SYEV Seychelle Environmental Technologies Inc (CE)

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 nine month periods ended November 30, 2018 and 2017. 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, 2018.  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:

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.  Patents and trade secrets cover all proprietary products.

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 nine month periods ended November 30, 2018 and 2017 are derived from our condensed consolidated financial statements included elsewhere in this report.

Sales. Sales decreased by $1,019,880 or (63%) to $609,444 during the three months ended November 30, 2018 from $1,629,324 during the three months ended November 30, 2017.  The decrease is primarily due to decrease in sales of our bottle, portable retail, pitcher replacement and pitcher custom product lines. Sales during the three months ended November 30, 2017 of this product line were $1,471,441, compared to $537,267 in the comparable current period 2018.

In fiscal year 2018 a significant portion of our revenues came from organizations which were engaged in natural disaster relief activities. In fiscal year 2019, we did not have the same level of natural disaster revenues and did not replace these customers. As a result our revenue decreased. We have refocused our attention in replacing our customer revenue by expanding our scope with other organizations and will continue to do so.

Cost of sales and gross profit percentage. As a percentage of sales, the gross profit margin during the three months ended November 30, 2018 decreased to 47% 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 decrease to a range around approximately 45% in the foreseeable future.

Selling, general, and administrative expenses. These expenses decreased by $77,675, or (15%), during the three months ended November 30, 2018 compared to the same period ended in the prior year.  The decrease was a direct result of the decrease in legal 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 $126,258 during the three month period ended November 30, 2018. The Company recorded no tax provision due to NOL utilization even with a pretax income of $246,618 during the three months ended November 30, 2017.

Net (loss) income. Net (loss) for the three month period ended November 30, 2018 was $126,258 compared to net income for the three month period ended November 30, 2017 of $246,618.  This was primarily due to the decrease of $1,019,880 or (63%) in sales.

Sales. The decrease in sales by $1,350,443 during the nine months ended November 30, 2018 from $3,829,465 during the nine months ended November 30, 2017.  The decrease of (35%) is primarily due to decrease in sales of our bottle, portable retail and pitcher product lines.

In fiscal year 2018 a significant portion of our revenues came from organizations which were engaged in natural disaster relief activities. In fiscal year 2019, we did not have the same level of natural disaster revenues and did not replace these customers. As a result our revenue decreased. We have refocused our attention in replacing our customer revenue by expanding our scope with other organizations and will continue to do so.

Cost of sales and gross profit percentage. As a percentage of sales, the gross profit margin during the nine months ended November 30, 2018 increased to 50% from 47%.  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 decrease to a range around approximately 45% in the foreseeable future.

Selling, general, and administrative expenses. These expenses increased by $88,752, or 7%, during the nine months ended November 30, 2018 compared to the same period in the prior year.  The increase was a direct result of the increase in legal and advertising costs.

Depreciation and amortization .  Depreciation and amortization was decreased due to fully depreciated fixed assets.

Income tax benefit (expense).  The Company recorded an income tax $0 due to pretax loss of $163,087 compared to an income tax of $6,050 due to NOL utilization even with pretax income of $498,046 during the nine month period ended November 30, 2017.

Net (loss) income. Net loss for the nine month period ended November 30, 2018 was $163,087 compared to net income of $491,995 for the nine month period ended November 30, 2017.

Net cash from operating activities. During the nine month period ended November 30, 2018, cash used in operating activities was $13,302, compared to cash provided in operating activities of $1,060,767 in the same period during 2017. This was primarily the result of decreased sales and increased expenses combined with collections of accounts receivable.

Net cash from investing activities. During the nine month period ended November 30, 2018, the Company spent approximately $14,259 on capital expenditures.  In comparable period of the prior year, the Company spent $13,364 on capital expenditures.

Net cash from financing activities. Cash used in financing activities during the nine month period ended November 30, 2018 was $3,966 compared to $3,033 during the comparable period. This was a result of the addition of a new capital lease in this fiscal year compared to various leases added in the previous year.

Management's Plan. As of November 30, 2018, the Company had $2,044,306 in cash and cash equivalents, $484,889 in accounts receivable and a backlog of $376,722 in unshipped product.  This year, Seychelle plans to release a variety of new products in the upcoming months that introduce hollow fiber technology and further improvements to our filter effectiveness and production.  We anticipate an increase in earnings with the addition of our innovative technology to products that focus on water soluble medical cannabis in conjunction with our portable products. 

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 nine month period ended November 30, 2018.

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 beginning in fiscal 2019 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 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. The Company is currently evaluating the potential impact this standard will have on its condensed consolidated financial statements and related disclosures.

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 condensed consolidated financial statements.