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EX-32.1 - SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CAsyev_ex321.htm
EX-32.2 - SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CAsyev_ex322.htm


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 November 30, 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 Of incorporation)
 
(IRS Employer File Number)
 
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
Smaller reporting company
þ
(Do not check if a smaller reporting company)      

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 January 6, 2012 was 25,957,646.

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


 
 

 
 
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 Income
   
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
   
11
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
   
18
 
Item 4.
Controls and Procedures
   
18
 
Item 4T.
Controls and Procedures
   
18
 
           
PART II OTHER INFORMATION
           
Item 1.
Legal Proceedings
   
19
 
Item 1A.
Risk Factors
   
19
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
19
 
Item 3.
Defaults Upon Senior Securities
   
19
 
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

   
November 30, 2011
   
February 28, 2011
 
   
(Unaudited)
   
(Audited)
 
ASSETS
Current assets:
           
Cash and cash equivalents
 
$
1,352,793
   
$
1,244,290
 
Accounts receivable, net of allowance for doubtful accounts and sales returns
               
   of $112,798 and $99,406, respectively
   
191,211
     
53,710
 
Inventory, net
   
890,804
     
447,489
 
     Prepaid expenses and other current assets
   
225,644
     
77,520
 
      Total current assets
   
2,660,452
     
1,823,009
 
Property and equipment, net
   
154,895
     
98,977
 
Intangible assets, net
   
7,128
     
7,243
 
Deferred tax assets
   
581,256
     
694,833
 
Other assets
   
8,514
     
8,514
 
      Total assets 
 
$
3,412,245
   
$
2,632,576
 
   
LIABILITIES AND STOCKHOLDERS' EQUITY
 
   
           
Current liabilities:
               
   Accounts payable and accrued expenses
 
$
193,372
   
$
230,732
 
   Customer deposits
   
212,432
     
65,454
 
   Notes payable and capital lease obligations
   
6,395
     
53,037
 
       Total current liabilities
   
412,199
     
349,223
 
                 
Long terrn Liabilities:
               
   Notes payable and capital lease obligations
     17,900        -  
                 
Stockholders' equity:
               
Preferred stock, 6,000,000 shares authorized, none issued or outstanding
   
-
     
-
 
Common stock $0.001 par value, 50,000,000 shares authorized, 25,957,646 and 25,882,646  issued
   and outstanding (including 157,500 and 57,5000 shares in treasury) at November 30, 2011 and
   February 28, 2011, respectively
   
25,958
     
25,883
 
Additional paid-in capital
   
7,311,736
     
7,016,148
 
    Accumulated deficit
   
(4,312,999
)
   
(4,741,129
)
Treasury stock     (42,549     (17,549
          Total stockholders' equity
   
2,982,146
     
2,283,353
 
 Total liabilities and stockholders' equity
 
$
3,412,245
   
$
2,632,576
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
3

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

   
For the Three Months Ended
 
   
November 30,
   
November 30,
 
   
2011
   
2010
 
Revenues
 
$
823,316
   
$
1,280,017
 
Cost of sales
   
239,005
     
656,554
 
               Gross profit
   
584,311
     
623,463
 
Operating expenses:
               
    Selling, general and administrative Expenses
   
473,002
     
262,012
 
    Depreciation and amortization
   
10,615
     
9,251
 
                 Total  operating expenses
   
483,617
     
271,263
 
Income from Operations
   
100,694
     
352,200
 
Other Income (Expense)
               
     Interest income
   
330
     
277
 
     Interest expense-related parties
   
-
     
(841
)
     Interest expense-other
   
-
     
(1,393
)
     Other expense
   
3,671
     
16,985
 
                    Total other income
   
4,001
     
15,028
 
Income before provision for income taxes
   
104,695
     
367,228
 
Provision for income taxes
   
14,180
 
   
58,450
 
Net Income
 
$
90,515
   
$
308,778
 
BASIC INCOME PER SHARE
 
$
0.00
   
$
0.01
 
DILUTED INCOME PER SHARE
 
$
0.00
   
$
0.01
 
BASIC WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
   
25,942,811
     
25,862,602
 
DILUTED WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
   
29,021,800
     
30,246,097
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
4

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

   
For the Nine Months Ended
 
   
November 30,
   
November 30,
 
   
2011
   
2010
 
Revenues
 
$
4,112,801
   
$
3,191,538
 
Cost of sales
   
1,977,093
     
1,580,816
 
               Gross profit
   
2,135,708
     
1,610,722
 
Operating expenses:
               
    Selling, General and Administrative Expenses
   
1,429,304
     
721,633
 
    Depreciation and amortization
   
32,573
     
36,474
 
                 Total  operating expenses
   
1,461,877
     
758,107
 
Income from Operations
   
673,831
     
852,615
 
Other Income (Expense)
               
     Interest income
   
1,079
     
660
 
     Interest expense-related parties
   
-
     
(9,004
)
     Interest expense-other
   
(1,055
)
   
(3,693
)
  Other expense
   
(12,292
)
   
16,982
 
                    Total other (expense)
   
(12,268
)
   
4,945
 
Income before provision for income taxes
   
661,563
     
857,560
 
Provision for income taxes
   
233,433
     
58,450
 
Net Income
 
$
428,130
   
$
799,110
 
BASIC INCOME PER SHARE
 
$
0.02
   
$
0.03
 
DILUTED INCOME PER SHARE
 
$
0.01
   
$
0.03
 
BASIC WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
   
25,924,010
     
25,856,954
 
DILUTED WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
   
28,874,128
     
30,221,433
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
5

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

   
For The Nine Months Ended
 
   
November 30,
   
November 30,
 
   
2011
   
2010
 
             
OPERATING ACTIVITIES:
           
Net income
 
$
428,130
   
$
799,110
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
                 
    Depreciation and amortization
   
32,573
     
36,474
 
    Loss on sale of assets
   
12,291
     
34,205
 
    Stock-based compensation
   
288,163
 
   
6,270
 
    Contributed services
   
7,500
     
-
 
    Provision for doubtful accounts
   
13,392
     
92,562
 
    Increase (decrease) in inventory reserve
   
(243,143
   
124,882
 
    Change in deferred tax assets
   
113,577
     
  -
 
Changes in operating assets and liabilities:
               
   (Increase) decrease in accounts receivable
   
(150,893
)
   
(175,219
)
   (Increase) decrease in inventory
   
(200,172
)
   
(31,223
 ) 
   (Increase) decrease in prepaid expenses and other assets
   
(148,124
)
   
(21,031
 )
   Increase (decrease) in accounts payable and accrued expenses
   
(37,360
 )
   
52,951
 
   Increase (decrease) in accrued interest due to related party
   
-
     
(50,034
 )
   Increase (decrease) in customer deposits
   
146,978
     
(23,750
)
Net Cash Provided by Operating Activities
   
262,912
     
845,197
 
                 
INVESTING ACTIVITIES:
               
   Purchase of property and equipment
   
(72,367
)
   
(44,223
)
   Purchase of intangible assets
   
(4,005
)
   
(2,705)
 
Net Cash Used in Investing Activities
   
(76,372
)
   
(46,928
)
                 
FINANCING ACTIVITIES:
               
   Proceeds from notes payable
   
-
     
38,167
 
   Repayment of notes payable and capital lease obligations
   
(53,037
)
   
(471,088
)
   Purchase of common stock
   
(25,000)
         
Net Cash Used in Financing Activities
   
(78,037
)
   
(432,921
)
                 
       NET INCREASE IN CASH AND CASH EQUIVALENTS
   
108,503
     
365,348
 
                 
       CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
1,244,290
     
502,167
 
                 
       CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
1,352,793
   
$
867,515
 
                 
Supplemental disclosures of cash flow information:
               
    Non-cash investing and financing activities:
               
 Purchase of equipment under capital lease
 
$
24,295
   
$
-
 
                 
    Cash paid for:
               
 Interest
 
$
1,056
   
$
12,697
 
 Income taxes
 
$
231,310
   
$
-
 
 
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 November 30, 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 November 30, 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.


 
7

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED (UNAUDITED) 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 November 30, 2011 is adjusted to include the effect of dilutive common stock equivalents, consisting of warrants totaling 3,078,989 and 2,950,118 for the three and nine month periods ended November 30, 2011, respectively.  The denominator for diluted income per share for the period ended November 30, 2010 is adjusted to include the effect of dilutive common stock equivalents, consisting of warrants totaling 4,383,495 and 4,364,479 for the three and nine month periods ended November 30, 2010, respectively.  Common stock equivalents consisting of 1,819,721 and 1,809,721 warrants were considered but were not included in the computation of income per share for the three and nine month periods ended November 30, 2010, because they would have been anti-dilutive.

NOTE 3:   STOCKHOLDERS’ EQUITY
 
Common Stock
During the nine-month period ended November 30, 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.  During the quarter ended November 30, 2011, the Company issued 25,000 shares of restricted common stock to employees as compensation at a total value of $6,250, which was based on the fair value of the stock on the date of grant.

The Company purchased 100,000 shares of common stock at a cost of $25,000 during the nine months ended November 30, 2011 which were placed in the treasury and recorded at cost.  No shares of common stock were purchased by the Company during the quarter ended November 30, 2011.
 
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 $7,500, the contractual value of these services, for the three and nine month periods, respectively, in each of the periods ended November 30, 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 $266,413 for the three and nine month periods ended November 30, 2011, respectively, and $-nil- for the three and nine month periods ended November 30, 2010.  All outstanding warrants are expected to vest in December 2015.

 
8

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED (UNAUDITED) FINANCIAL STATEMENTS
 
A summary of warrant activity for the nine months ended November 30, 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 November 30, 2011
   
8,467,221
     
0.21
 
Vested at November 30, 2011
   
0
     
0.21
 
Exercisable at November 30, 2011
   
0
     
0.21
 
 
The following table summarizes significant ranges of outstanding warrants as of November 30, 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
     
9.29
   
$
0.21
   
$
0.21
 
                                     
 
 
9

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 4:    INVENTORY
 
The Company’s inventory consisted of the following at November 30, 2011 and February 28, 2011:

Raw materials
 
$
591,751
   
$
503,265
 
Finished goods
   
321,195
     
209,509
 
     
912,946
     
712,774
 
Reserve for obsolete and slow moving inventory
   
(22,142
)
   
(265,285
)
   
$
890,804
   
$
447,489
 

NOTE 5:    LINE OF CREDIT

As of November 30, 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 (3.25% as of November 30, 2011) plus 1.75 percent and is due February 1, 2012.  As of November 30, 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 46% and 59% of total revenues for the three and nine month periods ended November 30, 2011, respectively, and website sales accounted for 10% of total revenue during both periods.  For the three and nine month periods ended November 30, 2010, sales to four customers accounted for 70% and 65% of total revenues, respectively, and website sales were 9% of total revenue during both periods.

NOTE 7:    RELATED PARTY TRANSACTIONS

During the three and nine month period ended November 30, 2011, payments totaling $25,000 and $82,500, 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 nine month period ended November 30, 2010 payments to TAM Irrevocable Trust were made totaling $17,500 and $60,280, respectively, for consulting services.

NOTE 8: SUBSEQUENT EVENTS

In December 2011, the Company leased an additional 7,077 square foot warehouse.  The lease is approximately $5,000 per month and escalates by $0.03 per square foot annually.  The lease is for January 2012 through July 2014.

During the month of December 2011, the Company created a majority-owned subsidiary, Seychelle Japan, a Japanese company, to assist with selling product to Japan.
 
 
10

 
 
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 nine month periods ended November 30, 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.
 
 
11

 
 
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. and one majority-owned subsidiary, Seychelle Japan, a Japanese company, formed in December 2011, (collectively, the Company or Seychelle).We use the trade name "Seychelle Water Filtration Products, Inc." in our commercial operations.
 
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 nine month periods ended November 30, 2011 and 2010 are derived from our condensed consolidated financial statements included elsewhere in this report.
 
 
12

 
 
Three-month period ended November 30, 2011 compared to the corresponding period in 2010
       
                   
               
Year over
       
   
2011
   
2010
   
year change
   
%
 
                         
Revenues
 
$
823,316
   
$
1,280,017
     
(456,701
 )
   
-35.7
%
Cost of revenues
   
239,005
     
656,554
     
(417,549
 )
   
-63.6
%
Gross profit
   
584,311
     
623,463
     
(39,152
 )
   
-6.3
%
Gross profit %
   
71.0
%
   
48.7
%
               
Selling, general, and administrative expenses
   
473,002
     
262,012
     
210,990
     
80.5
%
Depreciation and amortization exp
   
10,615
     
9,251
     
1,364
     
14.7
%
Income before provision for income taxes
   
104,695
     
367,228
     
(262,533
 )
   
-71.5
%
Provision for income taxes
   
(14,180
 )
   
(58,450
)
   
44,270
     
-75.7
%
Net Income
   
90,515
     
308,789
     
(218,263
 )
   
-70.7
%
 
Net Income %
   
11.0
%
   
24.1
%
               
 
Revenues. Our customer concentration is constantly changing, which contributes to much of the fluctuation in revenues.  The current period decrease in revenues is primarily due to sales to two customers who accounted for approximately $665,800 of the net decrease, accounting for 46% of revenues in the three-month period ended November 30, 2011 compared to 70% in the same period ended November 30, 2010.  There was also a $23,000 decrease in website sales for the three-month period ended November 30, 2011 compared to the same period in the prior year. The decrease in sales is also the net result of a shift in our product mix.  Significant variances were experienced within a few product lines: missionary packs increased by $89.500, pitcher increased by $33,280, stainless steel bottles decreased by $68,300, replacement filters decreased by $65,400, pumps decreased by $22,200, straws decreased by $18,300, and plastic bottles decreased by $120,500.  Sales were also down this quarter due to delays in negotiating three major new distributor agreements, shipments to Japan and the launch of the new pH product line.

 
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Cost of revenues and gross profit percentage. The decrease in cost of revenues is largely a direct result of the 36% decrease in sales for the three-month period ended November 30, 2011 from the comparable period in the prior year.  Cost of revenues decreased by 64% from period to period by comparison, resulting in an increase in gross profit margin to 71% from 49%.  Our profit margin will fluctuate from time to time based on the product mix within sales.   The main reason for the fluctuation is due to inventory reserve of pitchers and countertops being written down in previous periods and these items having greater sales in the current year.  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 the lower margin products will have on the product mix.
 
Selling, general and administrative expenses.  These expenses increased by approximately $211,000, or 81%, during the three months ended November 30, 2011 compared to the same period ended in the prior year.  Selling expenses increased approximately $77,000 compared to the same period in 2010.  This is due to the increase in commissionable sales.   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 13% of sales for the remainder of fiscal year 2011.    Significant components of the increase are gift and bonus expense to reward performance for a profitable year in 2011 (to $7,600 for 2011 compared to $6,700 for 2010), merchant fee expense (to $7,400 compared to $5,200), printing expense (to $8,300 compared to $14,700), outside services (to $23,600 compared to $9,700), worker’s compensation insurance ($39,200 compared to $6,400), and consulting fees ($147,000 compared to $45,900). We anticipate general and administrative expenses for the remainder of fiscal 2011 to remain consistent or decrease due to the annual insurance adjustment for additional employees hired throughout the year that was expensed in the quarter ended November 30, 2011.
 
Depreciation and amortization expense.  The increase in depreciation and amortization expense is due to additional assets being purchased throughout the year due to changing product designs.
 
Net Income. Net income for the three-month period ended November 30, 2011 was $90,515 compared to net income of $308,778 for the three-month period ended November 30, 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.  This net income short-fall doesn’t change the long-term outlook as revenues continue to increase versus prior year.  Finally, we are aggressively working on expanding the number of customers to lessen the impact of volume changes by customers from period to period to make production runs longer creating greater efficiencies and increasing net income.
 
 
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Nine-month period ended November 30, 2011 compared to the corresponding period in 2010
 
                   
               
Year over
       
   
2011
   
2010
   
year change
   
%
 
                         
                         
Revenues
 
$
4,112,801
   
$
3,191,538
     
921,263
     
28.9
%
Cost of revenues
   
1,977,093
     
1,580,816
     
396,277
     
25.1
%
Gross profit
   
2,135,708
     
1,610,722
     
524,986
     
32.6
%
Gross profit %
   
51.9
%
   
50.5
%
               
Selling, general, and administrative expenses
   
1,429,304
     
721,633
     
707,671
     
98.1
%
Depreciation expense
   
32,573
     
36,474
     
(3,901
)
   
-10.7
%
Income before provision for income taxes
   
661,563
     
857,560
     
(195,997
 )
   
-22.9
%
Provision for income taxes
   
(233,433
)
   
58,450
     
(174,983
 )
   
299.4
%
Net Income
   
428,130
     
799,110
     
(370,980)
     
-46.4
%
Net Income %
   
10.4
%
   
25.0
%
               
 
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 $2,507,595 compared to $2,123,189 of the net increase, accounting for 59% of revenues in the nine-month period ended November, 2011 compared to 65% in the same period ended November 30, 2010.  This was increased further by website sales which contributed $543,529 in the nine-month period ended November 30, 2011 compared to the same period ended November 30, 2010 of $290,613.  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 $684,000 in the current quarter as compared to $704,000 in sales for the comparable period), pitchers (which increased to $1,180,000 from $369,000), stainless steel bottles(which increased to $346,000 from $291,000), straws (increased to $199,00 from $86,000), countertop units (increased to $92,000 from $4,000), replacement filters (increased to $322,000 from $297,000), and plastic bottles (which decreased to $902,000 from $995,000).   There were also increased revenues from the introduction of new product lines, such as the Aqua Mist and shower lines, which combined for $131,000 of current year revenue as compared to zero in the comparable period of the prior year.
 
 
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Cost of revenues and gross profit percentage. The increase in cost of revenues is largely a direct result of the 29% increase in sales for the nine-month period ended November 30, 2011 from the comparable period in the prior year. Cost of revenues increased by 25% from period to period by comparison, resulting in an increase in gross profit margin to 52% from 51%.  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 $811,000 increase in sales of pitchers compared to the same period in the prior year.  The sales of pitchers typically result in a lower margin per unit than most of the Company’s other product lines.  As noted in the 3 month period ended November 30, 2011, discussion of gross margins  are continuing to pursue efficiencies in the production process and we 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 $708,000, or 98%, during the nine months ended November 30, 2011 compared to the same period ended in the prior year.  Selling expenses increased approximately $204,600 compared to the same period in 2010.  This is due to the increase in commissioned sales.   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 13% of sales for the remainder of fiscal year 2011.  Significant components of the increase in general and administrative expenses are gift and bonus expense to reward performance for a profitable year in 2011 (to $49,200 for 2011 compared to $18,100 for 2010), merchant fee expense (to $32,700 compared to $16,200), accounting fee (to $63,000 compared to $52,000), worker’s compensation insurance (to $47,000 compared to $22,000), printing expense (to $44,700 compared to $30,500), outside services (to $87,800 compared to $28,700), and consulting fees ($448,800 compared to $150,400).  The increases in outside services is due primarily to website orders being filled by outside fulfillment center and an increase in labor required to fulfill incoming orders. We expect general and administrative expenses for the remainder of fiscal 2011 to remain constant or slightly decrease as we expand to handle the growth of our sales and try to focus on inefficiencies.
 
Depreciation and amortization expense.  The decrease in depreciation and amortization expense is due to some assets becoming fully depreciated as well as a bagging machine being removed from our assets in the current year.

Net Income.  Net income for the nine-month period ended November 30, 2011 was $428,130 compared to net income of $799,110 for the nine-month period ended November 30, 2010.  This decrease was primarily due to higher selling, general and administrative expenses as mentioned above.  We continue to be bullish on the long-term prospects of the Company with the high margin new products being launched in the fourth quarter and the increased consumer awareness of the contamination of the fresh water supply both in the United States and internationally.

Liquidity and Capital Resources
 
Net cash provided by operating activities.
During the nine-month ended November 30, 2011, the Company funded its operations primarily through proceeds from product sales. Our accounts receivable, excluding change in allowances, increased by $151,000 reflecting the growth in sales, while our customer deposits increased by $147,000 due the growth in customer orders.   Net income was impacted by noncash charges for stock-based compensation amounting to $288,000, largely due to warrant amortization and 75,000 shares issued for services rendered in the nine month period ended November 30, 2011.
 
 
16

 
 
Net cash used in investing activities. During the nine-month period ended November 30, 2011, the increase in cash used by investing activities was due to the purchase of $72,000 of property and equipment.
 
Net cash used in financing activities.
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 November 30, 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 nine-month period ended November 30, 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 November 30, 2011, the Company had $1,352,793 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.
 
 
17

 
 
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.
 
 
18

 
 
PART II - OTHER INFORMATION
 
ITEM 1.   LEGAL PROCEEDINGS
 
In early, 2005, the Company was named in a lawsuit originally brought against the Company’s President involving issues unrelated to the Company’s water filtration business. The case was brought in the Superior Court for the State of California, San Diego County District, and was titled Letty Garcia vs. Carl Palmer; Seychelle Environmental Technologies Inc., et, al.   A jury trial was held June, 2005 and the Company was found to have no liability in this matter.  However, in May of 2011, the plaintiff in that case again reopened the same action and has again named the Company as a defendant.  This case is entitled titled Letty Garcia  vs. Carl Palmer; Seychelle Environmental Technologies Inc., et, al. The Company is vigorously defending itself and believes that it will again prevail.
 
Otherwise, as of November 30, 2011 we know of no legal proceedings pending or threatened or judgments entered against the Company or any of our directors or officers in their 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 nine-month period ended November 30, 2011, the Company issued 50,000 shares of restricted common stock for outside services to one individual in exchange for services rendered in addition to 25,000 shares of restricted stock to employees 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
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None
 
ITEM 5.  OTHER INFORMATION
 
None
 
 
19

 
 
ITEM 6.  EXHIBITS

Exhibits
 
 
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 six reports on Form 8-K for the nine-month period ended November 30, 2011.  On October 17, 2011, we announced revenues and earnings for our fiscal quarter ended August 31, 2011 and information concerning certain anticipated operations.  On October 11, 2011, we announced new sales programs and new distributors.  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: January 13, 2012
By:  
/s/ Carl Palmer
 
 
Carl Palmer
Director, Chief Executive Officer and President
 
 
Date: January 13, 2012
By:  
/s/ Jim Place
 
 
Jim Place
Director and Chief Financial Officer and Chief Operating Officer 
 
 
 
 
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