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 ending
August
31, 2006
(
) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
For
the
transition period from _______________ to __________________
Commission
File No. 0-29373
Seychelle
Environmental Technologies, Inc.
(Exact
Name of registrant as specified in its charter)
|
Nevada
|
33-6159915
|
|
(State
or other jurisdiction
|
(IRS
Employer File Number)
|
|
of
incorporation)
|
|
|
|
|
|
33012
Calle Perfecto
|
|
|
San
Juan Capistrano, California
|
92675
|
|
(Address
of principal executive offices)
|
(zip
code)
|
|
|
|
(949)
234-1999
(Registrant's
telephone number, including area code)
Check
whether the registrant filed all documents and reports required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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: _
_
No:
_X__
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes [ ] No [X]
State
the
number of shares outstanding of the Registrant's common stock, as of the latest
practicable date, August 31, 2006, was 25,017,402.
Transitional
Small Business Disclosure Format (Check one): Yes: ___ No: __
X
_
References
in this document to "us," "we," or "Company" refer to Seychelle Environmental
Technologies, Inc., a Nevada corporation and our wholly owned subsidiary,
Seychelle Water Technologies, Inc., also a Nevada corporation.
FORM
10-QSB
Securities
and Exchange Commission
Washington,
D.C. 20549
Seychelle
Environmental Technology, Inc.
INDEX
|
Item
|
Description
|
Page
|
|
|
||
|
Part
I
|
FINANCIAL
INFORMATION
|
|
|
|
||
|
Item
1.
|
Condensed consolidated Financial Statements | 3 |
|
|
||
|
|
Condensed
consolidated Balance Sheet at August 31, 2006 (unaudited)
|
3
|
|
|
||
|
|
Condensed
consolidated Statements of Operations for the three months ended
August
31, 2006 (unaudited) and 2005 (unaudited)
|
5
|
|
|
||
|
|
Condensed
consolidated Statements of Operations for the six months ended
August 31,
2006 (unaudited) and 2005 (unaudited)
|
6
|
|
|
||
|
|
Condensed
consolidated Statements of Cash Flows for the six months ended
August 31,
2006 (unaudited) and 2005 (unaudited)
|
7
|
|
|
||
|
|
Notes
to Condensed consolidated Financial Statements (unaudited)
|
9 |
|
|
||
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
24 |
|
|
||
|
Item
3.
|
Controls
and Procedures
|
32 |
|
|
||
|
Part
II
|
OTHER
INFORMATION
|
34 |
|
|
||
|
Item
1.
|
Legal
Proceedings
|
34 |
|
|
||
|
Item
2.
|
Changes
in Securities
|
34 |
|
|
||
|
Item
3.
|
Defaults
Upon Senior Securities
|
36 |
|
|
||
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
36 |
|
|
||
|
Item
5.
|
Other
Information
|
36 |
|
|
||
|
Item
6.
|
Exhibits
and Reports on Form 8-K
|
36 |
|
|
||
|
|
Signatures
|
37 |
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED
BALANCE SHEET (UNAUDITED)
As
of
August 31, 2006
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
|
|
$
|
448,285
|
|
|
Trade
receivables
|
|
|
53,453
|
|
|
Inventories,
net
|
|
|
478,647
|
|
|
Prepaid
expenses
|
|
|
225,840
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,206,225
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
302,236
|
|
|
|
|
|
|
|
|
INTANGIBLE
ASSETS, NET
|
|
|
34,266
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
6,742
|
|
|
|
|
|
|
|
|
Total
non-current assets
|
|
|
343,244
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
1,549,469
|
|
See
accompanying notes to condensed consolidated financial statements.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(CONTINUED)
As
of
August 31, 2006
See
accompanying notes to condensed consolidated financial statements.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For
the
Three-Month Periods Ending August 31,
|
|
|
2006
|
|
2005
|
|
||
|
|
|
|
|
|
|
||
|
SALES
|
|
$
|
219,024
|
|
$
|
186,425
|
|
|
COST
OF SALES
|
|
|
108,739
|
|
|
138,573
|
|
|
|
|
|
|
|
|
||
|
Gross
profit
|
|
|
110,285
|
|
|
47,852
|
|
|
|
|
|
|
|
|
||
|
OPERATING
EXPENSES
|
|
|
|
|
|
||
|
Selling
|
|
|
17,761
|
|
|
2,833
|
|
|
General
and administrative
|
|
|
170,841
|
|
|
163,901
|
|
|
Consulting
fees to related parties
|
|
|
56,860
|
|
|
59,044
|
|
|
|
|
|
|
|
|
||
|
Total
expenses
|
|
|
245,462
|
|
|
225,778
|
|
|
|
|
|
|
|
|
||
|
LOSS
FROM OPERATIONS
|
|
|
(135,177
|
)
|
|
(177,926
|
)
|
|
|
|
|
|
|
|
||
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
||
|
Interest
income
|
|
|
4,392
|
|
|
-
|
|
|
Interest
expense to related parties
|
|
|
(155,410
|
)
|
|
(60,820
|
)
|
|
Miscellaneous
income (expense)
|
|
|
2,413
|
|
|
(1,830
|
)
|
|
|
|
|
|
|
|
||
|
Total
other income (expense)
|
|
|
(148,605
|
)
|
|
(62,650
|
)
|
|
|
|
|
|
|
|
||
|
Net
loss
|
|
$
|
(283,782
|
)
|
$
|
(240,576
|
)
|
|
BASIC
AND DILUTED (LOSS)
|
|
|
|
|
|
||
|
PER
SHARE
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
||
|
WEIGHTED
AVERAGE NUMBER OF
|
|
|
|
|
|
||
|
SHARES:
BASIC AND DILUTED
|
|
|
22,531,128
|
|
|
16,536,620
|
|
See
accompanying notes to condensed consolidated financial statements
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For
the
Six-Month Periods Ending August 31,
|
|
|
2006
|
|
2005
|
|
||
|
|
|
|
|
|
|
||
|
SALES
|
|
$
|
388,899
|
|
$
|
424,412
|
|
|
COST
OF SALES
|
|
|
220,132
|
|
|
215,548
|
|
|
|
|
|
|
|
|
||
|
Gross
profit
|
|
|
168,767
|
|
|
208,864
|
|
|
|
|
|
|
|
|
||
|
OPERATING
EXPENSES
|
|
|
|
|
|
||
|
Selling
|
|
|
36,796
|
|
|
2,833
|
|
|
General
and administrative
|
|
|
318,287
|
|
|
324,474
|
|
|
Consulting
fees to related parties
|
|
|
113,720
|
|
|
89,045
|
|
|
|
|
|
|
|
|
||
|
Total
expenses
|
|
|
468,803
|
|
|
416,352
|
|
|
|
|
|
|
|
|
||
|
LOSS
FROM OPERATIONS
|
|
|
(300,036
|
)
|
|
(207,488
|
)
|
|
|
|
|
|
|
|
||
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
||
|
Interest
income
|
|
|
9,144
|
|
|
-
|
|
|
Interest
expense to related parties
|
|
|
(310,820
|
)
|
|
(114,573
|
)
|
|
Miscellaneous
income (expense)
|
|
|
1,114
|
|
|
-
|
|
|
|
|
|
|
|
|
||
|
Total
other income (expense)
|
|
|
(300,562
|
)
|
|
(114,573
|
)
|
|
|
|
|
|
|
|
||
|
Net
loss
|
|
$
|
(600,598
|
)
|
$
|
(322,061
|
)
|
|
BASIC
AND DILUTED (LOSS)
|
|
|
|
|
|
||
|
PER
SHARE
|
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
||
|
WEIGHTED
AVERAGE NUMBER OF
|
|
|
|
|
|
||
|
SHARES:
BASIC AND DILUTED
|
|
|
22,531,128
|
|
|
16,536,620
|
|
See
accompanying notes to condensed consolidated financial statements
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For
the
Six-Month Periods Ending August 31,
|
|
|
2006
|
|
2005
|
|
||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
||
|
Net
loss
|
|
$
|
(600,598
|
)
|
$
|
(322,061
|
)
|
|
Adjustments
to reconcile net loss to net
|
|
|
|
|
|
||
|
cash
used in operating activities:
|
|
|
|
|
|
||
|
Depreciation
and amortization
|
|
|
14,224
|
|
|
14,074
|
|
|
Compensation
and interest expense on stock and warrants
|
|
|
407,040
|
|
|
165,541
|
|
|
Contributed
executive services
|
|
|
5,000
|
|
|
5,000
|
|
|
Stock
issued for services
|
|
|
3,072
|
|
|
22,326
|
|
|
Provision
for doubtful accounts
|
|
|
-
|
|
|
(2,047
|
)
|
|
Return
of shares due to failure to perform services
|
|
|
-
|
|
|
(32,500
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
||
|
Trade
receivables
|
|
|
(19,851
|
)
|
|
(8,648
|
)
|
|
Inventory
|
|
|
(87,006
|
)
|
|
(17,152
|
)
|
|
Prepaid
expenses and other assets
|
|
|
(182,035
|
)
|
|
(63,640
|
)
|
|
Accounts
payable
|
|
|
23,233
|
|
|
18,692
|
|
|
Accrued
expenses
|
|
|
46,859
|
|
|
94,184
|
|
|
Accrued
interest due to related parties
|
|
|
14,129
|
|
|
19,119
|
|
|
Customer
deposits
|
|
|
262,652
|
|
|
1,203
|
|
|
Income
tax payable
|
|
|
1,600
|
|
|
(1,997
|
)
|
|
|
|
|
|
|
|
||
|
Net
cash used in operating activities
|
|
|
(111,681
|
)
|
|
(107,906
|
)
|
|
|
|
|
|
|
|
||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
||
|
Down
payment on purchase of airplane
|
|
|
(10,000
|
)
|
|
-
|
|
|
Purchase
of tooling, equipment and leasehold improvements
|
|
|
(14,228
|
)
|
|
(30,800
|
)
|
|
Insurance
proceeds from damaged equipment
|
|
|
2,500
|
|
|
-
|
|
|
Increase
in patents
|
|
|
(1,150
|
)
|
|
(1,440
|
)
|
|
|
|
|
|
|
|
||
|
Net
cash used investing activities
|
|
|
(22,878
|
)
|
|
(32,240
|
)
|
See
accompanying notes to condensed consolidated financial statements.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
For
the
Six-Month Periods Ending August 31,
|
|
|
2006
|
|
2005
|
|
||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
||
|
Proceeds
from sale of common stock
|
|
$
|
11,250
|
|
$
|
1,012,390
|
|
|
Unissued
stock liability
|
|
|
-
|
|
|
3,000
|
|
|
Purchase
of common stock
|
|
|
-
|
|
|
(32,480
|
)
|
|
Payment
of finders fees
|
|
|
-
|
|
|
(11,800
|
)
|
|
Proceeds
from line of credit
|
|
|
-
|
|
|
50,000
|
|
|
Repayments
on related party notes payable
|
|
|
(63,975
|
)
|
|
(85,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(52,725
|
)
|
|
936,110
|
|
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH
|
|
|
(187,284
|
)
|
|
795,964
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
635,569
|
|
|
23,782
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
448,285
|
|
$
|
819,746
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
$
|
-
|
|
|
Income
taxes
|
|
$
|
-
|
|
$
|
1,997
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of airplane with debt
|
|
$
|
136,413
|
|
$
|
-
|
|
|
Stock
issued for settlement of debt
|
|
$
|
131,662
|
|
$
|
53,401
|
|
|
Stock
issued for intellectual property
|
|
$
|
16,100
|
|
$
|
-
|
|
|
Stock
issued for services
|
|
$
|
3,072
|
|
$
|
22,326
|
|
|
Stock
issued for accrued interest
|
|
$
|
-
|
|
$
|
228,000
|
|
|
Return
of shares due to non-performance of services
|
|
$
|
-
|
|
$
|
32,500
|
|
See
accompanying notes to condensed consolidated financial statements.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
NOTE
1:
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited
Interim Financial Information
The
unaudited condensed consolidated financial statements of Seychelle Environmental
Technologies, Inc. (the “Company”) for the three and six-month periods ended
August 31, 2006 and August 31, 2005 have been prepared in conformity with the
accounting principles described in the Company’s Annual Report on Form 10-KSB
for the fiscal year ended February 28, 2006 (the “Annual Report”) and include
all adjustments considered necessary by management for a fair statement of
the
interim periods. Such adjustments consist only of normal recurring items. This
report should be read in conjunction with the Annual Report. Results for the
three and six-month periods ended August 31, 2006 are not necessarily indicative
of the results that may be expected for the fiscal year ending February 28,
2007.
Revenue
Recognition
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the price to the buyer is fixed or determinable and
collectibility is reasonably assured. These criteria are typically met when
product is shipped. Revenue is not recognized at the time of shipment if these
criteria are not met.
On
sales
to Food for Health, the Company functions as a broker and therefore, receives
only a fee for coordinating sales from Huanghua Seychelle Plastic Co., Ltd.
with
the customer. Since the Company has no risk of inventory ownership, the Company
records its revenue from each transaction as only its portion of the fee
associated with the shipment. During the three-month period ended August 31,
2006, the Company recognized $9,000 in distribution income from its efforts,
which is included in sales on the Company’s Condensed Consolidated Statement of
Operations.
As
of
August 31, 2006, the Company received $291,000 as a deposit on future shipments
and prepaid Huanghua Seychelle Plastic Co., Ltd. approximately $178,000 for
ordered product.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
NOTE
1:
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES, continued
Adoption
of Statement of Financial Accounting Standards No. 123®
On
March
1, 2006, the Company adopted
Statement of Financial Accounting Standards No.
123
(revised 2004),
Share
Based Payment
,
(“FAS
123R) which establishes standards for the accounting of transactions in which
an
entity exchanges its equity instruments for goods or services, primarily
focusing on accounting for transactions where an entity obtains services in
share based payment transactions. FAS 123R requires a public entity to measure
the cost of services received in exchange for an award of equity instruments,
including stock warrants, based on the grant date fair value of the award and
to
recognize it as compensation expense over the period required to provide service
in exchange for the award, usually the vesting period. FAS 123R supersedes
the
Company’s previous accounting under Accounting Principles Board Opinion No. 25,
Accounting
for Stock Issues to Employees
(APB 25)
for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to 123R.
The Company has applied the provisions of SAB 107 in its adoption of FAS
123R.
The
Company adopted FAS 123R using the modified prospective transition method,
which
requires the application of the accounting standard as of March 1, 2006, the
first day of the Company’s fiscal year 2007. The Company’s condensed
consolidated financial statements as of and for the three and six-months ended
August 31, 2006 reflect the impact of FAS 123R In accordance with the modified
prospective transition method, the Company’s condensed consolidated financial
statements for the three and six-months ended August 31, 2005 have not been
restated to reflect, and do not include, the impact of 123R.
123R
requires companies to estimate the fair value of share based payment awards
on
the date of grant using an option-pricing model. The value of the portion of
the
award that is ultimately expected to vest is recognized as expense over the
requisite service periods in the Company’s condensed consolidated statement of
operations. Prior to the adoption of FAS 123R, the Company accounted for stock
based awards using the intrinsic value method in accordance with APB 25 as
allowed under Statement of Financial Accounting Standards No. 123,
Accounting
for Stock Based Compensation
(FAS
123). Under the intrinsic value method, no stock based compensation expense
had
been recognized in the Company’s Condensed Consolidated Statement of Operations,
other than as related to warrants or restricted common shares granted below
the
fair market value of the underlying stock at the date of grant.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
Stock
based compensation expense recognized during the three and six-months ended
August 31, 2006 is based on the value of the portion of share based payment
awards that is ultimately expected to vest during the period. Stock based
compensation expense recognized in the Company’s condensed consolidated
statement of operations for the three and six-months ended August 31, 2006
included compensation expense for share based payment awards granted prior
to,
but not yet vested as of February 28, 2006 based on the grant date fair value
estimated in accordance with the pro forma provisions of 123R and compensation
expense for the share based payment awards granted subsequent to February 28,
2006 based on the grant date fair value estimated in accordance with the
provisions of FAS 123R. As stock based compensation expense recognized in the
condensed consolidated statement of operations for the first six months of
fiscal 2007 has been based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. For the three and six-month periods
ended August 31, 2006, the Company applied an estimated forfeiture rate of
zero%
for officer grants as the vesting periods were almost complete at the time
of
this filing. As of the date of this filing, there were no warrants granted
to
non-officers of the Company and therefore, no forfeiture rate was utilized.
The
estimated vesting term of warrant grants for the three and six-month periods
ended August 31, 2006 was 4.0 years for officer grants. As of the date of this
filing, there were no warrants or restricted common shares granted to
non-officers of the Company.
FAS
123R
requires the cash flows resulting from the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those warrants
to
be classified as financing cash flows. Due to the Company’s loss position, there
were no such tax benefits during the three and six-month periods ended August
31, 2006 and 2005. Prior to the adoption of FAS 123R, those benefits would
have
been reported as operating cash flows had the Company received any tax benefits
related to stock warrant exercises.
The
fair
value of stock based awards is calculated using the Black Scholes option pricing
model, even though this model was developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which differ
significantly from the Company’s stock warrants. The Black Scholes model also
requires subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
risk
free rate selected to value any particular grant is based on the Company’s
current borrowing rate (6.5%). The expected volatility is based on the
historical volatility of the Company’s stock price. These factors could change
in the future, affecting the determination of stock based compensation expense
in future periods.
The
weighted average fair value of stock based compensation is based on the single
option valuation approach. Forfeitures are estimated and it is assumed no
dividends will be declared. The estimated fair value of stock based compensation
awards is amortized using the straight line method over the vesting period
of
the warrants or restricted common shares, as such method is consistent with
the
officers contractual obligation. The Company’s fair value calculations for stock
based compensation awards for the three and six-month periods ended August
31,
2006 were based on the following assumptions:
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
|
Three
Months Ended
August
31, 2006
|
Six
Months Ended
August
31, 2006
|
|
|
Risk
free interest rate
|
6.5%
|
6.5%
|
|
Expected
life
|
1.58
- 3.33
|
1.58
- 3.33
|
|
Expected
volatility
|
235
- 323%
|
235
- 323%
|
|
Expected
dividends
|
None
|
None
|
The
following table summarizes stock based compensation expense related to stock
warrants and restrictive common shares under FAS 123R for the three and
six-month periods ended August 31, 2006, allocated as shown:
|
Three
Months Ended
August
31, 2006
|
Six
Months Ended
August
31, 2006
|
|
|
General
and administrative
|
$
1,948
|
$
1,948
|
|
Consulting
fees to related
parties
|
$
56,860
|
$113,720
|
|
Interest
expense to related
parties
|
$155,410
|
$310,820
|
|
Total
stock and warrant
based
compensation
expense
|
$214,218
|
$426,488
|
For
the
three and six-month periods ended August 31, 2006, the amounts of stock based
compensation expense related to stock warrants were $49,457 and $96,966,
respectively. For the three and six-month periods ended August 31, 2006, the
amounts of stock based compensation expense related to restricted common shares
were $9,351 and $18,702, respectively.
For
the
three and six-month periods ended August 31, 2006, the amounts of stock based
interest expense related to stock warrants were $109,415 and $91,990,
respectively. For the three and six-month periods ended August 31, 2006, the
amounts of stock based interest expense related to restricted common shares
were
$45,995 and $218,830, respectively.
As
a
result of adopting FAS
123R
on March
1, 2006, the Company’s net loss for the three and six-month periods ended August
31, 2006 was $283,782 and $600,598 respectively. The Company’s net loss for the
three months ended August 31, 2006 was $105,760 greater than it would have
been
if the Company had continued to account for share based compensation under
APB
25. The Company’s net loss per common share, basic and diluted, for the three
months ended August 31, 2006 was $0.01. The Company’s net loss per common share,
basic and diluted, for the three months ended August 31, 2006 was equal to
what
it would have been if the Company had continued to account for share based
compensation under APB 25. The Company’s net loss for the six months ended
August 31, 2006 was $205,500 greater than it would have been if the Company
had
continued to account for share based compensation under APB 25. The Company’s
net loss per common share, basic and diluted, for the six months ended August
31, 2006 was $.03. The Company’s net loss per common share, basic and diluted,
for the six months ended August 31, 2006 was $0.01 greater than it would have
been if the Company had continued to account for share based compensation under
APB 25.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
The
summary of the warrant activity, relating to compensation and interest expense,
during the six months ended August 31, 2006 is as follows:
|
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (in years)
|
Aggregate
Intrinsic Value
|
||||||||||
|
Outstanding
at February 28, 2006
|
4,000,000
|
$
|
0.225
|
||||||||||
|
Granted
|
100,000
|
$
|
0.40
|
||||||||||
|
Exercised
|
-
|
-
|
|||||||||||
|
Cancelled
|
-
|
-
|
|||||||||||
|
Outstanding
at August 31, 2006
|
4,100,000
|
$
|
0.229
|
2.29
|
$
|
191,910
|
|||||||
|
Vested
or expected to vest at August 31, 2006
|
-
|
-
|
-
|
-
|
|||||||||
|
Exercisable
at August 31, 2006
|
-
|
$
|
0.229
|
2.29
|
$
|
191,910
|
|||||||
The
following table summarizes significant ranges of outstanding
warrants as of August 31, 2006:
|
|
Warrants
Outstanding
|
Warrants
|
Exercisable
|
|||||||||||||
|
Range
of Exercise Prices
|
Number
Outstanding
|
Weighted
Average Remaining Contractual Life (in years)
|
Weighted
Average Exercise Price
|
Number
Outstanding
|
Weighted
Average Exercise Price
|
|||||||||||
|
$0.225
|
500,000
|
2.25
|
$
|
0.225
|
-
|
$
|
0.225
|
|||||||||
|
$0.225
|
500,000
|
2.25
|
$
|
0.225
|
-
|
$
|
0.225
|
|||||||||
|
$0.225
|
500,000
|
2.25
|
$
|
0.225
|
-
|
$
|
0.225
|
|||||||||
|
$0.225
|
|
250,000
|
2.25
|
$
|
0.225
|
-
|
$
|
0.225
|
||||||||
|
$0.225
|
250,000
|
2.25
|
$
|
0.225
|
-
|
$
|
0.225
|
|||||||||
|
$0.225
|
2,000,000
|
2.25
|
$
|
0.225
|
-
|
$
|
0.225
|
|||||||||
|
$0.400
|
100,000
|
4.25
|
$
|
0.400
|
-
|
$
|
0.400
|
|||||||||
|
4,100,000
|
2.29
|
$
|
0.229
|
-
|
$
|
0.229
|
||||||||||
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
The
per
share weighted average fair value of warrants outstanding during the three
months ended August 31, 2006 and 2005 was $0.229 and $0.225, respectively.
The
per share weighted average fair value of warrants outstanding during the
six
months ended August 31, 2006 and 2005 was $0.229 and $0.225, respectively.
There
were no warrants exercised or exercisable during the three and six-months
ended
August 31, 2006 as all warrants granted to officers fully vest during December
2006. As of August 31, 2006, total unrecognized adjusted compensation costs
related to nonvested stock warrants was approximately $55,000, which is expected
to be recognized as an expense over a weighted average period of approximately
2
years ending August 2008. As of August 31, 2006, total unrecognized adjusted
interest costs related to nonvested stock warrants was approximately $137,000,
which is expected to be recognized as an expense over a weighted average
period
of approximately 4 months ending December 2006.
The
summary of the restricted stock grants, relating to compensation and interest
expense, during the six months ended August 31, 2006 is as follows:
|
Number
of Shares
|
Weighted
Average Purchase Price
|
Weighted
Average Remaining Contractual Life (in years)
|
Aggregate
Intrinsic Value
|
||||||||||
|
Outstanding
at February 28, 2006
|
2,768,445
|
$
|
0.052
|
||||||||||
|
Granted
|
-
|
-
|
|||||||||||
|
Exercised
|
-
|
-
|
|||||||||||
|
Cancelled
|
-
|
-
|
|||||||||||
|
Outstanding
at August 31, 2006
|
2,768,445
|
$
|
0.052
|
0.33
|
$
|
164,486
|
|||||||
|
Vested
or expected to vest at August 31, 2006
|
1,853,258
|
$
|
0.229
|
0.33
|
$
|
110,111
|
|||||||
|
Exercisable
at August 31, 2006
|
1,853,258
|
$
|
0.229
|
0.33
|
$
|
110,111
|
|||||||
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
The
following table summarizes significant ranges of outstanding restricted stock
grants as of August 31, 2006:
|
|
Restricted
Stock Outstanding
|
Restricted
Stock
Exercisable
|
||||||||||||||
|
Range
of Purchase Prices
|
Number
Outstanding
|
Weighted
Average Remaining Contractual Life (in years)
|
Weighted
Average Purchase Price
|
Number
Outstanding
|
Weighted
Average Purchase Price
|
|||||||||||
|
$0.030
|
240,000
|
0.33
|
$
|
0.030
|
160,000
|
$
|
0.030
|
|||||||||
|
$0.030
|
240,000
|
0.33
|
$
|
0.030
|
160,000
|
$
|
0.030
|
|||||||||
|
$0.225
|
316,312
|
0.33
|
$
|
0.225
|
211,929
|
$
|
0.225
|
|||||||||
|
$0.030
|
1,972,133
|
0.33
|
$
|
0.030
|
1,321,329
|
$
|
0.030
|
|||||||||
|
2,768,445
|
0.33
|
$
|
0.052
|
1,853,258
|
$
|
0.229
|
||||||||||
The
per
share weighted average fair value of restricted shares outstanding during
the
three months ended August 31, 2006 and 2005 was $0.229 and $0.225, respectively.
The per share weighted average fair value of warrants outstanding during
the six
months ended August 31, 2006 and 2005 was $0.229 and $0.225, respectively.
There
were 1,853,258 restricted commons shares vested during the three and six-months
ended August 31, 2006. As of August 31, 2006, total unrecognized adjusted
compensation costs related to nonvested restricted common shares was
approximately $123,000, which is expected to be recognized as an expense over
a
weighted average period of approximately 4 months ending December 2006. As
of
August 31, 2006, total unrecognized adjusted interest costs related to nonvested
restricted common shares was approximately $41,000, which is expected to be
recognized as an expense over a weighted average period of approximately 4
months ending December 2006.
Prior
to
fiscal 2006, the weighted average fair value of stock based compensation was
based on the single option valuation approach. Forfeitures were recognized
as
they occurred and it was assumed no dividends would be declared. The estimated
fair value of stock based compensation awards was amortized using the
straight-line method over the vesting period of the warrants.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
Pro
forma
results are as follows:
|
Three
months ended August 31, 2005
|
Six
months ended August 31, 2005
|
||||||
|
Net
loss, as reported
|
$
|
(240,576
|
)
|
$
|
(322,061
|
)
|
|
|
Add:
Stock based compensation and interest expense included in reported
net
loss
|
119,864
|
203,618
|
|||||
|
Deduct:
Total stock based compensation and interest expense determined
under the
fair value based method for all awards
|
(130,763
|
)
|
(193,886
|
)
|
|||
|
Net
loss, pro-forma
|
$
|
(251,475
|
)
|
$
|
(312,329
|
)
|
|
|
Basic
and diluted net loss per common share:
|
|||||||
|
As
reported
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
|
|
Pro-forma
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
|
New
Accounting Pronouncement
In
July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48,
Accounting
for Uncertainty in Income Taxes
(FIN
48).
FIN 48 clarifies the accounting for income taxes by prescribing a minimum
probability threshold that a tax position must meet before a financial statement
benefit is recognized. The minimum threshold is defined in FIN 48 as a tax
position, that based solely on its technical merits is more likely than not
to
be sustained upon examination by the applicable taxing authority. The tax
benefit to be recognized is measured as the largest amount of benefit that
is
greater than fifty percent likely of being realized upon ultimate settlement.
FIN 48 must be applied to all existing tax positions upon initial adoption.
The
cumulative effect of applying FIN 48 at adoption, if any, is to be reported
as
an adjustment to opening retained earnings for the year of adoption. FIN 48
is
effective for fiscal years beginning after December 15, 2006, which is the
Company’s 2007 fiscal year, although early adoption is permitted. The Company is
currently assessing the potential effect of FIN 48 on its financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157,
Fair
Value Measurements
(“FAS
157”). FAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements but does not require
any new fair value measurements. FAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company has not yet determined the impact of
applying FAS 157.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
158,
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans
,
(“FAS
158”). FAS 158 requires an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan (other than a multiemployer
plan) as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income. FAS 158 is effective for financial statements
as
of December 31, 2006. The Company does not expect any material impact from
applying FAS 158.
In
September 2006, the Securities and Exchange Commission released Staff Accounting
Bulletin No. 108, “Considering the Effects Prior Period Year Misstatements When
Quantifying Misstatements in Current Year Financial Statements,” (“SAB 108”).
SAB 108 provides interpretative guidance on how the effects of the carryover
or
reversal of prior year misstatements should be considered in quantifying a
current year misstatement. SAB 108 is effective for fiscal years ending after
November 15, 2006. The Company is currently evaluating the impact that
adopting SAB 108 will have on its operations and financial condition.
In
November 2005, the FASB issued FASB Staff Position 123(R)-3 (“FSP 123R-3”),
“Transition Election Related to Accounting for the Tax Effect of Share-based
Payment Awards,” that provides an elective alternative transition method of
calculating the pool of excess tax benefits available to absorb tax deficiencies
recognized
subsequent
to the adoption of SFAS 123R (the “APIC Pool”) to the method otherwise required
by paragraph 81 of SFAS 123R. The Company may take up to one year from the
effective date of this FSP to evaluate its available alternatives and make
its
one-time election. The Company is currently evaluating the alternative methods.
Until and unless the Company elects the transition method described in this
FSP,
the Company will follow the transition method described in paragraph 81 of
SFAS
123R.Reclassifications
Certain
amounts in the 2005 financial statements have been reclassified to conform
to
the 2006 presentations. These reclassifications had no effect on previously
reported results of operations or retained earnings (accumulated deficit).
NOTE
2:
INVENTORY
The
following is a summary of inventory as of August 31, 2006:
|
Raw
materials
|
|
$
|
166,559
|
|
|
Work
in progress
|
|
|
76,650
|
|
|
Finished
goods
|
|
|
315,227
|
|
|
|
|
|
558,436
|
|
|
Reserve
for obsolete or
Slow
moving inventory
|
|
|
(79,789
|
)
|
|
|
|
|
|
|
|
Net
inventories
|
|
$
|
478,647
|
|
Work
in
progress and finished goods inventory includes material, labor and manufacturing
overhead costs.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
NOTE
3:
PROPERTY
AND EQUIPMENT
The
following is a summary of property and equipment at August 31,
2006:
|
Tooling
|
|
$
|
282,851
|
|
|
Airplane
|
|
|
146,413
|
|
|
Equipment
|
|
|
47,137
|
|
|
Vehicles
|
|
|
10,000
|
|
|
Furniture
and fixtures
|
|
|
15,465
|
|
|
Computer
equipment
|
|
|
17,643
|
|
|
Leasehold
improvements
|
|
|
3,151
|
|
|
|
|
|
522,660
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
220,424
|
|
|
|
|
$
|
302,236
|
|
Total
depreciation expense for each of the six-month periods ended August 31, 2006
and
2005, was approximately $13,600.
NOTE
4:
INTANGIBLE
ASSETS
The
following is a summary of intangible assets at August 31, 2006:
|
Redi
Chlor brand name and trademark
|
|
$
|
16,100
|
|
|
Hand
pump
|
|
|
8,000
|
|
|
Patents
|
|
|
18,796
|
|
|
|
|
|
42,896
|
|
|
Less:
Accumulated amortization
|
|
|
8,630
|
|
|
|
|
|
|
|
|
|
|
$
|
34,266
|
|
The
estimated future amortization expense is approximately $1,200 per
year.
During
April 2006, the Company issued 50,000 common shares, subject to a one year
restriction period, to shareholders of Continental Technologies, Inc.
(“Continental’) with an approximate value of $16,100 for the Redi Chlor brand
name and trademark. The agreement further agrees to remit Continental a ten
percent commission on net sales as defined of the existing product, or any
new
products sold directly by Seychelle, and ten percent on any product sold by
Continental for Seychelle to their existing or new customers at Seychelle’s OEM
prices. The agreement has an indefinite life and therefore, the Company does
not
amortize the value of the agreement but does evaluate the value on a periodic
basis for impairment.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
NOTE
5:
ACCRUED
EXPENSES
Accrued
expenses consist of the following at August 31, 2006:
|
Accrued
legal expenses
|
|
$
|
133,260
|
|
|
Accrued
accounting expenses
|
|
|
13,379
|
|
|
Accrued
claim settlement
|
|
|
12,750
|
|
|
Accrued
commissions
|
|
|
10,905
|
|
|
Accrual
for stock purchase (Continental Technologies)
|
|
|
16,100
|
|
|
Other
accrued expenses
|
|
|
5,524
|
|
|
|
|
$
|
191,918
|
|
During
April 2006, the Company issued 50,000 common shares, subject to a one year
restriction period, to shareholders of Continental Technologies, Inc.
(“Continental’) with an approximate value of $16,100 for the Redi Chlor brand
name and trademark. As the purchase agreement provides the shareholders of
Continental the right to sell the common shares back-to the Company, at
Continental’s sole option for a period of six months after the restriction
period at $0.75 per share, the Company recorded a liability for approximately
$16,100 (see Note 4).
NOTE
6:
LINES
OF
CREDIT AND SUBSEQUENT EVENT
The
Company has a line of credit agreement, totaling $100,000. The line of credit
bears interest at the institution’s index rate (7.5% at August 31, 2006) plus
two percent and is due March 31, 2007. As of August 31, 2006, the Company
borrowed $50,000 against the line of credit.
During
August 2006, the Company entered into a second line of credit agreement,
totaling $150,000, to purchase an airplane. The line of credit bears interest
at
the institution’s index rate (7.5% at August 31, 2006) plus two percent and is
not repayable until August 31, 2007.
During
October 2006, the Company terminated the line of credit used to purchase the
airplane and entered into a three-year term loan. The term loan bears interest
at 6.5% and is not repayable until September 2009. As it was the Company’s
intent to finance the purchase of the airplane utilizing a term note and as
such
note was obtained subsequent to August 31, 2006, the Company has classified
the
debt as a long-term liability on the Condensed Consolidated Balance
Sheet.
NOTE
7:
CAPITAL
STRUCTURE
Common
Stock
During
the three-month period ended May 31, 2006, the Company issued an aggregate
of
50,000 common shares to various investors for cash for an approximate total
value of $11,250.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
NOTE
7:
CAPITAL
STRUCTURE, continued
During
the three-month period ending May 31, 2006, the Company issued 50,000 common
shares to shareholders of Continental Technologies, Inc. (“Continental’) with an
approximate value of $16,100 for intellectual property (see Note 4). As the
purchase agreement provides the shareholders of Continental the ability to
sell
the common shares after one year back-to the Company, the Company recorded
a
liability for approximately $16,100 (see Notes 4 and 5).
During
the three-month period ended May 31, 2006, the Company issued an aggregate
of
214,516 restricted shares to three debt holders with an approximate total value
of $108,000.
During
the three-month period ended August 31, 2006, the Company issued an aggregate
of
29,876 restricted shares to a debt holder with an approximate total value of
$23,700.
During
the three-month period ended August 31, 2006, the Company issued an aggregate
of
8,000 restricted shares to three consultants for services with an approximate
total value of $3,100.
Warrants
On
July
25, 2005, the Company granted to Gary Hess, doing business as Aqua Gear,
100,000
warrants redeemable on restricted shares of the Company’s stock at a purchase
price of $.40 per share. Aqua Gear is the licensor of all proprietary rights
associated with the technology, the hand pump and the trademark Aqua Gear
TM
(Note 4). The warrants are redeemable any time after August 1, 2008 and are
exercisable through December 1, 2010. As the warrants provide for the purchase
of common stock at below the Company’s market price on the date of grant, the
Company recorded compensation expense relating to the estimated value of
these
warrants, which is included in general and administrative expenses in the
Company’s Condensed Consolidated Statement of Operations.
A
summary
of warrant activity is as follows:
|
Outstanding
warrants
|
|
Warrants
Outstanding
|
|
Exercise
Price
|
|
||
|
|
|
|
|
|
|
||
|
Balance,
February 28, 2006
|
|
|
6,000,000
|
|
$
|
0.225
|
|
|
Granted
|
|
|
100,000
|
|
|
0.40
|
|
|
Exercised
|
|
|
0
|
|
|
0
|
|
|
Canceled
|
|
|
0
|
|
|
0
|
|
|
Balance,
August 31, 2006
|
|
|
6,100,000
|
|
$
|
0.225-0.40
|
|
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
NOTE
8:
RESTATEMENT
OF FINANCIAL STATEMENTS
The
Company became aware of certain errors in its previously filed financial
statements in the course of responding to comments of the Securities and
Exchange Committee resulting from their review of the Company’s General Form for
Registration of Securities on Form 10 and Quarterly Report on Form 10-QSB for
the quarter ended May 31, 2006 and during the preparation of its financial
statements in connection with its second quarter ended August 31, 2006. On
March 1, 2006, the Company adopted
Statement of Financial Accounting Standards No.
123
(revised 2004),
Share
Based Payment
,
(“FAS
123R”) which establishes standards for the accounting of transactions in which
an entity exchanges its equity instruments for goods or services, primarily
focusing on accounting for transactions where an entity obtains services in
share based payment transactions. In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to FAS
123R. In connection with the Company recalculating its compensation expense
under FAS 123R it was determined that an incorrect volatility factor was
previously utilized resulting in an approximate $100,000 understatement of
expenses during the three-month period ended May 31, 2006. Additionally, since
the Company elected the modified prospective transition method, the Company
adjusted its additional paid in capital as of the beginning of the fiscal year
for the carrying amounts of unearned compensation cost.
Prior
to
March 1, 2006, the Company accounted for stock based awards using the intrinsic
value method in accordance with APB 25 as allowed under Statement of Financial
Accounting Standards No. 123,
Accounting
for Stock Based Compensation
(FAS
123). Under the intrinsic value method, no stock based compensation expense
had
been recognized in the Company’s Condensed Consolidated Statement of Operations,
other than as related to warrants or restricted common shares granted to
employees and consultants below the fair market value of the underlying stock
at
the date of grant.
During
April 2006, the Company issued 50,000 common shares, subject to a one year
restriction period, to shareholders of Continental Technologies, Inc.
(“Continental’) with an approximate value of $16,100 for the Redi Chlor brand
name and trademark. As the purchase agreement provides the shareholders
of
Continental the right to sell the common shares back-to the Company, at
Continental’s sole option for a period of six months after the restriction
period at $0.75 per share, the Company recorded a liability for approximately
$16,100. Previously, the Company had overstated the fair value of the patent
by
approximately $10,700 and recorded the estimated fair market value of the
common
shares, approximately $16,100, as an equity
transaction.
Finally,
as recommended by the SEC the company reclassified the California minimum
franchise fee from provision for income taxes to a component of general and
administrative expenses.
The
following is a summary of the anticipated effects of these changes cited above
on the condensed consolidated balance sheets as May 31, 2006 as well as the
anticipated effects of these changes on the condensed consolidated statements
of
operations and cash flows for the quarter then ended.
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
May 31, 2006:
|
|
Condensed
Consolidated Balance Sheets
|
|
||||||||
|
|
|
As Previously
Reported
|
|
Adjustments
|
|
As
Restated
|
||||
|
Intangible
assets
|
$
|
44,128
|
$
|
(10,700
|
)
|
$
|
33,428
|
|||
|
Total
assets
|
1,255,545
|
(10,700
|
)
|
1,244,845
|
||||||
|
Accrued
expenses
|
224,968
|
5,400
|
230,368
|
|||||||
|
Total
liabilities
|
886,365
|
5,400
|
891,765
|
|||||||
|
Additional
paid in capital
|
5,530,113
|
(85,252
|
)
|
5,444,861
|
||||||
|
Unearned
compensation
|
(169,413
|
)
|
169,413
|
-
|
||||||
|
Unearned
interest
|
(287,753
|
)
|
(163,145
|
)
|
(450,898
|
)
|
||||
|
Accumulated
deficit
|
(5,174,489
|
)
|
(100,261
|
)
|
(5,274,750
|
)
|
||||
|
Net
(loss)
|
(216,555
|
)
|
(100,261
|
)
|
(316,816
|
)
|
||||
|
Net
(loss) per share-basic and diluted
|
(0.01
|
)
|
-
|
(0.01
|
)
|
|||||
|
Total
stockholders’ equity
|
369,180
|
(16,100
|
)
|
353,080
|
||||||
|
Total
liabilities and stockholders’ equity
|
1,255,545
|
(10,700
|
)
|
1,244,845
|
||||||
-
22
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
AUGUST 31, 2006
For
Quarter Ended
May 31, 2006:
|
|
Condensed
Consolidated Statements of Operations
|
|
||||||||
|
|
|
As Previously
Reported
|
|
Adjustments
|
|
As
Restated
|
||||
|
Consulting
fees to related parties
|
$
|
(35,000
|
)
|
$
|
(21,860
|
)
|
$
|
(56,860
|
)
|
|
|
Total
operating expenses
|
(203,429
|
)
|
(19,912
|
)
|
(223,341
|
)
|
||||
|
Net
loss from operations
|
(144,948
|
)
|
(19,912
|
)
|
(164,860
|
)
|
||||
|
Interest
expense to related parties
|
(75,582
|
)
|
(79,828
|
)
|
(155,410
|
)
|
||||
|
Total
other income (expense)
|
(70,007
|
)
|
(81,949
|
)
|
(151,956
|
)
|
||||
|
Net
loss before provision for income taxes
|
(214,955
|
)
|
(101,861
|
)
|
(316,816
|
)
|
||||
|
Provision
for income taxes
|
(1,600
|
)
|
1,600
|
-
|
||||||
|
Net
loss
|
(216,555
|
)
|
(100,261
|
)
|
(316,816
|
)
|
||||
|
Net
(loss) per share-basic and diluted
|
(0.01
|
)
|
-
|
(0.01
|
)
|
|||||
The
Company expects that the incremental non-cash compensation expense reflected
in
the restatement will not affect the Company’s current cash position or financial
condition. Moreover, the stock based compensation-related restatement will
not
affect previously reported revenues.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion contains forward-looking statements regarding our Company,
its business, prospects and results of operations that are subject to certain
risks and uncertainties posed by many factors and events that could cause our
actual business, prospects and results of operations to differ materially from
those that may be anticipated by such forward-looking statements. Factors that
may affect such forward-looking statements include, without limitation: our
ability to successfully develop new products for new markets, the impact of
competition on our revenues, changes in law or regulatory requirements that
adversely affect or preclude customers from using our products for certain
applications, delays in our introduction of new products or services, and our
failure to keep pace with emerging technologies.
When
used
in this discussion, words such as "believes," "anticipates," "expects,"
"intends" and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this document.
We
undertake no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise. Readers are urged
to carefully review and consider the various disclosures made by us in this
document and other reports filed with the Securities and Exchange Commission
that attempt to advise interested parties of the risks and factors that may
affect our business
Description
of the Business.
(a)
Business
Development
History
of Seychelle
We
are a
Nevada corporation. Our principal business address is 33012 Calle Perfecto,
San
Juan Capistrano, California 92675. Our telephone number at this address is
949-234-1999.
We
were
incorporated under the laws of the State of Nevada on January 23, 1998 as a
change of domicile of Royal Net, Inc., a Utah corporation that was originally
incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile
to Nevada and its name to Seychelle Environmental Technologies, Inc. effective
in January 1998.
On
January 30, 1998, we entered into an Exchange Agreement with Seychelle Water
Technologies, Inc., a Nevada corporation ("SWT"), whereby we exchanged our
issued and outstanding capital shares with the shareholders of SWT on a one
share for one share basis. We became the parent company and SWT became a wholly
owned subsidiary. SWT had been formed in 1997 to market water filtration systems
of Aqua Vision International.
On
January 31, 1998, we entered into a Purchase Agreement to acquire all of the
assets of Aqua Vision International, a private California entity. This Purchase
Agreement was amended on February 26, 1999 to provide for the issuance of 8,000
shares of Series "AAA" Cumulative Convertible Preferred Voting Stock in lieu
of
all consideration that had remained unpaid under the original Purchase
Agreement. Aqua Vision International had been in operation since 1995 to
develop, manufacture, and market its own proprietary water filtration systems.
In 2004, the Series "AAA" Cumulative Convertible Preferred Voting Stock was
converted to common stock. No preferred stock is currently issued or
outstanding.
Organization
Our
Company is presently comprised of Seychelle Environmental Technologies, Inc.,
a
Nevada corporation, with one subsidiary, Seychelle Water Technologies, Inc.,
also a Nevada corporation. We use the trade name, "Seychelle Water Filtration
Products, Inc.," in our commercial operations.
(b)
Business
of Seychelle
General
Seychelle
designs and manufactures unique, state-of-the-art Ionic Adsorption Micron
Filters that remove up to 99.8% of all pollutants and contaminants found in
any
fresh water source. Using breakthrough technology, Seychelle has also developed
proprietary ozone systems. Patents or trade secrets cover all proprietary
products. Since our bodies are 75% water and the quality of water worldwide
continues to deteriorate, our mission is twofold: First, to help educate
everyone to the fact that the quality of water they drink is important and
second, to make available low-cost, effective filtration products that will
meet
the growing need for safe water.
Seychelle
has sold over 2 million portable water filtration bottles throughout the world
to customers such as individuals, dealers, and distributors - and to
governments, military, agencies and emergency relief organizations such as
the
US Marine Corps, the International Red Cross, Eco-Challenge, Kenya Wild Life
Service, La Cruz Roja de Mexico and the NY Institute for the Blind. In addition,
the company has donated thousands of portable bottles to church groups and
missionaries worldwide.
In
2001,
the World Bank placed the value the world water market at close to $400 billion
annually. Bottled water, according to Water Facts, has emerged as the second
largest commercial beverage category by volume in the US. However, Seychelle
products compete in a more limited market: the portable and home filtration
products segments.
In
developing countries, many people in rural areas boil their water for drinking
and cooking to kill bacteria, but this process does not remove the pyrogens,
chemicals, toxins, and other elements that remain in the water. In Africa alone,
according to Earth Prayers from around the world, approximately 6,000 people
die
every day because of water borne diseases.
Business
Plan
The
management of Seychelle represents over 35 years of combined experience in
developing improvements and innovations in the field of micron technology.
As a
result, our products can deliver up to .2-micron filtration, at pennies per
gallon, with pressure as low as 24 pounds per square inch. Further, our point
of
difference filtration systems remove up to 99.8% of all known pollutants and
contaminants most commonalty found in fresh drinking water supplies in the
four
major areas of concern as follows:
AESTHETICS:
Taste,
odor, chlorine, sand, sediment and odor problems.
BIOLOGICS:
Pathogens
such as Cryptosporidium, Giardia and E-Coli bacteria.
CHEMICALS:
Pesticides,
detergents, toxic chemicals and industrial waste.
DISSOLVED
SOLIDS:
Heavy
metals such as aluminum, asbestos, copper, lead, mercury and radon
222.
Seychelle
filters have been tested by independent and government laboratories throughout
the world and are approved for sale and distribution in the following countries:
United States, Mexico, United Kingdom, Korea, Malaysia Indonesia, Japan, China,
Vietnam, New Zeeland, Australia, Brazil, Venezuela, Argentina, South Africa,
and
Pakistan. In the United States, Seychelle filters have been certified by
California and Florida approved independent laboratories implementing
Environmental Protection Agency, American Natural Standards Institute, and
National Sanitation Foundation protocol, procedures, standards and methodology.
Importantly, we offer a test pack for potential customers that include the
test
results from selected countries. In addition, results from the United States,
United Kingdom and South Africa are displayed our Website:
www.seychelle.com
.
To our
knowledge, no other water filtration system can achieve this level of removal
of
up to 99.8% of all known pollutants and contaminants most commonalty found
in
fresh drinking water supplies in the four major areas of concern. The benefit
of
such filtration can save lives worldwide as awareness of Seychelle’s product
line increases.
Principal
Products or Services and their Markets
Portables
Products
Seychelle
has a varied line of portable filters for people on the go. They include Flip
Top’s, Bottom’s Up’s and varied military style canteens - regular or with
silverators (for further bacteria control). Sizes are from 18oz to 30oz, and
provide up to 100 gallons of pure drinking water from any fresh water source,
running or stagnant (such as rivers, lakes, ponds, streams and
puddles).
The
current portable products include: Flip-Top, Survivor, Canteen, Bottoms UP,
In-Line Eliminator, Pure Water Bag, Pump n’ Pure, Facial Mist and replacement
filters.
Home
Products
Seychelle
technology has developed products for above the counter, below the counter,
and
to filter the whole house. Installation is easy, and unlike reverse osmosis
(RO), only a low pounds per square inch (PSI) input line is needed. No water
is
wasted in the filtration process. Seychelle also makes a variety of shower
filters.
The
current home products include: Deluxe Shower, Handheld Shower, Royal Shower
Wall
Mount, Royal Shower Handheld, P.O.U. Countertop, P.O.E., Total Home and all
replacement filters, and feature technology developed for portable
products.
New
Products
We
are
re-engineering the Flip Top bottle to eliminate parts, reduce costs, provide
a
more streamlined look, and add a disinfectant capability. The Counter Top has
been upgraded to provide more enhanced filter media to improve the taste and
quality of drinking water. Finally, the In-Line Filter is being changed to
provide greater filter media, and meet field conditions that require a longer,
narrower design.
We
signed
a License Agreement with Gary Hess, doing business as Aqua Gear USA on June
6,
2002 for a product known as the "Hand Held Pump Technology." We licensed all
proprietary rights associated with this technology. We will pay a 2% royalty
on
our gross income for the technology during the term of the license. The License
Agreement is for an initial term of five years, with five successive five-year
renewals. This offers us an additional proprietary product in the portable
filtration industry. We believe that this purchase compliments our current
product line. As of the date of this filing, this technology has resulted in
a
product called Pump N’ Pure which allows the user to draw filtered water from
virtually any container or location. The Company continues to believe that
the
product will be viable in developing countries as an emergency preparedness
product, and for families where cost is a prime consideration. No royalties
have
been accrued or paid to date under this agreement.
During
July 2006 the Company signed a second License Agreement with Gary Hess doing
business as Aqua Gear USA. We will pay a 2% royalty on net income up to $120,000
and 1% thereafter. The License Agreement shall continue indefinitely unless
terminated due to a default or breach of the agreement. This affords the Company
additional patent protection (patent # 6,136,188) and ownership of the trademark
Aqua Gear. Products affected all filter bottles and flip up bottles sold
in the product line.
During
April 2006, the Company issued 50,000 common shares to shareholders of
Continental Technologies, Inc. with an approximate value of $16,100 for the
Redi
Chlor brand name, trademark and the use of the EPA Registration Number
55304-4-7126. The agreement further agrees to remit Continental a ten percent
commission on net sales as defined of the existing product, or any new products
sold directly by us, and ten percent on any product sold by Continental for
us
to their existing or new customers at our OEM prices. The agreement is for
the
life of Seychelle. During the three-month period ending August 31, 2006, the
Company was preparing for launching several new products that have undergone
the
extensive research and development, design, tooling and production steps
required for commercialization prior to introduction.
Also
in
the third quarter, Food For Health has ordered an additional 20,000 bottles
for
a total of 40,000 bottles as of the date of this filing.
Manufacturing
The
Company has determined that we will be able to produce some of our product
components in China at a lower cost than what could be made in the US. However,
we anticipate that final assembly of our products will continue to be done
in
San Juan Capistrano.
In
China
our original manufacturing agreement with Heibei RO Environmental Technologies
expired and was not renewed. Instead, we signed an exclusive agreement with
Huanghua Seychelle Plastic Co., Ltd on September 1, 2005.
Distribution
Methods of the Products
We
plan
to pursue sales with Retail, Military, Government, Multi-Level Marketing,
International, OEM and Joint Ventures.
We
have
signed product distribution agreements with Confident, Inc. for China, Taiwan,
Hong Kong and Singapore and with ABMS Health Care for India and are exploring
opportunities in other countries.
In
Japan,
Vortex represents us as a non-exclusive distributor selling our product line
to
dealers, distributors and retail stores.
In
the
US, Food for Health, Inc. a manufacturer and marketer of nutritional food and
vitamin products based in Orem, UT has signed an Agreement with us to sell
certain water filtration products, using the Aqua Gear brand name, to a variety
of their customers including big-box stores in the US and Canada. To date,
Food
for Health, Inc. has ordered 40,000 bottles. Separately, Food for Health has
contracted with us to source varied products (such as pots, radios, utensils,
blankets, etc.) made in China for their Emergency Preparedness packs to be
sold to their customers. These products will be shipped direct to Food for
Health from China.
We
will
also continue to promote our products and technologies to non-profit
organizations, such as the Red Cross, the U.S. and international militaries,
missionaries, charitable and fund-raising groups and other philanthropic
organizations.
The
backlog of the Company has increased significantly from about $8,000 per quarter
to $286, 000 as of August 31, 2006. This is due to increased activity at
Wellness International with a backlog of $171,000 and $109,000 resulting from
the new distribution agreement signed in October 2006 with Food For
Health.
Management's
Discussion and Analysis
Results
of Operations
Three-month
period ending August 31, 2006 compared to the corresponding period in
2005.
|
Selected
Financial Data
|
|
2006
|
|
2005
|
|
Year
Over Year
Change
%
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Sales
|
|
$
|
219,024
|
|
$
|
186,425
|
|
$
|
32,599
|
|
|
17
|
|
|
Cost
of sales
|
|
$
|
108,739
|
|
$
|
138,573
|
|
|
($
29,834
|
)
|
|
(22
|
)
|
|
Gross
profit
|
|
$
|
110,285
|
|
$
|
47,852
|
|
$
|
62,433
|
|
|
130
|
|
|
General
& administrative expenses
|
|
$
|
170,841
|
|
$
|
163,901
|
|
$
|
6,940
|
|
|
4
|
|
|
Consulting
fees to related parties
|
|
$
|
56,860
|
|
$
|
59,044
|
|
|
($
2,184
|
)
|
|
(4
|
)
|
|
Interest
expense to related parties
|
|
$
|
155,410
|
|
$
|
60,820
|
|
$
|
94,590
|
|
|
156
|
|
Sales.
.
The
increase in sales is primarily attributable to changes in customer buying
patters. A few of the significant changes are: Aquasafe Corp. (from nil in
2005
to $23K in 2006), Vortex Ltd. (from nil in 2005 to $14K in 2006) and Emergency
Essentials (from nil in 2005 to $15K in 2006). This increase in sales was
partially offset by decreased sales to McConnell Associates (from approximately
$22,000 in 2005 to nil in 2006) and Juvio Corp. (from approximately $23,000
in
2005 to nil in 2006). Fluctuations in sales to other customers are not discussed
as management believes that such amounts are not significant.
Cost
of sales and gross profit.
The
increase in gross profit is primarily due to the Company recording a $79,789
sale on inventory during the three-month period ending August 31, 2005. This
increase in gross profit was partially offset by increased raw material costs
combined with additional costs of outside labor to assemble inventory
items.
General
& administrative expenses.
.
The
increase in general & administrative expenses was primarily due to increased
legal fees (from approximately $8,000 in 2005 to approximately $15,000 in 2006).
Consulting
fees to related parties.
The
decrease in consulting fees was due to warrants issued to Messrs. Richard
Parsons and Jim Place, during July 2005, redeemable into restricted shares
of
the Company’s stock at $.225 per share. As the warrants provide for the purchase
of common stock at below the Company’s market price on the date of grant, the
Company is amortizing the beneficial conversion feature over the life of the
warrants.
Interest
expense to related parties.
The
increase in interest expense was primarily due to the amortization of the
beneficial conversion feature of the warrants issued to the TAM Trust during
July 2005..
Net
loss.
We
had a
net loss for the three-month period ending August 31, 2006 of $283,782, compared
to a net loss of $240,576. Most of our continuing net losses in the three-month
period ending August 31, 2006 and 2005 were attributable to accounting and
legal
fees to assist in the preparation of the Form 10SB and other SEC filings,
financing costs with the TAM Trust, our the primary lender, and the amortization
of officer stock compensation.
Six-month
period ending August 31, 2006 compared to the corresponding period in
2005.
|
Selected
Financial Data
|
|
2006
|
|
2005
|
|
Year
Over Year
Change
%
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Sales
|
|
$
|
388,899
|
|
$
|
424,412
|
|
|
($
35,513
|
)
|
|
(8
|
)
|
|
Cost
of sales
|
|
$
|
220,132
|
|
$
|
215,548
|
|
$
|
4,584
|
|
|
2
|
|
|
Gross
profit
|
|
$
|
168,767
|
|
$
|
208,864
|
|
|
($
40,097
|
)
|
|
(19
|
)
|
|
General
& administrative expenses
|
|
$
|
318,287
|
|
$
|
324,474
|
|
|
($
6,187
|
)
|
|
(2
|
)
|
|
Consulting
fees to related parties
|
|
$
|
113,720
|
|
$
|
89,045
|
|
|
$
24,675
|
|
28
|
|
|
|
Interest
expense to related parties
|
|
$
|
310,820
|
|
$
|
114,573
|
|
$
|
196,247
|
|
|
171
|
|
|
Net
cash used in operating activities
|
|
|
($111,681
|
)
|
|
($107,906
|
)
|
$
|
(
3,775
|
)
|
|
(107
|
)
|
|
Net
cash used in investing activities
|
|
|
($22,878
|
)
|
|
($
32,240
|
)
|
$
|
9,362
|
|
|
29
|
|
|
Net
cash (used) provided financing activities
|
|
|
($
52,725
|
)
|
$
|
936,110
|
|
|
($988,835
|
)
|
|
(105
|
)
|
Sales.
The
decrease in sales is primarily attributable to changes in customer buying
patterns. A few of the significant changes are: approximately $59,000 sales
to
Wellness Enterprises and approximately $70,000 to BK Pakistan. This decrease
in
sales was partially offset by the Company entering into a five (5) year
exclusive distribution agreement with Confident, Inc. to sell its water
filtration products in the markets of The Peoples Republic of China, Taiwan,
Singapore and Hong Kong. During the six-month period ending August 31, 2006,
total sales to Confident, Inc. and its affiliated entities approximated $31,000.
Additionally, the Company increased sales with Healthy Directions LLC (from
approximately $14,000 in 2005 to approximately $31,000 in 2006), Vortex Ltd.
(from nil in 2005 to approximately $19,000 in 2006) and Aquasafe Corp. (from
$nil in 2005 to approximately $27,000 in 2006). In the winter of 2006, we plan
to launch several new products that we believe have undergone the extensive
research and development, design, tooling and production steps required for
commercialization prior to introduction. We believe that this is possible as
a
result of the exclusive plastic manufacturing agreement signed with Huanghua
Seychelle Plastic Co., Ltd. in China. Also, we are preparing a
disaster-preparedness order with one of our new products for a test market
by a
vendor of a major retailer. Fluctuations in sales to other customers are not
discussed as management believes that such amounts are not
significant.
Cost
of sales and gross profit.
The
decrease in gross profit is primarily due to a change in sales mix, as the
gross
profit for sales to Wellness Enterprises and BK Pakistan was approximately
$105,000 during the six-month period ending August 31, 2005 combined with
increased raw material costs and additional costs of outside labor to assemble
inventory items. The new products noted above have higher gross margins levels
and will improve the overall gross profit as the products achieve significant
sales levels.
General
& administrative expenses.
The
decrease in general & administrative expenses was primarily due to a
reduction in outside accounting assistance (from approximately $170,000 in
2005
to approximately $114,000 in 2006) as the Company incurred such costs to catch
up on SEC filings at the beginning of the prior year. Additionally, in the
prior
year a consultant surrendered to the Company 250,000 restricted common shares,
which we have estimated at approximately $33,000, due to his non-performance
of
certain contractual obligations. These decreases were partially offset by
increased legal fees (from approximately $8,000 in 2005 to approximately $35,000
in 2006).
Consulting
fees to related parties.
The
increase in consulting fees was primarily due to warrants issued to Messrs.
Richard Parsons and Jim Place, during July 2005, redeemable into restricted
shares of the Company’s stock at $.225 per share. As the warrants provide for
the purchase of common stock at below the Company’s market price on the date of
grant, the Company is amortizing the beneficial conversion feature over the
life
of the warrants.
Interest
expense to related parties.
The
increase in interest expense was primarily due to the amortization of the
beneficial conversion feature of the warrants issued to the TAM Trust during
July 2005.
Net
loss.
We
had a
net loss of $600,598 for the six-month period ending August 31, 2006, compared
to a net loss $322,061 for the six-month period ending August 31, 2005. Most
of
our continuing net losses in the six-month periods ending August 31, 2006 and
2005 were attributable to accounting and legal fees to assist in the preparation
of the Form 10SB and other SEC filings, financing costs with the TAM Trust,
our
the primary lender, and the amortization of officer stock
compensation.
Liquidity
and Capital Resources
Net
cash used in operating activities.
During
the six-month period ending August 31, 2005, the Company funded its operations
through funds previously obtained by sale of restricted common stock. During
the
six-month period ending August 31, 2006, the net loss from operations of
approximately $600,598 was offset by approximately $431,000 non-cash
expenditures. These non-cash expenses primarily relate to approximately $311,000
in financing costs and the amortization of approximately $113,000 in officer
stock compensation.
Net
cash used in financing activities.
.
The
2005 cash provided by financing activities was due to the sale of approximately
$1,013,000 in restricted common stock, which was partially reduced by
approximately $8,000 repayment of related party advances. During 2006 the
company decided to pay down its notes payable with a related party.
As
of
August 31, 2006, the Company had $448,285 in cash and $50,000 available
borrowing under its line of credit. The line of credit does not contain any
limitations on borrowing or any restrictive debt covenants. Over the next twelve
months, management is confident that sufficient working capital will be obtained
from a combination of revenues and external financing to meet the Company’s
liabilities and commitments as they become payable.
The
Company currently estimates monthly cash requirements of $36,000 to cover
general and administrative overhead costs.
Consequently,
we do not foresee the need for additional funding at least for the period ending
August 31, 2007. As of the date of this filing, the TAM Irrevocable Trust has
expressed a willingness to provide additional funding if required; however,
an
amount has not been discussed. Moreover, in the foreseeable future the Company
does not believe additional funding is required.
Critical
Accounting Policies and Estimates
Our
financial statements and accompanying notes are prepared in accordance with
U.S.
GAAP. Preparing financial statements requires management to make estimates
and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management’s
application of accounting policies. Critical accounting policies for us include
revenue recognition, impairment of goodwill and other intangible assets,
accounting for transactions which potentially could be settled in a company’s
own stock, accounting for legal contingencies, accounting for income taxes,
and
accounting for stock-based compensation.
Revenue
Recognition
EITF
Issue No. 99-19,
Reporting
Revenue Gross as a Principal versus Net as an Agent
,
discusses the diversity regarding whether a company should report revenue based
on gross billings or the net amount retained because it is earned a commission
or fee. On sales to Food for Health, the Company functions as a broker and
therefore, receives only a fee for coordinating sales from Huanghua Seychelle
Plastic Co., Ltd. with the customer. Since the Company has no risk of inventory
ownership, the Company records its revenue from each transaction as only its
portion of the fee associated with the shipment.
Goodwill
and Other Intangible Assets
SFAS
No. 142,
Goodwill
and Other Intangible Assets,
requires
that goodwill be tested for impairment on an annual basis (March 1 for us)
and
between annual tests if an event occurs or circumstances change that would
more
likely than not reduce the fair value of a reporting unit below its carrying
value. These events or circumstances could include a significant change in
the
business climate, legal factors, operating performance indicators, competition
or sale or disposition of a significant portion of an operating unit.
Application of the goodwill impairment test requires judgment, including the
identification of reporting units, assignment of assets and liabilities to
reporting units, assignment of goodwill to reporting units, and determination
of
the fair value of each reporting unit. The fair value of each reporting unit
is
estimated using a discounted cash flow methodology. This requires significant
judgments including estimation of future cash flows, which is dependent on
internal forecasts, estimation of the long-term rate of growth for our business,
the useful life over which cash flows will occur, and determination of our
weighted average cost of capital. Changes in these estimates and assumptions
could materially affect the determination of fair value and/or goodwill
impairment for each reporting unit. We allocate goodwill to reporting units
based on the reporting unit expected to benefit from the combination. We
evaluate our reporting units on an annual basis and if necessary, reassign
goodwill using a relative fair value allocation approach.
Transactions
Potentially Settled in a Company’s Own Stock
EITF
#00-19 establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity instruments.
Additionally,
the EITF #00-19 is based on the concept that contracts that require net-cash
settlement are assets / liabilities and contracts that require settlement in
shares are equity instruments. These contracts may be settled in a
variety of methods.
Contracts
that include any provision that could require net-cash settlement cannot be
accounted for as equity of the company. Company management believes the
warrants issued by the Company would be classified as a physical settlement
as
the buyer pay a predetermined price for a fixed number of shares, therefore,
no
net-cash settlement is required and classification as equity is
appropriate. Additionally, the company believes that
all
other
conditions required by EITF 00-19 have been met to be classified as
equity.
Income
Taxes
SFAS
No. 109,
Accounting
for Income Taxes,
establishes financial accounting and reporting standards for the effect of
income taxes. The objectives of accounting for income taxes are to recognize
the
amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have
been
recognized in an entity’s financial statements or tax returns. Judgment is
required in assessing the future tax consequences of events that have been
recognized in our financial statements or tax returns. Variations in the actual
outcome of these future tax consequences could materially impact our financial
position, results of operations, or cash flows. Accruals for tax contingencies
are provided for in accordance with the requirements of SFAS
No. 5.
Share
Based Compensation
We
account for stock-based compensation in accordance with SFAS No. 123(R),
Share-Based
Payment.
Under
the
fair value recognition provisions of this statement, share-based compensation
cost is measured at the grant date based on the value of the award and is
recognized as expense over the vesting period. Determining the fair value of
share-based awards at the grant date requires judgment, including estimating
expected dividends. In addition, judgment is also required in estimating the
amount of share-based awards that are expected to be forfeited. If actual
results differ significantly from these estimates, stock-based compensation
expense and our results of operations could be materially impacted.
ITEM
3. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures.
In
accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”), an evaluation was carried out by the Company’s President and
Chief Executive Officer and its Chief Financial Officer, of the effectiveness
of
the design and operation of the Company’s disclosure controls and procedures (as
defined in Rule 13a-14(c) and 15d-14(c) under the Exchange Act) as of the end
of
the quarter ended August 31, 2006. For the quarter ended August 31, 2006,
management has concluded that the Company’s disclosure controls are not
effective.
Changes
in Internal Controls
We
previously reported in Item 8A- "Controls and Procedures" in our annual report
on Form 10-KSB for the year ended February 28, 2006, material weaknesses in
internal controls.
Specifically,
as of such date, since the Company had not hired a full time internal
accountant, the Company concluded that their disclosure controls and procedures
were not effective in ensuring that all information required to be disclosed
in
reports to be filed or submitted under the Exchange Act were available within
the time periods specified
.
Additionally, the Company’s
management
concluded that as of February 28, 2006, the Company had not timely reconciled
various accounts including inventory, fixed assets, accrued liabilities and
other accounts, and were required to make adjustments during the audit process.
These aforementioned control deficiencies could result in a misstatement of
the
Company’s accounts, presentation and disclosure that may not be prevented or
detected.
During
July 2006, the Company hired an internal accountant with the goal of
strengthening its disclosure controls and procedures in time for the Form 10QSB
filing for the second quarter ending August 31, 2006.
In
connection with hiring an internal accountant, the Company began to enhance
procedures, which included improved training and review processes to ensure
proper preparation, review, presentation, and disclosure of amounts included
in
its financial statements. Accordingly, the Company’s management believed it had
improved the design and effectiveness of its internal control over financial
reporting; however, not all of the newly designed controls have operated for
a
sufficient period of time to demonstrate operating effectiveness.
During
the preparation, review, presentation, and disclosure of amounts included in
the
Company’s financial statements included in its Form 10QSB filing for the second
quarter ended August 31, 2006, Company management concluded that although
accounts were being reconciled on a more timely basis, controls surrounding
the
accumulation and valuation of inventory and molds maintained at vendor
facilities continue to require improvement.
In
addition, the Company was not applying appropriate accounting principles with
respect to transactions in which an entity exchanges its equity instruments
for
goods or services (Statement of Financial Accounting Standards No. 123R,
Share-Based
Payments
)
and was
required to make adjustments during the review process for both valuation and
presentation.
Additionally,
during April 2006, the Company issued 50,000 common shares, subject to a one
year restriction period, to shareholders of Continental Technologies, Inc.
(“Continental’). As the purchase agreement provides the shareholders of
Continental the right to sell the common shares back-to the Company, at
Continental’s sole option for a period of six months after the restriction
period at $0.75 per share, the Company recorded a contingent liability for
approximately $16,100. Previously, the Company had overstated the fair value
of
the patent by approximately $10,700 and recorded the estimated fair market
value
of the common shares, approximately $16,100, as an equity transaction. The
Company continues to aggressively address the aforementioned problems.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
During
May 2001, Seychelle Water Technologies, Inc. was named and served with a lawsuit
originally filed by SafeWater Anywhere, Inc. and John Ferguson as plaintiffs.
This lawsuit was filed in State Superior Court in Orange County, California.
Mr.
Carl Palmer was also named as a defendant. The complaint alleged breach of
fiduciary duty, constructive fraud, promissory fraud, rescission, constructive
trusts, unfair trade practices, and conversion, and sought unspecified damages
and injunctive relief. The original suit was dismissed upon motion of the
defendants, but was subsequently re-filed by John M. Ferguson individually
on or
about October 13, 2004. The re-filed suit was again brought against Seychelle
Water Technologies, Inc. and Carl Palmer, and again alleges breach of fiduciary
duty, constructive fraud, promissory fraud, rescission, constructive trust,
unfair trade practices, and conversion, and seeks unspecified damages and
injunctive relief. Plaintiff essentially alleges that defendants Seychelle
Water
Technologies, Inc. (hereafter “Seychelle Water”) and Carl Palmer fraudulently
induced plaintiff to enter into an agreement to relinquish 4,000,000 shares
of
the stock of defendant Seychelle Water. Plaintiff alleges that he originally
entered into a joint venture and stock subscription agreement with DuSean
Berkich (“Berkich”), pursuant to which Berkich and plaintiff formed and
controlled Seychelle Water. Plaintiff alleges that when he discovered certain
improprieties by Berkich, he became concerned, and ultimately agreed to the
(re)purchase by Berkich of his interest in the Seychelle Water stock. Plaintiff
is now suing to recover damages he allegedly suffered as a result of the
(re)purchase by Berkich of his interest in Seychelle Water. A demurrer to the
re-filed complaint was filed and in response a first amended complaint was
filed
and served. A second demurrer to the First Amended Complaint has been filed
and
sustained by the Court, and plaintiff has been granted fourteen days leave
to
amend. A second amended complaint has now been filed and answered. As of the
filing of this document, the lawsuit has been settled for 5,000 restricted
shares of common stock and dismissal is pending.
Otherwise,
we know of no legal proceedings pending or threatened or judgments entered
against the Company or against any of our directors or officers in his or her
capacity as such.
ITEM
2. CHANGES IN SECURITIES
Warrants
On
July
25, 2005, the Company granted to Gary Hess, doing business as Aqua Gear USA,
100,000 warrants redeemable on restricted shares of the Company’s stock at a
purchase price of $.40 per share. Mr. Hess is the licensor of all proprietary
rights associated with the technology and the trademark Aqua Gear TM. The
warrants are redeemable any time after August 1, 2008 and are exercisable
through December 1, 2010. As the warrants provide for the purchase of common
stock at below the Company’s market price on the date of grant, the Company
recorded compensation expense relating to the estimated value of these warrants,
which is included in general and administrative expenses in the Company’s
Condensed Consolidated Statement of Operations.
Common
stock
During
the three-month period ended August 31, 2006, the Company issued an aggregate
of
50,000 common shares to various investors for cash for an approximate total
value of $50,000.
|
|
|
|
|
Common
Stock
|
|
|||||
|
Date
Issued
|
|
Issued
to
|
|
Shares
|
|
Estimated
value
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
March
16, 2006
|
|
|
B.
Clark
|
|
|
10,000
|
|
$
|
2,250
|
|
|
March
16, 2006
|
|
|
C.
Yris
|
|
|
10,000
|
|
$
|
2,250
|
|
|
March
16, 2006
|
|
|
J.
Condon
|
|
|
10,000
|
|
$
|
2,250
|
|
|
March
16, 2006
|
|
|
J.
Oppat
|
|
|
10,000
|
|
$
|
2,250
|
|
|
March
16, 2006
|
|
|
J.
Westwood
|
|
|
10,000
|
|
$
|
2,250
|
|
During
the three-month period ending May 31, 2006, the Company issued 50,000 common
shares to shareholders of Continental Technologies, Inc. (“Continental’) with an
approximate value of $26,800 for intellectual property.
During
the three-month period ended May 31, 2006, the Company issued an aggregate
of
214,516 restricted shares to three debt holders with an approximate total value
of $108,000.
|
|
|
|
|
|
|
Common
Stock
|
|
||||||
|
Date
Issued
|
|
Issued
to
|
|
Type
of Liability
|
|
Shares
|
|
Estimated
value
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
March
29, 2006
|
|
|
Wong
Johnson & Associates, APC
|
|
|
Accrued
accounting fees
|
|
|
25,000
|
|
$
|
65,470
|
|
|
April
10, 2006
|
|
|
Phil
Englund
|
|
|
Accrued
legal fees
|
|
|
65,516
|
|
$
|
5,000
|
|
|
April
26, 2006
|
|
|
Horn
& Loomis
|
|
|
Accrued
legal fees
|
|
|
75,000
|
|
$
|
37,500
|
|
During
the three-month period ended August 31, 2006, the Company issued an aggregate
of
8,000 restricted shares to three consultants for services with an approximate
total value of $3,100.
During
the three-month period ended August 31, 2006, the Company issued an aggregate
of
29,876 restricted shares to a debt holder with an approximate total value of
$23,700.
In
the
transactions shown above, the issuance, delivery and sale of our common stock
were made pursuant to the private offering exemption within the meaning of
Section 4(2) of the Act because the offers were made to a limited number of
people, all of whom received all material information concerning the investment
and all of whom have had sophistication and ability to bear economic risk based
upon their representations to us and their prior experience in such
investments. In all of the transactions shown above, we have issued stop
transfer orders concerning the transfer of certificates representing all the
common stock issued and outstanding as reported in this section.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS OF A VOTE TO SECURITY HOLDERS
We
did
not submit any matter to a vote of security holders through solicitation of
proxies during the second quarter of the fiscal year covered by this
report.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS AND REPORTS IN FORM 8-K
(a)
Exhibits
|
10.R
|
Food
for Food Health Purchase Agreement
|
|
10.S
|
Food
for Health Distribution Agreement
|
|
10.T
|
Seychelle
Environmental Technologies, Inc. License Agreement with Mr. Gary
Hess
|
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) (Section
302 of
the Sarbanes-Oxley Act of 2002)
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) (Section
302 of
the Sarbanes-Oxley Act of 2002)
|
|
32.1
|
Certification
of the Chief Executive Officer and the Chief Financial Officer pursuant
to
18 U.S.C.ss.1350 Section 906 of the Sarbanes-Oxley Act of 2002)
|
|
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C.ss.1350 Section
906 of
the Sarbanes-Oxley Act of 2002)
|
(b)
Reports on Form 8-K
None.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act OF 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
Seychelle
Environmental Technologies, Inc.
|
|
Date:
December
28, 2006
|
By:
|
/s/
Carl
Palmer
|
|
|
Director,
Chief Executive Officer and President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
December
28, 2006
|
By:
|
/s/
Jim
Place
|
|
|
Director
and Chief Financial Officer and Chief Operating
Officer
|
|