UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ending November 30, 2019

 

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

 

For the transition period from _______________ to __________________

 

Commission File No. 0-29373

 

 

 

Seychelle Environmental Technologies, Inc.

(Exact Name of registrant as specified in its charter)

 

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

(949) 234-1999

(Registrant's telephone number, including area code)

  

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or, an emerging growth company. 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 an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for 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   No þ

 

The number of shares outstanding of the Registrant’s common stock, as of January 10, 2020 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
	Condensed 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

 

 

  

 

PART I

ITEM 1. FINANCIAL STATEMENTS

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		November 30, 2019				February 28, 2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	2,134,349			$	2,078,122
Accounts receivable, net of allowance for doubtful accounts of $1,737 and $4,614,
respectively			453,454				352,818
Related party receivables			25,650				31,472
Inventory, net			961,841				972,497
Prepaid expenses, deposits, and other current assets			75,222				129,049
Total current assets			3,650,516				3,563,958
PROPERTY AND EQUIPMENT, NET			86,455				118,154
OTHER ASSETS
Other assets			66,670				66,670
Right-of-use lease asset-operating			392,159				-
Total assets		$	4,195,800			$	3,748,782
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	298,801			$	267,641
Customer deposits			106,420				30,567
Lease liability, current portion			244,605				5,938
Total current liabilities			649,826				304,146
LONG-TERM LIABILITIES:
Lease liability, net of current portion			171,953				3,182
Total long-term liabilities			171,953				3,182
Total Liabilities			821,779				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			(5,567,308	)			(5,499,875	)
Less treasury stock at cost, 66,000 shares			(29,680	)			(29,680	)
Total stockholders' equity			3,374,021				3,441,454
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	4,195,800			$	3,748,782

 

 See accompanying notes to condensed consolidated financial statements.

 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

		For the Three Months Ended November 30,
		2019				2018
Sales		$	816,001			$	609,444
Cost of sales			422,496				292,296
Gross profit			393,505				317,148
Operating expenses
Selling, general, and administrative			373,053				429,650
Depreciation and amortization			11,747				13,294
Total operating expenses			384,800				442,944
Income (loss) from operations			8,705				(125,796	)
Other income (expense)
Interest income (expense)			5				(453	)
Other income (expense)			1,708				(9	)
Total other expense, net			1,713				(462	)
Income (loss) before income tax expense			10,418				(126,258	)
Income tax expense							-
Net income (loss)		$	10,418			$	(126,258	)
BASIC EARNINGS PER SHARE		$	0.00			$	0.00
DILUTED EARNINGS 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 consolidated financial statements.

 

 

 

 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		For the Nine Months Ended November 30,
		2019				2018
Sales		$	2,287,343			$	2,479,023
Cost of sales			1,238,968				1,246,809
Gross profit			1,048,375				1,232,214
Operating expenses
Selling, general, and administrative			1,078,073				1,352,421
Depreciation and amortization			36,560				41,296
Total operating expenses			1,114,633				1,393,717
Loss from operations			(66,258	)			(161,503	)
Other income (expense)
Interest expense			(1,055	)			(1,491	)
Other income (expense)			1,480				(93	)
Total other income (expense)			425				(1,584	)
Loss before income tax expense			(65,833	)			(163,087	)
Income tax expense			(1,600	)			-
Net loss		$	(67,433	)		$	(163,087	)
BASIC EARNINGS PER SHARE		$	0.00			$	(0.01	)
DILUTED EARNINGS PER SHARE		$	0.00			$	(0.01	)
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 consolidated financial statements.

 

 

  

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended November 30, 2019 and 2018

 (UNAUDITED)

 

 

	Common Stock								Treasury Stock
	Shares				Amount				Shares				Amount				Additional Paid-In Capital				Accumulated Deficit				Total
Balance at August 31, 2018		26,640,313			$	26,641				66,000			$	(29,680	)		$	8,944,368			$	(5,296,577	)		$	3,644,752
Net loss		-				-				-				-				-				(126,258)				(126,258)
Balance at November 30, 2018		26,640,313			$	26,641				66,000			$	(29,680	)		$	8,944,368			$	(5,422,835	)		$	3,518,494
Balance at August 31, 2019		26,640,313			$	26,641				66,000			$	(29,680	)		$	8,944,368			$	(5,577,726	)		$	3,363,603
Net income		-				-				-				-				-				10,418				10,418
Balance at November 30, 2019		26,640,313			$	26,641				66,000			$	(29,680	)		$	8,944,368			$	(5,567,308	)		$	3,374,021

 

 

 See accompanying notes to condensed consolidated financial statements.

 

 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended November 30, 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			$	(5,259,748	)		$	3,681,581
Net loss		-				-				-				-				-				(163,087)				(163,087)
Balance at November 30, 2018		26,640,313			$	26,641				66,000			$	(29,680	)		$	8,944,368			$	(5,422,835	)		$	3,518,494
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		-				-				-				-				-				(67,433)				(67,433)
Balance at November 30, 2019		26,640,313			$	26,641				66,000			$	(29,680	)		$	8,944,368			$	(5,567,308	)		$	3,374,021

 

 

 See accompanying notes to condensed consolidated financial statements.

 

 

 

 

  SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

		For The Nine Months Ended November 30,
		2019				2018
OPERATING ACTIVITIES:
Net loss		$	(67,433	)		$	(163,087	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			36,560				41,296
(Recovery) provision for doubtful accounts			(2,877	)			21,567
Accretion of right-of-use lease asset			(2,319	)			-
Changes in operating assets and liabilities:
Accounts receivable			(97,759	)			323,334
Related party receivables			5,822				(1,693	)
Inventory			10,656				(85,121	)
Prepaid expenses, deposits and other current assets			53,827				77,757
Accounts payable and accrued expenses			53,159				(138,808	)
Customer deposits			75,853				(88,547	)
Net cash provided by (used in) operating activities			65,489				(13,302	)
INVESTING ACTIVITIES:
Purchase of property and equipment			(4,861	)			(14,259	)
Net cash used in investing activities			(4,861	)			(14,259	)
FINANCING ACTIVITIES:
Repayment of capital lease obligations			(4,401	)			(3,966	)
Net cash used in financing activities			(4,401	)			(3,966	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			56,227				(31,527	)
CASH AND CASH EQUIVALENTS - beginning of period			2,078,122				2,075,833
CASH AND CASH EQUIVALENTS - end of period		$	2,134,349			$	2,044,306
Supplemental disclosures of cash flow information:
Initial recognition of lease asset		$	555,296			$	-
Cash paid for:
Interest		$	1,056			$	1,491

 

 

 See accompanying notes to condensed consolidated financial statements.

 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2019

(UNAUDITED) 

 

NOTE 1:    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying condensed consolidated financial statements have been prepared by Seychelle Environmental Technologies, Inc., and subsidiaries (the "Company") without audit.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at November 30, 2019, and for all periods presented herein, have been made.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted.  It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended February 28, 2019.  The results of operations for the periods ended November 30, 2019 and 2018 are not necessarily indicative of the operating results for the full fiscal years.

 

The summary of significant accounting policies of the Company is presented to assist in understanding the Company's condensed consolidated financial statements. The condensed consolidated financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to U.S. GAAP and have been consistently applied in the preparation of the condensed consolidated financial statements and the February 28, 2019 consolidated financials included in the 10-K filed on May 29, 2019.

 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP 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 condensed consolidated financial statements and the reported amounts of revenue 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 accounting policies in Note 2 - Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2019.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which amended the existing accounting standards for lease accounting to increase transparency and comparability among organizations by requiring the 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 for periods presented before March 1, 2019 as these prior periods conform to the Accounting Standards Codification 840. We elected the package of practical expedients permitted under the transition guidance within the new standard. By adopting these practical expedients, we were not required to reassess (1) whether an existing contract meets the definition of a lease; (2) the lease classification for existing leases; or (3) costs previously capitalized as initial direct costs. We evaluated all leases within this scope under existing accounting standards and under the new ASU lease standard recognized approximately $580,000 of operating right-of-use assets 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 lease liability are as follows:

 

	2020			$	63,748
	2021				259,456
	2022				109,435
	Total			$	432,639

 

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

 

 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2019

 (UNAUDITED)

 

 

 

NOTE 2:   EARNINGS PER SHARE

 

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

 

The denominator for diluted loss per share for the nine months ended November 30, 2019 and 2018, respectively, did not include 6,407,221 warrants as they would have been anti-dilutive.

 

		For the nine months ended
		November 30,
		2019				2018
Net loss available to common shareholders		$	(67,433	)		$	(163,087	)
Weighted average common shares – basic			26,574,313				26,574,313
Earnings per share – basic		$	0.00			$	(0.01	)
Dilutive effect of common stock equivalents:
Warrants			-				-
Weighted average common shares – diluted			26,574,313				26,574,313
Earnings per share – diluted		$	0.00			$	(0.01	)

 

 

		For the three months ended
		November 30,
		2019				2018
Net income (loss) available to common shareholders		$	10,418			$	(126,258	)
Weighted average common shares – basic			26,574,313				26,574,313
Earnings 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
Earnings per share – diluted		$	0.00			$	0.00

 

 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2019

 (UNAUDITED)

 

 

 

NOTE 3:   COMMON STOCK

 

Warrants

 

A summary of warrant activity for the nine months ended November 30, 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 November 30, 2019			6,407,221				0.21
Vested at November 30, 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 outstanding warrants as of November 30, 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		0.79		$0.21		6,407,221		$0.21

 

 

NOTE 4:    INVENTORY

 

The Company's inventory consisted of the following at November 30, 2019 and February 28, 2019:

 

		November 30, 2019				February 28, 2019
Raw materials		$	621,469			$	382,658
Finished goods			340,372				589,839
Net inventory		$	961,841			$	972,497

 

 

 

 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2019

 (UNAUDITED)

 

 

 

NOTE 5:    REVENUE RECOGNITION AND CONCENTRATIONS

 

We derive our revenue primarily from product 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 of the transaction price to the performance obligations in the contract; (5) recognition of revenue when, or as, we satisfy a performance obligation.

 

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

 

Sales to three customers accounted for 66.25% and 70.61% of sales for the three and nine month periods ended November 30, 2019, respectively.  Accounts receivable from these customers amounted to $324,000 or approximately 82% of accounts receivable as of November 30, 2019.

 

Sales to two customers accounted for 56% of sales for the three and nine month periods ended November 30, 2018. Accounts receivable from these customers amounted to $290,215 or approximately 66% of accounts receivable as of November 30, 2018.

 

NOTE 6:    RELATED PARTY TRANSACTIONS

 

The Company utilizes the services of an individual, who is a related party, to source materials and provide the manufacturing of component parts with third-party vendors in China. For the nine months ended November 30, 2019 and 2018, purchases facilitated through the related party accounted for approximately 33% and 16%, respectively, of total raw material purchases. For the three months ended November 30, 2019 and 2018, purchases facilitated through the related party accounted for approximately 37% and 24%, respectively. The Company paid approximately $23,907 and $39,000 in direct commissions to the related party consultant during the nine months ended November 30, 2019 and 2018, respectively, and $11,669 and $4 during the three months ended November 30, 2019 and 2018, respectively.

 

During the three and nine months ended November 30, 2019, the Company incurred $33,131 and $94,000, respectively, for consulting services from Carl Palmer. Carl is a Board member and father of Cari Beck, an officer and Board member. These amounts are included as a component of selling, general, and administrative expenses on the condensed consolidated statements of operations.

 

The Company had advanced amounts to an employee of $25,550 and $26,150 as of November 30, 2019 and 2018, respectively. These amounts are being repaid through direct payroll withdrawals.

 

The Company had receivables from stockholders of approximately $100 and $11,000 as of November 30, 2019 and 2018, respectively.

 

The Company had sales to two companies related to a former member of the Board of Directors.  Specifically, sales to Sovereign Earth, LLC (dba Revolve) totaled approximately $800,000 and $653,000 for the nine months ended November 30, 2019 and 2018, respectively, and $217,000 and $215,000 for the three months ended November 30, 2019 and 2018, respectively. Sales to Amazon Seychelle totaled approximately $307,000 and $98,000 for the nine months ended November 30, 2019 and 2018, respectively, and $84,000 and $42,000 for the three months ended November 30, 2019 and 2018, respectively.  Pursuant to the agreement with the Company, Sovereign Earth, LLC is the sole and exclusive seller of certain Seychelle products in specified Amazon world markets.

 

 

 

 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2019

 (UNAUDITED)

 

 

NOTE 7:  COMMITMENTS AND CONTINGENCIES

 

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

 

 Legal Proceedings

 

There is a pending legal action named Rolling Tides, LLC vs. Carl Palmer, Seychelle Environmental Technologies, Inc., and other defendants.  The case was brought in the Superior Court of the State of California, County of Orange.  The action alleges certain fraudulent transfers occurred from 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 February 2020.  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 Company believes that the case has no merit.

 

Licenses

 

The Company has historically entered into licensing agreements with third-parties for product proprietary rights, patent and trademark ownership, and use of product name. In return, the Company agrees to pay licensing fees and/or royalties on sales of those products. During the nine months ended November 30, 2019 and 2018, the Company paid $9,226 and $7,136, respectively, and during the three months ended November 30, 2019 and 2018 $3,000 and $3,085, respectively, in royalties and licensing fees related under these agreements.

 

 

NOTE 8: SUBSEQUENT EVENTS

 

Management has evaluated subsequent events from November 30, 2019 through the date the condensed consolidated financial statements were issued, and has concluded that no subsequent events have occurred that would require recognition or disclosure in these condensed consolidated financial statements.

 

 

NOTE 9:  INCOME TAX

 

Tax Cuts and Jobs Act

 

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

 

In connection with the Company's initial analysis 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. Due to the Company having a full valuation allowance related to their deferred taxes, the $282,408 discrete tax expense associated with the remeasurement was equally offset by the valuation allowance causing an overall net zero impact on the Company's current tax rate.

 

We recorded a provision for income taxes of $0 for the quarter ended November 30, 2019 related to state taxes, based on the Company’s expected annual effective tax rate.

 

 

 

 

 

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

 

This discussion summarizes the significant factors affecting the operating results, financial condition and liquidity and cash flows of Seychelle Environmental Technologies, Inc., and subsidiaries (the "Company") as of and for the three and nine month periods ended November 30, 2019 and 2018. 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 condensed consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2019.  Except for historical information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the Company's control.

 

Forward-Looking Statements

 

Certain statements contained herein are "forward-looking" statements.  Forward-looking statements include statements which are predictive in nature; which depend upon or refer to future events or conditions; or which include words such as "expects", "anticipates", "intends", "plans", "believes", "estimates", or variations or negatives thereof or by similar or comparable words or phrases. In addition, any statement concerning future financial performance, ongoing business strategies or prospects, and possible future Company actions that may be provided by management are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about the Company; and economic and market factors in the countries in which the Company does business, among other things. These statements are not guarantees of future performance, and the Company has no specific intentions to update these statements. Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors including, among others:

 

(1)	the portable water filtration industry is in a state of rapid technological change, which can render the Company's products obsolete or unmarketable;
(2)	any failure by the Company to anticipate or respond to technological developments or changes in industry standards or customer requirements, or any significant delays in product development or introduction, could have a material adverse effect on the Company's business, operating results and financial condition;
(3)	the Company's cost of sales may be materially affected by increases in the market prices of the raw materials used in the Company's assembly processes;
(4)	the Company's 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.

 

 

 

Description of the Business

 

We were incorporated under the laws of the State of Nevada on January 23, 1998 as a change of domicile to Royal Net, Inc., a Utah corporation that was originally incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies, Inc. effective in January 1998.

 

On January 30, 1998, we entered into an Exchange Agreement with Seychelle Water Technologies, Inc., a Nevada corporation ("SWT"), whereby we exchanged our issued and outstanding capital shares with the shareholders of SWT on a one share for one share basis. We became the parent company and SWT became a wholly owned subsidiary. SWT had been formed in 1997 to market water filtration systems of Aqua Vision International.

 

Our Company is presently comprised of Seychelle Environmental Technologies, Inc., a Nevada corporation, with 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 distributes unique, state-of-the-art ionic absorption micron filters for portable filter devices that remove up to 99.99% of all pollutants and contaminants found in any fresh water source.  

 

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

 

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

 

Results of Operations

 

Our summarized historical financial data is presented in the following table to aid in your analysis. You should read this data in conjunction with this section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations, our condensed consolidated financial statements and the related notes to the condensed consolidated financial statements included elsewhere in this report. The selected condensed consolidated statements of operations data for the three and nine month periods ended November 30, 2019 and 2018 are derived from our condensed consolidated financial statements included elsewhere in this report.

 

Three month period ended November 30, 2019 compared to the corresponding period in 2018

 

										Period over
		2019				2018				Period change				%
Sales		$	816,001			$	609,444				206,557				34	%
Cost of sales			422,496				292,296				130,200				45	%
Gross profit			393,505				317,148				76,357				24	%
Gross profit %			48	%			52	%			37	%
Selling, general, and administrative			373,053				429,650				(56,597	)			(13	%)
Depreciation and amortization			11,747				13,294				(1,547	)			(12	%)
Other income (expense)			1,713				(462	)			2,175				(471	%)
Income (loss) before income tax expense			10,418				(126,258	)			136,676				(108	%)
Provision for income taxes			-				-				-
Net income (loss)			10,418				(126,258	)			133,676				(108	%)

 

 

 

 

 

Sales. Sales increased by $206,557 or 34% to $816,001 during the three months ended November 30, 2019 from $609,444 during the three months ended November, 2018.  The increase is primarily due to increase in sales of our pitcher, pitcher replacement and pitcher custom product lines. Sales during the three months ended November 30, 2019 of this product line were $523,428, compared to $401,386 in the comparable current period 2018.

 

Cost of sales and gross profit percentage. As a percentage of sales, the gross profit margin during the three months ended November 30, 2019 decreased to 48% from 52%.  The product mix and timing of significant sales is always an important factor in the resulting profit margins reported.  The Company believes that the average gross margin percentages overall could eventually be in a range around approximately 45% in the foreseeable future.

 

Selling, general, and administrative expenses. These expenses decreased by $56,597, or (13%), during the three months ended November 30, 2019 compared to the same period ended in the prior year.  The decrease was a direct result of the decrease in legal and advertising costs.

 

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

 

Income tax benefit (expense).  The Company did not record a provision due to a net loss carry forward.

 

Net income (loss). Net income for the three months period ended November 30, 2019 was $10,418 compared to net loss for the three months period ended November 30, 2018 of $126,258. 

 

Nine month period ended November 30, 2019 compared to the corresponding period in 2018

 

										Period over
		2019				2018				Period change				%
Sales		$	2,287,343			$	2,479,023				(191,680	)			(8	%)
Cost of sales			1,238,968				1,246,809				(7,841	)			(1	%)
Gross profit			1,048,375				1,232,214				(183,839	)			(15	%)
Gross profit %			46	%			50	%			96	%
Selling, general, and administrative			1,078,073				1,352,421				(274,348	)			(20	%)
Depreciation and amortization			36,560				41,296				(4,736	)			(11	%)
Other income (expense)			425				(1,584	)			2,009				(127	%)
Loss before income tax expense			(65,833	)			(163,087	)			97,254				(60	%)
Income tax expense			(1,600	)			-				(1,600	)
Net loss			(67,433	)			(163,087	)			95,654				(59	%)

 

Sales. Sales decreased by $191,680 or 8% to $2,287,343 during the nine months ended November 30, 2019.  The decrease is primarily due to a decrease in sales of our pitcher product lines.

 

Cost of sales and gross profit percentage. As a percentage of sales, the gross profit margin during the nine months ended November 30, 2019 decreased to 46% from 50%.  The product mix and timing of significant sales is always an important factor in the resulting profit margins reported.  The Company believes that the average gross margin percentages overall will remain in a range around approximately 45% in the foreseeable future.

 

Selling, general, and administrative. These expenses decreased by $274,348, or (20%), during the nine months ended November 30, 2019 compared to the same period in the prior year.  The decrease was a direct result of the decrease in legal and advertising costs.

 

 

 

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

 

Income tax expense.  The Company recorded an income tax expense of $1,600 during the nine months period ended November 30, 2019.

 

Net loss. Net loss for the nine month period ended November 30, 2019 was $67,433 compared to net loss for the nine month period ended November 30, 2018 of $163,087 due to decrease in sales of $191,680, offset by the decrease in selling, general and administrative expense of $274,348.

 

Net cash from operating activities. During the nine month period ended November 30, 2019, cash provided in operating activities was $65,489, compared to cash used in operating activities of $13,302 in the same period during 2018. This was primarily due to increase in customer deposits, collections of accounts receivable and related party receivable, increase in inventories and prepayments.

 

Net cash from investing activities. During the nine month period ended November 30, 2019, the Company spent $4,861 on capital expenditures.  In comparable period of the prior year, the Company spent $14,259 on capital expenditures.

 

Net cash from financing activities. Cash used in financing activities during the nine month period ended November 30, 2019 was $4,401 compared to $3,966 during the comparable period. This is was a result of capital lease repayments.

 

Management's Plan. As of November 30, 2019, the Company had $2,134,349 in cash and cash equivalents, $453,454 in accounts receivable and a backlog of $413,389 in unshipped product.  The Company is continuing to develop products and improve technology. The Company plans to release a variety of new 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 its financial condition and results of operations are based upon its condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

 

The Company believes that the estimates, assumptions and judgments involved in the accounting policies described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of its most recent Annual Report on Form 10-K have the greatest potential impact on its consolidated financial statements, so it considers these to be its critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates the Company uses in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for inventory reserves and stock-based compensation. These policies require that the Company make estimates in the preparation of its consolidated financial statements as of a given date.

 

Within the context of these critical accounting policies, the Company is not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. There were no material changes to the Company's critical accounting policies or estimates during the nine month period ended November 30, 2019.

 

In May 2014, the Financial Accounting Standards Board ("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 of transactions to determine when and how revenue is recognized. The premise of the standard is that a Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the guidance effective March 1, 2018 using the modified retrospective approach. The adoption of this guidance did not have a significant impact on our consolidated financial statements.

 

 

 

In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which amended the existing accounting standards for lease accounting to increase transparency and comparability among organizations by requiring the 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 for periods presented before March 1, 2019 as these prior periods conform to the Accounting Standards Codification 840. We elected the package of practical expedients permitted under the transition guidance within the new standard. By adopting these practical expedients, we were not required to reassess (1) whether an existing contract meets the definition of a lease; (2) the lease classification for existing leases; or (3) costs previously capitalized as initial direct costs. We evaluated all leases within this scope under existing accounting standards and under the new ASU lease standard recognized approximately $580,000 of operating right-of-use assets and lease liabilities at the date of adoption.

 

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

 

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

 

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

None.

 

 

ITEM 4.  CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file with the SEC under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and that such information 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 out an evaluation, under the supervision and with the participation of our management, including our principal executive and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-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 effective to ensure the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed and reported within the time periods specified in the SEC's rules and forms.

 

Management's Annual Report on Internal Control over Financial Reporting

 

The management of the Company is responsible for 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 of the Company's Chief Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with 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;

 

 

 

 

  

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

 

Management has used the framework set forth in the report entitled Internal Control-Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, management has concluded that our internal control over financial reporting was not effective as of November 30, 2019.

 

A material weakness is a deficiency, or combination of deficiencies, that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses at November 30, 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 weaknesses set forth in items (1) through (4) above did not have an effect on the Company's financial reporting during the period ended November 30, 2019.

 

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

 

We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are 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 over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during our first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

PART II - OTHER INFORMATION

 

ITEM 1.   LEGAL PROCEEDINGS

 

There is a pending legal action named Rolling Tides, LLC vs. Carl Palmer, Seychelle Environmental Technologies, Inc., and other defendants. The case was brought in the Superior Court of the State of California, County of Orange. The action alleges certain fraudulent transfers occurred from 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 February 2020. 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 Company believes that the case has no merit.

 

 

ITEM 1A. RISK FACTORS

 

There have been no changes to our Risk Factors included 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 SECURITIES AND USE OF PROCEEDS

 

During the quarter ended November 30, 2019, the Company did not issue any securities.

 

 

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

 

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

 

 

 

 

 

SIGNATURES

 

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

 

	Seychelle Environmental Technologies, Inc.
Date: January 14, 2020	By:	/s/ Cari Beck
		Cari Beck Director, Chief Executive Officer and Chief Financial Officer