Saturday, February 03, 2007 9:14:34 AM
SYEV -- FORM 10-QSB
Seychelle Environmental Technologies, Inc.
Com ($0.001)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending November 30, 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__
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
State the number of shares outstanding of the Registrant's common stock, as of the latest practicable date, November 30, 2006, was 25,108,211.
Transitional Small Business Disclosure Format (Check one): Yes: ___ No: __ X _
References in this document to "us," "we," “Seychelle,” “SYEV,” or "Company" refer to Seychelle Environmental Technologies, Inc., a Nevada corporation and our wholly owned subsidiary, Seychelle Water Technologies, Inc., also a Nevada corporation.
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FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
Seychelle Environmental Technology, Inc.
INDEX
Item Description Page
Part I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheet at November 30, 2006 (unaudited) 3
Condensed Consolidated Statements of Operations for the three-months ended November 30, 2006 (unaudited) and 2005 (unaudited) 5
Condensed Consolidated Statements of Operations for the nine-months ended November 30, 2006 (unaudited) and 2005 (unaudited) 6
Condensed Consolidated Statements of Cash Flows for the nine-months ended November 30, 2006 (unaudited) and 2005 (unaudited) 7
Notes to Condensed Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3. Controls and Procedures 29
Part II OTHER INFORMATION 31
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
As of November 30, 2006
ASSETS
CURRENT ASSETS
Cash $ 419,336
Trade receivables 80,775
Inventories, net 598,373
Prepaid expenses 370,864
Total current assets 1,469,348
PROPERTY AND EQUIPMENT, NET 340,519
INTANGIBLE ASSETS, NET 35,279
OTHER ASSETS 6,742
Total non-current assets 382,540
TOTAL ASSETS $ 1,851,888
See accompanying notes to condensed consolidated financial statements.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(CONTINUED)
As of November 30, 2006
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 69,819
Accrued expenses 229,380
Line of credit 50,000
Accrued interest due to related parties 245,078
Customer deposits 615,660
Income taxes payable 3,600
Total current liabilities 1,213,537
NOTES PAYABLE TO RELATED PARTIES 299,175
NOTE PAYABLE TO FINANCIAL INSTITUTION 136,413
Total long-term liabilities 435,588
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock $.001 par value - 50,000,000 shares authorized;
25,108,211 issued and outstanding 25,103
Additional paid-in capital 5,604,891
Estimated value of warrants 448,000
Accumulated deficit (5,875,231 )
Total stockholders' equity 202,763
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,851,888
See accompanying notes to condensed consolidated financial statements.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three-Month Periods Ending November 30,
2006 2005
SALES $ 295,313 $ 146,419
COST OF SALES 116,999 187,678
Gross profit 178,314 (41,259 )
OPERATING EXPENSES
Selling 45,161 3,112
General and administrative 153,521 75,366
Consulting fees to related parties 13,208 46,020
Total expenses 211,890 124,498
LOSS FROM OPERATIONS (33,576 ) (165,757 )
OTHER INCOME (EXPENSES)
Interest income 4,022 4,005
Interest expense to related parties (284,430 ) (76,178 )
Miscellaneous expense (2,714 ) (1,733 )
Total other income (expense) (283,122 ) (73,906 )
Net loss $ (316,698 ) $ (239,663 )
BASIC AND DILUTED (LOSS)
PER SHARE $ (0.01 ) $ (0.02 )
WEIGHTED AVERAGE NUMBER OF
SHARES: BASIC AND DILUTED 22,810,836 13,363,702
See accompanying notes to condensed consolidated financial statements
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Nine-Month Periods Ending November 30,
2006 2005
SALES $ 684,212 $ 570,831
COST OF SALES 337,132 440,125
Gross profit 347,080 130,706
OPERATING EXPENSES
Selling 81,957 11,158
General and administrative 473,408 399,621
Consulting fees to related parties 126,928 135,061
Total expenses 682,293 545,840
LOSS FROM OPERATIONS (335,213 ) (415,134 )
OTHER INCOME (EXPENSES)
Interest income 13,166 5,212
Interest expense to related parties (595,250 ) (190,073 )
Miscellaneous income (expense) - 1,377
Total other income (expense) (582,084 ) (183,484 )
Net loss $ (917,297 ) $ (598,618 )
BASIC AND DILUTED (LOSS)
PER SHARE $ (0.04 ) $ (0.04 )
WEIGHTED AVERAGE NUMBER OF
SHARES: BASIC AND DILUTED 22,642,826 13,363,702
See accompanying notes to condensed consolidated financial statements
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine-Month Periods Ending November 30,
2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (917,297 ) $ (598,618 )
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 25,158 19,931
Stock-based compensation and interest expense 620,911 340,269
Contributed executive services 7,500 7,500
Stock issued for services 33,406 25,350
Estimated value of unearned compensation (46,993 ) -
Return of shares due to failure to perform services - (32,500 )
Provision for doubtful accounts - (2,047 )
Provision for slow moving inventory - 79,789
Changes in operating assets and liabilities:
Trade receivables (47,173 ) (10,889 )
Inventory (206,732 ) (110,186 )
Prepaid expenses and other assets (327,593 ) (20,790 )
Accounts payable 8,808 533
Accrued expenses 98,531 64,425
Accrued interest due to related parties 75,763 26,702
Customer deposits 586,612 1,278
Income tax payable (2,800 ) 1,600
Net cash used in operating activities (91,899 ) (207,653 )
CASH FLOWS FROM INVESTING ACTIVITIES
Down payment on purchase of airplane (10,000 ) -
Purchase of tooling, equipment and leasehold improvements (63,209 ) (33,413 )
Insurance proceeds from damaged equipment 2,500 -
Increase in patents (2,400 ) (1,440 )
Net cash used investing activities (73,109 ) (34,853 )
See accompanying notes to condensed consolidated financial statements.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
For the Nine-Month Periods Ending November 30,
2006 2005
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock $ 12,750 $ 1,013,756
Unissued stock liability - 6,000
Purchase of common stock - (32,846 )
Payment of finders fees - (11,800 )
Proceeds from line of credit - 50,000
Repayments on related party notes payable (63,975 ) (92,500 )
Net cash (used in) provided by financing activities (51,225 ) 932,610
NET (DECREASE) INCREASE IN CASH (216,233 ) 690,104
Cash, beginning of period 635,569 23,782
Cash, end of period $ 419,336 $ 713,886
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ - $ -
Income taxes $ 4,400 $ -
NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchase of airplane with debt $ 136,413 $ -
Stock issued for settlement of debt $ 147,305 $ 125,405
Stock issued for intellectual property $ 16,100 $ -
Stock issued for services $ 33,406 $ 25,350
Stock issued for accrued interest $ - $ 228,000
See accompanying notes to condensed consolidated financial statements.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
The unaudited condensed consolidated financial statements of Seychelle Environmental Technologies, Inc. (the “Company”) for the three and nine-month periods ended November 30, 2006 and November 30, 2005 have been prepared in conformity with the accounting principles described in the Company’s Annual Report on Form 10-KSB for the fiscal year ended February 28, 2006 (the “Annual Report”) and include all adjustments considered necessary by management for a fair statement of the interim periods. Such adjustments consist only of normal recurring items. This report should be read in conjunction with the Annual Report. Results for the three and nine-month periods ended November 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 2007.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collectibility is reasonably assured. These criteria are typically met when product is shipped. Revenue is not recognized at the time of shipment if these criteria are not met.
On sales to Food for Health, the Company functions as a broker and therefore, receives only a fee for coordinating sales from Huanghua Seychelle Plastic Co., Ltd. with the customer. Since the Company has no risk of inventory ownership, the Company records its revenue from each transaction as only its portion of the fee associated with the shipment. During the three and nine-month periods ended November 30, 2006, the Company recognized approximately $47,500 and $56,500, respectively, in distribution income from its efforts, which is included in sales on the Company’s Condensed Consolidated Statement of Operations.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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 and nine-months ended November 30, 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 and nine-months ended November 30, 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.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
Stock based compensation expense recognized during the three and nine-months ended November 30, 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 and nine-months ended November 30, 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 nine months of fiscal 2007 has been based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the three and nine-month periods ended November 30, 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 and nine-month periods ended November 30, 2006 was 4.0 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 and nine-month periods ended November 30, 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.
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 and nine-month periods ended November 30, 2006 were based on the following assumptions:
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
Three-Months Ended
November 30, 2006 Nine-Months Ended
November 30, 2006
Risk free interest rate 3.5% 3.5%
Expected life 1.58 - 3.33 1.58 - 3.33
Expected volatility 235 - 323% 235 - 323%
Expected dividends None None
The following table summarizes stock based compensation, consulting and interest costs related to stock warrants and restrictive common shares under FAS 123(R) for the three and nine-month periods ended November 30, 2006, allocated as shown:
Three-Months Ended
November 30, 2006 Nine-Months Ended
November 30, 2006
General and administrative $ 1,948 $ 3,896
Consulting fees to related parties $ 61,580 $180,847
Interest expense to related parties $155,410 $466,230
Total stock and warrant based compensation expense $218,938 $650,973
For the three and nine-month periods ended November 30, 2006, the amounts of stock based compensation related to stock warrants were $49,457 and $142,530, respectively. For the three and nine-month periods ended November 30, 2006, the amounts of stock based compensation expense related to restricted common shares were $14,071 and $42,213, respectively.
For the three and nine-month periods ended November 30, 2006, the amounts of stock based interest related to stock warrants were $109,415 and $328,245, respectively. For the three and nine-month periods ended November 30, 2006, the amounts of stock based interest expense related to restricted common shares were $45,995 and $137,985, respectively.
The Company’s net loss for the three and nine-month periods ended November 30, 2006 was $316,698 and $917,297 respectively. The Company’s net loss for the three months ended November 30, 2006 was $116,641 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 November 30, 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 Company’s net loss for the nine months ended November 30, 2006 was $353,816 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 nine months ended November 30, 2006 was $.04. The Company’s net loss per common share, basic and diluted, for the nine months ended November 30, 2006 was $0.02 greater than it would have been if the Company had continued to account for share based compensation under APB 25.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
The summary of the warrant activity, relating to compensation and interest expense, during the nine-months ended November 30, 2006 is as follows:
Number of Shares
Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years)
Aggregate Intrinsic Value
Outstanding at February 28, 2006 4,000,000 $ 0.225
Granted 100,000 $ 0.40
Exercised - -
Cancelled - -
Outstanding at November 30, 2006 4,100,000 $ 0.229 2.29 $ -0-
Vested or expected to vest at November 30, 2006 4,100,000 $ 0.229 2.29 -
Exercisable at November 30, 2006 2,680,000 $ 0.229 2.29 $ -0-
The following table summarizes significant ranges of outstanding warrants accounted for under the provisions of SFAS 123(R) as of November 30, 2006:
Warrants Outstanding Warrants Exercisable
Range of Exercise Prices
Number Outstanding Weighted Average Remaining Contractual Life (in years)
Weighted Average Exercise Price
Number Outstanding
Weighted Average Exercise Price
$0.225 500,000 2.25 $ 0.225 335,000 $ 0.225
$0.225 500,000 2.25 $ 0.225 335,000 $ 0.225
$0.225 500,000 2.25 $ 0.225 335,000 $ 0.225
$0.225 250,000 2.25 $ 0.225 167,500 $ 0.225
$0.225 250,000 2.25 $ 0.225 167,500 $ 0.225
$0.225 2,000,000 2.25 $ 0.225 1,340,000 $ 0.225
$0.400 100,000 4.25 $ 0.400 - $ 0.400
4,100,000 2.29 $ 0.229 2,680,000 $ 0.229
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
The per share weighted average fair value of warrants outstanding during the three-months ended November 30, 2006 and 2005 was $0.30 and $0.29, respectively. The per share weighted average fair value of warrants outstanding during the nine-months ended November 30, 2006 and 2005 was $0.30 and $0.29, respectively.
There were no warrants exercised or exercisable during the three and nine-months ended November 30, 2006 as all warrants granted to officers fully vest as December 1, 2006. As of November 30, 2006, total unrecognized adjusted compensation costs related to nonvested stock warrants for non-officers was approximately $45,000, which is expected to be recognized as an expense over a weighted average period of approximately 2 years ending August 2008. As of November 30, 2006, there were no unrecognized adjusted interest costs related to nonvested stock warrants as the warrants are fully vested as of December 1, 2006.
The summary of the restricted stock grants, relating to compensation and interest expense, during the nine-months ended November 30, 2006 is as follows:
Number of Shares
Nonvested balance at March 1, 2006 915,187
Granted -
Vested -
Forfeited -
Nonvested balance at November 30, 2006 915,187
Vested or expected to vest at November 30, 2006 2,768,445
Exercisable at November 30, 2006 1,853,258
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
During the nine month periods ended November 30, 2005 and 2006, the following activity occurred -
November 30, 2005 November 30, 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 November 30, 2006 and 2005 was $0.24 and $0.24, respectively. The per share weighted average fair value of warrants outstanding during the nine months ended November 30, 2006 and 2005 was $0.24 and $0.24, respectively.
There were 1,853,258 restricted common shares vested during the three and nine-months ended November 30, 2006. As of November 30, 2006, there were no unrecognized adjusted compensation costs related to nonvested restricted common shares as all restricted shares are fully vested as of December 1, 2006. As of November 30, 2006, there were no unrecognized adjusted interest costs related to nonvested restricted common shares 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.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
Pro forma results are as follows:
Three months ended November 30, 2005 Nine months ended November 30, 2005
Net loss, as reported $ (239,663 ) $ (598,618 )
Add: Stock based compensation and interest expense included in reported net loss 122,195 325,134
Deduct: Total stock based compensation and interest expense determined under the fair value based method for all awards (238,836 ) (678,950 )
Net loss, pro-forma $ (356,304 ) $ (952,434 )
Basic and diluted net loss per common share:
As reported $ (0.02 ) $ (0.04 )
Pro-forma $ (0.03 ) $ (0.07 )
New Accounting Pronouncement
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position, that based solely on its technical merits is more likely than not to be sustained upon examination by the applicable taxing authority. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. FIN 48 must be applied to all existing tax positions upon initial adoption. The cumulative effect of applying FIN 48 at adoption, if any, is to be reported as an adjustment to opening retained earnings for the year of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006, which is the Company’s 2007 fiscal year, although early adoption is permitted. The Company does not expect any material impact from applying FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements but does not require any new fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not yet determined the impact of applying FAS 157.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, (“FAS 158”). FAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. FAS 158 is effective for financial statements as of December 31, 2006. The Company does not expect any material impact from applying FAS 158.
In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin No. 108, “Considering the Effects Prior Period Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” (“SAB 108”). SAB 108 provides interpretative guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect any material impact from applying SAB 108.
In November 2005, the FASB issued FASB Staff Position 123(R)-3 (“FSP 123(R)-3”), “Transition Election Related to Accounting for the Tax Effect of Share-based Payment Awards,” that provides an elective alternative transition method of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123(R) (the “APIC Pool”) to the method otherwise required by paragraph 81 of SFAS 123(R). The Company may take up to one year from the effective date of this FSP to evaluate its available alternatives and make its one-time election. The Company is currently evaluating the alternative methods. Until and unless the Company elects the transition method described in this FSP, the Company will follow the transition method described in paragraph 81 of SFAS 123(R).
Reclassifications
Certain amounts in the fiscal 2006 financial statements have been reclassified to conform to the fiscal 2007 presentations. These reclassifications had no effect on previously reported results of operations or retained earnings (accumulated deficit).
NOTE 2: FOOD FOR HEALTH
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 November 30, 2006, Food for Health, Inc. has ordered 100,000 bottles. As required by the agreement, the Company received fifty percent of the purchase order amount to provide the Company funds to purchase the required products from outside vendors. As of November 30, 2006, the Company had prepaid approximately $63,000 and $6,000 to Huanghua Seychelle Plastic Co., Ltd and Krudico Inc. for manufactured bottles and chlorine tablets. These payments are included within prepaid expenses in the Company’s Condensed Consolidated Balance Sheet.
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 November 30, 2006, Food For Health has ordered approximately $628,000 in products from China. As required by the agreement, the Company received payment in full, approximately $310K, to provide the Company funds to purchase the required products. As of November 30, 2006, the Company prepaid Huanghua Seychelle Plastic Co., Ltd. approximately $271,000 for the ordered products. This prepayment is included within prepaid expenses in the Company’s Condensed Consolidated Balance Sheet.
NOTE 3: INVENTORY
The following is a summary of inventory as of November 30, 2006:
Raw materials $ 124,397
Work in progress 77,750
Finished goods 476,015
678,162
Reserve for obsolete or
slow moving inventory (79,789 )
Net inventories $ 598,373
Work in progress and finished goods inventory includes material, labor and manufacturing overhead costs.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
NOTE 4: PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at November 30, 2006:
Tooling $ 314,934
Airplane 146,413
Equipment 49,354
Vehicles 10,000
Furniture and fixtures 15,465
Computer equipment 32,196
Leasehold improvements 3,279
571,641
Less: accumulated depreciation and amortization 231,122
$ 340,519
Total depreciation expense for the nine-month periods ended November 30, 2006 and 2005, was approximately $24,300 and $19,000, respectively.
NOTE 5: INTANGIBLE ASSETS
The following is a summary of intangible assets at November 30, 2006:
Redi Chlor brand name and trademark $ 16,100
Hand pump 8,000
Patents 20,145
44,245
Less: Accumulated amortization 8,966
$ 35,279
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.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
NOTE 6: ACCRUED EXPENSES
Accrued expenses consist of the following at November 30, 2006:
Accrued legal expenses $ 145,768
Accrued accounting expenses 29,002
Accrued claim settlement 12,750
Accrued commissions 10,909
Accrual for stock purchase (Continental Technologies) 16,100
Other accrued expenses 14,851
$ 229,380
During April 2006, the Company issued 50,000 common shares, subject to a one-year restriction period, to shareholders of Continental Technologies, Inc. (“Continental’) with an approximate value of $16,100 for the Redi Chlor brand name and trademark. As the purchase agreement provides the shareholders of Continental the right to sell the common shares back-to the Company, at Continental’s sole option for a period of six months after the restriction period at $0.75 per share, the Company recorded a liability for approximately $16,100 (see Note 5).
NOTE 7: LINES OF CREDIT
The Company has a line of credit agreement, totaling $100,000. The line of credit bears interest at the institution’s index rate (7.75% at November 30, 2006) plus two percent and is due March 31, 2007. As of November 30, 2006, the Company borrowed $50,000 against the line of credit.
During August 2006, the Company entered into a second line of credit agreement, totaling $150,000, to purchase an airplane.
During October 2006, the Company terminated the line of credit used to purchase the airplane and entered into a three-year term loan. The term loan bears interest at 6.5%, payable monthly, with the principal balance not repayable until September 2009.
NOTE 8: 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.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
NOTE 8: CAPITAL STRUCTURE, continued
During the three-month period ending May 31, 2006, the Company issued 50,000 common shares to shareholders of Continental Technologies, Inc. (“Continental’) with an approximate value of $16,100 for intellectual property (see Note 5). 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 5 and 6).
During the three-month period ended May 31, 2006, the Company issued an aggregate of 214,516 restricted shares to three debt holders with an approximate total value of $108,000.
During the three-month period ended August 31, 2006, the Company issued an aggregate of 29,876 restricted shares to a debt holder with an approximate total value of $23,700.
During the three-month period ended August 31, 2006, the Company issued an aggregate of 8,000 restricted shares to three consultants for services with an approximate total value of $3,100.
During the three-month period ended November 30, 2006, the Company issued an aggregate of restricted 58,789 shares to consultants for services with an approximate total value of $40,541.
During the three-month period ended November 30, 2006, the Company issued an aggregate of 24,020 restricted shares to a debt holder with an approximate total value of $15,600.
D uring the three-month period ended November 30, 2006, the Company issued an aggregate of 3,000 common shares to various investors for cash for an approximate total value of $1,500.
Warrants
On July 25, 2006, the Company granted to Gary Hess, doing business as Aqua Gear, 100,000 warrants redeemable on restricted shares of the Company’s stock at a purchase price of $.40 per share. Aqua Gear is the licensor of all proprietary rights associated with the technology, the hand pump and the trademark Aqua Gear TM (see Note 5). The warrants are redeemable any time after August 1, 2008 and are exercisable through December 1, 2010. As the warrants provide for the purchase of common stock at below the Company’s market price on the date of grant, the Company recorded compensation expense relating to the estimated value of these warrants, which is included in general and administrative expenses in the Company’s Condensed Consolidated Statement of Operations.
A summary of warrant activity is as follows:
Outstanding warrants Warrants Outstanding Exercise Price
Balance, February 28, 2006 6,000,000 $ 0.225
Granted 100,000 0.40
Exercised 0 0
Canceled 0 0
Balance, November 30, 2006 6,100,000 $ 0.225-0.40
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements regarding our Company, its business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that may affect such forward-looking statements include, without limitation: our ability to successfully develop new products for new markets, the impact of competition on our revenues, changes in law or regulatory requirements that adversely affect or preclude customers from using our products for certain applications, delays in our introduction of new products or services, and our failure to keep pace with emerging technologies.
When used in this discussion, words such as "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this document and other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business
Description of the Business.
(a) Business Development
History of Seychelle
We are a Nevada corporation. Our principal business address is 33012 Calle Perfecto, San Juan Capistrano, California 92675. Our telephone number at this address is 949-234-1999.
We were incorporated under the laws of the State of Nevada on January 23, 1998 as a change of domicile of Royal Net, Inc., a Utah corporation that was originally incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies, Inc. effective in January 1998.
On January 30, 1998, we entered into an Exchange Agreement with Seychelle Water Technologies, Inc., a Nevada corporation ("SWT"), whereby we exchanged our issued and outstanding capital shares with the shareholders of SWT on a one share for one share basis. We became the parent company and SWT became a wholly owned subsidiary. SWT had been formed in 1997 to market water filtration systems of Aqua Vision International.
On January 31, 1998, we entered into a Purchase Agreement to acquire all of the assets of Aqua Vision International, a private California entity. This Purchase Agreement was amended on February 26, 1999 to provide for the issuance of 8,000 shares of Series "AAA" Cumulative Convertible Preferred Voting Stock in lieu of all consideration that had remained unpaid under the original Purchase Agreement. Aqua Vision International had been in operation since 1995 to develop, manufacture, and market its own proprietary water filtration systems. In 2004, the Series "AAA" Cumulative Convertible Preferred Voting Stock was converted to common stock. No preferred stock is currently issued or outstanding.
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Organization
Our Company is presently comprised of Seychelle Environmental Technologies, Inc., a Nevada corporation, with one subsidiary, Seychelle Water Technologies, Inc., also a Nevada corporation. We use the trade name, "Seychelle Water Filtration Products, Inc.," in our commercial operations.
(b) Business of Seychelle
General
Seychelle designs and manufactures unique, state-of-the-art Ionic Adsorption Micron Filters that remove up to 99.8% of all pollutants and contaminants found in any fresh water source. Using breakthrough technology, Seychelle has also developed proprietary ozone systems. Patents or trade secrets cover all proprietary products. Since our bodies are 75% water and the quality of water worldwide continues to deteriorate, our mission is twofold: First, to help educate everyone to the fact that the quality of water they drink is important and second, to make available low-cost, effective filtration products that will meet the growing need for safe water.
Seychelle has sold over 2 million portable water filtration bottles throughout the world to customers such as individuals, dealers, and distributors - and to governments, military, agencies and emergency relief organizations such as the US Marine Corps, the International Red Cross, Eco-Challenge, Kenya Wild Life Service, La Cruz Roja de Mexico and the NY Institute for the Blind. In addition, the company has donated thousands of portable bottles to church groups and missionaries worldwide.
In 2001, the World Bank placed the value the world water market at close to $400 billion annually. Bottled water, according to Water Facts, has emerged as the second largest commercial beverage category by volume in the US. However, Seychelle products compete in a more limited market: the portable and home filtration products segments.
In developing countries, many people in rural areas boil their water for drinking and cooking to kill bacteria, but this process does not remove the pyrogens, chemicals, toxins, and other elements that remain in the water. In Africa alone, according to Earth Prayers from around the world, approximately 6,000 people die every day because of water borne diseases.
Business Plan
The management of Seychelle represents over 35 years of combined experience in developing improvements and innovations in the field of micron technology. As a result, our products can deliver up to .2-micron filtration, at pennies per gallon, with pressure as low as 24 pounds per square inch. Further, our point of difference filtration systems remove up to 99.8% of all known pollutants and contaminants most commonly 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.
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DISSOLVED SOLIDS: Heavy metals such as aluminum, asbestos, copper, lead, mercury and radon 222.
Seychelle filters have been tested by independent and government laboratories throughout the world and are approved for sale and distribution in the following countries: United States, Mexico, United Kingdom, Korea, Malaysia Indonesia, Japan, China, Vietnam, New Zeeland, Australia, Brazil, Venezuela, Argentina, South Africa, and Pakistan. In the United States, Seychelle filters have been certified by California and Florida approved independent laboratories implementing Environmental Protection Agency, American Natural Standards Institute, and National Sanitation Foundation protocol, procedures, standards and methodology. Importantly, we offer a test pack for potential customers that include the test results from selected countries. In addition, results from the United States, United Kingdom and South Africa are displayed our Website: www.seychelle.com . To our knowledge, no other water filtration system can achieve this level of removal of up to 99.8% of all known pollutants and contaminants most commonalty found in fresh drinking water supplies in the four major areas of concern. The benefit of such filtration can save lives worldwide as awareness of Seychelle’s product line increases.
Principal Products or Services and their Markets
Portables Products
Seychelle has a varied line of portable filters for people on the go. They include Flip Top’s, Bottom’s Up’s and varied military style canteens - regular or with silverators (for further bacteria control). Sizes are from 18oz to 30oz, and provide up to 100 gallons of pure drinking water from any fresh water source, running or stagnant (such as rivers, lakes, ponds, streams and puddles).
The current portable products include: Flip-Top, Survivor, Canteen, Bottoms UP, In-Line Eliminator, Pure Water Bag, Pump n’ Pure, Facial Mist and replacement filters.
Home Products
Seychelle technology has developed products for above the counter, below the counter, and to filter the whole house. Installation is easy, and unlike reverse osmosis (RO), only a low pounds per square inch (PSI) input line is needed. No water is wasted in the filtration process. Seychelle also makes a variety of shower filters.
The current home products include: Deluxe Shower, Handheld Shower, Royal Shower Wall Mount, Royal Shower Handheld, P.O.U. Countertop, P.O.E., Total Home and all replacement filters, and feature technology developed for portable products.
New Products
We are re-engineering the Flip Top bottle to eliminate parts, reduce costs, provide a more streamlined look, and add a disinfectant capability. The Counter Top has been upgraded to provide more enhanced filter media to improve the taste and quality of drinking water. Finally, the In-Line Filter is being changed to provide greater filter media, and meet field conditions that require a longer, narrower design.
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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 commence marketing the Hand Held Pump as part of its Aqua Gear product line to the United States sporting goods industry in 2007. As of November 30, 2006, approximately $2K in royalties have been accrued or paid under this agreement.
During July 2006 the Company signed a second License Agreement with Gary Hess doing business as Aqua Gear USA. We will pay a 2% royalty on net income up to $120,000 and 1% thereafter. The License Agreement shall continue indefinitely unless terminated due to a default or breach of the agreement. This affords the Company additional patent protection (patent # 6,136,188) and ownership of the trademark Aqua Gear. Products affected include all filter bottles and flip up bottles sold in the product line.
During April 2006, the Company issued 50,000 common shares to shareholders of Continental Technologies, Inc. with an approximate value of $16,100 for the Redi Chlor brand name, trademark and the use of the EPA Registration Number 55304-4-7126. During the three-month period ended November 30, 2006, the Company 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 for the life of Seychelle.
During the three-month period ended November 30, 2006, Food For Health ordered an additional 80,000 bottles for a total of 100,000 bottles as of the date of this filing.
Manufacturing
The Company has determined that we will be able to produce some of our product components in China at a lower cost than what could be made in the US. However, we anticipate that final assembly of our products will continue to be done in San Juan Capistrano.
In China our original manufacturing agreement with Heibei RO Environmental Technologies expired and was not renewed. Instead, we signed an exclusive agreement with Huanghua Seychelle Plastic Co., Ltd on September 1, 2005.
Distribution Methods of the Products
We plan to pursue sales with Retail, Military, Government, Multi-Level Marketing, International, OEM and Joint Ventures.
We have signed product distribution agreements with Confident, Inc. for China, Taiwan, Hong Kong and Singapore and with ABMS Health Care for India and are exploring opportunities in other countries.
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In Japan, Vortex represents Seychelle as a non-exclusive distributor selling our product line to dealers, distributors and retail stores.
In the US, Food for Health, Inc. a manufacturer and marketer of nutritional food and vitamin products based in Orem, UT has signed an Agreement with us to sell certain water filtration products, using the Aqua Gear brand name, to a variety of their customers including big-box stores in the US and Canada. As of November 30, 2006, Food for Health, Inc. has ordered 100,000 bottles. Separately, Food for Health has contracted with us to source varied products (such as pots, radios, utensils, blankets, etc.) made in China for their Emergency Preparedness packs to be sold to their customers. These products will be shipped direct to Food for Health from China. As of November 30, 2006, Food For Health has ordered approximately $628,000 in products from China. As required by the distribution agreements, the Company was paid in full upon the execution of a purchase orders and therefore, provides the Company with funds to source the raw material costs related to the orders. As of November 30, 2006, the Company prepaid Huanghua Seychelle Plastic Co., Ltd. approximately $271,000 for ordered product.
We will also continue to promote our products and technologies to non-profit organizations, such as the Red Cross, the U.S. and international militaries, missionaries, charitable and fund-raising groups and other philanthropic organizations.
The backlog of the Company has increased significantly from about $8,000 per quarter to approximately $607K as of November 30, 2006. This increase is primarily due to the distribution agreement signed in October 2006 with Food For Health. As of November 2006, Food For Health has outstanding orders with the Company for approximately 62K units of the 18 ounce bottle, estimated value at approximately $446K.
Management's Discussion and Analysis
Results of Operations
Three-month period ending November 30, 2006 compared to the corresponding period in 2005.
Selected Financial Data
2006
2005 Year Over Year
Change Year Over Year
Change %
Sales $ 295,313 $ 146,419 $ 148,894 102
Cost of sales $ 116,999 $ 187,678 $ (70,679 ) (38 )
Gross profit $ 178,314 $ (41,259 ) $ 219,573 532
Gross profit percentage 60 % (28 )% 88 % 314
General & administrative expenses $ 153,521 $ 75,366 $ 78,155 104
Interest expense to related parties $ 284,430 $ 76,178 $ 208,252 273
Sales. . The increase in sales is primarily attributable to approximately $155K in sales of 18 ounce bottles and related accessories to Food For Health during the three-month period ending November 30, 2006. Additionally, the Company received brokerage income of approximately $47K from Food For Health as shipments of approximately $275K in various emergency preparedness items were manufactured and shipped from China. As no single customer accounted for 10 percent of sales during the three months ending November 30, 2005, fluctuations in sales to other customers are not discussed, as management believes that such amounts are not significant.
Cost of sales and gross profit The decrease in cost of sales and the increase in gross profit percentage is primarily due to lower raw material costs (from $115K to $24K) as the Company began manufacturing bottles and related accessories in China. In addition to the above, as previously noted, gross profit increased due to approximately $47K in distribution income. The inclusion of the distribution fee increases the gross profit percentage by approximately 36 percent during the three months ending November 2006. The above increases in gross profit were partially offset by increased costs of outside labor to assemble products (from $16K to $26K) and freight (from $55K to $65K).
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General & administrative expenses. . The increase in general & administrative expenses was primarily due to the following - (1) $25K increase in salaries and related employee expenses as the Company hired an administrative assistant during June 2005; (2) $17K increase in outside general ledger assistance as the Company hired several consultants sequentially to fill its vacant internal accounting position; (3) $16K increase in legal fees relating to the settlement of the Ferguson case; (4) $10K increase in gifts / bonuses as the Company issued restricted shares to employees given the increase in sales activity; (5) $6K increase in depreciation expense due to the purchase of the airplane during the end of Q2 of 2006 and the purchase of molds during the last fiscal year; and, (6) $3K increase in claims settlements for the Ferguson case (estimated value of restricted shares granted).
Interest expense to related parties. The increase in interest expense was primarily due to the amortization of the beneficial conversion feature of the warrants / restricted common shares granted to the TAM Trust. As previously noted, on March 1, 2006 such fees increased due to the adoption of SFAS 123R.
Net loss. We had a net loss for the three-month period ending November 30, 2006 of $316,698, compared to a net loss of $239,663 for the three-month period ending November 30, in 2005. Most of our continuing net losses in the three-month period ending November 30, 2006 and 2005 were attributable to financing costs with the TAM Trust, our the primary lender.
Nine-month period ending November 30, 2006 compared to the corresponding period in 2005.
Selected Financial Data
2006
2005 Year Over Year
Change Year Over Year
Change %
Sales $ 684,212 $ 570,831 $ 113,381 20
Cost of sales $ 337,132 $ 440,125 $ (102,993 ) (23 )
Gross profit $ 347,080 $ 130,706 $ 216,374 166
Gross profit percentage 51 % 23 % 28 122
General & administrative expenses $ 473,408 $ 399,621 $ 73,787 18
Interest expense to related parties $ 595,250 $ 190,073 $ 405,177 213
Net cash used in operating activities $ (91,899 ) $ (207,653 ) $ 115,754 56
Net cash used in investing activities $ (73,109 ) $ ( 34,853 ) $ (38,256 ) (110 )
Net cash (used) provided financing activities $ ( 51,225 ) $ 932,610 $ (983,835 ) (105 )
Sales. The increase in sales is primarily attributable to approximately $155K in sales of 18 ounce bottles and related accessories to Food For Health during the nine-month period ending November 30, 2006. Additionally, the Company received distribution income of approximately $56K from Food For Health as shipments of approximately $300,000 in various emergency preparedness items were made and shipped from China. Finally, due to the signing of new / revised distribution agreements during 2006, the Company increased sales with Healthy Directions LLC (from approximately $14K in 2005 to approximately $35K in 2006), Vortex Ltd. (from nil in 2005 to approximately $27K in 2006) and Aquasafe Corp. (from $nil in 2005 to approximately $27K in 2006). These increases were partially offset by decreases in sales of approximately $65K sales to Wellness Enterprises and approximately $70K to BK Pakistan (one-time sale transaction).
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Cost of sales and gross profit. The decrease in cost of sales and the increase in gross profit percentage is primarily due to the Company re-evaluating its countertop water filtration systems during FY 2006 and determining that such product should be wholly-reserved and therefore, recording an inventory reserve of approximately $79K. If such reserve had not been recorded, the gross profit percentage for the nine months ending November 2005 would have been 37 percent. In addition to the above, gross profit increased due to approximately $56K in distribution income. The inclusion of the distribution fee increases the gross profit percentage by approximately 18 percent during the nine months ending November 2006. The above increases in gross profit were partially offset by increased costs of outside labor to assemble products (from $20K to $57K) and freight (from $69K to $103K).
General & administrative expenses. The increase in general & administrative expenses was primarily due to the following - (1) $25K increase in salaries and related employee expenses as the Company hired an administrative assistant during June 2005; (2) $24K increase in outside general ledger assistance as the Company hired several consultants sequentially to fill its vacant internal accounting position; (3) $16K increase in legal fees relating to the settlement of the Ferguson case; (4) $10K increase in gifts / bonuses as the Company issued restricted shares to employees given the increase in sales activity; (5) $5K increase in depreciation expense due to the purchase of the airplane during the end of Q2 of 2006 and the purchase of molds during the last fiscal year; and, (6) $3K increase in claims settlements for the Ferguson case (estimated value of restricted shares granted). These increases were partially offset a reduction in outside accounting assistance (from approximately $220K in 2005 to approximately $171K in 2006) as the Company incurred such costs to catch up on SEC filings.
Interest expense to related parties. The increase in interest expense was primarily due to the amortization of the beneficial conversion feature of the warrants / restricted common shares issued to the TAM Trust. As previously noted, on March 1, 2006 such fees increased due to the adoption of SFAS 123R.
Net loss. We had a net loss of $917,297 for the nine-month period ending November 30, 2006, compared to a net loss $598,618 for the nine-month period ending November 30, 2005. Most of our continuing net losses in the nine-month periods ending November 30, 2006 and 2005 were attributable to financing costs with the TAM Trust, our the primary lender..
Liquidity and Capital Resources
Net cash used in operating activities. During the nine-month period ending November 30, 2005, the Company funded its operations through funds previously obtained by sale of restricted common stock. During the nine-month period ending November 30, 2006, the net loss from operations of approximately $917,297 was offset by approximately $680,000 non-cash expenditures. These non-cash expenses primarily relate to approximately $436,000 in financing costs, the amortization of approximately $185,000 in officer stock compensation and the issuance of approximately $34,000 in stock for services. As of November 30, 2006, the Company had increased its inventory on-hand by approximately $207K and its prepaid expense by $327K with China in anticipation of fulfilling the backorders for Food For Health during the 4 th quarter of 2006. As required by the distribution agreements, the Company was paid in full upon the execution of a purchase order and therefore, the Company had an increased customer liability of approximately $587K.
Net cash used in financing activities. . The 2005 cash provided by financing activities was due to the sale of approximately $1,013,000 in restricted common stock, which was partially reduced by approximately $8,000 for the repayment of related party advances. During 2006 the Company decided to pay down its notes payable with a related party.
As of November 30, 2006, the Company had $419,336 in cash and $50,000 available for borrowing under its line of credit. The cash received from Food For Health during the three month period ending November 30, 2006 provides the Company with funds to source the raw materials required to fulfill the orders. 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.
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Consequently, we do not foresee the need for additional funding at least for the period ending November 30, 2007. As of the date of this filing, the TAM Irrevocable Trust has expressed a willingness to provide additional funding if required; however, an amount has not been discussed. Moreover, in the foreseeable future the Company does not believe additional funding is required.
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes are prepared in accordance with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include revenue recognition, impairment of goodwill and other intangible assets, accounting for transactions which potentially could be settled in a company’s own stock, accounting for legal contingencies, accounting for income taxes, and accounting for stock-based compensation.
Revenue Recognition
EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent , discusses the diversity regarding whether a company should report revenue based on gross billings or the net amount retained because it is earned a commission or fee. On sales to Food for Health, the Company functions as a broker and therefore, receives only a fee for coordinating sales from Huanghua Seychelle Plastic Co., Ltd. with the customer. Since the Company has no risk of inventory ownership, the Company records its revenue from each transaction as only its portion of the fee associated with the shipment.
Goodwill and Other Intangible Assets
SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment on an annual basis (March 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of an operating unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. We allocate goodwill to reporting units based on the reporting unit expected to benefit from the combination. We evaluate our reporting units on an annual basis and if necessary, reassign goodwill using a relative fair value allocation approach.
Transactions Potentially Settled in a Company’s Own Stock
EITF #00-19 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
Additionally, the EITF #00-19 is based on the concept that contracts that require net-cash settlement are assets / liabilities and contracts that require settlement in shares are equity instruments. These contracts may be settled in a variety of methods.
Contracts that include any provision that could require net-cash settlement cannot be accounted for as equity of the company. Company management believes the warrants issued by the Company would be classified as a physical settlement as the buyer pay a predetermined price for a fixed number of shares, therefore, no net-cash settlement is required and classification as equity is appropriate. Additionally, the company believes that all other conditions required by EITF 00-19 have been met to be classified as equity.
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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 November 30, 2006. For the quarter ended November 30, 2006, management has concluded that the Company’s disclosure controls are not effective.
Changes in Internal Controls
We previously reported in Item 8A- "Controls and Procedures" in our annual report on Form 10-KSB for the year ended February 28, 2006, material weaknesses in internal controls. Specifically, 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.
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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, the Company was not applying appropriate accounting principles with respect to transactions in which an entity exchanges its equity instruments for goods or services (Statement of Financial Accounting Standards No. 123R, Share-Based Payments ) and was required to make adjustments during the review process for both valuation and presentation.
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.
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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 Anywhere, Inc. and John Ferguson as plaintiffs. This lawsuit was filed in State Superior Court in Orange County, California. Mr. Carl Palmer was also named as a defendant. The complaint alleged breach of fiduciary duty, constructive fraud, promissory fraud, rescission, constructive trusts, unfair trade practices, and conversion, and sought unspecified damages and injunctive relief. The original suit was dismissed upon motion of the defendants, but was subsequently re-filed by John M. Ferguson individually on or about October 13, 2004. The re-filed suit was again brought against Seychelle Water Technologies, Inc. and Carl Palmer, and again alleges breach of fiduciary duty, constructive fraud, promissory fraud, rescission, constructive trust, unfair trade practices, and conversion, and seeks unspecified damages and injunctive relief. Plaintiff essentially alleges that defendants Seychelle Water Technologies, Inc. (hereafter “Seychelle Water”) and Carl Palmer fraudulently induced plaintiff to enter into an agreement to relinquish 4,000,000 shares of the stock of defendant Seychelle Water. Plaintiff alleges that he originally entered into a joint venture and stock subscription agreement with Dusean Berkich (“ Berkich”), pursuant to which Berkich and plaintiff formed and controlled Seychelle Water. Plaintiff alleges that when he discovered certain improprieties by Berkich, he became concerned, and ultimately agreed to the (re)purchase by Berkich of his interest in the Seychelle Water stock. Plaintiff is now suing to recover damages he allegedly suffered as a result of the (re)purchase by Berkich of his interest in Seychelle Water. A demurrer to the re-filed complaint was filed and in response a first amended complaint was filed and served. A second demurrer to the First Amended Complaint has been filed and sustained by the Court, and plaintiff has been granted fourteen days leave to amend. A second amended complaint has now been filed and answered. As of the filing of this document, the lawsuit has been settled for 5,000 restricted shares of common stock and dismissal is pending.
Otherwise, we know of no legal proceedings pending or threatened or judgments entered against the Company or against any of our directors or officers in his or her capacity as such.
ITEM 2. CHANGES IN SECURITIES
Warrants
None.
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Common stock
During the three-month period ended November 30, 2006, the Company issued an aggregate of 58,789 restricted shares to consultants and an employee for services with an approximate total value of $40,541.
Common Stock
Date Issued Issued to Type of Liability Shares Estimated value
September 21, 2006 Cara Good Consulting / advertising 18,000 $ 11,700
October 9, 2006 Cara Good Consultant / advertising 15,789 $ 11,841
November 1, 2006 Arturo Villafuerte Employee 2,500 $ 1,625
November 1, 2006 Maria Villafuerte Outside assembly 2,500 $ 1,625
November 2, 2006 Alexis Mayden Consultant / accounting 15,000 $ 10,500
November 7, 2006 Arturo Villafuerte Employee 5,000 $ 3,250
During the three-month period ended November 30, 2006, the Company issued an aggregate of 24,020 restricted shares to a debt holder with an approximate total value of $15,600.
During the three-month period ended November 30, 2006, the Company issued an aggregate of 3,000 common shares to various investors for cash for an approximate total value of $1,500.
Date Issued Issue to Common Shares Stock Estimated value
November 9, 2006 G. Orras Trust 2,000 $ 1,000
November 9, 2006 Robert Haugh 1,000 $ 500
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In the transactions shown above, the issuance, delivery and sale of our common stock were made pursuant to the private offering exemption within the meaning of Section 4(2) of the Act because the offers were made to a limited number of people, all of whom received all material information concerning the investment and all of whom have had sophistication and ability to bear economic risk based upon their representations to us and their prior experience in such investments. In all of the transactions shown above, we have issued stop transfer orders concerning the transfer of certificates representing all the common stock issued and outstanding as reported in this section.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE TO SECURITY HOLDERS
We did not submit any matter to a vote of security holders through solicitation of proxies during the third quarter of the fiscal year covered by this report.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K
(a) Exhibits
10.R Food for Food Health Purchase Agreement
10.S Food for Health Distribution Agreement
10.T Seychelle Environmental Technologies, Inc. License Agreement with Mr. Gary Hess
31.1* Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)
31.2* Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)
32.1* Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C.ss.1350 Section 906 of the Sarbanes-Oxley Act of 2002)
32.2* Certification of the Chief Financial Officer pursuant to 18 U.S.C.ss.1350 Section 906 of the Sarbanes-Oxley Act of 2002)
_________
* Filed herewith
(b) Reports on Form 8-K
November 1, 2006 News release dated October 30, 2006 announcing distribution rights agreement.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Seychelle Environmental Technologies, Inc.
Date: January 29, 2007 By: /s/ Carl Palmer
Director, Chief Executive Officer and President
Date: January 29, 2007 By: /s/ Jim Place
Director and Chief Financial Officer and Chief Operating Officer
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Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl Palmer, certify that:
1. I have reviewed this Quarterly report on Form 10-QSB of Seychelle Environmental Technologies, Inc. (the "Small business issuer");
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Small business issuer as of, and for, the periods presented in this report;
4. The Small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Small business issuer 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 Small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Small business issuer’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
d) Disclosed in this report any change in the Small business issuer's internal control over financial reporting that occurred during the Small business issuer’s most recent fiscal quarter (the small business issuer’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Small business issuer's internal control over financial reporting; and
5. The Small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Small business issuer's auditors and the audit committee of the Small business issuer's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Small business issuer's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Small business issuer's internal control over financial reporting.
Date: January 29, 2007
/s/ Carl Palmer
Chief Executive Officer
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Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jim Place, certify that:
1. I have reviewed this Quarterly report on Form 10-QSB of Seychelle Environmental Technologies, Inc. (the "Small business issuer");
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Small business issuer as of, and for, the periods presented in this report;
4. The Small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Small business issuer 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 Small business issuer, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Small business issuer’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
d) Disclosed in this report any change in the Small business issuer's internal control over financial reporting that occurred during the Small business issuer’s most recent fiscal quarter (the Small business issuer’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Small business issuer's internal control over financial reporting; and
5. The Small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Small business issuer's auditors and the audit committee of the Small business issuer's board of directors (or persons performing the equivalent functions);
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Small business issuer's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Small business issuer's internal control over financial reporting.
Date: January 29, 2007
/s/ Jim Place
Chief Financial Officer
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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 Quarterly Report of Seychelle Environmental Technologies, Inc. (the “Small business issuer”) on Form 10QSB for the period ending November 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carl Palmer, Chief Executive Officer of the Small business issuer 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 Small business issuer.
/s/ Carl Palmer
Carl Palmer
Chief Executive Officer
January 29, 2007
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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 Quarterly Report of Seychelle Environmental Technologies, Inc. (the “Small business issuer”) on Form 10QSB for the period ending November 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jim Place, Chief Financial Officer of the Small business issuer 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 Small business issuer.
/s/ Jim Place
Jim Place
Chief Financial Officer
January 29, 2007
All information contained herein is provided "as is." Pink Sheets LLC makes no representation or warranty, expressed or implied, as to the accuracy, timeliness, or completeness of the information provided herein. Neither Pink Sheets LLC, nor its directors, officers, employees, or third party data suppliers, shall bear any responsibility or liability to verify the information and/or its source or for the use, misuse, or inability to use the information provided. None of the foregoing parties shall be liable to any third-party claims or losses of any nature. Accordingly, investors should not use this information as the basis for making an investment decision. Please see Risk Warning and Terms of Service for more information.
Seychelle Environmental Technologies, Inc.
Com ($0.001)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending November 30, 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__
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
State the number of shares outstanding of the Registrant's common stock, as of the latest practicable date, November 30, 2006, was 25,108,211.
Transitional Small Business Disclosure Format (Check one): Yes: ___ No: __ X _
References in this document to "us," "we," “Seychelle,” “SYEV,” or "Company" refer to Seychelle Environmental Technologies, Inc., a Nevada corporation and our wholly owned subsidiary, Seychelle Water Technologies, Inc., also a Nevada corporation.
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FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
Seychelle Environmental Technology, Inc.
INDEX
Item Description Page
Part I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheet at November 30, 2006 (unaudited) 3
Condensed Consolidated Statements of Operations for the three-months ended November 30, 2006 (unaudited) and 2005 (unaudited) 5
Condensed Consolidated Statements of Operations for the nine-months ended November 30, 2006 (unaudited) and 2005 (unaudited) 6
Condensed Consolidated Statements of Cash Flows for the nine-months ended November 30, 2006 (unaudited) and 2005 (unaudited) 7
Notes to Condensed Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3. Controls and Procedures 29
Part II OTHER INFORMATION 31
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
As of November 30, 2006
ASSETS
CURRENT ASSETS
Cash $ 419,336
Trade receivables 80,775
Inventories, net 598,373
Prepaid expenses 370,864
Total current assets 1,469,348
PROPERTY AND EQUIPMENT, NET 340,519
INTANGIBLE ASSETS, NET 35,279
OTHER ASSETS 6,742
Total non-current assets 382,540
TOTAL ASSETS $ 1,851,888
See accompanying notes to condensed consolidated financial statements.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(CONTINUED)
As of November 30, 2006
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 69,819
Accrued expenses 229,380
Line of credit 50,000
Accrued interest due to related parties 245,078
Customer deposits 615,660
Income taxes payable 3,600
Total current liabilities 1,213,537
NOTES PAYABLE TO RELATED PARTIES 299,175
NOTE PAYABLE TO FINANCIAL INSTITUTION 136,413
Total long-term liabilities 435,588
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock $.001 par value - 50,000,000 shares authorized;
25,108,211 issued and outstanding 25,103
Additional paid-in capital 5,604,891
Estimated value of warrants 448,000
Accumulated deficit (5,875,231 )
Total stockholders' equity 202,763
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,851,888
See accompanying notes to condensed consolidated financial statements.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three-Month Periods Ending November 30,
2006 2005
SALES $ 295,313 $ 146,419
COST OF SALES 116,999 187,678
Gross profit 178,314 (41,259 )
OPERATING EXPENSES
Selling 45,161 3,112
General and administrative 153,521 75,366
Consulting fees to related parties 13,208 46,020
Total expenses 211,890 124,498
LOSS FROM OPERATIONS (33,576 ) (165,757 )
OTHER INCOME (EXPENSES)
Interest income 4,022 4,005
Interest expense to related parties (284,430 ) (76,178 )
Miscellaneous expense (2,714 ) (1,733 )
Total other income (expense) (283,122 ) (73,906 )
Net loss $ (316,698 ) $ (239,663 )
BASIC AND DILUTED (LOSS)
PER SHARE $ (0.01 ) $ (0.02 )
WEIGHTED AVERAGE NUMBER OF
SHARES: BASIC AND DILUTED 22,810,836 13,363,702
See accompanying notes to condensed consolidated financial statements
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Nine-Month Periods Ending November 30,
2006 2005
SALES $ 684,212 $ 570,831
COST OF SALES 337,132 440,125
Gross profit 347,080 130,706
OPERATING EXPENSES
Selling 81,957 11,158
General and administrative 473,408 399,621
Consulting fees to related parties 126,928 135,061
Total expenses 682,293 545,840
LOSS FROM OPERATIONS (335,213 ) (415,134 )
OTHER INCOME (EXPENSES)
Interest income 13,166 5,212
Interest expense to related parties (595,250 ) (190,073 )
Miscellaneous income (expense) - 1,377
Total other income (expense) (582,084 ) (183,484 )
Net loss $ (917,297 ) $ (598,618 )
BASIC AND DILUTED (LOSS)
PER SHARE $ (0.04 ) $ (0.04 )
WEIGHTED AVERAGE NUMBER OF
SHARES: BASIC AND DILUTED 22,642,826 13,363,702
See accompanying notes to condensed consolidated financial statements
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine-Month Periods Ending November 30,
2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (917,297 ) $ (598,618 )
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 25,158 19,931
Stock-based compensation and interest expense 620,911 340,269
Contributed executive services 7,500 7,500
Stock issued for services 33,406 25,350
Estimated value of unearned compensation (46,993 ) -
Return of shares due to failure to perform services - (32,500 )
Provision for doubtful accounts - (2,047 )
Provision for slow moving inventory - 79,789
Changes in operating assets and liabilities:
Trade receivables (47,173 ) (10,889 )
Inventory (206,732 ) (110,186 )
Prepaid expenses and other assets (327,593 ) (20,790 )
Accounts payable 8,808 533
Accrued expenses 98,531 64,425
Accrued interest due to related parties 75,763 26,702
Customer deposits 586,612 1,278
Income tax payable (2,800 ) 1,600
Net cash used in operating activities (91,899 ) (207,653 )
CASH FLOWS FROM INVESTING ACTIVITIES
Down payment on purchase of airplane (10,000 ) -
Purchase of tooling, equipment and leasehold improvements (63,209 ) (33,413 )
Insurance proceeds from damaged equipment 2,500 -
Increase in patents (2,400 ) (1,440 )
Net cash used investing activities (73,109 ) (34,853 )
See accompanying notes to condensed consolidated financial statements.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
For the Nine-Month Periods Ending November 30,
2006 2005
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock $ 12,750 $ 1,013,756
Unissued stock liability - 6,000
Purchase of common stock - (32,846 )
Payment of finders fees - (11,800 )
Proceeds from line of credit - 50,000
Repayments on related party notes payable (63,975 ) (92,500 )
Net cash (used in) provided by financing activities (51,225 ) 932,610
NET (DECREASE) INCREASE IN CASH (216,233 ) 690,104
Cash, beginning of period 635,569 23,782
Cash, end of period $ 419,336 $ 713,886
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ - $ -
Income taxes $ 4,400 $ -
NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchase of airplane with debt $ 136,413 $ -
Stock issued for settlement of debt $ 147,305 $ 125,405
Stock issued for intellectual property $ 16,100 $ -
Stock issued for services $ 33,406 $ 25,350
Stock issued for accrued interest $ - $ 228,000
See accompanying notes to condensed consolidated financial statements.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
The unaudited condensed consolidated financial statements of Seychelle Environmental Technologies, Inc. (the “Company”) for the three and nine-month periods ended November 30, 2006 and November 30, 2005 have been prepared in conformity with the accounting principles described in the Company’s Annual Report on Form 10-KSB for the fiscal year ended February 28, 2006 (the “Annual Report”) and include all adjustments considered necessary by management for a fair statement of the interim periods. Such adjustments consist only of normal recurring items. This report should be read in conjunction with the Annual Report. Results for the three and nine-month periods ended November 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 2007.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collectibility is reasonably assured. These criteria are typically met when product is shipped. Revenue is not recognized at the time of shipment if these criteria are not met.
On sales to Food for Health, the Company functions as a broker and therefore, receives only a fee for coordinating sales from Huanghua Seychelle Plastic Co., Ltd. with the customer. Since the Company has no risk of inventory ownership, the Company records its revenue from each transaction as only its portion of the fee associated with the shipment. During the three and nine-month periods ended November 30, 2006, the Company recognized approximately $47,500 and $56,500, respectively, in distribution income from its efforts, which is included in sales on the Company’s Condensed Consolidated Statement of Operations.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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 and nine-months ended November 30, 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 and nine-months ended November 30, 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.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
Stock based compensation expense recognized during the three and nine-months ended November 30, 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 and nine-months ended November 30, 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 nine months of fiscal 2007 has been based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the three and nine-month periods ended November 30, 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 and nine-month periods ended November 30, 2006 was 4.0 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 and nine-month periods ended November 30, 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.
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 and nine-month periods ended November 30, 2006 were based on the following assumptions:
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
Three-Months Ended
November 30, 2006 Nine-Months Ended
November 30, 2006
Risk free interest rate 3.5% 3.5%
Expected life 1.58 - 3.33 1.58 - 3.33
Expected volatility 235 - 323% 235 - 323%
Expected dividends None None
The following table summarizes stock based compensation, consulting and interest costs related to stock warrants and restrictive common shares under FAS 123(R) for the three and nine-month periods ended November 30, 2006, allocated as shown:
Three-Months Ended
November 30, 2006 Nine-Months Ended
November 30, 2006
General and administrative $ 1,948 $ 3,896
Consulting fees to related parties $ 61,580 $180,847
Interest expense to related parties $155,410 $466,230
Total stock and warrant based compensation expense $218,938 $650,973
For the three and nine-month periods ended November 30, 2006, the amounts of stock based compensation related to stock warrants were $49,457 and $142,530, respectively. For the three and nine-month periods ended November 30, 2006, the amounts of stock based compensation expense related to restricted common shares were $14,071 and $42,213, respectively.
For the three and nine-month periods ended November 30, 2006, the amounts of stock based interest related to stock warrants were $109,415 and $328,245, respectively. For the three and nine-month periods ended November 30, 2006, the amounts of stock based interest expense related to restricted common shares were $45,995 and $137,985, respectively.
The Company’s net loss for the three and nine-month periods ended November 30, 2006 was $316,698 and $917,297 respectively. The Company’s net loss for the three months ended November 30, 2006 was $116,641 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 November 30, 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 Company’s net loss for the nine months ended November 30, 2006 was $353,816 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 nine months ended November 30, 2006 was $.04. The Company’s net loss per common share, basic and diluted, for the nine months ended November 30, 2006 was $0.02 greater than it would have been if the Company had continued to account for share based compensation under APB 25.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
The summary of the warrant activity, relating to compensation and interest expense, during the nine-months ended November 30, 2006 is as follows:
Number of Shares
Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years)
Aggregate Intrinsic Value
Outstanding at February 28, 2006 4,000,000 $ 0.225
Granted 100,000 $ 0.40
Exercised - -
Cancelled - -
Outstanding at November 30, 2006 4,100,000 $ 0.229 2.29 $ -0-
Vested or expected to vest at November 30, 2006 4,100,000 $ 0.229 2.29 -
Exercisable at November 30, 2006 2,680,000 $ 0.229 2.29 $ -0-
The following table summarizes significant ranges of outstanding warrants accounted for under the provisions of SFAS 123(R) as of November 30, 2006:
Warrants Outstanding Warrants Exercisable
Range of Exercise Prices
Number Outstanding Weighted Average Remaining Contractual Life (in years)
Weighted Average Exercise Price
Number Outstanding
Weighted Average Exercise Price
$0.225 500,000 2.25 $ 0.225 335,000 $ 0.225
$0.225 500,000 2.25 $ 0.225 335,000 $ 0.225
$0.225 500,000 2.25 $ 0.225 335,000 $ 0.225
$0.225 250,000 2.25 $ 0.225 167,500 $ 0.225
$0.225 250,000 2.25 $ 0.225 167,500 $ 0.225
$0.225 2,000,000 2.25 $ 0.225 1,340,000 $ 0.225
$0.400 100,000 4.25 $ 0.400 - $ 0.400
4,100,000 2.29 $ 0.229 2,680,000 $ 0.229
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
The per share weighted average fair value of warrants outstanding during the three-months ended November 30, 2006 and 2005 was $0.30 and $0.29, respectively. The per share weighted average fair value of warrants outstanding during the nine-months ended November 30, 2006 and 2005 was $0.30 and $0.29, respectively.
There were no warrants exercised or exercisable during the three and nine-months ended November 30, 2006 as all warrants granted to officers fully vest as December 1, 2006. As of November 30, 2006, total unrecognized adjusted compensation costs related to nonvested stock warrants for non-officers was approximately $45,000, which is expected to be recognized as an expense over a weighted average period of approximately 2 years ending August 2008. As of November 30, 2006, there were no unrecognized adjusted interest costs related to nonvested stock warrants as the warrants are fully vested as of December 1, 2006.
The summary of the restricted stock grants, relating to compensation and interest expense, during the nine-months ended November 30, 2006 is as follows:
Number of Shares
Nonvested balance at March 1, 2006 915,187
Granted -
Vested -
Forfeited -
Nonvested balance at November 30, 2006 915,187
Vested or expected to vest at November 30, 2006 2,768,445
Exercisable at November 30, 2006 1,853,258
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
During the nine month periods ended November 30, 2005 and 2006, the following activity occurred -
November 30, 2005 November 30, 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 November 30, 2006 and 2005 was $0.24 and $0.24, respectively. The per share weighted average fair value of warrants outstanding during the nine months ended November 30, 2006 and 2005 was $0.24 and $0.24, respectively.
There were 1,853,258 restricted common shares vested during the three and nine-months ended November 30, 2006. As of November 30, 2006, there were no unrecognized adjusted compensation costs related to nonvested restricted common shares as all restricted shares are fully vested as of December 1, 2006. As of November 30, 2006, there were no unrecognized adjusted interest costs related to nonvested restricted common shares 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.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
Pro forma results are as follows:
Three months ended November 30, 2005 Nine months ended November 30, 2005
Net loss, as reported $ (239,663 ) $ (598,618 )
Add: Stock based compensation and interest expense included in reported net loss 122,195 325,134
Deduct: Total stock based compensation and interest expense determined under the fair value based method for all awards (238,836 ) (678,950 )
Net loss, pro-forma $ (356,304 ) $ (952,434 )
Basic and diluted net loss per common share:
As reported $ (0.02 ) $ (0.04 )
Pro-forma $ (0.03 ) $ (0.07 )
New Accounting Pronouncement
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position, that based solely on its technical merits is more likely than not to be sustained upon examination by the applicable taxing authority. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. FIN 48 must be applied to all existing tax positions upon initial adoption. The cumulative effect of applying FIN 48 at adoption, if any, is to be reported as an adjustment to opening retained earnings for the year of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006, which is the Company’s 2007 fiscal year, although early adoption is permitted. The Company does not expect any material impact from applying FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements but does not require any new fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not yet determined the impact of applying FAS 157.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, (“FAS 158”). FAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. FAS 158 is effective for financial statements as of December 31, 2006. The Company does not expect any material impact from applying FAS 158.
In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin No. 108, “Considering the Effects Prior Period Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” (“SAB 108”). SAB 108 provides interpretative guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect any material impact from applying SAB 108.
In November 2005, the FASB issued FASB Staff Position 123(R)-3 (“FSP 123(R)-3”), “Transition Election Related to Accounting for the Tax Effect of Share-based Payment Awards,” that provides an elective alternative transition method of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123(R) (the “APIC Pool”) to the method otherwise required by paragraph 81 of SFAS 123(R). The Company may take up to one year from the effective date of this FSP to evaluate its available alternatives and make its one-time election. The Company is currently evaluating the alternative methods. Until and unless the Company elects the transition method described in this FSP, the Company will follow the transition method described in paragraph 81 of SFAS 123(R).
Reclassifications
Certain amounts in the fiscal 2006 financial statements have been reclassified to conform to the fiscal 2007 presentations. These reclassifications had no effect on previously reported results of operations or retained earnings (accumulated deficit).
NOTE 2: FOOD FOR HEALTH
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 November 30, 2006, Food for Health, Inc. has ordered 100,000 bottles. As required by the agreement, the Company received fifty percent of the purchase order amount to provide the Company funds to purchase the required products from outside vendors. As of November 30, 2006, the Company had prepaid approximately $63,000 and $6,000 to Huanghua Seychelle Plastic Co., Ltd and Krudico Inc. for manufactured bottles and chlorine tablets. These payments are included within prepaid expenses in the Company’s Condensed Consolidated Balance Sheet.
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 November 30, 2006, Food For Health has ordered approximately $628,000 in products from China. As required by the agreement, the Company received payment in full, approximately $310K, to provide the Company funds to purchase the required products. As of November 30, 2006, the Company prepaid Huanghua Seychelle Plastic Co., Ltd. approximately $271,000 for the ordered products. This prepayment is included within prepaid expenses in the Company’s Condensed Consolidated Balance Sheet.
NOTE 3: INVENTORY
The following is a summary of inventory as of November 30, 2006:
Raw materials $ 124,397
Work in progress 77,750
Finished goods 476,015
678,162
Reserve for obsolete or
slow moving inventory (79,789 )
Net inventories $ 598,373
Work in progress and finished goods inventory includes material, labor and manufacturing overhead costs.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
NOTE 4: PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at November 30, 2006:
Tooling $ 314,934
Airplane 146,413
Equipment 49,354
Vehicles 10,000
Furniture and fixtures 15,465
Computer equipment 32,196
Leasehold improvements 3,279
571,641
Less: accumulated depreciation and amortization 231,122
$ 340,519
Total depreciation expense for the nine-month periods ended November 30, 2006 and 2005, was approximately $24,300 and $19,000, respectively.
NOTE 5: INTANGIBLE ASSETS
The following is a summary of intangible assets at November 30, 2006:
Redi Chlor brand name and trademark $ 16,100
Hand pump 8,000
Patents 20,145
44,245
Less: Accumulated amortization 8,966
$ 35,279
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.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
NOTE 6: ACCRUED EXPENSES
Accrued expenses consist of the following at November 30, 2006:
Accrued legal expenses $ 145,768
Accrued accounting expenses 29,002
Accrued claim settlement 12,750
Accrued commissions 10,909
Accrual for stock purchase (Continental Technologies) 16,100
Other accrued expenses 14,851
$ 229,380
During April 2006, the Company issued 50,000 common shares, subject to a one-year restriction period, to shareholders of Continental Technologies, Inc. (“Continental’) with an approximate value of $16,100 for the Redi Chlor brand name and trademark. As the purchase agreement provides the shareholders of Continental the right to sell the common shares back-to the Company, at Continental’s sole option for a period of six months after the restriction period at $0.75 per share, the Company recorded a liability for approximately $16,100 (see Note 5).
NOTE 7: LINES OF CREDIT
The Company has a line of credit agreement, totaling $100,000. The line of credit bears interest at the institution’s index rate (7.75% at November 30, 2006) plus two percent and is due March 31, 2007. As of November 30, 2006, the Company borrowed $50,000 against the line of credit.
During August 2006, the Company entered into a second line of credit agreement, totaling $150,000, to purchase an airplane.
During October 2006, the Company terminated the line of credit used to purchase the airplane and entered into a three-year term loan. The term loan bears interest at 6.5%, payable monthly, with the principal balance not repayable until September 2009.
NOTE 8: 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.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 2006
NOTE 8: CAPITAL STRUCTURE, continued
During the three-month period ending May 31, 2006, the Company issued 50,000 common shares to shareholders of Continental Technologies, Inc. (“Continental’) with an approximate value of $16,100 for intellectual property (see Note 5). 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 5 and 6).
During the three-month period ended May 31, 2006, the Company issued an aggregate of 214,516 restricted shares to three debt holders with an approximate total value of $108,000.
During the three-month period ended August 31, 2006, the Company issued an aggregate of 29,876 restricted shares to a debt holder with an approximate total value of $23,700.
During the three-month period ended August 31, 2006, the Company issued an aggregate of 8,000 restricted shares to three consultants for services with an approximate total value of $3,100.
During the three-month period ended November 30, 2006, the Company issued an aggregate of restricted 58,789 shares to consultants for services with an approximate total value of $40,541.
During the three-month period ended November 30, 2006, the Company issued an aggregate of 24,020 restricted shares to a debt holder with an approximate total value of $15,600.
D uring the three-month period ended November 30, 2006, the Company issued an aggregate of 3,000 common shares to various investors for cash for an approximate total value of $1,500.
Warrants
On July 25, 2006, the Company granted to Gary Hess, doing business as Aqua Gear, 100,000 warrants redeemable on restricted shares of the Company’s stock at a purchase price of $.40 per share. Aqua Gear is the licensor of all proprietary rights associated with the technology, the hand pump and the trademark Aqua Gear TM (see Note 5). The warrants are redeemable any time after August 1, 2008 and are exercisable through December 1, 2010. As the warrants provide for the purchase of common stock at below the Company’s market price on the date of grant, the Company recorded compensation expense relating to the estimated value of these warrants, which is included in general and administrative expenses in the Company’s Condensed Consolidated Statement of Operations.
A summary of warrant activity is as follows:
Outstanding warrants Warrants Outstanding Exercise Price
Balance, February 28, 2006 6,000,000 $ 0.225
Granted 100,000 0.40
Exercised 0 0
Canceled 0 0
Balance, November 30, 2006 6,100,000 $ 0.225-0.40
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements regarding our Company, its business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that may affect such forward-looking statements include, without limitation: our ability to successfully develop new products for new markets, the impact of competition on our revenues, changes in law or regulatory requirements that adversely affect or preclude customers from using our products for certain applications, delays in our introduction of new products or services, and our failure to keep pace with emerging technologies.
When used in this discussion, words such as "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this document and other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business
Description of the Business.
(a) Business Development
History of Seychelle
We are a Nevada corporation. Our principal business address is 33012 Calle Perfecto, San Juan Capistrano, California 92675. Our telephone number at this address is 949-234-1999.
We were incorporated under the laws of the State of Nevada on January 23, 1998 as a change of domicile of Royal Net, Inc., a Utah corporation that was originally incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies, Inc. effective in January 1998.
On January 30, 1998, we entered into an Exchange Agreement with Seychelle Water Technologies, Inc., a Nevada corporation ("SWT"), whereby we exchanged our issued and outstanding capital shares with the shareholders of SWT on a one share for one share basis. We became the parent company and SWT became a wholly owned subsidiary. SWT had been formed in 1997 to market water filtration systems of Aqua Vision International.
On January 31, 1998, we entered into a Purchase Agreement to acquire all of the assets of Aqua Vision International, a private California entity. This Purchase Agreement was amended on February 26, 1999 to provide for the issuance of 8,000 shares of Series "AAA" Cumulative Convertible Preferred Voting Stock in lieu of all consideration that had remained unpaid under the original Purchase Agreement. Aqua Vision International had been in operation since 1995 to develop, manufacture, and market its own proprietary water filtration systems. In 2004, the Series "AAA" Cumulative Convertible Preferred Voting Stock was converted to common stock. No preferred stock is currently issued or outstanding.
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Organization
Our Company is presently comprised of Seychelle Environmental Technologies, Inc., a Nevada corporation, with one subsidiary, Seychelle Water Technologies, Inc., also a Nevada corporation. We use the trade name, "Seychelle Water Filtration Products, Inc.," in our commercial operations.
(b) Business of Seychelle
General
Seychelle designs and manufactures unique, state-of-the-art Ionic Adsorption Micron Filters that remove up to 99.8% of all pollutants and contaminants found in any fresh water source. Using breakthrough technology, Seychelle has also developed proprietary ozone systems. Patents or trade secrets cover all proprietary products. Since our bodies are 75% water and the quality of water worldwide continues to deteriorate, our mission is twofold: First, to help educate everyone to the fact that the quality of water they drink is important and second, to make available low-cost, effective filtration products that will meet the growing need for safe water.
Seychelle has sold over 2 million portable water filtration bottles throughout the world to customers such as individuals, dealers, and distributors - and to governments, military, agencies and emergency relief organizations such as the US Marine Corps, the International Red Cross, Eco-Challenge, Kenya Wild Life Service, La Cruz Roja de Mexico and the NY Institute for the Blind. In addition, the company has donated thousands of portable bottles to church groups and missionaries worldwide.
In 2001, the World Bank placed the value the world water market at close to $400 billion annually. Bottled water, according to Water Facts, has emerged as the second largest commercial beverage category by volume in the US. However, Seychelle products compete in a more limited market: the portable and home filtration products segments.
In developing countries, many people in rural areas boil their water for drinking and cooking to kill bacteria, but this process does not remove the pyrogens, chemicals, toxins, and other elements that remain in the water. In Africa alone, according to Earth Prayers from around the world, approximately 6,000 people die every day because of water borne diseases.
Business Plan
The management of Seychelle represents over 35 years of combined experience in developing improvements and innovations in the field of micron technology. As a result, our products can deliver up to .2-micron filtration, at pennies per gallon, with pressure as low as 24 pounds per square inch. Further, our point of difference filtration systems remove up to 99.8% of all known pollutants and contaminants most commonly 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.
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DISSOLVED SOLIDS: Heavy metals such as aluminum, asbestos, copper, lead, mercury and radon 222.
Seychelle filters have been tested by independent and government laboratories throughout the world and are approved for sale and distribution in the following countries: United States, Mexico, United Kingdom, Korea, Malaysia Indonesia, Japan, China, Vietnam, New Zeeland, Australia, Brazil, Venezuela, Argentina, South Africa, and Pakistan. In the United States, Seychelle filters have been certified by California and Florida approved independent laboratories implementing Environmental Protection Agency, American Natural Standards Institute, and National Sanitation Foundation protocol, procedures, standards and methodology. Importantly, we offer a test pack for potential customers that include the test results from selected countries. In addition, results from the United States, United Kingdom and South Africa are displayed our Website: www.seychelle.com . To our knowledge, no other water filtration system can achieve this level of removal of up to 99.8% of all known pollutants and contaminants most commonalty found in fresh drinking water supplies in the four major areas of concern. The benefit of such filtration can save lives worldwide as awareness of Seychelle’s product line increases.
Principal Products or Services and their Markets
Portables Products
Seychelle has a varied line of portable filters for people on the go. They include Flip Top’s, Bottom’s Up’s and varied military style canteens - regular or with silverators (for further bacteria control). Sizes are from 18oz to 30oz, and provide up to 100 gallons of pure drinking water from any fresh water source, running or stagnant (such as rivers, lakes, ponds, streams and puddles).
The current portable products include: Flip-Top, Survivor, Canteen, Bottoms UP, In-Line Eliminator, Pure Water Bag, Pump n’ Pure, Facial Mist and replacement filters.
Home Products
Seychelle technology has developed products for above the counter, below the counter, and to filter the whole house. Installation is easy, and unlike reverse osmosis (RO), only a low pounds per square inch (PSI) input line is needed. No water is wasted in the filtration process. Seychelle also makes a variety of shower filters.
The current home products include: Deluxe Shower, Handheld Shower, Royal Shower Wall Mount, Royal Shower Handheld, P.O.U. Countertop, P.O.E., Total Home and all replacement filters, and feature technology developed for portable products.
New Products
We are re-engineering the Flip Top bottle to eliminate parts, reduce costs, provide a more streamlined look, and add a disinfectant capability. The Counter Top has been upgraded to provide more enhanced filter media to improve the taste and quality of drinking water. Finally, the In-Line Filter is being changed to provide greater filter media, and meet field conditions that require a longer, narrower design.
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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 commence marketing the Hand Held Pump as part of its Aqua Gear product line to the United States sporting goods industry in 2007. As of November 30, 2006, approximately $2K in royalties have been accrued or paid under this agreement.
During July 2006 the Company signed a second License Agreement with Gary Hess doing business as Aqua Gear USA. We will pay a 2% royalty on net income up to $120,000 and 1% thereafter. The License Agreement shall continue indefinitely unless terminated due to a default or breach of the agreement. This affords the Company additional patent protection (patent # 6,136,188) and ownership of the trademark Aqua Gear. Products affected include all filter bottles and flip up bottles sold in the product line.
During April 2006, the Company issued 50,000 common shares to shareholders of Continental Technologies, Inc. with an approximate value of $16,100 for the Redi Chlor brand name, trademark and the use of the EPA Registration Number 55304-4-7126. During the three-month period ended November 30, 2006, the Company 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 for the life of Seychelle.
During the three-month period ended November 30, 2006, Food For Health ordered an additional 80,000 bottles for a total of 100,000 bottles as of the date of this filing.
Manufacturing
The Company has determined that we will be able to produce some of our product components in China at a lower cost than what could be made in the US. However, we anticipate that final assembly of our products will continue to be done in San Juan Capistrano.
In China our original manufacturing agreement with Heibei RO Environmental Technologies expired and was not renewed. Instead, we signed an exclusive agreement with Huanghua Seychelle Plastic Co., Ltd on September 1, 2005.
Distribution Methods of the Products
We plan to pursue sales with Retail, Military, Government, Multi-Level Marketing, International, OEM and Joint Ventures.
We have signed product distribution agreements with Confident, Inc. for China, Taiwan, Hong Kong and Singapore and with ABMS Health Care for India and are exploring opportunities in other countries.
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In Japan, Vortex represents Seychelle as a non-exclusive distributor selling our product line to dealers, distributors and retail stores.
In the US, Food for Health, Inc. a manufacturer and marketer of nutritional food and vitamin products based in Orem, UT has signed an Agreement with us to sell certain water filtration products, using the Aqua Gear brand name, to a variety of their customers including big-box stores in the US and Canada. As of November 30, 2006, Food for Health, Inc. has ordered 100,000 bottles. Separately, Food for Health has contracted with us to source varied products (such as pots, radios, utensils, blankets, etc.) made in China for their Emergency Preparedness packs to be sold to their customers. These products will be shipped direct to Food for Health from China. As of November 30, 2006, Food For Health has ordered approximately $628,000 in products from China. As required by the distribution agreements, the Company was paid in full upon the execution of a purchase orders and therefore, provides the Company with funds to source the raw material costs related to the orders. As of November 30, 2006, the Company prepaid Huanghua Seychelle Plastic Co., Ltd. approximately $271,000 for ordered product.
We will also continue to promote our products and technologies to non-profit organizations, such as the Red Cross, the U.S. and international militaries, missionaries, charitable and fund-raising groups and other philanthropic organizations.
The backlog of the Company has increased significantly from about $8,000 per quarter to approximately $607K as of November 30, 2006. This increase is primarily due to the distribution agreement signed in October 2006 with Food For Health. As of November 2006, Food For Health has outstanding orders with the Company for approximately 62K units of the 18 ounce bottle, estimated value at approximately $446K.
Management's Discussion and Analysis
Results of Operations
Three-month period ending November 30, 2006 compared to the corresponding period in 2005.
Selected Financial Data
2006
2005 Year Over Year
Change Year Over Year
Change %
Sales $ 295,313 $ 146,419 $ 148,894 102
Cost of sales $ 116,999 $ 187,678 $ (70,679 ) (38 )
Gross profit $ 178,314 $ (41,259 ) $ 219,573 532
Gross profit percentage 60 % (28 )% 88 % 314
General & administrative expenses $ 153,521 $ 75,366 $ 78,155 104
Interest expense to related parties $ 284,430 $ 76,178 $ 208,252 273
Sales. . The increase in sales is primarily attributable to approximately $155K in sales of 18 ounce bottles and related accessories to Food For Health during the three-month period ending November 30, 2006. Additionally, the Company received brokerage income of approximately $47K from Food For Health as shipments of approximately $275K in various emergency preparedness items were manufactured and shipped from China. As no single customer accounted for 10 percent of sales during the three months ending November 30, 2005, fluctuations in sales to other customers are not discussed, as management believes that such amounts are not significant.
Cost of sales and gross profit The decrease in cost of sales and the increase in gross profit percentage is primarily due to lower raw material costs (from $115K to $24K) as the Company began manufacturing bottles and related accessories in China. In addition to the above, as previously noted, gross profit increased due to approximately $47K in distribution income. The inclusion of the distribution fee increases the gross profit percentage by approximately 36 percent during the three months ending November 2006. The above increases in gross profit were partially offset by increased costs of outside labor to assemble products (from $16K to $26K) and freight (from $55K to $65K).
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General & administrative expenses. . The increase in general & administrative expenses was primarily due to the following - (1) $25K increase in salaries and related employee expenses as the Company hired an administrative assistant during June 2005; (2) $17K increase in outside general ledger assistance as the Company hired several consultants sequentially to fill its vacant internal accounting position; (3) $16K increase in legal fees relating to the settlement of the Ferguson case; (4) $10K increase in gifts / bonuses as the Company issued restricted shares to employees given the increase in sales activity; (5) $6K increase in depreciation expense due to the purchase of the airplane during the end of Q2 of 2006 and the purchase of molds during the last fiscal year; and, (6) $3K increase in claims settlements for the Ferguson case (estimated value of restricted shares granted).
Interest expense to related parties. The increase in interest expense was primarily due to the amortization of the beneficial conversion feature of the warrants / restricted common shares granted to the TAM Trust. As previously noted, on March 1, 2006 such fees increased due to the adoption of SFAS 123R.
Net loss. We had a net loss for the three-month period ending November 30, 2006 of $316,698, compared to a net loss of $239,663 for the three-month period ending November 30, in 2005. Most of our continuing net losses in the three-month period ending November 30, 2006 and 2005 were attributable to financing costs with the TAM Trust, our the primary lender.
Nine-month period ending November 30, 2006 compared to the corresponding period in 2005.
Selected Financial Data
2006
2005 Year Over Year
Change Year Over Year
Change %
Sales $ 684,212 $ 570,831 $ 113,381 20
Cost of sales $ 337,132 $ 440,125 $ (102,993 ) (23 )
Gross profit $ 347,080 $ 130,706 $ 216,374 166
Gross profit percentage 51 % 23 % 28 122
General & administrative expenses $ 473,408 $ 399,621 $ 73,787 18
Interest expense to related parties $ 595,250 $ 190,073 $ 405,177 213
Net cash used in operating activities $ (91,899 ) $ (207,653 ) $ 115,754 56
Net cash used in investing activities $ (73,109 ) $ ( 34,853 ) $ (38,256 ) (110 )
Net cash (used) provided financing activities $ ( 51,225 ) $ 932,610 $ (983,835 ) (105 )
Sales. The increase in sales is primarily attributable to approximately $155K in sales of 18 ounce bottles and related accessories to Food For Health during the nine-month period ending November 30, 2006. Additionally, the Company received distribution income of approximately $56K from Food For Health as shipments of approximately $300,000 in various emergency preparedness items were made and shipped from China. Finally, due to the signing of new / revised distribution agreements during 2006, the Company increased sales with Healthy Directions LLC (from approximately $14K in 2005 to approximately $35K in 2006), Vortex Ltd. (from nil in 2005 to approximately $27K in 2006) and Aquasafe Corp. (from $nil in 2005 to approximately $27K in 2006). These increases were partially offset by decreases in sales of approximately $65K sales to Wellness Enterprises and approximately $70K to BK Pakistan (one-time sale transaction).
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Cost of sales and gross profit. The decrease in cost of sales and the increase in gross profit percentage is primarily due to the Company re-evaluating its countertop water filtration systems during FY 2006 and determining that such product should be wholly-reserved and therefore, recording an inventory reserve of approximately $79K. If such reserve had not been recorded, the gross profit percentage for the nine months ending November 2005 would have been 37 percent. In addition to the above, gross profit increased due to approximately $56K in distribution income. The inclusion of the distribution fee increases the gross profit percentage by approximately 18 percent during the nine months ending November 2006. The above increases in gross profit were partially offset by increased costs of outside labor to assemble products (from $20K to $57K) and freight (from $69K to $103K).
General & administrative expenses. The increase in general & administrative expenses was primarily due to the following - (1) $25K increase in salaries and related employee expenses as the Company hired an administrative assistant during June 2005; (2) $24K increase in outside general ledger assistance as the Company hired several consultants sequentially to fill its vacant internal accounting position; (3) $16K increase in legal fees relating to the settlement of the Ferguson case; (4) $10K increase in gifts / bonuses as the Company issued restricted shares to employees given the increase in sales activity; (5) $5K increase in depreciation expense due to the purchase of the airplane during the end of Q2 of 2006 and the purchase of molds during the last fiscal year; and, (6) $3K increase in claims settlements for the Ferguson case (estimated value of restricted shares granted). These increases were partially offset a reduction in outside accounting assistance (from approximately $220K in 2005 to approximately $171K in 2006) as the Company incurred such costs to catch up on SEC filings.
Interest expense to related parties. The increase in interest expense was primarily due to the amortization of the beneficial conversion feature of the warrants / restricted common shares issued to the TAM Trust. As previously noted, on March 1, 2006 such fees increased due to the adoption of SFAS 123R.
Net loss. We had a net loss of $917,297 for the nine-month period ending November 30, 2006, compared to a net loss $598,618 for the nine-month period ending November 30, 2005. Most of our continuing net losses in the nine-month periods ending November 30, 2006 and 2005 were attributable to financing costs with the TAM Trust, our the primary lender..
Liquidity and Capital Resources
Net cash used in operating activities. During the nine-month period ending November 30, 2005, the Company funded its operations through funds previously obtained by sale of restricted common stock. During the nine-month period ending November 30, 2006, the net loss from operations of approximately $917,297 was offset by approximately $680,000 non-cash expenditures. These non-cash expenses primarily relate to approximately $436,000 in financing costs, the amortization of approximately $185,000 in officer stock compensation and the issuance of approximately $34,000 in stock for services. As of November 30, 2006, the Company had increased its inventory on-hand by approximately $207K and its prepaid expense by $327K with China in anticipation of fulfilling the backorders for Food For Health during the 4 th quarter of 2006. As required by the distribution agreements, the Company was paid in full upon the execution of a purchase order and therefore, the Company had an increased customer liability of approximately $587K.
Net cash used in financing activities. . The 2005 cash provided by financing activities was due to the sale of approximately $1,013,000 in restricted common stock, which was partially reduced by approximately $8,000 for the repayment of related party advances. During 2006 the Company decided to pay down its notes payable with a related party.
As of November 30, 2006, the Company had $419,336 in cash and $50,000 available for borrowing under its line of credit. The cash received from Food For Health during the three month period ending November 30, 2006 provides the Company with funds to source the raw materials required to fulfill the orders. 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.
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Consequently, we do not foresee the need for additional funding at least for the period ending November 30, 2007. As of the date of this filing, the TAM Irrevocable Trust has expressed a willingness to provide additional funding if required; however, an amount has not been discussed. Moreover, in the foreseeable future the Company does not believe additional funding is required.
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes are prepared in accordance with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include revenue recognition, impairment of goodwill and other intangible assets, accounting for transactions which potentially could be settled in a company’s own stock, accounting for legal contingencies, accounting for income taxes, and accounting for stock-based compensation.
Revenue Recognition
EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent , discusses the diversity regarding whether a company should report revenue based on gross billings or the net amount retained because it is earned a commission or fee. On sales to Food for Health, the Company functions as a broker and therefore, receives only a fee for coordinating sales from Huanghua Seychelle Plastic Co., Ltd. with the customer. Since the Company has no risk of inventory ownership, the Company records its revenue from each transaction as only its portion of the fee associated with the shipment.
Goodwill and Other Intangible Assets
SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment on an annual basis (March 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of an operating unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. We allocate goodwill to reporting units based on the reporting unit expected to benefit from the combination. We evaluate our reporting units on an annual basis and if necessary, reassign goodwill using a relative fair value allocation approach.
Transactions Potentially Settled in a Company’s Own Stock
EITF #00-19 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
Additionally, the EITF #00-19 is based on the concept that contracts that require net-cash settlement are assets / liabilities and contracts that require settlement in shares are equity instruments. These contracts may be settled in a variety of methods.
Contracts that include any provision that could require net-cash settlement cannot be accounted for as equity of the company. Company management believes the warrants issued by the Company would be classified as a physical settlement as the buyer pay a predetermined price for a fixed number of shares, therefore, no net-cash settlement is required and classification as equity is appropriate. Additionally, the company believes that all other conditions required by EITF 00-19 have been met to be classified as equity.
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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 November 30, 2006. For the quarter ended November 30, 2006, management has concluded that the Company’s disclosure controls are not effective.
Changes in Internal Controls
We previously reported in Item 8A- "Controls and Procedures" in our annual report on Form 10-KSB for the year ended February 28, 2006, material weaknesses in internal controls. Specifically, 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.
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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, the Company was not applying appropriate accounting principles with respect to transactions in which an entity exchanges its equity instruments for goods or services (Statement of Financial Accounting Standards No. 123R, Share-Based Payments ) and was required to make adjustments during the review process for both valuation and presentation.
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.
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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 Anywhere, Inc. and John Ferguson as plaintiffs. This lawsuit was filed in State Superior Court in Orange County, California. Mr. Carl Palmer was also named as a defendant. The complaint alleged breach of fiduciary duty, constructive fraud, promissory fraud, rescission, constructive trusts, unfair trade practices, and conversion, and sought unspecified damages and injunctive relief. The original suit was dismissed upon motion of the defendants, but was subsequently re-filed by John M. Ferguson individually on or about October 13, 2004. The re-filed suit was again brought against Seychelle Water Technologies, Inc. and Carl Palmer, and again alleges breach of fiduciary duty, constructive fraud, promissory fraud, rescission, constructive trust, unfair trade practices, and conversion, and seeks unspecified damages and injunctive relief. Plaintiff essentially alleges that defendants Seychelle Water Technologies, Inc. (hereafter “Seychelle Water”) and Carl Palmer fraudulently induced plaintiff to enter into an agreement to relinquish 4,000,000 shares of the stock of defendant Seychelle Water. Plaintiff alleges that he originally entered into a joint venture and stock subscription agreement with Dusean Berkich (“ Berkich”), pursuant to which Berkich and plaintiff formed and controlled Seychelle Water. Plaintiff alleges that when he discovered certain improprieties by Berkich, he became concerned, and ultimately agreed to the (re)purchase by Berkich of his interest in the Seychelle Water stock. Plaintiff is now suing to recover damages he allegedly suffered as a result of the (re)purchase by Berkich of his interest in Seychelle Water. A demurrer to the re-filed complaint was filed and in response a first amended complaint was filed and served. A second demurrer to the First Amended Complaint has been filed and sustained by the Court, and plaintiff has been granted fourteen days leave to amend. A second amended complaint has now been filed and answered. As of the filing of this document, the lawsuit has been settled for 5,000 restricted shares of common stock and dismissal is pending.
Otherwise, we know of no legal proceedings pending or threatened or judgments entered against the Company or against any of our directors or officers in his or her capacity as such.
ITEM 2. CHANGES IN SECURITIES
Warrants
None.
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Common stock
During the three-month period ended November 30, 2006, the Company issued an aggregate of 58,789 restricted shares to consultants and an employee for services with an approximate total value of $40,541.
Common Stock
Date Issued Issued to Type of Liability Shares Estimated value
September 21, 2006 Cara Good Consulting / advertising 18,000 $ 11,700
October 9, 2006 Cara Good Consultant / advertising 15,789 $ 11,841
November 1, 2006 Arturo Villafuerte Employee 2,500 $ 1,625
November 1, 2006 Maria Villafuerte Outside assembly 2,500 $ 1,625
November 2, 2006 Alexis Mayden Consultant / accounting 15,000 $ 10,500
November 7, 2006 Arturo Villafuerte Employee 5,000 $ 3,250
During the three-month period ended November 30, 2006, the Company issued an aggregate of 24,020 restricted shares to a debt holder with an approximate total value of $15,600.
During the three-month period ended November 30, 2006, the Company issued an aggregate of 3,000 common shares to various investors for cash for an approximate total value of $1,500.
Date Issued Issue to Common Shares Stock Estimated value
November 9, 2006 G. Orras Trust 2,000 $ 1,000
November 9, 2006 Robert Haugh 1,000 $ 500
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In the transactions shown above, the issuance, delivery and sale of our common stock were made pursuant to the private offering exemption within the meaning of Section 4(2) of the Act because the offers were made to a limited number of people, all of whom received all material information concerning the investment and all of whom have had sophistication and ability to bear economic risk based upon their representations to us and their prior experience in such investments. In all of the transactions shown above, we have issued stop transfer orders concerning the transfer of certificates representing all the common stock issued and outstanding as reported in this section.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE TO SECURITY HOLDERS
We did not submit any matter to a vote of security holders through solicitation of proxies during the third quarter of the fiscal year covered by this report.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K
(a) Exhibits
10.R Food for Food Health Purchase Agreement
10.S Food for Health Distribution Agreement
10.T Seychelle Environmental Technologies, Inc. License Agreement with Mr. Gary Hess
31.1* Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)
31.2* Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)
32.1* Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C.ss.1350 Section 906 of the Sarbanes-Oxley Act of 2002)
32.2* Certification of the Chief Financial Officer pursuant to 18 U.S.C.ss.1350 Section 906 of the Sarbanes-Oxley Act of 2002)
_________
* Filed herewith
(b) Reports on Form 8-K
November 1, 2006 News release dated October 30, 2006 announcing distribution rights agreement.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Seychelle Environmental Technologies, Inc.
Date: January 29, 2007 By: /s/ Carl Palmer
Director, Chief Executive Officer and President
Date: January 29, 2007 By: /s/ Jim Place
Director and Chief Financial Officer and Chief Operating Officer
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Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl Palmer, certify that:
1. I have reviewed this Quarterly report on Form 10-QSB of Seychelle Environmental Technologies, Inc. (the "Small business issuer");
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Small business issuer as of, and for, the periods presented in this report;
4. The Small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Small business issuer 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 Small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Small business issuer’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
d) Disclosed in this report any change in the Small business issuer's internal control over financial reporting that occurred during the Small business issuer’s most recent fiscal quarter (the small business issuer’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Small business issuer's internal control over financial reporting; and
5. The Small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Small business issuer's auditors and the audit committee of the Small business issuer's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Small business issuer's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Small business issuer's internal control over financial reporting.
Date: January 29, 2007
/s/ Carl Palmer
Chief Executive Officer
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Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jim Place, certify that:
1. I have reviewed this Quarterly report on Form 10-QSB of Seychelle Environmental Technologies, Inc. (the "Small business issuer");
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Small business issuer as of, and for, the periods presented in this report;
4. The Small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Small business issuer 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 Small business issuer, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Small business issuer’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
d) Disclosed in this report any change in the Small business issuer's internal control over financial reporting that occurred during the Small business issuer’s most recent fiscal quarter (the Small business issuer’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Small business issuer's internal control over financial reporting; and
5. The Small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Small business issuer's auditors and the audit committee of the Small business issuer's board of directors (or persons performing the equivalent functions);
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Small business issuer's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Small business issuer's internal control over financial reporting.
Date: January 29, 2007
/s/ Jim Place
Chief Financial Officer
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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 Quarterly Report of Seychelle Environmental Technologies, Inc. (the “Small business issuer”) on Form 10QSB for the period ending November 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carl Palmer, Chief Executive Officer of the Small business issuer 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 Small business issuer.
/s/ Carl Palmer
Carl Palmer
Chief Executive Officer
January 29, 2007
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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 Quarterly Report of Seychelle Environmental Technologies, Inc. (the “Small business issuer”) on Form 10QSB for the period ending November 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jim Place, Chief Financial Officer of the Small business issuer 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 Small business issuer.
/s/ Jim Place
Jim Place
Chief Financial Officer
January 29, 2007
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