SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CA - Quarter Report: 2009 August (Form 10-Q)

seychelle10q83109_101409.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ending August 31, 2009

( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from _______________ to __________________

Commission File No. 0-29373

Seychelle Environmental Technologies, Inc.

(Exact Name of registrant as specified in its charter)

Nevada	33-0836954
(State or other jurisdiction	(IRS Employer File Number)
Of incorporation)

32963 Calle Perfecto
San Juan Capistrano, California	92675
(Address of principal executive offices)	(zip code)

(949) 234-1999

(Registrant's telephone number, including area code)

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

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 [] No [ ]

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 [ ]	Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

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

The number of shares outstanding of the Registrant's $0.001 par value common stock, as of August 31, 2009 was 25,824,146. Moreover, the aggregate market value of the voting stock of the Registrant held by non-affiliates as of October 14, 2009 was approximately $2,953,000.

FORM 10-Q

Securities and Exchange Commission

Washington, D.C. 20549

Seychelle Environmental Technology, Inc.

TABLE OF CONTENTS

	Page
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets (unaudited) as of August 31, 2009 and February 28, 2009	3
Statements of Operations (unaudited) for the Three Months and Six Months Ended August 31, 2009 and 2008	4
Statements of Cash Flows (unaudited) for the Six Months Ended August 31, 2009 and 2008	6
Notes to Financial Statements (unaudited)	7

Item 2. Management’s Discussion and Analysis and Plan of Operation	12
Item 3. Quantitative and Qualitative Disclosures About Market Risk	16
Item 4. Controls and Procedures	16
Item 4T. Controls and Procedures	16

PART II OTHER INFORMATION
Item 1. Legal Proceedings	17
Item 1A. Risk Factors	17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3. Defaults Upon Senior Securities	21
Item 4. Submission of Matters to a Vote of Security Holders	21
Item 5. Other Information	21
Item 6. Exhibits	21

Signatures	22

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PART I

ITEM 1. FINANCIAL STATEMENTS

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)


	August 31,			February 28,
	2009			2009
ASSETS

Current assets:
Cash and cash equivalents	$	310,978			160,415
Accounts receivable, net of allowance for doubtful accounts
of $5,648 and $3,986		149,641			61,447
Inventory, net		267,460			409,353
Prepaid expenses and other current assets		35,368			77,827
Total current assets		763,447			709,042

Property and equipment, net		115,616			129,964
Intangible assets, net		13,551			16,374
Other assets		15,139			6,624
Total assets	$	907,753			862,004

LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)

Current liabilities:
Accounts payable and accrued expenses	$	103,310			92,818
Customer deposits		158,112			177,325
Accrued interest due to related party		35,075			76,359
Capital lease obligation		21,314			26,802
Notes payable		100,000			100,000
Total current liabilities		417,811			473,304

Notes payable – related party		471,088			471,088
Total liabilities		888,899			944,392

Commitments and contingencies

Stockholders' equity/(deficit):
Preferred stock, 6,000,000 shares authorized, none issued or outstanding as of August 31, 2009 and February 28, 2009, respectively.		-			-
Common stock $0.001 par value, 50,000,000 shares authorized, 25,824,146 and 25,824,146 shares issued and outstanding as of August 31, 2009 and February 28, 2009, respectively.		25,824			25,824
Additional paid-in capital		6,914,334			6,907,637
Accumulated deficit		(6,921,304	)		(7,015,849	)
Total stockholders' equity/(deficit)		18,854			(82,388	)
Total liabilities and stockholders' equity/(deficit)	$	907,753			862,004

See accompanying notes to consolidated financial statements.

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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Six Months Ended August 31,
	2009			2008


Revenues	$	1,031,037		$	477,082
Cost of sales		611,351			237,605
Gross profit		419,686			239,477

Selling, general and administrative expenses		269,593			476,095
Depreciation and amortization		27,250			15,702
Income (loss) from operations		122,843			(252,319	)

Other Income (expense)
Interest income		302			56
Interest expense-related parties		(19,217	)		(73,738	)
Interest expense-other		(6,770	)		(6,269	)
Other income (expense)		(2,613	)		62,256
Total other income (expense)		(28,298	)		(17,695	)

Net income (loss) before income taxes		94,545			(270,015	)
Provision for income taxes		-			-
Net income (loss)	$	94,545		$	(270,015	)

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		25,824,146			25,293,818
DILUTED WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING		32,361,367			25,293,818

See accompanying notes to consolidated financial statements.

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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended August 31,
	2009			2008


Revenues	$	632,662		$	247,862
Cost of sales		360,214			108,482
Gross profit		272,448			139,380

Selling, general and administrative expenses		81,367			257,711
Depreciation and amortization		13,657			8,694
Income (loss) from operations		177,424			(127,025	)

Other income (expense)
Interest income		140			47
Interest expense-related parties		(9,676	)		(65,078	)
Interest expense-other		(3,515	)		(2,723	)
Other income (expense)		-			48,256
Total other income (expense)		(13,051	)		(19,499	)

Net income (loss) before income taxes		164,373			(146,524	)
Provision for income taxes		-			-
Net income (loss)	$	164,373		$	(146,524	)

BASIC INCOME (LOSS) PER SHARE	$	0.01		$	(0.01	)
DILUTED INCOME (LOSS) PER SHARE	$	0.01		$	(0.01	)

BASIC WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING		25,824,146			25,757,003
DILUTED WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING		30,249,649			25,757,003

See accompanying notes to consolidated financial statements.

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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended August 31,
	2009			2008

OPERATING ACTIVITIES:
Net income (loss)	$	94,545		$	(270,015	)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization		27,250			15,702
Stock-based compensation and interest expense		6,697			462,476

Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(88,194	)		(57,334	)
(Increase) decrease in inventory		141,893			18,768
(Increase) decrease in prepaid expenses and other assets		(22,299	)		(205,844	)
(Increase) decrease in asset held for sale		-			149,111
Increase (decrease) in accounts payable and accrued expenses		10,492			(4,679	)
Increase (decrease) in accrued interest		14,959			8,958
Increase (decrease) in customer deposits		(19,213	)		38,447
Net cash provided by operating activities		166,130			155,590

INVESTING ACTIVITIES:

Purchase of property and equipment		(9,139	)		-
Payment for patents		(940	)		-
Net cash used in financing activities		(10,079	)		-

FINANCING ACTIVITIES:
Proceeds from notes payable		-			75,000
Repayment of capital lease and notes payable		(5,488	)		(158,446	)
Net cash used in financing activities		(5,488	)		(83,446	)

NET INCREASE IN CASH		150,563			72,144

CASH AT BEGINNING OF PERIOD		160,415			19,851

CASH AT END OF PERIOD	$	310,978		$	91,995

NON-CASH INVESTING AND FINANCING ACTIVITIES
Stock issued for settlement of debt	$	-		$	-
Stock issued for services	$	-		$	143
Warrants issued for accrued interest on notes payable	$	56,243		$	-

Supplemental disclosures of cash flow information:
Cash Paid for:
Interest	$	-		$	-
Income taxes	$	-		$	-

See accompanying notes to consolidated financial statements.

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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1: FINANCIAL STATEMENTS

The consolidated financial statements have been prepared by the Company without audit and in accordance with accounting principles generally accepted in the United States and the rules of the Securities and Exchange Commission (“SEC”). 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, 2009, and for all periods presented herein, have been made.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report filed with the SEC on Form 10-K for the year ended February 28, 2009. The results of operations for interim periods are not necessarily indicative of the operating results for the full year. Notes to financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year, as reported on Form 10-K, have been omitted.

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.

Certain amounts in prior period financial statements have been reclassified to conform with current presentation.

In April 2009, the FASB issued FASB Staff Position FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 enhance consistency in financial reporting by increasing the frequency of fair value disclosures. This FSP relates to fair value disclosures for any financial instruments that are not currently reflected in a company’s balance sheet at fair value. Prior to the effective date of this FSP, fair values for these assets and liabilities were only disclosed once a year. This FSP will now require these disclosures to be made on a quarterly basis. FSP FAS 107-1 and APB 28-1 became effective for us on June 1, 2009 and the adoption did not have an impact on our consolidated financial statements..

In May 2009, the FASB issued Statement No. 165, Subsequent Events (“SFAS 165”), to be effective for interim or annual financial periods ending after June 15, 2009. SFAS 165 does not materially change the existing guidance but introduces the concept of financial statements being available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether the date represents the date the financial statements were issued or were “available to be issued”. This disclosure is intended to alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. Statement 165 is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. SFAS 165 became effective for us on June 1, 2009 and the adoption did not have an impact on our consolidated financial statements.

In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”), which amends SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 168 will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, SFAS 168 will supersede all then existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in SFAS 168 will become non-authoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We are currently assessing the impact SFAS 168 will have on our consolidated financial statements and disclosures.

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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 2: GOING CONCERN

The Company has experienced recurring losses from operations and has an accumulated deficit of $6,921,304 as of August 31, 2009. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

Recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company's ability to continue to finance its activities and ultimately generate positive cash flows from operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence.

In order to continue as a going concern, the Company needs to develop a reliable source of revenue, and achieve a profitable level of operation. During the fiscal year ended February 28, 2009 and the six months ended August 31, 2009, the Company funded its operations primarily through utilization of customer sales to pay related purchase orders and funds received from a related party. As of August 31, 2009, the Company held $310,978 in cash. It had a backlog of $98,816 in unshipped products and $328,087 available to borrow from a related party. Over the next twelve months, management believes that sufficient working capital may be obtained from a combination of revenues and external financing to meet the Company’s liabilities and commitments as they become payable. However, additional funding may still be required from the TAM Irrevocable Trust (TAM Trust), a related entity, or other shareholders. During June 2007, the TAM Trust committed to providing up to $250,000 in additional funding. As of August 31, 2009, $78,087 remained available under this commitment. During April 2009, the TAM Trust committed to providing up to $250,000 in additional funding if necessary. As of August 31, 2009, the TAM Trust has extended $506,163 in financing borrowings including accrued interest to the Company.

NOTE 3: PROPERTY AND EQUIPMENT

The following is a summary of property and equipment as of August 31, 2009 and February 28, 2009, respectively.

	August 31,			February 28,
	2009			2009
Tooling	$	317,839		$	311,918
Equipment		56,654			56,654
Vehicles		10,000			10,000
Furniture and fixtures		15,775			15,775
Computer equipment		16,520			16,520
Leasehold equipment		7,928			4,710
		424,716			415,577
Less: accumulated depreciation
and amortization		(309,100	)		(285,613	)

	$	115,616		$	129,964

Total depreciation and amortization expense for property and equipment for the six month period ended August 31, 2009 was $23,487.

NOTE 4: BASIC AND DILUTED INCOME (LOSS) PER SHARE

The three month computation of loss per common share is based on the weighted average number of shares outstanding during the year plus the common stock equivalents which would arise from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the year. Common stock equivalents, consisting of 1,802,500 in warrants were considered but were not included in the computation of loss per share for the three and six month periods ended August 31, 2008, because they would have been anti-dilutive. For the three and six months periods common stock equivalents consisting of 4,647,221 in warrants were included in the computation of fully diluted income per share. The diluted weighted average number of shares for the three and six month periods ended August 31, 2009 were 30,249,649 and 32,361,367, respectively.

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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 5: CUSTOMER CONCENTRATION

For the six months ended August 31, 2008, the Company had sales to one customer totaling 29.35% of our revenues, and sales to three other customers totaling over 5% of revenue individually.

For the three months ended August 31, 2009, Company sales to one customer totaled 48.59% of revenue and sales to three other customers contributing to over 5% of revenue individually.

NOTE 6: EQUITY

There were no shares issued during the six month period ended August 31, 2009.

Warrants

The Company has determined the estimated value of the compensatory warrants granted to employee and non-employees in exchange for services and financing expenses using the Black-Scholes pricing model. The amount of the expense charged to operations for compensatory warrants granted in exchange for services was $1,697 for the six months ended August 31, 2009.

The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company. These warrants were granted in lieu of cash compensation for services performed or financing expenses.

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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 6: EQUITY (Continued)

A summary of warrant activity for the six months ended August 31, 2009 are as follows:

	Warrants Outstanding		Weighted- Avereage Exercise Price

Outstanding at March 1, 2009		6,549,721	$	0.26
Granted		-		-
Exercised		-		-
Forfeited		-		-

Outstanding at August 31, 2009		6,549,721		0.26

Exercisable at August 31, 2009		6,549,721	$	0.26

The following table summarizes the outstanding warrants as of August 31, 2009:

		Warrants Outstanding						Warrants Exercisable
				Weighted		Weighted				Weighted
				Average		Average				Average
Exercise		Number		Remaining		Exercise		Number		Exercise
Price		Outstanding		Life (Years)		Price		Outstanding		Price

$	0.19		600,000		1.25	$	0.19		600,000	$	0.19
	0.23		4,000,000		1.25		0.23		4,000,000		0.23
	0.29		107,221		1.25		0.29		107,221		0.29
	0.40		100,000		1.25		0.40		100,000		0.40
	0.33		1,700,000		1.25		0.33		1,700,000		0.33
	0.16		30,000		1.25		0.16		30,000		0.16
	0.25		10,000		1.25		0.25		10,000		0.25
$	0.40		2,500		1.25		0.40		2,500		0.40
			6,549,721			$	0.26		6,549,721	$	0.26

NOTE 7: LINE OF CREDIT

As of August 31, 2009, the Company has a line of credit agreement, totaling $100,000. The line of credit bears interest at the lending institutions’ index rate (4.75% at August 31, 2009) plus two percent and is due February 1, 2010. As of August 31, 2009, the Company has borrowed $100,000 against the line of credit, which is recorded as a note payable. The line of credit agreement does not include any limitations on borrowings or any restrictive debt covenants.

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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 8: INVENTORY

The Company’s inventory consisted of the following at:

	August 31, 2009			February 28, 2009

Raw materials	$	185,897		$	230,018
Work in progress		-			53,187
Finished goods		198,472			260,461
		384,369			543,666
Reserve for obsolete and slow moving inventory		(116,909	)		(134,313	)
	$	267,460		$	409,353

NOTE 9: RELATED PARTIES

The Company has notes payable of $471,088 and accrued interest payable totaling $35,075 to related party entities controlled by a director.

The Company recorded $5,000 of compensation expense for donated services of the President of the Company during the six months ended August 31, 2009. The offsetting amount was recorded as additional paid in capital.

NOTE 10: COMMITMENTS AND CONTINGENCIES

Commitments

The Company’s office and production facility leases expired in August of 2009. Consequently, the Company leased new office and production facility space at a new location under two leases. Both leases were signed July 15, 2009 for a term of 60 months each, at a monthly cost of $3,551 and $4,764, respectively.

The future minimum lease payments for the new office leases are as follows:

Twelve Month Period ending August 31,
2010	$	99,780
2011		99,780
2012		99,780
2013		99,780
2014		87,308
Total	$	486,428

Contingencies

In July 2008, the Company defaulted on a loan collateralized by an airplane. In settlement of the loan, the Company exchanged the airplane for the remaining amount of the loan outstanding. The Company believes a contingent liability may exist for the loan as it has not received any release of liability. Due to the nature of the contingency, the Company is unable to estimate the possible loss or range of loss.

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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 the Company and its subsidiary for the three and three and six-month period ended August 31, 2009 and 2008. 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, 2009. 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 manufacturing 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 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.

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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.

Seychelle designs and manufactures unique, state-of-the-art ionic adsorption micron filters that remove up to 99.99% of all pollutants and contaminants found in any fresh water source. 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

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 consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this report. The selected consolidated statements of operations data for the three and six-months ended August 31, 2009 and 2008 are derived from our consolidated financial statements included elsewhere in this report.

Three-month period ended August 31, 2009 compared to the corresponding period in 2008

							Year over
	2009			2008			year change			%


Sales	$	632,663		$	247,862			384,801			155	%
Cost of sales		320,215			108,482			25,732			232	%
Gross profit		272,488			139,380			133,068			95	%
Gross profit percentage		43	%		56	%
Selling, general and administrative expenses		81,367			257,711			(176,344	)		-68	%
Depreciation & amortization expense		13,657			8,694			4,963			57	%
Interest income		140			47			93			198	%
Interest expense to related parties		9,676			65,078			(155,402	)		-85	%
Net Income (Loss)		164,372			(146,524	)		310,896			212	%

Sales. The increase in sales is primarily due to increased sales to one of our customers. We had approximately $305,000 in sales to one customer in the three month period ended August 31, 2009 compared to $16,000 in sales to the same customer in the three month period ended August 31, 2008. This increase in sales was further expanded by sales to two other customers increasing by $48,000 and $45,000, respectively, for the three month period ended August 31, 2009 compared to the three month period ended August 31, 2008. The average sales price per bottle increased by approximately 20% from $6.45 in 2008 to $7.72 in 2009.

Cost of sales and gross profit percentage. The increase in cost of sales is primarily due to increased sales. The actual average cost per bottle increased 173% to $4.78 as of August 31, 2009 from $1.75 as of August 31, 2008. This increase in cost is primarily due to increased sales during the three month period ended August 31, 2009 due to quality control issues and an increase in costs for components. As a percentage of sales, the gross profit margin during the three months ended August 31, 2009 decreased to 43% from 56% for the three months ended August 31, 2008.

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Selling, general, and administrative expenses. Selling expenses consist primarily of commissions paid to salespeople. The increase in 2009 versus 2008 is a direct result of an increase in the amount of sales that we have to pay commissions. General and administrative expenses decreased primarily due to a reduction in outside services and a decrease in allocated general and administrative expense due to overhead calculation. Compensation to executive officers decreased for the three-month period ended August 31, 2009, compared to the three-month period ended August 31, 2008, is due to an additional 700,000 warrants being issued to two executive officers in April 2008. The warrants issued in April 2008 had a nine-month vesting period and were valued at $74,000. Additional warrants valued at $16,700 were granted in December 2007 and vested in December 2008.

Interest expense to related parties. The decrease in interest expense for the three-month period ended August 31, 2009, compared to the three-month period ended August 31, 2008, is due to the Company issuing 1,000,000 warrants on April 30, 2008 in payment of accrued interest on related party notes payable. The value of these warrants was $224,970. One fourth of the value was recognized as interest expense in the three month period ended August 31, 2008 for a value of 56,243.

Net Income (loss). Net Income for the three-month period ended August 31, 2009 was $164,372 compared to a net loss of $146,524 for the three-month period ended August 31, 2008. This was primarily due to an increase in sales in the three month period ended August 31, 2009 of over $300,000 compared to the three months ended August 31, 2008.

Six-month period ended August 31, 2009 compared to the corresponding period in 2008

							Year over
	2009			2008			year change			%


Sales	$	1,031,037		$	477,082			553,955			116	%
Cost of sales		611,351			237,605			373,746			157	%
Gross profit		419,686			239,477			180,209			75	%
Gross profit percentage		41	%		50	%
Selling, general and administrative expenses		269,593			476,095			(206,502	)		-43	%
Depreciation & amortization expense		27,250			15,702			11,548			74	%
Interest income		302			56			246			439	%
Interest expense to related parties		19,217			73,738			(54,521	)		-74	%
Net income (loss)		94,545			(270,014	)		364,559			-135	%

Net cash provided by (used in) operating activities		166,130			155,590			10,083			7	%
Net cash provided by (used in) investing activities		(10,079	)		-			(10,079	)		100	%
Net cash provided by (used in) financing activities		(5,488	)		(83,446	)		77,958			-93	%

Sales. Sales increased primarily due to sales to one customer during the six-month period ended August 31, 2009 in comparison to the previous fiscal year’s first six months. The number of bottles sold increased from 36,961 to 82,210, while the average price per bottle increased from $5.53 to $8.27. Sales of bottles totaled approximately $680,000 while sales of other products during the six-month period ended August 30, 2009 totaled approximately $351,000, including the new emergency survival pack, replacement filters and canteens.

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Cost of sales and gross profit. The increase in cost of sales is primarily due to increased sales. As a percentage of sales, the gross profit percentage decreased from 50% to 41% due to a change in the pricing of bottles combined with a change in production costs due to quality control issues and a slight increase in cost of components. The average sales price per bottle increased while the average cost per bottle decreased slightly from $2.68 to $2.55 for the six month period ended August 31, 2009.

Selling, general and administrative expenses. The decrease in general and administrative expenses is due to the following: a decrease in accounting fees of $72,000 offset by an increase in rent of $11,000. Compensation to executive officers decreased for the six-month period ended August 31, 2009, compared to the six-month period ended August 31, 2008, is due to an additional 700,000 warrants being issued to two executive officers in April 2008. The warrants issued in April 2008 had a nine-month vesting period and were valued at $148,000 which was recognized over the vesting period.

Interest expense to related parties. The decrease in interest expense for the six-month period ended August 31, 2009, compared to the six-month period ended August 31, 2008, is due to the Company issuing 1,000,000 warrants on April 30, 2008 as interest due for related party notes payable. The value of these warrants was $224,970. One fourth of the value totaling $56,243 was recognized as interest expense in the three month period ended August 31, 2008.

Net income (loss). There was a net income of $94,545 for the six-month period ended August 31, 2009 compared to a net loss of $270,014 for the six-month period ended August 31, 2008. The loss was significant in the previous year primarily due to additional warrants being issued in April 2008 which increased expenses in the six month period ended August 31, 2008. In addition, total sales increased by over $500,000 for the six months ended August 31, 2009 compared to the six months ended August 31, 2008.

Liquidity and Capital Resources

Operating Activities

We received $166,130 from operating activities during the six month period ended August 31, 2009 as compared to $155,447 for the same period 2008. This increase is largely due to a an increase in sales which moved more incentory out of our warehouse more quickly than in prior periods.

Investing Activities

We used $10,079 in investing activities during the six month period ended August 31, 2009 compared to $nil in the same period 2008. We invested $9,000 in tooling molds for China production and an additional $1,000 in patents and trademarks..

Financing Activities

We used $5,488 in financing activities during the six month period ended August 31, 2009 compared to $83,446 in the same period 2008. The $5,488 was payment for an equipment lease.

Our principal sources of liquidity have historically been funds generated from operating activities and borrowings from the TAM Trust, one of our principal shareholders. As of August 31, 2009 the TAM Trust has loaned the Company $464,175 at 10% simple interest, repayable after March 1, 2011. The Company believes that despite the increase in sales experienced during the fiscal years ended February 28, 2007, 2008, 2009 and the six-month period ended August 31, 2009, additional funding may still be required from the TAM Trust or other shareholders. During June 2007, the TAM Trust committed to providing up to $250,000 in additional funding. As of August 31, 2009 the TAM Trust has advanced the Company $171,913 of $500,000 committed.

As of August 31, 2009, the Company had $310,978 in cash and no remaining amount available to borrow under 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 and committed funds to meet its operating needs through August 31, 2010..

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Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these 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 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, impairment of long-lived assets and intangible assets, accounting for transactions which potentially could be settled in a company’s own stock 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 ineffective 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.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As of August 31, 2009, there are of no known legal proceedings or judgments entered, either pending or threatened, against the Company or any of our directors or officers.

ITEM 1A. RISK FACTORS

Risk Factors Related to Our Business

THE OWNERSHIP AND INVESTMENT IN OUR SECURITIES INVOLVES SUBSTANTIAL RISKS. OUR COMMON SHARES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS RELATING TO OUR COMPANY.

Lack of Successful Operating History. Our Company was formed on January 23, 1998 and acquired the operations of a company that had been in existence since 1996. Since beginning operations, we initially sold water filtration products to a number of customers, then during March 2001 entered into a sales marketing agreement with Nikken Global, Inc. and Kenko World, two affiliated multi-level marketing companies (collectively “Nikken”). This agreement allowed Nikken the exclusive rights to distribute our products and technology for a period of ten years, commencing March 1, 2001. During the period of the agreement, the Company continued to promote its products and technologies to non-profit organizations, such as the Red Cross, the U.S. and international militaries, missionaries, charitable and fund-raising groups and other philanthropic organizations, which do not sell to distributors or resell to customers. During the fiscal year ending February 28, 2002, the Company decided to terminate its agreement with Nikken. The Company has continued to expand its product lines, since the Nikken business ended, but have not generated enough revenue to support operations. This has required us to seek both investor capital and financing to buy the time required by new management to reverse the downward trend. Recent sales activity for the fiscal year ended February 28, 2009 has increased over the past year. Still, we have limited financial results upon which you may judge our potential. The Company is not engaged in enough consistent business activity over a sustained period of time to be said to have a successful operating history. We have experienced in the past and may experience in the future under-capitalization, shortages, setbacks and many of the problems, delays and expenses encountered by any early stage business. These include:

-	operating as a public entity, incurring non-cost of sales expenses such as accounting, auditing, financial reporting and compliance, legal and costs to maintain full compliance with rules governing regulated reporting status, including continuing Sarbanes-Oxley requirements,
-	unplanned delays and expenses related to research, development and testing of our new products
-	production and marketing problems that may be encountered in connection with our existing products and technologies,
-	competition from larger and more established companies, and
-	under-capitalization to challenge the lack of market acceptance of our new products and technologies.

Lack of Profitability. To date, we have incurred significant losses. The Company had net income for the quarter ended August 31, 2009 of $164,373 compared to a net loss in the comparative quarter ended August 31, 2008 of $146,524. This reduced the accumulative deficit to $6,921,304. We have a policy of not projecting sales and profits due to:

-	lack of consistent sales to maintain profitability,
-	significant legal and professional fees associated with regulated business activities and the SEC,
-	reporting requirements, including continuing Sarbanes-Oxley requirements.

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Inherently Risky-Competition. Because we are a Company with no history of repeated profitability, our operations will be extremely competitive and subject to numerous risks. The water filtration business is highly competitive with many companies having access to the same market. Substantially all of them have greater financial resources and longer operating histories than we have and can be expected to compete within the business in which we engage and intend to engage. There can be no assurance that we will have the necessary resources to be competitive. Therefore, investors should consider an investment in us to be an extremely risky venture.

Delays in the Development of New Products. We have a limited product line, and the development of some of our technologies has taken longer than anticipated and could be additionally delayed. Therefore, there can be no assurance of timely completion and introduction of improved products on a cost-effective basis, or that such products, if introduced, will achieve market acceptance such that, in combination with existing products, they will sustain us or allow us to achieve profitable operations.

Dependence Upon Technology. We are operating in a business that requires extensive and continuing research, development and testing efforts. There can be no assurance that new products will not render our products obsolete or non-competitive at some time in the future.

Protection of Technology. A successful challenge to the ownership of our technology could materially damage our business prospects. We rely principally on trade secrets as well as trade secret laws, two patents, two trademarks, copyrights, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We currently have two U.S. patents issued and a license on two patents. Any issued patent may be challenged and invalidated. Patents may not be issued from any of our future applications. Any claims allowed from existing or future pending patents may not be of sufficient scope or strength to provide significant protection for our products. Patents may not be issued in all countries where our products can be sold so as to provide meaningful protection or any commercial advantage to us. Our competitors may also be able to design around our patents or the patents that we license.

Vigorous protection and pursuit of intellectual property rights or positions characterize our industry, which has resulted in significant and often protracted and expensive litigation. Therefore, our competitors may assert that our technologies or products infringe on their patents or proprietary rights. Problems with patents or other rights could increase the cost of our products or delay or preclude new product development and commercialization by us. If infringement claims against us are deemed valid, we may not be able to obtain appropriate licenses on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our future patent and/or technology license positions or to defend against infringement claims.

Competition. Technological competition from larger and more established companies is significant and expected to increase. Most of the companies with which we compete and expect to compete have far greater capital resources and more significant research and development staffs, marketing and distribution programs and facilities, and many of them have substantially greater experience in the production and marketing of products. Our ability to compete effectively may be adversely affected by the ability of these competitors to devote greater resources to the sale and marketing of their products than we can. In addition, one or more of our competitors may succeed or may already have succeeded in developing technologies and products that are more effective than any of those we currently offer or are developing. In addition, there can be no guarantee that we will be able to protect our technology from being copied or infringed upon. Therefore, there are no assurances that we will ever be able to obtain and to maintain a profitable position in the marketplace.

Success Dependent Upon Management. Our success is dependent upon the decision making of our directors and executive officers. These individuals have made a full commitment to the business. The loss of any or all of these individuals could have a materially adverse impact on our operations. On December 1, 2001, we entered into an employment agreement with our President. During November 2004, the Company entered into consulting agreements with two officers to provide management consulting services.

Dependence on One or a Few Customers. For the quarter ended August 31, 2009, one customer (FFH) individually accounted for greater than 10 percent of total sales. In addition three other customers (EcoUsable, Innova, and Dr. Seeman) individually account for greater than 5% of total sales. Management believes that if the targeted revenues are not achieved within their current marketing and distribution agreements, the revenues can be replaced through the sale of filters and related products to other direct marketing companies. However, there can be no assurance that this will occur which could result in an adverse effect on the Company’s financial condition or results of operations in the future.

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Our Senior Management’s Limited Experience Managing A Publicly Traded Company May Divert Management’s Attention From Operations and Harm Our Business. Our management team has relatively limited recent experience managing a publicly traded company and complying with federal securities laws, including compliance with recently adopted disclosure requirements on a timely basis. Our management will be required to design and implement appropriate programs and policies in responding to increased legal, regulatory compliance and reporting requirements, and any failure to do so could lead to the imposition of fines and penalties and harm our business.

The Acquisition of Other Technologies Could Result In Operating Difficulties, Dilution and Other Harmful Consequences. We may selectively pursue strategic acquisitions, any of which could be material to our business, operating results and financial condition. Future acquisitions could divert management’s time and focus from operating our business. In addition, integrating an acquired technology is risky and may result in unforeseen operating difficulties and expenditures.

The anticipated benefits of our future acquisitions may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our common stock, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of intellectual properties any of which could harm our financial condition. Future acquisitions may also require us to obtain additional financing, which may not be available on favorable terms or at all.

We Face Risks Associated With Currency Exchange Rate Fluctuations. Although we currently transact business primarily in U.S. dollars, a large portion of our revenues and related cost of goods sold may be determined in foreign currencies if we continue to expand our international operations. Conducting business in currencies other than U.S. dollars subjects the Company to fluctuations in currency exchange rates that could have a negative impact on our reported operating results. Fluctuations in the value of the U.S. dollar relative to other currencies may impact our revenue, cost of goods sold and operating gross margin and result in foreign currency transaction gains and losses. Historically, we have not engaged in exchange rate hedging activities.

Changes to Financial Accounting or Other Standards May Affect Our Operating Results and Cause Us To Change Our Business Practices. We prepare our consolidated financial statements to conform to generally accepted accounting principles, or GAAP, in the United States. These accounting principles are subject to interpretation by the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission, the Public Company Accounting Oversight Board and various other bodies. A change in those policies could have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced.

Our Financial Results Could Vary Significantly From Quarter to Quarter and Are Difficult to Predict. Our revenues and operating results could vary significantly from quarter to quarter because of a variety of factors, many of which are outside of the Company’s control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In addition, we may not be able to predict our future revenues or results of operations. We base our current and future expense levels on our internal operating plans and anticipated sales levels, and our operating costs are to a large extent fixed. As a result, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately and adversely affect financial results for that period. In addition, any payments due to us from our customers may be delayed because of changes or issues with those customers’ processes.

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If We Continue to Fail in Maintaining Effective Internal Control Over Financial Reporting, The Price of Our Common Stock May be Adversely Affected. We Have Determined That Our Internal Control Over Financial Reporting Have Material Weaknesses and Conditions That Need to Be Addressed, The Disclosure of Which May Have an Adverse Impact on the Price of Our Common Stock. We are required to establish and maintain appropriate internal control over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosure regarding our business, financial condition or results of operations. In addition, our future assessments of internal control over financial reporting may identify additional weaknesses and conditions that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors. Any actual of perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal control over financial reporting or disclosure of our independent registered public accounting firm’s attestation report, when applicable, on management’s assessment of our internal control over financial reporting may have an adverse impact of our common stock.

Standards for Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are Uncertain, and If We Fail to Comply in a Timely Manner, Our Business Could Be Harmed and Our Stock Price Could Decline. Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of our assessment by our independent registered public accounting firm. Currently, we believe these two requirements apply to our annual report for fiscal year ending February 28, 2010. The standards that must be met for the management to assess the internal control over financial reporting as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We have incurred, and expect to incur, significant expenses and to devote resources to Section 404 compliance during the remainder of 2009 and on an ongoing basis. It is difficult for us to predict how long it will take to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In addition, the attestation process by our independent registered public accounting firm is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of our assessment by our independent registered public accounting firm. In the event that our Chief Executive Officer, Chief Financial Officer, or independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react of how the market prices of our shares will be affected, however, we believe that there is a risk that investor confidence and share value may be negatively impacted.

Maintaining and Improving Our Financial Controls and The Requirements Of Being a Public Company May Strain Our Resources, Divert Managements Attention and Affect Our Ability to Attract and Retain Qualified Members For Our Board of Directors. As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. The requirements of these rules and regulations increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems, and resources. The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Fulfilling this requirement can be difficult to achieve and maintain.

We have a substantial effort ahead of us to remediate our control deficiencies and material weaknesses we have identified. As a result, management’s attention may be diverted from other business concerns, which could harm our business, operating results and financial condition. These efforts will also involve substantial accounting related costs.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the six-month period ended August 31, 2009, the Company issued no restricted stock or warrants.

There have been no further issuances of securities through the date of this filing.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

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)

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SIGNATURES

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

	Seychelle Environmental Technologies, Inc.

Date: October 20, 2009	By:	/s/ Carl Palmer
		Carl Palmer Director, Chief Executive Officer and President



Date: October 20, 2009	By:	/s/ Jim Place
		Jim Place Director and Chief Financial Officer and Chief Operating Officer

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