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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2005
[_] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________________ to _________________.
Commission file number 000-13895
SEALIFE CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 90-0224435
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 W. SLAUSON AVENUE, CULVER CITY, CALIFORNIA 90230
(Address of principal executive offices)
(310) 338-9757
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
As of May 20, 2005, the issuer had 18,794,319 shares of common stock,
par value $.0001 per share, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
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SEALIFE CORPORATION
INDEX TO FORM 10-QSB
PAGE
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PART I FINANCIAL INFORMATION................................................3
Item 1. Financial Statements (unaudited).....................................3
Condensed Consolidated Balance Sheet (unaudited)
as of March 31, 2005..............................................3
Condensed Consolidated Statement of Income (unaudited)
for the three months ended March 31, 2005 and
March 31, 2004....................................................4
Consolidated Changes of Stockholders' Equity.........................5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2005 and
March 31, 2004....................................................6
Notes to Condensed Consolidated Financial Statements.................7
Item 2. Management's Discussion and Analysis or Plan of Operation...........15
Item 3. Controls and Procedures.............................................30
PART II OTHER INFORMATION...................................................31
Item 2. Legal Proceedings...................................................31
Item 2. Unregistered Sales of Securities and Us of Proceeds.................32
Item 6. Exhibits............................................................33
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2005 and 2004
March 31, March 31,
2005 2004
----------- -----------
ASSETS
Current Assets
Cash .......................................... $ -- $ 5,441
Cash in escrow ................................ 15,000 --
Inventory ..................................... 39,637 6,000
Accounts Receivable ........................... 16,397 14,688
Prepaid expenses .............................. 155,371 440,000
----------- -----------
Total Current Assets ..................... 226,405 451,441
Other Assets
Technology .................................... 1,735,309 1,735,309
Less: accumulated amortization ................ (285,922) (170,230)
----------- -----------
1,449,387 1,565,079
----------- -----------
Total Assets ............................. $ 1,675,792 $ 2,016,520
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank overdrafts ............................... $ 856 $ --
Notes payable ................................. 175,500 130,000
Accounts payable .............................. 72,805 54,531
Accounts payable - shareholders ............... 91,755 61,130
Accrued expenses .............................. 194,210 --
Accrued wages ................................. 437,297 64,560
Accrued interest .............................. 17,844 4,584
Accrued payroll taxes ......................... 8,382 8,382
Current portion of long-term debt ............. 7,313 3,291
----------- -----------
Total Current Liabilities ................ 1,005,962 326,478
Long-Term Debt
Notes payable ................................. 311,003 315,025
Stockholders' Equity
Common stock .................................. 1,874 1,454
Additional paid in capital .................... 5,619,326 3,855,368
Deficit accumulated ........................... (5,262,373) (2,481,805)
----------- -----------
Total Stockholders' Equity ............... 358,827 1,375,017
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,675,792 $ 2,016,520
=========== ===========
3
SEALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Three Months Ended March 31, 2005 and 2004
March 31, March 31,
2005 2004
------------ ------------
Sales .................................. $ 36,052 $ 12,816
Cost of sales .......................... 20,049 9,188
------------ ------------
Gross Profit ............. 16,002 3,628
Sales and marketing .................... 127,452 4,087
General and administrative ............. 678,639 81,527
------------ ------------
Total Expenses ........... 806,090 85,614
------------ ------------
Net Loss ............................... $ (790,088) $ (81,986)
============ ============
Loss per share ........... $ (0.05) $ (0.01)
Average shares outstanding ............. 15,703,993 11,760,097
4
SEALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CHANGES OF STOCKHOLDERS' EQUITY
For the period from May 31, 2003 through March 31, 2005
DEFICIT
ACCUMULATED
ADDITIONAL DURING
PREFERRED STOCK COMMON STOCK PAID IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance May 31, 2003 . -- $ -- 9,558,806 $ 956 $ 1,493,067 $ (702,085) $ 791,938
Stock for services -- -- 4,261,088 426 1,833,134 -- 1,833,560
Stock for Technology -- -- 400,000 40 399,960 -- 400,000
Sale of stock ... -- -- 316,261 32 129,207 -- 129,239
Net loss for the period -- -- -- -- -- (1,807,055) (1,807,055)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance May 31, 2004 . -- -- 14,536,155 1,454 3,855,368 (2,509,140) 1,347,682
Stock for services -- -- 2,532,522 253 1,123,157 -- 1,123,410
Sale of Stock ... -- -- 242,862 24 121,927 -- 121,951
Net loss for the period -- -- -- -- -- (1,963,145) (1,963,145)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 2004 -- -- 17,311,539 1,731 5,100,452 (4,472,285) 629,898
Stock for services -- -- 1,239,778 124 458,893 -- 459,017
Sale of Stock ... -- -- 190,476 19 59,981 -- 60,000
Net loss for the period -- -- -- -- -- (790,088) (790,088)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance March 31, 2005 -- $ -- 18,635,793 $ 1,874 $ 5,619,326 $(5,262,373) $ 358,827
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes and accountant's report.
5
SEALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2005 and March 31, 2004
March 31, March 31,
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ........................................ $(790,088) $ (81,986)
Adjustments to reconcile net loss to net
cash provided used in operating activities
Amortization ............................... 28,923 28,923
Stock issued for services .................. 459,017 --
Changes in Current Assets and liabilities:
(Increase) in Accounts receivable .......... (16,396) --
(Increase) in Inventories .................. (15,333) --
(Increase) in Prepaid expenses ............. (52,706) --
Increase in Accounts payable ............... 50,572 509
Increase in Accrued expenses ............... 194,210 --
Increase in Accrued wages .................. 90,237 --
Increase in Accrued interest ............... 5,396 --
Increase in Accrued payroll taxes .......... -- 8,382
--------- ---------
NET CASH (USED) BY
OPERATING ACTIVITIES .................. (46,168) (44,172)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Common stock ............................ 60,000 27,000
Increase (decrease) in Notes payable ............ (16,850) 14,500
(Decrease) Increase in Accounts payable SH ...... (3,775) --
--------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES .................. 39,375 41,500
--------- ---------
NET INCREASE (DECREASE) IN CASH ...................... (6,793) (2,672)
CASH AT BEGINNING OF PERIOD .......................... 20,937 8,113
--------- ---------
CASH AT END OF PERIOD ................................ $ 14,144 $ 5,441
========= =========
See accompanying notes and accountant's report.
6
SEALIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HISTORY:
Sealife Corp., a Nevada corporation ("Sealife Nevada"), was incorporated in
2002. Also in 2002 Sealife Nevada became the sole shareholder of SeaLife Marine
Products, Inc., a California corporation. The subsidiary was formed to
concentrate on certain marine product applications of its technology.
On June 30, 2002 SeaLife Nevada entered into an agreement with the shareholders
of Division G, Inc. to exchange 100% of the stock of Division G, Inc. for shares
of SeaLife Nevada's common stock. The agreement became effective July 1, 2002.
At the time of acquisition Division G, Inc.'s assets consisted of ownership of
all rights in perpetuity to ProTerra A6, a soil conditioner, Grease Bust, a
grease treatment and cleaner, Soil Rescue, a soil Bio-remediation product,
OilEx, a soil detoxification and rebuilding product, and Muni-Mix a sewer
clean-up and detoxification product. All products were in the early stages of
development. Division G, Inc. had no liabilities at the time of acquisition.
On July 31, 2002 Sealife Nevada formed a wholly-owned subsidiary, Proterra
Technologies, Inc., a California corporation. The subsidiary was formed to
concentrate on the agricultural product applications.
On December 20, 2002, SeaLife Nevada was acquired by SeaLife Corporation, a
Delaware corporation (the "Company"), formerly Integrated Enterprises, Inc., a
public, reporting corporation, pursuant to the terms of a Share Exchange
Agreement. The Company was a shell at the time of the acquisition and therefore
the acquisition was treated as a reverse merger whereby the acquired company is
treated as the acquiring company for accounting purposes. At the same time as
the share exchange, the Company effected a 15 to 1 reverse stock split.
A history of the Company is as follows:
Sealife Corporation, formerly Integrated Enterprises, Inc., formerly Vast
Technologies Holding Company, Inc., formerly Fraser Realty Group, Inc., is the
successor to Fraser Mortgage Investments (the Trust), an unincorporated
association in the form of a business trust organized in Ohio under the
Declaration of Trust dated May 7, 1969. At a special meeting of the shareholders
of the Trust held on August 28, 1984 a plan of reorganization was approved
pursuant to which:
1. All of the assets of the Trust were sold to FRG;
2. FRG assumed all of the Trust's liabilities and obligations;
3. Each issued and outstanding share of the Trust was converted
into one share of FRG common stock; and
4. The Trust was terminated.
The purpose of the proposed reorganization was to convert the Trust to a
business organization taxable as an ordinary corporation, instead of a real
estate investment trust, under Federal income tax laws. Unless the context
otherwise requires, the term FRG includes its predecessor, the Trust.
7
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
FRG invested in real estate and mortgage loans. FRG was organized as a real
estate trust, primarily for the purpose of making passive investments in real
estate and passing through the income realized from such investments to its
shareholders. From its inception, FRG financed its real estate investment
operations principally through sale of common stock, and short-term debt
financing, including both bank borrowings and the issuance of commercial paper.
FRG saw its real estate investments evolve from principally short-term
construction loans to a mix of variable and fixed-rate mortgage loans of which a
significant portion consists of mortgage positions on improved and unimproved
land held by investors for development purposes. Accordingly, FRG's investments
in mortgage loans represent long-term assets with the realization dates
dependent upon the equity holder's ability to complete development projects or
obtain refinancing from other sources. At the same time, bank notes payable and
commercial paper outstanding were all short-term borrowings renewable at the
option of the note holders. FRG relied on these short-term borrowings, the
intermittent repayment of loans and the refinancing or sale of portfolio
investments in order to meet its current obligations. During fiscal 1989, cash
provided from these sources was wholly inadequate to provide working capital to
fund operations. Management was unable to secure additional financing or find
other means of obtaining needed cash in fiscal 1990 to permit FRG to meet its
current obligations. Accordingly, management determined that there was no reason
to continue operating and, thus, incurring further losses. FRG has been inactive
since 1990 and has not conducted any business since that time.
On August 4, 1998, the Chairman of the Board and President and with first
receiving the consent, approval and authorization of FRG's Board of Directors,
filed with the Secretary of State of Delaware for renewal, revival and
restoration of the Company's Certificate of Incorporation.
On October 27, 1999 the Company entered into an Acquisition Merger agreement
with a private company, Motorsports USA, Inc. The Company also effected a name
change at that time to Motorsports USA, Inc. With this transaction certain
assets became the property of the Company. However, the custody and control of
such assets were not perfected and the management of the private company
evidenced tentative compliance with SEC reporting requirements. This condition
was considered intolerable to the Company's Board of Directors and accordingly
on August 1, 2000 the transaction was rescinded. The Company also changed its
name on June 1, 2000 to Vast Technologies Holding Company. Accordingly the
enclosed financial statements were prepared as if the merger with Motorsports
USA, Inc. had not taken place.
On June 11, 2001 the Company changed its name to Integrated Enterprises, Inc.,
issued 12,000,000 shares of Common Stock for services and reverse split its
Common Shares, one new common share for each ten old common shares with a par
value of $ 0.0001 per share.
On December 20, 2002 the Company acquired SeaLife Nevada.
Basis of Consolidation:
The accompanying consolidated financial statements include the accounts of the
Company, SeaLife Nevada, a wholly-owned subsidiary of the Company, and SeaLife
Marine Products, Inc., Proterra Technologies, Inc. and Division G, Inc., SeaLife
Nevada's three subsidiaries. All significant inter-company accounts and
transactions, if any, have been eliminated in consolidation.
8
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
Cash and Cash Equivalents:
For the purposes of the Statement of Cash Flows, the Company considers all
short-term debt securities to be cash equivalents.
Income Taxes:
The Company accounts for income taxes under a method, which requires a company
to recognize deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in a company's financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statements carrying amounts and tax basis of assets and liabilities using
enacted tax rates. The Company presently prepares its tax return on the cash
basis and its financial statements on the accrual basis. No deferred tax assets
or liabilities have been recognized at this time, since the Company has shown
losses for both tax and financial reporting. The Company's net operating loss
carryforward at March 31, 2005 is approximately $4,750,000.
Amortization:
The Company provides for amortization of the Marine Product Technologies and
Proterra Technologies (each as defined in Note 2) utilizing the straight-line
method to apportion costs over a 15 year estimated life.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Development Stage:
Until January 1, 2005, the Company, together with its subsidiaries, was a
development stage company as defined under Statements of Financial Accounting
Standards No. 7.
NOTE 2 - TECHNOLOGIES
SeaLife Marine Products, Inc. entered into an asset purchase agreement to
acquire certain technologies (the "Marine Product Technologies") from Gael
Himmah on June 30, 2002. The purchase price was $1,335,309. Under this purchase
agreement the Company acquired the following:
1. Parents, patent application rights for EPA registration number
70214-1 and all modifications, enhancements and improvements
thereon.
2. All rights in perpetuity, including but not limited to SeaLife
1000, SeaLife 2000 (now known as SeaLife 1000 OutDrive(TM)),
and SeaLife 3000 (now known as SeaLife 100 XP(TM)), present
and future marine coating and all modifications, variations,
enhancements and improvements thereon.
3. Full power to enforce its ownership interests.
9
NOTE 2 - TECHNOLOGIES-CONTINUED
SeaLife 1000 is a solvent-based, anti-fouling coating for underwater use. It
provides a unique anti-shell, anti-algae, anti-fungus and anti-rust coating,
with competitive results.
SeaLife 1000 OutDrive(TM) is a solvent-based, anti-fouling coating for submerged
marine use.
SeaLife 1000 XP(TM) is a solvent-based coating with advanced anti-rust additives
for above water applications.
The Marine Product Technologies were subsequently assigned to the Company. The
Marine Product Technologies are being amortized on the straight-line basis over
a 15-year life. It is management's opinion that 15 years represents a reasonable
estimate of product life at this time.
On September 17, 2003 the Company entered into an agreement with Gael Himmah to
purchase all proprietary rights and interests in four additional products and
technologies developed by him (the "Proterra Technologies"). Two of the products
are for agricultural applications and the other two appeal to a broader market
and are for soil recovery. The purchase price was $400,000 and was paid with
400,000 shares of the Company's common stock. These proprietary rights and
interests are being amortized on a straight-line basis over a 15-year life. It
is management's opinion that 15 years represents a reasonable estimate of the
product life at this time.
Amortization expense for the Marine Product Technologies and the Proterra
Technologies for the periods is as follows:
Period Ended:
MARCH 31, 2005 MARCH 31, 2004
-------------- --------------
Amortization $ 28,923 $22,226
Future amortization expense for the next five years is as follows:
2005 $115,688
2006 $115,688
2007 $115,688
2008 $115,688
2009 $115,688
NOTE 3 - NOTES PAYABLE
Current Notes Payable:
On January 9, 2004, the Company, in connection with a consulting contract,
entered into a $100,000 note with an individual. The note was due in full on
January 9, 2005, and is unsecured. The interest rate is 7% per annum. The
balance of the note at March 31, 2005 and 2004 was $100,000. The Company is
currently in default under this note.
10
NOTE 3 - NOTES PAYABLE-CONTINUED
On June 14, 2004, the Company entered into a $30,000 note with an individual.
The note is due June 14, 2005, is unsecured, and does not call for any payments
until maturity. The interest rate is 7% per annum. The balance of the note at
March 31, 2005, was $30,000.
On August 4, 2004, the Company entered into a $35,000 note with an individual.
The note was due September 15, 2004, unsecured, and does not call for payments
until maturity. The interest rate is 36% per annum. The Company is in default
under this agreement at December 31, 2004. The balance of this note, including
accrued interest, at March 31, 2005 and 2004 was $45,500 and $0 respectively.
LONG - TERM DEBT - NOTES PAYABLE
In connection with the purchase of the Marine Product Technologies on June 30,
2003 SeaLife Nevada entered into a ten-year note for $1,220,309. The note is to
be repaid based on the Company's sales, i.e. at 5% of the first $3,000,000 of
sales, and at 2.5% on the sales in excess of that amount, until paid in full.
The note payments are to be made monthly and the note bears interest at the rate
of 7% per annum. The note may be converted at the option of the holder to the
common stock of the company at a conversion price, which is equivalent to 80% of
the market price, based on the average bid price for the last 30 days. On
January 2, 2003 the holder converted $1,000,000 of the note for 1,000,000 shares
of SeaLife Corporation stock. The balance of the note at September 30, 2004 and
May 31, 2004 was $303,816.
At March 31, 2005, there remained $7,313 past due on the note. The note has
certain default provisions and stated period of times to correct the default.
The note holder has not formally notified the Company of default.
Because of the repayment schedule of the note and an inability to accurately
forecast future sales, maturities on long-term debt annually can not be
computed.
NOTE 4 - COMMON STOCK
The Company has 100,000,000 shares of $.0001 par value Common Stock authorized.
At March 31, 2005 and March 31, 2004 the Company had 18,741,843, and 12,292,710
shares outstanding respectively.
During the quarter ended March 31, 2005 the Company issued 1,239,778 shares of
Common Stock for services. The shares issued and value assigned for these shares
are as follows:
SERVICE SHARES VALUE
- -------------------------------------------- --------- ---------
Business Consulting ........................ 491,204 $ 169,090
Legal Services ............................. 470,001 184,381
Officer Salaries ........................... 180,000 70,614
Product Consulting ......................... 98,573 34,932
--------- ---------
Total Stock for Services ................... 1,239,778 $ 459,017
========= =========
11
NOTE 5- PREFERRED STOCK
The Company had 2,000,000 shares of convertible preferred stock outstanding at
December 20, 2002, the date the Company acquired SeaLife Nevada. These had
conversion rights of 10 shares of common for each shares of preferred. In an
agreement signed June 24, 2003 the owners of these shares agreed to cancel
1,840,000 shares of preferred stock. The remaining 160,000 shares were converted
to 1,600,000 shares of common stock of the Company of which 300,000 shares were
conveyed to the original shareholders of SeaLife Nevada, including the current
Directors of the Company
NOTE 6 - CONSULTING AGREEMENT
On June 30, 2002 in connection with the purchase of the Marine Product
Technologies, SeaLife Nevada entered into a consulting agreement with the
developer of the Marine Product Technologies for his advice in the use and
improvement of such assets. This agreement was assigned to the Company and
amended in January 2003. The consultant is to provide all necessary support in
complying with government regulations, in solving specific marketing and
environmental problems, in product improvement, in developing operational
protocols, in advising and support on the operation of the Company's business
and to assist in the purchase or manufacture of the Company's products.
The agreement calls for the consultant to receive $10,000 per month from
September 1, 2002 to April 15, 2004, and $12,000 per month thereafter until
September 1, 2007. During 2004 the consultant agreed to 100,000 shares of the
Company's common stock in lieu of $100,000 owed to him pursuant to the
consulting agreeement. In addition, during the quarter ended November 30, 2003
the Company entered into an additional agreement with this consultant to provide
services through December 31, 2003 for an additional 300,000 shares of the
Company's common stock.
NOTE 7 - GOING CONCERN
The Company has not generated significant revenues or profits to date. This
factor among others may indicate the Company will be unable to continue as a
going concern. The Company's continuation as a going concern depends upon its
ability to generate sufficient cash flow to conduct its operations and its
ability to obtain additional sources of capital and financing. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 8 - RELATED PARTIES
At March 31, 2005 and 2004, the Company owed two major shareholders $91,755, and
$61,130 respectively for monies advanced to the Company. The amounts due are
non-interest bearing and have no priority in liquidation.
The Company owed two of its officers and aggregate of $437,291 and $64,560 for
wages at March 31, 2005 and 2004, respectively.
On January 1, 2004 the Company entered into a 5-year employment contract with
the President of the Company. The agreement defines the duties and
responsibilities of the position, provides an annual compensation of $300,000 a
year, with certain vacation and sick days. The Company is required to maintain
an office and certain death benefits during the term of the contract. On October
29, 2004 the contract was amended to provide for annual compensation of $200,000
per year.
12
NOTE 8 - RELATED PARTIES - CONTINUED
On January 1, 2004 the Company entered into a 4-year employment contract with
the Vice-President of the Company. The agreement defines the duties and
responsibilities of the position, provides an annual compensation of $300,000,
with annual reviews and the participation in an incentive program when adopted.
On October 29, 2004 the contract was amended to provide for annual compensation
of $100,000 per year.
The Company also owed its consultant, the developer of the Marine Product
Technologies, $7,313 past due on a note, and $311,003, the principal balance of
such note at March 31, 2005. During the period ended March 31, 2005 the Company
issued 98,573 shares to the consultant for product consulting.
During the period ended March 31, 2005 the Company issued 180,000 shares to an
officer for compensation.
NOTE 9 - SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On April 5, 2005, the United States Securities and Exchange Commission (the
"SEC") filed a civil complaint in the United States District Court for the
District of Colorado against the Company, Robert McCaslin (our Chief Executive
Officer and Chief Financial Officer), and several third parties not currently
affiliated with the Company, alleging violations of the Securities Act of 1933
and the Securities Exchange Act of 1934 in connection with events that occurred
in 2002 and 2003.
The complaint alleges that the Company, Mr. Caslin and six other individuals and
entities engaged in a "scheme" to defraud the investing public by "using
materially false and misleading public statements and manipulative stock trading
to create an artificial market for, and to sell, stock in the Company without
registration or a valid exemption under the federal securities laws."
Specifically, the complaint alleges that, Mr. McCaslin retained Roland Thomas
("Thomas") to raise capital for the Company and promote the company to
investors, and to raise $400,000 to pay the principal shareholders of the
Company and complete the acquisition SeaLife Nevada, and that Thomas devised a
plan with Douglas A. Glaser ("Glaser") to meet those goals. To carry out the
plan, the complaint alleges, the Company issued one million shares to Thomas,
Glaser, and an employee of ERT Technology Corporation (a Delaware corporation
owned by Thomas, Douglas A. Glaser and Barry S. Griffin ("Griffin"), Jeffrey A.
Hayden ("Hayden"), and Morgan J. Wilbur III ("Wilbur"), and registered the stock
with the SEC on Form S-8, which registers stock issued to a company's employees
and consultants. However, the complaint alleges that Form S-8 was improperly
used because Thomas and Glaser were retained to raise capital for the Company
and to promote and maintain the market for the Company's stock.
13
NOTE 9 - SECURITIES AND EXCHANGE COMMISSION INVESTIGATION - CONTINUED
The complaint further alleges that Thomas and Glaser transferred portions of
their stock to Griffin, Hayden, and Wilbur for ultimate sale to the public
through brokerage transactions. Between January and March 2003, Thomas, ERT,
Glaser, Griffin, Hayden, and Wilbur sold close to one million shares of the
Company's common stock. During this time, the Company was engaged in a publicity
campaign using press releases, a corporate fact sheet, and a business plan. The
latter two documents were disseminated to brokers and investors and also placed
on the Company's web site for public review. The complaint alleges that the
publicity included materially false and misleading information, which included
claims (a) that the Company's products were ready to be marketed, when in fact
the Company needed capital to conduct further testing; (b) that the Company's
intellectual property was worth more than $60 million, when in fact the Company
carried the property on its books at less than $1.5 million; and (c) that
projected over $5 million sales during the Company's first year and significant
profits based on a 70% gross margin, when in fact the Company had no basis for
figuring our sales margin and could not meet its projections without additional
product testing and capital. In addition, the complaint alleges that the
Company's publicity campaign did not disclose the $400,000 owed to the prior
principal shareholders of the Company or the fact that the Company had retained
Thomas and Glaser to sell the Company's stock to pay that debt and raise
capital. Filings made with the Commission on Form 8-K allegedly compounded the
false and misleading impact of the publicity campaign. The complaint further
alleges that Thomas, ERT, Glaser, Griffin, Hayden, and Wilbur used manipulative
techniques to distribute our common stock. According to the complaint, they
engaged in wash sales or matched trades, and purchased small amounts of the
stock that they were distributing to create artificial trading volume and
maintain the price for the distribution. The complaint also alleges that the
Company made false and misleading statements in an August 2003 press release
about a renegotiation with the prior principal shareholders of the shell, which
helped conceal the earlier fraudulent activities described above. All defendants
are charged with violating the securities registration and antifraud provisions
of the federal securities laws, Sections 5(a) and (c) and 17(a) of the
Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities
Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder. Thomas, ERT,
Glaser, Griffin, Hayden, and Wilbur are also charged with violating Rule 101 of
Regulation M, an anti-manipulation rule that prohibits participants in a stock
distribution from purchasing stock that they are distributing. The complaint
also charges that Mr. McCaslin, Thomas, ERT, and Glaser violated ownership
reporting provisions in Sections 13(d)(1) and 16(a) of the Exchange Act and
Rules 13d-1 and 16a-3, and that Thomas, ERT, and Glaser violated Section
13(d)(2) and Rule 13d-2. Finally, the complaint charges that SeaLife violated
the filings provisions, Section 13(a) of the Exchange Act and Rules 13a-11,
13a-13, and 12b-20, and that Mr. McCaslin aided and abetted those violations.
The Commission seeks permanent injunctions against all defendants, an order
requiring Thomas, ERT, Glaser, Griffin, and Wilbur to provide an accounting and
disgorgement, civil penalties against all defendants, an officer-and-director
bar against Mr. McCaslin, and penny stock bars against Thomas, ERT, Glaser,
Griffin, Hayden, and Wilbur. Based on an initial review of the complaint, the
Company and Mr. McCaslin deny the allegations made by the SEC, and intend to
continue to investigate the allegations and vigorously defend the suit. The
Company and Mr. McCaslin have been served with the complaint, and no further
proceedings are scheduled at this time.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in this Form 10-QSB is intended to update the
information contained in our Annual Report on Form 10-KSB for the year ended
December 31, 2004 and presumes that readers have access to, and will have read,
the "Management's Discussion and Analysis or Plan of Operation" and other
information contained in such Form 10-KSB and 2004 Form 10-QSBs previously
filed. The following discussion and analysis also should be read together with
our condensed consolidated financial statements and the notes to the condensed
consolidated financial statements included elsewhere in this Form 10-QSB.
THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF SEALIFE CORPORATION. FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND THE THREE
MONTHS ENDED MARCH 31, 2004. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS
DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ARE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES AND ARE BASED
UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR CONTROL. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE FACTORS DESCRIBED BELOW UNDER
THE CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS."
OVERVIEW
SeaLife Corporation was formed as a Delaware corporation in 1984 under
the name Fraser Realty Group. We operated as a real estate investment trust
until 1990, when management was unable to secure additional financing or find
other means of obtaining needed cash to permit us to meet our obligations. As a
result, we ceased operations and remained inactive until December, 2002.
On December 17, 2002, pursuant to an Exchange Agreement dated June 30,
2002, we acquired all of the issued and outstanding shares of SeaLife Corp., a
Nevada Corporation ("SeaLife Nevada"), in exchange for a substantial majority of
the shares of our common stock (the "Acquisition"). Our stockholders retained
their 274,554 shares of common stock which were issued and outstanding prior to
the consummation of the Acquisition. Concurrent with the Acquisition, we changed
our name from Integrated Enterprises, Inc. to SeaLife Corporation, our former
directors and officers resigned, and the directors and officers of SeaLife
Nevada. became our directors and officers. Also concurrent with the acquisition,
we effected a 15-to-1 reverse stock split.
The Acquisition resulted in a change of control of, with the former
stockholders of SeaLife Nevada acquiring a substantial majority of our common
stock immediately following the closing of the Acquisition. Therefore, the
Acquisition was accounted for as a reverse merger, pursuant to which the
accounting basis of SeaLife Nevada continued unchanged subsequent to the
transaction date. Accordingly, the pre-transaction financial statements of
SeaLife Nevada are now our historical financial statements.
Sealife Nevada was organized in April of 2002 to acquire, develop and
market certain proprietary products invented by Gael Himmah. At the time of the
Acquisition, Sealife Nevada owned all of the outstanding stock of Division G,
Inc., a Nevada corporation ("Division G"), Sealife Marine Products, Inc., a
California corporation ("Sealife Marine"), and Proterra Technologies, Inc. a
California corporation ("Proterra"). As a result of the Acquisition, we became
the parent and sole shareholder of Sealife Nevada, which, in turn, was the sole
15
shareholder of Division G, Sealife Marine and Proterra.
Our vision is to develop, market and supply eco-friendly products that
can solve complex environmental problems with simple natural solutions,
establishing the environmentally safe choice as the right choice in specific
markets.
Our goal is to establish ourself as the global leader in "probiotic"
technologies. Probiotic technologies refer to technologies and products that
work in "partnership with nature" without harming the environment in its
targeted markets. We believe that worldwide demand for development of products
that are not only safe for the environment but will also help clean the
environmental damage caused by decades of use and disposal of deadly toxins and
the overuse of pesticides and fertilizers, is growing, and will continue to
grow. We believe that a large percentage of the products in use today can and
will be replaced by effective, environmentally safe equivalents.
We developed a line of products utilizing such "probiotic" technologies
for the marine, agricultural and remediation markets. We began substantial sales
and marketing efforts in the first quarter of 2005. In anticipation of our
intended growth and the introduction of additional products to the market in the
future, we have implemented a corporate structure whereby each market is served
by a separately operated subsidiary or division. Our marine products business is
operated by our indirect wholly-owned subsidiary, SeaLife Marine. Our
agricultural products business is operated by the our indirect wholly-owned
subsidiary, ProTerra. Our remediation product business is operated as a. We also
plan on establishing a research and development division that will focus on the
testing and development of existing and new products for each of our
subsidiaries and divisions provided sufficient capital can be obtained to fund
such division. We have structured our operations in this manner to accommodate a
range of products for specific markets that have been and will be developed by
us.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our discussion and analysis of our financial conditions and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of financial statements require management to
make estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses and disclosures on the date of the financial
statements. On an on-going basis, we evaluate our estimates, including, but not
limited to, those related to revenue recognition. We use authoritative
pronouncements, historical experience and other assumptions as the basis for
making judgments. Actual results could differ from those estimates. We believe
that the following critical accounting policies affect our more significant
judgments and estimates in the preparation of our consolidated financial
statements.
IMPAIRMENT OF GOODWILL. We adopted SFAS No. 142 for all goodwill and
other intangible assets recognized in our statement of financial position as of
May 31, 2004. This standard changes the accounting for goodwill from an
amortization method to an impairment-only approach. Our technologies are being
amortized over 15 years. This is management's best estimate of the technologies'
life at this time.
REVENUE RECOGNITION. Revenue is recognized on the day a product is
shipped and invoiced.
ACCOUNTS RECEIVABLE. Accounts receivable balances are evaluated on a
continual basis
16
and allowances, if any, are provided for potentially uncollectible accounts
based on management's estimate of our ability to collect such accounts. If the
financial condition of a customer deteriorates, resulting in an impairment of
its ability to make payments, an additional allowance may be required. Allowance
adjustments, if any, are charged to operations in the period in which the facts
that give rise to the adjustments become known. To date, we have not had any
customer whose payment was considered past due, and as such, have not recorded
any reserves for doubtful collectibility.
STOCK-BASED COMPENSATION. We account for stock-based compensation using
Accounting Principles Board ("APB") Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEE."
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 123R "SHARE-BASED PAYMENT," a revision to FASB No. 123. SFAS No.
123R replaces existing requirements under SFAS No. 123 and APB Opinion No. 25,
and requires public companies to recognize the cost of employee services
received in exchange for equity instruments, based on the grant-date fair value
of those instruments, with limited exceptions. SFAS No. 123R also affects the
pattern in which compensation cost is recognized, the accounting for employee
share purchase plans, and the accounting for income tax effects of share-based
payment transactions. For small-business filers, SFAS No. 123R will be effective
for interim periods beginning after December 15, 2005. We are currently
determining what impact the proposed statement would have on our results of
operations and financial position.
The FASB has proposed FASB Staff Position No. SFAS No. 109 a,
"APPLICATION OF FASB STATEMENT NO. 109, ACCOUNTING FOR INCOME TAXES, FOR THE TAX
DEDUCTION PROVIDED TO U.S. BASED MANUFACTURERS BY THE AMERICAN JOBS CREATION ACT
OF 2004." On October 22, 2004, the AMERICAN JOBS CREATION ACT OF 2004 (the
"ACT") was signed into law by the President. This Act includes tax relief for
domestic manufacturers by providing a tax deduction up to 9 percent (when fully
phased-in) of the lesser of (a) "qualified production activities income," as
defined in the Act, or (b) taxable income (after the deduction for the
utilization of any net operating loss carry forwards). As a result of this Act,
an issue has arisen as to whether this deduction should be accounted for as a
special deduction or a tax rate reduction under Statement 109. The FASB staff
believes that the domestic manufacturing deduction's characteristics are similar
to special deductions because the domestic manufacturing deduction is based on
the future performance of specific activities, including the level of wages.
Accordingly, the FASB staff believes that the deduction provided for under the
Act should be accounted for as a special deduction in accordance with Statement
109 and not as a tax rate reduction. This provision of the Act is not expected
to have an impact on our financial statements.
In November 2004, the FASB issued FASB Statement No. 151, which revised
ARB No.43, relating to inventory costs. This revision is to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). This Statement requires that these items
be recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after the date this Statement is issued. Management believes this
Statement will have no impact on our financial statements once adopted.
17
In December 2004, the FASB issued FASB Statement No. 152, which amends
FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position ("SOP") 04-2,
ACCOUNTING FOR REAL ESTATE TIME-SHARING TRANSACTIONS. This Statement also amends
FASB Statement No. 67, ACCOUNTING FOR COSTS AND INITIAL RENTAL OPERATIONS OF
REAL ESTATE PROJECTS, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to
real-estate time-sharing transactions. The accounting for those operations and
costs is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Management
believes this Statement will have no impact on our financial statements once
adopted.
In December 2004, the FASB issued FASB Statement No. 153. This
Statement addresses the measurement of exchanges of nonmonetary assets. The
guidance in APB Opinion No. 29, ACCOUNTING FOR NONMONETARY TRANSACTIONS, is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. This Statement amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during fiscal
years beginning after the date of this Statement is issued. Management believes
this Statement will have no impact on our financial statements once adopted.
THREE MONTHS ENDED MARCH 31, 2004 VERSUS THREE MONTHS ENDED MARCH 31, 2005
RESULTS OF OPERATIONS
We incurred a net loss of $790,088 for the three months ended March 31,
2005 as compared to a net loss of $81,986 for the three months ended March 31,
2004. This loss solely represents a loss from operations in each period. Our net
loss increased primarily due to a marked increase in sales/marketing and
general/administrative expenses, as described below.
We had revenues of $36,052 for the three months ended March 31, 2005
and revenues of $12,816 for the same period ending in 2004. Sales are expected
to become more significant over the balance of fiscal 2005. However, the rate of
this increase will depend on the success of our marketing efforts and our
ability to raise additional capital to support continued operations.
General and administrative expenses is due to in increase in
compensation expenses for legal services, marketing and sales executives,
implementation of our distribution system, business consulting, research and
development, industrial relations consulting and our executive officers' wages.
These expenses increased in connection with our increase in sales and marketing
efforts during the period ended March 31, 2005. The majority of our expenses are
recorded as paid-in capital, since the large majority of our administrative
expenses are paid in
18
the form of common stock instead of cash.
Beginning with its financial statements for the four month period ended
September 30, 2004, the Company accounted for products delivered by suppliers,
royalty fees and California Environmental Protection Agency tax on sales as
"Cost of Sales" and accounted for sample costs as an expense charged to
Marketing and Sales. Sample costs are our costs for products that are provided
at no cost to our customers who are testing such products. Prior to the
financial statements for the four month period ended September 30, 2004, the
royalty fees and California Environmental Protection Agency tax on sales were
treated as a General/Administrative Expense and sample costs were accounted for
as a "Cost of Sales."
For the quarter ended March 31, 2005, we continued to account for products
delivered by suppliers, royalty fees and California Environmental Protection
Agency tax on sales as "Cost of Sales," and to account for sample costs as an
expense charged to Marketing and Sales. However, for the purpose of this
Management's Discussion and Analysis of our Results of Operations, we have not
adjusted the Consolidated Statement of Income for the period ended March 31,
2004 on a similar basis to provide a comparative analysis. As a result of
Management's limited resources and the undue cost and expense required to
provide such comparison, Management has determined that such a comparison could
not be provided.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, we had cash and cash equivalents of approximately
$14,144. As of March 31, 2005, we had negative working capital of approximately
$779,557. We expect a significant use of cash during the balance of fiscal 2005
as we continue to develop our sales and marketing. We anticipate that our
current cash reserves plus cash we expect to generate from operations will not
be sufficient to fund our operational expenditures for the balance of 2005. We
anticipate the need required to raise additional funds by issuing additional
equity, the amount and timing of which will depend on sales volume and increased
investment spending in the areas of sales/marketing and expenses in the legal
and administration categories.
If additional funds are raised through the issuance of equity
securities, the current stockholders may experience dilution. Furthermore, there
can be no assurance that additional financings will be available when needed or
that if available, such financings will include terms favorable to our
stockholders. If such financings are not available when required or are not
available on acceptable terms, we may be unable to take advantage of business
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on our business, financial condition and results of
operations.
CASH FLOWS
We currently satisfy our working capital requirements primarily through
sales of equity securities. For the three months ended March 31, 2005, we had a
net decrease in cash of approximately $6,793. Cash flows from operating, and
financing activities for the three months ended March 31, 2004 and the three
months ended March 31, 2005 are summarized in the following table:
THREE MONTHS
ENDED MARCH 31,
--------------------------
ACTIVITY: 2004 2005
- -------------------------------------------- -------- --------
Operating activities ....................... $(44,172) $(46,168)
Financing activities ....................... 41,500 39,375
-------- --------
Net increase (decrease) in cash .......... $ (2,672) $ (6,793)
OPERATING ACTIVITIES
The net cash used in operating activities of approximately $46,168
during the three months ended March 31, 2005 was primarily the result of the net
loss of approximately $790,088 and increases in receivables of approximately
$16,396, inventory of approximately $15,333, and payments and prepaid and other
of approximately $52,706 as we increased our sales efforts during the three
month period, partially offset by an increase in accounts payable and accrued
liabilities of approximately $340,415 and non-cash expenses of approximately
$487,940. The non-cash expenses recorded during the period included $28,923 of
technology cost amortization, $37,500 of non-cash compensation expense for the
issuance of common stock in consideration of salary, and $421,517 of non-cash
expense for the issuance of common stock in consideration of consulting and
legal services.
19
The net cash used in operating activities of approximately $44,172
during the three months ended March 31, 2004 was primarily the result of the net
loss of approximately $81,986 and partially offset by an increase in accounts
payable of approximately $509 and non-cash expenses of approximately $37,305.
The non-cash expenses recorded during the period included $28,923 of technology
cost amortization, and $8,382 of accrued payroll taxes.
FINANCING ACTIVITIES
Net cash from financing activities was $39,375 for the three months
ended March 31, 2005, as compared to $41,500 for the three month period ending
March 31, 2004. The Company raised a total of $60,000 through the issuance of
common stock during the three months ended March 31, 2005. This was used to fund
the net loss from operations. The principal use of cash for the three months
ended March 31, 2004 was to fund the net loss from operations for the period.
On the balance sheet, paid in capital increased from $5,100,452 for the
period ending December 31, 2004 to $5,619,326 for the three months ending March
31, 2005. This paid in capital was used to fund services from our consultants,
attorneys and executives. These services will continue to be funded by paid in
capital until we reach a sales level that can fund continued operations.
GOING CONCERN
Our independent auditor has expressed substantial doubt as to our
ability to continue as a going concern, in its report for the seven months ended
December 31, 2004, based on significant operating losses that we incurred and
the fact that we do not have adequate working capital to finance our day-to-day
operations.
We currently plan to raise additional capital through the public or
private placement of our common stock and/or private placement of debt or
convertible debentures in order to meet our ongoing cash needs. However, the
additional funding we require may not be available on acceptable terms or at all
and, if obtained, could result in significant dilution. Management also hopes to
begin generating commercial orders for its SeaLife 1000(TM) marine paint product
which would generate additional cash flow.
To date we have financed approximately 90% of our expenses by issuing
shares of common stock in exchange for services of legal and other
professionals. The remaining 10% was financed through private placement stock
offerings. In order to expand, we will be required to obtain additional
financing either in the form of debt or equity.
If we cannot obtain adequate funding or achieve revenues from the sale
of its products, it could be required to significantly curtail or even shutdown
its operations.
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain
forward-looking statements that involve risks and uncertainties. Factors
associated with the forward-looking statements that could cause actual results
to differ materially from those projected or forecast are included in the
statements below. In addition to other information contained in this report,
readers should carefully consider the following cautionary statements.
20
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS REPORT BEFORE PURCHASING SHARES OF OUR COMMON
STOCK. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IF ANY OF
THE FOLLOWING EVENTS OR OUTCOMES ACTUALLY OCCURS, OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION WOULD LIKELY SUFFER. AS A RESULT, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF THE
MONEY YOU PAID TO PURCHASE OUR COMMON STOCK.
RISKS RELATED TO OUR BUSINESS
OUR AUDITORS HAVE A GOING CONCERN QUALIFICATION IN THEIR OPINION CONTAINED IN
OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS WHICH RAISES SUBSTANTIAL DOUBT
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
As a result of our substantial historical operating losses, limited
revenues and working capital and our capital needs, our auditors added a going
concern qualification (explanatory paragraph) in their report contained in our
audited consolidated financial statements for the seven months ended December
31, 2004 which raises substantial doubt about our ability to continue as a going
concern. While we have relied principally in the past on external financing and
the payment of equity as direct compensation for services to provide liquidity
and capital resources for our operations, we can provide no assurances that cash
generated from operations together with cash received in the future from
external financing will be sufficient to enable us to continue as a going
concern.
Additionally, we can provide no assurances that service providers, such
as our lawyers and other consultants, previously willing to accept our common
stock as direct compensation for their services, will continue to find that form
of compensation acceptable. If these service providers refuse to accept our
equity as compensation, and we are unable to generate adequate cash to sustain
operations or to obtain enough cash from future financing, we will not be able
to continue as a going concern.
WE HAVE INCURRED SUBSTANTIAL LOSSES FROM INCEPTION WHILE REALIZING LIMITED
REVENUES AND WE MAY NEVER GENERATE SUBSTANTIAL REVENUES OR BE PROFITABLE IN THE
FUTURE.
For each fiscal year since our acquisition of SeaLife Nevada in 2002,
we have generated net losses and we have accumulated losses totaling
approximately $5,262,373 as of March 31, 2005. We have only recently emerged
from our development stage operations and have historically generated limited
revenues. We can provide no assurances that our operations will generate
substantial revenues or be profitable in the future. We have just recently
introduced some of our products into the marketplace and have shipped small
quantities to our distributors.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL AND IT MAY NOT BE AVAILABLE TO US ON
FAVORABLE TERMS OR AT ALL; INABILITY TO OBTAIN ANY NEEDED ADDITIONAL CAPITAL ON
FAVORABLE TERMS COULD ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
We estimate that we may need to raise up to $5 million of additional
capital over the next 12 to 15 months to support our operations, meet
competitive pressures and/or respond to unanticipated requirements during and
beyond that period. While there are no definitive
21
arrangements with respect to sources of additional financing, management is
optimistic that these funds can be raised through public and/or private
offerings of our common stock. However, our inability to obtain additional
financing, when needed or on favorable terms, could materially adversely affect
our business, results of operations and financial condition and could cause us
to curtail or cease operations.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR QUARTERLY OPERATING RESULTS MAY
FLUCTUATE SIGNIFICANTLY.
We have a very limited operating history, and have very little revenue
to date. We cannot forecast with any degree of certainty whether any of our
products or services will ever generate meaningful revenue or the amount of
revenue to be generated by any of our products or services. In addition, we
cannot predict the consistency of our quarterly operating results. Factors which
may cause our operating results to fluctuate significantly from quarter to
quarter include:
o our ability to attract new and repeat customers;
o our ability to keep current with the evolving requirements of
our target market;
o our ability to protect our proprietary technology;
o the ability of our competitors to offer new or enhanced
products or services;
o our ability to sell products during different parts of the
calendar year where the use of our products by consumers is
less likely; and
o unanticipated delays or cost increases with respect to
research and development.
Because of these and other factors, we believe comparisons of our
results of operations for our three months ended March 31, 2005 and March 31,
2004, are not good indicators of our future performance. If our operating
results fall below the expectations of securities analysts and investors in some
future periods, then our stock price may decline.
WE EXPECT OUR BUSINESS TO BE SEASONAL WHICH MEANS THAT WE ANTICIPATE HAVING LESS
REVENUE DURING CERTAIN PORTIONS OF THE YEAR.
The practical application of our products, both in the case of SeaLife
Marine paint products and Proterra agriculture products, requires warmer weather
conditions with little to no precipitation. As a result, management expects our
business to be seasonal, with sales and earnings being relatively higher during
the outdoor season (such as the spring and summer seasons) and lower during the
indoor season (such as the fall and winter seasons). Accordingly, we may show
lower revenues during portions of the year which could correspondingly adversely
affect the price of our common stock.
OUR SUCCESS DEPENDS IN PART ON OUR SUCCESSFUL DEVELOPMENT AND SALE OF PRODUCTS
CURRENTLY IN THE RESEARCH AND DEVELOPMENT STAGE.
Many of our product candidates are still in the research and
development stage. The successful development of new products is uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early states of development may not reach the market for a number
of reasons, including but not limited to, the cost and time of development.
Potential products may be found to be ineffective or cause harmful side effects,
fail to receive necessary regulatory approvals, be difficult to manufacture on a
large scale or be uneconomical or
22
fail to achieve market acceptance. Additionally, our proprietary products may
not be commercially available for a number of years, if at all.
There can be no assurance that any of our products in development will
be successfully developed or that we will achieve significant revenues from such
products even if they are successfully developed. Our success is dependent upon
our ability to develop and market our products on a timely basis. There can be
no assurance that we will be successful in developing or marketing such
products, or taking advantage of the perceived demand for such products. In
addition, there can be no assurance that products or technologies developed by
others will not render our products or technologies non-competitive or obsolete.
WE WILL RELY IN PART ON INTERNATIONAL SALES, WHICH ARE SUBJECT TO ADDITIONAL
RISKS.
International sales may account for a significant portion of our
revenues. International sales can be subject to many inherent risks that are
difficult or impossible for us to predict or control, including:
o unexpected changes in regulatory requirements and tariffs;
o difficulties and costs associated with staffing and managing
foreign operations, including foreign distributor
relationships;
o longer accounts receivable collection cycles in certain
foreign countries;
o adverse economic or political changes;
o unexpected changes in regulatory requirements;
o more limited protection for intellectual property in some
countries;
o changes in our international distribution network and direct
sales force;
o potential trade restrictions, exchange controls and import and
export licensing requirements;
o potentially adverse tax consequences of overlapping tax
structure; and
o foreign currency fluctuations.
FAILURE TO ADEQUATELY EXPAND TO ADDRESS EXPANDING MARKET OPPORTUNITIES COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
We anticipate that a significant expansion of operations will be
required to address potential market opportunities. There can be no assurances
that we will expand our operations in a timely or sufficiently large manner to
capitalize on these market opportunities. The anticipated substantial growth is
expected to place a significant strain on our managerial, operational and
financial resources and systems. While management believes it must implement,
improve and effectively use our operational, management, research and
development, marketing, financial and employee training systems to manage
anticipated substantial growth, there can be no assurances that these practices
will be successful.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND
MAY BE EXPOSED TO INFRINGEMENT CLAIMS FROM THIRD PARTIES.
The technologies upon which our products are based are protected only
by laws governing the protection of trade secrets. Our success will depend in
part on our ability to preserve our trade secrets and to operate without
infringing on the proprietary rights of third parties. There can be no assurance
that others will not independently develop similar technologies, duplicate our
technologies or design around our technologies.
23
The processes and know-how of importance to our technology are
dependent upon the skills, knowledge and experience of our technical personnel,
consultants and advisors and such skills, knowledge and experience are not
patentable. To help protect our rights, we require employees, significant
consultants and advisors with access to confidential information to enter into
confidentiality and proprietary rights agreements. There can be no assurance,
however, that these agreements will provide adequate protection for our trade
secrets, know-how or proprietary information in the event of any unauthorized
use or disclosure.
We may, from time to time, become involved in litigation regarding
intellectual property rights. From time to time, we may receive notices from
third parties of potential infringement and claims of potential infringement.
Defending these claims could be costly and time consuming and would divert the
attention of management and key personnel from other business issues. The
complexity of the technology involved and the uncertainty of intellectual
property litigation increases these risks. Claims of intellectual property
infringement also might require us to enter into costly royalty or license
agreements. However, we may be unable to obtain royalty or license agreements on
terms acceptable to us, or at all.
We do not believe that any of our technology infringes on the patent
rights of third parties. However, there can be no assurance that certain aspects
of our technology will not be challenged by the holders of patents or that we
will not be required to license or otherwise acquire from third parties the
right to use additional technology. The failure to overcome such challenges or
obtain such licenses or rights on acceptable terms could have a material adverse
affect on us, our business, results of operations and financial condition.
IF WE BECOME INVOLVED IN LITIGATION ARISING FROM THE FACT THAT OUR PRODUCTS ARE
FOUND TO ADVERSELY AFFECT THE ENVIRONMENT, OR IF WE ARE REQUIRED TO PARTICIPATE
IN ANY ENVIRONMENTAL REMEDIATION PROCESSES, THE COSTS OF SUCH ACTIVITIES MAY BE
SIGNIFICANT AND COULD MATERIALLY AND ADVERSELY HARM OUR BUSINESS.
As a chemical manufacturer, certain of our products are regulated by
the U.S. Environmental Protection Agency and the individual states, cities and
localities where marketed. Certain of our products are also regulated by
individual countries in the foreign markets in which we distribute, or intend to
distribute, our products. While we believe that our products do not harm the
environment, and while our products currently comply with the environmental
regulations to which they are subject, in the event any of our products do cause
adverse affects to the environment, we may be involved in litigation and other
claims raised by private parties, specialized environmental interest groups and
governmental regulatory agencies. Additionally, we may be required to remediate
any areas that are harmed by our products. If we are required to pay any third
party or regulatory agency as a result of such claims, or if we are required to
participate in any such remediation processes, the costs of such activities
could materially and adversely affect our business.
WE FACE TECHNICAL RISKS ASSOCIATED WITH COMMERCIALIZING OUR TECHNOLOGY WHICH
COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS RESULTS AND OPERATIONS.
A key to our future success is the ability to produce our products at
lower costs than our competitors. Although we are currently utilizing
proprietary technology to produce such products at lower costs, our method for
producing such products on a commercial basis has only recently begun. Further,
although results from recent independent tests and our early production results
have been encouraging, the ability of our technology to commercially produce
such products at consistent levels is still being evaluated. There can be no
assurance that we will continue to
24
produce such products at lower costs than our competitors, nor that our
technology will allow us to commercially produce such products at consistent
levels.
WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH COMPETITORS OF PERCEIVED COMPETING
TECHNOLOGIES OR DIRECT COMPETITORS THAT MAY ENTER OUR MARKET WITH NEW
TECHNOLOGIES.
The market for our products and services is relatively new. Our ability
to increase revenues and generate profitability is directly related to our
ability to maintain a competitive advantage because of our U.S. Environmental
Protection Agency regulatory registration of our leading product, SeaLife
1000(TM). However, we face potential direct competition from companies that may
enter this market with new competing technologies and with greater financial,
marketing and distribution resources than us. These greater resources could
permit our competitors to introduce new products and implement extensive
advertising and promotional programs, with which we may not be able to compete.
As a result, we can provide no assurances that we will be able to compete
effectively in the future.
OUR PRODUCTS MAY BE SUBJECT TO TECHNOLOGICAL OBSOLESCENCE.
Considerable research is underway by competitors and potential future
competitors into the causes of and solutions for marine, agricultural and other
environmental pollution. Discovery of new technologies could replace or result
in lower than anticipated demand for our products, which would materially
adversely effect our operations and could cause us to curtail or cease
operations.
OUR INABILITY TO ACCESS, OR A CHANGE IN THE PRICES OF, RAW MATERIALS COULD
MATERIALLY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.
We purchase certain raw materials such as Cuprous Oxide and other
biocides, pesticides or toxins, under short- and long-term supply contracts. The
purchase prices are generally determined based on prevailing market conditions.
If there is a shortage in these raw materials, or if our suppliers otherwise
increase the costs of such materials, this could materially adversely impact our
results of operations.
WE HAVE LIMITED HUMAN RESOURCES.
Our growth to date has placed, and our anticipated further expansion of
our operations will continue to place, a significant strain on our management,
systems and resources. We will need to continue to develop and improve our
financial and management controls and our reporting systems and procedures. We
cannot assure you that we will be able to efficiently or effectively manage the
growth of our operations, and any failure to do so may limit our future growth
and materially and adversely affect our business, financial condition and
results of operations.
OUR FUTURE SUCCESS DEPENDS, IN PART, ON OUR KEY PERSONNEL, CONSULTANTS AND
PRINCIPAL MANAGEMENT'S CONTINUED PARTICIPATION.
Our ability to successfully develop our products, manage growth and
maintain our competitive position will depend, in large part, on our ability to
attract and retain highly qualified management and technologists. We are
dependent upon our Chief Executive Officer and Chief Financial Officer,
President of SeaLife Marine, and Gael Himmah, an independent contractor that
acts as our Chief Consulting Scientist, and other members of our management and
consulting
25
team. We do not maintain Key Man life insurance on any of these employees or
consultants. Competition for such personnel is significant, and there can be no
assurance that we will be able to continue to attract and retain such personnel.
Our consultants may be affiliated or employed by others and some may have
consulting or other advisory arrangements with other entities that may conflict
or compete with their obligations to us. We address such potential conflicts by
requiring that our consultants and independent contractors execute
confidentiality agreements upon commencement of relationships with us, by
closely monitoring the work of such persons and by requiring material transfer
and assignment agreements wherever possible and appropriate.
Gael Himmah, the individual responsible for the development of most of
the technology that forms the basis of our products is currently party to a
consulting agreement with us. If Mr. Himmah terminates his relationship with us,
or otherwise is unable to provide services to us, it may have a material
negative affect on our ability to continue development of our current and new
product lines. We do not carry any Key Man life insurance on Mr. Himmah and do
not have any plans to do so in the near future.
WE ARE HIGHLY DEPENDENT ON OUTSIDE CONSULTANTS.
If our consultants or collaborative partners, including, in particular,
our Chief Consulting Scientist, Gael Himmah, do not perform, we may be unable to
develop and bring to market new products as anticipated, or to further develop
and commercialize existing products.
We may in the future enter into consulting arrangements with third
parties to develop products. These arrangements may not produce successful
products. If we fail to establish these arrangements, the number of products
from which we could receive future revenues will be limited.
Our dependence on consulting arrangements with third parties subjects
us to a number of risks. These arrangements may not be on terms favorable to us.
We cannot absolutely control the amount and timing of resources our consultants
may devote to our products, and these third parties may choose to pursue
alternative products. These third parties also may not perform their obligations
as expected. Business combinations, significant changes in their business
strategy, or their access to financial resources may adversely affect a
consultant's or partner's willingness or ability to complete its obligations
under the arrangement. Moreover, we could become involved in disputes with our
consultants or partners, which could lead to delays or termination of the
arrangements and time-consuming and expensive litigation or arbitration.
WE DO NOT HAVE A SEPARATE STANDING AUDIT COMMITTEE, COMPENSATION COMMITTEE OR
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE, SO THE DUTIES CUSTOMARILY
DELEGATED TO THOSE COMMITTEES ARE PERFORMED BY THE BOARD OF DIRECTORS AS A
WHOLE, AND NO DIRECTOR IS AN "AUDIT COMMITTEE FINANCIAL EXPERT" AS DEFINED BY
THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION.
Our Board of Directors consists of two members, our Chief Executive
Officer and Chief Financial Officer, and our Vice President and Secretary. The
Board of Directors as a whole performs the functions of an Audit Committee,
Compensation Committee and Nominating and Corporate Governance Committee.
Neither of the directors is considered "independent" under Rule 4200(a)(15) of
the National Association of Securities Dealers listing standards, and neither
qualifies as an audit committee financial expert as defined in Item 401 of
Regulation S-B. Accordingly, we will not be able to list our common stock with a
nationally recognized exchange until we recruit independent directors to the
Board and restructure our Board to comply with
26
various requirements currently in place by those self-regulating organizations,
and as a result, it may be difficult for you to sell our common stock.
THE REQUIREMENTS OF THE SARBANES-OXLEY ACT, INCLUDING SECTION 404, ARE
BURDENSOME, AND OUR FAILURE TO COMPLY WITH THEM COULD HAVE A MATERIAL ADVERSE
AFFECT ON OUR BUSINESS AND STOCK PRICE.
Except with respect to the adoption of our Code of Ethics and our
compliance with certain requirements specifically applicable to our Annual
Report on Form 10-KSB and our other periodic reports, our management has not
commenced any specific procedures to comply with the requirements of the
Sarbanes Oxley Act of 2002, including specifically, the process necessary to
implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002,
which requires our management to assess the effectiveness of our internal
controls over financial reporting and include an assertion in our annual report
as to the effectiveness of our controls. Beginning with our Annual Report on
Form 10-KSB for the year ended December 31, 2006, unless otherwise amended by
the Securities and Exchange Commission, our independent registered accounting
firm will be required to attest to whether our assessment of the effectiveness
of our internal control over financial reporting is fairly stated in all
material respects and separately report on whether it believes we maintained, in
all material respects, effective internal controls over financial reporting as
of December 31, 2006. Because of our management's lack of resources, and our
limited operations, we have not commenced the process of preparing the system
and process documentation, performing an evaluation of our internal controls
required for our management to make this assessment and for the auditors to
provide their attestation report, and accordingly, have not begun testing of the
effectiveness of these internal controls. We expect that this process will
require significant amounts of management time and resources, as well as higher
expenses in the form of higher audit and review fees, higher legal fees and
higher internal costs to document, test and potentially remediate internal
controls. Accordingly, with respect to Section 404 in particular, there exists a
significant risk that we will not be able to meet all the requirements of
Section 404 by the end of fiscal year 2006, when we are required to report on
our internal controls and provide our auditor's opinion thereon. Additionally,
even in the event we attempt to comply with Section 404, in the course of
evaluation and testing, management may identify deficiencies that will need to
be addressed and remediated, which could potentially have a material adverse
effect on our stock price and could result in significant additional
expenditures.
RISKS RELATED TO OUR INDUSTRY
OUR INDUSTRY IS VERY COMPETITIVE, AND WE MAY BE UNABLE TO CONTINUE TO COMPETE
EFFECTIVELY IN THIS INDUSTRY IN THE FUTURE.
We are engaged in an industry that is highly competitive. We compete
with many other suppliers and new competitors continue to enter the markets.
Many of our competitors, both in the United States and elsewhere, are major
chemical companies, and many of them have substantially greater capital
resources, marketing experience, research and development staffs, and facilities
than we do. Any of these companies could succeed in developing products that are
more effective than the products that we have or may develop and may also be
more successful than us in producing and marketing their products. We expect
this competition to continue and intensify in the future. Competition in our
markets is primarily driven by:
o product performance, features and liability;
o price;
o timing of product introductions;
27
o ability to develop, maintain and protect proprietary products
and technologies;
o sales and distribution capabilities;
o technical support and service;
o brand loyalty;
o applications support; and
o breadth of product line.
If a competitor develops superior technology or cost-effective
alternatives to our products, our business, financial condition and results of
operations could be materially adversely affected.
WE ARE SUBJECT TO A WIDE VARIETY OF LOCAL, STATE AND FEDERAL RULES AND
REGULATIONS, WHICH COULD RESULT IN UNINTENTIONAL VIOLATIONS OF SUCH LAWS. ALSO,
CHANGES IN SUCH LAWS COULD RESULT IN LOSS OF REVENUES.
As a chemical manufacturer, we are subject to a wide variety of local,
state and federal rules and regulations. While we believe that our operations
are in compliance with all applicable rules and regulations, we can provide no
assurances that from time to time unintentional violations of such rules and
regulations will not occur. Certain of our products are regulated by the U. S.
Environmental Protection Agency and the individual states where marketed.
Government regulation results in added costs for compliance activities and
increases the risk of losing revenues should regulations change. Also, from time
to time we must expend resources to comply with newly adopted regulations, as
well as changes in existing regulations. If we fail to comply with these
regulations, we could be subject to disciplinary actions or administrative
enforcement actions. These actions could result in penalties, including fines.
RISKS RELATED TO OUR COMMON STOCK
WE HAVE A LIMITED TRADING VOLUME AND SHARES ELIGIBLE FOR FUTURE SALE BY OUR
CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE.
To date, we have had a very limited trading volume in our common stock.
As long as this condition continues, the sale of a significant number of shares
of common stock at any particular time could be difficult to achieve at the
market prices prevailing immediately before such shares are offered. In
addition, sales of substantial amounts of common stock, including shares issued
upon the exercise of outstanding options and warrants, under Rule 144 or
otherwise could adversely affect the prevailing market price of our common stock
and could impair our ability to raise capital at that time through the sale of
our securities. As a result of our limited cash, a number of our employees and
consultants have elected to accept a portion of their compensation in shares of
our common stock and a portion of these shares have been issued pursuant to
effective registration statements or registered for resale to the public.
OUR COMMON STOCK PRICE IS HIGHLY VOLATILE.
The market price of our common stock is likely to be highly volatile as
the stock market in general, and the market for technology companies in
particular, has been highly volatile.
Factors that could cause such volatility in our common stock may
include, among other things:
28
o actual or anticipated fluctuations in our quarterly operating
results;
o announcements of technological innovations;
o changes in financial estimates by securities analysts;
o conditions or trends in our industry; and
o changes in the market valuations of other comparable
companies.
THE SALE OF OUR COMMON STOCK ON THE OVER-THE-COUNTER BULLETIN BOARD AND THE
POTENTIAL DESIGNATION OF OUR COMMON STOCK AS A "PENNY STOCK" COULD IMPACT THE
TRADING MARKET FOR OUR COMMON STOCK.
Our securities, as traded on the Over-the-Counter Bulletin Board, will
be subject to Securities and Exchange Commission rules that impose special sales
practice requirements upon broker-dealers who sell such securities to persons
other than established customers or accredited investors. For purposes of the
rule, the phrase "accredited investors" means, in general terms, institutions
with assets in excess of $5,000,000, or individuals having a net worth in excess
of $1,000,000 or having an annual income that exceeds $200,000 (or that, when
combined with a spouse's income, exceeds $300,000). For transactions covered by
the rule, the broker-dealer must make a special suitability determination for
the purchaser and receive the purchaser's written agreement to the transaction
prior to the sale. Consequently, the rule may affect the ability of
broker-dealers to sell our securities and also may affect the ability of
purchasers to sell their securities in any market that might develop therefor.
In addition, the Securities and Exchange Commission has adopted a
number of rules to regulate "penny stock." Such rules include Rules 3a51-1,
15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities
and Exchange Act of 1934, as amended. Because our securities may constitute
"penny stock" within the meaning of the rules, the rules would apply to us and
to our securities. The rules may further affect the ability of owners of our
common stock to sell our securities in any market that might develop for them.
Shareholders should be aware that, according to Securities and Exchange
Commission, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the security by one or a few broker-dealers that are often related to the
promoter or issuer; (ii) manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases; (iii) "boiler room"
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed
bid-ask differentials and markups by selling broker-dealers; and (v) the
wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, resulting in investor losses.
Our management is aware of the abuses that have occurred historically in the
penny stock market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
WE DO NOT FORESEE PAYING DIVIDENDS IN THE NEAR FUTURE.
We have not paid dividends on our common stock and do not anticipate
paying such dividends in the foreseeable future.
ANY ISSUANCE OF FURTHER STOCK MAY RESULT IN THE LOSS OF CONTROL BY PRESENT
MANAGEMENT AND SHAREHOLDERS.
29
We may issue shares in consideration for cash, assets or services out
of our authorized but unissued common stock that could, upon issuance, represent
a majority of our voting power and equity. The result of such an issuance would
be that those new shareholders and management would control us, and unknown
persons could replace our management at that time. Such an occurrence would
result in a greatly reduced percentage of ownership of us by our current
shareholders.
OFFICERS AND DIRECTORS OWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHICH
COULD LIMIT OUR SHAREHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY
TRANSACTIONS.
As of March 22, 2005, our officers and directors and their affiliates
owned approximately 30% of our outstanding voting shares. As a result, our
officers and directors are able to exert considerable influence over the outcome
of any matters submitted to a vote of the holders of our common stock, including
the election of our Board of Directors. The voting power of these shareholders
could also discourage others from seeking to acquire control of us through the
purchase of our common stock, which might depress the price of our common stock.
ITEM 3. CONTROLS AND PROCEDURES.
CONTROLS AND PROCEDURES
Members of the company's management, including our Chief Executive
Officer, President and Chief Financial Officer, Robert McCaslin, have evaluated
the effectiveness of our disclosure controls and procedures, as defined by
paragraph (e) of Exchange Act Rules 13a-15 or 15d-15, as of March 31, 2005, the
end of the period covered by this report. Based upon that evaluation, Mr.
McCaslin concluded that our disclosure controls and procedures are effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting
or in other factors identified in connection with the evaluation required by
paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the
first quarter ended March 31, 2005 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
30
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On April 5, 2005, the United States Securities and Exchange Commission
(the "SEC") filed a civil complaint in the United States District Court for the
District of Colorado against us, Robert McCaslin (our Chief Executive Officer
and Chief Financial Officer), and several third parties not currently affiliated
with the Company, alleging violations of the Securities Act of 1933 and the
Securities Exchange Act of 1934 in connection with events that occurred in 2002
and 2003.
The complaint alleges that we, Mr. Caslin and six other individuals and
entities engaged in a "scheme" to defraud the investing public by "using
materially false and misleading public statements and manipulative stock trading
to create an artificial market for, and to sell, our common stock without
registration or a valid exemption under the federal securities laws."
Specifically, the complaint alleges that, Mr. McCaslin retained Roland
Thomas ("Thomas") to raise capital for us and promote us to investors, and to
raise $400,000 to pay our principal shareholders and complete the acquisition of
SeaLife Nevada, and that Thomas devised a plan with Douglas A. Glaser ("Glaser")
to meet those goals. To carry out the plan, the complaint alleges, we issued one
million shares to Thomas, Glaser, and an employee of ERT Technology Corporation
(a Delaware corporation owned by Thomas, Douglas A. Glaser and Barry S. Griffin
("Griffin"), Jeffrey A. Hayden ("Hayden"), and Morgan J. Wilbur III ("Wilbur"),
and registered the stock with the SEC on Form S-8, which registers stock issued
to a company's employees and consultants. However, the complaint alleges that
Form S-8 was improperly used because Thomas and Glaser were retained to raise
capital for us and to promote and maintain the market for our common stock.
The complaint further alleges that Thomas and Glaser transferred
portions of their stock to Griffin, Hayden, and Wilbur for ultimate sale to the
public through brokerage transactions. Between January and March 2003, Thomas,
ERT, Glaser, Griffin, Hayden, and Wilbur sold close to one million shares of our
common stock. During this time, we were engaged in a publicity campaign using
press releases, a corporate fact sheet, and a business plan. The latter two
documents were disseminated to brokers and investors and also placed on our web
site for public review. The complaint alleges that the publicity included
materially false and misleading information, which included claims (a) that our
products were ready to be marketed, when in fact we needed capital to conduct
further testing; (b) that our intellectual property was worth more than $60
million, when in fact we carried the property on its books at less than $1.5
million; and (c) that projected over $5 million sales during our first year and
significant profits based on a 70% gross margin, when in fact we had no basis
for figuring our sales margin and could not meet its projections without
additional product testing and capital. In addition, the complaint alleges that
our publicity campaign did not disclose the $400,000 owed to the principal
shareholders of the shell or the fact that we had retained Thomas and Glaser to
sell our common stock to pay that debt and raise capital. Filings made with the
Commission on Form 8-K allegedly compounded the false and misleading impact of
the publicity campaign.
The complaint further alleges that Thomas, ERT, Glaser, Griffin,
Hayden, and Wilbur used manipulative techniques to distribute our common stock.
According to the complaint, they engaged in wash sales or matched trades, and
purchased small amounts of the stock that they
31
were distributing to create artificial trading volume and maintain the price for
the distribution. Through these techniques, they were able to generate income
for themselves, but they did not send any of that money back to us or to the
prior principal shareholders of the shell. The complaint also alleges that we
made false and misleading statements in an August 2003 press release about a
renegotiation with the prior principal shareholders of the shell, which helped
conceal the earlier fraudulent activities described above.
All defendants are charged with violating the securities registration
and antifraud provisions of the federal securities laws, Sections 5(a) and (c)
and 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the
Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder.
Thomas, ERT, Glaser, Griffin, Hayden, and Wilbur are also charged with violating
Rule 101 of Regulation M, an anti-manipulation rule that prohibits participants
in a stock distribution from purchasing stock that they are distributing. The
complaint also charges that Mr. McCaslin, Thomas, ERT, and Glaser violated
ownership reporting provisions in Sections 13(d)(1) and 16(a) of the Exchange
Act and Rules 13d-1 and 16a-3, and that Thomas, ERT, and Glaser violated Section
13(d)(2) and Rule 13d-2. Finally, the complaint charges that SeaLife violated
the filings provisions, Section 13(a) of the Exchange Act and Rules 13a-11,
13a-13, and 12b-20, and that Mr. McCaslin aided and abetted those violations.
The Commission seeks permanent injunctions against all defendants, an
order requiring Thomas, ERT, Glaser, Griffin, and Wilbur to provide an
accounting and disgorgement, civil penalties against all defendants, an
officer-and-director bar against Mr. McCaslin, and penny stock bars against
Thomas, ERT, Glaser, Griffin, Hayden, and Wilbur.
Based on an initial review of the complaint, we and Mr. McCaslin deny
the allegations made by the SEC, and intend to continue to investigate the
allegations and vigorously defend the suit. We have been served with the
complaint, and no further proceedings are scheduled at this time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In January 2005 we issued an aggregate of 142,844 shares of our common
stock to two individuals at $0.35 per share, for a total investment of
approximately $50,000. The investors in this transaction represented to us that
each was an "accredited investor" within the meaning of Rule 501 of Regulation D
under the Securities Act of 1933, and that he was receiving the securities for
investment and not in connection with a distribution thereof. The issuance and
sale of these securities was exempt from the registration and prospectus
delivery requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act as transactions not involving any public offering.
In February 2005 we issued an aggregate of 47,619 shares of our common
stock to an individual at $0.21 per share, for a total investment of $10,000.
The investor in this transaction represented to us that he was an "accredited
investor" within the meaning of Rule 501 of Regulation D under the Securities
Act of 1933, and that he was receiving the securities for investment and not in
connection with a distribution thereof. The issuance and sale of these
securities was exempt from the registration and prospectus delivery requirements
of the Securities Act pursuant to Section 4(2) of the Securities Act as
transactions not involving any public offering.
Also in February 2005 we issued 100,000 shares of our common stock to
Lionel Gosselin, for sales and marketing services rendered pursuant to the terms
of that certain
32
Consulting Agreement dated July 1, 2003, between us and Mr. Gosselin. The
investor in this transaction represented to us that he was an "accredited
investor" within the meaning of Rule 501 of Regulation D under the Securities
Act of 1933, and that he was receiving the securities for investment and not in
connection with a distribution thereof. The issuance and sale of these
securities were exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act as transactions not involving any public offering.
Also in February 2005, we issued to Brokers Unlimited, Inc. 63,989
shares of our common stock, pursuant to the terms of a consulting agreement, as
payment for services rendered through December 31, 2004. In addition, pursuant
to the terms of the consulting agreement, we agreed to issue to Brokers
Unlimited, Inc., shares having an aggregate value of $115,000 on a monthly basis
for the seven-month term of the agreement. The consulting agreement was
subsequently terminated in January 2005 The issuance and sales of these
securities is exempt from the registration and prospectus delivery requirements
of the Securities Act pursuant to Section 4(2) of the Securities Act as
transactions not involving any public offering.
ITEM 6. EXHIBITS
THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------
3.1 Restated Certificate of Incorporation of SeaLife Corporation
(1)
3.2 Bylaws of SeaLife Corporation (1)
10.9 Amendment No. 1 to Consulting Agreement with Michael Sahl,
effective as of January 20, 2005.(2)
10.11 Distribution Agreement between Sealife Marine Products, Inc.
and Surface Protection Industries International, dated
February 15, 2005.(3)
10.12 Distribution Agreement between Sealife Marine Products, Inc.
and Current, Inc. dated March 10, 2005.(3)
10.13 Distribution Agreement between Sealife Marine Products, Inc.
and Sealife Marine Africa PTY Ltd., dated as of January 28,
2005.(3)
31.1 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to pursuant Securities Exchange Act
Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(1) Filed as an Exhibit to our Annual Report on Form 10-KSB for the period
ended May 31, 2003, dated September 19, 2004.
(2) Filed as an Exhibit to our Registration Statement on Form SB-2, filed
January 25, 2005.
(3) Filed as an Exhibit to our Annual Report on Form 10-KSB for the period
ended December 31, 2004, dated April 12, 1005.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SEALIFE CORPORATION
Date: May 23, 2005 /s/ Robert A. McCaslin
---------------------------------
By: Robert A. McCaslin
Its: Chief Financial Officer
(Principal Financial and
Accounting Officer)
34