NOTES TO CONDENSED CONSOLIDATED (UNAUDITED)
FINANCIAL STATEMENTS
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 consolidated financial position, results of operations, and cash flows as of May 31, 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 May 31, 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 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 28, 2019 consolidated financials
included in the 10-K filed on May 29, 2019.
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.
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 the 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. 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:
|
2019
|
$147,509
|
|
|
2020
|
$258,181
|
|
|
2021
|
$153,209
|
|
|
Total
|
$558,899
|
|
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 February 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 (UNAUDITED)
FINANCIAL STATEMENTS
NOTE 2: BASIC INCOME PER SHARE
Basic income 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 income per share
for the three months ended May 31, 2018 included 2,336,683 warrants.
|
|
For the three months ended
|
|
|
May 31,
|
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
47,793
|
|
|
$
|
92,791
|
|
Weighted average shares – basic
|
|
|
26,574,313
|
|
|
|
26,574,313
|
|
Net income per share – basic
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents:
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
-
|
|
|
|
2,336,683
|
|
Weighted average shares – diluted
|
|
|
26,574,313
|
|
|
|
28,910,996
|
|
Net income per share – diluted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
NOTE 3: COMMON STOCK
Common Stock
During the quarter ended May 31, 2019 and 2018, no shares
of restricted stock were issued by the Company.
Warrants
A summary of warrant activity for the
three months ended May 31, 2019 is shown below.
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding at March 1, 2019
|
|
|
6,407,221
|
|
|
$
|
0.21
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding at May 31, 2019
|
|
|
6,407,221
|
|
|
|
0.21
|
|
Vested at May 31, 2019
|
|
|
6,407,221
|
|
|
|
0.21
|
|
Exercisable at February 28, 2019
|
|
|
6,407,221
|
|
|
$
|
0.21
|
|
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED (UNAUDITED)
FINANCIAL STATEMENTS
NOTE 3: COMMON STOCK (continued)
The
following table summarizes significant ranges of outstanding warrants as of May 31, 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
|
|
1.54
|
|
$0.21
|
|
|
6,407,221
|
|
$0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4: INVENTORY
The Company's inventory consisted of the following at May 31, 2019
and February 28, 2019:
|
|
May 31,
2019
|
|
February 28,
2019
|
Raw materials
|
|
$
|
622,630
|
|
|
$
|
382,658
|
|
Finished goods
|
|
|
497,126
|
|
|
|
589,839
|
|
Net inventory
|
|
$
|
1,119,756
|
|
|
$
|
972,497
|
|
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 four customers accounted for 79% sales
for the three month period ended May 31, 2019. Accounts receivable from these customers accounted to approximately $274,000
or 93% of accounts receivable as of May 31, 2019.
Sales to three customers accounted for 71%
of sales for the three month period ended May 31, 2018. Accounts receivable from these customers accounted to approximately $532,000
or 71% of accounts receivable as of May 31, 2018.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES,
INC.
NOTES TO CONDENSED CONSOLIDATED (UNAUDITED)
FINANCIAL STATEMENTS
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 three months ended May 31, 2019 and 2018, purchases facilitated through the related party accounted for approximately 41%
and 20%, respectively, of total raw material purchases. The Company paid approximately $9,000 and $16,000 in direct commissions
to the related party consultant during the three months ended May 31, 2019 and 2018, respectively.
The Company had advanced amounts to employee
of approximately $26,000 and $27,000 as of May 31, 2019 and 2018, respectively. These amounts are being repaid through direct payroll
withdrawals.
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
$204,000 and $271,000 for the three months ended May 31, 2019 and 2018, respectively and sales to Amazon Seychelle totaled approximately
$125,000 and $34,000 for the three months ended May 31, 2019 and 2018, respectively. Pursuant to the agreement with the Company,
Sovereign Earth, LLC is the sole and exclusive seller of the certain Seychelle products in specified Amazon world markets.
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 in discovery and trial is set for August, 2019. 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 three months
ended May 31, 2019 and 2018, the Company paid $3,080 and $1,037, respectively, in royalties and licensing fees related under these
agreements.
NOTE 8: SUBSEQUENT EVENTS
Management has evaluated subsequent
events from May 31, 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.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED (UNAUDITED)
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.
The SEC staff issued Staff Accounting
Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides
a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting
under ASC 740. To the extent that a company's accounting for certain income tax effects of the TCJA is incomplete but it is able
to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
The valuation allowance for deferred
tax assets as of February 28, 2019 and 2018 was $674,924 and $611,182, respectively. In assessing the realization of deferred tax
assets, management considers whether it is more-likely-than-notthat some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax-planning strategies in making this assessment. It was determined that
it was more likely than not that a full valuation allowance was necessary as of February 28, 2019.
At February 28, 2019, the Company had
unused net operating loss carryovers of approximately $770,000 and $1,198,000 for federal and state tax purposes, respectively,
which expire beginning in 2038. Note that any federal net operating loss carryovers from 2018 have an indefinite carryforward
period. This was part of the legislation passed as part of the TCJA.
The Company includes interest and penalties,
if any, arising from the underpayment of income taxes in the consolidated statements of operations in the provision for income
taxes. As of February 28, 2019, the Company had no accrued interest or penalties related to uncertain tax positions. The tax years
that remain subject to examination by major taxing jurisdictions are fiscal years 2015 through 2018 for federal purposes and fiscal
years 2014 through 2018 for state purposes.
We recorded a provision for income taxes
of $800 for the quarter ended May 31, 2019 related to state taxes, based on the Company’s expected annual effective tax rate.