NOTE 4: INVENTORY
The Company's inventory consisted of the following at May 31, 2018 and February 28, 2018:
|
|
May 31,
2018
|
|
|
February 28, 2018
|
|
Raw materials
|
|
$
|
842,564
|
|
|
$
|
860,424
|
|
Finished goods
|
|
|
147,909
|
|
|
|
137,872
|
|
|
|
|
990,473
|
|
|
|
998,296
|
|
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.
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 one customer accounted for 37% sales for the three month period ended May 31, 2018. Accounts receivable from this customer accounted to approximately $467,000 or 69% of accounts receivable as of May 31, 2018.
Sales to one customer accounted for 33% of sales for the three month period ended May 31, 2017. Accounts receivable from this customer accounted to approximately $533,000 or 84% of accounts receivable as of May 31, 2017.
NOTE 6: RELATED PARTY TRANSACTIONS
During the three months ended May 31, 2018 and 2017, TAM purchased on behalf of the Company, approximately $1,000 and $0 respectively of raw materials from a vendor with which it already had a business relations. All amounts due to TAM had been paid in full as of May 31, 2018.
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, 2018 and 2017, purchases facilitated through the related party accounted for approximately 20% and 13%, respectively, of total raw material purchases. The Company paid approximately $16,000 and $14,000 in direct commissions to the related party consultant during the three months ended May 31, 2018 and 2017, respectively.
The Company had advanced amounts to employee of approximately $27,000 and $27,000 as of May 31, 2018 and 2017, respectively. These amounts are being repaid through direct payroll withdrawals.
The Company had receivable from stockholders of approximately $7,000 and $0 as of May 31, 2018 and 2017 respectively.
The Company had sales to two companies related to a member of the Board of Directors. Specifically, sales to Sovereign Earth, LLC (dba Revolve) totaled approximately $271,000 and $63,000 for the three months ended May 31, 2018 and 2017, respectively and sales to Amazon Seychelle totaled approximately $34,000 and $0 for the three months ended May 31, 2018 and 2017, respectively. Sovereign Earth, LLC (dba Revolve)
is the
sole and exclusive seller of the following products in worldwide markets, including Amazon World Marketplaces: amazon.com, amazon.co uk, amazon.de, amazon.fr, amazon.jp, amazon, it, amazon.ca, amazon.cn, amazon.in, and amazon.com.mx for the duration of the agreement: Generation#1 Filter Pitcher: All filter iterations (regular, standard, advanced, radiological, extreme, supreme, etc.)
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
The Company was involved in litigation or legal proceedings as of February 28, 2018. On March 27, 2017, the Company received a Notice of Filing of Discrimination complaint in the Superior Court of the State of California, County of Orange by a former employee. The Company also received on June 5, 2017, a Request for Entry of Default filed to Superior Court of California, County of Orange by the same employee. Trial was set for June 25, 2018. However this matter was resolved.
Another pending action is 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 early discovery and no trial date is set. 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, 2018 and 2017, the Company paid $1,037 and $0, respectively, in royalties and licensing fees related under these agreements.
NOTE 8: SUBSEQUENT EVENTS
Management has evaluated subsequent events from May 31, 2018 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 is 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.
We recorded the effects of the TCJA for year ended February 28, 2018 using our best estimates and the information available to us through the date the financial statements were issued. However, our analysis is ongoing and as such, the income tax effects that we have recorded are provisional.
The valuation allowance for deferred tax assets as of February 28, 2018 and February 28, 2017 totaled $611,182 and $1,222,653, respectively. The net change in the total valuation allowance was an increase of $558,002 and $1,081,998 for the years ended February 28, 2018 and February 28, 2017, respectively. In assessing the realization of deferred tax assets, management considers whether it is more-likely-than-not that 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, 2018.
At February 28, 2018, the Company had unused net operating loss carryovers of approximately $496,000 and $927,000 for federal and state tax purposes, respectively, which expire beginning in 2037.
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, 2018, 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 2014 through 2017 for federal purposes and fiscal years 2013 through 2017 for state purposes.
The Company expects its effective tax rate for the 2019 fiscal year to be different from the federal statutory rate due primarily to a change in valuation allowance.
We recorded a provision for income taxes of $0 and $4,252 for the quarter ended May 31, 2018 and 2017 respectively, related to federal and state taxes, based on the Company's expected annual effective tax rate.