Seychelle Environmental Technologies Inc (SYEV) SEC Quarterly Report (10-Q) for Q4 2016

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Sales. The decrease in sales to $2.9 million during the nine months ended November 30, 2016 compared to $8.3 million during the nine months ended November 30, 2015, a decrease of 65% is primarily due to our largest customer ceasing ordering in February 2016. There were no sales to this customer during the nine month period ended November 30, 2016 and the likelihood of this customer continuing to purchase our product in the future is remote.  The loss of business from this customer has had a material adverse effect on our revenues in the short term and may continue to have a material adverse effect on our revenues in the long term if these revenues are not replaced by expanded sales to existing or new customers.

While the Company has experienced decreased sales and anticipates lower total sales in the current fiscal year, the Company has developed an innovative new concept of a world filter product to sell worldwide where quality drinking water is not available.  Both the bottle and the cap will be sourced locally to make the finished product competitive in the international market.  The Company initiated these foreign sales plans during the three months ended August 31, 2016 with the appointment of its first international sales agent in Sri Lanka.  In addition to this appointment, we have identified sales agents for India, South Korea and the Philippines and are pursuing other contacts to dramatically expand this effort to expand our customer base.  Accordingly, management believes that over the remainder of the fiscal year, sufficient working capital and liquidity will be obtained from revenues to sustain operations

Cost of sales and gross profit percentage. As a percentage of sales, the gross profit margin during the nine months ended November 30, 2016 decreased to 32% from 51% as compared to the comparable period of the previous year. Such variations are the result of changes in on product mix and additional overhead charged in the nine months ended November 30, 2016 due to lower sales and inventory levels compared to the prior year.

Selling, general and administrative expenses.  These expenses increased by $59,856 or 3% during the nine months ended November 30, 2016 compared to the same period in the prior year. The Company's management expects selling, general and administrative expenses to increase during the remainder of the current fiscal year because we plan to hire additional production employees to handle increases in sales.

Depreciation and amortization expense.   Depreciation and amortization expense increased by $10,077 during the nine month period November 30, 2016 compared to period ended November 30, 2015.

Income tax expense (benefit).  The Company recorded an income tax $385,211 during the nine month period ended November 30, 2016 due to pretax loss of $1,262,252compared to provision of $705,820 due to the pretax income of $2,064,357 during the nine month period ended November 30, 2015.

Net income (loss). Net loss of $877,041 for the nine month period ended November 30, 2016 compared to net income for the nine month period ended November 30, 2015 was $1,358,537.  This was primarily due to the decrease in sales of approximately $5.4 million during the nine month period ended November 30, 2016.  

Liquidity and Capital Resources

Net cash provided operating activities. During the nine month period ended November 30, 2016 cash used in operating activities was $1,518,159 compared to during the nine month period ended November 30, 2015, cash provided by operating activities was $433,885, primarily as the result of the net loss reported for the period of $877,041.

Net cash used in investing activities. During the nine month period ended November 30, 2016, the Company spent $25,582 on capital expenditures.

Net cash provided by financing activities. Cash used in financing activities totaled $25,669 during the nine month period ended November 30, 2016 which consisted of $17,400 of common stock repurchased and repayments of capital lease obligations in the amount of $8,269.

Critical Accounting Policies and Estimates

The Company's discussion and analysis of its financial condition and results of operations are based upon its condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

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None.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a -15(e) and 15(d)-15(e) under the Exchange Act), our Chief Executive Officer and the Chief Financial Officer  has concluded that the Company has a material weakness resulting from inadequate segregation of duties in the accounting and financial reporting functions because we combined the functions of Chief Executive Officer and the Chief Financial Officer with one person and require our staff controller to report directly to that person. Therefore, we have concluded that our disclosure controls and procedures are not effective.

Otherwise, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 240.13a-15 or Rule 240.15d-15 of this chapter that occurred during our most recent fiscal three months that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

This report does not include an attestation report by the Company's independent registered public accounting firm regarding internal control over financial reporting as we are not subject to this requirement.

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The Water Filtration Business is Subject to Intense Competition and Subject to Numerous Risks. Many of Our Competitors Have Substantially Greater Capabilities and Resources and May be Able to Develop and Commercialize Products Before We Do.

The water filtration business is highly competitive with many companies having access to the same market. Technological competition from larger and more established companies is significant and expected to increase. Most of the companies with which we compete and expect to compete have far greater capital resources and significant research and development staffs, marketing and distribution programs and facilities, and many of them have substantially greater experience in the production and marketing of products. Our ability to compete effectively may be adversely affected by the ability of these competitors to devote greater resources to the sale and marketing of their products than we can. In addition, one or more of our competitors may succeed or may already have succeeded in developing technologies and products that are more effective than any of those we currently offer or are developing. In addition, there can be no guarantee that we will be able to protect our technology from being copied or infringed upon. There can be no assurance that we will have the necessary resources to be competitive. Therefore, investors should consider an investment in us to be an extremely risky venture.

As an Organization, We are Dependent Upon Technology for the Development of Our Products.

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

Our Success as an Organization Depends, in Large Part, Upon Our Ability to Protect Our Intellectual Property Rights.

A successful challenge to the ownership of our technology could materially damage our business prospects. We rely principally on trade secrets as well as trade secret laws, two patents, five trademarks, copyrights, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We currently have two U.S. patents issued and a license on one patent. As one of these patents expire d in 2016 and the other will expire in 2017, respectively, we cannot at this time estimate the financial impact of the expiration of these patents.  Any issued patent may be challenged and invalidated. Patents may not be issued from any of our future applications. Any claims allowed from existing or future pending patents may not be of sufficient scope or strength to provide significant protection for our products. Patents may not be issued in all countries where our products can be sold so as to provide meaningful protection or any commercial advantage to us. Our competitors may also be able to design around our patents or the patents that we license.

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

Our Success is Dependent Upon the Decision Making of Our Directors and Executive Officers.

Our directors and executive officers have made a full commitment to our business. The loss of any or all of these individuals, particularly Mr. Carl Palmer, would have a materially adverse impact on our operations because we have no succession plan for any of them. We will depend on our senior executive officers, particularly Mr. Carl Palmer, as well as other key personnel.  If Mr. Palmer or any key employee decides to terminate his employment with us, this termination could delay the commercialization of our products or prevent us from sustaining our profitability. Competition for qualified employees is intense among companies in our industry and the loss of qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for the expansion of our activities, could hinder our ability to successfully develop and maintain marketable products. 

The Acquisition of Other Technologies Could Result In Operating Difficulties, Dilution and Other Harmful Consequences .  

We may selectively pursue strategic acquisitions, any of which could be material to our business, operating results and financial condition.  Future acquisitions could divert management's time and focus from operating our business.  In addition, integrating an acquired technology is risky and may result in unforeseen operating difficulties and expenditures.

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

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We Face Risks Associated With Currency Exchange Rate Fluctuations.  

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

Changes to Financial Accounting or Other Standards May Affect Our Operating Results and Cause Us To Change Our Business Practices.

We prepare our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States.  These accounting principles are issued by the Financial Accounting Standards Board (FASB).  The Securities and Exchange Commission also provides interpretation, guidance and principles in the preparation of financial statements.  A change in those policies could have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced.

We Recently Have Noted the Existence of A Material Weakness. If We Fail in Maintaining Effective Internal Control Over Financial Reporting, The Price of Our Common Stock May be Adversely Affected.  

As of the date of this Form 10Q, we made changes in our internal control over financial reporting by combining the functions of Chief Executive Officer and the Chief Financial Officer with one person and having our staff controller report directly to that person. As a result, the Company has concluded that, with this present organization, the Company has a material weakness resulting from inadequate segregation of duties in the accounting and financial reporting functions. We are required to establish and maintain appropriate internal control over financial reporting.  Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosure regarding our business, financial condition or results of operations.  In addition, our future assessments of internal control over financial reporting may identify additional weaknesses and conditions that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors.  Any material weaknesses that needs to be addressed in management's assessment of our internal control over financial reporting or in the report on the effectiveness of our internal controls by our independent registered public accounting firm, when, and if, applicable, may have an adverse impact of our common stock.

If We Fail to Comply with Section 404 of the Sarbanes-Oxley Act of 2002 in a Timely Manner, Our Business Could Be Harmed and Our Stock Price Could Decline.  

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require management's annual assessment of our internal control over financial reporting.  The standards that must be met for the management to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing, and possible remediation to meet the detailed standards.  We have incurred significant expenses and we devote resources to Section 404 compliance on an ongoing basis.  In the event that our Chief Executive Officer and Chief Financial Officer determine that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react on how the market prices of our shares will be affected, however, we believe that there is a risk that investor confidence and share value may be negatively impacted.

Maintaining and Improving Our Financial Controls and The Requirements Of Being a Public Company May Strain Our Resources, Divert Management's Attention, and Affect Our Ability to Attract and Retain Qualified Members For Our Board of Directors.  

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002.  The requirements of these rules and regulations increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and may also place undue strain on our personnel, systems, and resources.  The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting.  Fulfilling this requirement can be difficult to achieve and maintain.

As a result, management's attention may be diverted from other business concerns, which could harm our business, operating results and financial condition.  These efforts also involve substantial costs

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We May be Impacted By the Implementation of Regulatory Requirements as a Result of the Passage of the Dodd-Frank Act.

In July, 2010, Congress enacted the Dodd-Frank Act, which instituted major changes in the regulatory regime for public companies. At the present time, we do not believe that Seychelle will be impacted in a material way by this legislation. However, the implementation of the provisions of the Dodd-Frank Act is subject to regulations which have not yet been written and its statutory provisions have not been the subject of extensive judicial review, so we cannot guarantee that we may not come under its purview at some point in the future and be affected negatively by it.

Our Articles of Incorporation and Bylaws Could Discourage Acquisition Proposals, Delay a Change in Control, or Prevent Other Transactions.

Provisions of our articles of incorporation and bylaws, as well as provisions of the Nevada Business Corporation Act, may discourage, delay or prevent a change in control of our Company that you as a stockholder may consider favorable and may be in your best interest. Our certificate of incorporation and bylaws contain provisions that:

Our Stock Price Can Be Volatile.

The future market price of our common stock could fluctuate widely because of:

The stock market has experienced price and volume fluctuations that have particularly affected the market price for many emerging companies. These fluctuations have often been unrelated to the operating performance of these companies. These broad market fluctuations may cause the market price of our common stock to be lower or more volatile than otherwise expected.

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Buying Penny Stocks is Very Risky and Speculative. The Applicability of the "Penny Stock Rules" to Broker-dealer Sales of Our Common Stock Will Have a Negative Effect on the Liquidity and Market Price of Our Common Stock.

Trading in our shares is subject to the "penny stock rules" adopted pursuant to Rule 15g-9 of the Securities and Exchange Act of 1934, as amended, which apply to companies that are not listed on an exchange and whose common stock trades at less than $5.00 per share or which have a tangible net worth of less than $5,000,000 - or $2,000,000 if we have been operating for three or more years. The penny stock rules impose additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the penny stock rules will affect the ability of broker-dealers to sell shares of our common stock and may affect the ability of shareholders to sell their shares in the secondary market, as compliance with such rules may delay and/or preclude certain trading transactions. The rules could also have an adverse effect on the market price of our common stock.

These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock. Many brokers may be unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult for stockholders to dispose of their shares. You will also find it difficult to obtain accurate information about, and/or quotations as to the price of our common stock.

We have added a stock broker to create or maintain a market in our common stock, which could favorably impact the price and liquidity of our securities.

We Do Not Expect to Pay Dividends on Our Common Stock.

We have not paid any cash dividends with respect to our common stock, and it is unlikely that we will pay any dividends on our common stock in the foreseeable future, as we are a growth company.

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

None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5.  OTHER INFORMATION

None