SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC. This discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of the Company and its subsidiaries as of and for the fiscal years endedFebruary 29, 2020 andFebruary 28, 2019 . The discussion and analysis that follows should be read together with the consolidated financial statements ofSeychelle Environmental Technologies, Inc. and the notes to the consolidated financial statements included elsewhere in this annual report on Form 10-K. 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.
Application of Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles inthe United States of America . Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Ultimate results could vary from amounts presently estimated.
Critical accounting policies for us include our accounting for inventory reserves, allowance for doubtful accounts receivable and sales returns reserves and determination of the valuation allowance for deferred tax assets.
Inventory Reserves
At each balance sheet date, the Company evaluates its ending inventory for excess quantities and obsolescence. This evaluation includes an analysis of sales levels by product type. Among other factors, the Company considers current product configurations, historical and forecasted demand, market conditions and product life cycles when determining the market value of the inventory. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, and the period over which cash flows will occur. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the excess or obsolete inventory. 12 ---
Allowance for Doubtful Accounts
The Company analyzes its current account receivable portfolio and make estimates for potential uncollectible amount based on a variety of factors, including the age of the receivable, historical payment patterns, and actual return experience of specific products or similar products. The Company also reviews its estimates for product returns based on expected return data communicated to us by customers and historical experience. Management is able to make reasonable and reliable estimates of its allowance for doubtful accounts and product returns based on our history in this business. Income Taxes
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts expected to be realized. The Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examinations by the tax authorities, based on the technical merits of the position.
Recent Accounting Pronouncements
InMay 2014 , theFinancial 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 five-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 ASU 2014-09 beginning fiscal year 2019 using the modified retrospective approach. The impact of adopting the standard on our consolidated financial statements and related disclosures was not material. InFebruary 2016 , the FASB issued ASU 2016-02, "Leases (Topic 842)," which required 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. We adopted the standard effectiveMarch 1, 2019 . Consequently, financial information will not be updated and disclosures required under the new standard will not be provided for periods presented beforeMarch 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 s initial direct costs. We evaluated all leases within this scope under existing standards and under the ASU lease standard recognized approximately$580,000 of operating right-of-use assets and lease liabilities at the date of adoption.
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.
Results of Operations Our summary historical financial data is presented in the following table to aid you 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 consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this annual report. The selected financial data below for the fiscal years endedFebruary 29, 2020 andFebruary 28, 2019 are derived from our consolidated financial statements included elsewhere in this annual report. 13 ---
Fiscal year ended
Selected Financial Data
Years Ended
February 29, February 28, Percentage
2020 2019 Difference Change
Sales $ 3,086,408 $ 3,153,429 $ (67,021 ) (2 %)
Cost of sales 1,701,671 1,633,430 68,241 4 %
Gross profit 1,384,737 1,519,999 (135,262 ) (9 %)
Gross profit percentage 45 % 48 %
Selling, general and
administrative 1,325,080 1,563,498 (238,418 ) (15 %)
Legal expenses 123,565 140,098 (16,533 ) (12 %)
Depreciation and amortization 51,505 55,040 (3,535 ) (6 %)
Loss from operations (115,413 ) (238,637 ) 123,224 (52 %)
Interest expense (1,368 ) (1,919 ) 551 (29 %)
Other (expense) income (618 ) 429 (1,047 ) (244 %)
Loss before income taxes (117,399 ) (240,127 ) (122,728 ) (51 %)
Loss before income taxes
percentage (4 %) (8 %)
Provision for income taxes (1,600 ) - (1,600 ) 100 %
Net loss (118,999 ) (240,127 ) 121,128 (50 %)
Net loss percentage (4 %) (8 %)
Net loss per share - basic and
diluted $ (0.00 ) $ (0.01 )
Net cash provided by operating
activities 262,800 45,310
Net cash used in investing
activities (12,842 ) (37,655 )
Net cash used in financing
activities (5,939 ) (5,366 )
Sales. Sales decreased to $3,086,408 during the fiscal year ended February 29,
2020 from $3,153,429 during the year ended February 28, 2019 . The decrease of
2% is primarily due to decreasing sales of our pitcher and bottle products.
Cost of sales and gross profit percentage. As a percentage of sales, the gross
profit margin during the fiscal year ended February 29, 2020 decreased to 45%
from 48% due to product mix and timing of significant sales. The Company
believes that the average gross margin percentages overall can decrease to a
range around approximately 40% in the foreseeable future.
Legal expenses. The decrease in legal expenses of
Selling, general and administrative. The selling, general and administrative decreased$238,418 , or (15%), from prior year. The decrease was a direct result of the Company reducing and managing its costs and expenses, including reducing the number of personnel.
Interest expense. Interest expense was relatively consistent from year to year.
Provision for income taxes. The Company recorded an income tax expense due to
its pretax loss of
Net loss. The net loss for the year ended
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CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTS
The Company has various contractual obligations, which are recorded as liabilities in the consolidated financial statements. Other items, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed.
The following table summarizes our significant contractual obligations on an undiscounted basis as ofFebruary 29, 2020 and the future periods in which such obligations are expected to be settled in cash or converted into the Company's common stock. In addition, the table reflects the timing of principal payments on outstanding borrowings. Additional details regarding these obligations are provided in footnotes, as referenced below: Less Than More Than Total 1 Year 1- 3 Years 3-5 Years 5 Years Accounts payable and accrued expenses$ 357,570 $ 357,570 $ - $ - $ - Customer deposits 143,651 143,651 - - - Capital lease 3,181 3,181 - - - Other contractual commitments (1) 353,893 245,586 108,307 - - Total contractual obligations$ 858,295 $ 749,988 $ 108,307 $ - $ -
(1) Office and facility lease commitments expiring
Liquidity and capital resources.
Net cash provided by operating activities. During the fiscal year endedFebruary 29, 2020 , the Company had cash provided by operating activities of$262,800 compared to cash provided by operating activities of$45,310 in the comparable prior period. The increase was primarily due to better collection efforts. During the year endedFebruary 29, 2020 , the Company had a net loss of$118,999 compared to year endedFebruary 28, 2019 the Company had a net loss of$240,127 due primarily to reduction in selling, general and administrative. Net cash used in investing activities. The Company spent approximately$13,000 on capital expenditures compared to approximately$38,000 in the prior period. Cash used in investment during the fiscal year endedFebruary 29, 2020 was for the purchase of additional tooling and molding to increase production capacity and also for shop equipment.
Net cash used in financing activities. In fiscal 2020 and 2019, the Company
repaid
As ofFebruary 29, 2020 , the Company has unrestricted cash and cash equivalents of approximately$2,322,000 and a backlog of approximately$775,000 in orders to fill. Capital expenditures. We do not expect any major capital expenditures in fiscal 2021. However, minor purchases of additional molds or tooling may be needed to expand our product line. We will be able to fund these purchases from cash on hand and we will
not require outside financing. Any seasonal aspects
We have not experienced seasonal spikes in our sales as a result of our very limited retail store distribution and our sales are not subject to material seasonal fluctuation.
Off-Balance Sheet Arrangements
None
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