|
|
|
LEGAL
MATTERS
|
57
|
|
|
EXPERTS
|
57
|
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
57
|
|
|
Index
to Consolidated Financial Statements
|
F-1
|
Report
of Independent Registered Certified Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Operations
|
F-4
|
Consolidated
Statements of Shareholders' Deficit
|
F-5
|
Consolidated
Statements of Cash Flows
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
Condensed
Consolidated Balance Sheets
|
F-26
|
Condensed
Consolidated Statements of Operations
|
F-27
|
Condensed
Consolidated Statements of Shareholders' Deficit
|
F-28
|
Condensed
Consolidated Statements of Cash Flows
|
F-29
|
Notes
to Condensed Consolidated Financial Statements
|
F-30
|