UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB/A
Amendment
No. 1
(
X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
For
the
quarterly period ending May 31, 2006
(
) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
For
the
transition period from _______________ to __________________
Commission
File No. 0-29373
Seychelle
Environmental Technologies, Inc.
(Exact
Name of registrant as specified in its charter)
|
Nevada
|
33-0836954
|
|
(State
or other jurisdiction
|
(IRS
Employer File Number)
|
|
Of
incorporation)
|
|
|
33012
Calle Perfecto
|
|
|
San
Juan Capistrano, California
|
92675
|
|
(Address
of principal executive offices)
|
(zip
code)
|
(949)
234-1999
(Registrant's
telephone number, including area code)
Check
whether the registrant filed all documents and reports required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past
90 days. Yes: __ No: __X_
State
the
number of shares outstanding of the Registrant's common stock, as of the latest
practicable date, May 31, 2006, was 24,979,526.
Transitional
Small Business Disclosure Format (Check one): Yes: ___ No: __X_
Explanatory
Note
This
Current Report on Form 10-QSB/A is filed as an amendment (Amendment No. 1)
to the Current Report on Form 10-QSB filed by Seychelle Environmental
Technologies, Inc. on July 17, 2006.
As
reported on Form 8-K, dated December 12, 2006,on December 5, 2006 the
Company’s Board of Directors, and the Company’s independent registered public
accounting firm, concluded that the Company’s financial statements for the
fiscal quarter ended May 31, 2006 and similar communications issued by the
Company relating to periods commencing on March 1, 2006 should no longer be
relied upon.
The
Company became aware of certain errors in its previously filed financial
statements in the course of responding to comments of the Securities and
Exchange Commission resulting from their review of the Company’s General Form
for Registration of Securities on Form 10 and Quarterly Report on Form 10-QSB
for the quarter ended May 31, 2006 and during the preparation of its
financial statements in connection with its second quarter ended August 31,
2006.
On
March
1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123
(revised 2004), Share
Based Payment,
(“FAS
123R”) which establishes standards for the accounting of transactions in which
an entity exchanges its equity instruments for goods or services. In connection
with the Company recalculating its compensation expense under FAS 123R, it
was
determined that an incorrect volatility factor was previously utilized resulting
in an approximate $100,000 understatement of expenses during the three-month
period ended May 31, 2006.
During
April 2006, the Company issued 50,000 common shares, subject to a one year
restriction period, to shareholders of Continental Technologies, Inc.
(“Continental’) with an approximate value of $26,800 for the Redi Chlor brand
name and trademark. As the purchase agreement provides the shareholders of
Continental the right to sell the common shares back-to the Company, at
Continental’s sole option for a period of six months after the restriction
period at $0.75 per share, the Company recorded a contingent liability for
approximately $16,100. Previously, the Company had overstated the fair value
of
the patent by approximately $10,700 and recorded the estimated fair market
value
of the common shares, approximately $16,100, as an equity
transaction.
Finally,
as recommended by the SEC the company reclassified the California minimum
franchise fee from provision for income taxes to a component of general and
administrative expenses.
The
following is a summary of the anticipated effects of these changes cited
above
on the condensed consolidated balance sheets as May 31, 2006 as well as the
anticipated effects of these changes on the condensed consolidated statements
of
operations for the quarter then ended.
May
31,
2006
|
|
|
Condensed
Consolidated Balance Sheets
|
|
|||||||
|
|
|
As Previously
Reported
|
|
Adjustments
|
|
As
Restated
|
|
|||
|
Intangible
assets
|
|
$
|
44,128
|
|
$
|
(10,700
|
)
|
$
|
33,428
|
|
|
Total
assets
|
|
|
1,255,545
|
|
|
(10,700
|
)
|
|
1,244,845
|
|
|
Accrued
expenses
|
|
|
224,968
|
|
|
5,400
|
|
|
230,368
|
|
|
Total
liabilities
|
|
|
886,365
|
|
|
5,400
|
|
|
891,765
|
|
|
Additional
paid in capital
|
|
|
5,530,113
|
|
|
(64,443
|
)
|
|
5,465,670
|
|
|
Unearned
compensation
|
|
|
(169,413
|
)
|
|
169,413
|
|
|
-
|
|
|
Unearned
interest
|
|
|
(287,753
|
)
|
|
(23,067
|
)
|
|
(310,820
|
)
|
|
Accumulated
deficit
|
|
|
(5,174,489
|
)
|
|
(100,261
|
)
|
|
(5,274,750
|
)
|
|
Net
(loss)
|
|
|
(216,555
|
)
|
|
(101,688
|
)
|
|
(318,243
|
)
|
|
Net
(loss) per share-basic and diluted
|
|
|
(0.01
|
)
|
|
-
|
|
|
(0.01
|
)
|
|
Total
stockholders’ equity
|
|
|
369,180
|
|
|
(16,100
|
)
|
|
353,080
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
1,255,545
|
|
$
|
(10,700
|
)
|
$
|
1,244,845
|
|
For
Quarter Ended May 31, 2006:
|
|
|
|
|
|
|
|
|
|||
|
|
|
Condensed
Consolidated Statements of Operations
|
|
|||||||
|
|
|
As Previously
Reported
|
|
Adjustments
|
|
As
Restated
|
|
|||
|
Consulting
fees to related parties
|
|
$
|
(35,000
|
)
|
$
|
(21,860
|
)
|
$
|
(56,860
|
)
|
|
Total
operating expenses
|
|
|
(203,429
|
)
|
|
(23,460
|
)
|
|
(226,889
|
)
|
|
Net
loss from operations
|
|
|
(144,948
|
)
|
|
(23,460
|
)
|
|
(168,408
|
)
|
|
Interest
expense to related parties
|
|
|
(75,582
|
)
|
|
(79,828
|
)
|
|
(155,410
|
)
|
|
Total
other income (expense)
|
|
|
(70,007
|
)
|
|
(79,828
|
)
|
|
(149,835
|
)
|
|
Net
loss before provision for income taxes
|
|
|
(214,955
|
)
|
|
(103,288
|
)
|
|
(318,243
|
)
|
|
Provision
for income taxes
|
|
|
(1,600
|
)
|
|
1,600
|
|
|
-
|
|
|
Net
loss
|
|
|
(216,555
|
)
|
|
(101,688
|
)
|
|
(318,243
|
)
|
|
Net
(loss) per share-basic and diluted
|
|
|
(0.01
|
)
|
|
-
|
|
|
(0.01
|
)
|
FORM
10-QSB
Securities
and Exchange Commission
Washington,
D.C. 20549
Seychelle
Environmental Technology, Inc.
INDEX
|
Item
|
Description
|
Page
|
|
Part
I
|
FINANCIAL
INFORMATION
|
|
|
Item
1.
|
Consolidated
Financial Statements
|
5
|
|
Consolidated
Balance Sheet at May 31, 2006 (unaudited)
|
5
|
|
|
|
Consolidated
Statements of Operations for the three months ended May 31, 2006
(unaudited) and 2005 (unaudited)
|
7
|
|
Consolidated
Statements of Cash Flows for the three months ended May 31, 2006
(unaudited) and 2005 (unaudited)
|
8
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
10
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
|
Item
3.
|
Controls
and Procedures
|
29
|
|
Part
II
|
OTHER
INFORMATION
|
|
|
Item
1.
|
Legal
Proceedings
|
30
|
|
Item
2.
|
Changes
in Securities
|
31
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
31
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
31
|
|
Item
5.
|
Other
Information
|
31
|
|
Item
6.
|
Exhibits
and Reports on Form 8-K
|
32
|
|
Signatures
|
32
|
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED
BALANCE SHEET (UNAUDITED)
As
of May
31, 2006
|
ASSETS
|
|
|||
|
CURRENT
ASSETS
|
|
|||
|
Cash
|
$
|
502,210
|
||
|
Trade
receivables, net of allowance for doubtful accounts
|
48,802
|
|||
|
of
$-0- as of May 31, 2006
|
||||
|
Inventories,
net
|
445,638
|
|||
|
Prepaid
expenses
|
58,359
|
|||
|
|
||||
|
Total
current assets
|
1,055,009
|
|||
|
|
||||
|
PROPERTY
AND EQUIPMENT, NET
|
149,666
|
|||
|
|
||||
|
INTANGIBLE
ASSETS, NET
|
33,428
|
|||
|
|
||||
|
OTHER
ASSETS
|
6,742
|
|||
|
|
||||
|
Total
non-current assets
|
189,836
|
|||
|
|
||||
|
TOTAL
ASSETS
|
$
|
1,244,845
|
||
See
accompanying notes to consolidated financial statements.
-
5
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED
BALANCE SHEET (UNAUDITED)
(CONTINUED)
As
of May
31, 2006
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|||
|
|
|
|||
|
CURRENT
LIABILITIES
|
|
|||
|
Accounts
payable
|
$
|
59,834
|
||
|
Accrued
expenses
|
230,368
|
|||
|
Line
of credit
|
50,000
|
|||
|
Accrued
interest due to related parties
|
177,597
|
|||
|
Customer
deposits
|
2,816
|
|||
|
Income
taxes payable
|
8,000
|
|||
|
|
||||
|
Total
current liabilities
|
528,615
|
|||
|
|
||||
|
NOTES
PAYABLE TO RELATED PARTIES
|
363,150
|
|||
|
|
||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||
|
|
||||
|
STOCKHOLDERS'
EQUITY
|
||||
|
Common
stock $.001 par value - 50,000,000 shares authorized;
24,979,526
issued and outstanding
|
24,980
|
|||
|
Additional
paid-in capital
|
5,465,670
|
|||
|
Estimated
value of warrants
|
448,000
|
|||
|
Accumulated
deficit
|
(5,274,750
|
)
|
||
|
Unearned
interest
|
(310,820
|
)
|
||
|
|
||||
|
Total
stockholders' equity
|
353,080
|
|||
|
|
||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
1,244,845
|
||
See
accompanying notes to consolidated financial statements.
-
6
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
For
Three-Month Periods Ending May 31,
|
|
2006
|
2005
|
|||||
|
|
|
|
|||||
|
SALES
|
$
|
169,875
|
$
|
237,987
|
|||
|
COST
OF SALES
|
111,394
|
76,975
|
|||||
|
|
|||||||
|
Gross
profit
|
58,481
|
161,012
|
|||||
|
|
|||||||
|
OPERATING
EXPENSES
|
|||||||
|
Selling
|
19,035
|
23,475
|
|||||
|
General
and administrative
|
150,994
|
133,895
|
|||||
|
Consulting
fees to related parties
|
56,860
|
30,000
|
|||||
|
|
|||||||
|
Total
expenses
|
226,889
|
187,370
|
|||||
|
|
|||||||
|
LOSS
FROM OPERATIONS
|
(168,408
|
)
|
(26,358
|
)
|
|||
|
|
|||||||
|
OTHER
INCOME (EXPENSES)
|
|||||||
|
Interest
income
|
4,752
|
-
|
|||||
|
Interest
expense to related parties
|
(155,410
|
)
|
(53,753
|
)
|
|||
|
Miscellaneous
income (expense)
|
823
|
(768
|
)
|
||||
|
|
|||||||
|
Total
other income (expense)
|
(149,835
|
)
|
(54,521
|
)
|
|||
|
Net
loss
|
$
|
(318,243
|
)
|
$
|
(80,879
|
)
|
|
|
BASIC
AND DILUTED (LOSS)
|
|||||||
|
PER
SHARE
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
|
|
|
|||||||
|
WEIGHTED
AVERAGE NUMBER OF
|
|||||||
|
SHARES:
BASIC AND DILUTED
|
22,126,033
|
14,027,909
|
|||||
See
accompanying notes to consolidated financial statements
-
7
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
For
the
Three-Month Periods Ending May 31,
|
|
2006
|
2005
|
|||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|||||
|
Net
loss
|
$
|
(318,243
|
)
|
$
|
(80,879
|
)
|
|
|
Adjustments
to reconcile net loss to net
|
|||||||
|
cash
used in operating activities:
|
|||||||
|
Depreciation
and amortization
|
7,124
|
7,005
|
|||||
|
Compensation
and interest expense on stock and warrants
|
202,458
|
53,708
|
|||||
|
Contributed
executive services
|
2,500
|
2,500
|
|||||
|
Provision
for doubtful accounts
|
-
|
(2,047
|
)
|
||||
|
Return
of shares due to failure to perform services
|
-
|
(32,500
|
)
|
||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Trade
receivables
|
(15,200
|
)
|
(56,255
|
)
|
|||
|
Inventory
|
(53,997
|
)
|
(18,660
|
)
|
|||
|
Prepaid
expenses and other assets
|
(13,097
|
)
|
(52,092
|
)
|
|||
|
Accounts
payable
|
(1,177
|
)
|
2,857
|
||||
|
Accrued
expenses
|
60,157
|
72,566
|
|||||
|
Accrued
interest due to related parties
|
8,282
|
9,946
|
|||||
|
Customer
deposits
|
(26,232
|
)
|
25,574
|
||||
|
Income
tax payable
|
1,600
|
(1,997
|
)
|
||||
|
|
|||||||
|
Net
cash used in operating activities
|
(145,825
|
)
|
(70,274
|
)
|
|||
|
|
|||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|||||||
|
Purchase
of tooling and equipment
|
(1,284
|
)
|
(25,435
|
)
|
|||
|
Net
cash used investing activities
|
(1,284
|
)
|
(25,435
|
)
|
|||
See
accompanying notes to consolidated financial statements.
-
8
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)(CONTINUED)
For
the
Three-Month Periods Ending May 31,
|
2006
|
2005
|
||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||
|
Proceeds
from sale of common stock
|
$
|
11,250
|
$
|
537,745
|
|||
|
Proceeds
from sale of equipment
|
2,500
|
-
|
|||||
|
Repayments
on related party notes payable
|
-
|
(25,000
|
)
|
||||
|
Net
cash provided by financing activities
|
13,750
|
512,745
|
|||||
|
NET
(DECREASE) INCREASE IN CASH
|
(133,359
|
)
|
417,036
|
||||
|
Cash,
beginning of period
|
635,569
|
23,782
|
|||||
|
Cash,
end of period
|
$
|
502,210
|
$
|
440,818
|
|||
|
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 settlement of debt
|
$
|
107,995
|
$
|
53,401
|
|||
|
Stock
issued for intellectual property
|
$
|
16,100
|
$
|
-
|
|||
|
Stock
issued for accrued interest
|
$
|
-
|
$
|
228,000
|
|||
|
Return
of shares due to non-performance of services
|
$
|
-
|
$
|
32,500
|
|||
See
accompanying notes to consolidated financial statements.
-
9
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
NOTE
1: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited
Interim Financial Information
The
unaudited consolidated condensed financial statements of Seychelle Environmental
Technologies, Inc. (the “Company”) for the three-month periods ended May 31,
2006 and May 31, 2005 have been prepared in conformity with the accounting
principles described in the Company’s Annual Report o Form 10-K for the fiscal
year ended February 28, 2006 (the “Annual Report”) and include all adjustments
considered necessary by management for a fair statement of the interim periods.
Such adjustments consist only of normal recurring items. This report should
be
read in conjunction with the Annual Report. Due to seasonality and other
factors, interim results are not necessarily indicative of the results to be
expected for the full year.
Adoption
of Statement of Financial Accounting Standards No. 123(R)
On
March
1, 2006, the Company adopted Statement of Financial Accounting Standards No.
123
(revised 2004), Share
Based Payment,
(FAS
123(R)) which establishes standards for the accounting of transactions in which
an entity exchanges its equity instruments for goods or services, primarily
focusing on accounting for transactions where an entity obtains services in
share based payment transactions. FAS 123(R) requires a public entity to measure
the cost of services received in exchange for an award of equity instruments,
including stock warrants, based on the grant date fair value of the award and
to
recognize it as compensation expense over the period required to provide service
in exchange for the award, usually the vesting period. FAS 123(R) supersedes
the
Company’s previous accounting under Accounting Principles Board Opinion No. 25,
Accounting
for Stock Issues to Employees
(APB 25)
for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to
123(R). The Company has applied the provisions of SAB 107 in its adoption of
FAS
123(R).
The
Company adopted FAS 123(R) using the modified prospective transition method,
which requires the application of the accounting standard as of March 1, 2006,
the first day of the Company’s fiscal year 2007. The Company’s condensed
consolidated financial statements as of and for the three-months ended May
31,
2006 reflect the impact of FAS 123(R). In accordance with the modified
prospective transition method, the Company’s condensed consolidated financial
statements for the three-months ended May 31, 2005 have not been restated to
reflect, and do not include, the impact of 123(R).
123(R)
requires companies to estimate the fair value of share based payment awards
on
the date of grant using an option-pricing model. The value of the portion of
the
award that is ultimately expected to vest is recognized as expense over the
requisite service periods in the Company’s condensed consolidated statement of
operations. Prior to the adoption of FAS 123R, the Company accounted for stock
based awards using the intrinsic value method in accordance with APB 25 as
allowed under Statement of Financial Accounting Standards No. 123, Accounting
for Stock Based Compensation
(FAS
123). Under the intrinsic value method, no stock based compensation expense
had
been recognized in the Company’s Condensed Consolidated Statement of Operations,
other than as related to warrants or restricted common shares granted below
the
fair market value of the underlying stock at the date of grant.
-
10
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
Stock
based compensation expense recognized during the three-months ended May 31,
2006
is based on the value of the portion of share based payment awards that are
ultimately expected to vest during the period. Stock based compensation expense
recognized in the Company’s condensed consolidated statement of operations for
the three-months ended May 31, 2006 included compensation expense for share
based payment awards granted prior to, but not yet vested as of February 28,
2006 based on the grant date fair value estimated in accordance with the pro
forma provisions of 123R and compensation expense for the share based payment
awards granted subsequent to February 28, 2006 based on the grant date fair
value estimated in accordance with the provisions of FAS 123R. As stock based
compensation expense recognized in the condensed consolidated statement of
operations for the first three-months of fiscal 2007 has been based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures.
FAS
123R requires forfeitures to be estimated at the time of grant and revised,
if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. For the three-months ended May 31, 2006, the Company applied an
estimated forfeiture rate of zero% for officer grants, as the vesting periods
are complete as of December 1, 2006. As of the date of this filing, there were
no warrants granted to non-officers of the Company and therefore, no forfeiture
rate was utilized. The estimated vesting term of warrant grants for the
three-months ended May 31, 2006 was 4.5 years for officer grants.
FAS
123(R) requires the cash flows resulting from the tax benefits resulting from
tax deductions in excess of the compensation cost recognized for those warrants
to be classified as financing cash flows. Due to the Company’s loss position,
there were no such tax benefits during the three-months ended May 31, 2006
and
2005. Prior to the adoption of FAS 123R, those benefits would have been reported
as operating cash flows had the Company received any tax benefits related to
stock warrant exercises.
The
fair
value of stock based awards is calculated using the Black Scholes option pricing
model, even though this model was developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which differ
significantly from the Company’s stock warrants. The Black Scholes model also
requires subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
risk
free rate selected to value any particular grant is based on the United States
Treasury’s T-bill rate (3.5%). The expected volatility is based on the
historical volatility of the Company’s stock price. These factors could change
in the future, affecting the determination of stock based compensation expense
in future periods.
-
11
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
The
weighted average fair value of stock based compensation is based on the single
option valuation approach. Forfeitures are estimated and it is assumed no
dividends will be declared. The estimated fair value of stock based compensation
awards is amortized using the straight line method over the vesting period
of
the warrants or restricted common shares, as such method is consistent with
the
officer's contractual obligation. The Company’s fair value calculations for
stock based compensation awards for the three-months ended May 31, 2006 were
based on the following assumptions:
|
Risk
free interest rate
|
3.5%
|
|
Expected
life
|
1.58
- 3.33
|
|
Expected
volatility
|
235
- 323%
|
|
Expected
dividends
|
None
|
The
following table summarizes stock based compensation, consulting and interest
costs related to stock warrants and restrictive common shares under FAS 123(R)
for the three-months ended May 31, 2006, allocated as shown:
|
Consulting
fees to related parties
|
$
56,860
|
|
Interest
expense to related parties
|
$155,410
|
|
Total
stock and warrant based compensation expense
|
$212,270
|
For
the
three-months ended May 31, 2006, the amount of stock based compensation related
to stock warrants was $42,789. For the three-months ended May 31, 2006, the
amount of stock based compensation expense related to restricted common shares
was $14,071.
For
the
three-months ended May 31, 2006, the amount of stock based interest related
to
stock warrants was $109,415. For the three-months ended May 31, 2006, the amount
of stock based interest expense related to restricted common shares was
$45,995.
-
12
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
The
Company’s net loss for the three-months ended May 31, 2006 was $318,243. The
Company’s net loss for the three-months ended May 31, 2006 was $101,688 greater
than it would have been if the Company had continued to account for share based
compensation under APB 25. The Company’s net loss per common share, basic and
diluted, for the three-months ended May 31, 2006 was $0.01. The Company’s net
loss per common share, basic and diluted, for the three months ended November
30, 2006 was equal to what it would have been if the Company had continued
to
account for share based compensation under APB 25.
The
summary of the warrant activity, relating to compensation and interest expense,
during the three-months ended May 31, 2006 is as follows:
|
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (in years)
|
Aggregate
Intrinsic Value
|
||||||||||
|
Outstanding
at February 28, 2006
|
4,000,000
|
$
|
0.225
|
||||||||||
|
Granted
|
-
|
-
|
|||||||||||
|
Exercised
|
-
|
-
|
|||||||||||
|
Cancelled
|
-
|
-
|
|||||||||||
|
Outstanding
at May 31, 2006
|
4,000,000
|
$
|
0.225
|
2.75
|
$
|
79,034
|
|||||||
|
Vested
or expected to vest at May 31, 2006
|
4,000,000
|
$
|
0.225
|
2.75
|
-
|
||||||||
|
Exercisable
at May 31, 2006
|
2,680,000
|
|
$
|
0.225
|
2.75
|
$
|
79,034
|
||||||
-
13
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
The
following table summarizes significant ranges of outstanding warrants accounted
for under the provisions of SFAS 123(R) as of May 31, 2006:
|
Warrants
Outstanding
|
Warrants
Exercisable
|
|
||||||||||||||
|
Range
of Exercise Prices
|
Number
Outstanding
|
Weighted
Average Remaining Contractual Life (in years)
|
Weighted
Average Exercise Price
|
Number
Outstanding
|
Weighted
Average Exercise Price
|
|||||||||||
|
$0.225
|
500,000
|
2.75
|
$
|
0.225
|
335,000
|
$
|
0.225
|
|||||||||
|
$0.225
|
500,000
|
2.75
|
$
|
0.225
|
335,000
|
$
|
0.225
|
|||||||||
|
$0.225
|
500,000
|
2.75
|
$
|
0.225
|
335,000
|
$
|
0.225
|
|||||||||
|
$0.225
|
250,000
|
2.75
|
$
|
0.225
|
167,500
|
$
|
0.225
|
|||||||||
|
$0.225
|
250,000
|
2.75
|
$
|
0.225
|
167,500
|
$
|
0.225
|
|||||||||
|
$0.225
|
2,000,000
|
2.75
|
$
|
0.225
|
1,340,000
|
$
|
0.225
|
|||||||||
|
4,000,000
|
2.75
|
$
|
0.225
|
2,680,000
|
$
|
0.225
|
|
|||||||||
The
per
share weighted average fair value of warrants outstanding during the
three-months ended May 31, 2006 and 2005 was $0.32 and $0.31, respectively.
There
were no warrants exercised or exercisable during the three-months ended May
31,
2006 as all warrants granted to officers fully vest as December 1, 2006.
As of
May 31, 2006, total unrecognized adjusted compensation costs related to
nonvested stock warrants for officers was approximately $85,600, which is
expected to be recognized as an expense over the six-month period ending
November 30, 2006. As of May 31, 2006, total unrecognized interest costs
related
to nonvested stock warrants was approximately $218,800, which is expected
to be
recognized as an expense over the six-month period ending November 30, 2006,
as
the warrants are fully vested as of December 1, 2006.
-
14
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
The
summary of the restricted stock grants, relating to compensation and interest
expense, during the three-months ended May 31, 2006 is as follows:
|
|
Number
of Shares
|
|||
|
|
||||
|
Nonvested
Balance at March 1, 2006
|
915,187
|
|||
|
Granted
|
-
|
|||
|
Vested
|
-
|
|||
|
Forfeited
|
-
|
|||
|
Nonvested
balance at May 31, 2006
|
915,187
|
|||
|
|
||||
|
Vested
or expected to vest at May 31, 2006
|
2,768,445
|
|||
|
|
||||
|
Exercisable
at May 31, 2006
|
1,853,258
|
|||
-
15
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
During
the three-months ended May 31, 2005 and 2006, the following activity
occurred:
|
May
31, 2005
|
May
31, 2006
|
||||||
|
Stock
awards granted
|
2,768,445
|
-
|
|||||
|
Weighted
average grant - date fair value
|
$
|
0.24
|
-
|
||||
The
per
share weighted average fair value of restricted shares outstanding during the
three-months ended May 31, 2006 and 2005 was $0.24 and $0.24, respectively.
There
were 1,853,258 restricted common shares vested during the three-months ended
May
31, 2006. As of May 31, 2006, there was $28,100 unrecognized adjusted
compensation costs related to nonvested restricted common shares, which is
expected to be recognized as an expense over the six-month period ending
November 30, 2006, as all restricted shares are fully vested as of December
1,
2006. As of May 31, 2006, there was $92,000 unrecognized interest costs related
to nonvested restricted common shares, which is expected to be recognized
as an
expense over the six-month period ending November 30, 2006, as all restricted
common shares are fully vested as of December 1, 2006.
Prior
to
fiscal 2006, the weighted average fair value of stock based compensation was
based on the single option valuation approach. Forfeitures were recognized
as
they occurred and it was assumed no dividends would be declared. The estimated
fair value of stock based compensation awards was amortized using the
straight-line method over the vesting period of the warrants.
-
16
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
Pro
forma
results are as follows:
|
|
Three
months ended May 31, 2005
|
|||
|
Net
loss, as reported
|
$
|
(80,879
|
)
|
|
|
|
||||
|
Add:
Stock based compensation and interest expense included in reported
net
loss
|
83,753
|
|||
|
|
||||
|
Deduct:
Total stock based compensation and interest expense determined under
the
fair value based method for all awards
|
(212,270
|
)
|
||
|
|
||||
|
Net
loss, pro-forma
|
$
|
(209,396
|
)
|
|
|
|
||||
|
Basic
and diluted net loss per common share:
|
||||
|
As
reported
|
$
|
(0.00
|
)
|
|
|
Pro-forma
|
$
|
(0.01
|
)
|
|
-
17
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
NOTE
2: INVENTORY
The
following is a summary of inventory as of May 31, 2006:
|
Raw
materials
|
$
|
181,007
|
||
|
Work
in progress
|
33,464
|
|||
|
Finished
goods
|
310,956
|
|||
|
525,427
|
||||
|
Reserve
for obsolete or
slow
moving inventory
|
(79,789
|
)
|
||
|
Net
inventories
|
$
|
445,638
|
Work
in
progress and finished goods inventory includes material, labor and manufacturing
overhead costs.
NOTE
3: PROPERTY
AND EQUIPMENT
The
following is a summary of property and equipment at May 31, 2006:
|
Tooling
|
$
|
285,695
|
||
|
Equipment
|
36,652
|
|||
|
Vehicles
|
10,000
|
|||
|
Furniture
and fixtures
|
15,465
|
|||
|
Computer
equipment
|
14,802
|
|||
|
Leasehold
equipment
|
1,000
|
|||
|
363,614
|
||||
|
Less:
accumulated depreciation and amortization
|
213,948
|
|||
|
$
|
149,666
|
Total
depreciation expense for the three-month periods ended May 31, 2006 and 2005,
respectively, was approximately $6,800.
-
18
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
NOTE
4: INTANGIBLE
ASSETS
The
following is a summary of intangible assets at May 31, 2006:
|
Redi
Chlor brand name and trademark
|
$
|
16,100
|
||
|
Hand
pump
|
8,000
|
|||
|
Patents
|
17,622
|
|||
|
41,722
|
||||
|
Less:
Accumulated amortization
|
8,294
|
|||
|
$
|
33,428
|
The
estimated future amortization expense is approximately $1,200 per
year.
During
April 2006, the Company issued 50,000 common shares, subject to a one-year
restriction period, to shareholders of Continental Technologies, Inc.
(“Continental’) with an approximate value of $16,100 for the Redi Chlor brand
name and trademark. The agreement further agrees to remit Continental a ten
percent commission on net sales as defined of the existing product, or any
new
products sold directly by Seychelle, and ten percent on any product sold by
Continental for Seychelle to their existing or new customers at Seychelle’s OEM
prices. The agreement has an indefinite life and therefore, the Company does
not
amortize the value of the agreement but does evaluate the value on a periodic
basis for impairment.
NOTE
5: ACCRUED
EXPENSES
Accrued
expenses consist of the following at May 31, 2006:
|
Accrued
legal expenses
|
$
|
129,398
|
||
|
Accrued
accounting expenses
|
48,082
|
|||
|
Accrued
claim settlement
|
12,750
|
|||
|
Accrued
commissions
|
10,905
|
|||
|
Accrual
for stock purchase (Continental Technologies)
|
16,100
|
|||
|
Accrued
credit card purchases
|
9,824
|
|||
|
Other
accrued expenses
|
3,309
|
|||
|
$
|
230,368
|
-
19
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
NOTE
5: ACCRUED
EXPENSES, continued
During
April 2006, the Company issued 50,000 common shares, subject to a one-year
restriction period, to shareholders of Continental Technologies, Inc.
(“Continental’) with an approximate value of $16,100 for the Redi Chlor brand
name and trademark. As the purchase agreement provides the shareholders of
Continental the right to sell the common shares back-to the Company, at
Continental’s sole option for a period of six months after the maturity date at
$0.75 per share, the Company recorded a liability for approximately $16,100
(see
Notes 4 and 7).
NOTE
6: LINES
OF
CREDIT
The
Company has one line of credit agreement, totaling $100,000. The line of credit
bears interest at the institutions index rate (7.5% at May 31, 2006) plus two
percent and are not repayable until March 31, 2007.
NOTE
7: CAPITAL
STRUCTURE
Common
Stock
During
the three-month period ended May 31, 2006, the Company issued an aggregate
of
50,000 common shares to various investors for cash for an approximate total
value of $11,250.
During
the three-month period ending May 31, 2006, the Company issued 50,000 common
shares to shareholders of Continental Technologies, Inc. (“Continental’) with an
approximate value of $16,100 for intellectual property (see Note 4). As the
purchase agreement provides the shareholders of Continental the ability to
sell
the common shares after one year back-to the Company, the Company recorded
a
liability for approximately $16,100 (see Notes 4 and 5).
During
the three-month period ended May 31, 2006, the Company issued an aggregate
of
214,516 restricted shares to three debt holders with an approximate total value
of $108,000.
Warrants
A
summary
of warrant activity is as follows:
|
Outstanding
warrants
|
Warrants
Outstanding
|
Exercise
Price
|
|||||
|
Balance,
March 1, 2006
|
6,000,000
|
$
|
0.225
|
||||
|
Granted
|
0
|
0
|
|||||
|
Exercised
|
0
|
0
|
|||||
|
Canceled
|
0
|
0
|
|||||
|
Balance,
May 31, 2006
|
6,000,000
|
$
|
0.225
|
||||
-
20
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
NOTE
8: RESTATEMENT
OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
As
reported on Form 8-K, dated December 12, 2006, the Company became aware of
the
following errors in its previously filed financial statements on Form 10-QSB
for
the quarter ended May 31, 2006-
|
1)
|
The
Company adopted Statement of Financial Accounting Standards No.
123
(revised 2004), Share Based Payment, (“FAS 123R”). In connection with the
Company recalculating its compensation expense under FAS 123R,
it was
determined that an incorrect volatility factor was previously utilized
resulting in an approximate $100,000 understatement of expenses
during the
three-month period ended May 31, 2006.
|
|
2)
|
During
April 2006, the Company issued 50,000 common shares, subject to a
one year
restriction period, to shareholders of Continental Technologies,
Inc.
(“Continental’). As the purchase agreement provides the shareholders of
Continental the right to sell the common shares back-to the Company,
the
Company recorded a contingent liability for approximately $16,100.
Previously, the Company had overstated the fair value of the patent
by
approximately $10,700 and recorded the estimated fair market value
of the
common shares, approximately $16,100, as an equity
transaction.
|
|
3)
|
Company
reclassified the California minimum franchise fee from income taxes
to a
component of general and administrative
expenses.
|
The
following is a summary of the effects of these changes cited above on the
condensed consolidated balance sheets as May 31, 2006 as well as the
effects of these changes on the condensed consolidated statements of operations
for the quarter then ended.
May 31, 2006
|
Condensed
Consolidated Balance Sheets
|
||||||||||
|
As
previously reported
|
Adjustments
|
Restated
|
||||||||
|
Total
assets
|
$
|
1,255,545
|
(10,700
|
)
|
$
|
1,244,845
|
||||
|
Total
liabilities
|
886,365
|
5,400
|
891,765
|
|||||||
|
Total
stockholder’s equity
|
369,180
|
(16,100
|
)
|
353,080
|
||||||
|
Total
liabilities & stockholder’s equity
|
1,255,545
|
(10,700
|
)
|
1,244,845
|
||||||
-
21
-
SEYCHELLE
ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF MAY
31, 2006
|
Condensed
Consolidated Statements of Operations
|
||||||||||
|
As
previously reported
|
Adjustments
|
Restated
|
||||||||
|
Sales
|
$
|
169,875
|
-
|
$
|
169,875
|
|||||
|
Cost
of sales
|
(111,394
|
)
|
-
|
(111,394
|
)
|
|||||
|
Gross
profit
|
58,481
|
-
|
58,481
|
|||||||
|
Operating
expenses
|
(203,429
|
)
|
(23,460
|
)
|
(226,889
|
)
|
||||
|
Net
loss from
operations
|
(144,948
|
)
|
(23,460
|
)
|
(168,408
|
)
|
||||
|
Total
other income
(expense)
|
(70,007
|
)
|
(79,828
|
)
|
(149,835
|
)
|
||||
|
Net
loss before
income
taxes
|
(214,955
|
)
|
(103,288
|
)
|
(318,243
|
)
|
||||
|
Income
taxes
|
(1,600
|
)
|
1,600
|
-
|
||||||
|
Net
loss
|
(216,555
|
)
|
(101,688
|
)
|
(318,243
|
)
|
||||
-
22
-
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OR
OPERATIONS
The
following discussion contains forward-looking statements regarding our Company,
its business, prospects and results of operations that are subject to certain
risks and uncertainties posed by many factors and events that could cause our
actual business, prospects and results of operations to differ materially from
those that may be anticipated by such forward-looking statements. Factors that
may affect such forward-looking statements include, without limitation: our
ability to successfully develop new products for new markets, the impact of
competition on our revenues, changes in law or regulatory requirements that
adversely affect or preclude customers from using our products for certain
applications, delays in our introduction of new products or services, and our
failure to keep pace with emerging technologies.
When
used
in this discussion, words such as "believes," "anticipates," "expects,"
"intends" and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this document.
We
undertake no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise. Readers are urged
to carefully review and consider the various disclosures made by us in this
document and other reports filed with the Securities and Exchange Commission
that attempt to advise interested parties of the risks and factors that may
affect our business
Description
of the Business.
(a)
Business
Development
History
of Seychelle
We
are a
Nevada corporation. Our principal business address is 33012 Calle Perfecto,
San
Juan Capistrano, California 92675. Our telephone number at this address is
949-234-1999.
We
were
incorporated under the laws of the State of Nevada on January 23, 1998 as a
change of domicile of Royal Net, Inc., a Utah corporation that was originally
incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile
to Nevada and its name to Seychelle Environmental Technologies, Inc. effective
in January 1998.
On
January 30, 1998, we entered into an Exchange Agreement with Seychelle Water
Technologies, Inc., a Nevada corporation ("SWT"), whereby we exchanged our
issued and outstanding capital shares with the shareholders of SWT on a one
share for one share basis. We became the parent company and SWT became a wholly
owned subsidiary. SWT had been formed in 1997 to market water filtration systems
of Aqua Vision International.
On
January 31, 1998, we entered into a Purchase Agreement to acquire all of the
assets of Aqua Vision International, a private California entity. This Purchase
Agreement was amended on February 26, 1999 to provide for the issuance of 8,000
shares of Series "AAA" Cumulative Convertible Preferred Voting Stock in lieu
of
all consideration that had remained unpaid under the original Purchase
Agreement. Aqua Vision International had been in operation since 1995 to
develop, manufacture, and market its own proprietary water filtration systems.
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.
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23
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(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 human bodies are 75% water and 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 need for safe, great tasting, high quality drinking 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 including the recent disaster in New Orleans. 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.
According
to an article in the May 15, 2000 edition of Fortune magazine, the value
of the
world water market is $400 billion annually. Bottled water, according to
Water
Facts, has emerged as the second largest commercial beverage category by
volume
in the US. However, Seychelle products compete in a more limited market:
the
portable and home filtration products segments. The US household water
filtration market was estimated by Enviroscrub Technology, in March 2004,
to be
$500 million in size, growing at 10 percent annually.
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, volatile organisms, heavy metals and other pathogens 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 5 pounds per square inch. Further, our point
of
difference filtration systems remove up to 99.8% of all known pollutants and
contaminants most commonalty found in fresh drinking water supplies in the
four
major areas of concern as follows:
AESTHETICS:
Taste,
odor, chlorine, sand, sediment and odor problems.
BIOLOGICS:
Pathogens
such as Cryptosporidium, Giardia and E-Coli bacteria.
CHEMICALS:
Pesticides,
detergents, toxic chemicals and industrial waste.
DISSOLVED
SOLIDS: Heavy
metals such as aluminum, asbestos, copper, lead, mercury and radon
222.
Seychelle
filters have been tested by independent and government laboratories throughout
the world and are approved for sale and distribution in the following countries:
United States, Mexico, United Kingdom, Korea, Malaysia Indonesia, Japan,
China,
Vietnam, New Zeeland, Australia, Brazil, Venezuela, Argentina, South Africa,
and
Pakistan. In the United States, Seychelle filters have been certified by
California and Florida approved independent laboratories implementing
Environmental Protection Agency, American National Standards Institute, and
National Sanitation Foundation protocol, procedures, standards and methodology.
Importantly, we offer a test pack for potential customers that include the
test
results from selected countries. In addition, results from the United States,
United Kingdom and South Africa are displayed on 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 commonly 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 and is used.
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24
-
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.
New
Products
We
have
re-engineered 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, including media to reduce
arsenic, to improve the taste and quality of drinking water. Finally, the
In-Line Filter is being changed to provide greater filter media, and meet field
conditions that require a longer, narrower design.
We
signed
a License Agreement with Gary Hess, doing business as Aqua Gear USA on June
6,
2002 for a product known as the "Hand Held Pump Technology." We licensed all
proprietary rights associated with this technology. We will pay a 2% royalty
on
our gross income for the technology during the term of the license. The License
Agreement is for an initial term of five years, with five successive five-year
renewals. This offers us an additional proprietary product in the portable
filtration industry. We believe that this purchase compliments our current
product line. As of the date of this filing, this technology has resulted in
a
product called Pump N’ Pure which allows the user to draw filtered water from
virtually any container or location. The Company continues to believe that
the
product will be viable in developing countries as an emergency preparedness
product, and for families where cost is a prime consideration. The Company
plans
to start marketing the Hand Held Pump as part of its Aqua Gear product line
in
the US sporting goods industry in 2007.
During
April 2006, the Company issued 50,000 common shares to shareholders of
Continental Technologies, Inc. with an approximate value of $16,100 for the
Redi
Chlor brand name, trademark and the use of the EPA Registration Number
55304-4-7126. As of the date of this filing, the Company has commenced its
plans
to sell the Redi Chlor brand name water chlorine tablets to consumers, dealers,
distributors and manufactures. Each tablet disinfects five gallons of source
water. The agreement further agrees to remit Continental a ten percent
commission on net sales as defined of the existing product, or any new products
sold directly by us, and ten percent on any product sold by Continental for
us
to their existing or new customers at our OEM prices. The agreement is of the
life of Seychelle.
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.
Importantly, the filter continues to be manufactured in the US. The final
assembly of our products is completed at our facility in San Juan
Capistrano.
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25
-
In
China
the original manufacturing agreement with Heibei RO Environmental Technologies
expired and was not renewed. Instead, we signed an exclusive joint venture
agreement with Huanghua Seychelle Plastic Co., Ltd on September 1,
2005.
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.
In
Japan,
Vortex represents Seychelle as a non-exclusive distributor selling our product
line to dealers, distributors and retail stores.
During
August 2006, the Company signed an agreement with Food for Health, Inc. a
manufacturer and marketer of nutritional food and vitamin products, to sell
certain water filtration products, using the Aqua Gear brand name, to a variety
of their customers including big-box stores in the US and Canada. As of the
date
of filing, Food for Health, Inc. has ordered 100,000 bottles.
Separately,
Food for Health contracted with the Company to source varied products (such
as
pots, radios, utensils, blankets, etc.) made in China for their Emergency
Preparedness packs to be sold to their customers. These products will be shipped
directly to Food for Health from China. As of date of this filing, Food For
Health has ordered approximately $628,000 in products from China.
We
will
also continue to promote our products and technologies to non-profit
organizations, such as the Red Cross, the U.S. and international militaries,
missionaries, charitable and fund-raising groups and other philanthropic
organizations.
Management's
Discussion and Analysis
Results
of Operations
Three-month
period ending May 31, 2006 compared to the corresponding period in
2005.
|
Selected
Financial Data
|
2005
|
2006
|
Year
Over Year
Change%
|
||||||||||
|
Sales
|
$
|
237,987
|
$
|
169,875
|
($
68,112
|
)
|
(29
|
)
|
|||||
|
Cost
of sales
|
$
|
76,975
|
$
|
111,394
|
$
|
34,419
|
45
|
||||||
|
Gross
profit
|
$
|
161,012
|
$
|
58,481
|
($102,531
|
)
|
(64
|
)
|
|||||
|
Gross
profit percentage
|
68
|
%
|
34
|
%
|
(34
|
%)
|
(50
|
)
|
|||||
|
General
& administrative expenses
|
$
|
133,895
|
$
|
150,994
|
$
|
17,099
|
13
|
||||||
|
Consulting
fees to related parties
|
$
|
30,000
|
$
|
56,860
|
$
|
26,860
|
90
|
||||||
|
Interest
expense to related parties
|
$
|
53,753
|
$
|
155,410
|
$
|
101,657
|
189
|
||||||
|
Net
cash used in operating activities
|
($70,274
|
)
|
($145,825
|
)
|
$
|
(
75,551
|
)
|
(108
|
)
|
||||
|
Net
cash used in investing activities
|
($25,435
|
)
|
($1,283
|
)
|
$
|
24,152
|
95
|
||||||
|
Net
cash provided financing activities
|
$
|
512,745
|
$
|
13,750
|
($498,995
|
)
|
(97
|
)
|
|||||
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26
-
Sales.
The
decrease in sales is primarily attributable to decreased sales with two
customers - approximately $59K sales to Wellness Enterprises and $70K to BK
Pakistan. This decrease in sales was partially offset by the Company entering
into a five (5) year exclusive distribution agreement with Confident, Inc.
to
sell its water filtration products in the markets of The Peoples Republic of
China, Taiwan, Singapore and Hong Kong. During the three-month period ending
May
31, 2006, total sales to Confident, Inc. and its affiliated entities
approximated $30,000. Additionally, the Company increased sales with Healthy
Directions LLC (from $7K in 2005 to $21K in 2006), Vortex Ltd. (from nil in
2005
to $9K in 2006) and Blackhawk Industries (from $1K in 2005 to $13K in 2006).
In
the fall of 2006, the Company will be launching several new products that have
undergone the extensive research and development, design, tooling and production
steps required for commercialization prior to introduction. This was made
possible by the exclusive plastic manufacturing agreement signed with Huanghua
Seychelle Plastic Co., Ltd. in China. Also, the Company is preparing a
disaster-preparedness order with one of the new products for a test market
by a
vendor of a major retailer. Overall,
the Company sold approximately 11,400 bottles during both the nine months ending
November 30, 2006 and 2005, respectively. The Company’s sale of countertops to
BK Pakistan was a one-time transaction. Overall,
the Company sold approximately 11,400 bottles during both the nine months ending
November 30, 2006 and 2005, respectively. The Company’s sale of countertops to
BK Pakistan was a one-time transaction.
Cost
of sales and gross profit. The
decrease in gross profit is primarily due to a change in sales mix, as the
gross
profit for sales to Wellness Enterprises and BK Pakistan approximated $105K
during the three-month period ending May 31, 2005. The new products noted above
have higher gross margins levels and will improve the overall gross profit
as
the products achieve significant sales levels.
General
& administrative expenses. The
increase in general & administrative expenses was primarily to increased
legal fees (from $8K in 2005 to $15K in 2006) and the reduction in prior year
consulting expenses of $33K as a consultant surrendered to the Company 250,000
restricted common shares due to his non-performance of certain contractual
obligations. This increase in general and administrative expenses was partially
offset by a decrease in outside accounting assistance (from $88K in 2005 to
$63K
in 2006) as the Company incurred such costs to catch up on SEC filings at the
beginning of the prior year.
Consulting
fees to related parties.
The
increase in consulting fees was due to warrants issued to Messrs. Richard
Parsons and Jim Place, during July 2005, redeemable into restricted shares
of
the Company’s stock at $.225 per share. As the warrants provide for the purchase
of common stock at below the Company’s market price on the date of grant, the
Company recorded unearned compensation relating to the estimated value of these
warrants and is amortizing the beneficial conversion feature over the life
of
the warrants. Additionally, as
previously noted, on March 1, 2006 such fees increased due to the adoption
of
SFAS 123R.
Interest
expense to related parties. The
increase in interest expense was primarily due to the amortization of the
beneficial conversion feature of the warrants issued to the TAM Trust during
July 2005. The Company has recorded interest expense of approximately $22,500
related to amortization of the July 2005 warrants for the three-month period
ending May 31, 2006. Additionally, as
previously noted, on March 1, 2006 such fees increased due to the adoption
of
SFAS 123R.
Net
loss. Even
though profits for the three-month period ending May 31, 2006 were negative
by
$318K, $78K in accounting and legal fees to assist in the audit and preparation
of the Form 10 and other SEC filings, in addition to, $155K in financing costs
with TAM the primary lender, the amortization of $56K in officer stock
compensation were the primary reasons for the result.
Net
cash used in operating activities. During
the three-month period ending May 31, 2006, the Company funded its operations
through funds previously obtained by sale of restricted common stock. During
the
three-month period ending May 31, 2006, the net loss from operations of $318K
was offset by $213K non-cash expenditures. These non-cash expenses primarily
relate to $155K in financing costs and the amortization of $56K in officer
stock
compensation.
Net
cash used in investing activities. The
2005
increase in cash used by investment activities was primarily due to the purchase
of $25K in equipment and tooling.
Net
cash used in financing activities. The
2005
cash provided by financing activities was due to the sale of $537K in restricted
common stock, which was partially reduced by $25K repayment of related party
advances.
-
27
-
Liquidity
and capital resources.
As
of May
31, 2006, the Company had $502,210 in cash and $50,000 available borrowing
under
its line of credit. The line of credit does not contain any limitations on
borrowing or any restrictive debt covenants. Over the next twelve months,
management is confident that sufficient working capital will be obtained from
a
combination of revenues and external financing to meet the Company’s liabilities
and commitments as they become payable.
The
Company currently estimates monthly cash requirements of $36,000 to cover
general and administrative overhead costs.
Consequently,
we do not foresee the need for additional funding at least for the period ending
May 31, 2007. As of the date of this filing, the TAM Irrevocable Trust has
expressed a willingness to provide additional funding if required; however,
an
amount has not been discussed. Moreover, in the foreseeable future the Company
does not believe additional funding is required.
Critical
Accounting Policies and Estimates
Our
financial statements and accompanying notes are prepared in accordance with
U.S.
GAAP. Preparing financial statements requires management to make estimates
and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management’s
application of accounting policies. Critical accounting policies for us include
revenue recognition, impairment of goodwill and other intangible assets,
accounting for transactions which potentially could be settled in a company’s
own stock, accounting for legal contingencies, accounting for income taxes,
and
accounting for stock-based compensation.
Goodwill
and Other Intangible Assets
SFAS
No. 142, Goodwill
and Other Intangible Assets,
requires
that intangible assets be tested for impairment on an annual basis (March
1 for
us) and between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below
its
carrying value. These events or circumstances could include a significant
change
in the business climate, legal factors, operating performance indicators
or
competition.. Application of the impairment test requires judgment, including
the determination of the fair value of each intangible asset. The fair value
of
each intangible asset is estimated using a discounted cash flow methodology.
This requires significant judgments including estimation of future cash flows,
which is dependent on internal forecasts, estimation of the long-term rate
of
growth for our business, the useful life over which cash flows will occur,
and
determination of our weighted average cost of capital. Changes in these
estimates and assumptions could materially affect the determination of fair
value and/or impairment for each intangible asset.
Transactions Potentially Settled in a Company’s Own Stock
EITF
#00-19 establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity instruments.
-
28
-
Additionally,
the EITF #00-19 is based on the concept that contracts that require net-cash
settlement are assets / liabilities and contracts that require settlement in
shares are equity instruments. These contracts may be settled in a
variety of methods.
Contracts
that include any provision that could require net-cash settlement cannot be
accounted for as equity of the company. Company management believes the
warrants issued by the Company would be classified as a physical settlement
as
the buyer pay a predetermined price for a fixed number of shares, therefore,
no
net-cash settlement is required and classification as equity is
appropriate. Additionally, the company believes that all
other
conditions required by EITF 00-19 have been met to be classified as
equity.
Income
Taxes
SFAS
No. 109, Accounting
for Income Taxes,
establishes financial accounting and reporting standards for the effect of
income taxes. The objectives of accounting for income taxes are to recognize
the
amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have
been
recognized in an entity’s financial statements or tax returns. Judgment is
required in assessing the future tax consequences of events that have been
recognized in our financial statements or tax returns. Variations in the actual
outcome of these future tax consequences could materially impact our financial
position, results of operations, or cash flows. Accruals for tax contingencies
are provided for in accordance with the requirements of SFAS
No. 5.
Share
Based Compensation
We
account for stock-based compensation in accordance with SFAS No. 123(R),
Share-Based
Payment. Under
the
fair value recognition provisions of this statement, share-based compensation
cost is measured at the grant date based on the value of the award and is
recognized as expense over the vesting period. Determining the fair value of
share-based awards at the grant date requires judgment, including estimating
expected dividends. In addition, judgment is also required in estimating the
amount of share-based awards that are expected to be forfeited. If actual
results differ significantly from these estimates, stock-based compensation
expense and our results of operations could be materially impacted.
ITEM
3. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures.
In
accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”), an evaluation was carried out by the Company’s President and
Chief Executive Officer and its Chief Financial Officer, of the effectiveness
of
the design and operation of the Company’s disclosure controls and procedures (as
defined in Rule 13a-14(c) and 15d-14(c) under the Exchange Act) as of the end
of
the quarter ended May 31, 2006. For the quarter ended May 31, 2006,
management has concluded that the Company’s disclosure controls are not
effective. Management has continued the process of formal remediation and
hopes to soon conclude that the Company’s disclosure controls are effective.
Changes
in Internal Controls
We
previously reported in Item 8A- "Controls and Procedures" in our annual
report
on Form 10-KSB for the year ended February 28, 2006, material weaknesses
in
internal controls. Specifically, the Company concluded that their disclosure
controls and procedures were not effective in ensuring that all information
required to be disclosed in reports to be filed or submitted under
the Exchange
Act were available within the time periods specified. Additionally,
the
Company’s management concluded that as of February 28, 2006, the Company had
not
timely reconciled various accounts including inventory, fixed assets,
accrued
liabilities and other accounts, and were required to make adjustments
during the
audit process. These aforementioned control deficiencies could result
in a
misstatement of the Company’s accounts, presentation and disclosure that may not
be prevented or detected.
-
29
-
During
the preparation, review, presentation, and disclosure of amounts included
in the
Company’s financial statements included in its Form 10QSB filing for second
quarter ended August 31, 2006, Company management concluded that although
accounts were being reconciled on a timelier basis, controls surrounding
the
accumulation and valuation of inventory and molds maintained at vendor
facilities continue to require improvement. In addition, during the preparation
of the Form 10-QSB for the second quarter, and as a result of responding
to
certain Securities and Exchange Commission comments on the Company’s form 10-SB,
the Company determined, as disclosed in this amended Form 10-QSB, that
it was
not applying appropriate accounting principles with respect to transactions
in
which an entity exchanges its equity instruments for goods or services
(Statement of Financial Accounting Standards No. 123R, Share-Based Payments
)
and was required to make adjustments during the review process for both
valuation and presentation. In addition, the Company overstated the value
of an
intangible asset and was not properly classifying the contingent liability
for
the repurchase of common shares from Continental Technologies, Inc. On
December
12, 2006, the company reported in Form 8-K these events, and management
concluded at the time that the Company’s controls related to financial statement
preparation and disclosure controls were not effective.
For
the
quarter ended November 30, 2006, SYEV management concluded that the Company’s
disclosure controls were still not effective. However, during the fiscal
quarter, the Company promoted an accounting assistant to become the new
internal
accountant and conducted a thorough review of its internal controls and
procedures. Specifically, the Company has examined and is in the process
of
updating its inventory controls and account reconciliation procedures.
The
Company has established guidelines for the issuance of securities under
its
stock-based compensation programs. In addition, the Company is reviewing
its
financial statement preparation procedures and is in the process of setting
standards and goals for timely reporting of quarterly and annual reports.
As
a
result of the above, 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 deficiencies constitute
a
material weakness. Therefore, management will continue to monitor and assess
these control procedures to ascertain if the material weakness described
above
has been remedied.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
During
May 2001, Seychelle Water Technologies, Inc. was named and served with a lawsuit
originally filed by SafeWater Anywhere, Inc. and John Ferguson as plaintiffs.
This lawsuit was filed in State Superior Court in Orange County, California.
Mr.
Carl Palmer was also named as a defendant. The complaint alleged breach of
fiduciary duty, constructive fraud, promissory fraud, rescission,
constructive trusts, unfair trade practices, and conversion, and sought
unspecified damages and injunctive relief. The original suit was dismissed
upon
motion of the defendants, but was subsequently re-filed by John M. Ferguson
individually on or about October 13, 2004. The re-filed suit was again brought
against Seychelle Water Technologies, Inc. and Carl Palmer, and again alleges
breach of fiduciary duty, constructive fraud, promissory fraud, rescission,
constructive trust, unfair trade practices, and conversion, and seeks
unspecified damages and injunctive relief. Plaintiff essentially alleges that
defendants Seychelle Water Technologies, Inc. (hereafter “Seychelle Water”) and
Carl Palmer fraudulently induced plaintiff to enter into an agreement to
relinquish 4,000,000 shares of the stock of defendant Seychelle Water. Plaintiff
alleges that he originally entered into a joint venture and stock subscription
agreement with DuSean Berkich (“Berkich”), pursuant to which Berkich and
plaintiff formed and controlled Seychelle Water. Plaintiff alleges that when
he
discovered certain improprieties by Berkich, he became concerned, and ultimately
agreed to the (re)purchase by Berkich of his interest in the Seychelle Water
stock. Plaintiff is now suing to recover damages he allegedly suffered as a
result of the (re)purchase by Berkich of his interest in Seychelle Water. A
demurrer to the re-filed complaint was filed and in response a first amended
complaint was filed and served. A second demurrer to the First Amended Complaint
has been filed and sustained by the Court, and plaintiff has been granted
fourteen days leave to amend. A second amended complaint has now been filed
and
answered. As
of the
filing of this document, the lawsuit has been settled for 5,000 restricted
shares of common stock and dismissal is pending
As
of May
31, 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.
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30
-
ITEM
2. CHANGES IN SECURITIES
During
the three-month period ended May 31, 2006, the Company issued an aggregate
of
50,000 common shares to various investors for cash for an approximate total
value of $11,250.
|
Date
Issued
|
Issue
to
|
Common
Shares
|
Stock
Estimated
value
|
|
|
|
|
|
|
March
16, 2006
|
B.
Clark
|
10,000
|
$
2,250
|
|
March
16, 2006
|
C.
Yris
|
10,000
|
$
2,250
|
|
March
16, 2006
|
J.
Condon
|
10,000
|
$
2,250
|
|
March
16, 2006
|
J.
Oppat
|
10,000
|
$
2,250
|
|
March
16, 2006
|
J.
Westwood
|
10,000
|
$
2,250
|
During
the three-month period ending May 31, 2006, the Company issued 50,000 common
shares to shareholders of Continental Technologies, Inc. (“Continental’) with an
approximate value of $16,100 for intellectual property.
During
the three-month period ended May 31, 2006, the Company issued an aggregate
of
165,516 restricted shares to three debt holders with an approximate total value
of $108,000.
|
Date
Issued
|
Issue
to
|
Type
of Liability
|
Common
Shares
|
Stock
Estimated
value
|
|
|
|
|
|
|
|
March
29, 2006
|
Wong
Johnson & Associates, APC
|
Accrued
accounting fees
|
25,000
|
$
65,470
|
|
April
10, 2006
|
Phil
Englund
|
Accrued
legal fees
|
65,516
|
$
5,000
|
|
April
26, 2006
|
Horn
& Loomis
|
Accrued
legal fees
|
75,000
|
$
37,500
|
In
each
if these issuances, the Company relied on exemptions provided by Section 4(2)
of
the Securities Act of 1933, as amended. The Company made these offerings based
on the following factors: (1) the issuance was an isolated private transaction
by the Company which did not involve a public offering; (2) there was only
one
offeree in each issuance; (3) the offerees did not resell the stock but continue
to hold it until the present; (4) there were no subsequent or contemporaneous
public offerings of the stock; (5) the stock was not broken down into smaller
denominations; and (6) the negotiations for the sale of the stock took place
directly between the offerees and the Company.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS OF A VOTE TO SECURITY HOLDERS
We
did
not submit any matter to a vote of security holders through solicitation of
proxies during the first quarter of the fiscal year covered by this
report.
ITEM
5. OTHER INFORMATION
None.
-
31
-
ITEM
6. EXHIBITS AND REPORTS IN FORM 8-K
(a)
Exhibits
|
31.1*
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) (Section
302 of
the Sarbanes-Oxley Act of 2002)
|
|
31.2*
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) (Section
302 of
the Sarbanes-Oxley Act of 2002)
|
|
32.1*
|
Certification
of the Chief Executive Officer and the Chief Financial Officer pursuant
to
18 U.S.C.ss.1350 Section 906 of the Sarbanes-Oxley Act of 2002)
|
|
32.2*
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C.ss.1350 Section
906 of
the Sarbanes-Oxley Act of 2002)
|
*
Previously filed with the Securities and Exchange Commission as indicated and
incorporated by reference herein
(b)
Reports on Form 8-K
None.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act OF 1934, the Registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized.
| Seychelle Environmental Technologies, Inc. | ||
| |
|
|
| Date: February 23, 2007 | By: | /s/ Carl Palmer |
|
Carl Palmer Director,
Chief Executive Officer and
President
|
||
| |
|
|
| Date: February 23, 2007 | By: | /s/ Jim Place |
|
Jim Place Director
and Chief Financial Officer
and
Chief Operating Officer
|
||
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32
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