Seychelle Environmental Technologies Inc (SYEV) SEC Quarterly Report (10-Q) for Q2 2016

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 May 31, 2016, and for all periods presented herein, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K/A for the year ended February 29, 2016.  The results of operations for the periods ended May 31, 2016 and 2015 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 consolidated financial statements. The 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 accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the condensed consolidated financial statements and the February 29, 2016 consolidated financials included in the 10-K/A filed on June 16, 2016.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

NOTE 2:    MANAGEMENT'S PLAN

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

The denominator for diluted income (loss) per share for the period ended May 31, 2016 did not include warrants as they would have been anti-dilutive. At May 31, 2016 and 2015, 6,407,221 and 5,464,137 warrants, respectively, were excluded from the denominator for diluted income (loss) per share.

Common Stock

Warrants

The Company had previously granted warrants to selected members of management and determined the estimated value of warrants granted using the Black-Scholes option pricing model. The warrants became fully vested during the year ended February 29, 2016.  The amount of the expense charged to operations for these warrants was $0 and $67,199 for the three months ended May 31, 2016 and 2015, respectively.  

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Cost of sales and gross profit percentage. As a percentage of sales, the gross profit margin during the three months ended May 31, 2016 decreased from 54% to 35%. The largest decrease to our sales was directly related to the launch of our aforementioned pH2O product line. During the three months ended May 31, 2015, we were selling this product with strict minimum order quantities that allowed us to achieve greater profit margins, averaging 68% during the three months ended May 31, 2015. As competition for home and portable pH products increased, we introduced lower priced pH products and also began selling below previously established minimum order quantities. As a result, profit margins on the pH products decreased, averaging 47% during the three months ended May 31, 2016. Sales of the pH products decreased approximately $624,000 (63%), and the remaining product mix sold during the three months ended May 31, 2016, resulted in a lower gross margin.  The product mix and timing of significant sales is always a significant factor in the resulting profit margins reported.  The Company expects to market its new world filter product at a 50% gross margin, and therefore believes that the average gross margin percentages overall will remain at approximately 45% in the foreseeable future.

Selling, general and administrative expenses. These expenses increased by approximately $451,000, or 82%, during the period ended May 31, 2016 compared to the same period ended in the prior year.  The increase was largely a direct result of the increase in legal and personnel costs incurred in a restructuring of the Company's management and Board of Directors that occurred during the three months ended May 31, 2016. On March 18, 2016, the Board of Directors removed Mr. Carl Palmer from all of operational duties with the Company. Mr. Palmer remained a Director. On April 26, 2016, the Board of Directors voted to return Mr. Palmer to CEO, with a co-management structure for senior management where Mr. James Place became President. This decision of the Board is the result of extensive negotiations on how to best move the Company forward toward its sales and profit goals.

Depreciation and amortization expense .   Depreciation and amortization expense was increased due to additional fixed assets being added over the past year.

Income tax expense (benefit).  The Company recorded income tax benefit of approximately $285,000 due to the pretax loss of approximately $713,000 during the three-month period ended May 31, 2016 compared to a provision of approximately $245,000 due to the pretax income of approximately $718,000 during the three-month period ended May 31, 2015.

Net (loss) income. Net loss for the three-month period ended May 31, 2016 was $427,605, down $900,103 or 190% compared to net income of $472,498 for the three-month period ended May 31, 2015.  This was primarily due to a decrease of approximately $1.4 million in sales and an increase of approximately $451,000 in selling, general and administrative expenses. We remain focused on the primary factors affecting our bottom line and look to continue to improve the Company's profitability in the upcoming periods during fiscal 2017 as noted previously in both the sales and cost of sales/gross profit percentage sections.

Net cash provided by (used in) operating activities. During the three-month period ended May 31, 2016, cash used in operating activities was approximately $1,272,000, compared to $641,000 in the same period during 2015. This was primarily as the result of our net loss of approximately $428,000, paying $300,000 in accounts payable and other accrued expenses, purchasing $195,000 in inventory, paying $51,000 in prepaid expenses and deposits, and making an $80,000 payment on our income tax liability. We also increased our deferred tax assets by $285,000 and wrote off a previously reserved for sale of approximately $104,000. This was offset by net collection on accounts receivable of $29,000 and the add-back of non-cash expenses for stock based compensation and depreciation and amortization, the net of which was approximately $140,000.

Net cash used in investing activities. During the three-month periods ended May 31, 2016 and 2015, the Company spent approximately $23,000 and $11,000, respectively, on capital expenditures.

Net cash provided by financing activities. Cash used in financing activities during the three month period ended May 31, 2016 increased to approximately $20,000, compared to approximately $500 during the comparable prior period. This was a result of the addition of a capital lease, causing capital lease repayments to increase to $2,700 during the three month period ended May 31, 2016 compared to $500 during the three month period ended May 31, 2015. Additionally, the Company repurchased 30,000 shares of common stock at a cost of $17,400 during the three months ended May 31, 2016, with no comparable transactions during the three months ended May 31, 2015.

As of May 31, 2016, the Company had $747,846 in cash, $299,156 in accounts receivable and a backlog of $34,000 in unshipped product. Additionally, the Company has developed an innovative new concept of a world filter product to sell in the world where quality drinking water is not available. Both the bottle and cap will to be sourced locally to make the finished product competitive in the international market. The Company initiated these foreign sales plans subsequent to year-end with the appointment of its first international exclusive sales agent. Accordingly, management believes that over the next twelve months, sufficient working capital and liquidity will be obtained from revenues to sustain operations.  The TAM Trust has also committed to providing up to $500,000 in additional funding, if required.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5.  OTHER INFORMATION