SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CA - Quarter Report: 2016 August (Form 10-Q)

August 31, 2016

During the three month periods ended August 31, 2016 and 2015, the Company incurred consulting fees to related parties in the amounts of $25,000 and $25,000, respectively. During the six month periods ended August 31, 2016 and 2015, the Company incurred consulting fees to related parties in the amounts of $25,000 and $75,000, respectively. These fees were related to TAM, in which Cari Beck, is the trustee and current Board member, as well as a daughter of Carl Palmer, 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. All amounts due to TAM had been paid in full as of August 31, 2016 and 2015.  

During the three month periods ended August 31, 2016 and 2015, TAM purchased, on behalf of the Company, $12,350 and $208,000, respectively, of raw materials from a vendor with which it already had a business relationship. During the six month periods ended August 31, 2016 and 2015, TAM purchased, on behalf of the Company, $20,090 and $393,000, respectively, of raw materials, and paid $0 and $3,500, respectively, for related tooling to a vendor with which it already had a business relationship.

 

TAM has also verbally committed to provide up to $500,000 in funding as a line of credit on behalf of Seychelle, if required, but is not legally obligated to do so. 

August 31, 2016

On October 7, 2016, Mr. James Place, Director, President, Treasurer and CFO, resigned from the Board of Directors and the Company.  There were no disagreements between the Company and Mr. Place. Also on October 7, 2016, Mr. Carl Palmer became the President and Chief Financial Officer, as well as retaining the title of Chief Executive Officer. Ms. Cari Beck became the Treasurer as well as retaining the title of Secretary and Director.

- 15 -

---

 

 

 

- 17 -

---

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 2016 Annual Report on Form 10-K/A 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-month period ended August 31, 2016.

On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which is effective for public entities for annual reporting periods beginning after December 15, 2017. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle 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. ASU 2014-09 shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements and has not yet determined the method by which the Company will adopt the standard in fiscal year 2018.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern—Disclosures of Uncertainties about an entity's Ability to Continue as a Going Concern ("ASU 2014-15"). ASU 2014-15 provides new guidance related to management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards and to provide related footnote disclosures. This new guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company will adopt ASU 2014-15 at its current fiscal year-end on February 28, 2017.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update change existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of this standard.

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.

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 an aggregation of control deficiencies as more fully discussed in the Company's Form 10-K/A for the year ended February 29, 2016 filed with the Securities and Exchange Commission have been addressed and remedied. However, as a result of the changes in internal control noted below, we have concluded that the Company has a material weakness resulting from inadequate segregation of duties in the accounting and financial reporting functions.  Therefore, we have concluded that our disclosure controls and procedures are not effective.

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. 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.

On September 26, 2016, the Company was served with a complaint by a former employee alleging breach of contract in a case titled Josh Proffit vs. Seychelle Environmental Technologies, Inc., et, al., brought in the Superior Court for the State of California, Orange County District.  The Company believes the case is without merit and intends to vigorously defend itself in this matter. No outcome can be determined at this time.

THE OWNERSHIP AND INVESTMENT IN OUR SECURITIES INVOLVES SUBSTANTIAL RISKS. OUR COMMON SHARES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS RELATING TO OUR COMPANY

We Were Profitable for Our Most Recent Fiscal Year End and in Six of Our Seven Most Recent Fiscal Years. However, We Were Not Profitable In Our Most Recent Fiscal Quarter. We Cannot Guarantee That We Will Ever Continue to Conduct Profitable Operations.

We recorded a net loss of $148,466 for our most recent fiscal quarter. We also recorded net income and positive cash flows from operations for the most recent fiscal year ending February 29, 2016. We had the following net income (loss) for the years ending:

 

While we believe that we have had a successful operating history, we cannot guarantee that we will ever continue to be profitable.  If we do not continue to be profitable, we may go out of business, and an investor could lose his entire investment.

We Have a Significant Dependence on a Few Customers.

Sales to one customer accounted for 27% and 35% of sales for the three and six month periods ended August 31, 2016, respectively. Accounts receivable from three customers amounted to $290,720 or approximately 63% of accounts receivable as of August 31, 2016.

Sales to two customers accounted for 61% and 66%, respectively, of sales for the three and six month periods ended August 31, 2015. Accounts receivable from these two customers amounted to $166,861 or approximately 37% of accounts receivable as of August 31, 2015. Two other customers amounted to $194,500 or approximately 43% of accounts receivable as of August 31, 2015.

 

 

 

 

 

During the fiscal year ended February 29, 2016, the Company had three customers who accounted for approximately 34%, 28% and 14% (or 76% total) of total sales during the fiscal year ended February 29, 2016. One of those customers accounted for approximately 22% of net accounts receivable as of February 29, 2016. As of February 28, 2015, the Company had four customers who accounted for approximately 76% of net accounts receivable (37%, 14%, 13% and 12%, respectively). These four customers accounted for approximately 7%, 33%, 12% and 14% (or 66% total) of total sales during the fiscal year ended February 28, 2015.  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.

Our most significant customer in fiscal 2016 appears to have ceased business and will presumably no longer be available to purchase our products. The loss of business from this customer could have a materially adverse effect on our revenues in the short term and in the long term if these revenues are not replaced by new products and other existing or new customers.

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 these patents expire in 2016 and 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.

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

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.

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.

- 24 -

---

On October 7, 2016, Mr. James Place, Director, President, Treasurer and CFO, resigned from the Board of Directors and the Company.  There are no disagreements between the Company and Mr. Place. Also on October 7, 2016, Mr. Carl Palmer became the President and Chief Financial Officer, as well as retaining the title of Chief Executive Officer and Director. Ms. Cari Beck became the Treasurer well as retaining the title of Secretary and Director.

 

Three reports were filed under cover of Form 8-K for the fiscal quarter ended August 31, 2016 regarding Seychelle's financial operations (July 18, 2016); the election of two new directors (August 10, 2016); and the change of Seychelle's independent CPA's (August 31, 2016).