SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CA - Quarter Report: 2015 August (Form 10-Q)

Cost of sales and gross profit percentage. As a percentage of sales, the gross profit margin during the three months ended August 31, 2015 increased from 43% to 52% as compared to the comparable period of the previous year. The largest increase to our sales was directly related to the launch of our aforementioned pH2O product line. We are selling this product with strict minimum order quantities that allow us to achieve greater profit margins, averaging 68% during the three months ended August 31, 2015.  Additionally, our National Sales Manager (a position created and filled subsequent to the three months ended August 31, 2014), introduced a Minimum Advertised Pricing policy during the three months ended May 31, 2015 that has allowed us to increase our margins with customers who market our products online, as well as increased sales prices on our own website store.  The product mix and timing of significant sales is always a significant factor in the resulting profit margins reported.  The Company expects the gross margin percentages to remain at approximately 50% in the foreseeable future.

 

Selling, general and administrative expenses. These expenses decreased by $56,794, or 9%, during the period ended August 31, 2015 compared to the same period in the prior year. This decrease was largely a result of a decreased need for third-party consultants during the current quarter, as well as certain moving and product packaging development expenses that were incurred during the period ended August 31, 2014, but not in the current period. We anticipate slight increases in sales, general and administrative expenses in future quarters to accommodate our expanding markets and product lines, which are driving increases in sales.

The Archette case was settled on March 4, 2015 and there were no further legal expenses related to the case incurred during the period ended August 31, 2015.

Depreciation and amortization expense.  Depreciation and amortization expense was relatively flat from period to period, but the slight increase is due to additional tooling, and a Company vehicle being purchased during the period ended August 31, 2015.

Income tax expense (benefit).  The Company recorded income tax provision of approximately $268,000 due to the pretax income of approximately $783,000 during the three month period ended August 31, 2015, compared to a benefit of approximately $206,000 due to the pretax loss of approximately $548,000 during the three month period ended August 31, 2014.

 

Net income (loss). Net income for the three month period ended August 31, 2015 was $515,077, up 250% compared to net loss of $342,588 for the three month period ended August 31, 2014.  This was primarily due to an increase of approximately $1.9 million in sales during the three month period ended August 31, 2015.  Additionally, the improved margins and decrease in selling, general and administrative expenses and legal expense discussed above contributed to the net income during the three months ended August 31, 2015. We remain focused on the primary factors affecting our bottom line and expect the Company's profitability to continue during fiscal 2016 and future fiscal years.

 

  

 

Sales. The increase in sales to $5.1 million during the six months ended August 31, 2015 from $1.9 million during the three months ended August 31, 2014 (171%) is primarily due the launch of our pH2O product line, which increases the alkalinity of municipal water to between 8.0-9.5 pH. Sales during the six months ended August 31, 2015 of this product line were approximately $1.9 million, compared to nothing in the comparable period 2014. Additionally, we had one customer (who has not purchased any product from the pH2O line) that has developed a private label pitcher and bottle, and significantly increased its distribution line, with sales increasing from $106,000 during the six months ended August 31, 2014 to $1,249,000 during the six months ended August 31, 2015. Additionally, during the third quarter ended November 30, 2014, we hired a National Sales Manager to assume some of the sales and larger customer relationship roles, and to develop sales programs with our smaller customers to increase their sales and broaden our customer base. We anticipate continued sales improvements during the balance of this fiscal year, and in the subsequent fiscal year as we expand our distribution of the pH2O product line and continue to strengthen relationships with existing customers.

Cost of sales and gross profit percentage. As a percentage of sales, the gross profit margin during the six months ended August 31, 2015 increased from 46% to 53% as compared to the comparable period of the previous year. The largest increase to our sales was directly related to the launch of our aforementioned pH2O product line. We are selling this product with strict minimum order quantities that allow us to achieve greater profit margins, averaging 68% during the six months ended August 31, 2015.  Additionally, our National Sales Manager (a position created and filled subsequent to the three months ended August 31, 2014), introduced a Minimum Advertised Pricing policy during the three months ended May 31, 2015 that has allowed us to increase our margins with customers who market our products online, as well as increased sales prices on our own website store.  The product mix and timing of significant sales is always a significant factor in the resulting profit margins reported.  The Company expects the gross margin percentages to remain at approximately 50% in the foreseeable future.

Selling, general and administrative expenses. These expenses decreased by $70,747, or 6%, during the six months ended August 31, 2015 compared to the same period in the prior year. This decrease was largely a result of a decreased need for third-party consultants during the current period, as well as moving and product packaging development expenses that were incurred during the period ended August 31, 2014, but not in the current period. We anticipate slight increases in sales, general and administrative expenses in future quarters to accommodate our expanding markets and product lines, which are driving increases in sales.

The Archette case was settled on March 4, 2015 and there were no further legal expenses related to the case incurred during the six months ended August 31, 2015.

Depreciation and amortization expense.  Depreciation and amortization expense was relatively flat from period to period, but the slight increase is due to additional tooling and a Company vehicle being purchased during the period ended August 31, 2015.

Income tax expense (benefit).  The Company recorded an income tax provision of approximately $513,000 due to the pretax income of approximately $1,501,000 during the six month period ended August 31, 2015, compared to a benefit of approximately $244,000 due to the pretax loss of approximately $649,000 during the six month period ended August 31, 2014.

 

Net income (loss). Net income for the six month period ended August 31, 2015 was $987,585, up 344% compared to net loss of $405,316 for the six month period ended August 31, 2014.  This was primarily due to the increase in sales of approximately $3.2 million during the six month period ended August 31, 2015.  Additionally, the improved gross margins and decrease in selling, general and administrative expenses and legal expenses discussed above contributed to the net income during the six months ended August 31, 2015.  We remain focused on the primary factors affecting our bottom line and expect the Company's profitability to continue during fiscal 2016 and future fiscal years.

Liquidity and Capital Resources

Net cash provided operating activities. During the six month period ended August 31, 2015, cash provided by operating activities was approximately $210,000, primarily as the result of the net income reported for the period of approximately $988,000, compared to cash used in operating activities of approximately $396,000 during the six month period ended August 31, 2014. Additionally, we recorded a non-cash tax provision of approximately $513,000, issued stock-based compensation of approximately $218,000 and utilized prior period prepayments of approximately $20,000 during the current period. This was offset reducing our customer deposit liabilities by approximately $73,000, an increase in accounts receivable of approximately $153,000, a decrease in accounts payable and accrued expenses of approximately $48,000, a decrease of accrued legal and settlement fees of approximately $532,000, and an inventory increase of approximately $743,000.

 

Net cash used in investing activities. During the six month period ended August 31, 2015, the Company spent approximately $35,000 on capital expenditures. In the comparable period of the prior year, the Company spent approximately $34,000 on capital expenditures and $150,000 for intangible assets.

 

Net cash provided by financing activities. Cash used in financing activities during the six month period ended August 31, 2015 was relatively consistent with the comparable period in the prior year.

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As of August 31, 2015, the Company had approximately $1.7 million in cash and cash equivalents. The Company believes it has substantial liquidity to meet its operating needs through the balance of fiscal 2016.

 

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.

 

The Company believes that the estimates, assumptions and judgments involved in the accounting policies described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of its most recent fiscal 2015 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 six and three month periods ended August 31, 2015.

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers," which requires entities to recognize revenue in the way it expects to be entitled for the transfer of promised goods or services to customers.  The ASU will replace most of the existing revenue recognition requirements in U.S. GAAP when it becomes effective.  This pronouncement is effective for annual reporting periods beginning after December 15, 2017, as amended, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted.  The Company is currently evaluating the effect that this pronouncement will have on our consolidated financial statements and related disclosures.  

 

In August 2014, FASB issued ASU No. 2014-15, "Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern". Under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting. Even when an entity's liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this ASU should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will evaluate the going concern considerations in this ASU, however, at the current period, management does not believe that it has met conditions which would subject these condensed consolidated financial statements for additional disclosure.

In July 2015, FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory," which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out ("LIFO") or the retail inventory method. This ASU is effective for annual reporting periods beginning after December 15, 2016. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position and results of operations.

 

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.

 

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ITEM 1A. RISK FACTORS

There have been no changes to our Risk Factors included in our fiscal 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 29, 2015.

 

 

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

 

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None

 

 

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

 

None

 

ITEM 5.  OTHER INFORMATION

On June 1, 2015, 105,000 shares or restricted common stock were issued to employees and officers of the Company. Additionally, on the same date, 100,000, 20,000, and 10,000 shares of restricted common stock were issued to TAM, vendors, and TAM's trustee, respectively.

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