PINX:SYEV Quarterly Report 10-Q Filing - 8/31/2012

Effective Date 8/31/2012

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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, 2012

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 o  No þ
 
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)  Yes o   No þ
 
The number of shares outstanding of the Registrant's common stock, as of October 12, 2012 was 25,800,146

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

 
 

FORM 10-Q
 
Securities and Exchange Commission
Washington, D.C. 20549

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
   
14
 
Item 4.
Controls and Procedures
   
14
 
Item 4T.
Controls and Procedures
   
14
 
           
PART II  OTHER INFORMATION
       
           
Item 1.
Legal Proceedings
   
15
 
Item 1A.
Risk Factors
   
15
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
15
 
Item 3.
Defaults Upon Senior Securities
   
15
 
Item 4.
Submission of Matters to a Vote of Security Holders
   
15
 
Item 5.
Other Information
   
15
 
Item 6.
Exhibits
   
16
 
           
Signatures
   
17
 
 

 
 
 
2

 
 

 
PART I
 
ITEM 1. FINANCIAL STATEMENTS

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
   
August 31, 2012
(Unaudited)
     
February 29, 2012
 
 
ASSETS
 
Current assets:
           
Cash and cash equivalents
 
$
1,253,897
   
$
1,148,995
 
    Restricted cash
   
-
     
146,081
 
Accounts receivable, net of allowance for doubtful accounts and sales returns
               
   of $59,113 and $78,885, respectively
   
263,869
     
61,782
 
Inventory, net
   
779,034
     
964,580
 
Deferred tax assets
   
120,242
     
120,242
 
Prepaid expenses, deposits and other current assets
   
207,264
     
179,347
 
      Total current assets
   
2,624,306
     
2,621,027 
 
                 
Property and equipment, net
   
164,300
     
171,304
 
Intangible assets, net
   
5,449
     
5,799 
 
Deferred tax assets
   
406,039
     
406,039
 
Other assets
   
8,514
     
8,514 
 
                 
      Total assets 
 
$
3,208,608
   
$
3,212,683
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
               
   Accounts payable and accrued expenses
 
$
95,856
   
$
158,758
 
   Customer deposits
   
174,384
     
197,696
 
   Capital lease obligation
   
4,856
     
4,331 
 
       Total current liabilities
   
275,096
     
360,785
 
                 
Long-term liabilities:
               
 Capital lease obligation, net of current
   
16,301
     
18,591
 
    Total liabilities
   
291,397
     
379,376
 
                 
Stockholders' equity:
               
Preferred stock, 6,000,000 shares authorized, none issued or outstanding
   
-
     
 
    Common stock $0.001 par value, 50,000,000 shares authorized, 25,800,146 issued and
    outstanding at August 31, 2012 and February 29, 2012, respectively
   
25,800
     
25,800 
 
                 
Additional paid-in capital
   
7,528,258
     
7,350,650
 
Accumulated deficit
   
(4,636,847
)
   
(4,543,143
)
          Total stockholders' equity
   
2,917,211
     
2,833,307 
 
                 
 Total liabilities and stockholders' equity
 
$
3,208,608
   
$
3,212,683
 
 
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,
 
   
2012
   
2011
 
Sales
 
$
719,810
   
$
1,508,466
 
Cost of sales
   
341,552
     
759,472
 
               Gross profit
   
378,258
     
748,994
 
Operating Expenses
               
    Selling, General, and Administrative Expenses
   
366,262
     
484,923
 
    Depreciation and Amortization
   
11,271
     
10,712
 
                 Total  operating  expenses
   
377,533
     
495,635
 
 Income  from Operations
   
725
     
253,359
 
Other Income (Expense):
               
     Interest income
   
192
     
301
 
     Interest expense
   
(271
)
   
(431
)
     Other expense
   
-
     
(15,963
)
                    Total other income (expense)
   
(79
 )
   
(16,093
)
 Income  before provision for income taxes
   
646
     
237,266
 
 Income tax benefit  (expense)
   
3,090
     
(48,966)
 
Net  Income
 
$
3,736
   
$
188,300
 
BASIC INCOME  PER SHARE
 
$
0.00
   
$
0.01
 
DILUTED  INCOME  PER SHARE
 
$
0.00
   
$
0.01
 
BASIC WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
   
25,800,146
     
25,932,646
 
DILUTED WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
   
29,397,367
     
29,011,635
 
 
 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,
 
   
2012
   
2011
 
Sales
 
$
1,617,819
   
$
3,289,485
 
Cost of sales
   
929,757
     
1,738,088
 
               Gross profit
   
688,062
     
1,551,397
 
Operating Expenses
               
    Selling, General, and Administrative Expenses
   
833,836
     
956,303
 
    Depreciation and Amortization
   
22,639
     
21,957
 
                 Total  operating  expenses
   
856,475
     
978,260
 
 Income (Loss)  from Operations
   
(168,413
)
   
573,137
 
Other Income (Expense):
               
     Interest income
   
510
     
749
 
     
               
     Interest expense
   
(694
)
   
(1,055
)
     Other income (expense)
   
515
     
(15,963
)
                    Total other income (expense)
   
331
     
(16,269
)
 Income (loss)  before provision for income taxes
   
(168,082
)
   
556,868
 
 Income tax benefit (expense)
   
74,378
 
   
(219,253
)
Net  Income (Loss)
 
$
(93,704
)
 
$
337,615
 
BASIC INCOME (LOSS) PER SHARE
 
$
(0.00
)
 
$
0.01
 
DILUTED  INCOME (LOSS) PER SHARE
 
$
(0.00
)
 
$
0.01
 
BASIC WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
   
25,800,146
     
25,914,711
 
DILUTED WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
   
25,800,146
     
28,886,555
 
 
 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,
 
   
2012
   
2011
 
             
OPERATING ACTIVITIES:
           
Net   income (loss)
 
$
(93,704
)
 
$
337,615
 
Adjustments to reconcile net income (loss)  to net cash provided by  operating activities:
               
                 
    Depreciation and amortization
   
22,639
     
21,957
 
    Stock-based compensation
   
177,608
     
193,109
 
    Contributed services
   
-
     
5,000
 
    Provision for doubtful accounts
   
-
     
30,020
 
    (Gain) loss from sale of property and equipment
   
(517
)
   
15,963
 
    Increase in inventory reserve
   
8,513
     
-
 
     Deferred tax expense
   
     
114,023 
 
Changes in operating assets and liabilities:
               
   Increase in accounts receivable
   
(202,087
)
   
(132,108
)
   (Increase) decrease in inventory
   
177,033
     
(8,900
 )
   Increase in prepaid expenses, deposits  and other assets
   
(27,917
)
   
(85,217
 )
   Increase (decrease) in accounts payable and accrued expenses
   
(62,902
)
   
5,135
 
    Decrease in restricted cash
   
146,081
     
-
 
   Increase (decrease) in customer deposits
   
(23,312
)
   
45,230
 
Net Cash Provided By  Operating Activities
   
121,435
     
541,827
 
                 
INVESTING ACTIVITIES:
               
   Purchase of property and equipment
   
(26,668
)
   
(58,367
)
   Proceeds from sale of property and equipment
   
12,000
     
-
 
   Purchase of intangible assets
   
(100
 )
   
(3,030
)
Net Cash Used In Investing Activities
   
(14,768
 )
   
(61,397
)
                 
FINANCING ACTIVITIES:
               
   Repayment of  notes payable and capital lease obligations
   
(1,765
)
   
(53,037
)
   Purchase of common stock
   
-
     
(25,000
)
Net Cash Used in Financing Activities
   
(1,765
)
   
(78,037
)
                 
       NET INCREASE IN CASH AND CASH EQUIVALENTS
   
104,902
     
402,393
 
                 
       CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
1,148,995
     
1,244,290
 
                 
       CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
1,253,897
   
$
1,646,683
 
                 
                 
                 
                 
Supplemental disclosures of cash flow information:
               
    Cash paid for:
               
 Interest
 
$
694
   
$
1,056
 
 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 condensed consolidated 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, 2012, 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 consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended February 29, 2012.  The results of operations for the periods ended August 31, 2012 and 2011 are not necessarily indicative of the operating results for the full fiscal 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 these condensed consolidated financial statements and the February 29, 2012 consolidated financials included in the 10-K filed on May 29, 2012.

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 periods. Actual results could differ from those estimates.

In 2011, the Financial Accounting Standards Board (FASB) 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 and results in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.”

In September 2011, the FASB issued guidance on ASC 350, Intangibles-Goodwill and Other, for testing goodwill for impairment. The new guidance provides a company the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company’s assessment determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment to be recognized for that reporting unit, if any. If the company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.
 
For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company adopted this guidance effective March 1, 2012.  The impact of the adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

NOTE 2:    BASIC INCOME (LOSS) 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 presented.  Diluted income (loss) per share is determined using the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents.  In periods when losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.  The dilutive effect of outstanding stock options and warrants reflected in diluted earnings per share by application of the treasury stock method.

The denominator for diluted income per share for the three month period ended August 31, 2012 is adjusted to include the effect of dilutive common stock equivalents, consisting of warrants totaling 3,597,221.  The denominator for diluted loss per share for the six month period ended August 31, 2012 did not include warrants as they would have been anti-dilutive.  The denominator for diluted income per share for the three and six month periods 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, respectively.  
 
 
 
 
7

 
 


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

NOTE 3:   COMMON STOCK PURCHASE WARRANTS
 
Common Stock
During the six-month period ended August 31, 2012, the Company did not issue any shares of 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.
 
Contributed Executive Services
Historically, the President of the Company had a salary arrangement which resulted in the Company recording expense of $10,000 annually for the contractual value of his services.  Although the Company had 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 ended August 31, 2011, respectively, which is included in selling, general and administrative expenses and additional paid -in capital.  This agreement was terminated on May 15, 2012.
 
Warrants
In previous years, the Company had issued warrants and determined the estimated value of warrants granted using the Black-Scholes pricing model. The amount of the expense charged to operations for these warrants was $88,803 and $177,608 for the three and six months ended August 31, 2012 and $88,804 and $177,609 for the three and six months ended August 31, 2011.  All outstanding warrants are expected to be vested in December 2015.

A summary of warrant activity for the six months ended August 31, 2012 is as follows:
 
         
Weighted-
 
         
Average
 
   
Warrants
   
Exercise
 
   
Outstanding
   
Price
 
Outstanding at February 29, 2012
   
8,467,221
     
0.21
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Forfeited
   
-
     
-
 
Outstanding at August 31, 2012
   
8,467,221
     
0.21
 
Vested at August 31, 2012
   
1,693,444
     
0.21
 
Exercisable at August 31, 2012
   
1,693,444
     
0.21
 
 
The following table summarizes significant ranges of outstanding warrants as of August 31, 2012:
 
     
Warrants Outstanding
   
Warrants Exercisable
 
           
Weighted
   
Weighted
         
Weighted
 
           
Average
   
Average
         
Average
 
Exercise Price
   
Number
   
Remaining
   
Exercise
   
Number
   
Exercise
 
     
Outstanding
   
Life (Years)
   
Price
   
Outstanding
   
Price
 
$
0.21
   
8,467,221
   
8.29
   
$
0.21
   
1,693,444
   
$
0.21
 

 
 
 
8

 
 


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


NOTE 4:    INVENTORY
 
The Company’s inventory consisted of the following at August 31,2012 and February 29, 2012:
 
                 
Raw materials
 
$
453,856
   
$
589,774
 
Finished goods
   
341,406
     
382,521
 
     
795,262
     
972,295
 
Reserve for obsolete and slow moving inventory
   
(16,228
)
   
(7,715
)
   
$
779,034
   
$
964,580
 

NOTE 5:    LINE OF CREDIT

As of August 31, 2012, the Company had a line of credit agreement totaling $500,000.  The line of credit bears interest at the lending institution’s index rate (3.25% as of August 31, 2012) plus 0.75% and is due June 30, 2013.  As of August 31, 2012, the Company had not borrowed 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 five customers accounted for 64% of sales and 81% of accounts receivable for the three month period ended August 31, 2012.  Sales to six customers accounted for 55% of sales and 81% of accounts receivable for the six month period ended August 31, 2012.  For the three and six month periods ended August 31, 2011, sales to two customers accounted for 65% and 62% of total sales and 60% of accounts receivable.


NOTE 7:    RELATED PARTY TRANSACTIONS

During the three and six month periods ended August 31, 2012, payments totaling $27,400 and $52,800 were made to TAM Irrevocable Trust for consulting services, in which Cari Beck, is a trustee as well as the daughter of the Company’s President.  During the three and six month periods ended August 31, 2011 payments to TAM Irrevocable Trust were made totaling $31,900 and $57,500, respectively.


NOTE 8:  COMMITMENTS AND CONTINGENCIES

In the case titled Letty Garcia v. Carl Palmer; Seychelle Environmental Technologies, Inc., et, al., brought in the Superior Court for the State of California, San Diego County District, the court found against the Company in May, 2012 for approximately $157,000.  This amount was reflected in our February 29, 2012 consolidated financial statements. The Company has evaluated the ruling, believes that the ruling was incorrect, and has appealed the verdict.  The remaining amount of restricted cash that was reflected in previous financial statements relating to this case was returned to the Company during the three months ended August 31, 2012.
 
There is an additional unrelated lawsuit, Patricia Edwards v Seychelle Environmental Technologies, Inc., brought in January, 2012 in the Superior Court for the State of California, Orange County District, from a former employee of the Company regarding a claim of $280,000 for wrongful termination based on discrimination.  The Company is vigorously contesting the claim.  The case is scheduled for trial in the first calendar quarter of 2013, and the Company believes that it will prevail. 

Otherwise, as of August 31, 2012, we know of no other legal proceedings pending or threatened, or judgments entered against the Company or any of our directors or officers in their capacity as such.
 
 
 
 
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, 2012 and 2011. 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 29, 2012.  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 2012 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, 2012 and 2011 are derived from our condensed consolidated financial statements included elsewhere in this report.
 
Three-month period ended August 31, 2012 compared to the corresponding period in 2011
       
                   
               
Year over
       
   
2012
   
2011
   
year change
   
%
 
                         
Sales
 
$
719,810
   
$
1,508,466
     
(788,656
 )
   
-52
%
Cost of sales
   
341,552
     
759,472
     
(417,920
 )
   
-55
%
Gross profit
   
378,258
     
748,994
     
(370,736
 )
   
-49
%
Gross profit %
   
53
%
   
50
%
               
Selling, general, and administrative expenses
   
366,262
     
484,923
     
(118,661
 )
   
-24
%
Depreciation and amortization exp
   
11,271
     
10,712
     
559
     
5
%
Income before provision for income taxes
   
646
     
237,266
     
(236,620
 )
   
-100
%
(Provision) benefit for income taxes
   
3,090
     
(48,966
)
   
52,056
     
106
%
Net Income
   
3,736
     
188,300
     
(184,564
)
   
-98
%
                                 
Sales. Our customer concentration is constantly changing, which contributes toward much of the fluctuation in sales.  The current period decrease in sales is primarily due to sales to two customers who accounted for approximately $0.8 million  of the decrease, accounting for 12% of revenues in the three-month period ended August 31, 2012 compared to 65% in the same period ended August 31, 2011.   The decrease in sales is also the net result of a shift in our product mix.  Significant decreases were experienced within a few product lines: missionary packs (which decreased to $-nil- in the current quarter as compared to $284,000 in sales for the comparable period), pitchers (to $157,000 from $413,000), and bottles (to $90,000 from $364,000). 

Cost of sales and gross profit percentage. The decrease in cost of sales is largely a direct result of the 52% decrease in sales for the three-month period ended August 31, 2012 from the comparable period in the prior year. The increase in gross profit  from 50% to 53% was due to selling higher gross profit products during the period even though the  cost of revenues decreased by 55% from period to period.   Our profit margin will fluctuate from time to time based on the product mix within sales.   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.
 
 
 
 
11

 
 

Selling, general and administrative  expenses.  These expenses decreased by approximately $119,000, or 24%, during the three months ended August 31, 2012 compared to the same period ended in the prior year.   Selling expenses represented approximately 2.7% and 6.2% of sales for the three months ended August 31, 2012 and 2011, respectively.   The decrease in selling expenses as a percentage of sales is largely a direct result of the decrease in commissionable sales to two significant customers.  We expect sales commissions to be less than 6% of sales for the remainder of fiscal year 2013.  General and administrative expenses decreased approximately $44,000 when compared to the comparable period in the prior year.  Significant components of the decrease are gift and bonus expense to reward performance in fiscal 2012 (to $7,000 for fiscal 2013 compared to $40,900 for fiscal 2012), merchant fee expense (to $5,200 compared to $10,700), printing expense (to $500 compared to $19,100, outside services (to $12,800 compared to $28,600), and legal expense ($20,400 compared to $3,700). We do not expect an increase in general and administrative expenses as a percentage of sales for the remainder of fiscal 2013.
 
Depreciation and amortization expense.  The increase in depreciation and amortization expense is due to molds being purchased over the last twelve months to create additional products to introduce to the market.

Income tax expense.  Income tax expense decreased due to lower sales and profitability during the current fiscal year as compared to the comparable prior year period.
 
Net Income. Net income for the three-month period ended August 31, 2012 was $3,736 compared to net income of $188,300 for the three-month period ended August 31, 2011.  This was primarily due to a significant decrease in sales in the current year compared to the same period of the prior year.  This quarter’s performance and return to profitability represented a turnaround from poor results in the first quarter of fiscal year, period ended May 31, 2012 which reported a net loss of $97,441.  This change in direction, was due primarily to selling higher gross margin products, although with lower overall gross profits.  However, we continued to experience:  1) delay of orders for new higher margin products due to administrative issues with new customers in Japan and in several Mid East countries, and  2) a build-up of inventory for anticipated sales of the new RAD filter bottle and the new pH filter bottle now expected to begin in the third quarter, period ending November 30, 2012.   The net income should be improved when larger sales orders begin coming in for the higher margin volume products and as noted previously, and out-sourced production of sizable orders to a high volume assembler/fulfillment vendor we have established a relationship with. In addition we have two new products ready for the market: a 20 oz. sports bottle and a flat flask in-filter hydration unit that can be used either as a straw or attached to a backpack.   We have signed agreements for the above mentioned products.  We also have large distributors and representatives lined up regarding potential sales in Mexico and major retailers in  the United States and feel that this will favorably impact our financials, not only  in the third and fourth quarters this fiscal year, but into fiscal 2014.
 
Six-month period ended August 31, 2012 compared to the corresponding period in 2011
       
                   
               
Year over
       
   
2012
   
2011
   
year change
   
%
 
                         
                         
Sales
 
$
1,617,819
   
$
3,289,485
     
(1,671,666
 )
   
-51
%
Cost of sales
   
929,757
     
1,738,088
     
(808,331
 )
   
-47-
%
Gross profit
   
688,062
     
1,551,397
     
(863,335
 )
   
-56
%
Gross profit %
   
43
%
   
47
%
               
Selling, general, and administrative expenses
   
833,836
     
956,302
     
(122,466
 )
   
-13
%
Depreciation expense
   
22,639
     
21,958
     
681
     
3
%
Income (loss)  before provision for income taxes
   
(168,082
 )
   
556,868
     
(724,950
 )
   
130
%
Benefit (provision) for income taxes
   
74,378
     
(219,253
)
   
293,631
   
-134
%
Net Income (Loss)
   
(93,704
 )
   
337,615
     
(431,319)
     
-128
%
                                 

Sales. Our customer concentration is constantly changing, which contributes toward much of the fluctuation in sales.  The current period decrease in sales is largely due to sales to two customers who accounted for approximately $1.7 million  of the decrease, accounting for 20% of revenues in the six-month period ended August 31, 2012 compared to 62% in the same period ended August 31, 2011.  This was partially offset by fluctuation of other customers.    The decrease 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 $168,000 in the current period as compared to $456,000 in sales for the comparable prior year period), pitchers (which decreased to $281,000 from $1,052,000), and bottles (which decreased to $334,000 from $671,000).  The decrease in mission packs, pitchers, and bottle sales is due to sales fluctuations to one of the Company’s customers.  
 
 
 
 
12

 
 

Cost of sales and gross profit percentage. The decrease in cost of sales is largely a direct result of the 51% decrease in sales for the six-month period ended August 31, 2012 from the comparable period in the prior year.  Cost of sales decreased by 47% from period to period by comparison, resulting in a decrease in gross profit margin to 43% from 47%.  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 decrease in sales was a $771,000 decrease in sales of pitchers compared to the same period in the prior year, compared to a $288,000 decreases in sales of missionary packs.  As noted in the three- month period ended August 31, 2012, discussion of gross margins 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.  
 
Selling, general and administrative  expenses.  These expenses decreased by approximately $122,000, or 13%, during the six months ended August 31, 2012 compared to the same period ended in the prior year.  Selling expenses decreased approximately $145,000, or 73%, compared to the same period in fiscal 2012.  This is due to the decrease in commissionable sales.  The expenses represented approximately 3.4% and 6.1% of sales for the six months ended August 31, 2012 and 2011, respectively.   Not all sales are commissionable, and the decrease in selling expenses as a percentage of sales is largely a direct result of the decrease in commissionable sales to two significant customers.  We expect sales commissions to be less than 6% of sales for the remainder of fiscal year 2013.  General and administrative expenses increased approximately $23,000 when compared to the comparable period in the prior year.  Significant components of the increase are accounting fees (to $65,000 in fiscal 2013 compared to $45,000 for fiscal 2012. The increase in accounting fees is due to a re-audit being required after changing auditors during the first quarter of the current fiscal year along with an increase in contracted fees throughout the year.
   
Depreciation and amortization expense.  The increase in depreciation and amortization expense is due to molds being purchased over the last twelve months due to additional products being designed to potentially add to our product line.

Income tax expense. 
Income tax expense decreased due to our sales and profitability falling short of expectation during the current fiscal year to date, resulting in a $74,378 tax benefit during the six-month period ended August 31, 2012 as compared to an income tax expense of $219,253 for the comparable period of the prior fiscal year.

Net Income / Loss. Net loss for the six-month period ended August 31, 2012 was $93,704 compared to net income of $337,615 for the six-month period ended August 31, 2011.  This decrease was primarily due to the decrease in sales, partially offset by decreases in operating expenses as discussed above.  As noted in the commentary for the second quarter, we feel that sales and profits should be back on track starting in the third quarter and going forward.
   
Liquidity and Capital Resources
 
Net cash provided by operating activities. During the six-month period ended August 31, 2012, the Company funded its operations primarily through proceeds from product sales.  Our accounts receivable, excluding the change in allowances, increased by approximately $202,000 due to larger orders at the end of the time period to customers with credit terms, while our customer deposits decreased by approximately $23,000.  Net loss was impacted by non-cash charges for stock-based compensation amounting to $178,000, largely due to warrant amortization.  We also received the balance of the restricted cash in the amount of $146,081 during the quarter ended August 31, 2012.

Net cash used in investing activities. During the six-month period ended August 31, 2012, the decrease in cash used by investing activities was due to the purchase of $26,600 of property and equipment compared to $58,300 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, 2012 was largely due to repayment of capital lease obligations totaling $1,700 compared to $53,000 in the comparable period of fiscal  2012.  In the prior year period, the Company also expended $25,000 for repurchase shares of its common stock, this did not occur in the current period.
 
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, 2012, the Company had no outstanding borrowings either from TAM Trust or under our line of credit.  The Company believes that additional funding may still be required from the TAM Trust or other shareholders to handle the growth in sales volume. During April 2011, the TAM Trust committed to providing up to $250,000 in additional funding, which is still available to the Company to the date of this filing if it is needed.
 
As of August 31, 2012, the Company had $1,253,897 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 2013.
 
 
13

 

 
 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 2012 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.
 
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 control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 240.13a-15 or Rule 240.15d-15 of this chapter 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 as we are not subject to this requirement.

 
 
 
14

 
 
 
PART II - OTHER INFORMATION
 
ITEM 1.   LEGAL PROCEEDINGS
 
In the case titled Letty Garcia v. Carl Palmer; Seychelle Environmental Technologies, Inc., et, al., brought in the Superior Court for the State of California, San Diego County District, and the court found against the Company in May, 2012 for approximately $157,000.  This amount was reflected in our February 29, 2012 consolidated financial statements. The Company has evaluated the ruling, believes that the ruling was incorrect, and has appealed the verdict.
 
There is an additional unrelated lawsuit, Patricia Edwards v Seychelle Environmental Technologies, Inc., brought in January, 2012 in the Superior Court for the State of California, Orange County District, from a former employee of the Company regarding a claim of $280,000 for wrongful termination based on discrimination.  The Company is vigorously contesting the claim.  The case is scheduled for trial in the first calendar quarter of 2013, and the Company believes that it will prevail. 

Otherwise, as of August 31, 2012, we know of no other 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 fiscal 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 29, 2012.
 
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
During the six-month period ended August 31, 2012, there were no stock issuances, while in 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.  

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
 

 
 
 
15

 
 


 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
XBRL
 


 
 
 
16

 
 

 
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 12, 2012
By:  
/s/ Dick Parsons
 
 
Dick Parsons
Director, Chief Executive Officer
 
 
Date: October 12, 2012
By:  
/s/ Jim Place
 
 
Jim Place
Director and Chief Financial Officer and Chief Operating Officer 
 
 
 
 
 
 
17
 


 

PINX:SYEV Seychelle Environmental Technologies Inc Quarterly Report 10-Q Filling

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PINX:SYEV Quarterly Report 10-Q Filing - 8/31/2012
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