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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 June 30, 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 August 4, 2005, the issuer had 19,581,013 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
----
PART I FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements (unaudited)......................................3
Condensed Consolidated Balance Sheet (unaudited)
as of June 30, 2005...................................................3
Condensed Consolidated Statement of Income (unaudited)
for the three months and six months ended June 30, 2005
and June 30, 2004.....................................................4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the three and six months ended
June 30, 2005 and June 30, 2004.......................................5
Notes to Condensed Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis or Plan of Operation............14
Item 3. Controls and Procedures..............................................30
PART II OTHER INFORMATION....................................................31
Item 1. Legal Proceedings....................................................31
Item 2. Unregistered Sales of Securities and Use of Proceeds.................32
Item 6. Exhibits.............................................................33
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2005 and 2004
June 30, June 30,
2005 2004
----------- -----------
ASSETS
Current Assets
Cash ............................................ $ 17,255 $ 32,556
Cash in escrow .................................. 25,000 --
Inventory ....................................... 96,885 6,000
Accounts Receivable ............................. 3,248 --
Prepaid expenses ................................ 67,928 366,665
----------- -----------
Total Current Assets ....................... 210,316 405,221
Other Assets
Technology ...................................... 1,735,309 1,735,309
Less: accumulated amortization .................. (314,845) (199,153)
----------- -----------
1,420,464 1,536,156
----------- -----------
Total Assets ............................... $ 1,630,780 $ 1,941,377
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable ................................... $ 179,595 $ 130,000
Accounts payable ................................ 99,099 57,666
Accounts payable - shareholders ................. 127,944 61,130
Accrued expenses ................................ 202,483 --
Accrued wages ................................... 542,297 130,810
Accrued interest ................................ 25,340 7,083
Accrued payroll taxes ........................... 8,382 8,382
Sales deposits .................................. 6,000 --
Current portion of long-term debt ............... 11,119 3,291
Other Current Liabilities ....................... 23,000 --
Total Current Liabilties ................... 1,225,259 398,362
Long-Term Debt
Notes payable ................................... 307,197 315,025
Stockholders' Equity
Common stock
Additional paid in capital ...................... 1,939 1,454
Deficit accumulated during the development stage 5,773,491 3,855,368
Total Stockholders' Equity ................. (5,677,105) (2,628,832)
----------- -----------
98,324 1,227,990
----------- -----------
Total Liabilities and Stockholders' Equity
$ 1,630,780 $ 1,941,377
=========== ===========
See accompanying notes and accountants report.
3
SEALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Three and Six Months Ended June 30, 2005 and 2004
THREE MONTHS THREE MONTHS
ENDED JUNE 30, 2005 ENDED JUNE 30, 2004
JUNE 30, 2005 YEAR TO DATE JUNE 30, 2004 YEAR TO DATE
------------ ------------ ------------ ------------
Sales .................................. $ 41,279 $ 77,331 $ 11,926 $ 24,742
Cost of sales .......................... 25,564 45,613 7,411 16,599
------------ ------------ ------------ ------------
Gross Profit ...................... 15,716 31,718 4,515 8,143
Sales and marketing .................... 103,178 230,630 17,343 21,430
General and administrative ............. 327,270 1,005,908 134,199 215,726
------------ ------------ ------------ ------------
430,448 1,236,538 151,542 237,156
------------ ------------ ------------ ------------
Net Loss ............................... $ (414,732) $ (1,204,820) $ (147,027) $ (229,013)
============ ============ ============ ============
Loss per share
Weighted average shares outstanding 18,288,484 18,926,633
Loss per share .................... (0.02) (0.06)
See accompanying notes and accountants report.
4
SEALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2005 and June 30, 2004
THREE MONTHS THREE MONTHS
ENDED JUNE 30, 2005 ENDED JUNE 30, 2004
JUNE 30, 2005 YEAR TO DATE JUNE 30, 2004 YEAR TO DATE
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ...................................... $ (414,732) $(1,204,820) $ (147,027) $ (229,013)
Adjustments to reconcile net loss to net
cash provided used in operating activities
Amortization ............................. 28,923 57,846 28,923 57,846
Stock issued for services ................ 154,229 613,246 -- --
Changes in Current Assets and liabilities:
(Increase) Decrease in Accounts receivable 13,149 (3,247) -- --
(Increase) in Inventories ................ (57,247) (72,580) -- --
Decrease in Prepaid expenses ............. 87,443 34,737 73,335 73,335
Increase in Accounts payable ............. 26,295 76,867 3,135 3,644
Increase in Accrued expenses ............. 8,273 202,483 -- --
Increase in Accrued wages ................ 105,000 195,237 66,250 66,250
Increase in Accrued interest ............. 7,496 12,892 2,499 2,499
Increase in Accrued payroll taxes ........ -- -- -- 8,382
Increase in Sales deposits ............... 6,000 6,000 -- --
----------- ----------- ----------- -----------
NET CASH (USED) BY
OPERATING ACTIVITIES ................ (35,173) (81,341) 27,115 (17,057)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Common stock .......................... -- 60,000 -- 27,000
Increase (decrease) in Notes payable .......... 27,095 10,245 -- 14,500
(Decrease) Increase in Accounts payable SH .... 36,189 32,414 -- --
----------- ----------- ----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ................ 63,284 102,659 -- 41,500
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ...................... 28,111 21,318 27,115 24,443
CASH AT BEGINNING OF PERIOD .......................... 14,144 20,937 5,441 8,113
----------- ----------- ----------- -----------
CASH AT END OF PERIOD ................................ $ 42,255 $ 42,255 $ 32,556 $ 32,556
=========== =========== =========== ===========
See accompanying notes and accountant's report.
5
SEALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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 AG, 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.
6
SEALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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.
7
SEALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
carry forward at June 30, 2005 is approximately $5,677,000.
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 effective June 30, 2002. The purchase price for the Marine Product
Technologies 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.
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.
8
SEALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SeaLife 1000 XP(TM) is a solvent-based coating with advanced anti-rust additives
for above water applications.
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 (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:
THREE MONTH PERIOD ENDED:
JUNE 30, 2005 JUNE 30, 2004
------------- -------------
Amortization $28,923 $28,923
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,
issued a $100,000 note to one of its consultants. 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 June 30, 2005 and 2004 was $110,300. The Company is
currently in default under this note.
On June 14, 2004, the Company entered into a $30,000 note with an individual.
The note was 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
June 30, 2005 and 2004 was $32,160. The Company is currently in default under
this note.
On August 4, 2004, the Company entered into a $35,000 note with an individual.
The note was due September 15, 2004, is unsecured, and does not call for
payments until maturity. The interest rate is 36% per annum. The Company is
currently in default under this note. The balance of the note including interest
at June 30, 2005 and 2004 was $49,595 and $0 respectively.
During the three month period ended June 30, 2005, the Company issued a
five-year note for $14,500 at a 5% annual interest rate to its director, chief
executive office and chief financial officer,
9
SEALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Robert McCaslin, as evidence of prior loans made to the Company.
Long - Term Debt - Notes Payable:
In connection with the purchase of the Marine Product Technologies on June 30,
2002, SeaLife Nevada issued a ten-year note for $1,335,309. 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 into
common stock of the company at a conversion price which is equivalent to 80% of
the market price, based on the average bid price of the Company's common stock
over the previous thirty (30) days. On January 2, 2003 the holder converted
$1,000,000 of the note into 1,000,000 shares of SeaLife Corporation common
stock. The balance of the note at both June 30, 2005 and June 30, 2004 was
$303,816. At June 30, 2005, there remained $11,119 of past due interest 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 June 30, 2005 and June 30, 2004 the Company had 19,385,076, and 14,536,155
shares outstanding respectively.
During the quarter ended June 30, 2005 the Company issued 643,283 shares of
Common Stock for services. The shares issued and value assigned for these shares
are as follows:
SERVICE SHARES VALUE
- -------------------------------------------- -------- --------
Business Consulting ........................ 444,768 $108,184
Legal Services ............................. 0 0
Officer Salaries ........................... 34,286 7,845
Product Consulting ......................... 164,229 38,200
-------- --------
Total Stock for Services ................... 643,283 $154,229
======== ========
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
into 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, Gael Himmah, for his advice in the
use and improvement of such assets. This agreement was assigned to the Company
and amended in January 2003. Mr. Himmah is to provide all necessary support in
complying
10
SEALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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. During 2004 the
consultant agreed to accept 100,000 shares of the Company's common stock in lieu
of compensation owed to him pursuant to the consulting agreement. During the
three and six months ended June 30, 2005, Mr. Himmah accepted 164,229, and
202,802, shares of common stock, respectively in lieu of compensation owed to
him pursuant to the consulting agreement.
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 June 30, 2005 and 2004, the Company owed Robert McCasin and J.P. Heyes, each
directors, executive officers, and major shareholders of the Company, $127,944
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 Mr. McCaslin and Ms. Heyes an aggregate of $487,291 and $72,893
for wages at June 30, 2005 and 2004, respectively.
On January 1, 2004 the Company entered into a 5-year employment contract with
Mr. McCaslin, 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.
On January 1, 2004 the Company entered into a 4-year employment contract with
Ms. Heyes, 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.
11
SEALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On June 14, 2004 the Company entered into an employment contract with Barre
Rorabaugh, the President of the Company's subsidiary, Sealife Marine, for the
period extending through December 31, 2008. The agreement defines the duties and
responsibilities of the position, provides an annual compensation of $150,000
with annual reviews and the participation in an incentive program when adopted.
During the period ended June 30, 2005 the Company issued 34,286 shares of common
stock to the President of SeaLife Marine as compensation pursuant to the terms
of his employment 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, Gael Himmah, for his advice in the
use and improvement of such assets. This agreement was assigned to the Company
and amended in January 2003. Mr. Himmah 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 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. During
2004 the consultant agreed to accept 100,000 shares of the Company's common
stock in lieu of compensation owed to him pursuant to the consulting agreement.
During the three and six months ended June 30, 2005, Mr. Himmah accepted
164,229, and 202,802, shares of common stock, respectively in lieu of
compensation owed to him pursuant to the consulting agreement.
The Company also owed Mr. Himmah, $11,119 past due interest on a note, and
$303,816, the principal balance of such note at June 30, 2005.
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. McCaslin 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
12
SEALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company's 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 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.
13
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 2005 Form 10-QSB 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 AND SIX MONTHS ENDED JUNE 30, 2005 AND THE
THREE AND SIX MONTHS ENDED JUNE 30, 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
shareholder of Division G, Sealife Marine and ProTerra.
14
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 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
15
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.
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
16
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.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2004 VERSUS THREE MONTHS ENDED JUNE
30, 2005
RESULTS OF OPERATIONS
REVENUES
We had revenues of $41,279 for the three months ended June 30, 2005 and
revenues of $11,926 for the same period ending in 2004. All of the revenues for
the three months ended June 30, 2005 are attributable to sales of our SeaLife
Marine coating products to four (4) distributors. Sales are expected to become
more significant over the balance of fiscal 2005 as our marketing efforts
continue, we enter into relationships with additional distributors, and our
SeaLife Marine coating and other product lines are approved for sale in
additional territories. However, the rate of this increase will depend on the
success of our marketing efforts, regulatory acceptance of our products, and our
ability to raise additional capital to support continued operations.
OPERATING EXPENSES
Our Cost of Sales for the three months ended June 30, 2005 and for the
same period ending in 2004, was $25,564 and $7,411, respectively. Cost of sales
over these periods consisted of direct costs for goods and services directly
used in the production of our SeaLife Marine coating products. The increase in
Cost of Sales is directly attributable to our increase in products and sales
over the 2005 period. Our goal is to lower costs as a percentage of revenues, in
part, by increasing volume to achieve bulk discounts.
Beginning with its financial statements for the three month period
ended February 28, 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 three month period ended February 28, 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." This difference in accounting does not affect our
comparisons of our three and six month periods ended June 30, 2005 against our
three and six month periods June 30, 2004, since royalty fees, California
Environmental Protection Agency tax on sales and sample costs were similarly
accounted for
17
during such periods.
We incurred a net loss of $414,732 for the three months ended June 30,
2005 as compared to a net loss of $147,027 for the three months ended June 30,
2004. This loss solely represents a loss from operations. Our net loss increased
primarily due to a marked increase in sales/marketing and general/administrative
expenses, as described below.
Total operating expenses consist of general administrative, sales and
marketing expenses. For the three months ended June 30, 2005, total operating
expenses were $430,448. This represents a 284% increase over the same period in
the prior year, in which our total operating expenses were $151,542.
The major increase in general and administrative expenses is due to
compensation for marketing and sales executives, implementation of our
distribution system, business consulting, research and development, industrial
relations consulting and our executive officers' wages. The majority of our
expenses are recorded as paid-in capital, since the large majority of our
administrative expenses were paid in the form of common stock instead of cash.
We expect that these expenses will continue to increase.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2004 VERSUS SIX MONTHS ENDED JUNE 30,
2005
RESULTS OF OPERATIONS
REVENUES
We had revenues of $77,331 for the six months ended June 30, 2005 and
revenues of $24,742 for the same period ending in 2004. All of the revenues for
the six months ended June 30, 2005 are attributable to sales of our SeaLife
marine costing products to four (4) distributors. Sales are expected to become
more significant over the balance of fiscal 2005 as our marketing efforts
continue, we enter into relationships with additional distributors, and our
SeaLife marine coating other product lines are approved for sale in additional
territories. However, the rate of this increase will depend on the success of
our marketing efforts, regulatory acceptance of our products, and our ability to
raise additional capital to support continued operations.
Our Cost of Sales for the six months ended June 30, 2005 and for the
same period ending in 2004, was $45,613, and $16,559, respectively. Cost of
sales over these periods consisted of direct costs for goods and services
directly used in the production of our SeaLife Marine coating products. The
increase in Cost of Sales is directly attributable to our increase in products
and sales over the 2005 period. Our gross margin % increased from 32.9% for the
6 month period ending June 30, 2004 to 41.0% for the 6 month period ending June
30, 2005. The gross margin % is expected to increase as our volume increases.
Our goal is to lower costs as a percentage of revenues, in part, by increasing
volume to achieve bulk discounts.
We incurred a net loss of $1,204,820 for the six months ended June 30,
2005 as compared to a net loss of $229,013 for the six months ended June 30,
2004. This loss solely represents a loss from operations. Our net loss increased
primarily due to a marked increase in sales/marketing and general/administrative
expenses, as described below.
Total operating expenses consist of general administrative, sales and
marketing expenses. For the six months ended June 30, 2005, total operating
expenses were $1,236,538. This represents a 521% increase over the same period
in the prior year, in which our total operating expenses were $237,156.
18
The major increase in general and administrative expenses is due to
compensation for legal, marketing and sales executives, implementation of our
distribution system, business consulting, research and development, industrial
relations consulting and our executive officers' wages. The majority of our
expenses are recorded as paid-in capital, since the large majority of our
administrative expenses were paid in the form of common stock instead of cash.
We expect that these expenses to continue to be higher then the 2004 comparative
periods. However, expenses of $806,090 in first quarter ending March 31, 2005
have been reduced in this second quarter ending June 30, 2005 to $430,448 due to
reduced legal and outside consulting fees. However, the company cannot
guaranteed that this level of spending will not increase. As market
opportunities arise, the company will invest in these opportunities as cash from
operations and outside investment allows.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2005, we had cash and cash equivalents of approximately
$42,255 and negative working capital of approximately $1,011,137. We expect a
significant use of cash during the balance of fiscal 2005 as we continue to
develop our sales and marketing efforts. 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 a
need 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 six months ended June 30, 2005, we had a net
increase in cash of approximately $21,318. Cash flows from operating, and
financing activities for the six months ended June 30, 2004 and the six months
ended June 30, 2005 are summarized in the following table:
SIX MONTHS SIX MONTHS
ENDED ENDED
ACTIVITY: JUNE 30, 2004 JUNE 30, 2005
- ------------------------------------------ --------- ---------
Operating activities ..................... (17,057) (81,341)
Financing activities ..................... 41,500 102,659
Net increase (decrease) in cash ........ $ 24,443 $ 21,318
OPERATING ACTIVITIES
The net cash used in operating activities of approximately $81,341
during the six months ended June 30, 2005 was primarily the result of the net
loss of approximately $1,204,820; increase in receivables of approximately
$3,247, decrease in prepaid expenses of approximately $34,737; increases
19
in inventory of approximately $72,580, accounts payable of approximately
$76,867, sales deposits of $6,000 and accrued expenses totaling $410,612. The
non-cash expenses recorded during the period included $57,846 of technology cost
amortization and approximately $613,246 of non-cash expense for the issuance of
common stock in consideration of salary expense and consulting and legal
services..
The net cash used in operating activities of approximately $17,057
during the six months ended June 30, 2004 was primarily the result of the net
loss of approximately $229,013, an increase in accounts payable and accrued
expenses of approximately $80,775, and decrease in prepaid expenses of
approximately $73,335. The non-cash expenses recorded during the period included
$57,846 of technology cost amortization.
FINANCING ACTIVITIES
Net cash from financing activities was $102,659 for the six months
ended June 30, 2005, as compared to $41,500 for the six month period ending June
30, 2004. The principal use of cash for the six months ended June 30, 2005 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 $5,773,491 for the three months ending June
30, 2005. This paid in capital was used to fund services from our consultants
and executives. We anticipate that these services will continue to be funded by
paid in capital until we reach a sales level that can support continued
operations with cash, or our service providers are no longer willing to accept
equity in lieu of compensation.
GOING CONCERN
Our independent auditor 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 $5,164,732 as of June 30, 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 twelve months to support our operations, meet competitive
pressures and/or respond to unanticipated requirements during and beyond that
period. While there are no definitive arrangements with respect to
21
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 provide any guarantee that 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 and six months ended June 30, 2005 and June
30, 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 fail to achieve market acceptance.
Additionally, our proprietary products may not be commercially available for a
number of years, if at all.
22
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.
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
23
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 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.
24
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
chemicals, 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 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.
25
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 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
26
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;
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.
27
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:
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
28
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.
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 June 30, 2005, our officers and directors and their affiliates
owned approximately 27% 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.
29
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 June 30, 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
second quarter ended June 30, 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. McCaslin 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 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
31
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.
During the three months ended June 30, 2005, we did not have any
unregistered sales of equity securities.
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)
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.
32
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: August 18, 2005 /s/ Robert A. McCaslin
-------------------------------------
By: Robert A. McCaslin
Its: Chief Financial Officer
(Principal Financial and
Accounting Officer)
33
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation of SeaLife Corporation
(1)
3.2 Bylaws of SeaLife Corporation (1)
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.
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