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10-Q Form - Quarterly report [Sections 13 or 15(d)] - SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CA (0001056757) (Filer)

10-Q1syev10q8312019.htm

 

 

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

 

For the quarterly period ending August31, 2019

 

oTRANSITION 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 itscharter)

 

Nevada   33-0836954
(State or other jurisdiction Of incorporation)   (IRS Employer File Number)
     
22 Journey    
Aliso Viejo, California   92656
(Address of principal executive offices)   (zip code)
     

(949) 234-1999

(Registrant's telephone number, including areacode)

  

Check whether the issuer: (1) filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was requiredto file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes þ  Noo

 

Indicate by check mark whether the registrant has submitted electronicallyand posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule405 of Regulation S-T(Section 232.405 of this chapter) during the preceding 12 months(or such shorter period that the registrantwas required to submit and post such files. Yes þ  No o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or, an emerging growthcompany. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company",and "emerging growth company", in Rule 12b-2 of the Exchange Act.

 

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

 

If anemerging growth company, indicate by check mark if the registrant has elected not to use the extended transition periodfor complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act)  Yes o   Noþ

 

The number of shares outstanding of the Registrant’scommon stock, as of October 10, 2019 was 26,640,313.

 

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

 

 

  
 

 

 

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 (Unaudited)     3  
  Condensed Consolidated Balance Sheets      3  
  Condensed Consolidated Statements of Operations     4  
  Consolidated Statements of Stockholders' Equity     6  
  Condensed Consolidated Statements of Cash Flows     8  
  Notes to Condensed Consolidated Financial Statements     9  
           
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     14  
Item 3. Quantitative and Qualitative Disclosures About Market Risk     18  
Item 4. Controls and Procedures     18  
           
PART II  OTHER INFORMATION        
           
Item 1. Legal Proceedings     20  
Item 1A. Risk Factors     20  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     20  
Item 3. Defaults Upon Senior Securities     20  
Item 4. Submission of Matters to a Vote of Security Holders     20  
Item 5. Other Information     20  
Item 6. Exhibits     21  
           
Signatures     22  

 

 

 

  

 2 
 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   

August 31,

2019

   

February 28,

2019

 
ASSETS            
CURRENT ASSETS            
   Cash and cash equivalents   $ 2,175,966     $ 2,078,122  
   Accounts receivable, net of allowance for doubtful accounts of $1,004 and $4,614,                
      respectively     354,609       352,818  
   Related party receivables     25,700       31,472  
   Inventory, net     916,524       972,497  
   Prepaid expenses, deposits and other current assets     82,466       129,049  
       Total current assets     3,555,265       3,563,958  
                 
PROPERTY AND EQUIPMENT, NET     98,202       118,154  

 

OTHER ASSETS

               
Other assets     66,670       66,670  
Right-of-use lease asset-operating     447,405       -  
                 
        Total assets    $ 4,167,542     $ 3,748,782  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
CURRENT LIABILITIES                
   Accounts payable and accrued expenses   $ 275,479     $ 267,641  
   Customer deposits     53,350       30,567  
   Lease liability, current portion     240,495       5,938  
     Total current liabilities     569,324       304,146  
                 
Long-term liabilities:                
    Lease liability, net of current portion     234,615       3,182  
       Total long-term liabilities     234,615       3,182  
                 
Total Liabilities     803,939       307,328  
                 
Stockholders' equity:                
   Preferred stock, 6,000,000 shares authorized, none issued or outstanding     -       -  

   Common stock $0.001 par value, 50,000,000 shares authorized, 26,640,313

    issued and outstanding

    26,641       26,641  
   Additional paid-in capital     8,944,368       8,944,368  
   Accumulated deficit     (5,577,726 )     (5,499,875 )
   Less treasury stock at cost, 66,000 shares     (29,680 )     (29,680 )

 

Total stockholders' equity

    3,363,603       3,441,454  
                 
 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 4,167,542     $ 3,748,782  

 

 

See accompanying notes to condensed consolidatedfinancial statements.

 

 

 3 
 

 

   

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

   

For the Three Months Ended

August 31,

    2019   2018
Sales   $ 790,198     $ 735,677  
Cost of sales     532,721       351,073  
               Gross profit     257,477       384,604  
Operating expenses                
    Selling, general, and administrative     370,129       498,309  
    Depreciation and amortization     11,894       13,532  
           Total  operating  expenses     382,023       511,841  
 Loss from operations     (124,546 )     (127,237 )
Other income (expense)                
     Interest income (expense)     7       (485 )
     Other expense     (303 )     (1,901 )
                    Total other expense, net     (296 )     (2,386 )
 Loss before income tax expense     (124,842 )     (129,623 )
 Income tax expense     (800 )     -  
Net loss   $ (125,642 )   $ (129,623 )
BASIC LOSS PER SHARE   $ 0.00     $ 0.00  
DILUTED LOSS PER SHARE   $ 0.00     $ 0.00  
BASIC WEIGHTED AVERAGE NUMBER OF                
SHARES OUTSTANDING     26,574,313       26,574,313  
DILUTED WEIGHTED AVERAGE NUMBER OF                
SHARES OUTSTANDING     26,574,313       26,574,313  

 

  

 

 See accompanying notes to condensed consolidatedfinancial statements.

 

 

 4 
 

 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   

For the Six Months

Ended

August 31,

    2019   2018
Sales   $ 1,471,020     $ 1,869,578  
Cost of sales     816,472       954,513  
               Gross profit     654,548       915,065  
Operating expenses                
    Selling, general, and administrative     705,020       922,771  
    Depreciation and amortization     24,813       28,003  
                 Total operating  expenses     729,833       950,774  
 Loss from operations     (75,285 )     (35,709 )
Other expense                
     Interest expense     (739 )     (1,038 )
     Other expense     (227 )     (84 )
                    Total other expense     (966 )     (1,122 )
Loss before income tax expense     (76,251 )     (36,831 )
Income tax expense     (1,600 )     -  
Net loss   $ (77,851 )   $ (36,831 )
BASIC LOSS PER SHARE   $ 0.00     $ 0.00  
DILUTED LOSS PER SHARE   $ 0.00     $ 0.00  
BASIC WEIGHTED AVERAGE NUMBER OF                
SHARES OUTSTANDING     26,574,313       26,574,313  
DILUTED WEIGHTED AVERAGE NUMBER OF                
SHARES OUTSTANDING     26,574,313       26,574,313  

 

 

 See accompanying notes to condensed consolidatedfinancial statements.

 

 5 
 

 

 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

Consolidated Statements of Stockholders'Equity

For the Three Months Ended August31, 2019 and 2018

 (UNAUDITED)

 

 

  Common Stock   Treasury Stock            
  Shares   Amount   Shares   Amount  

Additional

Paid-In

Capital

 

Accumulated

Deficit

  Total
                           
Balance at May 31, 2018   26,640,313     $ 26,641       66,000     $ (29,680 )   $ 8,944,368     $ (5,166,957 )   $ 3,774,372  
                                                       
Net loss   -       -       -       -       -       (129,623)       (129,623)  
                                                       
Balance at August 31, 2018   26,640,313     $ 26,641       66,000     $ (29,680 )   $ 8,944,368     $ (5,296,577 )   $ 3,644,752  
                                                       
Balance at May 31, 2019   26,640,313     $ 26,641       66,000     $ (29,680 )   $ 8,944,368     $ (5,452,084 )   $ 3,489,245  
                                                       
Net loss   -       -       -       -       -       (125,642)       (125,642)  
                                                       
Balance at August 31, 2019   26,640,313     $ 26,641       66,000     $ (29,680 )   $ 8,944,368     $ (5,577,726 )   $ 3,363,603  

 

 See accompanying notes to condensed consolidatedfinancial statements.

 

 

 6 
 

 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

Consolidated Statements of Stockholders'Equity

For the Six Months Ended August 31,2019 and 2018

 (UNAUDITED)

 

 

 

  Common Stock   Treasury Stock            
  Shares   Amount   Shares   Amount  

Additional

Paid-In

Capital

 

Accumulated

Deficit

  Total
                           
Balance at February 28, 2018   26,640,313     $ 26,641       66,000     $ (29,680 )   $ 8,944,368     $ (5,259,746 )   $ 3,681,583  
                                                       
Net loss   -       -       -       -       -       (36,831)       (36,831)  
                                                       
Balance at August 31, 2018   26,640,313     $ 26,641       66,000     $ (29,680 )   $ 8,944,368     $ (5,296,577 )   $ 3,644,752  
                                                       
Balance at February 28, 2019   26,640,313     $ 26,641       66,000     $ (29,680 )   $ 8,944,368     $ (5,499,875 )   $ 3,441,454  
                                                       
Net loss   -       -       -       -       -       (77,851)       (77,851)  
                                                       
Balance at August 31, 2019   26,640,313     $ 26,641       66,000     $ (29,680 )   $ 8,944,368     $ (5,577,726 )   $ 3,363,603  

 

 

 See accompanying notes to condensed consolidatedfinancial statements.

 

 

 

 7 
 

 

 

  SEYCHELLE ENVIRONMENTAL TECHNOLOGIES,INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

(UNAUDITED)

 

 

   

For The Six Months Ended

August 31,

    2019   2018
         
OPERATING ACTIVITIES:                
Net loss   $ (77,851 )   $ (36,831 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                
   Depreciation and amortization     24,814       28,003  
   (Recovery) provision for doubtful accounts     (3,610 )     3,153  
  Accretion of right-of-use lease asset     (516 )     -  
Changes in operating assets and liabilities:                
   Accounts receivable     1,819       231,959  
   Related party receivables     5,772       2,056  
  Inventory     55,972       (75,059 )
  Prepaid expenses, deposits and other current assets     46,584       57,567  
   Accounts payable and accrued expenses     29,837       (207,705 )
   Customer deposits     22,783       (150,877 )
Net cash provided by (used in) operating activities     105,604       (147,734 )
                 
INVESTING ACTIVITIES:                
  Purchase of property and equipment     (4,861 )     (5,550 )
Net cash used in investing activities     (4,861 )     (5,550 )
                 
FINANCING ACTIVITIES:                
  Repayment of capital lease obligations     (2,899 )     (2,600 )
Net cash used in financing activities     (2,899 )     (2,600 )
                 
       NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     97,844       (155,884 )
                 
       CASH AND CASH EQUIVALENTS - beginning of period     2,078,122       2,075,833  
                 
       CASH AND CASH EQUIVALENTS - end of period   $ 2,175,966     $ 1,919,949  
                 
Supplemental disclosures of cash flow information:                
    Initial recognition of lease asset   $ 555,296     $ -  
    Cash paid for:                
 Interest   $ 353     $ 1,038  

 

 

 See accompanying notes to condensed consolidatedfinancial statements.

 

 

 

 8 
 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS
August 31, 2019

(UNAUDITED)

 

 

NOTE 1:    CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying condensed consolidated financialstatements have been prepared by Seychelle Environmental Technologies, Inc., and subsidiaries (the "Company") withoutaudit.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary topresent fairly the financial position, results of operations, and cash flows at August 31, 2019, and for all periods presentedherein, have been made.

 

Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted.  It is suggested that these condensed consolidated financial statements beread in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report onForm 10-K for the year ended February 28, 2019.  The results of operations for the periods ended August 31, 2019 and2018 are not necessarily indicative of the operating results for the full fiscal years.

 

The summary of significant accounting policiesof the Company is presented to assist in understanding the Company's condensed consolidated financial statements. The condensedconsolidated financial statements and notes are representations of the Company's management, which is responsible for their integrityand objectivity. These accounting policies conform to accounting principles generally accepted in the United States of Americaand have been consistently applied in the preparation of the condensed consolidated financial statements and the February 28, 2019consolidated financials included in the 10-K filed on May 29, 2019.

 

The preparation of condensed consolidated financialstatements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP")requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosureof contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts ofrevenue and expenses during the reporting periods. Actual results could differ from those estimates.

 

Except for the accounting policy for leases,which was updated as a result of adopting a new accounting standard, there have been no material changes to our significant accountingpolicies in Note 2 - Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements included in ourAnnual Report on Form 10-K for the fiscal year ended February 28, 2019.

 

In February 2016, the Financial AccountingStandards Board (FASB) issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which amended theexisting accounting standards for lease accounting to increase transparency and comparability among organizations by requiringthe recognition of right-of-use assets and lease liabilities on the balance sheet. We adopted the standard effective March 1, 2019.Consequently, financial information will not be updated and disclosures required under the new standard will not be provided forperiods presented before March 1, 2019 as these prior periods conform to the Accounting Standards Codification 840. We electedthe package of practical expedients permitted under the transition guidance within the new standard. By adopting these practicalexpedients, we were not required to reassess (1) whether an existing contract meets the definition of a lease; (2) the lease classificationfor existing leases; or (3) costs previously capitalized as initial direct costs. We evaluated all leases within this scope underexisting accounting standards and under the new ASU lease standard recognized approximately $580,000 of operating right-of-useassets and lease liabilities at the date of adoption. Other required disclosures include:

 

 

  Weighted average lease term 5 years  
  Weighted average lease rate 6.25%  

 

Future minimum payments on the operating leaseliability are as follows:

 

   2020 $127,497  
   2021 $259,456  
   2022 $109,435  
   Total $496,388  

 

The FASB issued an accounting standards updatethat creates a single source of revenue guidance under U.S. GAAP for all companies, in all industries. We adopted this guidanceon March 1, 2018 using the modified retrospective approach. The adoption of this guidance did not have a significant impact onour consolidated financial statements.  Refer to Note 5 of these Notes to Condensed Consolidated Financial Statements foradditional information.

 

 

 9 
 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS
August 31, 2019

 (UNAUDITED)

 

 

 

NOTE 2:    BASIC LOSS PER SHARE

 

Basic loss per common share is computed bydividing net income by the weighted average number of common shares outstanding during each period presented.  Dilutedincome per share is determined using the weighted average number of common shares outstanding during the period, adjusted for thedilutive effect of common stock equivalents, assuming conversion, exercise, or issuance of all potential common stock equivalentsunless the effect is to reduce a loss or increase the income per share.  If the inclusion of common stock equivalents in theweighted average number of common shares outstanding would be anti-dilutive these items would be omitted from the calculation ofnet income per common share.  The dilutive effect of outstanding stock options and warrants is reflected in diluted earningsper share by application of the treasury stock method.

 

The denominator for diluted loss pershare for the six months ended August 31, 2019 and 2018, respectively, did not include 6,407,221 warrants as they would have beenanti-dilutive.

 

    For the six months ended
    August 31,
    2019 2018
         
Net loss available to common shareholders
  $ (77,851 )   $ (36,831 )
Weighted average common shares – basic
    26,574,313       26,574,313  
Net loss per share – basic
  $ 0.00     $ 0.00  
                 
Dilutive effect of common stock equivalents:
               
Warrants
    -       -  
Weighted average common shares – diluted
    26,574,313       26,574,313  
Net loss per share – diluted
  $ 0.00     $ 0.00  

 

 

    For the three months ended
    August 31,
    2019   2018
         
Net loss available to common shareholders
  $ (125,642 )   $ (129,623 )
Weighted average common shares – basic
    26,574,313       26,574,313  
Net loss per share – basic
  $ 0.00     $ 0.00  
                 
Dilutive effect of common stock equivalents:
               
Warrants
    -       -  
Weighted average common shares – diluted
    26,574,313       26,574,313  
Net loss per share – diluted
  $ 0.00     $ 0.00  

 

 

 10 
 

 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS
August 31, 2019

 (UNAUDITED)

 

 

 

NOTE 3:   COMMON STOCK

 

Warrants

 

A summary of warrant activity for thesix months ended August 31, 2019 is shown below.

 

          Weighted-  
          Average
    Warrants     Exercise  
    Outstanding     Price  
             
Outstanding at March 1, 2019     6,407,221       0.21  
Granted     -       -  
Exercised     -       -  
Forfeited     -       -  
Outstanding at August 31, 2019     6,407,221       0.21  
Vested at August 31, 2018     6,407,221       0.21  
Exercisable at February 28, 2019     6,407,221       0.21  

Expiration date December 15, 2020

 

 

The following table summarizes significant ranges of outstandingwarrants as of August 31, 2019:

 

  Warrants Outstanding Warrants Exercisable
    Weighted Weighted   Weighted
    Average Average   Average
    Remaining Exercise Number Exercise
Exercise Price Number Life (Years) Price Outstanding Price
           
    $0.21      6,407,221      1.29     $0.21      6,407,221     $0.21
                       

 

NOTE 4:    INVENTORY

 

The Company's inventory consisted of the following at August31, 2019 and February 28, 2019:

 

  

August 31,

2019

 

February 28,

2019

Raw materials  $364,932   $382,658 
Finished goods   551,592    589,839 
Net Inventory  $916,524   $972,497 

 

 

NOTE 5:    REVENUE RECOGNITION AND CONCENTRATIONS

 

We derive our revenue primarily fromproduct sales.  We determine revenue recognition through the following steps: (1) identification of the contract with a customer;(2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation ofthe transaction price to the performance obligations in the contract; (5) recognition of revenue when, or as, we satisfy a performanceobligation.

 

The Company's performance obligationsconsist solely of product shipped to customers.  Revenue from product sales is recognized upon transfer of control of promisedproducts to customers in an amount that reflects the consideration we expect to receive in exchange for these products.  Revenueis recognized net of returns and any taxes collected from customers.  We offer standard contractual terms in our purchaseorders. In addition, we use the practical expedient related to commissions paid since they would be amortized in less than oneyear.

 

Sales to three customers accounted for78% and 73% of sales for the three and six month periods ended August 31, 2019, respectively.  Accounts receivable from thesecustomers amounted to $261,211 or approximately 86% of accounts receivable as of August 31, 2019.

 

Sales to two customers accounted for50% and 57% of sales for the three and six month periods ended August 31, 2018, respectively. Accounts receivable from thesecustomers amounted to $416,254 or approximately 70% of accounts receivable as of August 31, 2018.

 

 

 11 
 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS
August 31, 2019

 (UNAUDITED)

 

 

 

 

NOTE 6:    RELATED PARTY TRANSACTIONS

 

The Company utilizes the services ofan individual, who is a related party, to source materials and provide the manufacturing of component parts with third-party vendorsin China. For the six months ended August 31, 2019 and 2018, purchases facilitated through the related party accounted for approximately28% and 14%, respectively, of total raw material purchases. For the three months ended August 31, 2019 and 2018, purchases facilitatedthrough the related party accounted for approximately 9% and 25%, respectively. The Company paid approximately $12,000 and $31,000in direct commissions to the related party consultant during the six months ended August 31, 2019 and 2018, respectively, and $3,000and $15,000 during the three months ended August 31, 2019 and 2018, respectively.

 

The Company had advanced amountsto an employee of $25,700 and $26,000 as of August 31, 2019 and 2018, respectively. These amounts are being repaid through directpayroll withdrawals.

 

The Company had receivables from stockholdersof approximately $7,000 as of August 31, 2018.

 

The Company had sales to two companiesrelated to a former member of the Board of Directors.  Specifically, sales to Sovereign Earth, LLC (dba Revolve) totaled approximately$583,000 and $438,000 for the six months ended August 31, 2019 and 2018, respectively, and $379,000 and $166,000 for the threemonths ended August 31, 2019 and 2018, respectively. Sales to Amazon Seychelle totaled approximately $224,000 and $56,000 for thesix months ended August 31, 2019 and 2018, respectively, and $56,000 and $22,000 for the three months ended August 31, 2019 and2018, respectively.  Pursuant to the agreement with the Company, Sovereign Earth, LLC is the sole and exclusive seller ofcertain Seychelle products in specified Amazon world markets.

 

 

NOTE 7:  COMMITMENTS AND CONTINGENCIES

 

The Company entered into a lease agreement on one facilityfor its corporate offices, inventory and production at 22 Journey in Aliso Viejo, CA for a term of 5 years at a monthly rentalof approximately $19,000.

 

 Legal Proceedings

 

There is a pending legal action namedRolling Tides, LLC vs. Carl Palmer, Seychelle Environmental Technologies, Inc., and other defendants.  The case was broughtin the Superior Court of the State of California, County of Orange.  The action alleges certain fraudulent transfers occurredfrom Seychelle to the various defendants.  The plaintiffs have refused to identify any such transfers by date or amount. The matter is set for trial in November 2019.  All the defendants have denied the allegations of the complaint, and are vigorouslydefending the matter.  It is not likely that the case will be settled without trial.  The Company believes that the casehas no merit.

 

Licenses

 

The Company has historically enteredinto licensing agreements with third-parties for product proprietary rights, patent and trademark ownership, and use of productname. In return, the Company agrees to pay licensing fees and/or royalties on sales of those products. During the six months endedAugust 31, 2019 and 2018, the Company paid $6,226 and $4,051, respectively, and during the three months ended August 31, 2019 and2018 $3,146 and $3,085, respectively, in royalties and licensing fees related under these agreements.

 

NOTE 8: SUBSEQUENT EVENTS

 

Management has evaluated subsequentevents from August 31, 2019 through the date the condensed consolidated financial statements were issued, and has concluded thatno subs equent events have occurred that would require recognition or disclosure in these condensed consolidated financial statements.

 

 

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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS
August 31, 2019

 (UNAUDITED)

 

 

 

 

NOTE 9:  INCOME TAX

 

Tax Cuts and Jobs Act

 

On December 22, 2017, the U.S. governmentenacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"). The TCJA makesbroad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. statutory corporate income taxrate from 35 percent to 21 percent, effective January 1, 2018. U.S. GAAP requires that deferred income tax assets and liabilitiesbe remeasured at the income tax rate expected to apply when those temporary differences reverse, and that the effects of any changeto such income tax rate be recognized in the period when the change was enacted.

 

In connection with the Company's initialanalysis of the impact of the TCJA, the Company recorded a discrete net tax expense of $282,408 in the year ended February 28,2018. This net expense is primarily due to the remeasurement of the Company's existing deferred tax assets and liabilities. Dueto the Company having a full valuation allowance related to their deferred taxes, the $282,408 discrete tax expense associatedwith the remeasurement was equally offset by the valuation allowance causing an overall net zero impact on the Company's currenttax rate.

 

We recorded a provision for income taxesof $800 for the quarter ended August 31, 2019 related to state taxes, based on the Company’s expected annual effective taxrate.

 

 

 13 
 

 

ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This discussion summarizes the significantfactors affecting the operating results, financial condition and liquidity and cash flows of Seychelle Environmental Technologies,Inc., and subsidiaries (the "Company") as of and for the three and six month periods ended August 31, 2019 and 2018.The discussion and analysis that follows should be read together with the consolidated financial statements of Seychelle EnvironmentalTechnologies, Inc. and the notes to the condensed consolidated financial statements included in the Company's Annual Report onForm 10-K for the fiscal year ended February 28, 2019.  Except for historical information, the matters discussed in this sectionare forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors thatare beyond the Company's control.

 

Forward-Looking Statements

 

Certain statements contained hereinare "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 similaror comparable words or phrases. In addition, any statement concerning future financial performance, ongoing business strategiesor prospects, and possible future Company actions that may be provided by management are also forward-looking statements. Forward-lookingstatements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptionsabout the Company; and economic and market factors in the countries in which the Company does business, among other things. Thesestatements are not guarantees of future performance, and the Company has no specific intentions to update these statements. Actualevents and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factorsincluding, 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 dependence on a few customers. Sales to these customers are unpredictable and difficult to estimate, and as such, may result in material fluctuations in sales from period to period. Management believes that if future revenues from its significant customers decline, those revenues can be replaced through the sales to other customers.  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;

 

  (5) the Company's water related product sales could be materially affected by weather conditions and government regulations;

 

  (6) the Company is subject to the risks of conducting business internationally; and

 

  (7) 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 for the fiscal year ended February 28, 2019.

 

 

 

 14 
 

 

Description of the Business

 

We were incorporated under the lawsof the State of Nevada on January 23, 1998 as a change of domicile to Royal Net, Inc., a Utah corporation that was originally incorporatedon 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 intoan Exchange Agreement with Seychelle Water Technologies, Inc., a Nevada corporation ("SWT"), whereby we exchanged ourissued and outstanding capital shares with the shareholders of SWT on a one share for one share basis. We became the parent companyand 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 ofSeychelle Environmental Technologies, Inc., a Nevada corporation, with two wholly-owned subsidiaries, Seychelle Water Technologies,Inc. and Fill 2 Pure International, Inc., also Nevada corporations (collectively, the "Company" or "Seychelle").We use the trade name "Seychelle Water Filtration Products, Inc." in our commercial operations.

 

Seychelle designs, assembles and distributesunique, state-of-the-art ionic absorption micron filters for portable filter devices that remove up to 99.99% of all pollutantsand contaminants found in any fresh water source.  

 

Our principal business address is 22Journey, Aliso Viejo, California 92656. Our telephone number at this address is 949-234-1999.

 

Management's Discussion and Analysisof Financial Condition and Results of Operations

 

Results of Operations

 

Our summarized historical financialdata is presented in the following table to aid in your analysis. You should read this data in conjunction with this section entitledManagement's Discussion and Analysis of Financial Condition and Results of Operations, our condensed consolidated financial statementsand the related notes to the condensed consolidated financial statements included elsewhere in this report. The selected condensedconsolidated statements of operations data for the three and six month periods ended August 31, 2019 and 2018 are derived fromour condensed consolidated financial statements included elsewhere in this report.

 

Three month period ended August 31, 2019 compared to the corresponding period in 2018    

 

            Period over    
    2019   2018   Period change   %
                 
                 
Sales   $ 790,198     $ 735,677       54,521       7 %
Cost of sales     532,721       351,073       181,648       52 %
Gross profit     257,477       384,604       (127,127 )     (33 %)
Gross profit %     33 %     52 %     (233 %)        
Selling, general, and administrative     370,129       498,309       (128,180 )     (26 %)
Depreciation and amortization     11,894       13,532       (1,638 )     (12 %)
Other expense     (296 )     (2,386 )     2,090       (88 %)
Loss before income tax expense     (124,842 )     (129,623 )     4,781       (4 %)
Provision for income taxes     (800 )     -       (800 )     (100 %)
Net loss     (125,642 )     (129,623 )     3,981       (3 %)

 

 

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Sales. Sales increased by $54,521or 7% to $790,198 during the three months ended August 31, 2018 from $735,677 during the three months ended August 31, 2018. The increase is primarily due to increase in sales of our pitcher, pitcher replacement and pitcher custom product lines. Salesduring the three months ended August 31, 2019 of this product line were $664,627, compared to $408,984 in the comparable currentperiod 2018.

 

Cost of sales and gross profit percentage.As a percentage of sales, the gross profit margin during the three months ended August 31, 2019 decreased to 33% from 52%. The product mix and timing of significant sales is always an important factor in the resulting profit margins reported.  TheCompany believes that the average gross margin percentages overall could eventually be in a range around approximately 45% in theforeseeable future.

 

Selling, general, and administrativeexpenses. These expenses decreased by $126,180, or (26%), during the three months ended August 31, 2019 compared to the sameperiod ended in the prior year.  The decrease was a direct result of the decrease in legal and advertising costs.

 

Depreciation and amortization.  Depreciationand amortization expense was decreased due to fully depreciated fixed assets.

 

Income tax benefit (expense). The Company recorded provision of $0 due to a pretax loss of $125,642 and $129,623 during the three month period ended August31, 2019 and 2018.

 

Net loss. Net loss for the threemonth period ended August 31, 2019 was $125,642 compared to net loss for the three month period ended August 31, 2018 of $129,623. This was due primarily to the increase of $181,648 in cost of sales partially offset by decrease of $128,180 in selling, generaland administrative.

 

Six month period ended August 31, 2019 compared to the corresponding period in 2018      

 

                Period over        
    2019     2018     Period change     %  
                         
                         
Sales   $ 1,471,020     $ 1,869,578       (398,558 )     (21 %)
Cost of sales     816,472       954,513       (138,041 )     (14 %)
Gross profit     654,548       915,065       (260,517 )     (28 %)
Gross profit %     44 %     49 %     65 %        
Selling, general, and administrative     705,020       922,771       (217,751)       (24 %)
Depreciation and amortization     24,813       28,003       (3,190 )     (11 %)
Other expense     (966 )     (1,122 )     156       (14 %)
Loss before income tax expense     (76,251 )     (36,831 )     (39,420 )     107 %
Income tax expense     (1,600)       -       (1,600)          
Net loss     (77,851 )     (36,831 )     (41,020 )     111 %

 

Sales. The decrease in salesto $1,471,020 during the six months ended August 31, 2019 from $1,869,578 during the six months ended August 31, 2018.  Thedecrease of 21% is primarily due to decrease in sales of pitcher product lines.

 

Cost of sales and gross profit percentage.As a percentage of sales, the gross profit margin during the six months ended August 31, 2019 decreased to 44% from 49%. The product mix and timing of significant sales is always an important factor in the resulting profit margins reported.  TheCompany believes that the average gross margin percentages overall will remain in a range around approximately 45% in the foreseeablefuture.

 

Selling, general, and administrative.These expenses decreased by $217,751, or (24%), during the six months ended August 31, 2019 compared to the same periodin the prior year.  The decrease was a direct result of the decrease in legal and advertising costs.

 

 

 16 
 

 

 

Depreciation and amortization.  Depreciation andamortization was decreased due to fully depreciated fixed assets.

 

Income tax expense.  The Companyrecorded an income tax $1,600 due to pretax loss of $77,851 compared to an income tax of $0 due to the pretax loss of $36,831 duringthe six month period ended August 31, 2018.

 

Net loss. Net loss for the six monthperiod ended August 31, 2019 was $77,851 compared to net loss of $36,831 for the six month period ended August 31, 2018 due todecrease in sales of $398,558 offset by the decrease in selling, general and administrative expense of $217,751.

 

Net cash from operating activities.During the six-month period ended August 31, 2019, cash provided in operating activities was $105,604, compared to cash used inoperating activities of $147,734 in the same period during 2018. This was primarily due to increase in customer deposits,collections of accounts receivable and related party receivable, decrease in inventories and prepayments

 

Net cash from investing activities.During the six month period ended August 31, 2019, the Company spent $4,861 on capital expenditures.  In comparable periodof the prior year, the Company spent $5,550 on capital expenditures.

 

Net cash from financing activities.Cash used in financing activities during the six month period ended August 31, 2019 was $2,899 compared to $2,600 during the comparableperiod. This is was a result of capital lease repayments.

 

Management's Plan. As of August 31,2019, the Company had $2,175,966 in cash and cash equivalents, $354,609 in accounts receivable and a backlog of $256,372 in unshippedproduct.  The Company is continuing to develop products and improve technology. The Company plans to release a variety ofnew products in the upcoming months that include Thermal Bottles, new ergonomic loop cap, universal design style replacement filter,combination straw and bottle product that removes up to 500 gallons of pathogen.

 

Critical Accounting Policies and Estimates

 

The Company's discussion and analysis of itsfinancial condition and results of operations are based upon its condensed consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the United States of America. The preparation of these condensedconsolidated 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, assumptionsand judgments involved in the accounting policies described in the "Management's Discussion and Analysis of Financial Conditionand Results of Operations" section of its most recent fiscal 2018 Annual Report on Form 10-K have the greatest potential impacton its consolidated financial statements, so it considers these to be its critical accounting policies. Because of the uncertaintyinherent in these matters, actual results could differ from the estimates the Company uses in applying the critical accountingpolicies. Certain of these critical accounting policies affect working capital account balances, including the policies for inventoryreserves and stock-based compensation. These policies require that the Company make estimates in the preparation of its consolidatedfinancial statements as of a given date.

 

Within the context of these critical accountingpolicies, the Company is not currently aware of any reasonably likely events or circumstances that would result in materially differentamounts being reported. There were no material changes to the Company's critical accounting policies or estimates during the six-monthperiod ended August 31, 2019.

 

 

 17 
 

 

 

 

In May 2014, the Financial Accounting StandardsBoard ("FASB") issued Accounting Standards Updated ("ASU") 2014-09, Revenue from Contracts with Customers,issued as a new Topic, ASC Topic 606 ("ASU 2014-09"). The new revenue recognition standard provides a step analysis oftransactions to determine when and how revenue is recognized. The premise of the standard is that a Company should recognize revenueto depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entityexpects to be entitled in exchange for those goods or services. The Company adopted the guidance effective March 1, 2018 usingthe modified retrospective approach. The adoption of this guidance did not have a significant impact on our consolidated financialstatements.

 

In February 2016, the FASB issued AccountingStandards Update ("ASU") No. 2016-02, Leases (Topic 842), which amended the existing accounting standards for lease accountingto increase transparency and comparability among organizations by requiring the recognition of right-of-use assets and lease liabilitieson the balance sheet. We adopted the standard effective March 1, 2019. Consequently, financial information will not be updatedand disclosures required under the new standard will not be provided for periods presented before March 1, 2019 as these priorperiods conform to the Accounting Standards Codification 840. We elected the package of practical expedients permitted under thetransition guidance within the new standard. By adopting these practical expedients, we were not required to reassess (1) whetheran existing contract meets the definition of a lease; (2) the lease classification for existing leases; or (3) costs previouslycapitalized as initial direct costs. We evaluated all leases within this scope under existing accounting standards and under thenew ASU lease standard recognized approximately $580,000 of operating right-of-use assets and lease liabilities at the date ofadoption.

 

In June 2016, the FASB issued ASU 2016-13,“Financial Instruments – Credit Losses,” which will require the measurement of all expected credit losses forfinancial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportableforecasts. This guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods withinfiscal years beginning after December 15, 2020. The Company is currently evaluating this statement and its impact on the Company’sresults of operations and financial position.

 

Management does not believe any other recentlyissued but not yet effective accounting pronouncements, if adopted, would have a material effect on the Company's present or futureconsolidated financial statements.

 

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

 

None.

 

 

ITEM 4.  CONTROLS AND PROCEDURES

 

We maintain disclosure controls and proceduresthat are designed to ensure that information required to be disclosed in the reports that we file with the SEC under the ExchangeAct is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that suchinformation is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate,to allow for timely decisions regarding required disclosure. As required by Rule 15d-15(b) of the Exchange Act, we carried outan evaluation, under the supervision and with the participation of our management, including our principal executive and principalfinancial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report.  Based on the foregoing,our principal executive and principal financial officer concluded that our disclosure controls and procedures are not effectiveto ensure the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processedand reported within the time periods specified in the SEC's rules and forms.

 

Management's Annual Report on Internal Control over FinancialReporting

 

The management of the Company is responsiblefor establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f)under the Exchange Act. The Company's internal control over financial reporting is a process designed under the supervision ofthe Company's Chief Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of the Company's financial statements for external purposes in accordance with accountingprinciples generally accepted in the United States of America (U.S. GAAP) and includes those policies and procedures that:

 

 

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
   
provide reasonable assurance that the transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors;
   
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements;

 

 

 

 18 
 

 

  

Internal control over financial reporting cannotprovide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control overfinancial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdownsresulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper managementoverride. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timelybasis by internal control over financial reporting. However, these inherent limitations are known features of the financial reportingprocess. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Managementis responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

 

Management has used the framework set forthin the report entitled Internal Control-Integrated Framework (2013) published by the Committee of Sponsoring Organizationsof the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Basedon this assessment, management has concluded that our internal control over financial reporting was not effective as of August31, 2019.

 

A material weakness is a deficiency, or combinationof deficiencies, that results in more than a remote likelihood that a material misstatement of annual or interim financial statementswill not be prevented or detected. In connection with the assessment described above, management identified the following controldeficiencies that represent material weaknesses at August 31, 2019:

 

(1) lack of a functioning audit committee and lack of any outside directors on the Company's Board of Directors capable to oversee the audit function;
   
(2) inadequate segregation of duties due to limited number of personnel, which makes the reporting process susceptible to management override;
   
(3) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements;
   
(4) ineffective controls over period end financial disclosure and reporting processes;

 

Management believes that the material weaknessesset forth in items (1) through (4) above did not have an effect on the Company's financial reporting during the period ended August31, 2019.

 

We are committed to improving our financialorganization. As part of this commitment, we plan to prepare and implement sufficient written policies and checklists which willset forth procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosurerequirements.

 

We will continue to monitor and evaluate theeffectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis andare committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

 

Changes in Internal Control over Financial Reporting

 

There was no change in internal control overfinancial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during our first fiscal quarter thathas materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II - OTHER INFORMATION

 

ITEM 1.   LEGAL PROCEEDINGS

 

There is a pending legal action namedRolling Tides, LLC vs. Carl Palmer, Seychelle Environmental Technologies, Inc., and other defendants.  The case was broughtin the Superior Court of the State of California, County of Orange.  The action alleges certain fraudulent transfers occurredfrom Seychelle to the various defendants.  The plaintiffs have refused to identify any such transfers by date or amount. The matter is in discovery and trial is set for November, 2019.  All the defendants have denied the allegations of the complaint,and are vigorously defending the matter.  It is not likely that the case will be settled without trial.  The Companybelieves that the case has no merit.

 

 

ITEM 1A. RISK FACTORS

 

There have been no changes to our Risk Factorsincluded in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 29, 2019.

 

 

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS

 

During the quarter ended August 31, 2019, the Company did notissue any securities.

 

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None

 

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

 

None

 

 

ITEM 5.  OTHER INFORMATION

 

None

 

 

 

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 ITEM 6.  EXHIBITS

 

Exhibits

 

Exhibit No.   Description
     
31.1   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)
     
32.1   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.ss.1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 21 
 

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Actof 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 11, 2019 By:   /s/ Cari Beck  
 

Cari Beck

Director, Chief Executive Officer and Chief Financial Officer

 

 

 

 

 

 

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