UNITED STATES
  SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

( X ) ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ending February 28, 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
IRS# 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)

Securities Registered Pursuant to Section 12(b) of the Exchange Act: None

Securities Registered Pursuant to Section 12(g) of the Exchange Act:

Common Stock, $0.001 per share par value

Check whether the issuer (1) has filed all 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: ___

 
 
 

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year $751,844. The aggregate market value of the voting stock of the Registrant held by non-affiliates as of February 28, 2006 was approximately $19,030,557. The number of shares outstanding of the Registrant's common stock, as of the latest practicable date, February 28, 2006, was 24,715,010.

References in this document to "us," "we," or "the Company" refer to Seychelle Environmental Technologies, Inc., its predecessor and its subsidiary.
 
TABLE OF CONTENTS
 
Item
Description
Page
 
Part I
 
     
Item 1.
Description of Business
1
     
 
Risk Factors
7
     
Item 2.
Description of Property
9
     
Item 3.
Legal Proceedings
9
     
Item 4
Submission of Matters of a Vote of Security Holders
10
     
 
Part II
 
     
Item 5.
Market for Common Equity and Related Stockholder Matters
10
     
Item 6.
Management's Discussion and Analysis of Financial Condition and Results of Operations
12
     
Item 7.
Financial Statements and Supplementary Data
19
     
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
70
     
Item 8A
Controls and Procedures
70
     
 
Part III
 
     
Item 9.
Directors and Executive Officers, Promoters & Control Persons; Compliance with Section 16(a) of the Exchange Act
72
     
Item 10.
Executive Compensation
75
     
Item 11.
Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters
76
     
Item 12.
Certain Relationships and Related Transactions
77
     
 
Part IV
 
     
Item 13.
Exhibits
80
     
Item 14.
Principal Accountant Fees and Services
81
     
     
 
Signatures
83


 
 
 

PART I

ITEM 1. 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 to 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 April 2001, we repurchased all of our issued and outstanding Series A 13.5% Non-Voting, Cumulative Preferred Stock, $.01 par value per share. This repurchase was combined with a comprehensive settlement agreement, for the benefit of all parties, with the beneficial owner of the Preferred Stock. We also retired all of these Series A 13.5% Non-Voting, Cumulative Preferred.

However, The Company has consulting agreements with two officers. See Certain Relationships and Related Transactions.

In December 2004 all Series AAA at 12% Cumulative Convertible Preferred Shares were converted into 4,500,000 shares of restricted common stock issued to the Tam Irrevocable Trust. In addition, all dividends accrued and unpaid on the AAA Preferred were waived.

As of February 28, 2006, the TAM Irrevocable Trust, one of our principal shareholders, have loaned the Company funds to finance the company operations, with the balance due of $363,150 at 10% simple interest, repayable after March 1, 2011. The Company believes that with the increase in sales experienced during the fiscal year ending February 28, 2006, no additional funding will be required from the TAM Irrevocable Trust or other shareholders.

As of February 28, 2006, there wre 24,715,010 shares of common stock, par value $0.001, issued and outstanding.
1

 
 
 


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. Seychelle’s products are approved for sale and distribution in many countries including the US, Mexico, Brazil, Argentina, Venezuela, Japan, China, Korea, India, Pakistan, Australia, UK, New Zealand, Malaysia, Indonesia and South Africa.

In 2001, the World Bank placed the value the world water market at close to $ 1 trillion 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 segmenets.

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.
2

 
 
 


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, Venzuela, 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 includes the test results from selected countries. In addition, results from the United States, United Kingdom and South Africa are displayed our 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.

We signed a License Agreement with 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 derived from the license.for the technology during the term of the license which is a pressure patent for a pressure system. 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 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.

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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 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.

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 the original manufacturing agreement with Hebei RO Environmental Technologies expired and was not renewed.. Instead, the company signed an exclusive agreement with Huanghua Seychelle Plastic Co., Ltd on September 1, 2005 and is attached as an exhibit hereto.

Distribution Methods of the Products  

Sales channels to be pursued will include: Retail, Military, Government, Multi-Level Marketing, International, OEM and Joint Ventures.

Seychelle has 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. During the fiscal year ending February 28, 2006, total sales to Confident, Inc. and affiliated entities approximated $90,000. Both agreements are attached as exhibits hereto.

In Japan, Vortex represents Seychelle as a non-exclusive distributor selling our product line to dealers, distributors and retail stores.

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.


4

 
 
 

  Customers and Competition Business Conditions

Seychelle products compete against all forms of drinking water: tap water supplied by municipal water districts, bottled water, and treated water provided by means of reverse osmosis (technology discontinued April 2006), distillation, and filtration systems. There are literally thousands of companies in the field including Culligan, Clorox, Proctor and Gamble, G.E., Pepsi-Cola, Coca-Cola, Nestle and Danone. Therefore, Seychelle’s portable and home filtration products compete in a more limited segment of the market as an alternative to other sources of drinking water.

Seychelle is an emerging company with negligible share of the world’s pure water market. Our products sell in a niche category of the market - portable filtration bottles that use ionic. Adsorption Micron Filtration technology, which remove many organic and inorganic contaminants that simple activated carbon filters cannot. Most activated carbon filters on the market only remove Chlorine, sediment and dirt thus improving taste and odor as well as a handful of other contaminants such as Lead, Mercury Zinc and Copper. There are other small companies in the field with no one company having a majority share.

Seychelle sells its products in two ways. First, it sells its own brand to individuals, dealers, distributors, multilevel marketing companies and missionaries on a direct basis, and through our Internet Web Site. Second, the company offers its products to the same customers as a Private Label supplier. In some instances, we may supply only filters for their bottles or hydration backpacks as opposed to completed products

Currently, the majority of our sales are to customers in the US However, with Distribution Agreements for China and India, overseas sales could increase in the future as developing countries have a greater need for safe drinking water than industrialized nations.

Raw Materials

Seychelle’s filters include the finest powder activated coconut and three other media to form the porous plastic ionic filter. The media itself, the formulation process, and manufacturing methodology are governed by trade secrets. To date, there is adequate availability of material for all of our products. We do not expect this situation to change in the near future.

Dependence on One or a Few Customers and Backlog

As of February 28, 2006, the Company has expanded its customer base through entering into various marketing and distribution agreements. As of February 28, 2006, three customers(Wellness Enterprises, BK Pakistan and Confident, Inc.) account for greater than 10 percent of total sales. Management believes that if the targeted revenues are not achieved within their current marketing and distribution agreements, the revenues can be replaced through the sale of filters and related products to other direct marketing companies. However, there can no assurance that such this will occur which could result in an adverse effect on the Company’s financial condition or results of operations in the future.  

As of February 28, 2006 and 2005, we had backorders of $8,000 in portable water filtration units.

5

 
 
 

Proprietary Information and Technology

We own a patent for the Portable Water Filtration System with the filter cap assembly, Patent # 5,914,045 which expires on June 22, 2016. As described in the Abstract, it is "[a] filter assembly for a flexible, portable bottle having a sealing cap including a filter attached to the interior of the
cap to filter out substantially all inorganics, organics, radiological chemicals and microbiology. The filter assembly also may include a second filter or Iodinator sealed in the flexible bottle to further remove micro-organisms from water passing there-through. The filter assembly is designed so that the flexible bottle must be pressurized, as by being hand pressed, after it is filled with water to force flow of water through the [sic] either or both of the filters. The filter in the cap includes a check valve to allow the bottle to be re-pressurized after water has been dispensed from the bottle." The filter cap assembly is the core to the Company’s product lines, and will drive sales for many years to come as the Company adds new products and configurations.

We also own a patent, Patent #6,058,971 which expires on May 9, 2017 for a Quick Connect Diverter Valve. As described in the Abstract, it is "A quick-connect diverter valve for use in connecting existing water faucets and water filtration units in and around a kitchen, or other areas where clean water is desired." The quick connect diverter value is used in the above the counter filter system currently being sold in the United States, Pakistan and soon in China. The Company believes this is a viable and growing product line for developing countries where the quality of water continues to deteriorate.

Trademark registrations have been filed with the USPTO for both Seychelle and Aqua Gear and are in progress.

We have a trade name, "Seychelle Water Filtration Products, Inc.," which we use in our commercial operations.

Government Regulation

We are not, as a company, subject to any material governmental regulation or approvals. However, our products are subject to inspection and evaluation by regulatory authorities that have jurisdiction over water quality standards. Such authorities are on the federal, state, and local level, both in the United States and overseas, where we market our products. Most of our products have already been inspected and evaluated by all applicable governmental authorities in the areas in which we operate or plan to operate in the near future. With respect to our new proposed focus of operations, we do not know if governmental regulation will have a material impact on us in the future.

Research and Development

We have spent approximately $14,800 and $12,500 in research and development activities for the fiscal years ending, February 28, 2006 and 2005, respectively.
 
Environmental Compliance

At the present time Seychelle is not subject to any material costs for compliance with any environmental laws. With respect to our new proposed focus of operations, we do not know if environmental compliance will have a material impact on us in the future.

6

 
 
 


Employees

As of February 28, 2006, we had a President and two executive consultants managing the company with two (2) administrative consultants supporting that effort. In production, operations and warehousing we had one (1) full-time employees and four (4) independent contractors working to fill all sales orders.

Risk Factors Related to Our Business

THE OWNERSHIP AND INVESTMENT IN OUR SECURITIES INVOLVES SUBSTANTIAL RISKS. OUR COMMON SHARES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS RELATING TO OUR COMPANY.

Lack of History . Our Company was formed on January 23, 1998 and acquired the operations of a company that had been in existence since 1995. Since beginning operations, we initially sold water filtration products to a number of customers then during March 2001 entered into a sales marketing agreement with Nikken Global, Inc. and Kenko World, two affiliated multi-level marketing companies (collectively “Nikken”). This agreement allowed Nikken, the exclusive rights to distribute our products and technology for a period of ten years, commencing March 1, 2001. During the period of the agreement, the Company continued to promote its 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, which do not sell to distributors or resell to customers. During the fiscal year ending February 28, 2002, the Company decided to terminate its agreement with Nikken. The Company has continued to expand its product lines, since the Nikken business ended, but have not generated enough revenue to support operations. This has required us to seek both investor capital and financing to buy the time required by new management to reverse the downward trend. Recent sales activity for the fiscal year ending February 28, 2006 have expanded suggesting a positive change in direction with the new management. Still, we have limited financial results upon which you may judge our potential. The company is not engaged in enough consistent business activity over a sustained period of time to be said to have a successful operating history. We have experienced in the past and may experience in the future under-capitalization, shortages, setbacks and many of the problems, delays and expenses encountered by any early stage business. These include:
-  
operating as a public entity, incurring non-cost of sales expenses such as accounting, auditing, legal activities, and maintaining full compliance of a regulated reporting status including continuing Sarbanes-Oxley requirements.
-    
-   unplanned delays and expenses related to research, development and testing of our new products

-   production and marketing problems that may be encountered in connection with our existing products and technologies,

-   competition from larger and more established companies, and

-  
under-capitalization to challenge the lack of market acceptance of our new products and technologies.
7
Limited Profitability. To date, we have incurred significant losses. As of February 28, 2006, our revenue was $751,844 versus $341,106 in the prior fiscal year ending February 28, 2005. This increase was due primarily to sales with three customers.Net Losses as of February 28, 2006 of $932,456 were greater than in the prior year ending February 28, 2005 of $250,423 due to $274K in accounting and legal fees to assist in the audit and preparation of the Form 10, $272K in financing costs with TAM the primary lender, the amortization of $201K in officer stock compensation who received no salaries, the Company’s inventory reserve adjustment of $79K for the countertop product and an impairment charge of $104K for the discontinuance of the Enviro(3)Care technology were the primary reasons for the result.. Going forward the company has a policy of not projecting sales and profits due to:

-  
significant legal and professional fees associated with regulated business activities and

    SEC

-  
reporting requirements including continuing Sarbanes-Oxley requirements.

- lack of consistent sales to maintain profitability

Inherently Risky-Competition. Because we are a company with a limited history, our operations will be extremely competitive and subject to numerous risks. The water filtration business is highly competitive with many companies having access to the same market. Substantially all of them have greater financial resources and longer operating histories than we have and can be expected to compete within the business in which we engage and intend to engage. There can be no assurance that we will have the necessary resources to be competitive. Therefore, investors should consider an investment in us to be an extremely risky venture.

Delays in the Development of New Products . We have a limited product line, and the development of some of our technologies has taken longer than anticipated and could be additionally delayed. Therefore, there can be no assurance of timely completion and introduction of improved products on a cost-effective basis, or that such products, if introduced, will achieve market acceptance such that, in combination with existing products, they will sustain us or allow us to maintain profitable operations.

Dependence Upon Technology. We are operating in a business that requires extensive and continuing research, development and testing efforts. There can be no assurance that new products will not render our products obsolete or non-competitive at some time in the future.

Protection of Technology. A successful challenge to the ownership of our technology could materially damage our business prospects. We rely principally on trade secrets as well as trade
secret laws, two patents, two trademarks, copyrights, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We currently have two U.S. patents issued and a license on two patents. Any issued patent may be challenged and invalidated. Patents
may not issue from any of our future applications. Any claims allowed from existing or future pending patents may not be of sufficient scope or strength to provide significant protection for our products. Patents may not be issued in all countries where our products can be sold so as to provide meaningful protection or any commercial advantage to us. Our competitors may also be able to design around our patents or the patents that we license.

8

 
 
 

Vigorous protection and pursuit of intellectual property rights or positions characterize our industry, which has resulted in significant and often protracted and expensive litigation. Therefore, our competitors may assert that our technologies or products infringe on their patents or proprietary rights. Problems with patents or other rights could increase the cost of our products or delay or preclude new product development and commercialization by us. If infringement claims against us are deemed valid, we may not be able to obtain appropriate licenses on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our future patent and/or technology license positions or to defend against infringement claims.

Competition. Technological competition from larger and more established companies is significant and expected to increase. Most of the companies with which we compete and expect to compete have far greater capital resources and more significant research and development staffs, marketing and distribution programs and facilities, and many of them have substantially greater experience in the production and marketing of products. Our ability to compete effectively may be adversely affected by the ability of these competitors to devote greater resources to the sale and marketing of their products than we can. In addition, one or more of our competitors may succeed or may already have succeeded in developing technologies and products that are more effective than any of those we currently offer or are developing. In addition, there can be no guarantee that we will be able to protect our technology from being copied or infringed upon. Therefore, there are no assurances that we will ever be able to obtain and to maintain a profitable position in the marketplace.

Success Dependent Upon Management . Our success is dependent upon the decision making of our directors and executive officers. These individuals have made a full commitment to the business. The loss of any or all of these individuals could have a materially adverse impact on our operations. On December 1, 2001, we entered into an employment agreement with our President. During November 2004, the Company entered into consulting agreements with two officers to provide management consulting services.

ITEM 2. Description of Properties.  

As of February 28, 2006, our business office was located at 33012 Calle Perfecto, San Juan Capistrano, CA 92675. Our telephone number at this address is 949-234-1999. We pay a total of $7,200 in rent per month for approximately 7,200 square feet of office, operations and warehousing. We have a lease with an unaffiliated third party which expires February 2008.

We own two patents and numerous trade secrets, see Proprietary Information above, and other proprietary information related to our business operations. We recently filed for two trademarks: Seychelle that has been used in commerce since 1997 and Aqua Gear, which had been abandoned previously by Aqua Gear USA to capitalize on the patent agreement we secured from them.

ITEM 3. 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,

9

 
 
 

rescission, constructive trust, 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. We continue to believe that this matter is without merit and intend to vigorously defend against plaintiff’s claims.

As of February 28, 2006, we know of no legal proceedings pending or threatened or judgments entered against any of our directors or officers in his or her capacity as such.

ITEM 4 . Submission of Matters to a Vote of Security Holders .

We did not submit any matter to a vote of security holders through solicitation of proxies during the fourth quarter of the fiscal year covered by this report.


PART II

ITEM 5. Market for Common Equity and Related Stockholder Matters.  

(a) Principal Market or Markets  

Our Common Stock began trading in 1997. Since the consummation of the Exchange Agreement between our Company and SWT, market makers and other dealers have provided bid and ask quotations of our Common Stock under the symbol "SYEV." Trading was conducted in the over-the-counter market on the NASD's "Electronic Bulletin Board" until April 20, 2000. We traded on
the "Pink Sheets" until December, 2000, when we were re-listed on the NASD's "Electronic Bulletin Board." The table below represents the range of high and low bid quotations of our Common Stock as reported during the reporting period herein. The following bid price market quotations represent prices between dealers and do not include retail markup, markdown, or commissions; hence, they may not represent actual transactions. For the fiscal year ending February 28, 2006, the common stock was at a High of $.99 and a Low of $.11.

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Fiscal Year 2006
High Bid
Low Bid
     
Month Ending:
   
First Quarter May 2005
$.36
$.28
Common Shares
   
     
Second Quarter Aug 2005
$.36
$.17
Common Shares
   
     
Third Quarter Nov 2005
$.35
$.11
Common Shares
   
     
Fourth Quarter Feb 2006
$.99
$.27
Common Shares
   

Fiscal Year 2005
High Bid
Low Bid
     
Month Ending:
   
First Quarter May 2004
$.28
$.11
Common Shares
   
     
Second Quarter Aug 2004
$.16
$.09
Common Shares
   
     
Third Quarter Nov 2004
$.13
$.04
Common Shares
   
     
Fourth Quarter Feb 2005
$.65
$.05
Common Shares
   

    Source: Commodity Systems, Inc. through Yahoo Finance


(b) Approximate Number of Holders of Common Stock

As of February 28, 2006, there were approximately 339 shareholders of record of our common stock.

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(c) Dividends

Holders of Common Stock are entitled to receive such dividends as may be declared by our Board of Directors. Seychelle paid no dividends on the Common Stock during the periods reported herein nor do we anticipate paying such dividends in the foreseeable future.


ITEM 6. Management's Discussion and Analysis  

Forward-Looking Statements

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

Results of Operations

Fiscal year ending February 28, 2006 compared to the corresponding period in 2005.

 
Selected Financial Data
 
2005
 
2006
Year Over Year
Change
 
%
         
Sales
$341,106
$751,844
$410,738
120
Cost of sales
$155,113
$430,134
$275,021
177
Gross profit
$185,993
$321,710
$135,717
73
General & administrative expenses
$272,762
$591,557
$318,795
178
Consulting fees to related parties
$ 35,292
$201,293
$166,001
127
Interest expense to related parties
$124,629
$272,653
$148,024
119
Net cash used in operating activities
($64,262)
($212,974)
$148,712
123
Net cash used in investing activities
($12,434)
($109,349)
$96,915
779
Net cash provided financing activities
$ 31,710
$934,110
$902,400
2845


12

 
 
 

Sales. In the fiscal year ending February 28, 2006, sales were $751,844 compared to the same period in the prior year with sales of $341,106. This increase in sales is primarily attributable to continued increased sales with two customers - approximately $189K sales to Wellness Enterprises and $91K to BK Pakistan. Additionally, during the fiscal year ending February 28, 2006, the Company entered 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 fiscal year ending February 28, 2006, total sales to Confident, Inc. and its affiliated entities approximated $90,000.

Cost of sales and gross profit. In the fiscal year ending February 28, 2006, cost of sales was $430,134 compared to the same period in the prior year with cost of sales of $155,113. Gross profit increased to $321,710 compared to the same period in the prior year of $185,993. Gross profit as a percentage of sales decreased to 43% as compared to the same period in the prior year of 54%. As previously noted, during November 2005, the Company recorded an inventory reserve for its countertop product. If such reserve had not been recorded, the gross profit percentage for the fiscal year ending February 28, 2006 would have been 53%. The remaining slight decrease in gross profit is primarily due to increased raw material costs and increased cost for sub assemblies.

General & administrative expenses. In the fiscal year ending February 28, 2006, general and administrative expenses were $591,557 compared to the same period in the prior year of $272,762. This increase in general and administrative expenses was primarily due to the following - (1) $270K increase in legal and accounting fees as the Company incurred such costs to catch up on SEC filings; (2) $15K increase in consulting expense as the Company engaged an outside consultant to maintain its accounting records, as well as, engaged various individuals to perform design and engineering procedures: (3) $27K increase in salaries and related employee benefits for administrative assistant hired June 2005; and (4) and $5K increase in depreciation expense as the Company has purchased $113K in new equipment or tooling during the past twelve months.

Consulting fees to related parties. In the fiscal year ending February 28, 2006, consulting fees to related parties were $201,293 compared to the same period in the prior year of $35,292. This increase in consulting fees was due to the engagement of two officers / consultants, Messrs. Richard Parsons and Jim Place, during December 2004. Both Messrs. Parsons and Place received restricted common stock at below the estimated market value upon commencement of providing services to the Company. The increase in consulting expense relates to the amortization of the discount on the restricted common stock. As further consideration for services to be rendered, the consultants were granted warrants during March and 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 recorded unearned compensation relating to the estimated value of these warrants and is amortizing the beneficial conversion   feature over the life of the warrants.

Interest expense to related parties. In the fiscal year ending February 28,2006, interest expense to related parties were $272,653 compared to the same period in the prior year of $124,629. This increase in interest expense was due to the amortization of the beneficial conversion feature of the warrants issued to the TAM Trust during March and July 2005.

13

 
 
 

Net loss. Even though profits for the year ending February 28, 2006 were negative by $932K, $274K in accounting and legal fees to assist in the audit and preparation of the Form 10, in addition to, $272K in financing costs with TAM the primary lender, the amortization of $201K in officer stock compensation who received no salaries, the Company’s inventory reserve adjustment of $79K for the countertop product and an impairment charge of $104K for the discontinue of the Enviro(3)Care technology were the primary reasons for the result.

Net cash used in operating activities. Net cash used in operating activities for the year ending February 28, 2006 were $205,072 compared to the same period in the prior year of $64,262. During the fiscal year ending February 28, 2006, the Company funded its operations by sale of restricted common stock. During the fiscal year ending February 28, 2006, the net loss from operations of $932K was offset by $660K non-cash expenditures. These non-cash expenses primarily relate to $272K in financing costs, the amortization of $201K in officer stock compensation, the Company’s inventory reserve adjustment of $79K for the countertop product, the Company’s impairment charge of $104K for the Enviro(3)Care technology   and the issuance of $25K in restricted common stock for services rendered.

Net cash used in investing activities. Net cash used in investing activities for the fiscal year ending February 28, 2006 were $117,251 compared to the same period in the prior year of $12,434. The 2006 increase in cash used by investment activities was primarily due to the purchase of $135K in equipment and tooling.

Net cash used in financing activities. Net cash provided by financing activities for the fiscal year ending February 28, 2006 was $934,110 compared to the same period in the prior year of $31,710. The 2006 increase in cash provided by financing activities was due to the sale of $1,014K in restricted common stock, combined with the borrowing of $50K under one of the Company’s lines of credit. This increase in cash provided was partially reduced by the following - (1) $85K repayment of related party advances; (2) $33K purchase of treasury shares; and (3) payment of $12K in finders fees relating to the sale of certain restricted stock.
Fiscal year ending February 28, 2005 compared to the corresponding period in 2004.

 
Selected Financial Data
 
2004
 
2005
Year Over Year
Change
 
%
         
Sales
$468,420
$341,106
($127,314)
(27)
Cost of sales
$307,175
$155,113
($152,062)
(50)
Gross profit
$161,245
$185,993
$ 24,748
15
General & administrative expenses
$239,897
$272,762
$ 30,865)
14
Consulting fees to related parties
$ -0-
$ 35,292
$ 35,292
-
Interest expense to related parties
$117,584
$124,629
$ 7,045
6
Net cash used in operating activities
($36,643)
($64,262)
$ 27,619
74
Net cash used in investing activities
($15,956)
($12,434)
($ 3,522)
(22)
Net cash provided financing activities
$115,670
$ 31,710
($ 83,960)
(73)


14

 
 
 

Sales. In the fiscal year ending February 28, 2005, sales were $341,106 compared to the same period in the prior year with sales of $468,420. The decrease in sales is primarily attributable to the reduction in sales to Wellness Enterprises, a direct marketing company, with current year sales of $32,559 compared to the same period in the prior year of $223,935. This reduction in sales was partially offset by increased sales to Team in Focus (from $nil to $54K) and Phillips Publishing (from $19K to $48K).

Cost of sales and gross profit. In the fiscal year ending February 28, 2005, cost of sales was $155,113 compared to the same period in the prior year with sales of $307,175. Gross profit increased to $185,993 compared to the same period in the prior year of $161,245. The gross profit percentage for the fiscal year ending February 28, 2005 was 54 percent compared to 34 percent to the same period in the prior year. This increase in gross profit percentage is attributable to decreased cost for outside assembly labor combined with change in product mix, as previously noted the Company decreased selling product to a direct marketing company.

General & administrative expenses. In the fiscal year ending February 28, 2005, general and administrative expenses were $272,762 compared to the same period in the prior year of $239,897. This increase in general and administrative expenses was primarily due to $38K in consulting fees paid to two contractors who assisted with the company’s accounting department. This increase in expenses was partially offset by decreases in other administrative costs (i.e. telephone, utilities, etc.) due to decreased sales and production efforts.

Consulting fees to related parties. In the fiscal year ending February 28, 2005, consulting fees to related parties were $35,292 compared to the same period in the prior year of $nil. This increase in consulting fees was due to the engagement of two officers / consultants, Messrs. Richard Parsons and Jim Place, during December 2004. Both Messrs. Parsons and Place received restricted common stock at below the estimated market value upon commencement of providing services to the Company. The increase in consulting expense relates to the amortization of the discount on the restricted common stock.

Interest expense to related parties. In the fiscal year ending February 28,2005, interest expense to related parties were $124,629 compared to the same period in the prior year of $117,584. The slight increase in interest expense was due to the amortization of the beneficial conversion feature of the warrants issued to the TAM Trust during March 2004 for its continued financial support.

Net loss. Even though net loss for the fiscal year ending February 28, 2005 were negative by $250K, $125K in financing costs with TAM the primary lender, the amortization of $89K in officer stock compensation who received no salaries and a claim settlement of $31K were the primary reasons for the result.

Net cash operating activities . Net cash used in operating activities for the fiscal year ending February 28, 2005 were $64,262 compared to the same period in the prior year of $36,643. During the fiscal year ending February 28, 2005, the Company funded its operations by sale of restricted common stock. During the fiscal year ending February 28, 2005, the net loss from operations of $250K was offset by $ 211K of non-cash expenditures. These non-cash expenses primarily relate to the amortization of $89K in officer stock compensation, depreciation and amortization expense of $34K, the issuance of $31K in restricted common stock for services rendered and the issuance of stock to settle a claim, valued at $29K.

15

 
 
 

Net cash investing activities. Net cash used in investing activities for the fiscal year ending February 28, 2005 were $12,434 compared to the same period in the prior year of $15,956. The 2005 decrease in cash used by investment activities was primarily due to the proceeds from a sale of a vehicle.

Net cash financing activities. Net cash provided by financing activities for the fiscal year ending February 28, 2005 was $31,710 compared to the same period in the prior year of $115,670. The 2005 decrease in cash provided by financing activities was due to the prior year advances from related parties of $115,226 compared to $1,000 in the current fiscal year combined with the repayment of $60K in advances from related parties. This decrease in cash provided was partially offset by $91K in proceeds from sale of restricted common stock.

Liquidity and capital resources .

As of February 28, 2006 the Company had $635,569 in cash and $100,000 available borrowing under its two lines of credit. Both lines of credit do 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. During May 2006, the Company did not renew one of its lines of credit totaling $50,000.

                       
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTS
     
                       
The Company has various contractual obligations which are recorded as liabilities in the consolidated financial
   
statements. Other items, such as certain lease agreements are not recognized as liabilities in our
   
consolidated financial statements but are required to be disclosed. For example, the Company is contractually
   
committed to make certain minimum lease payments to rent its current corporate location.
 
                       
The following table summarizes our significant contractual obligations on an undiscounted basis as of February 28,
   
2006 and the future periods in which such obligations are expected to be settled in cash or converted into the Company’s common stock. In addition, the table reflects the timing of principal and interest payments on
   
outstanding borrowings. Additional details regarding these obligations are provided in footnotes to the
     
consolidated financial statements, as referenced in the table:
               
                       
     
 
 
Payments Due by Period
 
 
                       
                     
Convertible
     
Less than
         
More than
 
to common
 
Total
 
1 year
 
2 years
 
3 years
 
3 years
 
stock
                       
Accrued liabilities
$ 262,106
 
$ 70,556
             
$ 191,550
Line of credit
50,000
 
50,000
             
 


16

 
 
 


Accrued interest due to related party
169,315
             
169,315
 
 
Notes payable to related parties
363,150
 
15,000
 
 
 
 
 
  363,150
 
 
                       
 
844,571
 
120,556
 
 
 
 
 
532,465
 
191,550
                       
Other (1)
146,016
 
71,712
 
74,304
 
 
 
 
 
 
                       
Total contractual obligations (2)
$ 990,587
 
$ 192,268
 
$ 74,304
 
$ -
 
$ 532,465
 
$ 191,550
                       
                       
(1) Other commitments comprise of operating lease agreement with Turner San Juan LLC through February 2008
 
                     
(2) Comprised of the following:
                     
                       
Liabilities recorded on the balance sheet
     
$
844,571
           
Commitments not recorded on the balance sheet
     
146,016
           
                       
       
$
990,587
           
                       

The Company currently estimates monthly cash requirements of $26,000 to cover general and administrative overhead costs.

Consequently, we do not foresee the need for additional funding at least for the period ending February 28, 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.

Capital expenditures .

We do not expect any significant capital expenditures except for additional molds or tooling to supplement our existing capital equipment, which can be funded out of current cash flow.

Research and development.

The flip top container is being reengineered in design for greater ease of use and now includes disinfectant capabilities. The countertop is also been upgraded with more advanced filtration media for removal of contaminants and pollutants. The in-line filter is also being redesigned as
well to make it more applicable to field conditions.


17

 
 
 

Employees.  

We anticipate no additional executive and non-executive hiring even with an increase in the business that can be handled through the addition of variable and independent plant contractors and outside consultants.

Causes for any material changes from period to period .

In the fiscal year ending February 28, 2006, sales were $751,844 compared to the same period in the prior year with sales of $341,106 and our backlog was $,000 as of February 28, 2006 compared to the same period in the prior year with backlog of $8,000. Therefore, sales for the fiscal year ending February 28, 2006 plus current backlog have more than doubled sales from the fiscal year ending February 28, 2005. Consequently, the business is improving with both new and current (international and domestic) customers purchasing product. As previously noted, gross profit margins have decreased slightly due to the Company recorded an inventory reserve for its countertop product combined with higher outside assembly labor and raw material costs. Additionally, patent expirations in 2016 and 2017 should have no impact on sales as the proprietary information is held as trade secrets by the Company.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of long-lived
assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant estimates include the allowance for doubtful accounts, sales returns, inventory reserves, impairment of long-lived assets, deferred income tax valuation allowances and litigation . In addition, alternatives may exist among various accounting methods. In such cases, the choice of accounting method may also have a significant impact on reporting amounts. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that the application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. For a summary of our significant accounting policies see Note 2 to the Consolidated Financial Statements.



18

 
 
 


  ITEM 7. Financial Statements  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

 
To the Board of Directors and
 
Stockholders of Seychelle Environmental Technologies, Inc.
 
We have audited the accompanying consolidated balance sheet of Seychelle Environmental Technologies, Inc. as of February 28, 2006, and the related statements of operations, changes in stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Seychelle Environmental Technologies, Inc. as of February 28, 2006, and the results of its operations and its cash flows the year then ended in conformity with accounting principles generally accepted in the United States of America.
 

 

 
Windes & McCaughry Accountancy
 
Corporation
 
Irvine, CA
 
6//13/06









19

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 2006 AND 2005

     
 
2006
2005
ASSETS
   
     
CURRENT ASSETS
   
Cash and cash equivalents
$ 635,569
$ 23,782
Trade receivables, net of allowance for doubtful accounts of $-0- and $2,047
   
as of February 28, 2006 and 2005, respectively
33,602
20,047
Inventories, net
391,641
313,754
Prepaid expenses
45,261
-
     
Total current assets
1,106,073
357,583
     
PROPERTY AND EQUIPMENT, NET
157,671
99,826
     
INTANGIBLE ASSETS, NET
17,664
121,567
     
OTHER ASSETS
6,742
14,670
     
Total non-current assets
182,077
236,063
   
 
TOTAL ASSETS
$ 1,288,150
$ 593,646

See accompanying notes to consolidated financial statements.

20

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET (CONTINUED)
FEBRUARY 28, 2006 AND 2005
     
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
2006
2005
     
CURRENT LIABILITIES
   
Accounts payable
$ 61,010
$ 25,179
Accrued expenses
262,106
188,900
Line of credit
50,000
-
Accrued interest due to related parties
169,315
362,518
Current portion of notes payable to related parties
 
100,000
Customer deposits
29,048
25,911
Income taxes payable
6,400
8,397
 
 
 
Total current liabilities
577,879
610,905
     
NOTES PAYABLE TO RELATED PARTIES, less current portion
363,150
348,150
     
COMMITMENTS AND CONTINGENCIES
   
     
STOCKHOLDERS' EQUITY (DEFICIT)
   
     
   
 
     
Common stock $.001 par value - 50,000,000 shares
22,458
16,665
authorized; 22,458,384 and 16,665,646 shares issued and
   
outstanding as of February 28, 2006 and 2005, respectively
   
Additional paid-in capital
5,392,553
4,340,086
Estimated value of warrants
448,000
-
Accumulated deficit
(4,957,934)
(4,025,910)
Unearned interest
(353,523)
(462,443)
Unearned compensation
(204,413)
(333,807)
Finders fees
(11,800)
-
     
Total stockholders' equity (deficit)
347,121
(465,409)
     
TOTAL LIABILITIES AND
   
STOCKHOLDERS' EQUITY (DEFICIT)
$ 1,288,150
$ 593,646
See accompanying notes to consolidated financial statements.
21

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Fiscal Years Ending February 28, 2006 and 2005
 
2006
2005
SALES
$ 751,844
$ 341,106
     
COST OF SALES
430,134
155,113
     
Gross profit
321,710
185,993
     
OPERATING EXPENSES
   
Selling
59,459
27,425
General and administrative
591,557
272,762
Consulting fees due to related parties
201,293
35,292
Impairment of intellectual property
104,000
-
     
Total expenses
956,309
335,479
     
LOSS FROM OPERATIONS
(634,599)
(149,486)
     
OTHER INCOME (EXPENSES)
   
Interest expense due to related parties
(272,653)
(124,629)
Claim settlement
-
(31,360)
Write-off of accrual for product return liability
-
61,630
Gain (loss) on sale of vehicle / equipment
(30,000)
5,100
Miscellaneous income (expense)
6,396
(10,078)
Total other income (expense)
(296,257)
(99,337)


22

 
 
 


LOSS BEFORE PROVISION
   
     
FOR INCOME TAXES
(930,856)
(248,823)
PROVISION FOR INCOME TAXES
1,600
1,600
Net loss
$ (932,456)
$ (250,423 )
     
BASIC AND DILUTED (LOSS) PER SHARE
$ (0.05)
$ (0.02)
     
WEIGHTED AVERAGE NUMBER OF
   
SHARES: BASIC AND DILUTED
17,969,317
11,936,767
See accompanying notes to consolidated financial statements.

23



 
 
 




. SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For Fiscal Years Ending February 28, 2006 and 2005
 
Preferred
Preferred
Common
Common
Additional
Estimated
Unissued
 
 
 
 
Total
 
Stock
Stock
Stock
Stock
Paid-in
 
Value of
stock
Accumulated
Unearned
Unearned
 
Finders
Stockholders
 
Shares
Amount
Shares
Amount
Capital
 
Warrants
liability
Deficit
Interest
Compensation
 
Fees
Deficit
Balance, February 29, 2004
8,000
$80
10,513,480
$10,513
$3,213,469
 
-
$20,000
$(3,775,487)
-
-
-
$(531,425)
 
                       
Issuance of common stock
-
-
200,000
200
19,800
 
-
(20,000)
-
-
-
-
-
 
                       
Contributed executive services
-
-
-
-
10,000
 
-
-
-
-
-
-
10,000
 
                       
Issuance of common stock for
                       
compensation and services
-
-
125,000
125
9,500
 
-
-
-
-
-
-
9,625
 
                       
Issuance of common stock
                       
to employees
-
-
70,000
70
21,280
-
-
-
-
-
-
21,350
 
                       
Issuance of common stock for
                       
Cash
-
-
541,166
541
90,561
-
-
-
-
-
-
91,102
 
                       
24

 
 
 


Issuance of common stock in
                       
exchange for debt
-
-
55,000
55
42,307
-
-
-
-
-
-
42,362
 
                       
Issuance of common stock
                       
for technology
-
-
32,000
32
5,868
-
-
-
-
-
-
5,900
 
                       
Issuance of common stock
                       
for claim settlement
-
-
84,000
84
29,316
-
-
-
-
-
-
29,400
 
                       
Conversion of preferred to
                       
common stock
(8,000)
(80)
4,500,000
4,500
(4,420)
-
-
-
-
-
-
-

See accompanying notes to consolidated financial statements.

25

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For Fiscal Years Ending February 28, 2006 and 2005
 
Preferred
Preferred
Common
Common
Additional
Estimated
Unissued
 
 
 
 
Total
 
Stock
Stock
Stock
Stock
Paid-in
Value of
Stock
Accumulated
Unearned
Unearned
Finders
Stockholders
 
Shares
Amount
Shares
Amount
Capital
Warrants
Liability
Deficit
Interest
Compensation
Fees
Deficit
Discount factor on common
                       
stock issued to consultants
                       
at below fair value
-
-
65,000
65
22,685
 
-
-
-
-
-
-
15,167
 
                       
Discount factor on common
                       
stock issued to officers
                       
at below fair value
-
-
480,000
480
225,120
-
-
-
-
(206,800)
-
18,800
                         
Beneficial conversion feature
                       
on warrants issued to
                       
officers at below fair value
-
-
-
-
55,275
 
-
-
-
-
(49,133)
 
-
6,142
                         
Beneficial conversion feature
                       
on warrants issued to note
                       
holder at below fair value
-
-
-
-
27,225
 
-
-
-
(24,200)
-
 
-
3,025
                         
26

 
 
 


Discount factor on common
                       
stock issued to officers
                       
at below fair value
-
-
-
-
79,100
-
-
-
-
(70,291)
-
8,809
 
                       
Discount factor on common
                       
stock issued to note
                       
holder at below fair value
-
-
-
-
493,000
 
-
-
-
(438,243)
-
-
54,757
 
                       
Net loss from fiscal year ending February 28, 2005
-
-
-
-
-
 
-
(250,423)
 
-
 
-
(250,423)
Balance, February 28, 2005
0
0
16,665,646
16,665
4,340,086
 
-
-
(4,025,910)
(462,443)
(333,807)
 
-
(465,409)
See accompanying notes to consolidated financial statements.

27

 
 
 



 
Preferred
Preferred
Common
Common
Additional
Estimated
Unissued
       
Total
 
Stock
Stock
Stock
Stock
Paid-in
Value of
Stock
Accumulated
Unearned
Unearned
Finders
Stockholders
 
Shares
Amount
Shares
Amount
Capital
Warrants
Liability
Deficit
Interest
Compensation
Fees
Deficit
                         
Contributed executive services
-
-
-
-
10,000
 
-
-
-
-
-
 
-
10,000
                         
Issuance of shares for services rendered
-
-
64,300
64
18,344
 
 
-
-
-
-
-
 
 
-
18,408
                         
Issuance of shares for compensation or services
-
-
30,000
30
20,085
 
-
-
-
-
-
 
-
7,200
                         
Issuance of common stock for cash
-
-
2,474,225
2,474
564,282
 
-
-
-
-
-
 
-
563,756
                         
Issuance of common shares with detachable stock warrants with conversion at below market value
-
-
2,000,000
2,000
-
 
 
 
 
 
448,000
-
-
-
-
 
 
 
 
 
-
450,000
                         
Issuance of shares to settle accrued interest to primary shareholder
-
-
1,266,667
1,267
226,733
 
 
 
-
-
-
-
-
 
 
 
-
228,000
                         
28

 
 
 


Issuance of shares to primary lendor for continued financial support
-
-
37,500
38
8,400
-
 
-
-
-
-
-
 
8,438
                         
Issuance of shares for settlement of debt
-
-
312,784
312
125,093
 
 
-
-
-
-
-
 
 
-
125,405
                         
Issuance of shares to consultant for services performed
-
-
37,500
37
8,401
 
 
-
-
-
-
-
 
 
-
8,438
                         
Payment of finders fees
-
-
-
-
-
 
-
-
-
-
-
 
(11,800)
(11,800)
                         
Surrender of shares due to failure to perform services
-
-
(250,000)
(250)
(32,250)
 
 
-
-
-
-
-
 
 
-
(32,500)
                         
Repurchase of shares from investor
-
-
(210,238)
(210)
(32,636)
 
-
-
-
-
-
 
-
(32,846)
                         
Beneficial conversion feature
                       
on warrants issued to note holder
                       
at below fair value
-
-
-
-
120,000
 
-
-
-
(120,000)
-
 
-
-
                         

29

 
 
 


Discount factor on common stock / warrants issued to primary lendor at below fair value
-
-
-
-
-
 
 
 
 
-
-
-
228,920
-
 
 
 
 
-
228,920
                         
Beneficial conversion feature on warrants
                       
issued to consultants
                       
at below fair value
-
-
30,000
300
8,700
-
-
-
-
(9,000)
-
-
                         
Discount factor on common stock / warrants issued to officers at below fair value
 
 
 
 
-
 
 
 
 
-
 
 
 
 
-
 
 
 
 
-
 
 
 
 
-
 
 
 
 
-
 
 
 
 
-
 
 
 
 
-
 
 
 
 
-
 
 
 
 
192,854
 
 
 
 
-
 
 
 
 
192,854
                         
Discount factor on common stock issued to consultants at below fair value
-
-
-
-
-
 
 
 
-
-
-
-
3,517
 
 
 
-
3,517
                         
Discount factor on warrants
                       
issued to consultant
                       
at below fair value
-
-
-
-
15,000
 
-
-
-
-
(15,000)
 
-
-
                         

30

 
 
 


Discount factor on warrants issued to employee at below fair value
-
-
-
-
15,000
 
 
 
-
-
-
-
(15,000)
 
 
 
-
-
                         
Net loss from fiscal year ending February 28, 2006
-
-
-
-
-
 
 
-
-
(932,456)
 
-
 
 
-
(932,456)
                         
Balance, February 28, 2006
0
0
22,448,384
$22,458
$5,404,33
 
 
$448,000
-
($4,957,934)
($353,523)
($204,413)
 
($11,800)
$ 347,121

See accompanying notes to consolidated financial statements

31




 
 
 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ending February 28, 2006 and 2005

 
2006
2005
CASH FLOWS FROM OPERATING ACTIVITIES
   
Net loss
$ (932,456)
$ (250,423)
Adjustments to reconcile net loss to net cash used by operating activities:
   
Depreciation and amortization
26,407
33,868
 
   
Compensation and interest expense on stock and warrants
422,519
106,700
Contributed executive services
10,000
10,000
Stock issued for services
25,350
30,975
Stock issued for claim settlement
-
29,400
Allowance for doubtful accounts
2,047
9,018
Impairment of intellectual property
104,000
-
(Reversal) Provision for slow moving inventory
79,789-
(162,700)
Write off of product return liability
-
(61,630)
Gain (loss) on disposal of vehicle / equipment
(30,000)
(5,100)
Return of shares due to failure to perform services
(32,500)
-
Changes in operating assets and liabilities:
   
Trade receivables
(15,602)
7,624
Inventories
(157,676)
(118,333)
Prepaid expenses and other assets
(37,329)
-
Accounts payable
35,831
(8,171)
Accrued expenses
198,611
(349)
Accrued interest due to related parties
34,797
124,559
Income tax payable
(1,997)
1,600
Customer deposits
3,137
26,000
     
Net cash used by operating activities
(205,072)
(64,262)
     
CASH FLOWS FROM INVESTING ACTIVITIES
   
Proceeds from sale of vehicle / equipment
20,000
5,800
Purchase of equipment
(135,811)
(18,234)
Increase in patents
(1,440)
-
     
Net cash used by investing activities
(117,251)
(12,434)

See accompanying notes to consolidated financial statements.

32

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Fiscal Years Ending February 28, 2006 and 2005

 
2006
2005
CASH FLOWS FROM FINANCING ACTIVITIES
   
Proceeds from sale of common stock
$ 1,013,756
$ 91,102
Purchase of Treasury shares
(32,846)
-
Payment of finders fees
(11,800)
-
Proceeds from line of credit
50,000
-
Proceeds from related party advances
-
1,000
Repayments on related party notes payable
(85,000)
(60,392)
     
Net cash provided by financing activities
934,110
31,7100
     
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
611,787
(44,987)
     
Cash & cash equivalents, beginning of year
23,782
68,768
     
Cash & cash equivalents, end of year
$ 635,569
$ 23,782
     
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   
     
Cash paid during the year for:
   
     
Interest
$ -
$ -
     
Income taxes
$ 1,997
$ -
     
NON-CASH INVESTING AND FINANCING ACTIVITIES
   
     
Stock issued for services
$ 25,350
$ 30,975
Stock issued for settlement of debt
$ 125,405
$-
Stock issued for accrued interest
$228,000
-
Stock issued for settlement of claim
$-
$ 29,400
Return of shares due to non-performance of services
$ 32,500
-
Stock issued for purchase of technology
$-
$ 5,900
 
See accompanying notes to consolidated financial statements.
33

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

ORGANIZATION AND DESCRIPTION OF BUSINESS

Organization

Seychelle Environmental Technologies, Inc. (“SET”), was incorporated under the laws of the State of Nevada on January 23, 1998 as a change in domicile to 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.

Seychelle Water Technologies (“SWT”) was formed as a corporation in February 1997 under the laws of the state of Nevada for the purpose of marketing the products of Aqua Vision International (“Aqua Vision”), a private California entity operating since 1996. Prior to January 1998, SWT operations were limited primarily to fundraising and marketing activities.

On January 30, 1998, SET entered into a stock exchange agreement with SWT, whereby SWT shareholders emerged as the majority stockholder of SET. This reverse acquisition resulted in SWT becoming a wholly owned subsidiary of SET. SWT had no material operations for each of the eight fiscal years ending February 28, 2006.

On January 31, 1998, SET attempted a purchase of the assets of Aqua Vision for $9.5 million. Only $1.2 million was paid to the Aqua Vision owners and the transaction was not consummated. Effective February 28, 1999, the Company revised its Purchase Agreement and issued 8,000 shares of its Series “AAA” Preferred Stock Cumulative Preferred Voting Stock (described in Note 8) to Aqua Vision’s owners. As a result, Aqua Vision’s owners became the ultimate controlling stockholder of SET. Because the assets were acquired from existing shareholders, the $1.2 million payment was treated as a distribution and the Series “AAA” stock issuance was treated as a recapitalization.

34


 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 1:   ORGANIZATION AND DESCRIPTION OF BUSINESS, continued

Description of Business

The Company designs, manufactures and supplies water filtration systems to the general public. These systems range from portable water bottles that can be filled from nearly any available source to units, which provide entire water facilities at the point of entry for a facility. There are a number of established companies in the water filtration business, with no one company dominating the business.

Significant Agreements

During June 2002, the Company entered into an exclusive agreement with Heibei R.O. Environmental Technologies, whereby the Company can sell reverse osmosis-based products, which are currently being developed in China. Additionally, the agreement allows the Company to produce all portable filtration products in China. During the fourth quarter of fiscal 2006, the Company commenced production in China. As of February 28, 2006, the Company has prepaid inventory in China of approximately $33,000. The Company believes this agreement will allow the Seychelle brand to be sold at a very competitive price to US, China, Asia and other international markets.

Also, during June 2002, the Company entered into a License Agreement for a product known as the “Hand Pump Technology.” The Company licensed all proprietary rights associated with this technology and the trademark Aqua Gear TM. The Company will pay a two percent royalty and a one- percent license of trademark fee on any sales using this 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 the Company an additional proprietary product in the portable filtration industry. The Company believes that this purchase compliments our current product line. As of the date of this filing, this technology has resulted in 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.
35

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 1:   ORGANIZATION AND DESCRIPTION OF BUSINESS, continued

During 2005,the Company attempted to enter into an agreement with Vortex, acompany in Japan to market and sell the Company’s entire product line on an exclusive basis throughout Japan. However, they never signed the agreement but are representing us on a non-exclusive basis.

Seychelle has signed 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. Under the agreement, to maintain exclusivity, Confident, Inc. has to purchase from Seychelle a minimum of one million dollars ($1,000,000) of product the first year, with a minimum volume increase of fifty percent (50%) in each of the succeeding years over the previous year’s minimum purchase requirement. Upon signing the agreement on January 4, 2006, Confident, Inc. placed an initial product order for $50,000. During the fiscal year ending February 28, 2006, total sales to Confident, Inc. and affiliated entities approximated $90,000. The agreement is subject to cancellation and is outlined in the agreement..

Seychelle has also signed a ten (10) year exclusive distribution/manufacturing agreement, subject to certain restrictions, with ABMS Health Care Pvt. Ltd. to sell its water filtration products on a non-exclusive basis in India.  

The Company sells its products throughout the United States and internationally. Geographic information for the fiscal years ending February 28, 2006 and 2005 is as follows:

 
2006
2005
Water filtration products sold to
   
external customers (1) (2) in:
   
     
The United States
$523,077
$173,213
Pakistan
91,700
-
China
90,000
-
Asia
35,115
167,893
United Kingdom
11,952
-
     
Total
$751,844
$341,106
36
(1)     Sales to external customers are attributed based on the country of residence of the customer.

(2)   Long lived assets outside the United States included $96,500 and $50,000 in tooling costs located in China at February 28, 2006 and 2005, respectively.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of SET and its wholly owned subsidiary, SWT, (collectively the “Company”). All significant inter-company transactions and balances have been eliminated.

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

 
The Company’s consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has experienced recurring losses from operations and has an accumulated deficit of $4,957,934 as of February 28, 2006. These factors, among others, raise substantial doubt as to its ability to have the necessary resources to market the Company’s new products.

In order to continue as a going concern, the Company needs to develop a reliable source of revenues, and achieve a profitable level of operations. During the fiscal year ending February 28, 2006, the Company funded its operations by sale of restricted common stock.   As of February 28, 2006 the Company had $635,569 in cash and $100,000 available borrowing under its two lines of credit. Both lines of credit do not contain any limitations on borrowing or any restrictive debt covenants. Over the next twelve months, management believes 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. 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. The Company currently estimates monthly cash requirements of $26,000 to cover general and administrative overhead costs.

Accordingly, the consolidated financial statements are accounted for as if the Company is a going concern and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or other adjustments that might be necessary should be Company be unable to continue as a going concern.
37

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006
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.
 
Cost of Sales

Cost of sales is comprised primarily of the cost of purchased product, as well as, labor, inbound freight costs and other material costs required to complete products.

Shipping and handling

All amounts billed to a customer in a sales transaction related to shipping and handling represent revenues earned and is reported as revenue. Costs incurred by the Company for shipping and handling, including transportation costs paid to third party shippers, are reported as a cost of sale expense.

General and Administrative Expenses

General and administrative expense is comprised primarily of legal and accounting fees incurred to assist the Company in catching up with SEC filings, consulting costs for outside accounting personal and design and engineering projects, salaries and related costs for an administrative assistant hired during June 2005 and other administrative costs (i.e. telephone, utilities, etc.) to support operations.

Product Return Reserve

The Company provides a reserve for returned products. Such costs are included in cost of sales. Total costs for returned products for the fiscal years ending February 28, 2006 and 2005 was $nil.

Management reviews and estimates reserve for returned products on a regular basis. Although management believes its evaluations are sound, it is at least reasonably possible that such estimates may change in the near term. During the fiscal year ending February 28, 2005, the Company adjusted its reserve for returned products as no products had been returned to the Company during the three fiscal years ending February 28, 2005.
38
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Seychelle has an unconditional return policy for the first 90 days. Customers may return the product for a full refund, or they may receive a replacement at no charge. The same policy applies to any product sold from the period 91 days after purchase to one year, for any defects in materials or workmanship.

Accordingly, the consolidated financial statements are accounted for as if the Company is a going concern and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or other adjustments that might be necessary should be Company be unable to continue as a going concern.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the average cost method and consist of the following as of February 29, 2006 and 2005:

 
2006
2005
Raw materials
$161,066
$ 169,427
Work in progress
105,760
34,513
Finished goods
204,604
109,814
 
471,430
313,754
Reserve for obsolete or
slow moving inventory
 
(79,789)
 
  -
     
Net inventories
$391,641
$ 313,754
     

Finished goods inventory includes material, labor and manufacturing overhead costs.

reasonably possible that such estimates may change in the near term. During the fiscal year ending February 28, 2005, the Company scrapped its previously identified slow moving and obsolete inventory of approximately $162,000.

39
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Property and Equipment

Management reviews and estimates realization of inventory on a regular basis with respect to obsolete and slow moving inventory. During November 2005, the Company re-evaluated its countertop water filtration systems and determined that such product should be wholly reserved and recorded an inventory reserve adjustment of approximately $79,800. Although management believes its evaluations are sound, it is at least Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. The estimated useful lives used in determining depreciation are three to five years for tooling and five years for computers, furniture and equipment and vehicles. Management evaluates useful lives regularly in order to determine recoverability taking into consideration current technological conditions. Maintenance and repairs are charged to expense as incurred; additions and betterments are capitalized. Upon retirement or sale, the cost and related accumulated depreciation of the disposed assets are removed, and any resulting gain or loss is recorded. Fully depreciated assets are not removed from the accounts until physical disposition. During the fiscal year ending February 28, 2006, the Company disposed of certain tooling, as well as, scrapped certain fully depreciated assets (Note 3).

Intangible Assets

Intangible assets include patents, product rights and technology costs. All patent, product rights and technology costs are capitalized and amortized over ten years using the straight-line method. The Company assesses whether there has been a permanent impairment of the value of intangible assets by considering factors such as expected future product revenues, anticipated product demand and prospects and other economic factors. During the fiscal year ending February 28, 2006, the Company determined that the Enviro(3)Care system was no longer economically feasible and recorded an impairment charge (Note 4).


40

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Accounting For Long-Lived Assets

Long-lived and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In that case, if the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized for the difference between the carrying amount of the asset and the fair value of the asset.

Customer Deposits

Customer deposits represent advance payments received for products and is recognized as revenue in accordance with the Company’s revenue recognition policy.

Research and Development Expenses

Research and development costs are expensed as incurred and amounted to approximately $14,800 and $12,500 for the fiscal years ending February 28, 2006 and 2005, respectively, and are included in general and administrative expenses in the accompanying consolidated statements of operations.

Advertising Expenses

Advertising expenses are expensed as incurred. Total advertising expenses amounted to approximately $19,400 and $1,000 for the fiscal years ending February 28, 2006 and 2005, respectively, and are included in selling expenses in the accompanying consolidated statements of operations.

Concentration of Credit Risks
Cash

The Company maintains its cash in various accounts at several financial institutions. At various times during the year, the amount on deposit with a single financial institution may exceed federal depository insurance limits. At February 28, 2006, the Company had balances on deposit approximating $478,000 in excess of such limits. Management does not believe this represents a significant risk to the Company.

41

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Trade Receivables

The Company performs periodic credit evaluations of its customers’ financial condition and does not require collateral. Trade receivables generally are due in 30 days. Credit losses have consistently been within management’s expectations. An allowance for doubtful accounts is recorded when it is probable that all or a portion of trade receivables balance will not be collected.

For the fiscal years ending February 28, 2006 and 2005, SET had several customers, which individually accounted for at least 10% of total sales. The following table summarizes total sales and accounts receivable for the fiscal years then ended for these customers:

 
2006
2006
2005
2005
 
Sales
Accounts
Sales
Accounts
 
Percentage
Receivable
Percentage
Receivable
         
Customer 1
25%
$6,100
10%
$ -
Customer 2
4%
673
16%
2,041
Customer 3
12%
-
-%
-
Customer 4
12%
-
-%
10-

During the fiscal year ending February 28, 2006, the Company has entered into several marketing and distribution agreements to sell its products internationally on both an exclusive and non-exclusive basis. Management believes that if the targeted revenues are not achieved, the revenues can be replaced through the sale of filters and related products to other direct marketing companies. However, there can be no assurance that this will occur which could result in an adverse effect on the Company’s financial condition or results of operations in the future.

Account Payable

For the fiscal years ending February 28, 2006 and 2005, SET had several vendors, which individually supplied at least 10% of total purchases. The following table summarizes total raw material purchases and accounts payable for the fiscal years then ended.

42

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 2:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 
2006
2006
2005
2005
 
Purchase
Accounts
Purchase
Accounts
 
Percentage
Payable
Percentage
Payable
         
Vendor 1
24%
$ 7,407
-
$ -
Vendor 2
15%
-
18%
-
Vendor 3
-
-
11%%
-

As previously noted, in China, the original manufacturing agreement with Hebei RO Environmental Technologies expired and was not renewed. Instead, the company signed an exclusive agreement with Huanghua Seychelle Plastic Co. Ltd. on September 1, 2005.

Income Taxes

The Company utilizes Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Issuance of Stock for Services

 
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue to account for employee stock-based compensation using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, as permitted by SFAS No. 123; accordingly, compensation
 
 
43
 

 
 
 

 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 
expense for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.
 
 
For stock options or other securities issued to non-employees, the issuance of such securities is accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Compensation expense is recognized in the financial statements for securities granted to non-employees in the period in which the consideration is obtained from the non-employee.
 

Loss Per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted average number of outstanding common shares (restricted and free trading) during the periods presented. Basic loss per share and diluted loss per share are the same amount because the impact of additional common shares that might have been issued under the Company’s stock option plan, warrants and convertible debt would be anti-dilutive.

 
Fair Value of Financial Instruments
 
 
Statement of Financial Accounting Standards (“SFAS”) No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments when it is practicable to estimate that value. The carrying amounts of the Company’s financial instruments as of February 28, 2006 and 2005 approximate their respective fair values because of the nature of these instruments. Such instruments consist of accounts receivable and payable, inventory and certain accrued expenses. The fair value of the related party accrued liabilities and notes payable are not determinable.

44

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Management’s Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements include the allowance for doubtful accounts, sales returns, inventory reserves, deferred income tax valuation allowances and litigation. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Segment Disclosures

SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” requires public enterprises to report financial and descriptive information about reportable operating segments and establishes standards for related disclosures about product and services, geographic areas, and major customers. The Company evaluated SFAS No. 131 and determined that the Company operates in multiple segments (Note 18).

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.

In November 2004, the Financial Accounting Standards Board Statement issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4”, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and charges regardless of whether they meet the criterion of “so abnormal” that was originally stated in Accounting Research Bulletin No. 43, chapter 4. In addition, SFAS No. 151 requires that the allocation of fixed production overheads to conversion costs be based on the normal capacity of the production

45
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

facilities. SFAS No. 151 is effective for inventory costs incurred during   fiscal years beginning after June 15, 2005. Management does not expect the implementation of this new standard to have a material impact on its financial position, results of operations and cash flows

In December 2004, the FASB published SFAS 123R, “Share Based Payments” (“SFAS 123R). SFAS 123R required that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights and employee share purchase plans. The provisions of SFAS 123R are effective as of the first interim period that begins after June 15, 2005. In March 2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), which provides interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. It also provides the SEC staff’s views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS 123(R), to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial statements.

On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets” (“SFAS 153”), an amendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions” (“APB 29”). This statement amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception of exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. SFAS 153 is effective for nonmonetary transactions in fiscal periods that begin after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial statements.

46

 
 
 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This statement applies to all voluntary changes in accounting principle and requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless this would be impracticable. This statement also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial statements.

In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements (“EITF 05-6.”) EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. The guidance in EITF 05-6 will be applied prospectively and is effective for periods beginning after June 29, 2005.  EITF 05-6 is not expected to have a material effect on its consolidated financial position or results of operations.

In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”.  SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other

47

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

than another derivative financial instrument.  This statement is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006. SFAS  No. 155 is not expected to have a material effect on its consolidated financial position or results of operations.

NOTE 3:   PROPERTY AND EQUIPMENT

The following is a summary of property and equipment at February 28, 2006 and 2005:

 
2006
2005
     
Tooling
$271,510
$231,216
Equipment
36,602
21,392
Vehicles
10,000
33,433
Furniture and fixtures
15,465
15,465
Computer equipment
16,956
15,726
Leasehold equipment
1,000
1,000
 
351,533
316,262
     
Less: Accumulated depreciation
206,810
288,941
Book Value
144,723
27,341
Tooling not in service
12,948
72,485
 
$ 157,671
$99,826

As of February 28, 2006 and 2005, the Company had recorded $12,985 and $72,485, respectively, in reverse osmosis-based tooling to be used in China. Depreciation will be computed using the straight-line method over a period of 5 years.

During the fiscal year ending February 28, 2006, the Company sold for $20,000 a pleating machine with an approximate cost of $25,000. Additionally, during 2006, a countertop machine with a value of $25,000 was stolen from its location in China. The combined $30,000 loss on disposition of this equipment is included in other expenses in the accompanying consolidated statement of operations. Both of these items had previously been included in equipment not in service in the accompanying consolidated balance sheet.
48
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 3:   PROPERTY AND EQUIPMENT, continued

The carrying amount of all property and equipment is evaluated periodically to determine if adjustment to the useful life or to the un-depreciated balance is warranted. As of February 28, 2006, no event has been identified that would indicate an impairment of the value of property and equipment recorded in the accompanying consolidated financial statements.

Total depreciation expense for the fiscal years ending February 28, 2006 and February 29, 2005 was approximately $25,100 and $24,800, respectively.

NOTE 4:   INTANGIBLE ASSETS

The following is a summary of intangible assets at February 28, 2006 and 2005:

 
2006
2005
Enviro Care technologies
$ -
$ 104,000
Hand pump
8,000
8,000
Patents
17,623
16,182
 
25,623
128,182
     
Less: Accumulated amortization
7,959
6,615
 
$ 17,664
$ 121,567

The estimated future amortization expense of intangible assets as of February 28, 2006 for each of the five succeeding years is approximately $1,200.

The Company has a License Agreement for a product known as the “Hand Pump Technology.” The Company licensed all proprietary rights associated with this technology and the trademark Aqua Gear TM. The Company will pay a two percent royalty and a one- percent license of trademark fee on any sales using this technology during the term of the license. The Company intends to market this technology in the United States and internationally. In connection with the license agreement, the Company granted the licensor 50,000 shares of common stock valued at $0.16 per share, or $8,000. The shares were issued during March 2002. The License Agreement is for an initial term of five years, with five successive five years renewals.
49

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 4:   INTANGIBLE ASSETS, continued
 

The carrying amount of all intangibles is evaluated periodically to determine if adjustment to the useful life or to the un-amortized balance is warranted. As of February 28, 2006, except for the impairment relating to the Enviro(3)Care system, no event has been identified that would indicate an impairment of the value of intangibles recorded in the accompanying consolidated financial statements.

NOTE 5:   ACCRUED EXPENSES

Accrued expenses consist of the following at February 28, 2006 and 2005:

 
2006
2005
     
Accrued legal expenses
$124,296
$114,985
Accrued accounting expenses
95,346
6,076
Accrued rent
-
14,889
Accrued claim settlement
12,750
12,750
Accrued credit card purchases
11,926
19,134
Accrued wages and benefits
2,647
1,932
Other accrued expenses
15,141
19,134
     
 
$262,106
$188,900

During March 2006, the Company settled approximately $90,300 of its accrued accounting expenses as of February 28, 2006 through the payment of $25,000 cash and the issuance of 25,000 shares of the Company’s restricted common stock.

The accrued legal expenses represent the attorney fees the Company incurred in connection with the SWT stock exchange agreement and purchase of Aqua Vision (Note 1), of which approximately $113,500 will be paid in stock. Management does not believe however, that the stock will be issued during the foreseeable future.

The accrued settlement represents an estimate of the settlement of an employment-related claim, of which $12,750 will be paid in stock. Management does not believe however, that the stock will be issued during the foreseeable future.
50

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 6:   LINES OF CREDIT

During March 2005, the Company entered into two unsecured lines of credit agreements, totaling $150,000. The lines of credit bear interest at the institutions index rate (7.5% at February 28, 2006) plus two percent and are not repayable until March 31, 2006. The Company utilized proceeds of $50,000 from one line of credit was used to pay down the Note Payable to Related Parties (see Note 7). Both agreements do not contain any limitations on borrowing or any restrictive debt covenants. During April 2006, the Company decided not to renew one of its lines of credit.

NOTE 7: NOTES PAYABLE TO RELATED PARTIES

As the February 28, 2006 and 2005, the Company received advances of $363,200 and $448,200 from the Company’s primary investor, TAM Irrevocable Trust (“TAM Trust”). These advances bear interest at 10 percent. As of February 28, 2006, the balance of the advances are not repayable until after March 1, 2011. The repayment of these advances is subordinate to the Company’s lines of credit (see Note 6).

As of February 28, 2006 and 2005, accrued interest on these advances was approximately $169,300 and $134,500, respectively, which is included in accrued interest due to related parties.

During April 2005, the Company settled this liability through the issuance of 1,266,667 shares of common stock to the Company’s primary investor.

On March 29, 2005, the Company granted the TAM Trust 500,000 warrants redeemable on restricted shares of the Company’s stock at a purchase price of $.225 per share. The warrants are to be distributed in equal installments commencing on December 1, 2004, 2005 and 2006 and are exercisable through December 1, 2008. 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 unearned interest relating to the estimated value of these warrants of $27,200. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded amortization of approximately $9,100 and $3,000 for the fiscal years ending February 28, 2006 and 2005, respectively.

51

 
 
 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 7: NOTES PAYABLE TO RELATED PARTIES, continued

Additionally, on March 29, 2005, the Company granted the TAM Trust 1,972,133 restricted shares of the Company’s common stock. These shares were granted at a price of $0.03 per share and vest over a three-year period, beginning November 1, 2004. As the TAM Trust was granted the common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these shares of $493,000. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $164,300 and $54,800 for the fiscal years ending February 28, 2006 and 2005, respectively.

On July 27, 2005, the Company granted the TAM Trust 2,000,000 warrants redeemable on restricted shares of the Company’s stock at a purchase price of $.225 per share. The warrants are exercisable any time after December 1, 2006 and expire December 1, 2008. 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 unearned interest relating to the estimated value of these warrants of $120,000. The Company is amortizing the estimated fair market value of the unearned interest over the period from date of grant through December 1, 2006. The Company has recorded interest expense of approximately $46,700 as of February 28, 2006.

On January 23, 2006, the Company issued to the TAM Trust 37,500 common shares for continued financial support. As the common stock was issued at below the Company’s market price at the date of grant ($nil cost per share), the Company recorded interest expense relating to the estimated value of these shares of $8,437.

NOTE 8:   CAPITAL STRUCTURE

Common Stock

The holders of Common Stock have one vote per share on all matters (including election of Directors) without provisions for cumulative voting. The Common Stock is not redeemable and has no conversion or preemptive rights.

52

 
 
 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 8:   CAPITAL STRUCTURE -- continued

In the event of liquidation of the Company, the holders of Common Stock will share equally in any balance of the Company’s assets available for distribution to them after satisfaction of creditors and the holders of the Company’s preferred securities. The Company may pay dividends, in cash or in securities or other property, when and as declared by the Board of Directors from assets legally available. To date, the Company has not declared or paid dividends on its Common Stock.

On February 28, 2004, the Company received $20,000 in proceeds for the issuance of 200,000 shares of common stock. The stock was delivered to the investor during March 2004. As of February 29, 2004, the Company recorded the proceeds as an un-issued stock liability in the accompanying consolidated financial statements.

During December 2004, the Company granted the TAM Irrevocable Trust restricted common stock of 1,266,667 shares,for interest from the period March 1, 2002 through February 28, 2005. The restricted common shares were distributed during the first quarter of the fiscal year ending February 28, 2006. The fair market value of the restricted shares was estimated at $228,000.

During the fiscal year ending February 28, 2005, the Company issued 125,000 shares for compensation; and 70,000 shares for services provided.

During the fiscal year ending February 28, 2005, the Company issued an aggregate of 541,166 common shares to various investors for cash for an approximate total value of $91,100.

During the fiscal year ending February 28, 2005, the Company issued an aggregate of 55,000 shares to various debt holders with an approximate total value of $42,400.

During the fiscal year ending February 28, 2005, the Company issued 32,000 shares to purchase tooling with an approximate value of $5,900.

53

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 8: CAPITAL STRUCTURE, continued

During the fiscal year ending February 28, 2005, the Company issued 84,000 shares to settle a claim with an approximate total value of $29,400.

During November 2004, the Company entered into a six-month consulting agreement with an individual to provide accounting services for the Company. As consideration for services to be rendered, the consultant received 65,000 restricted shares of the Company’s common stock. The common shares were distributed on November 1, 2004. The Company recorded unearned compensation relating to the estimated value of the shares of $22,750.

The Company has recorded amortization of approximately $7,600 and $15,100 for the fiscal years ending February 28, 2006 and 2005, respectively.

During December 2004, all Series AAA at 12% Cumulative Convertible Preferred Shares were converted into 4,500,000 shares of restricted common stock issued to the TAM Irrevocable Trust.

Additionally, on March 29, 2005, the Company granted the TAM Trust 1,972,133 restricted shares of the Company’s common stock. These shares were granted at a price of $0.03 per share and vest over a three-year period, beginning November 1, 2004. As the TAM Trust was granted the common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these shares of $493,000. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $164,300 and $54,800 for the fiscal years ending February 28, 2006 and 2005, respectively.

During the fiscal year ending February 28, 2006, the Company issued an aggregate of 4,248,334 common shares to various investors for cash for an approximate total value of $1,013,000.

54

 
 
 

SEY CHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 8:   CAPITAL STRUCTURE, continued

During the fiscal year ending February 28, 2006, the Company issued 295,766 in restricted shares, estimated value $119,400, for accounting services provided in connection with Form 10 and other SEC filings.

During March 2005, a consultant surrendered to the Company 250,000 of common stock, valued at $32,500, due to failure to perform certain contractual obligations.

During the fiscal year ending February 28, 2006, the Company issued 30,000 shares for compensation; and 94,300 shares for services provided.


During the fiscal year ending February 28, 2006, a shareholder presented an opportunity to the Company to repurchase approximately 210,238 common shares, at prices under the market ranging from $0.15 to $0.17 that the Company accepted for an approximate total value of $32,800.

During January 2006, the Company issued to one of its officers 37,500 common shares, estimated value of $8,400, for services rendered.

During January 2006, the Company issued to its primary lender (TAM) 37,500 common shares, estimated value of $8,400, for continued financial support.

Preferred Stock

The Board of Directors has the authority to issue Preferred Stock and to fix and determine its series, relative rights and preferences to the fullest extent permitted by the laws of the State of Nevada and its articles of incorporation. As of February 28, 2006, three classes of Preferred Stock were authorized and none was outstanding.

Series “A” 13.5% Non Voting, Cumulative, Convertible Preferred Stock

Series “A” Preferred Stock has rights which are superior to all other securities of the Company, including upon liquidation and as to payment of dividends, if any, carries a cumulative dividend of 13.5% per annum, is non-voting, and is redeemable by the Company at any time at face value and is convertible into common shares of the Company at the lesser of $10 per share or 85% of the last five closing bid prices
55

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 8:   CAPITAL STRUCTURE, continued

During April 2001, the Company repurchased for $350,000 all issued and outstanding Series A 13.5 percent non-voting, cumulative preferred stock, $0.01 par value per share and settled all liability for dividends. This repurchase was done in conjunction with a comprehensive settlement agreement with the beneficial owner of the preferred stock. The stock repurchase was funded by a loan made by one of the Company’s principal stockholders.

Series “AA” Non Voting, Cumulative, Convertible Preferred Stock

Series “AA” Preferred Stock had rights superior to all other securities of the Company except to Series “A” Preferred Stock, including upon liquidation and as to payment of dividends, if any, carried a 10% cumulative dividend, was non-voting, redeemable by the Company at any time at face value and was convertible into common shares of the Company at 85% of the last five closing bid prices. On June 14, 1999, all of the Series “AA” Non Voting, Cumulative Convertible Preferred Stock was converted into 1,337,509 shares of Common Stock at the original conversion terms.

Series “AAA” 12 % Cumulative, Convertible Preferred Shares

Series “AAA” Preferred Stock has rights, which are superior to all other securities of the Company except Series “A”, and the Series “AA” Preferred Stock, including upon liquidation and as to payment of dividends, if any. Series “AAA” Cumulative, Convertible Preferred Voting Stock carries a 12% per annum dividend payable in stock or cash, is voting, with each share equal to 100 shares of Common Stock, and is redeemable, at the Company’s option, according to the following procedure: upon written notice of conversion from the holders, the Company shall have 45 days from receipt of such notice to repurchase for cash up to 2,000 shares of the Series “AAA” 12 % Cumulative, Convertible Preferred Shares at $1,000 per share.

In December 2004, all Series AAA at 12% Cumulative Convertible Preferred Shares were converted into 4,500,000 shares of restricted common stock issued to the TAM Irrevocable Trust. In addition, all dividends accrued and unpaid on the AAA Preferred were waived.

56

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 8:   CAPITAL STRUCTURE, continued

Consulting Agreements

During November 2004, the Company entered into consulting agreements with two officers to provide management consulting services for the Company. As consideration for services to be rendered, the consultants received 480,000 restricted shares of the Company’s common stock at a purchase price of $0.03 per share (below market). The common shares are to be distributed in equal installments commencing on December 1, 2004, 2005 and 2006. The first third vested on the effective date of the agreement as an enticement to enter into the agreement.

The fair market value for these options was estimated at the date of grant using a Black-Scholes security pricing model with the following assumptions for the fiscal year 2004: risk-free interest rate of 6.5%; expected life of the option of 3 years; zero dividend yield; and a volatility factor of the expected market price of SET common stock of 250%. The estimated fair market value of the stock as of November 30, 2004 was $225,600 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreements. The Company has recorded compensation expense of approximately $75,200 and $18,800 for the fiscal years ending February 28, 2006 and 2005, respectively.

In November 2004 Mr. Parsons and Mr. Place joined the Company as Executive Vice President and Chief Operating Officer respectively. In March 2005 Mr. Parsons assumed additional responsibilities for International sales activities in Asia including China and India; and Mr. Place assumed additional responsibilities for Manufacturing, Operations and became acting Chief Financial Officer.

On March 29, 2005, the Company expanded the consulting agreement with one officer to provide management-consulting services for the Company. As consideration for services to be rendered, the consultant received 316,312 restricted shares of the Company’s common stock at a purchase price of $0.03 per share (below market). The common shares are to be distributed in equal installments commencing   on December 1, 2004, 2005 and 2006.

57

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 8:   CAPITAL STRUCTURE, continued

The fair market value of the restricted shares as of November 30, 2004 was estimated at $79,100 and recorded to unearned compensation.   The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded compensation expense of approximately $26,400 and $8,800 for the fiscal years ending February 28, 2006 and 2005, respectively.

Warrants

On March 29, 2005, the Company expanded the consulting agreements with two officers to provide management-consulting services for the Company. As further consideration for services to be rendered, the consultants were granted 1,000,000 warrants redeemable on restricted shares of the Company’s stock at a purchase price of $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. The fair market value of the warrants as of November 30, 2004 was estimated at $55,300 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreements. The Company has recorded compensation expense of approximately $18,400 and $6,100 for the fiscal years ending February 28, 2006 and 2005, respectively.

On March 29, 2005, the Company granted the TAM Trust 500,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. 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 unearned interest relating to the estimated value of these warrants of $27,200. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $9,100 and $3,000 for the fiscal year ending February 28, 2006 and 2005, respectively.

58

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 8: CAPITAL STRUCTURE, continued

The fair market value for these warrants was estimated at the date of grant using a Black-Scholes security pricing model with the following assumptions for the fiscal year 2004: risk-free interest rate of 6.5%; expected life of the option of 3 years; zero dividend yield; and a volatility factor of the expected market price of SET common stock of 250%.

On July 27, 2005, the Company expanded the consulting agreements with two officers to provide management-consulting services for the Company. As further consideration for services to be rendered, the consultants were granted 500,000 warrants redeemable on restricted shares of the Company’s stock at a purchase price of $.225 per share. The warrants are exercisable any time after December 1, 2006 and expire December 1, 2008. As the warrants provide for the purchase of commons stock at below the Company’s market price on the date of grant, the Company recorded unearned compensation relating to the estimated value of these warrants of $30,000. The Company is amortizing the estimated fair market value of the unearned compensation over the period from date of grant through December 1, 2006. The Company has recorded compensation expense of approximately $11,700 for the fiscal year ending February 28, 2006.

A summary of warrant activity is as follows:
Outstanding warrants
Warrants Outstanding
Exercise Price
     
Balance, February 29 ,2004
0
0
Granted
1,500,000
$ 0.225
Exercised
0
0
Canceled
0
0
Balance, February 28, 2005
1,500,000
$ 0.225
Granted
2,500,000
$ 0.225
Exercised
0
 
Canceled
0
 
Balance, February 28, 2006
4,000,000
$ 0.225


59

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 8: CAPITAL STRUCTURE, continued

Stock Compensation Plan

During July 2000, the Company adopted a stock compensation plan to be administered by the Board of Directors, or a Compensation Committee to be appointed by the Board. Consultants, advisors, and employees of the Company are eligible to participate in the Plan. The Plan provides for the issuance of 300,000 shares of common stock to be issued as stock grants, or under stock option agreements. During October 2000, the Company settled approximately $109,200 of its accrued expenses through the issuance of 109,139 shares of common stock.

During the fiscal year ending February 28, 2005, the Company terminated this stock compensation plan.

During February 2002, the Company adopted an additional stock compensation plan to be administered by the Board of Directors or a Compensation Committee to be appointed by the Board. The Plan provides for the issuance of 300,000 shares of common stock to be issued as stock grants, or under stock option agreements. During February 2002, the Company issued 10,000 shares for compensation and 232,000 shares for services provided. During the fiscal year ending February 28, 2005, the Company terminated this stock compensation plan.

A summary of stock option activity is as follows:

 
Outstanding options
Stock Options Outstanding
Exercise Price
     
Balance, February 29, 2004
248,861
Market
Granted
0
 
Exercised
0
 
Canceled
248,861
 
Balance, February 28, 2005
0
 
Granted
0
 
Exercised
0
 
Canceled
0
 
Balance, February 28, 2006
0
 

60

 
 
 

  SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 8:   CAPITAL STRUCTURE, continued

Contributed Executive Services
 
Effective December 1, 2001, the Company entered into an employment agreement with the President of the Company. The agreement is for five years and provides for a salary of $10,000 per year plus one percent of the net after tax profits of the Company as reported in the Company's Form 10-KSB. The agreement shall be automatically renewed for successive one-year terms unless the Company or employee provides written notice of non-renewal.  

As the President of the Company has decided not to accept his salary until the Company has become profitable, the Company recorded additional paid in capital in the accompanying consolidated statements of changes in stockholders’ deficit.

NOTE 9:   INCOME TAXES

The components of the provision for income taxes for the fiscal years ending February 28, 2006 and 2005 are as follows:

 
2006
2005
Current:
   
State
$1,600
$1,600
Federal
-
-
     
Deferred:
   
State
97,503
(16,797)
Federal
308,761
(70,591)
     
Valuation allowance
(406,264)
87,388
     
Provision for income taxes
$1,600
$1,600


61

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

The reconciliation of the effective tax rates and U.S. statutory tax rates for the fiscal years ending February 28, 2006 and 2005 are as follows:

 
2006
2005
     
Tax (benefit) of statutory rate
(34%)
(34%)
     
Deferred tax effect of goodwill
   
relating to Aqua Vision Acquisition
(6%)
(12%)
Contributed executive services
1%
3%
Interest due to related parties
29%
49%
Consulting fees due to related parties
21%
35%
Impairment and inventory reserves
19%
(64%)
Effect of state tax benefit
(3%)
(3%)
Other
13%
4%
Change in valuation allowance
(40)%
22%
     
Effective tax Rate
0%
0%

At February 28, 2006, the Company has net operating loss carry forwards, for income tax reporting purposes, of approximately $3,411 ,000 and $1,865,000 available to offset future federal and California taxable income, respectively. Based on current tax law, the Company’s federal net operating loss carry forwards will expire as follows: $801,500 during the fiscal year ending 2018; $1,084,900 during the fiscal year ending 2019; $110,600 during the fiscal year ending 2020; $625,100 during the fiscal year ending 2021; $249,900 during the fiscal year ending 2023; $170,000 during the fiscal year ending 2024; $38,000 during the fiscal year ending 2025 ; and $331,000 during the fiscal year ending 2026. The Company’s state net operating loss carry forwards begin to expire in 2010 through 2026 .

At February 28, 2006, the Company had available tax credit carry forwards comprised of federal and state research and experimentation credits of approximately $8,700 and $5,100, respectively. The research and experimentation credit carry forwards expire through 2023 for federal purposes and do not expire for California purposes.


62

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 9:   INCOME TAXES, continued

The components of the net deferred tax asset for the fiscal years ending February 28, 2006 and 2005 are as follows:

 
2006
2005
     
Net operating loss carry forward
$ 1,111,651
$ 922,372
Interest to related parties
144,610
45,365
Consulting fees to related parties
105,486
32,216
Impairment charge
37,856
-
Inventory & bad debt reserves
29,043
14,275
Other
6,003
14,157
     
Less: Valuation allowance
(1,434,649)
(1,028,385)
     
Net deferred tax asset
$ 0
$ 0

NOTE 10:   COMMITMENTS AND CONTINGENCIES

The Company leases an office and production facility under an operating lease that expires in February 2008. As of February 28, 2006, the Company paid $5,544 per month in base rent. The Company must also pay approximately $1,300 per month to cover taxes, maintenance, insurance and certain other operating expenses applicable to the premises.

Total rent expense amounted to approximately $98,700 and $82,900 for the fiscal years ending February 28, 2006 and 2005, respectively.

Future minimum base lease payments are as follows:

Fiscal Year Ending February 28
2007
$ 71,712
2008
74,304
   
 
$146,016

63

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 10:   COMMITMENTS AND CONTINGENCIES, continued

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 trust, 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. Currently a second demurrer to the First Amended Complaint has been filed and sustained by the Court, and plaintiff has been granted fourteen days to leave to amend. A second amended complaint has now been filed and answered. We continue to believe that this matter is without merit and intend to vigorously defend against plaintiff’s claims.

As of February 28, 2006, we know of no legal proceedings pending or threatened or judgments entered against any of our directors or officers in his or her capacity as such


64

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 10:   COMMITMENTS AND CONTINGENCIES, continued

.

NOTE 11:   RELATED PARTY TRANSACTIONS

Effective December 1, 2001, the Company entered into an employment agreement with the President of the Company. The agreement is for five years and provides for a salary of $10,000 per year plus one percent of the net after tax profits of the Company. The agreement shall be automatically renew for successive one-year terms unless the Company or employee provides written notice of non-renewal.

During November 2004, the Company entered into consulting agreements with two officers to provide management consulting services for the Company. As consideration for services to be rendered, the consultants received 480,000 restricted shares of the Company’s common stock at a purchase price of $0.03 per share (below market). The common shares are to be distributed in equal installments commencing on December 1, 2004, 2005 and 2006. The fair market value of the restricted share earned during the period ending November 30, 2004 was estimated at $225,600 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreements. The Company has recorded compensation expense of approximately $75,200 and $18,800 for the fiscal years ending February 28, 2006 and 2005, respectively.

During December 2004, all Series AAA at 12% Cumulative Convertible
Preferred Shares were converted into 4,500,000 shares of restricted common stock issued to the TAM Irrevocable Trust. In addition, all dividends accrued and unpaid on the AAA Preferred were waived.

During December 2004, the Company granted the TAM Irrevocable Trust restricted common stock of 1,266,667 shares for interest on prior year advances. The fair market value of the restricted shares was estimated at $228,000. The Company is amortizing the estimated fair market value of the interest over
the three-year term commencing March 1, 2002. The Company has recorded interest expense of $228,000 as of February 28, 2005. During April 2005, the Company issued the 1,266,667 shares to the TAM Irrevocable Trust.

65

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 11: RELATED PARTY TRANSACTIONS, continued

In November 2004 Mr. Parsons and Mr. Place joined the Company as Executive Vice President and Chief Operating Officer respectively. In March 2005 Mr. Parsons assumed additional responsibilities for International sales activities in Asia including China and India; and Mr. Place assumed additional responsibilities for Manufacturing, Operations and became acting Chief Financial Officer.

On March 29, 2005, the Company expanded the consulting agreement with one officer to provide management-consulting services for the Company. As consideration for services to be rendered, the consultant received 316,312 restricted shares of the Company’s common stock at a purchase price of $0.03 per share (below market). The common shares are to be distributed in equal installments commencing   on December 1, 2004, 2005 and 2006. The fair market value of the restricted share earned during the period ending November 30, 2004 was estimated at $79,100 and recorded to unearned compensation.   The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded compensation expense of approximately $26,400 and $8,800 for the fiscal years ending February 28, 2006 and 2005, respectively.

Additionally, on March 29, 2005, the Company granted the TAM Trust 1,972,133 restricted shares of the Company’s common stock. These shares were granted at a price of $0.03 per share and vest over a three-year period, beginning November 1, 2004. As the Tam Trust was granted the common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these shares of $493,000. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $164,300 and $54,800 for the fiscal years ending February 28, 2006 and 2005, respectively.

On March 29, 2005, the Company expanded the consulting agreements with two officers to provide management-consulting services for the Company. As further consideration for services to be rendered, the consultants were granted 1,000,000 warrants redeemable on restricted shares of the Company’s stock at a purchase price of $.225 per share. The

66

 
 
 

  SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 11:   RELATED PARTY TRANSACTIONS, continued

warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. The fair market value of the warrants earned during the period ending November 30, 2004 was estimated at $55,300 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreements. The Company has recorded compensation expense of approximately $18,400 and $6,100 for the fiscal years ending February 28, 2006 and 2005, respectively.

On March 29, 2005, the Company granted the TAM Trust 500,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. 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 unearned interest relating to the estimated value of these warrants of $27,200. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $9,100 and $3,000 for the fiscal years ending February 28, 2006 and 2005, respectively.

On July 27, 2005, the Company expanded the consulting agreements with two officers to provide management-consulting services for the Company. As further consideration for services to be rendered, the consultants were granted 500,000 warrants redeemable on restricted shares of the Company’s stock at a purchase price of $.225 per share. The warrants are exercisable any time after December 1, 2006 and expire December 1, 2008. As the warrants provide for the purchase of commons stock at below the Company’s market price on the date of grant, the Company recorded unearned compensation relating to the estimated value of these warrants of $30,000. The Company is amortizing the estimated fair market value of the unearned compensation over the period from date of grant through December 1, 2006. The Company has recorded compensation expense of approximately $11,700 for the fiscal year ending February 28, 2006


67
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 11:   RELATED PARTY TRANSACTIONS, continued

During January 2006, the Company issued to its primary lender 37,500 common shares, estimated value of $8,400, for continued financial support.

 
NOTE 12 - SEGMENT INFORMATION
 
 

 
During the fiscal years ending February 28, 2006 and 2005, the Company had foreign assets in China. The following geographic area data for trade revenues is based on product or service delivery location, and property, plant, and equipment is based on physical location.

 
Net revenue from external sources at February 28,:
 
 
2006   2005
 

  $ 1,288,150 $ 593,646

NOTE 13:   LOSS PER SHARE

 
February 28, 2006
February 28, 2005
Numerator:
   
     
Net loss
$ (932,456)
$ (250,423)
     
Loss available to common stockholders
$ (932,456)
$ (250,423)
     
Denominator:
   
     
Weighted average shares outstanding (includes both restricted and free trading shares)
17,969,317
11,936,767
     
Basic and diluted loss per share
$ (0.05)
$ (0.02)


68
 

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2006

NOTE 13: LOSS PER SHARE, continued

Warrants to purchase common stock were outstanding during the 2006 fiscal year (see Note 8) but were excluded in the computation of the diluted loss per share because their inclusion would have an anti-dilutive effect.


NOTE 14:   SUBSEQUENT EVENTS


The Company has now signed a product distribution/manufacturing agreement that incorporates an earlier distribution arrangement with ABMS Health Care for India with a copy of this agreement attached as an exhibit hereto.

The Company purchased certain assets, rights, contracts, EPA registration number and the Redi-Chlor trademark from Continental Technologies. The terms of the agreement are attached as an exhibit hereto.


69

 
 
 

ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financing Disclosure.  

On February 21, 2005, the Board of Directors approved the engagement of Armando C. Ibarra, Certified Public Accountants (A Professional Corporation) as independent auditors for the Company.

Effective February 28, 2006, the independent auditors for Seychelle Environmental Technologies, Inc. (the “Company”), terminated its relationship with Armando C. Ibarra as principal auditor for the Company. At no time were there any disagreements between the Company and Armando C. Ibarra on any matter of accounting principles or practices, financial statement disclosures or auditing scopes or procedures. Armando C. Ibarra performed the audit of the Company’s financial statements for the fiscal years-ending February 29, 2004 and February 28, 2005. The audit report of Armando C. Ibarra, Certified Public Accountants did not contain either an adverse opinion or disclaimer of opinion, and was not modified as to uncertainty, audit scope or accounting principles.

The Board of Directors of the Company, at a meeting held on March 26, 2006, approved the resignation of Armando C. Ibarra and appointed Windes & McClaughry Accountancy Corporation as independent auditors for the Company beginning with the fiscal year ending February 28, 2006.


ITEM 8A.   Controls and Procedures

(a)        Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this annual report (the “Evaluation Date”). During the fiscal year February 28, 2006, the Company attempted to establish disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors. As the Company has not hired a full time internal accountant, the Company has concluded, as of the Evaluation Date, that our disclosure controls and procedures were not effective in ensuring that all information required to be disclosed in reports that we file or submit  
under the Exchange Act was available within the time periods specified in the Securities and
Exchange Commission rules and forms.

(b) Management’s Report on Internal Control Over Financial Reporting . Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was not effective in ensuring that all information required to be disclosed in reports that we file or submit under the Exchange Act was available within the time periods specified in the Securities and Exchange Commission rules and forms.
in our financial statements as of February 28, 2006, as previously noted above.

70
Material Weakness in Internal Control over Financial Reporting


(c) Material Weakness in Internal Control over Financial Reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has concluded that as of February 28, 2006, the Company did not maintain effective controls over the preparation, review,
presentation and disclosure of amounts included in our Consolidated Balance Sheet, consolidated Statements of Operations and Consolidated Statement of Cash Flows and the related footnotes. Specifically the company did not timely reconcile various accounts including inventory, fixed assets and other accounts, and were required to make adjustments during the audit process. In addition, the company was not applying appropriate accounting principles with respect to impaired assets and was required to make adjustments during the audit process for both valuation and presentation. As a result the company was not able to timely report its regulatory filings. These control deficiencies could result in a misstatement of the Company’s accounts that would result in a material misstatement to the Company’s presentation and disclosure that would not be prevented or detected. Accordingly, management has concluded that these control deficiencies constitute a material weakness.

(d) Remediation Plan. The remediation plan the Company has implemented provides for enhanced procedures which include improved training and review processes to ensure proper preparation, review, presentation, and disclosure of amounts included in its balance sheet, operations statement and statement of cash flows. Accordingly, management believes it has 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. Therefore, management will continue to monitor and assess these control procedures to ascertain if the material weakness discussed above has been remediated. To fully implement these control procedures, the Company is currently in the process of locating an internal accountant.
.
(e) Changes in Internal Controls over Financial Reporting. During the most recent fiscal year, there have not been any significant changes in our internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to material affect our internal controls over financial reporting.



71

 
 
 

PART III

ITEM 9. Directors, Executive officers, Promoters and Control Persons; Compliance with Section 16 (A) of the Exchange Act

Our Directors and Executive Officers, their ages and positions held in the Company as of February 28, 2006 are as follows:

NAME
AGE
POSITION HELD
     
Carl Palmer
72
President, Chief Executive Officer and Director
Richard Parsons
71
Executive Vice President, Secretary and Director
James Place
67
Chief Operating Officer, Treasurer and Director

Our directors have served and will serve in such capacity until the next annual meeting of our
shareholders and until their successors have been elected and qualified. The officers serve at the discretion of our directors.

Biographies of Our Executive Officers and Directors

Carl Palmer . Mr. Palmer has been the President, CEO and a director of the Company since January 1998. He is the founder of our company, innovator of the complete line of Seychelle water filtration products and primary spokesperson worldwide. He is an internationally recognized expert in the field for over 35 years and pioneered the development of the reverse osmosis (RO) home and office pure water business in the US in the late 1970’s. That company, Aq-Ro-Matic, was later sold to Coca-Cola in 1973. He developed cellouse triacetate membrane, a breakthrough technological development in the industry and subsequently, created and sold pure water companies to Coca Cola Los Angeles as noted previously, AMF/Cuno in 1985 and Shaklee in 1989. Also, in the late 1980’s Mr. Palmer developed the Best Water reverse osmosis business for Shaklee and sold over $53 million in above-the-counter systems. Carl’s 30 years of direct sales experience has led to many significant business relationships, many of which continue today. He is the inventor of thirteen patented products related to water purification. Mr. Palmer received a Bachelors Degree from Whittier College.

Richard Parsons . Mr. Parsons has been Secretary, Executive Vice President and a director of the Company since November 2004. In March of2005, he assumed additional responsibilities for International sales activities in Asia, including China an India He has over 30 years experience in bottled water, reverse osmosis and water filtration with major companies such as Coca-Cola, Arrowhead, Shaklee, and Canadian Glacier. Mr. Parsons was a General Manager at Coca-Cola in 1974, a Vice President at Arrowhead from 1975 to 1985, a consultant with Shaklee in 1988, and Vice President of US Operations for Canadian Glacier from 1989 to 1990.

For the past five years, Mr. Parsons acted as a consultant, and then became chairman of The Beverage Group, Inc. in 2002. In November 2004, he joined Seychelle as Executive Vice President. Mr. Parsons ran his own successful consulting business in water and related beverages with clients such as General Foods, Coke-USA, The Beverage Group, Coke-Japan and Mitsubishi Industries for many years. He also has over 20 years experience in direct sales and multilevel marketing with companies such as Avon, Holiday Magic, Arrowhead and National Education. Mr. Parsons has a Bachelors Degree from Principia College.

72

 
 
 


James Place . Mr. Place has been Treasurer, CFO, COO and a director of our Company since November 2004. In March of 2005, he assumed additional responsibilities for Manufacuring, Operations and became the Chief Financial Officer (CFO). He has over 30 years experience in food, beverages and bottled water. While at Arrowhead, he took the liter still and sparkling business from $10 to $75 million in 5 years. Mr. Place also had extensive marketing, new product development and operating experience with Fortune 100 companies such as Carnation, Kerr Glass and Hunt-Wesson. Mr. Place was Vice President and General Manager of the Grocery Products Division at Arrowhead from 1981 to 1988, a Vice President of Sales/Marketing - New Products at Kerr Glass from 1988 to 1990, Manager, New Products at Carnation from 1979 to 1981 and Sales/Marketing Manager at Hunt-Wesson Foods from 1970 to 1976.

Mr. Place also has substantial experience in business development, Mergers & Acquisitions and with the investment community. Mr. Place ran his own consulting business in consumer products including water and other beverages with small to medium sized companies from 1990 to 2004. This included working successfully with these companies on financing plans for both new products and expansion programs. Mr. Place has an MBA from Michigan State University and a Bachelors degree from Albion College.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

To the Company’s knowledge, based solely on its review of the copies of such reports furnished to the company and written representations that no other reports were required during the fiscal year ended February 28, 2006, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with.
 
Code of Ethics for Chief Executive Officer and Senior Financial Officers

On May 20, 2006, the Board of Directors of the Company adopted the Code of Ethics for Chief Executive Officer and Senior Financial Officers, which is included in Item 13 as an exhibit 99.

Indemnification of Directors and Officers.
 
Seychelle's Bylaws provide that it will indemnify its officers and directors to the full extent permitted by Nevada state law. Seychelle's bylaws likewise provide that Seychelle will indemnify and hold harmless its officers and directors for any liability including reasonable costs of defense arising out of any act or omission taken on behalf of Seychelle, to the full extent allowed by Nevada law, if the officer or director acted in good faith and in a manner the officer or director reasonably believed to be in, or not opposed to, the best interests of the corporation.
 
 

 
 
73
 

 
 
 

 

 
In so far as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 
74
 

 
 
 

 

 
 
ITEM 9B. Other Information
 
 
None.  
 

ITEM 10. Executive Compensation.  

The following table sets forth the Summary Compensation Table for the Chief Executive Officer and the compensated executive officers with salaries in excess of $100,000 per annum who were serving as executive officers at the end of the last three completed fiscal years. Compensation does not include minor business-related and other expenses paid by us. Such amounts in the aggregate do not exceed $10,000.

Summary Compensation Table

Annual Compensation
Long Term Compensation
----------------------------------
---------------------------------------
Awards
Payouts
----------------------------------
---------------------------------------
         
Restricted
All
Name and
 
Salary
Annual
Other Stock
LTIP
Other
Principal/
Positions
Fiscal Year
Ending
Compensation ($) (2)
Bonus ($)
Compensation ($)(1)(3)
Award(s)
Securities
Carl Palmer
2006
$10,000 (2)
       
President & CEO
2005
$10,000 (2)
       
Director
2004
$10,000 (2)
       
             
Richard Parsons
2006
$0
 
$44,203(3)(5)(7)
 
$77,595(4)(6)
Executive VP*
2005
$0
 
$9,400(3)
 
$11,908(4)
Director (1)
2004
$0
       
             
James Place
2006
$0
 
$9,400(3)
 
$70,0944,584(4)(6)
COO*
2005
   
$9,400(3)
 
$4,584(4)
Director (1)
2004
   
--
   
 
(1)  
Elected to Board of Directors during November 2004
(2) Effective December 1, 2001, the Company entered into an employment agreement with the President of the Company. The President of the Company has decided not accept his salary until the Company becomes profitable.

75

 
 
 


(3) During November 2004, Messrs. Parsons and Place were granted 240,000 shares of restricted common stock valued at $.03 per share and are distributed over three years beginning December 1, 2004, 2005 and 2006. The fair market value of the restricted shares was estimated to be $225,600 and the Company is amortizing this value over the three-year term of the consulting agreements.
(4) In November 2004 Mr. Parsons and Mr. Place joined the Company as Executive Vice President and Chief Operating Officer respectively. In March 2005 Mr. Parsons assumed additional responsibilities for International sales activities in Asia including China and India; and Mr. Place assumed additional responsibilities for Manufacturing, Operations and became acting Chief Financial Officer.
(5) During March 2005, Messrs. Parsons and Place were granted warrants to purchase     500,000 shares of restricted common stock at $0.225 per share and are distributed over   the same three years and are exercisable from December 1, 2004 until December 1, 2008.   The fair value of the warrants was estimated to be $55,300 and the Company is   amortizing this value over the three-year term of the consulting agreements.
(6) During March 2005, Mr. Parsons was granted 316,312 shares of restricted common stock valued at $0.03 per share and are distributed in equal installments commencing on December 1, 2004, 2005 and 2006. The fair market value of the restricted shares was estimated to be $79,100 and the Company is amortizing the estimated value over the three-year term of the consulting agreement.
(7) During July 2005, the Company expanded the consulting agreements with Messrs.     Parsons and Place to provide management-consulting services for the Company. As   further consideration for services to be rendered, the consultants were granted 500,000   warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The   warrants are exercisable any time after December 1, 2006 and expire December 1, 2008.   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 unearned compensation relating   to these warrants of $30,000. The Company is amortizing the estimated fair market value   of the unearned compensation over the period from the date of grant through December   1, 2006.
(8) During January 2006, the Company issued Mr. Parsons 37,500 shares of common shares     for services rendered. As the common stock was issued at below the Company’s market   price at date of grant ($nil cost per share), the Company recorded consulting expense   relating to the estimated value of these shares of $8,437.

The Board of Directors as a whole acts as a compensation committee. We have no retirement, pension, sharing, stock option, insurance or other similar programs.

We do not pay members of our Board of Directors any fees for attendance or similar remuneration, but reimburse them for any out-of- pocket expenses incurred by them in connection with their activities.


ITEM 11. Security Ownership of Certain Beneficial Owners and Management .

The following sets forth the number of shares of our $0.001 par value Common Stock beneficially owned, including instruments stock warrants, etc. that are issuable within sixty days from the filing of this document, by (i) each person who, as of November 30, 2005, was known by us to own beneficially more than five percent (5%) of our Common Stock; (ii) our individual directors and (iii) our officers and directors as a group. As of February 28, 2006 there were a total of24,715,010 shares of Common Stock issued and outstanding.
76
NAME AND ADDRESS
AMOUNT AND NATURE OF
PERCENT OF
OF BENEFICIAL OWNER
BENEFICIAL OWNERSHIP (1)(2)(4)
CLASS
     
The TAM Irrevocable Trust
10,216,030 (3)
41.3%
4012 S. Rainbow #K111
   
Las Vegas, NV 80103-2012
   
     
Shawn Lampman
4,000,000
16.2%
2345 Calico Creek
   
Las Vegas, NV 89135
   
     
FTS Worldwide Corp.
1,320,009
5.3%
24 Route De Malagnou
   
1208 Geneva Switzerland
   
     
Carl Palmer
-0-
-0-
251 Jeanell Dr., Ste 3
   
Carson City, NV 89703
   
     
Richard Parsons
687,263
2.8%
251 Jeanell Dr., Ste 3
   
Carson City, NV 89703
   

James Place
205,000
0.8%
251 Jeanell Dr., Ste 3
   
Carson City, NV 89703
   
     
All officers and directors
892,263
3.6%
As a Group (three persons)
   
 
(1) All ownership is beneficial and of record, unless indicated otherwise.

(2) Beneficial owners listed above have sole voting and investment power with respect to the shares shown, unless otherwise indicated.

(3) The TAM Irrevocable Trust is an irrevocable trust for the benefit of certain family members of Mr. Carl Palmer. Mr. Palmer disclaims any beneficial ownership or interest in this Trust. Cari Beck, his daughter, is the Trustee of the Trust and has total beneficiary rights and direction as the Trustee. The Trust is held in her name (50%) as well as that of Lindsay Helvey (25%) and Casey Helvey (25%), both granddaughters.

(4)  
There are no other financial instruments, including stock warrants, etc. that are issuable within sixty days from the filing of this document.

(5) All three officers spend 100% of their time managing the affairs of the Company.


ITEM 12. Certain Relationships and Related Transactions  
77
Effective December 1, 2001, the Company entered into an employment agreement with Carl Palmer, the President of the Company. The agreement is for five years and provides for a salary of $10,000 per year plus one percent of the net after tax profits of the Company. The agreement shall be automatically renew for successive one-year terms unless the Company or employee provides written notice of non-renewal.

During November 2004, the Company entered into consulting agreements with Messrs. Parsons
and Place to provide management consulting services for the Company. As consideration for services to be rendered, the Messrs. Parsons and Place received 480,000 restricted shares of the Company’s common stock at $0.03 per share (below market) with agreements attached as an exhibit hereto. The common shares are to be distributed in equal installments commencing on December 1, 2004, 2005 and 2006. The fair market value of the restricted shares earned during the period ending November 30, 2004 was estimated at $225,600 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded amortization of approximately $75,000 and $18,8000 for the fiscal year ending February 28, 2006 and 2005 respectively.

During December 2004, all Series AAA at 12% Cumulative Convertible Preferred Shares were converted into 4,500,000 shares of restricted common stock issued to the Tam Irrevocable Trust. In addition, all dividends accrued and unpaid on the AAA Preferred were waived.

As the February 28, 2006 and 2005, the Company had received advances of $363,150 and$448,200 and $504,800 from the TAM Irrevocable Trust in which Cari Beck, is a trustee as well as a daughter of Carl Palmer an officer and Board member. These advances bear interest at 10 percent. As of February 28, 2006, $100,000 of these advances are not repayable until after March 1, 2006.

As of February 28, 2006 and 2005, accrued interest on these advances was approximately $169,300 and $134,500, respectively, and is included in accrued interest due to
related parties in the accompanying consolidated balance sheet.

During December 2004, the Company granted the TAM Irrevocable Trust restricted common stock of 1,266,667 shares, effective March 1, 2002, for interest on prior advances of funds. The restricted common shares are to be distributed during the first quarter of the fiscal year ending February 28, 2006. The fair market value of the restricted shares was estimated at $228,000. The Company is amortizing the estimated fair market value of the interest over the three-year term commencing March 1, 2002 (or $76,000 per year). During April, 2005,the company settled this liability through the issuance of common stock to the company’s primary investor.

As of February 28, 206 and 2005, accrued interest on these advances was approximately $228,000 and $0, respectively, and is included in accrued interest due to related parties in the accompanying consolidated balance sheet.

On March 29, 2005, the Company expanded the consulting agreement with Mr. Parsons to provide management-consulting services for the Company with agreements attached as an exhibit hereto. As consideration for services to be rendered, the consultant received 316,312 restricted shares of the Company’s common stock at $0.03 per share (below market). The common shares are to be distributed in equal installments commencing on December 1, 2004, 2005 and 2006. The fair market value of the restricted share earned during the period ending November 30, 2004 was estimated at $79,100 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded amortization of approximately $18,400 and $6,100 for the fiscal year ending February 28, 2006 and 2005, respectively. 78
On March 29, 2005, the Company expanded the consulting agreements with Messrs. Parsons  
and Place   to provide management consulting services for the Company with agreements attached as an exhibit hereto. As further consideration for services to be rendered, the consultants were granted 1,000,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 and are exercisable through December 1, 2008. The fair market value of the warrants earned during the period ending November 30, 2004 was estimated at $55,300 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded amortization of approximately $18,400 and $6,100 for the fiscal year ending February 28, 2006 and 2005, respectively.

On March 29, 2005, the Company granted the TAM Trust 500,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share for additional interest charged to the Company for previous unpaid notes and continued financial support. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. 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 unearned interest relating to the estimated value of these warrants of $27,200. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded amortization of approximately $9,100 and $3,000 for the fiscal year ending February 28, 2006 and 2005, respectively.

On July 27, 2005, the Company granted the TAM Trust 2,000,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are exercisable any time after December 1, 2006 and expire December 1, 2008. 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 unearned interest relating to the estimated value of these warrants of $120,000. The Company is amortizing the estimated fair market value of the unearned interest over the period from date of grant through December 1, 2006. The Company has recorded interest expense of approximately $46,700 for the fiscal year ending February 28, 2006.

On July 27, 2005, the Company expanded the consulting agreements with Messrs. Parsons
and Place to provide management consulting services for the Company with agreements attached as an exhibit hereto. As further consideration for services to be rendered, the consultants were granted 500,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are exercisable any time after December 1, 2006 and expire December 1, 2008. 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 unearned compensation relating to the estimated value of these warrants of $30,000. The Company is amortizing the estimated fair market value of the unearned compensation over the period from date of grant through December 1, 2006. The Company has recorded consulting fees of approximately $11,700 for the fiscal year ending February 28, 2006.

On January 23, 2006, the Company issued to the TAM Trust 37,500 common shares for continued financial support. As the common stock was issued at below the Company’s market price at the date of grant ($nil cost per share), the Company recorded interest expense relating to the estimated value of these shares of $8,437.

On January 23, 2006, the Company issued to the Messr. Parsons 37,500 common shares for services rendered. As the common stock was issued at below the Company’s market price at the date of grant ($nil cost per share), the Company recorded compensation expense relating to the estimated value of these shares of $8,437. 79

ITEM 13.   EXHIBITS, LIST
 
(a) Exhibits

Exhibit No.
 
Description
2A*
Plan of Exchange between Seychelle Environmental Technologies, Inc. and Seychelle Water Technologies, Inc. dated January 30, 1998 as filed with Form 10-SB 12 G on February 8, 2000.
   
3A*
Articles of Incorporation dated January 23, 1998 as filed with Form 10-SB 12 G on February 8, 2000.
   
3B*
Articles of Merger of Royal Net, Inc. into Seychelle Environmental Technologies, Inc as filed with Form 10-SB 12 G on February 8, 2000.
   
3C*
Amendment to Articles of Incorporation re: Series "A" Preferred Stock as of January 31, 1998 as filed with Form 10-SB 12 G on February 8, 2000.
   
3D*
Amendment to Articles of Incorporation re: Series "AA" Preferred Stock as of June 5, 1998 as filed with Form 10-SB 12 G on February 8, 2000.
   
3E*
Amendment to Articles of Incorporation re: Series "AAA" Preferred Stock as of February 18, 1999 as filed with Form 10-SB 12 G on February 8, 2000.
   
3F*
Bylaws as filed with Form 10-SB 12 G on February 8, 2000.
   
10A*
Purchase Agreement with Aqua Vision as filed with Form 10-SB 12 G on February 8, 2000.
   
10B*
Amended Purchase Agreement with Aqua Vision as filed with Form 10-SB 12 G on February 8, 2000.
   
10C*
2000 Stock Compensation Plan I, dated July 1, 2000 as filed with Registration Statement on Form S-8 on August 31, 2000.
   
10D*
2002 Stock Compensation Plan I, dated February 12, 2002 as filed with Registration Statement on Form S-8 on February 27, 2002.
   
10E*
Purchase Agreement with Aqua Gear as filed with Annual Report on Form 10-KSB on June 14, 2002.
   
10F*
Employment Contract with Carl Palmer as filed with Annual Report on Form 10-KSB on June 14, 2002.
   
10G*
Management Consulting Contract with Richard Parsons
   
   
10H*
Management Consulting Contract with James Place
   
10I**
Joint Venture Agreement with Huanghua Plastic Co. Ltd. dated September 1, 2005
   
10J**
ABMS Health Care Pvt. Ltd. Distribution Rights Agreement dated April 1, 2006
   
10K*
Confident, Inc. Exclusive Distribution Rights Agreement dated January 1, 2006
   
10L**
Continental Technologies. Inc., Purchase Agreement dated April 26, 2006
   
23**
Auditor’s Consent
   
31.1**
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
(Section 302 of the Sarbanes-Oxley Act of 2002)
   
31.1**
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 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)
   
99**
C ode of Ethics for Chief Executive Officer and Senior Financial Officers

* Previously filed with the Securities and Exchange Commission as indicated and incorporated by reference herein
** Attached as an exhibit hereto

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

1) Audit Fees & Audit-Related Fees

During fiscal year ending February 29, 2004, there were no fees billed associated with the examination of financial statements.

During fiscal year ending February 28, 2005, there were no fees billed associated with the
examination of financial statements.
During fiscal year ending February 28, 2006, there were no fees billed associated with the
examination of financial statements.

2) Tax Fees

During fiscal year ending February 29, 2004, there were no fees billed associated with the preparation of tax filings.

81

 
 
 

During fiscal year ending February 28, 2005, there were no fees billed associated with the preparation of tax filings.

During fiscal year ending February 28, 2006, there were no fees billed associated with the preparation of tax filings.


3) All Other Fees

During fiscal year ending February 29, 2004, there were no other fees billed by the Company’s principal accountant for services.

During fiscal year ending February 28, 2005, there were no other fees billed by the Company’s principal accountant for services.

During fiscal year ending February 28, 2006, there were no other fees billed by the Company’s principal accountant for services.


Audit committee’s pre-approval policies and procedures

Curently the full Board of Direcors acts s n audit commite.

Percentage of hours expended

The amount of hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was less than 50%.

82

 
 
 

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Seychelle Environemental Technologies, Inc.
 
By: /s/ Carl Palmer
        Carl Palmer
        Director, Chief Executive Officer and
        President

Date: June 13, 2006

By: /s/ Jim Place
        Jim Place
        Director and Chief Financial Officer
                       and Chieef Operating Officer
Date: June 13, 2006


In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Carl Palmer     Director,
 Chief Executive Officer and President
June 13, 2006

/s/ Jim Place
Director and Chief Financial Officer and Chief Operating Officer
June 13, 2006




83


Exh8ibit 10 I

JOINT VENTURE AGREEMENT



AGREEMENT (the “Agreement”) dated and effective as of September 1, 2005, by and between HUANGHUA PLASTIC CO. LTD, (“HUANGHUA”), having its principal offices in China, and SEYCHELLE ENVIRONMENTAL PRODUCTS INC. (“SEYCHELLE”), having its principal offices at 33012 Calle Perfecto, San Juan Capistrano, CA 92675 .

WHEREAS , SEYCHELLE is interested in having a joint venture in China to make certain products and parts, and;

WHEREAS, HUANGHUA, is willing to participate in such a venture;
 
NOW THEREFORE , in consideration of the mutual covenants herein contained, and for other and good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

1.  
Objective

The Joint Venture will operate an injection molding and assembly facility in China to deliver low cost, high volume, and exceptional quality products and parts for SEYCHELLE filtration for sale in the U.S., China and Asia.

2.  
Details

SEYCHELLE will provide design, development, product know-how and R&D capability to the venture with managerial expertise.

HUANGHUA will operate the facility, provide supervision, injection manufacturing to SEYCHELLE’S specifications, low cost production and assembly as needed.

3. Representations and Warranties

SEYCHELLE and HUANGHUA hereby warrant that they have the sole right to enter into this Purchase Agreement, and there has been no act or omission by either party which would give rise to any valid claim against any of the parties hereto for a brokerage commission, finder’s fee or other like payment in connection with the transaction contemplated hereby.

  4. Miscellaneous Provisions  


A.  
Modification: No modification, waiver or amendment of any term or condition of this Agreement shall be effective unless and until it shall be reduced to writing and signed by both of the parties hereto or their legal representatives .

B.  
Complete Agreement: This Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof and supersedes in all respects all prior proposals, negotiations, conversations, discussions and agreements between the parties concerning the subject matter hereof.

C.  
Assignment: This Agreement may not be assigned, in whole or in part, by either party hereto without prior written.

D.  
Governing Law: This Agreement shall be construed according to the laws of the State of California and shall not be subject to any choice of law provisions of such laws. This Agreement shall be binding upon HUANGHUA and SEYCHELLE , and their respective successors and assigns.

E.  
Binding on Successors: The terms and provisions of the Agreement that by their sense and context to survive the performance hereof by either party or by other parties hereto shall so survive the completion of performance and termination of this Agreement, including without limitation the making of any and all payments due hereunder unless otherwise noted.

   

ACCEPTED AND AGREED BY:


HUANGHUA PLASTIC CO.

By: ________________________         Date ___________________
Wang Gin Sheng, General Manager


SEYCHELLE ENVIRONMENTAL PRODUCTS INC.

By: _________________________       Date: ___________________
Carl Palmer, President and CEO







Exhibit 10.J

Distribution Rights Agreement


AGREEMENT (the “Agreement”) dated as of April 1, 2006, by and between ABMS Health Care Pvt. Ltd. (hereinafter referred to as ABMS) having its principal offices at 61-B Kasturba Nagar, Bhopal 462024 (Madhya Pradesh) India and SEYCHELLE ENVIRONMENTAL PRODUCTS INC. (“SEYCHELLE”), having its principal offices at 33012 Calle Perfecto, San Juan Capistrano, CA 92675.

WHEREAS , ABMS now desires to be designated by SEYCHELLE as a distributor within India of the water filtration products manufactured and sold by SEYCHELLE which products are described on Exhibit “A” hereto (and are each herein referred to individually as a “PRODUCT” and, collectively, as the (“PRODUCTS”), and thereby to have and hold the right to distribute and sell each of the PRODUCTS within India during the time periods provided herein; and

WHEREAS, ABMS now desires to set up a manufacturing operation in India to make certain of Seychelle’s PRODUCTS: and

WHEREAS, SEYCHELLE is willing to designate and empower ABMS as a distributor and manufacturer of the PRODUCTS in India on the terms and conditions and set forth herein.  

NOW THEREFORE , in consideration of the mutual covenants herein contained, and for other and good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

1. Grant of Distribution Rights .

A.  
SEYCHELLE hereby grants to ABMS the right to distribute and sell each of the PRODUCTS within India on an on-going basis, and for a minimum of ten (10) years.
B.  
ABMS shall have the right of first refusal to handle sales of any third party orders provided that they can meet the terms and conditions of such a transaction within thirty (30) days of receipt of order.
C.  
ABMS shall have the right to represent itself as a distributor for each of the PRODUCTS within India in printed communications, public marketing and promotional materials and in any discussions with private parties or governmental agencies within India.
 
 
2.   Obligations of ABMS as Distributor.

A.  
In consideration of the grant of Distribution Rights made to ABMS in Section 1., above, ABMS hereby agrees that it will undertake, at its own reasonable expense and using reasonable best efforts, to obtain all necessary governmental licenses, permits and approvals required to allow the sale of the PRODUCTS within India prior in each case to its commencement of distribution and sale activities of that PRODUCT in India.

B.  
In addition, ABMS agrees that it will use reasonable best efforts, at its own expense, to open distribution channels for each of the PRODUCTS within the private, governmental, education and military sectors within India.

C.  
ABMS   shall be exclusively responsible for all sales, promotion and marketing expenses relating to its distribution and sale of PRODUCTS in India.

D.  
ABMS covenants and agrees that it will not distribute or resell any PRODUCTS purchased directly from SEYCHELLE, or manufactured by ABMS in India, other than in India, without first advising SEYCHELLE of its intention, and receiving SEYCHELLE’S prior written approval to do so.

3.   Obligations of ABMS as Manufacturer.

The intent of this Agreement is to enter into a business relationship whereby manufacturing for the PRODUCTS is done in India exclusive of SEYCHELLE’S proprietary filters, ozone reactors, Ultra Filtration (UF) membranes, and Vending Machines (which will be covered by a separate Agreement). This is further covered in Section 5, below ( Understanding The Business Relationship ). In the event that ABMS purchases PRODUCTS from SEYCHELLE which are manufactured in the USA, the following applies:


A. Price of PRODUCTS to ABMS:

(i) SEYCHELLE hereby agrees to sell to ABMS, on presentment of written purchase orders therefore, such quantity or quantities of each PRODUCT as AMBS shall request, in each case at the per unit price for such PRODUCT established by SEYCHELLE from time to time for purchase orders based upon current OEM pricing. (A schedule of such prices as currently offered by SEYCHELLE is annexed as Exhibit “B” hereto.) In addition, SEYCHELLE agrees to afford to ABMS the benefit of any volume discount(s) offered to any SEYCHELLE customers with respect to each PRODUCT on a “most favored nation” basis.

(ii) ABMS shall be responsible for all costs of shipping the purchased PRODUCTS from point of manufacture.
 
B.    Commitment to Supply Products: SEYCHELLE represents and agrees that SEYCHELLE will use all commercially reasonable efforts to manufacture and deliver any PRODUCTS ordered by ABMS on a priority basis, but in all events in a timely fashion.

C. AMBS as a Manufacturer: SEYCHELLE will help ABMS set up local manufacturing under the terms and conditions set forth in EXHIBIT “C.”


4.   Further Covenants.

The parties hereto understand and agree that their mutual cooperation will be important and integral to the success that ABMS may achieve in opening sales and distribution channels for the PRODUCTS in India. Accordingly:

A. SEYCHELLE hereby covenants and agrees that it shall cooperate with marketing, sales, public relations and other personnel of ABMS in support of it’s efforts to manufacture, distribute and sell PRODUCTS in India.

B.  
SEYCHELLE further covenants and agrees that, at ABMS’s request, upon reasonable advance notice, SEYCHELLE shall make available a representative of its senior management who will travel to India, for a period of up to one (1) week, to promote the PRODUCTS and support ABMS’s sales and distribution efforts at the start of our business relationship. ABMS will be solely responsible for all expenses of such travel (including, but not limited to, airfare (business class), hotel accommodations, local transportation and meals), but will not be required otherwise to compensate SEYCHELLE for the time or participation of its representative in such visits.


C.  
ABMS covenants and agrees that it shall bear its own expenses in the performance of its duties hereunder.

5.  
Understanding the Business Relationship. ABMS and SEYCHELLE agree to enter into this Agreement for the purpose of manufacturing and distributing the PRODUCTS in India and its sub-continent and in other such regions where there may be non-conflicting business opportunities.

For Vending Machines, the parties agree to detail the terms and conditions in a separate Agreement, with the intent to manufacture and distribute them in India with an ownership split of 60% to ABMS and its investors, and 40% to SEYCHELLE.

6. Termination of the Agreement

If the parties to this Agreement shall at any time commit any breach of any provision, covenant or condition of this Agreement, and shall fail to remedy such within ninety (90) days of written notice by the other party, that party shall be in material breach of this Agreement. In such an event, the non-breaching party may at its option, and without limitation, cancel and terminate this Agreement by notice in writing to such effect and claim damages owing to it.

For purposes of this Agreement, “breach” shall be defined as:

FOR   ABMS:


 
1.
Failure to perform any obligations under this Agreement.
 
2.
Is declared insolvent or bankrupt or makes a bankruptcy filing or an assignment or similar arrangement for the benefit of its creditors or ceases active business operations.
 
3.
Attempting to copy any or all SEYCHELLE technologies with the idea of competing directly against SEYCHELLE, or avoiding any payments due SEYCHELLE.

FOR   SEYCHELLE:

1.  
Willfully refuses or is unable to supply filters or technology as set forth in this Agreement.
2.  
Failure to perform any other obligations or covenants set forth in this Agreement.
 

7. Indemnification.

A. SEYCHELLE warrants and represents to ABMS that (i) SEYCHELLE has full power and authority to grant the Distribution and Manufacturing Rights to ABMS, (ii) no approval or consent of any third party is required to enable SEYCHELLE to make such grant or for ABMS thereupon to be entitled to exercise the full rights and benefits intended thereby, and (iii) the grant thereof will not breach any license, patent or other right or agreement to which SEYCHELLE is a party with respect to SEYCHELLE’S rights and authority to manufacture and sell each of the PRODUCTS.
 
B. SEYCHELLE shall defend and indemnify ABMS and hold its members, managers, officers, employees and agents harmless against all claims and losses (including reasonable attorney’s fees and costs incurred in investigating or defending against any such claims) suffered by ABMS in connection with or as a result of a breach of the representation and warranty made by SEYCHELLE in subsection A. above.

C. Conversely, ABMS agrees that it shall defend and indemnify SEYCHELLE and hold its, managers, officers, employees and agents harmless against all claims and losses (including reasonable attorney’s fees and costs incurred in investigating or defending against any such claims) suffered by SEYCHELLE in connection with or as a result of the gross negligence, misrepresentation, or willful misconduct of ABMS or its personnel in the performance of ABMS’s duties hereunder.

D. SEYCHELLE further shall defend and indemnify ABMS and hold its members, managers, officers, employees and agents harmless against all claims and losses (including reasonable attorney’s fees and costs incurred in investigating or defending against any such claims) suffered by ABMS in connection with or as a result of any claim of breach of implied warranty or of product liability with respect to any PRODUCT manufactured by SEYCHELLE, purchased by ABMS and thereafter distributed.  

8. Miscellaneous Provisions.

A. Modification: No modification, waiver or amendment of any term or condition of this Agreement shall be effective unless and until it shall be reduced to writing and signed by both of the parties hereto or their legal representatives .

B. Waiver: Failure by either party at any time to require performance by the other party or to claim a breach of any term of this Agreement will not be construed as a waiver of any right under this Agreement, will not affect any subsequent breach, will not affect the effectiveness of this Agreement or any part thereof, and will not prejudice either party as regards any subsequent action.

C. Severability: If any term or provision of this Agreement should be declared invalid by a court of competent jurisdiction, the remaining terms and provisions of this Agreement shall be unimpaired.

D. Complete Agreement: This Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof and supersedes in all respects all prior proposals, negotiations, conversations, discussions and agreements between the parties concerning the subject matter hereof.

E. Assignment: This Agreement may not be assigned, in whole or in part, by either party hereto without prior written consent shall not be unreasonably withheld.

F. Governing Law
This agreement shall be constituted according to the laws of India as the entire manufacturing process and the establishment of units and the distribution and sale of the PRODUCTS are subjected to India and its sub-continent. In case of any dispute between the parties, the same shall be referred to an Independent Arbitrator appointed with the mutual consent of the parties and the place of arbitration would be in Mumbai (India) and the provisions of the Arbitration and Reconciliation Act, 1996 would be applicable to the proceedings before the Arbitrator and the decision of the Arbitrator shall be binding on both the parties.

G. Compliance with Laws: The parties hereto represent and agree each for itself that they and their respective employees, agents and subcontractors will comply with all applicable local laws, ordinances, regulations and codes in the performance of their respective services, duties and obligations under this Agreement.

H. Force Majeure: Either party is excused from performance and shall not be liable for any delay in performance or delivery or for non-performance or non-delivery, in whole or in part, caused by the occurrence of any contingency beyond the control of the parties including, but not limited to, work stoppages, fires, civil disobedience, riots, rebellions, accident, explosion, flood, storm, acts of God and similar occurrences. Either party may terminate or suspend its obligations under this Agreement if such obligations are prevented by any of the above events to the extent such events are beyond the reasonable control of the party whose reasonable performance is prevented.

I. Counterparts: This Agreement may be executed in counterparts each of which shall be deemed an original, but all of which together shall constitute one and the same.

J. Notices: All notices to be given and payments to be made to ABMS hereunder shall be sent to ABMS 61-B Kasturba Nagar, Bhopal 462024 (Madhya Pradesh), India attention: Mr. Sarang Bhand, Director. All notices to SEYCHELLE, to be made hereunder shall be given or made to SEYCHELLE at 33012 Calle Perfecto, San Juan Capistrano, CA 92675. Attention: Mr. Richard Parsons, Executive VP. All notices shall be sent by registered or certified mail or by a nationally recognized overnight delivery service and shall be deemed to have been given at the time such notice is received.

8. Survival Provisions.  

The terms and provisions of the Agreement that by their sense and context to survive the performance hereof by either party or by other parties hereto shall so survive the completion of performance and termination of this Agreement, including without limitation the making of any and all payments due hereunder unless otherwise noted.

   
9. Confidentiality.

A. The information furnished or disclosed by either party to the other in connection with this Agreement and the performance of the respective party’s services, duties and obligations hereunder, may contain or reflect confidential information with respect to the business operations and practices of the parties, any selling properties and/or buying sponsors (“Confidential Information”). Confidential Information furnished by either party to the other shall be used exclusively and only in connection with this Agreement.

B. The parties hereto acknowledge and agree that the unauthorized disclosure of use of any Confidential Information may cause immediate and irreparable injury to the party which has disclosed that Confidential Information to the other party, injury which can not be adequately compensated by monetary damages. Accordingly, each party hereto authorizes the other party to seek any temporary or permanent injunctive relief necessary to prevent such disclosure or use, or threat thereof. Further, each party hereto consent to the jurisdiction of any federal or state court sitting in the State of California for purposes of any suit seeking such injunctive relief, and consents to the service of process therein by certified or registered mail, return receipt requested.

 

ACCEPTED AND AGREED TO:

ABMS

By: ________________________         Date ___________________
Sarang Bhand, Director
 

SEYCHELLE

By: _________________________       Date: ___________________
Richard Parsons, Executive VP  





EXHIBIT “A”

The PRODUCTS covered by this Agreement include, but are not limited to, the following:

For Local Manufacturing:

-  
Portable filter bottles (Flip Top and Bottoms Up)
-  
Portable canteens

For Importing:

-  
In-line hydration filters and packs
-  
Pure water bags and pumps
-  
Shower filters
-  
Countertop filter systems
-  
Pitchers
-  
Straws

Note: PRODUCTS noted as imports may later be included for local manufacturing.


EXHIBIT “B”


ABMS purchase of PRODUCT from SEYCHELLE will be priced as follows:


1.  
Portable Bottles

- Flip Tops (Advanced Filters- no sleeves): $6.00
- Flip Tops with sleeve: 6.25
- Bottoms Up and Canteens “same as above”

Pricing of other products will be covered by separate correspondence as needed.

2.  
Advanced Filters

Quantity Pricing

1 to 149,999 $2.75
150,000 to 249,999 2.50
250,000 plus 2.25

3.  
Terms and Conditions

-  
FOB our plant in San Juan Capistrano, CA.
-  
Payment in US dollars.
-  
Prices subject to change with sixty (60) days written notice.
-  
Irrevocable Letters of Credit written as follows: release of 50% of the funds to SEYCHELLE upon the placement of the order; 50% released by the Bank upon presentation of Bill of Lading and all other documents when shipment is released by SEYCHELLE to the freight forwarder.


EXHIBIT “C”


SEYCHELLE will help ABMS set up manufacturing in India as follows:

1.  
Payment

SEYCHELLE will be paid $250,000 (US) for setting up local manufacturing for ABMS.


2.  
Payment Schedule

Payments will be as follows:

-  
$150,000 when molds are ordered.
-  
$100,000 when SEYCHELLE personnel deliver the molds and work with ABMS to set up assembly (approximately 45 to 60 days later).
-  
Both payments are to be wire transfers.

3.  
Products

PRODUCTS will be the Flip Top, Bottoms Up and Military Style Canteen.

4.  
Plan detail .

A.  
SEYCHELLE will order (and pay its suppliers cash up front) molds for:

-  
Flip Top Bottle : which consists of a bottle and cap (cap, mouthpiece, gasket, stem for filter and O-ring). This consists of 5 molds.
-  
Bottoms Up Bottle : which consists of a bottle and cap (same as Flip Top) as well as filter stem extender and bottom cap (tether, tether insert, cap, gasket, and plastic Chlorine tablet housing). This consists of a total of 11 molds - 6 for the top assembly, and 5 for the bottom cap.
-  
Military Canteen : which consists of a bottle, cap (pull top and screw-in filter for replacement) poppett top and male adapter. This will be a total of 3 molds.
-  
Check Valve: if we supply these out of China, they are at $.12 each.

B.  
India manufacturing capability.

Prior to ordering molds, SEYCHELLE will need to understand the injection and blow molding capability of manufacturing companies in India to insure compatibility with the molds before manufacturing. SEYCHELLE will work with ABMS to search out and set up local sourcing if necessary.

When SEYCHELLE orders the molds, SEYCHELLE will also order jigs, tooling (such as fixtures for putting on sleeves), hot pots for filter gluing and bulk glue (SEYCHELLE uses a special blend).

C.  
Timetable

Upon receipt of order and payment, the molds will be ordered and delivery should be in 45 days. It will take an additional 15 days to tune the tooling to insure that the finished product meets production specifications.

As the molds are being made, SEYCHELLE will work with ABMS personnel to set up assembly operations in your facility. This will include storage, product picking, inventory control, training, assembly (SEYCHELLE will provide a detailed plant layout), quality control and shipping. This should commence in the first 45 days which means that ABMS will have to build the infrastructure beforehand. SEYCHELLE will send to India its Operations Manager for this purpose. SEYCHELLE will pay for his salary and transportation, and we ask that ABMS pay for his room and board.

D.  
Getting started.

Recognizing that the above may well take 90 days to execute, SEYCHELLE will send to ABMS parts and filters for 5,000 Flip Tops and 5,000 canteens (or whichever ABMS wants) at SEYCHELLES cost so that assembly can begin (with all of the above details) and sales can be “jump started.” This will enable ABMS to serve some of ABMS’S customers without typical “start-up” worries and help train ABMS production and management people in the product line.











Exhibit 10.L

PURCHASE AGREEMENT



AGREEMENT (the “Agreement”) dated and effective as of April 26, 2006, by and between CONTINENTAL TECHNOLOGIES. INC ., (“CONTINENTAL”), having its principal offices at 255 Main Street, Little River, Kansas 67457 and SEYCHELLE ENVIRONMENTAL PRODUCTS INC. (“SEYCHELLE”), having its principal offices at 33012 Calle Perfecto, San Juan Capistrano, CA 92675 .

WHEREAS , SEYCHELLE is interested in purchasing certain assets, rights, contracts, EPA registrations and trademark use covered in EXHIBIT “A”; and

WHEREAS, CONTINENTAL, subject to the terms and conditions hereinafter set forth, at the closing of the transaction contemplated hereby, is willing to sell, convey, transfer and deliver to SEYCHELLE such items identified in EXHIBIT “A.”
 
NOW THEREFORE , in consideration of the mutual covenants herein contained, and for other and good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

1.  
Purchase Price

SEYCHELLE agrees to purchase from CONTINENTAL those items covered in EXHIBIT “A” for 50,000 shares of SEYCHELLE’S restricted common stock (One year maturity date) to be issued within ten (10) working days after closing. SEYCHELLE further warrants that, after the date the stock restriction is removed, for a period of six (6) months thereafter, it will purchase back from CONTINENTAL, at CONTINENAL’S option, some or all of the 50,000 shares of SEYCHELLE restricted common stock for $.75 per share.

SEYCHELLE further agrees to pay CONTINENTAL a 10% commission on net sales (gross sales less cash discounts, returns or bad debts) of the existing product, or any new products sold directly by SEYCHELLE, and 10% on any product sold by CONTINENTAL for SEYCHELLE to their existing or new customers at SEYCHELLE’S OEM (Lowest volume) prices. Commissions on product (s) sold below SEYCHELLE’S OEM prices will be agreed upon in advance by both parties.

SEYCHELLE shall keep all appropriate records to enable it to meet all of its obligations herein, and upon request by CONTINENTAL, and at their expense, such records may be audited with ten (10) days written notice.

Commissions will be paid to CONTINENTAL on the tenth of each month for the proceeding months sales activity, and will be supported by appropriate sales reports.


 
2 . REPRESENTATIONS and WARRANTIES of PARTIES

SEYCHELLE and CONTINENTAL hereby warrant that they have the sole right to enter into this Purchase Agreement, and there has been no act or omission by either party which would give rise to any valid claim against any of the parties hereto for a brokerage commission, finder’s fee or other like payment in connection with the transaction contemplated hereby.

CONTINENTAL further warrants that it is the owner of the certain assets, rights, contracts, EPA registrations and trademarks covered in EXHIBIT “A”, and there are no known actions, activities, lawsuits or judgments pending or outstanding which would prohibit the sale and transfer of same to SEYCHELLE.

3 . MISCELLANEOUS PROVISIONS

A.  
Modification: No modification, waiver or amendment of any term or condition of this Agreement shall be effective unless and until it shall be reduced to writing and signed by both of the parties hereto or their legal representatives .

B.  
Complete Agreement: This Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof and supersedes in all respects all prior proposals, negotiations, conversations, discussions and agreements between the parties concerning the subject matter hereof.

C.  
Assignment: This Agreement may not be assigned, in whole or in part, by either party hereto without prior written.

D.  
Governing Law: This Agreement shall be construed according to the laws of the State of California and shall not be subject to any choice of law provisions of such laws. This Agreement shall be binding upon CONTINENTAL and SEYCHELLE , and their respective successors and assigns.

E.  
Binding on Successors: The terms and provisions of the Agreement that by their sense and context to survive the performance hereof by either party or by other parties hereto shall so survive the completion of performance and termination of this Agreement, including without limitation the making of any and all payments due hereunder unless otherwise noted.

F.  
Best Efforts: Seychelle warrants that it put forth its “best efforts” to increase the sales of the business, and will not circumvent any independent efforts of CONTINENTAL.

G.  
Closing Date: The date of closing will be April 26, 2006.

H.  
Confidentiality: CONTINENTAL agrees to the terms and conditions set forth in the Confidentiality Agreement set forth in EXHIBIT “B.

I.  
Term of Agreement : This Agreement will be in force for the life of the company, and binding on acquirers should the company be sold.

J.  
Non-Circumvent: SEYCHELLE agrees not to circumvent any of CONTINENTALS present or future customers as identified in SEYCHELLE’S Contract Exclusivity Form.

K.  
Other Stipulation : In the event that CONTINENTAL is dissolved or otherwise becomes inactive, the residual commissions and royalty payments revert to the three principals as follows: Loretta M. Teeters - 20%, Donald L. Teeters - 40%, and Leland M. Young - 40%.

4. Non-Compete

CONTINENTAL management and officers agree not to compete with SEYCHELLE directly or indirectly in the Chlorine tablet business for a period of five (5) years after the close of this transaction other than the exception covered in Section 1, above.

 

ACCEPTED AND AGREED BY:

CONTINENTAL TECHNOLOGIES INC.

By: ________________________         Date ___________________
Don Teeters, President


SEYCHELLE ENVIRONMENTAL PRODUCTS INC.

By: _________________________       Date: ___________________
Carl Palmer, President and CEO





EXHIBIT “A”

The following items are covered under this Purchase Agreement:

A.  
Use of EPA Registration Number 55304-4-71426.
B.  
Name of Chlorine supplier and contract, if any.
C.  
Use of Redi Chlor Brand name and Trademark.

EXHIBIT “B”


SEYCHELLE
Confidentiality Agreement

WHEREAS, Seychelle Environmental Technologies, Inc., (hereinafter referred to as “Purchaser”) is interested in the possibility of purchasing certain assets, rights, contracts, registrations, and trademarks (hereinafter referred to as “Confidential Information”); and

WHEREAS, Continental Technologies Inc., (hereinafter referred to as “Discloser”), is desirous of selling said Confidential Information to Purchaser and is willing to proceed with discussions with Purchaser related thereto, and Discloser is willing to disclose the Confidential Information to Purchaser for this purpose, subject to the terms of this Agreement.

NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties agree as follows:

1.  
Upon the execution if this Agreement, Discloser agrees to disclose to Purchaser certain of the Confidential Information.

2.  
Purchaser agrees to hold said Confidential Information, and any Confidential Information previously disclosed to Purchaser, in confidence, and not to use the Confidential Information for anyone accept Purchaser. Purchaser agrees to limit dissemination of, and access to, the Confidential Information to within Purchaser’s organization, and then only to those personnel or associates who have a need for access to the information for the above-described purpose, and who have entered into a restrictive agreement prohibiting such personnel from doing anything with respect to the Confidential Information that Purchaser would itself be prohibited from doing under this Agreement.

3.  
It is agreed that the obligations of confidentiality and non-use imposed hereunder will not in any way apply with respect to any of the following information:

a.  
Information which Purchaser reasonably demonstrates is a part of the public domain at the time the information is received by Purchaser and is not otherwise a protect able trade secret; and;
b.  
Information that Purchaser reasonably demonstrates was already known to Purchaser at the time of disclosure of the Confidential Information to Purchaser by Discloser, as evidenced by presently existing written documentation.


4.  
With regard to the interpretation of paragraph 3, Purchaser agrees that the fact that Purchaser had prior knowledge of a particular item of Confidential Information, or that such particular item is generally known to the public, at the time of it’s receipt, shall not permit Purchaser’s disclosure to others of such item of Confidential Information, or use of the same, in connection with one or other known items disclosed to Purchaser by Discloser, unless the particular combination itself, as well as it’s advantages and operability, were previously known to and not abandoned by the Purchaser, or the public generally, for the same specific purposes and uses disclosed to Purchaser by Discloser.

5.  
Nothing in this Agreement may be deemed a commitment of any kind, by either Purchaser or Discloser, to enter into any further agreement with the other.





 
   
Armando C. Ibarra, C.P.A. Members of the California Society of Certified Public Accountants
Armando Ibarra, Jr., C.P.A., JD Members of the American Institute of Certified Public Accountants
Registered with the Public Company Accounting Oversight Board  



June 14, 2006


To Whom It May Concern:

The firm of Armando C. Ibarra, Certified Public Accountants, APC consents to the inclusion of our report of August 16, 2005, on the audited consolidated financial statements of Seychelle Environmental Technologies, Inc., as of February 28, 2005 in the annual filing of form 10KSB for the fiscal year ended February 28, 2006 with the U.S. Securities and Exchange Commission.



Very truly yours,


____________________________
ARMANDO C. IBARRA, C.P.A.




Exhibit 23.2



CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the inclusion in the Annual Report of Seychelle Environmental Technologies, Inc. on Form 10-KSB of our report dated April 10, 2006, on the audited financial statements of Seychelle Environmental Technologies Inc., as of February 28, 2006 and for the year then ended.


Windes & McClaughry Accountancy Corporation
Irvine, California
June 12, 2006

Exhibit 31.1
CEO Certification
 
I, Carl Palmer, certify that:
 
The undersigned certifies that:

1. I have reviewed this Annual report on Form 10-KSB of Seychelle Environmental Technology, Inc. (the "Company");

2. Based on my knowledge, this Annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual report; and

3. Based on my knowledge, the financial statements, and other financial information included in this Annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Annual report.

4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:

a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual report is being prepared;

b) evaluated the effectiveness of the Company's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and

c) disclosed in this report any change in the Company's
internal control over financial reporting that occurred during the Company's
most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting;

5. The Company's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Company's auditors and the audit committee of Company's board of directors
(or persons performing the equivalent functions);

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the Company's
internal controls over financial reporting.

Date: June 12, 2006
 
/s/ Carl Palmer 
Carl Palmer, Chief Executive Officer


Exhibit 31.2
CFO Certification
 
I, Jim Place, certify that:
 
The undersigned certifies that:

1. I have reviewed this Annual report on Form 10-KSB of Seychelle Environmental Technology, Inc. (the "Company");

2. Based on my knowledge, this Annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual report; and

3. Based on my knowledge, the financial statements, and other financial information included in this Annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Annual report.

4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:

a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual report is being prepared;

b) evaluated the effectiveness of the Company's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and

c) disclosed in this report any change in the Company's
internal control over financial reporting that occurred during the Company's
most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting;

5. The Company's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Company's auditors and the audit committee of Company's board of directors
(or persons performing the equivalent functions);

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the Company's
internal controls over financial reporting.

/s/ Jim Place
------------------------------
Jim Place
Chief Financial Officer
JUNE 12, 2006


Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of Seychelle Environmental Technology, Inc. (the "Company") on Form 10-KSB for the fiscal year ending February 28, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Carl Palmer, Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of the undersigned’s knowledge and belief:

(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.

/s/ Carl Palmer -----------------------------
Carl Palmer
Chief Executive Officer
June 12, 2006


Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of Seychelle Environmental Technology, Inc. (the "Company") on Form 10-KSB for the fiscal year ending February 28, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jim Place, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that to the best of the undersigned’s knowledge and belief:

(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.




/s/ Jim Place
------------------------------
Jim Place
Chief Financial Officer
June 12, 2006


Exhibit 99
 

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC. CODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS  
 
 
The Board of Directors of Seychelle Environmental Technologies, Inc. (the “Company”) has adopted the following Code of Ethics (the “Code”) to apply to each of the Company’s Chief Executive Officers, Chief Financial Officer, principal accounting officer or controller, and persons performing similar functions (collectively, “Senior Financial Officers”). This Code is intended to focus Senior Financial Officers on areas of ethical risk, provide guidance to help them recognize and deal with ethical issues, provide a mechanism to report unethical conduct, foster a culture of honesty and accountability, deter wrongdoing and promote fair and accurate disclosure and financial reporting, deal with conflicts of interest, and compliance with law.
 
 
The Senior Financial Officers each owe a duty to the Company to adhere to a high standard of ethical conduct.
 
 
This Code is intended to serve as a source of guiding principles. Senior Financial Officers are encouraged to raise questions about particular circumstances that may involve one or more provisions of this Code to the attention of the Audit Committee (or in the absence thereof, to the Company’s Board of Directors), who may consult with legal counsel.
 
 
1. The Senior Financial Officers are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports and other filings made by the Company with the Securities and Exchange Commission (“SEC”). The Senior Financial Officers are required to familiarize themselves with disclosure requirements applicable to the Company as well as the business and financial operations of the Company. In the performance of their duties, the Senior Financial Officers are prohibited from knowingly misrepresenting facts.
 
 
2. It is the Company’s policy to comply with all applicable laws, rules and regulations relating to its business and operations. It is the responsibility of the Senior Financial Officers to adhere to the standards and restrictions imposed by such laws, rules and regulations.
 
 
3. The Senior Financial Officers shall encourage open communication and full disclosure of financial information by providing well understood processes under which management is kept informed of financial information of importance, including any departures from sound policy, practice or accounting norms. However, such officers should refrain from disclosing confidential information acquired in the course of their work except where authorized, unless legally obligated to do so. They should also refrain from using confidential information acquired in the course of their work for unethical or illegal advantage, either personally or through others.
 
 
4. The Senior Financial Officers, among other things, have a supervisory role over the preparation of financial disclosure to be included in the Company’s periodic reports to be filed with the SEC.
 
 
5. It is the responsibility of the Senior Financial Officers to bring to the attention of the Board of Directors (“Board”) and the Audit Committee (upon the formation thereof by the Board) any material information of which he or she may become aware that affects the disclosures made by the Company in its filings with the SEC or otherwise assist the Board and Audit Committee (upon the formation thereof by the Board) in fulfilling their responsibilities.
 
 
6. The Senior Financial Officers shall promptly bring to the attention of the Board and the Audit Committee (upon the formation thereof by the Board) any information he or she may have concerning (a) a significant deficiency in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s financial reporting, disclosures or internal controls.
 
 
7. The Senior Financial Officers shall promptly bring to the attention of the CEO or Audit Committee (or in the absence thereof, to the Board) any information he or she may have concerning any violation of these procedures, including any actual or apparent conflict of interest between personal and professional relationships, involving any management or other employee who has a significant role in the Company’s financial reporting, disclosures or internal controls.
 
 
8. The Senior Financial Officers shall promptly bring to the attention of the CEO or Audit Committee (or in the absence thereof, to the Board) any information he or she may have concerning evidence of a violation of the securities or other laws, rules or regulations applicable to the Company and the operations of its business, by the Company or any agent thereof, or of violation of these procedures.
 
 
9. The Board shall determine, or designate an appropriate person to determine, appropriate actions to be taken in the event of violations of these procedures by the Senior Financial Officers. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to these procedures, and shall include written notices to the individual involved that the Board has determined there has been a violation, censure of the Board, demotion or re-assignment of the individual, suspension with or without pay or benefits (as determined by the Board) and termination of the individual’s employment. In determining what action is appropriate in a particular case, the Board or such designee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action or whether or not the individual in question had committed other violations in the past.
 
Approved by the Board of Directors,
May 20, 2006.