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

FORM 10-Q

 þ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ending August 31, 2011

o 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)
   
     
32963 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 issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes þ  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(Section 232.405 of this chapter) during the preceding 12 months(or such shorter period that the registrant was required to submit and post such files. Yes þ  No o

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o                                  
Accelerated filer o
Non-accelerated filer   o (Do not check if a smaller reporting company)
 Smaller reporting company  þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yeso    No þ

The number of shares outstanding of the Registrant's common stock, as of October 4, 2011 was 25,932,646.

References in this document to "us," "we," “Seychelle,” “SYEV,” or "the Company" refer to Seychelle Environmental Technologies, Inc., its predecessor and its subsidiary.
 


 
 

 
 
Seychelle Environmental Technologies, Inc.


TABLE OF CONTENTS

   
Page
 
PART I  FINANCIAL INFORMATION
 
     
Item 1. Financial Statements
   3  
       
                     Condensed Consolidated Balance Sheets 
    3  
                     Condensed Consolidated Statements of Operations
    4  
                     Condensed Consolidated Statements of Cash Flows
    6  
                     Notes to Condensed Consolidated Financial Statements
    7  
         
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    10  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
    17  
Item 4. Controls and Procedures
    17  
Item 4T. Controls and Procedures
    17  
         
PART II  OTHER INFORMATION
       
         
Item 1. Legal Proceedings
    18  
Item 1A. Risk Factors
    18  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    18  
Item 3. Defaults Upon Senior Securities
    18  
Item 4. Submission of Matters to a Vote of Security Holders
    19  
Item 5. Other Information
    19  
Item 6. Exhibits
    20  
         
Signatures
    22  
         

 
2

 
PART I
 
ITEM 1. FINANCIAL STATEMENTS

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

   
August 31, 2011
   
February 28, 2011
 
   
(Unaudited)
   
(Audited)
 
ASSETS
 
Current assets:
           
Cash and cash equivalents
 
$
1,646,683
   
$
1,244,290
 
Accounts receivable, net of allowance for doubtful accounts and sales returns
               
   of $129,426 and $99,406, respectively
   
155,798
     
53,710
 
Inventory, net
   
456,389
     
447,489
 
     Prepaid expenses and other current assets
   
162,737
     
77,520
 
      Total current assets
   
2,421,607
     
1,823,009
 
Property and equipment, net
   
122,115
     
98,977
 
Intangible assets, net
   
7,582
     
7,243
 
Deferred tax assets
   
580,810
     
694,833
 
Other assets
   
8,514
     
8,514
 
      Total assets 
 
$
3,140,628
   
$
2,632,576
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
           
Current liabilities:
               
   Accounts payable and accrued expenses
 
$
235,867
   
$
230,732
 
   Customer deposits
   
110,684
     
65,454
 
   Notes payable and capital lease obligations
   
-
     
53,037
 
       Total current liabilities
   
346,551
     
349,223
 
                 
                 
Stockholders' equity:
               
Preferred stock, 6,000,000 shares authorized, none issued or outstanding
   
-
     
-
 
Common stock $0.001 par value, 50,000,000 shares authorized, 25,932,646 and 25,882,646  issued at August 31, 2011 and February 28, 2011, respectively
   
25,933
     
25,883
 
Treasury stock
   
(42,549)
     
(17,549)
 
Additional paid-in capital
   
7,214,207
     
7,016,148
 
    Accumulated deficit
   
(4,403,514
)
   
(4,741,129
)
          Total stockholders' equity
   
2,794,077
     
2,283,353
 
 Total liabilities and stockholders' equity
 
$
3,140,628
   
$
2,632,576
 
 
See accompanying notes to condensed consolidated financial statements.

 
3

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
For the Three Months Ended
 
   
August 31,
   
August 31,
 
   
2011
   
2010
 
Revenues
 
$
1,508,466
   
$
700,102
 
Cost of sales
   
759,472
     
390,144
 
               Gross profit
   
748,994
     
309,958
 
Operating expenses:
               
    Selling, General and Administrative Expenses
   
484,923
     
273,770
 
    Depreciation and amortization
   
10,712
     
14,042
 
                 Total  operating expenses
   
495,635
     
287,812
 
Income from Operations
   
253,359
     
22,146
 
Other Income (Expense)
               
     Interest income
   
301
     
236
 
     Interest expense-related parties
   
-
     
(3,784
)
     Interest expense-other
   
(431
)
   
(1,186
)
     Other expense
   
(15,963
)
   
-
 
                    Total other (expense)
   
(16,093
)
   
(4,734
)
Income before provision for income taxes
   
237,266
     
17,412
 
Provision for income taxes
   
48,966
     
-
 
Net Income
 
$
188,300
   
$
17,412
 
BASIC INCOME PER SHARE
 
$
0.01
   
$
0.00
 
DILUTED INCOME PER SHARE
 
$
0.01
   
$
0.00
 
BASIC WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
   
25,932,646
     
25,854,146
 
DILUTED WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
   
29,011,635
     
30,212,670
 

 See accompanying notes to condensed consolidated financial statements.

 
4

 
 
 SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
For the Six Months Ended
 
   
August 31,
   
August 31,
 
   
2011
   
2010
 
Revenues
 
$
3,289,485
   
$
1,911,522
 
Cost of sales
   
1,738,088
     
924,263
 
               Gross profit
   
1,551,397
     
987,259
 
Operating expenses:
               
    Selling, General and Administrative Expenses
   
956,302
     
459,633
 
    Depreciation and amortization
   
21,958
     
27,223
 
                 Total  operating expenses
   
978,260
     
486,856
 
Income from Operations
   
573,137
     
500,403
 
Other Income (Expense)
               
     Interest income
   
749
     
382
 
     Interest expense-related parties
   
-
     
(8,163
)
     Interest expense-other
   
(1,055
)
   
(2,301
)
  Other expense
   
(15,963
)
   
-
 
                    Total other (expense)
   
(16,269
)
   
(10,082
)
Income before provision for income taxes
   
556,868
     
490,321
 
Provision for income taxes
   
219,253
     
-
 
Net Income
 
$
337,615
   
$
490,321
 
BASIC INCOME PER SHARE
 
$
0.01
   
$
0.02
 
DILUTED INCOME PER SHARE
 
$
0.01
   
$
0.02
 
BASIC WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
   
25,914,711
     
25,854,146
 
DILUTED WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
   
28,886,555
     
30,208,657
 

 See accompanying notes to condensed consolidated financial statements.

 
5

 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
For The Six Months Ended
 
   
August 31,
   
August 31,
 
   
2011
   
2010
 
             
OPERATING ACTIVITIES:
           
Net income
 
$
337,615
   
$
490,321
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
                 
    Depreciation and amortization
   
21,957
     
27,223
 
    Loss on sale of assets
   
15,963
     
-
 
    Stock-based compensation
   
193,109
     
-
 
    Contributed services
   
5,000
     
  -
 
    Provision for doubtful accounts
   
30,020
     
  -
 
    Change in deferred tax assets
   
114,023
     
  -
 
Changes in operating assets and liabilities:
               
   (Increase) decrease in accounts receivable
   
(132,108
)
   
(83,369
)
   (Increase) decrease in inventory
   
(8,900
)
   
47,225
 
   (Increase) decrease in prepaid expenses and other assets
   
(85,217
)
   
(65,075
 )
   Increase (decrease) in accounts payable and accrued expenses
   
5,135
     
3,681
 
   Increase (decrease) in accrued interest due to related party
   
-
     
3,769
 
   Increase (decrease) in customer deposits
   
45,230
     
(54,955
)
Net Cash Provided by Operating Activities
   
541,827
     
368,820
 
                 
INVESTING ACTIVITIES:
               
   Purchase of property and equipment
   
(58,367
)
   
(32,730
)
   Purchase of intangible assets
   
(3,030
)
   
(650)
 
Net Cash Used in Investing Activities
   
(61,397
)
   
(33,380
)
                 
FINANCING ACTIVITIES:
               
   Proceeds from notes payable
   
-
     
100,000
 
   Repayment of notes payable and capital lease obligations
   
(53,037
)
   
(306,743
)
   Purchase of common stock
   
(25,000)
     
-
 
Net Cash Used in Financing Activities
   
(78,037
)
   
(206,743
)
                 
       NET INCREASE IN CASH
   
402,393
     
128,697
 
                 
       CASH AT BEGINNING OF PERIOD
   
1,244,290
     
502,167
 
                 
       CASH AT END OF PERIOD
 
$
1,646,683
   
$
630,864
 
                 
Supplemental disclosures of cash flow information:
               
    Cash paid for:
               
 Interest
 
$
1,056
   
$
6,695
 
 Income taxes
 
$
162,990
   
$
-
 
                 
 
See accompanying notes to condensed consolidated financial statements.
 
 

 
6

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED (UNAUDITED) FINANCIAL STATEMENTS
 
 
NOTE 1:    CONDENSED FINANCIAL STATEMENTS

The accompanying financial statements have been prepared by Seychelle Environmental Technologies, Inc., and subsidiary (the “Company”) without audit.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at August 31, 2011, and for all periods presented herein, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s February 28, 2011 audited financial statements.  The results of operations for the periods ended August 31, 2011 and 2010 are not necessarily indicative of the operating results for the full years.

The summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the condensed consolidated financial statements and the February 28, 2011 financials included in the 10-K filed on May 31, 2011.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs.

The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted.  The Company has not yet determined the potential impact on its future consolidated financial statements.

NOTE 2:    INCOME PER SHARE

Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during each period.  Diluted net income (loss) per share is computed by using the treasury stock method and dividing net income (loss) by the weighted average number of common shares outstanding during the period after giving effect to all potentially dilutive common stock, consisting of stock warrants.

The denominator for diluted income per share for the period ended August 31, 2011 is adjusted to include the effect of dilutive common stock equivalents, consisting of warrants totaling 3,078,989 and 2,971,844 for the three and six month periods ended August 31, 2011, respectively.  The denominator for diluted income per share for the period ended August 31, 2010 is adjusted to include the effect of dilutive common stock equivalents, consisting of warrants totaling 4,358,524 and 4,354,511 for the three and six month periods ended August 31, 2010, respectively.  Common stock equivalents consisting of 1,809,721 warrants were considered but were not included in the computation of income per share for the each of the three and six month periods ended August 31, 2010, because they would have been anti-dilutive.

 
7

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED (UNAUDITED) FINANCIAL STATEMENTS

NOTE 3:   STOCKHOLDERS’ EQUITY
 
Common Stock
During the six-month period ended August 31, 2011, the Company issued 50,000 shares of restricted common stock to a consultant for services rendered, valued at $15,500 based on the estimated fair value of the common stock on the date of the grant which is included in stock-based compensation. No shares of restricted stock were issued during the quarter ended August 31, 2011.

The Company purchased 100,000 shares of common stock at a cost of $25,000 during the quarter ended August 31, 2011 which were placed in the treasury and recorded at cost.
 
Contributed Executive Services
The President of the Company elected not to accept his salary until the Company has become profitable. Although the Company has achieved profitable operations, he continued to not accept his salary. Accordingly, the Company recorded $2,500 and $5,000, the contractual value of these services, for the three and six month periods, respectively, in each of the periods ended August 31, 2011 and 2010, which is included in selling, general and administrative expenses and additional paid-in capital.

Warrants
The Company has determined the estimated value of warrants granted using the Black-Scholes pricing model. The amount of the expense charged to operations for warrants was $88,804 and $177,609 for the three and six month periods ended August 31, 2011 and $-nil- for the three and six month periods ended August 31, 2010.  All outstanding warrants are expected to vest in December 2015.

A summary of warrant activity for the three months ended August 31, 2011 is as follows:
 
         
Weighted-
 
         
Average
 
   
Warrants
   
Exercise
 
   
Outstanding
   
Price
 
Outstanding at February 28, 2011
   
8,467,221
     
0.21
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Forfeited
   
-
     
-
 
Outstanding at August 31, 2011
   
8,467,221
     
0.21
 
Vested at August 31, 2011
   
0
     
0.21
 
Exercisable at August 31, 2011
   
0
     
0.21
 
 
The following table summarizes significant ranges of outstanding warrants as of August 31, 2011:
 
     
Warrants Outstanding
   
Warrants Exercisable
 
           
Weighted
   
Weighted
   
Weighted
 
           
Average
   
Average
   
Average
 
 
   
Number
   
Remaining
   
Exercise
   
Exercise
 
Exercise    
Outstanding
   
Life (Years)
   
Price
   
Price
 
$ 0.21       8,467,221       9.54     $ 0.21     $ 0.21  
                                     
 
 
 
8

 
 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4:    INVENTORY

The Company’s inventory consisted of the following at August 31, 2011 and February 28, 2011:
 
 
Raw materials
 
$
288,474
   
$
503,265
 
Finished goods
   
187,133
     
209,509
 
     
475,607
     
712,774
 
Reserve for obsolete and slow moving inventory
   
(19,218
)
   
(265,285
)
   
$
456,389
   
$
447,489
 

NOTE 5:    LINE OF CREDIT

 As of August 31, 2011, the Company had a line of credit agreement totaling $100,000.  The line of credit bears interest at the lending institution’s index rate (3.0% as of August 31, 2011) plus two percent and is due February 1, 2012.  As of August 31, 2011, the Company had no outstanding borrowings against the line of credit.  The line of credit agreement does not include any limitations on borrowings or any restrictive debt covenants.

NOTE 6:    CONCENTRATIONS

Sales to two customers accounted for 65% and 62% of total revenues for the three and six month periods ended August 31, 2011, respectively.  For the three and six month periods ended August 31, 2010, sales to three customers accounted for 46% and 61% of total revenues, respectively.

NOTE 7:    RELATED PARTY TRANSACTIONS

During the three and six month period ended August 31, 2011, payments totaling $31,900 and $57,400, respectively, were made to TAM Irrevocable Trust, in which Cari Beck, is a trustee as well as the daughter of the Company’s President, for consulting services.  During the three and six month period ended August 31, 2010 payments to TAM Irrevocable Trust were made totaling $27,280 and $42,780, respectively, for consulting services.

 
9

 
 
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion summarizes the significant factors affecting the operating results, financial condition and liquidity and cash flows of Seychelle Environmental Technologies, Inc., and subsidiary (the “Company”) for the three and six month periods ended August 31, 2011 and 2010. The discussion and analysis that follows should be read together with the consolidated financial statements of Seychelle Environmental Technologies, Inc. and the notes to the consolidated financial statements included in the Company’s annual report on Form 10-K for the fiscal year ended February 28, 2011.  Except for historical information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the Company’s control.
 
Forward-Looking Statements
 
Certain statements contained herein are “forward-looking” statements.  Forward-looking statements include statements which are predictive in nature; which depend upon or refer to future events or conditions; or which include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or variations or negatives thereof or by similar or comparable words or phrases. In addition, any statement concerning future financial performance, ongoing business strategies or prospects, and possible future Company actions that may be provided by management are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about the Company; and economic and market factors in the countries in which the Company does business, among other things. These statements are not guarantees of future performance, and the Company has no specific intentions to update these statements. Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors including, among others:
 
 
(1)
the portable water filtration industry is in a state of rapid technological change, which can render the Company’s products obsolete or unmarketable;
 
 
(2)
any failure by the Company to anticipate or respond to technological developments or changes in industry standards or customer requirements, or any significant delays in product development or introduction, could have a material adverse effect on the Company’s business, operating results and financial condition;
 
 
(3)
the Company’s cost of sales may be materially affected by increases in the market prices of the raw materials used in the Company’s assembly processes;
 
 
(4)
the Company’s water related product sales could be materially affected by weather conditions and government regulations;
 
 
(5)
the Company is subject to the risks of conducting business internationally; and
 
 
(6)
the industries in which the Company operates are highly competitive. Additional risks and uncertainties are outlined in the Company’s filings with the Securities and Exchange Commission, including its most recent fiscal 2011 Annual Report on Form 10-K.
 
Description of the Business
 
We were incorporated under the laws of the State of Nevada on January 23, 1998 as a change of domicile to Royal Net, Inc., a Utah corporation that was originally incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies, Inc. effective in January 1998.
 
On January 30, 1998, we entered into an Exchange Agreement with Seychelle Water Technologies, Inc., a Nevada corporation (SWT), whereby we exchanged our issued and outstanding capital shares with the shareholders of SWT on a one share for one share basis. We became the parent company and SWT became a wholly owned subsidiary. SWT had been formed in 1997 to market water filtration systems of Aqua Vision International.
 
Our Company is presently comprised of Seychelle Environmental Technologies, Inc., a Nevada corporation, with one wholly-owned subsidiary, Seychelle Water Technologies, Inc., also a Nevada corporation (collectively, the Company or Seychelle). We use the trade name "Seychelle Water Filtration Products, Inc." in our commercial operations.

 
10

 

Seychelle designs, assembles and distributes water filtration systems. These systems include portable water bottles that can be filled from nearly any available source of water. Patents or trade secrets cover all proprietary products.

Our principal business address is 32963 Calle Perfecto, San Juan Capistrano, California 92675. Our telephone number at this address is 949-234-1999.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Results of Operations
 
Our summary historical financial data is presented in the following table to aid in your analysis. You should read this data in conjunction with this section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations, our condensed consolidated financial statements and the related notes to the condensed consolidated financial statements included elsewhere in this report. The selected condensed consolidated statements of operations data for the three and six month periods ended August 31, 2011 and 2010 are derived from our condensed consolidated financial statements included elsewhere in this report.

Three-month period ended August 31, 2011 compared to the corresponding period in 2010
       
                   
               
Year over
       
   
2011
   
2010
   
year change
   
%
 
                         
Revenues
 
$
1,508,466
   
$
700,102
     
808,364
     
116
%
Cost of revenues
   
759,472
     
390,144
     
369,328
     
95
%
Gross profit
   
748,994
     
309,958
     
439,036
     
142
%
Gross profit %
   
50
%
   
44
%
               
Selling, general, and administrative expenses
   
484,923
     
273,770
   
 
211,153
     
77
%
Depreciation and amortization exp
   
10,712
     
14,042
     
(3,330)
     
-24
%
Income before provision for income taxes
   
237,266
     
17,412
 
   
219,854
     
1,263
%
Provision for income taxes
   
48,966
 
   
-
     
48,966
 
   
100
%
Net Income
   
188,300
     
17,412
     
170,888
     
981
%
Net Income %
   
12
%
   
3
%
               

 
11

 
Revenues. Our customer concentration is constantly changing, which contributes to much of the fluctuation in revenues.  The current period increase in revenues is primarily due to sales to two customers who accounted for approximately $659,000 of the increase, accounting for 65% of revenues in the three-month period ended August 31, 2011 compared to 46% in the same period ended August 31, 2010.  There was also a $24,000 increase in website sales for the three-month period ended August 31, 2011 compared to the same period in the prior year as more and more customers are discovering this means of purchasing our product.  The increase in sales is also the net result of a shift in our product mix.  Significant increases were experienced within a few product lines: missionary packs (which increased to $284,000 in the current quarter as compared to $163,000 in sales for the comparable period), pitchers (to $413,000 from $97,000), and bottles (to $364,000 from $220,000).  The increase in missionary packs is due to orders from a couple of the Company’s larger customers changing the items they order.  A missionary pack consists of a plastic filter bottle and a replacement filter.  
 
Cost of revenues and gross profit percentage. The increase in cost of revenues is largely a direct result of the 116% increase in sales for the three-month period ended August 31, 2011 from the comparable period in the prior year.  Cost of revenues only increased by 95% from period to period by comparison, resulting in an increase in gross profit margin to 50% from 44%.  Our profit margin will fluctuate from time to time based on the product mix within sales.   As mentioned in the sales discussion, a large reason for the increase in sales was a $121,000 increase in sales of the missionary pack versus prior year.  The missionary pack results in a higher margin per unit than many of our other products.  We are continuing to pursue efficiencies in the production process and are negotiating for better filter prices and believe that gross margins will improve further if we are successful in these plans and will be able to reduce the impact of the lower margin products will have on the product mix.
 
Selling, general and administrative  expenses.  These expenses increased by approximately $211,000, or 77%, during the three months ended August 31, 2011 compared to the same period ended in the prior year.  Selling expenses increased approximately $53,000, or 128%, compared to the same period in 2010.  This is due to the increase in sales.  The expenses represented 6.2% and 5.9% of sales for the three months ended August 31, 2011 and 2010, respectively.   Not all sales are commissionable, and the increase in selling expenses as a percentage of sales is largely a direct result of the increase in commissionable sales to two significant customers.  We expect sales commissions to be approximately 6% of sales for the remainder of fiscal year 2011.  General and administrative expenses increased approximately $158,000 when compared to the comparable period in the prior year.  Significant components of the increase are gift and bonus expense to reward performance for a profitable year in 2011 (to $40,900 for 2011 compared to $11,400 for 2010), merchant fee expense (to $10,700 compared to $5,400, printing expense (to $19,100 compared to $5,300, outside services (to $28,600 compared to $13,700, and consulting fees ($145,000 compared to $62,600). We expect only a slight increase in general and administrative expenses for the remainder of fiscal 2011 as we expand to handle the growth of our sales.
 
 
12

 
 
Depreciation and amortization expense.  The decrease in depreciation and amortization expense is due to some assets becoming fully depreciated as well as a reduction in the amount of molds we currently have due to change in the product design.

Income tax expense.  Income tax expense increased due to California disallowing the net loss carry-forward and a decrease in the deferred tax asset, resulting in $48,966 during the quarter.

Net Income. Net income for the three-month period ended August 31, 2011 was $188,300 compared to net income of $17,412 for the three-month period ended August 31, 2010.  This was primarily due to the slight decrease in cost of goods sold as a percentage of sales, partially offset by the increases in operating expenses as discussed above. The net income can be improved when larger sales orders begin coming in for the larger volume products and as noted previously, out-source the production to a high volume assembler/fulfillment vendor we have established a relationship with to do this for us.  The introduction of the radiological filter will add to the net income in the coming months as  $25,000 in orders  has already being received for it in the US.  Another new product being finalized will add even more to the bottom line.
 
 
13

 
 
 
Six-month period ended August 31, 2011 compared to the corresponding period in 2010
       
                   
               
Year over
       
   
2011
   
2010
   
year change
   
%
 
                         
                         
Revenues
 
$
3,289,485
   
$
1,911,522
     
1,377,963
     
72
%
Cost of revenues
   
1,738,088
     
924,263
     
813,825
     
88
%
Gross profit
   
1,551,397
     
987,259
     
564,138
     
57
%
Gross profit %
   
47
%
   
52
%
               
Selling, general, and administrative expenses
   
956,302
     
459,633
     
496,669
     
108
%
Depreciation expense
   
21,958
     
27,223
     
(5,265
)
   
-19
%
Income before provision for income taxes
   
556,868
     
490,321
     
66,547
     
14
%
Provision for income taxes
   
219,253
 
   
-
     
219,253
 
   
100
%
Net Income
   
337,615
     
490,321
     
(152,706)
     
-31
%
Net Income %
   
10
%
   
26
%
               

Revenues. Our customer concentration is constantly changing, which contributes to much of the fluctuation in revenues.  The current period increase in revenues is largely due to sales to two customers who accounted for approximately $1,203,000 of the increase, accounting for 62% of revenues in the six-month period ended August 31, 2011 compared to 46% in the same period ended August 31, 2010.  This was partially offset by another significant customer who accounted for a decrease of approximately $206,000.  This customer accounted for 15% of sales in the prior year but only 3% in the current year.  There was also a $204,000 increase in website sales for the six-month period ended August 31, 2011 compared to the same period in the prior year as more and more customers are discovering this means of purchasing our product.  The increase in sales is also the net result of a shift in our product mix.  Significant changes were experienced within a few product lines: missionary packs (which decreased to $456,000 in the current quarter as compared to $643,000 in sales for the comparable period), pitchers (which increased to $1,052,000 from $248,000), and bottles (which decreased to $671,000 from $819,000).  The increase in pitchers, and decrease in mission packs, and bottle sales is due to sales fluctuations to one of the Company’s customers.   There were also increased revenues from the introduction of new product lines, such as the Aqua Mist and shower lines, which combined for $129,000 of current year revenue as compared to zero in the comparable period of the prior year.
 
 
14

 
 
Cost of revenues and gross profit percentage. The increase in cost of revenues is largely a direct result of the 72% increase in sales for the six-month period ended August 31, 2011 from the comparable period in the prior year.  Cost of revenues increased by 88% from period to period by comparison, resulting in a decrease in gross profit margin to 47% from 52%.  Our profit margin will fluctuate from time to time based on the product mix within sales.   As mentioned in the sales discussion, a large reason for the increase in sales was an $804,000 increase in sales of pitchers compared to the same period in the prior year, partially offset by an $187,000 decrease in sales of missionary packs.  The sales of pitchers typically result in a lower margin per unit than most of the Company’s other product lines, while the sales of missionary packs typically result in a higher margin per unit than many of our other products.  So the increase in low margin pitcher sales and the decrease in high margin missionary pack sales combined to cause a decline in margin percentages for the period.  As noted in the 3 month period ended August 31, 2011, discussion of gross margins  are continuing to pursue efficiencies in the production process and are negotiating for better filter prices and believe that gross margins will improve further if we are successful in these plans.  
 
Selling, general and administrative  expenses.  These expenses increased by approximately $497,000, or 108%, during the six months ended August 31, 2011 compared to the same period ended in the prior year.  Selling expenses increased approximately $122,000, or 167%, compared to the same period in 2010.  This is due to the increase in sales.  The expenses represented 6.1% and 3.8% of sales for the six months ended August 31, 2011 and 2010, respectively.   Not all sales are commissionable, and the increase in selling expenses as a percentage of sales is largely a direct result of the increase in commissionable sales to two significant customers.  We expect sales commissions to be approximately 6% of sales for the remainder of fiscal year 2011.  General and administrative expenses increased approximately $375,000 when compared to the comparable period in the prior year.  Significant components of the increase are gift and bonus expense to reward performance for a profitable year in 2011 (to $41,700 for 2011 compared to $11,400 for 2010), merchant fee expense (to $25,300 compared to $11,000, printing expense (to $36,400 compared to $15,800, outside services (to $64,200 compared to $19,000, and consulting fees ($301,500 compared to $104,800).  The increases in outside services and consulting fees are due primarily to website orders being filled by outside fulfillment center and an increase in labor required to fulfill incoming orders. We expect only a slight increase in general and administrative expenses for the remainder of fiscal 2011 as we expand to handle the growth of our sales.
 
Depreciation and amortization expense.  The decrease in depreciation and amortization expense is due to some assets becoming fully depreciated as well as a reduction in the amount of molds we currently have due to change in the product design.

Income tax expense.  Income tax expense increased due to California disallowing the net loss carryforward and a decrease in the deferred tax asset, resulting in $219,253 during the six-month period.

Net Income. Net income for the six-month period ended August 31, 2011 was $337,615 compared to net income of $490,300 for the six-month period ended August 31, 2010.  This decrease was primarily due to the slight increase in cost of goods sold as a percentage of sales, as well as increases in operating expenses as discussed above.  Comparing apples to apples with net income, it should be noted that before the tax provision, net income was ahead of prior year.  However, with the new products we are launching including the radiological filter which has already  received orders, we expect to more than offset the tax provision on an on-going basis.
 
Liquidity and Capital Resources
 
Net cash provided by operating activities. During the six-month period ended August 31, 2011, the Company funded its operations primarily through proceeds from product sales.  Our accounts receivable, excluding the change in allowances, increased by $132,000 reflecting the growth in sales, while our customer deposits increased by $45,000 also due to the growth in sales.  Net income was impacted by noncash charges for stock-based compensation amounting to $193,000, largely due to warrant amortization.
 
 
15

 
Net cash used in investing activities. During the six-month period ended August 31, 2011, the increase in cash used by investing activities was due to the purchase of $58,300 of property and equipment compared to $32,730 during the same time period in the prior fiscal year.
 
Net cash used in financing activities. The decrease in cash used in financing activities during the six-month period ended August 31, 2011 was largely due to repayment of notes payable and capital lease obligations totaling $78,000 compared to $206,700 in the time period of 2010.
 
Our principal sources of liquidity have historically been funds generated from operating activities and borrowings from the TAM Trust, one of our principal shareholders and borrowing under our line of credit. As of August 31, 2011, the Company has no outstanding borrowings either from TAM Trust or under our line of credit.  The Company believes that despite the increase in sales experienced during the fiscal years ended February 28, 2011 and 2010 and the six-month period ended August 31, 2011, additional funding may still be required from the TAM Trust or other shareholders to handle the growth in sales volume. During April 2010, the TAM Trust committed to providing up to $250,000 in additional funding.
 
As of August 31, 2011, the Company had $1,646,700 in cash and no borrowings outstanding on its line of credit. The line of credit does not contain any limitations on borrowing or any restrictive debt covenants. The Company believes it has liquidity to meet its operating needs through the balance of fiscal 2012.
 
Critical Accounting Policies and Estimates
 
The Company’s discussion and analysis of its financial condition and results of operations are based upon its condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
 
The Company believes that the estimates, assumptions and judgments involved in the accounting policies described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of its most recent fiscal 2011 Annual Report on Form 10-K have the greatest potential impact on its consolidated financial statements, so it considers these to be its critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates the Company uses in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for inventory reserves and stock-based compensation. These policies require that the Company make estimates in the preparation of its consolidated financial statements as of a given date.
 
Within the context of these critical accounting policies, the Company is not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
 
 
16

 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
None.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Not applicable

ITEM 4T. CONTROLS AND PROCEDURES
 
As of the end of the period covered by this report, based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a -15(e) and 15(d)-15(e) under the Exchange Act), our Chief Executive Officer and the Chief Financial Officer each have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the applicable time periods specified by the SEC’s rules and forms.
 
There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal three months that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
This report does not include an attestation report by the Company’s independent registered public accounting firm regarding internal control over financial reporting.

 
17

 
PART II - OTHER INFORMATION
 
ITEM 1.   LEGAL PROCEEDINGS
 
As of August 31, 2011, we know of no legal proceedings pending or threatened or judgments entered against the Company or any of our directors or officers in his capacity as such.
 
ITEM 1A. RISK FACTORS

There have been no changes to our Risk Factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 31, 2011.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
During the six-month period ended August 31, 2011, the Company issued 50,000 shares of restricted common stock for outside services to one individual in exchange for services rendered.  The Company issued no other restricted or unrestricted stock, warrants or options during this period.  

There have been no further issuances of securities through the date of this filing.
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
None
 
 
18

 
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None
 
ITEM 5.  OTHER INFORMATION
 
None
 
 
 
19

 
 
 
ITEM 6.  EXHIBITS

Exhibits

31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)
 
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)
 
32.1
Certification of the Chief Executive Officer 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)
 
101.DEF
 
XBRL Taxonomy Extension Definition Link base Document
     
101.INS
 
XBRL Instance Document
     
101SCH
 
XBRL Taxonomy Extension Schema Document
     
101.CAL
 
XBRL Taxonomy Extension Calculation Link base Document
     
101.LAB
 
XBRL Taxonomy Extension Label Link base Document
     
101.PRE
 
XBRL Taxonomy Extension Presentation Link base Document
     
101.DEF
 
XBRL Taxonomy Extension Definition Link base Document

 
20

 
 

Reports on Form 8-K

We filed four reports on Form 8-K for the six-month period ended August 31, 2011.  On July 18, 2011, we announced revenues and earnings for our fiscal quarter ended May 31, 2011 and information concerning certain anticipated operations.  On March 14, 2011, we announced fiscal year end guidance. On May 10, 2011, we announced a new product. On May 31, 2011, we discussed our fiscal year end results and provided information regarding our operations.

 
21

 
 

SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized. 

 
Seychelle Environmental Technologies, Inc.
 
  
  
  
 
Date: October 14, 2011
By:  
/s/ Carl Palmer
 
 
Carl Palmer
Director, Chief Executive Officer and President
 
 
       
  
  
  
 
Date: October 14, 2011
By:  
/s/ Jim Place
 
 
Jim Place
Director and Chief Financial Officer and Chief Operating Officer 
 
 

 
22