ITEM 1. FINANCIAL STATEMENTS
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
August 31,
2019
|
|
|
February 28,
2019
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,175,966
|
|
|
$
|
2,078,122
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,004 and $4,614,
|
|
|
|
|
|
|
|
|
respectively
|
|
|
354,609
|
|
|
|
352,818
|
|
Related party receivables
|
|
|
25,700
|
|
|
|
31,472
|
|
Inventory, net
|
|
|
916,524
|
|
|
|
972,497
|
|
Prepaid expenses, deposits and other current assets
|
|
|
82,466
|
|
|
|
129,049
|
|
Total current assets
|
|
|
3,555,265
|
|
|
|
3,563,958
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
98,202
|
|
|
|
118,154
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
66,670
|
|
|
|
66,670
|
|
Right-of-use lease asset-operating
|
|
|
447,405
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,167,542
|
|
|
$
|
3,748,782
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
275,479
|
|
|
$
|
267,641
|
|
Customer deposits
|
|
|
53,350
|
|
|
|
30,567
|
|
Lease liability, current portion
|
|
|
240,495
|
|
|
|
5,938
|
|
Total current liabilities
|
|
|
569,324
|
|
|
|
304,146
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Lease liability, net of current portion
|
|
|
234,615
|
|
|
|
3,182
|
|
Total long-term liabilities
|
|
|
234,615
|
|
|
|
3,182
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
803,939
|
|
|
|
307,328
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, 6,000,000 shares authorized, none issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock $0.001 par value, 50,000,000 shares
authorized, 26,640,313
issued and outstanding
|
|
|
26,641
|
|
|
|
26,641
|
|
Additional paid-in capital
|
|
|
8,944,368
|
|
|
|
8,944,368
|
|
Accumulated deficit
|
|
|
(5,577,726
|
)
|
|
|
(5,499,875
|
)
|
Less treasury stock at cost, 66,000 shares
|
|
|
(29,680
|
)
|
|
|
(29,680
|
)
|
Total stockholders' equity
|
|
|
3,363,603
|
|
|
|
3,441,454
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
4,167,542
|
|
|
$
|
3,748,782
|
|
See accompanying notes to condensed consolidated
financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For the Three Months Ended
August 31,
|
|
|
2019
|
|
2018
|
Sales
|
|
$
|
790,198
|
|
|
$
|
735,677
|
|
Cost of sales
|
|
|
532,721
|
|
|
|
351,073
|
|
Gross profit
|
|
|
257,477
|
|
|
|
384,604
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
|
370,129
|
|
|
|
498,309
|
|
Depreciation and amortization
|
|
|
11,894
|
|
|
|
13,532
|
|
Total operating expenses
|
|
|
382,023
|
|
|
|
511,841
|
|
Loss from operations
|
|
|
(124,546
|
)
|
|
|
(127,237
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income (expense)
|
|
|
7
|
|
|
|
(485
|
)
|
Other expense
|
|
|
(303
|
)
|
|
|
(1,901
|
)
|
Total other expense, net
|
|
|
(296
|
)
|
|
|
(2,386
|
)
|
Loss before income tax expense
|
|
|
(124,842
|
)
|
|
|
(129,623
|
)
|
Income tax expense
|
|
|
(800
|
)
|
|
|
-
|
|
Net loss
|
|
$
|
(125,642
|
)
|
|
$
|
(129,623
|
)
|
BASIC LOSS PER SHARE
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
DILUTED LOSS PER SHARE
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
BASIC WEIGHTED AVERAGE NUMBER OF
|
|
|
|
|
|
|
|
|
SHARES OUTSTANDING
|
|
|
26,574,313
|
|
|
|
26,574,313
|
|
DILUTED WEIGHTED AVERAGE NUMBER OF
|
|
|
|
|
|
|
|
|
SHARES OUTSTANDING
|
|
|
26,574,313
|
|
|
|
26,574,313
|
|
See accompanying notes to condensed consolidated
financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For the Six Months
Ended
August 31,
|
|
|
2019
|
|
2018
|
Sales
|
|
$
|
1,471,020
|
|
|
$
|
1,869,578
|
|
Cost of sales
|
|
|
816,472
|
|
|
|
954,513
|
|
Gross profit
|
|
|
654,548
|
|
|
|
915,065
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
|
705,020
|
|
|
|
922,771
|
|
Depreciation and amortization
|
|
|
24,813
|
|
|
|
28,003
|
|
Total operating expenses
|
|
|
729,833
|
|
|
|
950,774
|
|
Loss from operations
|
|
|
(75,285
|
)
|
|
|
(35,709
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(739
|
)
|
|
|
(1,038
|
)
|
Other expense
|
|
|
(227
|
)
|
|
|
(84
|
)
|
Total other expense
|
|
|
(966
|
)
|
|
|
(1,122
|
)
|
Loss before income tax expense
|
|
|
(76,251
|
)
|
|
|
(36,831
|
)
|
Income tax expense
|
|
|
(1,600
|
)
|
|
|
-
|
|
Net loss
|
|
$
|
(77,851
|
)
|
|
$
|
(36,831
|
)
|
BASIC LOSS PER SHARE
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
DILUTED LOSS PER SHARE
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
BASIC WEIGHTED AVERAGE NUMBER OF
|
|
|
|
|
|
|
|
|
SHARES OUTSTANDING
|
|
|
26,574,313
|
|
|
|
26,574,313
|
|
DILUTED WEIGHTED AVERAGE NUMBER OF
|
|
|
|
|
|
|
|
|
SHARES OUTSTANDING
|
|
|
26,574,313
|
|
|
|
26,574,313
|
|
See accompanying notes to condensed consolidated
financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Statements of Stockholders'
Equity
For the Three Months Ended August
31, 2019 and 2018
(UNAUDITED)
|
Common Stock
|
|
Treasury Stock
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2018
|
|
26,640,313
|
|
|
$
|
26,641
|
|
|
|
66,000
|
|
|
$
|
(29,680
|
)
|
|
$
|
8,944,368
|
|
|
$
|
(5,166,957
|
)
|
|
$
|
3,774,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(129,623)
|
|
|
|
(129,623)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2018
|
|
26,640,313
|
|
|
$
|
26,641
|
|
|
|
66,000
|
|
|
$
|
(29,680
|
)
|
|
$
|
8,944,368
|
|
|
$
|
(5,296,577
|
)
|
|
$
|
3,644,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2019
|
|
26,640,313
|
|
|
$
|
26,641
|
|
|
|
66,000
|
|
|
$
|
(29,680
|
)
|
|
$
|
8,944,368
|
|
|
$
|
(5,452,084
|
)
|
|
$
|
3,489,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(125,642)
|
|
|
|
(125,642)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2019
|
|
26,640,313
|
|
|
$
|
26,641
|
|
|
|
66,000
|
|
|
$
|
(29,680
|
)
|
|
$
|
8,944,368
|
|
|
$
|
(5,577,726
|
)
|
|
$
|
3,363,603
|
|
See accompanying notes to condensed consolidated
financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Statements of Stockholders'
Equity
For the Six Months Ended August 31,
2019 and 2018
(UNAUDITED)
|
Common Stock
|
|
Treasury Stock
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2018
|
|
26,640,313
|
|
|
$
|
26,641
|
|
|
|
66,000
|
|
|
$
|
(29,680
|
)
|
|
$
|
8,944,368
|
|
|
$
|
(5,259,746
|
)
|
|
$
|
3,681,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(36,831)
|
|
|
|
(36,831)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2018
|
|
26,640,313
|
|
|
$
|
26,641
|
|
|
|
66,000
|
|
|
$
|
(29,680
|
)
|
|
$
|
8,944,368
|
|
|
$
|
(5,296,577
|
)
|
|
$
|
3,644,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2019
|
|
26,640,313
|
|
|
$
|
26,641
|
|
|
|
66,000
|
|
|
$
|
(29,680
|
)
|
|
$
|
8,944,368
|
|
|
$
|
(5,499,875
|
)
|
|
$
|
3,441,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(77,851)
|
|
|
|
(77,851)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2019
|
|
26,640,313
|
|
|
$
|
26,641
|
|
|
|
66,000
|
|
|
$
|
(29,680
|
)
|
|
$
|
8,944,368
|
|
|
$
|
(5,577,726
|
)
|
|
$
|
3,363,603
|
|
See accompanying notes to condensed consolidated
financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(UNAUDITED)
|
|
For The Six Months Ended
August 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(77,851
|
)
|
|
$
|
(36,831
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
24,814
|
|
|
|
28,003
|
|
(Recovery) provision for doubtful accounts
|
|
|
(3,610
|
)
|
|
|
3,153
|
|
Accretion of right-of-use lease asset
|
|
|
(516
|
)
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,819
|
|
|
|
231,959
|
|
Related party receivables
|
|
|
5,772
|
|
|
|
2,056
|
|
Inventory
|
|
|
55,972
|
|
|
|
(75,059
|
)
|
Prepaid expenses, deposits and other current assets
|
|
|
46,584
|
|
|
|
57,567
|
|
Accounts payable and accrued expenses
|
|
|
29,837
|
|
|
|
(207,705
|
)
|
Customer deposits
|
|
|
22,783
|
|
|
|
(150,877
|
)
|
Net cash provided by (used in) operating activities
|
|
|
105,604
|
|
|
|
(147,734
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(4,861
|
)
|
|
|
(5,550
|
)
|
Net cash used in investing activities
|
|
|
(4,861
|
)
|
|
|
(5,550
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayment of capital lease obligations
|
|
|
(2,899
|
)
|
|
|
(2,600
|
)
|
Net cash used in financing activities
|
|
|
(2,899
|
)
|
|
|
(2,600
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
97,844
|
|
|
|
(155,884
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS - beginning of period
|
|
|
2,078,122
|
|
|
|
2,075,833
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS - end of period
|
|
$
|
2,175,966
|
|
|
$
|
1,919,949
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Initial recognition of lease asset
|
|
$
|
555,296
|
|
|
$
|
-
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
353
|
|
|
$
|
1,038
|
|
See accompanying notes to condensed consolidated
financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
August 31, 2019
(UNAUDITED)
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 financial position, results of operations, and cash flows at August 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 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 August 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 condensed consolidated financial statements. The condensed
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 condensed consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP")
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 condensed 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 Condensed 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 at the date of adoption. 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:
|
2020
|
$127,497
|
|
|
2021
|
$259,456
|
|
|
2022
|
$109,435
|
|
|
Total
|
$496,388
|
|
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 March 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 FINANCIAL
STATEMENTS
August 31, 2019
(UNAUDITED)
NOTE 2: BASIC LOSS PER SHARE
Basic loss 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 loss per
share for the six months ended August 31, 2019 and 2018, respectively, did not include 6,407,221 warrants as they would have been
anti-dilutive.
|
|
For the six months ended
|
|
|
August 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(77,851
|
)
|
|
$
|
(36,831
|
)
|
Weighted average common shares – basic
|
|
|
26,574,313
|
|
|
|
26,574,313
|
|
Net loss per share – basic
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents:
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
Weighted average common shares – diluted
|
|
|
26,574,313
|
|
|
|
26,574,313
|
|
Net loss per share – diluted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
For the three months ended
|
|
|
August 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(125,642
|
)
|
|
$
|
(129,623
|
)
|
Weighted average common shares – basic
|
|
|
26,574,313
|
|
|
|
26,574,313
|
|
Net loss per share – basic
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents:
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
Weighted average common shares – diluted
|
|
|
26,574,313
|
|
|
|
26,574,313
|
|
Net loss per share – diluted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
August 31, 2019
(UNAUDITED)
NOTE 3: COMMON STOCK
Warrants
A summary of warrant activity for the
six months ended August 31, 2019 is shown below.
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding at March 1, 2019
|
|
|
6,407,221
|
|
|
|
0.21
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding at August 31, 2019
|
|
|
6,407,221
|
|
|
|
0.21
|
|
Vested at August 31, 2018
|
|
|
6,407,221
|
|
|
|
0.21
|
|
Exercisable at February 28, 2019
|
|
|
6,407,221
|
|
|
|
0.21
|
|
Expiration date December 15, 2020
The following table summarizes significant ranges of outstanding
warrants as of August 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
|
|
1.29
|
|
$0.21
|
|
6,407,221
|
|
$0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4: INVENTORY
The Company's inventory consisted of the following at August
31, 2019 and February 28, 2019:
|
|
August 31,
2019
|
|
February 28,
2019
|
Raw materials
|
|
$
|
364,932
|
|
|
$
|
382,658
|
|
Finished goods
|
|
|
551,592
|
|
|
|
589,839
|
|
Net Inventory
|
|
$
|
916,524
|
|
|
$
|
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 three customers accounted for
78% and 73% of sales for the three and six month periods ended August 31, 2019, respectively. Accounts receivable from these
customers amounted to $261,211 or approximately 86% of accounts receivable as of August 31, 2019.
Sales to two customers accounted for
50% and 57% of sales for the three and six month periods ended August 31, 2018, respectively. Accounts receivable from these
customers amounted to $416,254 or approximately 70% of accounts receivable as of August 31, 2018.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
August 31, 2019
(UNAUDITED)
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 six months ended August 31, 2019 and 2018, purchases facilitated through the related party accounted for approximately
28% and 14%, respectively, of total raw material purchases. For the three months ended August 31, 2019 and 2018, purchases facilitated
through the related party accounted for approximately 9% and 25%, respectively. The Company paid approximately $12,000 and $31,000
in direct commissions to the related party consultant during the six months ended August 31, 2019 and 2018, respectively, and $3,000
and $15,000 during the three months ended August 31, 2019 and 2018, respectively.
The Company had advanced amounts
to an employee of $25,700 and $26,000 as of August 31, 2019 and 2018, respectively. These amounts are being repaid through direct
payroll withdrawals.
The Company had receivables from stockholders
of approximately $7,000 as of August 31, 2018.
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
$583,000 and $438,000 for the six months ended August 31, 2019 and 2018, respectively, and $379,000 and $166,000 for the three
months ended August 31, 2019 and 2018, respectively. Sales to Amazon Seychelle totaled approximately $224,000 and $56,000 for the
six months ended August 31, 2019 and 2018, respectively, and $56,000 and $22,000 for the three months ended August 31, 2019 and
2018, respectively. Pursuant to the agreement with the Company, Sovereign Earth, LLC is the sole and exclusive seller of
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 set for trial in November 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 six months ended
August 31, 2019 and 2018, the Company paid $6,226 and $4,051, respectively, and during the three months ended August 31, 2019 and
2018 $3,146 and $3,085, respectively, in royalties and licensing fees related under these agreements.
NOTE 8: SUBSEQUENT EVENTS
Management has evaluated subsequent
events from August 31, 2019 through the date the condensed consolidated financial statements were issued, and has concluded that
no subs equent events have occurred that would require recognition or disclosure in these condensed consolidated financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
August 31, 2019
(UNAUDITED)
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.
We recorded a provision for income taxes
of $800 for the quarter ended August 31, 2019 related to state taxes, based on the Company’s expected annual effective tax
rate.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion summarizes the significant
factors affecting the operating results, financial condition and liquidity and cash flows of Seychelle Environmental Technologies,
Inc., and subsidiaries (the "Company") as of and for the three and six month periods ended August 31, 2019 and 2018.
The discussion and analysis that follows should be read together with the consolidated financial statements of Seychelle Environmental
Technologies, Inc. and the notes to the condensed consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended February 28, 2019. Except for historical information, the matters discussed in this section
are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that
are beyond the Company's control.
Forward-Looking Statements
Certain statements contained herein
are "forward-looking" statements. Forward-looking statements include statements which are predictive in nature;
which depend upon or refer to future events or conditions; or which include words such as "expects", "anticipates",
"intends", "plans", "believes", "estimates", or variations or negatives thereof or by similar
or comparable words or phrases. In addition, any statement concerning future financial performance, ongoing business strategies
or prospects, and possible future Company actions that may be provided by management are also forward-looking statements. Forward-looking
statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions
about the Company; and economic and market factors in the countries in which the Company does business, among other things. These
statements are not guarantees of future performance, and the Company has no specific intentions to update these statements. Actual
events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors
including, among others:
|
(1)
|
the portable water filtration industry is in a state of rapid technological change, which can render the Company's products obsolete or unmarketable;
|
|
(2)
|
any failure by the Company to anticipate or respond to technological developments or changes in industry standards or customer requirements, or any significant delays in product development or introduction, could have a material adverse effect on the Company's business, operating results and financial condition;
|
|
(3)
|
the Company's cost of sales may be materially affected by increases in the market prices of the raw materials used in the Company's assembly processes;
|
|
(4)
|
the Company's dependence on a few customers. Sales to these customers are unpredictable and difficult to estimate, and as such, may result in material fluctuations in sales from period to period. 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;
|
|
(5)
|
the Company's water related product sales could be materially affected by weather conditions and government regulations;
|
|
(6)
|
the Company is subject to the risks of conducting business internationally; and
|
|
(7)
|
the industries in which the Company operates are highly competitive. Additional risks and uncertainties are outlined in the Company's filings with the Securities and Exchange Commission, including its most recent fiscal Annual Report on Form 10-K for the fiscal year ended February 28, 2019.
|
Description of the Business
We were incorporated under the laws
of the State of Nevada on January 23, 1998 as a change of domicile to Royal Net, Inc., a Utah corporation that was originally incorporated
on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies,
Inc. effective in January 1998.
On January 30, 1998, we entered into
an Exchange Agreement with Seychelle Water Technologies, Inc., a Nevada corporation ("SWT"), whereby we exchanged our
issued and outstanding capital shares with the shareholders of SWT on a one share for one share basis. We became the parent company
and SWT became a wholly owned subsidiary. SWT had been formed in 1997 to market water filtration systems of Aqua Vision International.
Our Company is presently comprised of
Seychelle Environmental Technologies, Inc., a Nevada corporation, with two wholly-owned subsidiaries, Seychelle Water Technologies,
Inc. and Fill 2 Pure International, Inc., also Nevada corporations (collectively, the "Company" or "Seychelle").
We use the trade name "Seychelle Water Filtration Products, Inc." in our commercial operations.
Seychelle designs, assembles and distributes
unique, state-of-the-art ionic absorption micron filters for portable filter devices that remove up to 99.99% of all pollutants
and contaminants found in any fresh water source.
Our principal business address is 22
Journey, Aliso Viejo, California 92656. Our telephone number at this address is 949-234-1999.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Our summarized historical financial
data is presented in the following table to aid in your analysis. You should read this data in conjunction with this section entitled
Management's Discussion and Analysis of Financial Condition and Results of Operations, our condensed consolidated financial statements
and the related notes to the condensed consolidated financial statements included elsewhere in this report. The selected condensed
consolidated statements of operations data for the three and six month periods ended August 31, 2019 and 2018 are derived from
our condensed consolidated financial statements included elsewhere in this report.
Three month period ended August 31, 2019 compared to the corresponding period in 2018
|
|
|
|
|
|
|
|
|
Period over
|
|
|
|
|
2019
|
|
2018
|
|
Period change
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
790,198
|
|
|
$
|
735,677
|
|
|
|
54,521
|
|
|
|
7
|
%
|
Cost of sales
|
|
|
532,721
|
|
|
|
351,073
|
|
|
|
181,648
|
|
|
|
52
|
%
|
Gross profit
|
|
|
257,477
|
|
|
|
384,604
|
|
|
|
(127,127
|
)
|
|
|
(33
|
%)
|
Gross profit %
|
|
|
33
|
%
|
|
|
52
|
%
|
|
|
(233
|
%)
|
|
|
|
|
Selling, general, and administrative
|
|
|
370,129
|
|
|
|
498,309
|
|
|
|
(128,180
|
)
|
|
|
(26
|
%)
|
Depreciation and amortization
|
|
|
11,894
|
|
|
|
13,532
|
|
|
|
(1,638
|
)
|
|
|
(12
|
%)
|
Other expense
|
|
|
(296
|
)
|
|
|
(2,386
|
)
|
|
|
2,090
|
|
|
|
(88
|
%)
|
Loss before income tax expense
|
|
|
(124,842
|
)
|
|
|
(129,623
|
)
|
|
|
4,781
|
|
|
|
(4
|
%)
|
Provision for income taxes
|
|
|
(800
|
)
|
|
|
-
|
|
|
|
(800
|
)
|
|
|
(100
|
%)
|
Net loss
|
|
|
(125,642
|
)
|
|
|
(129,623
|
)
|
|
|
3,981
|
|
|
|
(3
|
%)
|
Sales. Sales increased by $54,521
or 7% to $790,198 during the three months ended August 31, 2018 from $735,677 during the three months ended August 31, 2018.
The increase is primarily due to increase in sales of our pitcher, pitcher replacement and pitcher custom product lines. Sales
during the three months ended August 31, 2019 of this product line were $664,627, compared to $408,984 in the comparable current
period 2018.
Cost of sales and gross profit percentage.
As a percentage of sales, the gross profit margin during the three months ended August 31, 2019 decreased to 33% from 52%.
The product mix and timing of significant sales is always an important factor in the resulting profit margins reported. The
Company believes that the average gross margin percentages overall could eventually be in a range around approximately 45% in the
foreseeable future.
Selling, general, and administrative
expenses. These expenses decreased by $126,180, or (26%), during the three months ended August 31, 2019 compared to the same
period ended in the prior year. The decrease was a direct result of the decrease in legal and advertising costs.
Depreciation and amortization. Depreciation
and amortization expense was decreased due to fully depreciated fixed assets.
Income tax benefit (expense).
The Company recorded provision of $0 due to a pretax loss of $125,642 and $129,623 during the three month period ended August
31, 2019 and 2018.
Net loss. Net loss for the three
month period ended August 31, 2019 was $125,642 compared to net loss for the three month period ended August 31, 2018 of $129,623.
This was due primarily to the increase of $181,648 in cost of sales partially offset by decrease of $128,180 in selling, general
and administrative.
Six month period ended August 31, 2019 compared to the corresponding period in 2018
|
|
|
|
|
|
|
|
|
|
|
|
Period over
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Period change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,471,020
|
|
|
$
|
1,869,578
|
|
|
|
(398,558
|
)
|
|
|
(21
|
%)
|
Cost of sales
|
|
|
816,472
|
|
|
|
954,513
|
|
|
|
(138,041
|
)
|
|
|
(14
|
%)
|
Gross profit
|
|
|
654,548
|
|
|
|
915,065
|
|
|
|
(260,517
|
)
|
|
|
(28
|
%)
|
Gross profit %
|
|
|
44
|
%
|
|
|
49
|
%
|
|
|
65
|
%
|
|
|
|
|
Selling, general, and administrative
|
|
|
705,020
|
|
|
|
922,771
|
|
|
|
(217,751)
|
|
|
|
(24
|
%)
|
Depreciation and amortization
|
|
|
24,813
|
|
|
|
28,003
|
|
|
|
(3,190
|
)
|
|
|
(11
|
%)
|
Other expense
|
|
|
(966
|
)
|
|
|
(1,122
|
)
|
|
|
156
|
|
|
|
(14
|
%)
|
Loss before income tax expense
|
|
|
(76,251
|
)
|
|
|
(36,831
|
)
|
|
|
(39,420
|
)
|
|
|
107
|
%
|
Income tax expense
|
|
|
(1,600)
|
|
|
|
-
|
|
|
|
(1,600)
|
|
|
|
|
|
Net loss
|
|
|
(77,851
|
)
|
|
|
(36,831
|
)
|
|
|
(41,020
|
)
|
|
|
111
|
%
|
Sales. The decrease in sales
to $1,471,020 during the six months ended August 31, 2019 from $1,869,578 during the six months ended August 31, 2018. The
decrease of 21% is primarily due to decrease in sales of pitcher product lines.
Cost of sales and gross profit percentage.
As a percentage of sales, the gross profit margin during the six months ended August 31, 2019 decreased to 44% from 49%.
The product mix and timing of significant sales is always an important factor in the resulting profit margins reported. The
Company believes that the average gross margin percentages overall will remain in a range around approximately 45% in the foreseeable
future.
Selling, general, and administrative.
These expenses decreased by $217,751, or (24%), during the six months ended August 31, 2019 compared to the same period
in the prior year. The decrease was a direct result of the decrease in legal and advertising costs.
Depreciation and amortization. Depreciation and
amortization was decreased due to fully depreciated fixed assets.
Income tax expense. The Company
recorded an income tax $1,600 due to pretax loss of $77,851 compared to an income tax of $0 due to the pretax loss of $36,831 during
the six month period ended August 31, 2018.
Net loss. Net loss for the six month
period ended August 31, 2019 was $77,851 compared to net loss of $36,831 for the six month period ended August 31, 2018 due to
decrease in sales of $398,558 offset by the decrease in selling, general and administrative expense of $217,751.
Net cash from operating activities.
During the six-month period ended August 31, 2019, cash provided in operating activities was $105,604, compared to cash used in
operating activities of $147,734 in the same period during 2018. This was primarily due to increase in customer deposits,
collections of accounts receivable and related party receivable, decrease in inventories and prepayments
Net cash from investing activities.
During the six month period ended August 31, 2019, the Company spent $4,861 on capital expenditures. In comparable period
of the prior year, the Company spent $5,550 on capital expenditures.
Net cash from financing activities.
Cash used in financing activities during the six month period ended August 31, 2019 was $2,899 compared to $2,600 during the comparable
period. This is was a result of capital lease repayments.
Management's Plan. As of August 31,
2019, the Company had $2,175,966 in cash and cash equivalents, $354,609 in accounts receivable and a backlog of $256,372 in unshipped
product. The Company is continuing to develop products and improve technology. The Company plans to release a variety of
new products in the upcoming months that include Thermal Bottles, new ergonomic loop cap, universal design style replacement filter,
combination straw and bottle product that removes up to 500 gallons of pathogen.
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 2018 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-month
period ended August 31, 2019.
In May 2014, the Financial Accounting Standards
Board ("FASB") issued Accounting Standards Updated ("ASU") 2014-09, Revenue from Contracts with Customers,
issued as a new Topic, ASC Topic 606 ("ASU 2014-09"). The new revenue recognition standard provides a step analysis of
transactions to determine when and how revenue is recognized. The premise of the standard 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. The Company adopted the guidance effective March 1, 2018 using
the modified retrospective approach. The adoption of this guidance did not have a significant impact on our consolidated financial
statements.
In February 2016, the 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 at the date of
adoption.
In June 2016, the FASB issued ASU 2016-13,
“Financial Instruments – Credit Losses,” which will require the measurement of all expected credit losses for
financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable
forecasts. This guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within
fiscal years beginning after December 15, 2020. The Company is currently evaluating this statement and its impact on the Company’s
results of operations and financial position.
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.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures
that are designed to ensure that information required to be disclosed in the reports that we file with the SEC under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such
information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate,
to allow for timely decisions regarding required disclosure. As required by Rule 15d-15(b) of the Exchange Act, we carried out
an evaluation, under the supervision and with the participation of our management, including our principal executive and principal
financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on the foregoing,
our principal executive and principal financial officer concluded that our disclosure controls and procedures are not effective
to ensure the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed
and reported within the time periods specified in the SEC's rules and forms.
Management's Annual Report on Internal Control over Financial
Reporting
The management of the Company is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Exchange Act. The Company's internal control over financial reporting is a process designed under the supervision of
the Company's Chief Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP) and includes those policies and procedures that:
●
|
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
|
|
|
●
|
provide reasonable assurance that the transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors;
|
|
|
●
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements;
|
Internal control over financial reporting cannot
provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely
basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management
is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
Management has used the framework set forth
in the report entitled Internal Control-Integrated Framework (2013) published by the Committee of Sponsoring Organizations
of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based
on this assessment, management has concluded that our internal control over financial reporting was not effective as of August
31, 2019.
A material weakness is a deficiency, or combination
of deficiencies, that results in more than a remote likelihood that a material misstatement of annual or interim financial statements
will not be prevented or detected. In connection with the assessment described above, management identified the following control
deficiencies that represent material weaknesses at August 31, 2019:
(1)
|
lack of a functioning audit committee and lack of any outside directors on the Company's Board of Directors capable to oversee the audit function;
|
|
|
(2)
|
inadequate segregation of duties due to limited number of personnel, which makes the reporting process susceptible to management override;
|
|
|
(3)
|
insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements;
|
|
|
(4)
|
ineffective controls over period end financial disclosure and reporting processes;
|
Management believes that the material weaknesses
set forth in items (1) through (4) above did not have an effect on the Company's financial reporting during the period ended August
31, 2019.
We are committed to improving our financial
organization. As part of this commitment, we plan to prepare and implement sufficient written policies and checklists which will
set forth procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure
requirements.
We will continue to monitor and evaluate the
effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and
are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
Changes in Internal Control over Financial Reporting
There was no change in internal control over
financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during our first fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.