10-K 1 sey10k2282013.htm ANNUAL REPORT sey10k2282013.htm


 
UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-K
 
( X ) ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 28, 2013

( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to __________________
 
Commission File No. 0-29373
 
Seychelle Environmental Technologies, Inc.
(Exact Name of registrant as specified in its charter)


Nevada
33-0836954
(State or other jurisdiction
(IRS Employer File Number)
Of incorporation)
 
   
32963 Calle Perfecto
 
San Juan Capistrano, California
92675
(Address of principal executive offices)
(zip code)
   
 
(949) 234-1999
(Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Exchange Act: None

Securities Registered Pursuant to Section 12(g) of the Exchange Act:

Common Stock, $0.001 per share par value

Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes []   No [X].

Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes [] No [X].
 
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]  No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months(or such shorter period that the registrant was required to submit and post such files. Yes []  No [X]
 
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained herein to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [X]
 
Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer []    
Accelerated filer []
Non-accelerated filer   [] (Do not check if a smaller reporting company)     
Smaller reporting company  [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) : Yes [ ] No [X]
 
The number of shares outstanding of the registrant's common stock, as of May 1, 2013 was 25,833,646. 
 
The aggregate market value of the voting stock of the Registrant held by non-affiliates as of May 21, 2013 was approximately $3,161,000.
 
References in this document to "us," "we," or "Company" refer to Seychelle Environmental Technologies, Inc., a Nevada corporation and our wholly-owned subsidiaries, Seychelle Water Technologies, Inc. and Fill 2 Pure International, Inc., also Nevada corporations.
 
 
 
 

 
 
 

TABLE OF CONTENTS

 
PART I
  Page
   
     Item 1. Business
3
   
    Item 1A. Risk Factors
6
   
     Item 1B. Unresolved Staff Comments
10
   
     Item 2. Properties
10
   
     Item 3. Legal Proceedings
10
   
     Item 4. Removed and Reserved
10
   
PART II
 
   
      Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
      of Equity Securities
10
   
      Item 6. Selected Financial Data
11
   
      Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
11
   
      Item 7A. Quantitative and Qualitative Disclosures About Market Risk
17
   
      Item 8. Financial Statements and Supplementary Data
17
   
      Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
36
   
      Item 9A(T). Controls and Procedures
36
   
      Item 9B. Other Information
36
      
 
PART III
 
   
     Item 10. Directors, Executive Officers and Corporate Governance
37
   
     Item 11. Executive Compensation
39
   
     Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
     Stockholder Matters
40
   
     Item 13. Certain Relationships and Related Transactions, and Director Independence
41
   
     Item 14. Principal Accounting Fees and Services
41
   
     Item 15. Exhibits, Financial Statement Schedules
42
   
Signatures
44
 
 
2

 
 
PART I

Item 1. BUSINESS.

History of Seychelle

We are a Nevada corporation. Our principal business address is 32963 Calle Perfecto, San Juan Capistrano, California 92675. Our telephone number at this address is 949-234-1999.
 
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.
 
Organization
 
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.
 
Business of Seychelle
 
General
 
Seychelle designs, assembles and distributes unique, state-of-the-art ionic adsorption micron filters specifically for portable filter devices that remove up to 99.99% of all pollutants and contaminants found in any fresh water source. Patents or trade secrets cover all proprietary products. Since human bodies are approximately 75% water, our mission is twofold: First, to help educate everyone to the fact that the quality of water they drink is important and second, to make available low-cost, effective filtration products that will meet the need for safe, great tasting, and high quality drinking water.
 
As of February 28, 2013, Seychelle has sold over 5 million portable water filtration bottles throughout the world to customers such as individuals, dealers, distributors, governments, militaries, non-governmental organizations and emergency relief organizations such as the Jimmy Bakker Ministry, International Red Cross, Eco-Challenge, Kenya Wild Life Service, La Cruz Roja de Mexico and the N.Y. Institute for the Blind. In addition, the Company has donated thousands of portable bottles to church groups and missionaries worldwide.

In 2010, Beverage Marketing placed the value of the world pure water market at close to $100 billion annually. Bottled water, mostly half liters, is a $16 billion business growing at 4% to 6% annually. Seychelle products compete in a more limited market; the portable filtration product segment which includes such brands as Brita, PUR and Aquasana.

In developing countries, many people in rural areas boil their water for drinking and cooking to kill bacteria, but this process does not remove the pyrogens, chemicals, toxins, volatile organic compounds, heavy metals or other pathogens that remain in the water. In Africa alone, according to Earth Prayers From Around the World, approximately 6,000 people die every day because of water borne diseases.
 
Business Plan
 
The management of Seychelle represents over 100 years of combined experience in developing improvements and innovations in the field of bottled water, reverse osmosis, ultra filtration and filter technology. As a result, our products can deliver up to 2micron absolute filtration for pennies per gallon, with pressure as low as 2 pounds per square inch (PSI). Further, our point of difference filtration systems remove up to 99.99% of  pollutants and contaminants most commonly found in fresh drinking water supplies in the five major areas of concern as follows: 
AESTHETICS: Taste, chlorine, sand, sediment and odor problems.
BIOLOGICS: Pathogens such as Cryptosporidium, Giardia and E. Coli Bacteria.
CHEMICALS: Pesticides, detergents, toxic chemicals and industrial waste.
DISSOLVED SOLIDS: Heavy metals such as aluminum, asbestos, copper, lead, mercury and chromium 6.

 
3

 
 


RADIOLOGICAL:  Cesium 137, Radon, Radium, Uranium, Radioactive Iodine, etc.

Seychelle filters have been tested by independent and government laboratories throughout the world and are approved for sale and distribution in the following countries: United States, Mexico, Canada, Slovenia, Czech Republic, India, Tanzania, United Kingdom, Korea, Malaysia, Japan, The Peoples Republic of China, Vietnam, New Zealand, Australia, Brazil, Venezuela, Argentina, South Africa, and Pakistan. In the United States, Seychelle filters have been certified by independent government laboratories using EPA/ANSI protocols and NSF Standards 42 and 53 by Broward Testing Labs. Additionally, we offer a test pack for potential customers that includes the test results from selected countries. Selected results from the United States, United Kingdom and South Africa are displayed on our Website at www.seychelle.com. To our knowledge, no other portable water filtration system can achieve removal of up to 99.99% of pollutants and contaminants most commonly found in fresh drinking water supplies in the five major areas of concern defined above. The benefit of such filtration can save lives worldwide as more people become aware of the benefits of using products utilizing Seychelles’s proprietary portable water filtration technology.
 
Principal Products or Services and their Markets

Current Products

Seychelle has a varied line of portable filter bottles for people on the go. The current products include: Flip-Top and Pull Top bottles, Canteens, Water Pitchers, Pure Water Pump, Stainless Steel bottles, In-Line Filter, Pure Water Bag, Pump N’ Pure, Pure Water Pouch and   Pure Water Straws.  They include regular, standard or advanced filters (for virus and bacteria control up to 99.9999% reduction). Sizes are from 20 ounce to 38 ounces, and provide up to 150 gallons of pure drinking water from any fresh water source; running or stagnant (such as rivers, lakes, ponds and streams).

New Products

We have added several new products including radiological and PH filters.  Product design is a constant focus and all products are reviewed annually.

 Manufacturing

The Company has determined that the production and assembly of some of our product components can be achieved in China and Mexico at a lower cost than in the U.S. while maintaining equivalent quality standards; however, our proprietary filter will continue to be manufactured in the U.S. The assembly of all our products is completed at our facility in San Juan Capistrano, California which has been expanded to an adjacent building to increase the production capacity.  We are also looking at an assembler/fulfillment company that could handle large orders.

On September 1, 2005, we signed an exclusive leasing agreement with Huanghua Plastic Co., Ltd, a third party, to manufacture some component parts.  There is not a purchasing commitment required by this agreement.

Sales Channels

Sales channels to be pursued will include: retail, military, government, non-governmental agencies (NGO)’s, foundations, missionaries, multi-level marketing, international, OEM and joint ventures. Several distributors sell the Company’s portable water filtration products to customers in specific distribution channels; including: retail, multi-national corporations, foundations, sports, governmental agencies, and the military (both domestically and internationally).

Raw Materials

Seychelles’s filters include powdered water-activated coconut and other media as components in the porous plastic ionic filter. To date, there is an adequate availability of material for all of our products. We do not expect this situation to change in the near future.
 
Customers and Competition

Seychelle products compete against companies offering water filtration and bottled water including (1) bottled water and (2) home water treatment systems provided by suppliers (such as independent dealers, distributors, catalogs, internet sellers, etc.) in the form of reverse osmosis systems, distillation, and filtration systems.  Therefore, Seychelle’s portable and home filtration products compete in a limited segment of the drinking water market as an alternative to other sources of filtered or purified drinking water.

 
4

 
 


Seychelle has a negligible share of the world’s filtered or purified water market. Our products sell in a niche category of the market - portable filtration bottles that use powder-activated carbon filters that compete with our powder-activated coconut filters with various media called ionic adsorption micron filtration technology (IAMF) which remove many organic and inorganic contaminants that simple activated carbon filters cannot. Most powder activated carbon filters on the market remove Chlorine, sediment and dirt thus improving taste and odor, as well as a handful of other contaminants such as Lead, Mercury, Zinc and Copper. This would include leading brands such as Brita, PUR, General Electric and Culligan, who collectively dominate the home market. In the portable segment of the market, there are hundreds of small companies selling a variety of specialized filters, with no one company having a majority share and no industry data available. We believe that our current share of this market is negligible.

Seychelle sells its products in two ways. First, it sells its own brand to individuals, dealers, distributors, multilevel marketing companies and missionaries on a direct basis, and through our internet web site. Second, the Company offers specially designed products to the same customers as a private label supplier if purchasers buy in significant volume. In some instances, we may supply only filters for their bottles or hydration backpacks as opposed to complete products.

Currently, the majority of our sales are to customers in the U.S.  However, we are in contact with several overseas distributors and sales could increase in the future in these countries if customers have a greater demand for safe drinking water  For the year ended  February 28, 2013, we had one customer that accounted for approximately 34% of our total sales.

Backlog
 
As of February 28, 2013, we had a backlog of approximately $317,000 in unshipped orders.

Employees

As of February 28, 2013, we had a President and two (2) executive employees managing the Company with four (4) administrative employees supporting that effort.  In assembly, operations and warehousing we had twenty (20) full-time employees and two (2) part-time employees working to fill orders.
 
Proprietary Information and Technology

We own a patent for the portable water filtration system with the filter cap assembly, Patent # 5,914,045, which expires on June 22, 2016. As described in the Abstract, it is "[a] filter assembly for a flexible, portable bottle having a sealing cap including a filter attached to the interior of the cap to filter out substantially all inorganics, organics, radiological chemicals and microbiology. The filter assembly also may include a second filter or iodinator sealed in the flexible bottle to further remove micro-organisms from water passing there-through. The filter assembly is designed so that the flexible bottle must be pressurized, as by being hand pressed, after it is filled with water to force flow of water through the [sic] either or both of the filters. The filter in the cap includes a check valve to allow the bottle to be re-pressurized after water has been dispensed from the bottle." The filter cap assembly is the core to the Company’s product lines.  The media itself, the formulation process, and manufacturing methodology are governed by trade secrets.
 
We also own a second patent, Patent #6,058,971, which expires on May 9, 2017 for a quick connect diverter valve. As described in the abstract, it is "A quick-connect diverter valve for use in connecting existing water faucets and water filtration units in and around a kitchen, or other areas where clean water is desired." The quick connect diverter value is used in the above the counter filter system currently being sold in the United States, Pakistan and China. The Company believes this is a viable and growing product line for developing countries where the quality of water continues to deteriorate.

During April 2006, the Company issued 50,000 shares of common stock to the shareholders of Continental Technologies, Inc. (Continental) with an approximate value of $16,100 for the Redi Chlor brand name, trademark and the use of the EPA Registration Number 55304-4-7126.  

As these patents expire over the next three to four years, the Company cannot at this time estimate the financial impact of the expiration of these patents.

We have filed and received approval  for five trademarks with the United States Patent and Trademark Office which were granted:  Seychelle®, which has been used in commerce since 1997, along with Pres 2 Pure. Fill 2 Pure pH20 Plus and Aq-RO-matic.

We have a trade name, "Seychelle Water Filtration Products, Inc.," which we use in our commercial operations.

 
5

 
 


Government Regulation

We are not, as a company, subject to any material governmental regulation or approvals. However, our products are subject to inspection and evaluation by regulatory authorities that have jurisdiction over water quality standards. Such authorities are on the federal, state, and local level, both in the United States and overseas, where we market our products. Most of our products have already been inspected and evaluated by all applicable governmental authorities in the areas in which we operate or plan to operate in the near future. With respect to our current focus of operations, we do not know if governmental regulation will have a material impact on us in the future.
 
Research and Development

We did not spend a significant amount for research and development activities during the fiscal year ended February 28, 2013.  

Environmental Compliance

At the present time, Seychelle is not subject to any material costs for compliance with any environmental laws. With respect to our current focus of operations, we do not know if environmental compliance will have a material impact on us in the future.  
 
Item 1A. RISK FACTORS

THE OWNERSHIP AND INVESTMENT IN OUR SECURITIES INVOLVES SUBSTANTIAL RISKS. OUR COMMON SHARES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS RELATING TO OUR COMPANY.
 
We have been profitable in our four most recent fiscal years. However, we cannot guarantee that we will continue to conduct profitable operations.

Through February 28, 2009, we had incurred significant losses. However, sales activity for 48 months ended February 28, 2013 increased significantly, and we have recorded profits and positive cash flows from operations. We had net income of $635,883 for the year ended February 28, 2013, $197,986 for the year ended February 29, 2012, $1,711,790 for the year ended February 28, 2011, and $562,930 for the year ended February 28, 2010.  This reduced our accumulated deficit to $3,907,260.  Nevertheless, we believe that we have not engaged in enough consistent profitable business activity over a sustained period of time to be said to have a successful operating history.  If we do not continue to be profitable, we may go out of business, and an investor could lose his entire investment.

The water filtration business is subject to intense competition and subject to numerous risks. Many of our competitors have substantially greater capabilities and resources and may be able to develop and commercialize products before we do.

The water filtration business is highly competitive with many companies having access to the same market. Technological competition from larger and more established companies is significant and expected to increase. Most of the companies with which we compete and expect to compete have far greater capital resources and significant research and development staffs, marketing and distribution programs and facilities, and many of them have substantially greater experience in the production and marketing of products. Our ability to compete effectively may be adversely affected by the ability of these competitors to devote greater resources to the sale and marketing of their products than we can. In addition, one or more of our competitors may succeed or may already have succeeded in developing technologies and products that are more effective than any of those we currently offer or are developing. In addition, there can be no guarantee that we will be able to protect our technology from being copied or infringed upon. There can be no assurance that we will have the necessary resources to be competitive. Therefore, investors should consider an investment in us to be an extremely risky venture.

As an organization, we are dependent upon technology for the development of our products.

We are operating in a business that requires continuing research, development and testing efforts. There can be no assurance that new products will not render our products obsolete or non-competitive at some time in the future.


 
6

 
 

Our success as an organization depends, in large part, upon our ability to protect our intellectual property rights.

A successful challenge to the ownership of our technology could materially damage our business prospects. We rely principally on trade secrets as well as trade secret laws, two patents, five trademarks, copyrights, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We currently have two U.S. patents issued and a license on one patent. As these two patents expire over three and four years, respectively, we cannot at this time estimate the financial impact of the expiration of these patents.  Any issued patent may be challenged and invalidated. Patents may not be issued from any of our future applications. Any claims allowed from existing or future pending patents may not be of sufficient scope or strength to provide significant protection for our products. Patents may not be issued in all countries where our products can be sold so as to provide meaningful protection or any commercial advantage to us. Our competitors may also be able to design around our patents or the patents that we license.
 
Vigorous protection and pursuit of intellectual property rights or positions characterize our industry, which has resulted in significant and often protracted and expensive litigation. Therefore, our competitors may assert that our technologies or products infringe on their patents or proprietary rights. Problems with patents or other rights could increase the cost of our products or delay or preclude new product development and commercialization by us. If infringement claims against us are deemed valid, we may not be able to obtain appropriate licenses on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our future patent and/or technology license positions or to defend against infringement claims.
 
Our success is dependent upon the decision making of our directors and executive officers.

Our directors and executive officers have made a full commitment to our business. The loss of any or all of these individuals could have a materially adverse impact on our operations because we have no succession plan for any of them. We will depend on our senior executive officers as well as other key personnel.  If any key employee decides to terminate his employment with us, this termination could delay the commercialization of our products or prevent us from sustaining our profitability. Competition for qualified employees is intense among companies in our industry and the loss of qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for the expansion of our activities, could hinder our ability to successfully develop and maintain marketable products. 
 
We have a significant dependence on a few customers.

As of February 28, 2013, we had three customers who accounted for approximately 87% of net accounts receivable. We had one customer during the fiscal year ended February 28, 2013 who accounted for approximately 34% of total sales.  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.

The Acquisition of Other Technologies Could Result In Operating Difficulties, Dilution and Other Harmful Consequences.  

We may selectively pursue strategic acquisitions, any of which could be material to our business, operating results and financial condition.  Future acquisitions could divert management’s time and focus from operating our business.  In addition, integrating an acquired technology is risky and may result in unforeseen operating difficulties and expenditures.

The anticipated benefits of future acquisitions, if consummated, may not materialize.  Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our common stock, the incurrence of debt, contingent liabilities, or write-offs of intellectual properties any of which could harm our financial condition.  Future acquisitions may also require us to obtain additional financing, which may not be available on favorable terms or at all.

We Face Risks Associated With Currency Exchange Rate Fluctuations.  

Although we currently transact business primarily in U.S. dollars, a large portion of our revenues and related cost of goods sold may be determined in foreign currencies if we continue to expand our international operations.  Conducting business in currencies other than U.S. dollars subjects the Company to fluctuations in currency exchange rates that could have a negative impact on our reported operating results.  Fluctuations in the value of the U.S. dollar relative to other currencies may impact our revenue, cost of goods sold and operating gross margin, and result in foreign currency translation gains and losses.  Historically, we have not engaged in exchange rate hedging activities.


 
7

 
 

Changes to Financial Accounting or Other Standards May Affect Our Operating Results and Cause Us To Change Our Business Practices.    

We prepare our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States.  These accounting principles are issued by the Financial Accounting Standards Board (FASB).  The Securities and Exchange Commission also provides interpretation, guidance and principles in the preparation of financial statements.  A change in those policies could have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced.
 
For example, the Company has used stock warrants, restricted stock, and other equity incentives as a fundamental component of our executive compensation packages.  The Company believes that stock warrants and other equity incentives directly motivate our executives to maximize long-term stockholder value and, through the use of vesting, encourage executives to remain with the Company; however, grants of equity based compensation are measured at their grant date fair value and recognized over the requisite service period, if any.  
 
If We Fail in Maintaining Effective Internal Control Over Financial Reporting, The Price of Our Common Stock May be Adversely Affected.  

We are required to establish and maintain appropriate internal control over financial reporting.  Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosure regarding our business, financial condition or results of operations.  In addition, our future assessments of internal control over financial reporting may identify additional weaknesses and conditions that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors.  Any material weaknesses that needs to be addressed in management’s assessment of our internal control over financial reporting or in the report on the effectiveness of our internal controls by our independent registered public accounting firm, when, and if, applicable, may have an adverse impact of our common stock.
 
 If We Fail to Comply with Section 404 of the Sarbanes-Oxley Act of 2002 in a Timely Manner, Our Business Could Be Harmed and Our Stock Price Could Decline.  
 
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require management’s annual assessment of our internal control over financial reporting.  The standards that must be met for the management to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing, and possible remediation to meet the detailed standards.  We have incurred, and expect to incur, significant expenses and we devote resources to Section 404 compliance on an ongoing basis.  In the event that our Chief Executive Officer and Chief Financial Officer determine that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react on how the market prices of our shares will be affected, however, we believe that there is a risk that investor confidence and share value may be negatively impacted.
 
Maintaining and Improving Our Financial Controls and The Requirements Of Being a Public Company May Strain Our Resources, Divert Management’s Attention, and Affect Our Ability to Attract and Retain Qualified Members For Our Board of Directors.  
 
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002.  The requirements of these rules and regulations increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and may also place undue strain on our personnel, systems, and resources.  The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting.  Fulfilling this requirement can be difficult to achieve and maintain.
 
As a result, management’s attention may be diverted from other business concerns, which could harm our business, operating results and financial condition.  These efforts also involve substantial costs.

We may be impacted by new regulatory requirements as a result of the passage of the Dodd-Frank Act.
 
In July, 2010, Congress enacted the Dodd-Frank Act, which instituted major changes in the regulatory regime for public companies. At the present time, we do not believe that Seychelle will be impacted in a material way by this legislation. However, the implementation of the provisions of the Dodd-Frank Act is subject to regulations which have not yet been written and its statutory provisions have not been the subject of extensive judicial review, so we cannot guarantee that we may not come under its purview at some point in the future and be affected negatively by it.
 

 
8

 
 

Our articles of incorporation and bylaws could discourage acquisition proposals, delay a change in control, or prevent other transactions.

Provisions of our articles of incorporation and bylaws, as well as provisions of the Nevada Business Corporation Act, may discourage, delay or prevent a change in control of our Company that you as a stockholder may consider favorable and may be in your best interest. Our certificate of incorporation and bylaws contain provisions that:
 
 authorize the issuance of  “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and discourage a takeover attempt; and
   
 Limit who may call special meetings of stockholders.

Our stock price can be volatile.

The future market price of our common stock could fluctuate widely because of:
   
Future announcements about our Company or our competitors, including the results of testing, technological innovations or new commercial products;
   
negative regulatory actions with respect to our potential products or regulatory approvals with respect to our competitors’ products;
   
 changes in government regulations;
   
developments in our relationships with our partners including customers, vendors and distributors;
   
developments affecting our partners; including customers, vendors and distributors;
   
our failure to acquire or maintain proprietary rights to the products we develop;
   
 litigation; and
   
Public concern as to the safety of our products.

The stock market has experienced price and volume fluctuations that have particularly affected the market price for many emerging companies. These fluctuations have often been unrelated to the operating performance of these companies. These broad market fluctuations may cause the market price of our common stock to be lower or more volatile than otherwise expected.

Buying penny stocks is very risky and speculative. The applicability of the “penny stock rules” to broker-dealer sales of our common stock will have a negative effect on the liquidity and market price of our common stock.

Trading in our shares is subject to the "penny stock rules" adopted pursuant to Rule 15g-9 of the Securities and Exchange Act of 1934, as amended, which apply to companies that are not listed on an exchange and whose common stock trades at less than $5.00 per share or which have a tangible net worth of less than $5,000,000 - or $2,000,000 if we have been operating for three or more years. The penny stock rules impose additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the penny stock rules will affect the ability of broker-dealers to sell shares of our common stock and may affect the ability of shareholders to sell their shares in the secondary market, as compliance with such rules may delay and/or preclude certain trading transactions. The rules could also have an adverse effect on the market price of our common stock.
 
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock. Many brokers may be unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult for stockholders to dispose of their shares. You will also find it difficult to obtain accurate information about, and/or quotations as to the price of our common stock.

We have added a stock broker to create or maintain a market in our common stock, which could favorably impact the price and liquidity of our securities.
 

 
9

 
 

We do not expect to pay dividends on common stock.

We have not paid any cash dividends with respect to our common stock, and it is unlikely that we will pay any dividends on our common stock in the foreseeable future, as we are a growth company.
  
ITEM 1B. UNRESOLVED STAFF COMMENTS.

A smaller reporting company is not required to provide the information in this Item.
 
ITEM 2. DESCRIPTION OF PROPERTY.
 
As of February 28, 2013, our business office was located at 32963 Calle Perfecto, San Juan Capistrano, CA 92675 with an additional warehouse located at 32901 Calle Perfecto, San Juan Capistrano, CA 92675. Our office telephone number is 949-234-1999. We pay a total of approximately $13,200 in rent per month for approximately 17,200 square feet of office, operations and warehousing. We have a lease for the 32963 location with an unaffiliated third party, which was initiated in June 2009 and will expire in June 2014.   The lease for the 32901 location is with a different unaffiliated third party, was initiated November 2011, and will expire in July 2014. 
 
We own two patents and numerous trade secrets, see Proprietary Information and Technology above, and other proprietary information related to our business operations. We have filed for five trademarks with the United States Patent and Trademark Office which were granted:  Seychelle®, which has been used in commerce since 1997, along with Pres 2 Pure,. Fill 2 Pure, pH20 Plus and Aq-RO-matic. 
 
 
ITEM 3. LEGAL PROCEEDINGS.

In the case titled Letty Garcia v. Carl Palmer; Seychelle Environmental Technologies, Inc., et, al., brought in the Superior Court for the State of California, San Diego County District, the issue was an action by the plaintiff, Ms. Garcia, to enforce judgment against Mr. Palmer by levying the assets of Seychelle. The court found against the Company in May 2012 for approximately $157,000.  This amount was reflected in our February 29, 2012 consolidated financial statements. The Company believed that the ruling was incorrect and has filed an appeal. We believe that the appeal will be heard in late 2013, and that the Company will prevail.  The remaining amount of restricted cash that was reflected in previous financial statements relating to this case was returned to the Company during the year ended February 28, 2013.
 
Otherwise, as of February 28, 2013, we know of no other legal proceedings pending or threatened, or judgments entered against the Company or any of our directors or officers in their capacity as such.

ITEM 4. REMOVED AND RESERVED.
 
PART II
  
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Principal Market or Markets 
 
Our Common Stock began trading in 1997 on the OTC Bulletin Board (“OTCBB”).  Since the consummation of trading our common stock, market makers and other dealers have provided bid and ask quotations of our Common Stock under the symbol "SYEV." We were de-listed from the OTCBB in 2002 and were traded on the "Pink Sheets" from December 2002 to March 11, 2008, when we were re-listed on the OTCBB. The table below represents the range of high and low bid quotations of our common stock as reported during the reporting period herein. The following bid price market quotations represent prices between dealers and do not include retail markup, markdown, or commissions; hence, they may not represent actual transactions. For the fiscal year ended February 28, 2013, the common stock had a High bid price of $0.59 and a Low bid price of $0.17.

 
10

 
 


Fiscal Year 2013
High Bid
Low Bid
     
Quarter Ended:
   
     
First Quarter May 2012
$0.59
$0.43
     
     
Second Quarter August 2012
$0.48
$0.25
     
     
Third Quarter November 2012
$0.35
$0.22
     
     
Fourth Quarter February 2013
$0.30
$0.17
     
  
Fiscal Year 2012
High Bid
Low Bid
     
Quarter Ended:
   
     
First Quarter May 2011
$0.35
$0.30
     
     
Second Quarter August 2011
$0.35
$0.26
     
     
Third Quarter November 2011
$0.62
$0.22
     
     
Fourth Quarter February 2012
$0.65
$0.40
     

Approximate Number of Holders of Common Stock
 
As of February 28, 2013, there were approximately 352 shareholders of record of our common stock.

Dividends
 
Holders of our common stock are entitled to receive such dividends as may be declared by our Board of Directors. We paid no dividends on our common stock during the periods reported herein nor do we anticipate paying such dividends in the foreseeable future.
 

ITEM 6. SELECTED FINANCIAL DATA
 
A smaller reporting company is not required to provide the information in this Item.

 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of the Company and its subsidiary as of and for the fiscal years ended February 28, 2013 and February 29, 2012.  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 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.
 

 
11

 
 

Application of Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. 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.

 Critical accounting policies for us include our accounting for inventory reserves, sales returns reserves, share based payment arrangements 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 market values.  Once established, write-downs are considered permanent adjustments to the cost basis of the excess or obsolete inventory.  

Sales Returns Reserves

The Company analyzes sales returns in accordance with FASB Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. Estimates for sales returns are based on a variety of factors, including 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.  Management is able to make reasonable and reliable estimates of product returns based on our history in this business.  

Stock Based Compensation

FASB ASC Topic 718, Compensation – Stock Compensation, requires companies to estimate the fair value of stock based compensation on the date of grant. For stock grants, the Company uses the closing price on the date of grant. For warrants, the Company uses the Black-Scholes option pricing model. In order to estimate the fair value of the warrants, certain assumptions are made regarding future events. Such assumptions include the estimated future volatility of the Company’s stock price, the expected lives of the awards and the expected dividends, and risk-free rate. Changes in these estimates would change the estimated fair value of the awards, the corresponding accounting for the awards.

Income Taxes
 
We account for income taxes using the asset and liability method under which deferred tax assets or liabilities are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.

Recent Accounting Pronouncements

In July 2012, the FASB issued Accounting Standards Update No. (ASU) 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.  This update amends ASU 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill.  The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.  The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.


 
12

 
 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income: Presentation of Comprehensive Income, as guidance on ASC 220, Comprehensive Income, regarding the presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. Instead, a company is required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance also requires companies to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented.  The Company’s adoption of this guidance effective March 1, 2012 did not have an impact on the on the Company’s consolidated financial statement presentation.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, requiring further disclosure requirements regarding components of comprehensive income.  This new guidance is effective for the Company beginning March 1, 2013 and is not expected to have an impact on the on the Company’s consolidated financial statement presentation.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).  This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company’s adoption of this guidance effective March 1, 2012 did not have a significant impact on the consolidated balance sheet, results of operations or cash flow. 

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 ended February 28, 2013 and February 29, 2012 are derived from our consolidated financial statements included elsewhere in this annual report.


 
13

 
 

Fiscal year ended February 28, 2013 compared to the corresponding period in fiscal 2012.

Selected Financial Data
 
   
Years Ended
             
   
February 28,
   
February 29,
         
Percentage
 
   
2013
   
2012
   
Difference
   
Change
 
                         
Sales
 
$
4,847,147
   
$
5,142,260
     
(295,113
)
   
(6
)%
Cost of sales
   
2,502,365
     
2,651,007
     
(148,642
)
   
(6
)%
Gross profit
   
2,344,782
     
2,491,253
     
(146,471
)
   
(6
)%
Gross profit percentage
   
48
%
   
48
%
           
-
%
                                 
Total operating expenses
   
1,863,889
     
2,041,142
     
(177,253
)
   
(9
)%
Income from operations
   
480,893
     
450,111
     
30,782
     
7
%
Interest expense (including related party)
   
(1,956
)
   
(1,649
)
   
(307
)
   
19
%
Interest income
   
945
     
1,221
     
(276
)
   
(23
)%
Other income (expense)
   
11,221
     
(12,284
)
   
23,504
     
(191
)%
Benefit (expense) from income taxes
   
144,780
     
(239,413
)
   
384,193
     
(161
)%
Net income
   
635,883
     
197,986
     
437,897
     
221
%
Net income percentage
   
13
%
   
4
%
           
9
%
                                 
Net cash provided by operating activities
   
1,136,481
     
83,930
     
1,052,550
     
1,254
%
Net cash used in investing activities
   
(46,600
)
   
(115,778
)
   
69,179
     
(60
)%
Net cash used in financing activities
   
(4,331
)
   
(63,447
)
   
59,116
     
(93
)%
 
Sales.  Our customer concentration is constantly changing which contributes to much of the fluctuation in revenues.   The current period decrease in revenues is largely due to sales to two customers who accounted for approximately $2,056,000 of net sales, or 42% of revenues for the year ended February 28, 2013 compared to $2,927,000 of net sales, or 56% of revenues for the year ended February 29, 2012.  This was decreased further by website sales which contributed $267,000 in the year ended February 28, 2013 compared to $552,000 in the year ended February 29, 2012.     These decreases were largely offset with increases in other higher margin product lines in the product mix, notably in plastic bottles (which increased to $1,707,000 from $1,108,000), pumps (which increased to $248,000 from $127,000), inline (increased to $62,000 from $4,000), and replacement filters (which increased to $440,000 from $383,000).   Decreases were experienced within a few product lines: missionary packs (which decreased to $335,000 in the current year as compared to $851,000 in sales for the comparable period), pitchers (which decreased to $1,093,000 from $1,384,000), stainless steel bottles (which decreased to $193,000 from $426,000), straws (decreased to $176,000 from $233,000), countertop units (decreased to $19,000 from $93,000), and shower (which decreased to $12,000 from $95,000).    There were also increased revenues from the introduction of new product lines, such as the Aqua Mist and shower lines, which combined for $136,000 of current year revenue as compared to zero in the comparable period of the prior year.  We anticipate continued improvement in the sales figures as we expand into new markets both internationally and in the US.
 

 
14

 
 

Cost of sales and gross profit percentage.  The decrease in cost of sales is largely a direct result of the 6% decrease in sales for the year ended February 28, 2013 from the year ended February 29, 2012.  Cost of sales decreased by 6% from period to period by comparison, resulting in gross profit margin remaining at approximately 48%.  Our profit margin will fluctuate from time to time based on the product mix within sales.    As mentioned in the sales discussion, there were decreased sales for mission packs, pitchers and stainless steel bottles, each of these product lines typically result in a lower margin per unit than most of the Company’s other product lines.  However, the five product lines with the highest dollar increases in sales for the year ended February 28, 2013 each produce product margins at or above 50%, including plastic bottles and replacement filter packs.   We continue to review our gross margins and are continuing to pursue efficiencies in the production process, and we are negotiating for better filter prices as volume increases and believe that gross margins will improve further if we are successful in these plans.  
 
Operating expenses. The decrease in general and administrative expenses was primarily due to the decrease in sales commission of approximately $203,000.  There was an increase in commissionable sales during fiscal 2012, resulting in sales commissions for that period increasing by $182,000 over the year prior.  Due to a shift in sales mix and modifications to commissions arrangements, these expenses decreased for the year ended February 28, 2013 back to levels consistent with years prior to fiscal 2012.  Legal expenses increased by approximately $102,000 as a result of the resolution of ongoing litigation as noted in the legal proceedings footnote.    SG&A expenses in future periods are expected to increase from a total dollar standpoint, but we do not foresee an increase as a percentage of sales.  

Interest income and expense. Interest income and expense was relatively consistent from year to year.
 
Benefit from income taxes.   Prior to the fiscal year ended February 28, 2010, the Company had a history of losses and accumulated a significant number of net operating loss carryforwards (NOL’s).  Due to the uncertainty of the Company’s ability to utilize these NOL’s in the future, a full valuation allowance was provided against deferred tax assets at that time.  For the years ended February 28, 2013, February 29, 2012 and February 28, 2011 and 2010, the Company achieved pretax income and was able to utilize NOL carryforwards of approximately $0.9 million, $0.7 million, $1.4 million and $600,000 in these periods, respectively.   Given that the Company now has reported pretax income in the last four years and expectations of continued profitability in the future, there is currently a more optimistic outlook as to whether the Company will be able to utilize the NOL’s before expiration.  As a result, the Company reversed a portion of the valuation allowance during the year ended February 28, 2013, by approximately $383,000.  In the fiscal year ended February 28, 2013, the Company recorded income tax benefit of approximately $145,000, of which approximately $50,000 was current expense and $195,000 was deferred benefit.
 
Net Income. The net income for the fiscal year ended February 28, 2013 was $635,883 ($0.02 per basic and diluted share) or 221% more than February 29, 2012, which was $197,986 ($0.01 per basic and diluted share) due to the decrease in general and administrative expenses and the deferred tax benefit recorded in fiscal year ended February 28, 2013, as discussed above.   Our expenses were higher than anticipated in the fiscal year ended February 28, 2013, although lower than prior year, resulting from delays in shipments to Japan, Mexico and Saudi Arabia, and the launch of the new pH product line with a major distributor for the US and Canada.    As a result of the beginning of shipments to Japan, and Saudi Arabia and the new pH product line to commence in June and July, we expect continued improvement in the profitability of the Company.   Once the supply catches up with demand we expect this improvement in profitability to continue on into fiscal year 2014 with the initial orders already being received in the first quarter from these efforts.
   
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, such as certain lease agreements are not recognized as liabilities in our consolidated financial statements but are required to be disclosed. For example, the Company is contractually committed to make certain minimum lease payments to rent its current corporate location.

The following table summarizes our significant contractual obligations on an undiscounted basis as of February 28, 2013 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:
 

 
15

 
 
 
   
Total
   
Less Than
1 Year
   
1- 3 Years
   
3-5 Years
   
More Than
5 Years
   
Convertible to
Stock or
Warrants
 
Accounts payable and accrued liabilities
 
$
157,253
   
$
157,253
   
$
-
   
$
-
   
$
-
   
$
-
 
Customer deposits
   
371,327
     
371,327
     
-
     
-
     
-
     
-
 
Capital lease
   
18,591
     
4,581
     
14,010
     
-
     
-
     
-
 
     
547,171
     
533,161
     
14,010
     
-
     
-
     
-
 
Other contractual commitments (1)
   
224,423
     
169,346
     
55,077
     
-
     
-
     
-
 
Total contractual obligations
 
$
771,594
   
$
702,507
   
$
69,087
   
$
-
   
$
-
   
$
-
 
                                                 
(1) Office lease commitment expiring June 2014 and equipment lease expiring 2015.
                         
 
 
Liquidity and capital resources.
 
Net cash provided by operating activities. During the fiscal years ended February 28, 2013 and February 29, 2012, the Company funded its operations through sales of products and a minimal level of borrowings. Additionally, the Company has been successful in collecting its accounts receivable timely, which also helps with operating cash flow.  Total cash provided through operations totaled $1,136,481 in 2013 and $83,930 in 2012.  This increase is primarily due to the increase in the Company’s profitability from 2012 to 2013, along with a decrease in inventory, an increase in customer deposits and the return of restricted cash previously being held as mentioned in the legal proceeding footnote, offset by an increase in accounts receivable due to timing of significant customer sales in 2013.
 
Net cash used in investing activities. The $46,600 and $115,778 of cash used in investment activities during fiscal 2013 and 2012 is primarily due to purchasing equipment throughout each year.
 
Net cash used in financing activities.  In 2013, we repaid $4,331 in capital leases payable.  In 2012, we repaid $38,447 in notes payable and capital lease obligations and spent $25,000 for repurchases of shares of the Company’s common stock. 
 
The Company currently estimates monthly cash requirements of approximately $135,000 to cover selling, general and administrative costs. Gross profits from sales are expected to provide sufficient cash flows to meet these cash requirements and pay contractual commitments.

As of February 28, 2013, the Company has unrestricted cash of $2,234,545 and a backlog of $317,000 in orders to fill.  The Company does not believe that additional funding will be required in the form of related party notes or other shareholder investment.   The TAM Trust has committed to providing up to $250,000 in additional funding, if required.  
 
Capital expenditures.

We do not expect any major capital expenditures in fiscal 2014.  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.
 
Employees.  

We anticipate no additional executive and non-executive hiring. 

Any seasonal aspects
 
We have not experienced seasonal spikes in our sales as a result of our very limited retail store distribution.
 

 
16

 
 

Off-Balance Sheet Arrangements : None
 
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
 
A smaller reporting company is not required to provide the information in this Item.
 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



 
17

 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
To the Board of Directors and Stockholders
of Seychelle Environmental Technologies, Inc.:
 
We have audited the accompanying consolidated balance sheets of Seychelle Environmental Technologies, Inc. and subsidiary (the Company) as of February 28, 2013 and February 29, 2012, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the two-year period ended February 28, 2013.  Seychelle Environmental Technologies, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Seychelle Environmental Technologies, Inc. as of February 28, 2013 and February 29, 2012, and the results of their operations and their cash flows for each of the years in the two-year period ended February 28, 2013 in conformity with accounting principles generally accepted in the United States of America.
 

 
/s/ Ramirez Jimenez International CPAs
   
Irvine, California
   
May 21, 2013
 
   


 
 
18

 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Balance Sheets
   
ASSETS
     
       
   
February 28,
2013
   
February 29,
2012
 
CURRENT ASSETS
           
Cash and cash equivalents
 
$
2,234,545
   
$
1,148,995
 
Restricted cash
   
-
     
146,081
 
Accounts receivable, net of allowance for doubtful accounts and sales returns  of $114,591 and $78,885, respectively
   
641,635
     
61,782
 
Inventory, net
   
464,998
     
964,580
 
Deferred tax assets
   
463,942
     
120,242
 
Prepaid expenses, deposits and other current assets
   
125,080
     
179,347
 
      Total current assets
   
3,930,200
     
2,621,027
 
                 
PROPERTY AND EQUIPMENT, NET
   
179,876
     
171,304
 
                 
OTHER ASSETS
               
Intangible assets, net
   
4,995
     
5,799
 
Deferred tax assets
   
257,392
     
406,039
 
Other assets
   
8,514
     
8,514
 
                 
         TOTAL ASSETS     
 
$
4,380,977
   
$
3,212,683
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
   Accounts payable and accrued expenses
 
$
157,253
   
$
158,758
 
   Customer deposits
   
371,327
     
197,696
 
   Notes payable and capital lease obligation
   
4,581
     
4,331
 
      Total current liabilities
   
533,161
     
360,785
 
                 
LONG-TERM LIABILITIES
               
     
               
     Capital lease obligation
   
14,010
     
18,591
 
      Total long-term liabilities
   
14,010
     
18,591
 
                 
      Total liabilities
   
547,171
     
379,376
 
                 
Commitments and contingencies (Note 10)
               
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, 6,000,000 shares authorized,
               
    none issued or outstanding
   
-
     
-
 
Common stock $0.001 par value, 50,000,000 shares
               
authorized, 25,833,646 and 25,800,146 shares
               
issued and outstanding, respectively
   
25,834
     
25,800
 
Additional paid-in capital
   
7,715,232
     
7,350,650
 
Accumulated deficit
   
(3,907,260
)
   
(4,543,143
)
                 
      Total Stockholders' Equity
   
3,833,806
     
2,833,307
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
4,380,977
   
$
3,212,683
 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
 
19

 
 

 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Statements of Income
 
   
 
For the Years Ended
 
   
February 28,
   
February 29,
 
   
2013
   
2012
 
             
SALES
 
$
4,847,147
   
$
5,142,260
 
COST OF SALES
   
2,502,365
     
2,651,007
 
GROSS PROFIT
   
2,344,782
     
2,491,253
 
                 
OPERATING EXPENSES
               
Selling, general and administrative expenses
   
1,813,836
     
1,998,244
 
Depreciation and amortization
   
50,053
     
42,898
 
                 
     Total operating expenses
   
1,863,889
     
2,041,142
 
                 
INCOME FROM OPERATIONS
   
480,893
     
450,111
 
                 
OTHER INCOME (EXPENSES)
               
Interest income
   
945
     
1,221
 
Interest expense
   
(1,956
)
   
(1,649
)
Other
   
11,221
     
(12,284
)
                 
     Total other income (expenses)
   
10,210
     
(12,712
)
                 
INCOME BEFORE INCOME TAX BENEFIT (EXPENSE)
   
491,103
     
437,399
 
                 
Income tax benefit (expense)
   
144,780
     
 (239,413
)
                 
NET INCOME
 
$
635,883
   
$
197,986
 
NET INCOME PER SHARE
               
  Basic
 
$
0.02
   
$
0.01
 
  Diluted
 
$
0.02
   
$
0.01
 
WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
               
  Basic
   
25,808,928
     
25,932,373
 
  Diluted
   
26,621,500
     
26,000,358
 
                 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
 
20

 
 

 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Statements of Stockholders' Equity
For the Years Ended February 28, 2013 and February 29, 2012
 
                                     
                     
Additional
             
   
Common Stock
   
Treasury
   
Paid-In
   
(Accumulated
       
   
Shares
   
Amount
   
Stock
   
Capital
   
Deficit)
   
Total
 
                                     
Balance at February 28, 2011
   
25,882,646
   
$
25,883
   
$
(17,549
)
 
$
7,016,148
   
$
(4,741,129
)
 
$
2,283,353
 
                                                 
Issuance of common stock for compensation
   
75,000
     
75
             
21,675
             
21,750
 
Common stock repurchased
                   
(25,000
)
                   
(25,000
)
Common stock cancelled
   
(157,500
)
   
(158
)
   
42,549
     
(42,391
)
           
-
 
Stock-based compensation
                           
355,218
             
355,218
 
Net income
   
-
     
-
                     
197,986
     
197,986
 
Balance at February 29, 2012
   
25,800,146
   
$
25,800
   
$
-
   
$
7,350,650
   
$
(4,543,143
)
 
$
2,833,307
 
                                                 
Issuance of common stock for compensation
   
33,500
     
34
             
9,366
             
9,400
 
Stock-based compensation
                           
355,216
             
355,216
 
Net income
   
-
     
-
                     
635,883
     
635,883
 
Balance at February 28, 2013
   
25,833,646
   
$
25,834
   
$
-
   
$
7,715,232
   
$
(3,907,260
)
 
$
3,833,806
 
  
The accompanying notes are an integral part of these consolidated financial statements.

 
 
21

 
 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
 
 
   
 
For the Years Ended
 
   
February 28,
   
February 29,
 
   
2013
   
2012
 
             
CASH FLOW FROM OPERATING ACTIVITIES:
           
Net income
 
$
635,883
   
$
197,986
 
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation and amortization
   
50,053
     
42,898
 
(Gain) loss on sale of assets
   
(11,221
)
   
12,292
 
Gain on extinguishment of debt
   
-
     
(1,963
)
Stock-based compensation
   
364,616
     
376,968
 
Provision for doubtful accounts
   
41,884
     
8,547
Increase (decrease) in inventory reserve
   
40,794
     
(257,570
)
Deferred tax provision (benefit)
   
(195,053
)
   
168,552
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(621,737
)
   
(16,619
)
Inventory
   
458,788
     
(259,521
Prepaid expenses, deposits and other current assets
   
54,267
     
(101,827
)
Restricted cash deposits
   
146,081
     
(146,081
)
Accounts payable and accrued expenses
   
(1,505
)
   
(71,974
)
Customer deposits
   
173,631
     
132,242
 
                 
Net Cash Provided by Operating Activities
   
1,136,481
     
83,930
 
                 
CASH FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
   
(57,983
)
   
(111,773
)
Proceeds from sale of property and equipment
   
11,483
     
-
 
Purchase of intangible assets
   
(100
)
   
(4,005
)
                 
Net Cash Used in Investing Activities
   
(46,600
)
   
(115,778
)
                 
CASH FROM FINANCING ACTIVITIES:
               
Repayment of notes payable and capital lease obligation
   
(4,331
)
   
(38,447
)
Repurchase of common stock
   
-
     
(25,000
)
                 
Net Cash Used in Financing Activities
   
(4,331
)
   
(63,447
)
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
1,085,550
     
(95,295
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
   
1,148,995
     
1,244,290
 
                 
CASH AND CASH EQUIVALENTS AT END OF YEAR
 
$
2,234,545
   
$
1,148,995
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:
               
Acquisition of equipment under capital lease
 
$
-
   
$
24,295
 
CASH PAID DURING THE YEAR FOR:
               
Interest
 
$
1,956
   
$
1,649
 
Income taxes
 
$
4,234
   
$
407,965
 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
 
22

 
 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements


NOTE 1:   ORGANIZATION AND DESCRIPTION OF BUSINESS

Organization

Seychelle Environmental Technologies, Inc. was incorporated under the laws of the State of Nevada on January 23, 1998 as a change in 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.  Seychelle Water Technologies, Inc., and Fill 2 Pure International, Inc., both wholly owned subsidiaries, were formed as corporations in February 1997 and April, 2013, respectively, under the laws of the state of Nevada for the purpose of marketing.

Description of Business

The Company designs, assembles and distributes water filtration systems. These systems include portable water bottles and related water filtration products that can be filled from nearly any available source of fresh water. 


NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES
 
This 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 generally accepted accounting principles in the United States and have been consistently applied in the preparation of the consolidated financial statements herein as of and for the years ended February 28, 2013 and February 29, 2012.
 
Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Principles of Consolidation

The 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). All significant intercompany transactions and balances have been eliminated in consolidation. No financial information is presented with respect to Fill 2 Pure International, Inc., which was formed after the date of these financial statements.
 
Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made in preparing the consolidated financial statements include the allowance for doubtful accounts and sales returns, stock-based compensation, inventory reserves, valuation allowances for property and equipment and intangible assets, and the deferred income tax valuation allowance. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.  The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
 
Cash and Cash Equivalents
 
Cash equivalents are comprised of certain highly liquid investments with original maturities of three months or less when purchased.  The Company maintains its cash and cash equivalents in bank deposit accounts which at times may exceed federally insured limits of $250,000.  The Company has not experienced any losses related to this concentration of risk. Deposits exceeded insured limits by approximately $1.7 million as of February 28, 2013.

 
 
23

 
 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements


NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Accounts Receivable
 
The Company performs periodic credit evaluations of its customers’ financial condition and does not require collateral. Trade receivables generally are due in 30 days. An allowance for doubtful accounts is recorded when it is probable that all or a portion of a trade receivable balance will not be collected.

Revenue Recognition
 
The Company recognizes revenue when persuasive evidence of an arrangement exists, products are shipped and title has passed, the price to the buyer is fixed or determinable and collectability is reasonably assured.  These criteria are typically met when the product is shipped. Revenue is not recognized at the time of shipment if these criteria are not met.  Certain of the Company’s sales include a right for the customer to return the product if they are not satisfied.  The Company has an unconditional return policy for the first 90 days.  Customers may return the product for a full refund, or they may receive a replacement at no charge. The same policy applies to any product sold from the period 91 days after purchase to one year, for any defects in materials or workmanship.  In accordance with FASB ASC Topic 605, Revenue Recognition, the Company makes periodic assessments of return activity and if necessary records a reserve for product returns

Inventory

Inventory is stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. Inventory is comprised of raw materials and finished goods.  Raw materials consist of fittings, caps and other components necessary to assemble the Company’s finished goods.  Finished goods consist of water bottles and other filtration systems that are available for shipment to customers.  Finished goods and work in process include the costs of materials, labor and an allocation of overhead.  Total overhead allocated to inventory as of February 28, 2013 and February 29, 2012 amounted to approximately $65,000 and $199,000, respectively.

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 net realizable value of the inventory.  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.  The Company’s reserve for excess and obsolete inventory amounted to approximately $49,000 and $8,000 as of February 28, 2013 and February 29, 2012, respectively.

Property and Equipment

Property and equipment are stated at cost.  Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets.  The estimated useful lives used in determining depreciation are three to five years for tooling, five years for computers and vehicles, and five to seven years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the respective asset.  Management evaluates useful lives regularly in order to determine recoverability.

Maintenance and repairs are charged to expense as incurred; additions and betterments are capitalized. Upon retirement or sale, the cost and related accumulated depreciation of the disposed assets are removed, and any resulting gain or loss is recorded. Fully depreciated assets are not removed from the accounts until physical disposition.
 
Intangible Assets

Intangible assets include patents and trademarks. All patents and trademarks are capitalized and amortized over the economic useful lives using the straight-line method.  The Company assesses whether there has been a permanent impairment of the value of intangible assets by considering factors such as expected future product revenues, anticipated product demand and prospects, and other economic factors.
 

 
 
24

 
 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements


NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Long-Lived Assets
 
Long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

Customer Deposits

Customer deposits represent advance payments received for products and are recognized as revenue in accordance with the Company’s revenue recognition policy.

Fair Value of Financial Instruments

For certain financial instruments, including accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their relatively short maturities. In the case of the notes payable, the interest rate on the notes approximates the market rate of interest for similar borrowings. Consequently the carrying value of the notes payable also approximates the fair value.

Cost of Sales
 
Cost of sales is comprised primarily of the cost of purchased product, as well as labor, inbound freight costs, allocated overhead costs  and other material costs required to complete products, including inventory markdowns due to excess and obsolete inventory.

Shipping and Handling

All amounts billed to customers relating to shipping and handling are reported as a component of sales. Costs incurred by the Company for shipping and handling, including transportation costs paid to third party shippers, are reported as a component of cost of sales.

Sales Tax

The Company collects sales tax in various jurisdictions. Upon collection from customers, it records the amount as a payable to the related jurisdiction. On a periodic basis, it files a sales tax return with the jurisdictions and remits the amount indicated on the return.

Advertising

Advertising costs are expensed as incurred.  Total advertising expenses amounted to $4,085 and $10,767 for the fiscal years ended February 28, 2013 and February 29, 2012, respectively, and recorded as selling, general and administrative expenses.

Research and Development

Research and development costs are expensed as incurred and amounted to $283 and $1,109 for the fiscal years ended February 28, 2013 and February 29, 2012, respectively. These costs are included in selling, general and administrative expenses in the accompanying consolidated statements of income.


 
 
25

 
 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements


NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Stock-Based Compensation

The Company follows FASB ASC Topic 718, Compensation – Stock Compensation, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains services in share based payment transactions. ASC 718 requires entities to measure the cost of services received in exchange equity instruments, including stock options and warrants, based on the grant date fair value of the award and to recognize it as compensation expense over the period services are to be provided, usually the vesting period.

The fair value of options and warrants is calculated using the Black-Scholes option-pricing model. This model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions. As such, the values derived from using that model can differ significantly from other methods of valuing the Company’s stock based compensation arrangements. The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values.  These factors could change in the future, affecting the determination of stock based compensation expense in future periods.

The Company’s fair value calculations for stock based compensation awards have been based on the following assumptions.
 
     
Expected life in years
 7
 
Stock price volatility
244%
 
Risk free interest rate
2.9%
 
Expected dividends
None
 

The assumptions used in the Black-Scholes model referred to above are based upon the following data: (1) The expected life of the option or warrant is estimated by considering the contractual term, the vesting period and the expected exercise price. (2) The expected stock price volatility of the underlying shares over the expected life is based upon historical share price data. (3) The risk free interest rate is based on published U.S. Treasury Department interest rates for the expected life. (4) Expected dividends are based on historical dividend data and expected future dividend activity.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes.  The asset and liability method requires that the current or deferred tax consequences of all events recognized in the financial statements be measured by applying the provisions of enacted tax laws to determine the amount of taxes payable or refundable currently or in future years. Deferred tax assets are reviewed for recoverability and the Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that all or some portion of the deferred tax assets will not be recovered.

The Company recognizes and measures uncertain tax positions using a “more-likely-than-not” approach. The Company had no material uncertain tax positions at February 28, 2013 or February 29, 2012.

Income Per Common Share

Basic net income per common share is computed by dividing net income by the weighted average number of outstanding common shares during each of the periods presented. Diluted net income per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. The dilutive effect of outstanding stock options and warrants is reflected in diluted earnings per share by application of the treasury stock method. 

 
 
 
26

 
 

 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
 

NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
   
For the years ended
 
   
February 28,
   
February 29,
 
   
2013
   
2012
 
Numerator:
           
Net Income available to common shareholders
 
$
635,883
   
$
197,986
 
Weighted average shares – basic
   
25,808,928
     
25,932,373
 
Net income per share – basic
 
$
0.02
   
$
0.01
 
                 
Dilutive effect of common stock equivalents:
               
Warrants
   
812,572
     
67,985
 
Weighted average shares – diluted
   
26,621,500
     
26,000,358
 
Net income  per share – diluted
 
$
0.02
   
$
0.01
 
 
Concentrations

The Company has an agreement with a third party to manufacture the Company’s component parts in China. As of February 28, 2013 and February 29, 2012, the Company had deposits for inventory purchases in China of approximately $39,700 and $65,560, respectively. For the fiscal years ended February 28, 2013 and February 29, 2012, this vendor accounted for approximately 41% and 46%, respectively, of total raw material purchases.  The Company has two other vendors that respectively accounted for an additional 27% and 11% of total raw material purchases for the fiscal year ended February 28, 2013 and 26% and 10% of total raw material purchases for the fiscal year ended February 29, 2012.

As of February 28, 2013, the Company had three customers who accounted for approximately 87% of net accounts receivable.  The Company had one customer during the fiscal year ended February 28, 2013 who accounted for approximately 34% of total sales.  As of February 29, 2012, the Company had two customers which accounted for approximately 42% of net accounts receivable.  The Company had two customers during the fiscal year ended February 29, 2012 that accounted for approximately 56% of total sales.
 
Reclassifications
 
Certain reclassifications have been made to the fiscal 2012 consolidated financial statements to conform to the fiscal 2013 presentation.
 
Recent Accounting Pronouncements
 
In July 2012, the FASB issued Accounting Standards Update No. (ASU) 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.  This update amends ASU 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill.  The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.  The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

 
 
27

 
 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
 

NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income: Presentation of Comprehensive Income, as guidance on ASC 220, Comprehensive Income, regarding the presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. Instead, a company is required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance also requires companies to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented.  The Company’s adoption of this guidance effective March 1, 2012 did not have an impact on the on the Company’s consolidated financial statement presentation.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, requiring further disclosure requirements regarding components of comprehensive income.  This new guidance is effective for the Company beginning March 1, 2013 and is not expected to have an impact on the on the Company’s consolidated financial statement presentation.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).  This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company’s adoption of this guidance effective March 1, 2012 did not have a significant impact on the consolidated balance sheet, results of operations or cash flow.  

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.


NOTE 3:   INVENTORY

The Company’s inventory consisted of the following at February 28, 2013 and February 29, 2012:
 
   
February 28,
   
February 29,
 
   
2013
   
2012
 
Raw materials
 
$
336,966
   
$
589,774
 
                 
Finished goods
   
176,541
     
382,521
 
     
513,507
     
972,295
 
Reserve for obsolete and slow moving inventory
   
 (48,509
)
   
 (7,715
)
   
$
464,998
   
$
964,580
 

 
 
28

 
 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements


NOTE 4:   PROPERTY AND EQUIPMENT
 
The following is a summary of property and equipment at February 28, 2013 and  February 29, 2012:
 
       
   
February 28,
   
February 29,
 
   
2013
   
2012
 
Tooling
 
$
300,874
   
$
233,138
 
Equipment
   
45,782
     
45,203
 
Vehicles
   
-
     
13,000
 
Computer equipment
   
28,672
     
28,672
 
Leasehold equipment
   
11,129
     
11,129
 
     
386,457
     
331,142
 
 Less: accumulated depreciation
   
(206,581
)
   
(159,838
)
   
$
179,876
   
$
171,304
 

Fixed assets outside the United States included $229,931 and $170,197 in tooling and equipment, at cost, located in China with a third party to manufacture the Company’s component parts at February 28, 2013 and February 29, 2012, respectively. Depreciation expense included in cost of sales was $46,463 and $31,363 for the fiscal years ended February 28, 2013 and February 29, 2012 respectively.  Depreciation expense included in operating expense was $2,686 and $6,186 for the fiscal years ended February 28, 2013 and February 29, 2012, respectively.


NOTE 5:    INTANGIBLE ASSETS
 
The following is a summary of intangible assets at February 28, 2013 and February 29, 2012: 
 
       
   
February 28,
   
February 29,
 
   
2013
   
2012
 
Trademarks
 
$
24,100
   
$
24,100
 
Patents
   
20,702
     
20,602
 
     
44,802
     
44,702
 
Less: accumulated amortization
   
(39,807
)
   
(38,903
)
   
$
4,995
   
$
5,799
 

Intangible assets are amortized over their estimated useful economic lives of five years. Amortization expense related to intangibles was $904 and $5,349 during the fiscal years ended February 28, 2013 and February 29, 2012, respectively.  Amortization expense is expected to be approximately $1,000 in fiscal year 2014 and insignificant amounts thereafter.


 
 
29

 
 

 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
 
 
NOTE 6:    NOTES PAYABLE AND CAPITAL LEASE OBLIGATION
 
Obligations outstanding as of February 28, 2013 and February 29, 2012 consisted of the following:
 
   
February 28,
   
February 29,
 
   
2013
   
2012
 
Capital lease for equipment requiring monthly payments of principal and
interest of $491 through October 2016 bearing interest at an annual rate of 7.5%
 
 $
18,591
   
 $
22,922
 
  Less current portion
   
(4,581
)
   
(4,331
)
  Long term portion
 
$
14,010
   
$
18,591
 
 
Future maturities of the capital lease obligation as of February 28, 2013 are $4,581 in 2014, $5,116 in 2015, $5,420 in 2016 and $3,474 in 2017.
 
As of February 28, 2013, the Company has a line of credit with a bank for borrowings up to $500,000, with no outstanding borrowings as of February 28, 2013.  The line expires on June 30, 2013.


NOTE 7:   RELATED PARTY TRANSACTIONS
 
The Company paid consulting fees to the Company’s primary shareholder (the TAM  Irrevocable Trust, in which Cari Beck is the trustee as well as a daughter of Carl Palmer, an officer and Board member) totaling $117,000 and $108,000 during the years ended February 28, 2013 and February 29, 2012, respectively, which are included as a component of selling, general and administrative expenses on the consolidated statements of income.
 

NOTE 8:   EQUITY TRANSACTIONS

Restricted Stock Grants

During fiscal year 2013, 33,500 shares of restricted common stock were issued by the Company for services rendered valued at $9,400.  During fiscal year 2012, 75,000 shares of restricted common stock were issued by the Company for services rendered valued at $21,750.   All shares of restricted stock were fully vested upon issuance but not able to be traded on the open market upon issuance.  The values recorded were based on the estimated fair value of the stock on the dates of grant.


 
 
30

 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements

 
NOTE 8:   EQUITY TRANSACTIONS (CONTINUED)

Repurchase of Common Shares

During fiscal year 2011, the Company purchased 57,500 shares of common stock from the public market for $17,549.  These shares were held by the Company in treasury at February 28, 2011. During fiscal year 2012, the Company purchased an additional 100,000 shares of common stock from the public market for $25,000.  The total number of shares purchased through both fiscal years was cancelled on February 29, 2012.  They are now classified as authorized, but not issued and were not put back in the treasury.

Warrants

A summary of warrant activity for the fiscal years ended February 28, 2013 and February 29, 2012 is shown below.

         
Weighted-
 
         
Average
 
   
Warrants
   
Exercise
 
   
Outstanding
   
Price
 
             
Outstanding at February 28, 2011
   
8,467,221
     
0.21
 
Granted
   
  -
         
Exercised
   
-
     
-
 
Forfeited
   
  -
         
Outstanding at February 29, 2012
   
8,467,221
     
0.21
 
Granted
   
 -
         
Exercised
   
-
     
-
 
Forfeited
   
-
         
Outstanding at February 28, 2013
   
8,467,221
     
0.21
 
Vested at February 28, 2013
   
3,386,888
     
0.21
 
Exercisable at February 28, 2013
   
3,386,888
     
0.21
 

 The following table summarizes significant ranges of outstanding warrants as of February 28, 2013:

     
Warrants Outstanding
   
Warrants Exercisable
 
           
Weighted
   
Weighted
         
Weighted
 
           
Average
   
Average
         
Average
 
           
Remaining
   
Exercise
   
Number
   
Exercise
 
Exercise Price
   
Number
   
Life (Years)
   
Price
   
Outstanding
   
Price
 
                                 
$   0.21
   
8,467,221
   
7.79
   
$   0.21
   
3,386,888
   
$   0.21
 
                                 
During the year ended February 28, 2011, 8,467,221 warrants were issued to employees and related parties for future services to be rendered, with a vesting term of five (5) years and an exercise price of $0.21.  The fair value of these warrants on the date of grant totaled approximately $1.7 million and is being amortized to income over the vesting period.

As of February 28, 2013 the total outstanding warrants had an intrinsic value of $762,050.  
 

 
 
31

 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements


NOTE 9:   INCOME TAXES

Income tax expense (benefit) consists of the following:
 
   
Current
   
Deferred
   
Total
 
Year ended February 28 2013:
                 
U.S. federal
 
$
     
(219,972
)
   
(219,972
)
State
   
50,273
     
24,919
     
75,192
 
  Total income tax expense (benefit)
 
$
50,273
     
(195,053
)
   
(144,780
)
Year ended February 29, 2012:
                 
U.S. federal
 
$
     
143,269
     
143,269
 
State
   
70,861 
     
25,283
     
96,144
 
  Total income tax expense (benefit)
 
$
70,861
     
168,552
     
239,413
 
 
The income tax provision differs from the expected amount of income tax expense determined by applying a combined U.S. federal and state income tax rate of 39% to pretax income for the years ended February 28, 2013 and February 29, 2012 as follows:
 
   
2013
   
2012
 
Expected tax expense
 
$
195,137
   
$
170,585
 
Permanent differences
   
3,990
     
6,276
 
True up of state tax payable
   
39,238
     
62,552
 
Change in valuation allowance
   
(383,145
)
   
--
 
  Income tax expense (benefit)
 
$
(144,780
)
 
$
239,413
 
 
Deferred tax assets are as follows:
 
   
February 28, 2013
   
February 29, 2012
 
Deferred tax assets:
           
NOL carryforwards
 
$
469,136
   
$
722,140
 
Inventory reserves
   
(11,280
)
   
3,073
 
Depreciation
   
(51,305
)
   
(12,972
)
Accrued expenses
   
41,510
     
13,157
 
Stock compensation
   
319,148
     
177,650
 
Legal claim
   
-
     
62,552
 
Other
   
54,125
 
   
43,826
 
Valuation allowance
   
(100,000
)
   
(483,145
)
Net deferred tax assets
 
$
721,334
   
$
526,281
 
 
 
 
32

 
 

 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements

 
NOTE 9:   INCOME TAXES (CONTINUED)
 
The valuation allowance for deferred tax assets as of February 28, 2013 and February 29. 2012 was $100,000 and $483,145, respectively.  The net change in the total valuation allowance was a decrease of $383,145 for the year ended February 28, 2013. The valuation allowance at February 28, 2013 was, in part, related to Federal and state net operating loss carryforwards that, in the judgment of management, are not more-likely-than-not to be realized.  In assessing the realizability 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 (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment.  As of February 28, 2013, the Company has approximately $1.1 million and $1.9 million of remaining NOL carryforwards for federal and state purposes, respectively, which expire in various years through 2027.  Based upon the level of historical taxable income and projections for future taxable income over the periods in which the items underlying the Company’s deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at February 28, 2013. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced.

The Company includes interest and penalties, if any, arising from the underpayment of income taxes in the consolidated statements of income in the provision for income taxes. As of February 28, 2013 and February 29, 2012, 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 2009 through 2012 for federal purposes and fiscal years 2008 through 2012 for state purposes.

 
NOTE 10:    COMMITMENTS AND CONTINGENCIES
 
The Company’s office and production facility leases expire in June 2014.  All three leases are at a monthly cost of $3,622, $4,954 and $4,566, respectively. Total rent expense amounted to $147,180 and $106,335 for the fiscal years ended February 28, 2013 and February 29, 2012, respectively.  The Company also has operating leases for certain equipment at a monthly cost of approximately $265.
 
Future minimum base lease payments are as follows:
 
Fiscal Year Ending
   
 February 28,
Amount
 
     
2014
 
169,346
 
2015
   
55,077
 
Total
 
$
224,423
 
 
Legal Proceedings

In the case titled Letty Garcia v. Carl Palmer; Seychelle Environmental Technologies, Inc., et, al., brought in the Superior Court for the State of California, San Diego County District, the issue was an action by the plaintiff, Ms. Garcia, to enforce judgment against Mr. Palmer by levying the assets of Seychelle. The court found against the Company in May 2012 for approximately $157,000.  This amount was reflected in our February 29, 2012 consolidated financial statements. The Company believed that the ruling was incorrect and has filed  an appeal. We believe that the appeal will be heard in late 2013, and that the Company will prevail.  The remaining amount of restricted cash that was reflected in previous financial statements relating to this case was returned to the Company during the year ended February 28, 2013.


 
 
 
33

 
 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements


NOTE 10:    COMMITMENTS AND CONTINGENCIES (CONTINUED)

Otherwise, as of February 28, 2013, we know of no other legal proceedings pending or threatened, or judgments entered against the Company or any of our directors or officers in their capacity as such.
 
Significant Agreements
 
In June 2002 the Company entered into a license agreement for a product known as the “Hand Held Pump Technology.”  The Company licensed all proprietary rights associated with this technology.  The Company will pay a 2% royalty on its gross sales resulting from use of the technology during the term of the license agreement. The license agreement was for an initial term of five years, with five successive five-year renewals.  This technology has resulted in a product called Pump N’ Pure which allows the user to draw filtered water from virtually any container or location.  The Company has commenced marketing the Hand Held Pump as part of its Aqua Gear product line to the United States sporting goods industry. During the years ended February 28, 2013 and February 29, 2012 the Company paid $-0- in license fees.
 
During July 2006, the Company signed a second exclusive license agreement for a patent and ownership of the trademark Aqua Gear. The Company will pay a 2% royalty on net sales resulting from use of this technology up to $120,000, and 1% thereafter. The license agreement shall continue indefinitely unless terminated due to a default or breach of the agreement. Products affected include all Aqua Gear trademarked filter bottles and flip up bottles sold in the product line.  As of the date of this document, approximately $30,300 in royalties has been paid under these license agreements. During the years ended February 28, 2013 and February 29, 2012 the Company paid $-0- in license fees.
 
During April 2006, the Company issued 50,000 common shares with an approximate value of $16,100 for the Redi Chlor brand name, trademark and the use of the EPA Registration Number 55304-4-7126. During the fiscal year ended February 28, 2007, the Company commenced selling the Redi Chlor brand name water chlorine tablets to consumers, dealers, distributors and manufacturers. In connection with this agreement, the Company is also obligated to remit a 10% commission on net sales, as defined, of the existing product, or any new products sold directly by the Company, and 10% on any product sold by the counterparty on behalf of Seychelle.  The agreement is for the life of the Company.  During the years ended February 28, 2013 and February 29, 2012 the Company paid $-0- in license fees.
 

 
 
34

 
 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements


NOTE 11:   GEOGRAPHIC AREAS

The Company sells its products throughout the United States and internationally. Geographic sales information for the fiscal years ended February 28, 2013 and February 29, 2012 is as follows:
 
  
 
2013
   
2012
 
Water filtration products sold (1) in:
           
                 
The United States
 
$
4,465,268
   
$
4,567,066
 
Asia
   
176,698
     
303,124
 
United Kingdom
   
34,718
     
70,577
 
Other countries
   
170,463
     
201,493
 
                 
Total
 
$
4,847,147
   
$
5,142,260
 
         _____________
 
           (1)    Sales are based on the country of residence of the customer.
 
Long lived assets at February 28, 2013 are in the following geographic areas:

   
United
             
   
States
   
China
   
Total
 
                   
Property and equipment, net
 
$
56,952
   
$
122,924
   
$
179,876
 
                         
Intangible assets
   
4,995
     
                 -
     
4,995
 
                         
Other assets
   
8,514
     
                 -
     
8,514
 
   
$
70,461
   
$
122,924
   
$
193,385
 
 
Long lived assets at February 29, 2012 are in the following geographic areas:

   
United
             
   
States
   
China
   
Total
 
                   
Property and equipment, net
 
$
76,631
   
$
94,673
   
$
171,304
 
                         
Intangible assets
   
5,799
     
                 -
     
5,799
 
                         
Other assets
   
8,514
     
                 -
     
8,514
 
   
$
90,944
   
$
94,673
   
$
185,617
 
 
 
 
 
35

 
 


ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

We did not have any disagreements on accounting and financial disclosures with our present independent registered public accounting firm during the reporting periods.


ITEM 9A(T). CONTROLS AND PROCEDURES.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).  As a result of this evaluation, we identified no material weaknesses in our internal control over financial reporting as of February 28, 2013.  Accordingly, we concluded that our disclosure controls and procedures were effective as of February 28, 2013.

Our internal control over financial reporting (ICFR) are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U. S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
 
i.            pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
ii.           provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our  consolidated financial statements in accordance with U. S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
iii.          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 consolidated financial statements.

Management’s Annual Report on Internal Control Over Financial Reporting.

Management is responsible for establishing and maintaining adequate internal control over financial reporting.  Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation, management has concluded, as of February 28, 2013, we did maintain effective control over the financial reporting process.

Inherent Limitations Over Internal Controls

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
 
Attestation Report of the Registered Public Accounting Firm.

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this annual report.

Changes in Internal Control Over Financial Reporting.

We have made no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
ITEM 9B. OTHER INFORMATION.

Not Applicable.

 
 
36

 
 
 

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Our Directors and Executive Officers, their ages and positions held in the Company  are as follows:

   NAME
AGE
                    POSITION HELD
 
       
Carl Palmer
78
President,  and Director
 
Richard Parsons
78
Chief Executive Officer, Secretary and Director
 
James Place
74
Chief Operating Officer, Chief Financial Officer, Treasurer and Director
 
       

Our Directors have served and will serve in such capacity until the next annual meeting of our shareholders and until their successors have been elected and qualified. The officers serve at the discretion of our Directors. The Board of Directors as a whole serves as the audit committee and Mr. Place is the “financial expert” within the meaning of the rules and regulations of the SEC.  The Board of Directors has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in that member’s financial sophistication.  Accordingly, our Board of Directors believes that each of its members has sufficient knowledge and experience necessary to fulfill the duties and obligations that an audit committee would have. There are no family relationships among the Directors or Officers of the Company. None of the Directors have been involved in the types of litigation specified in Item 401d of Regulation S-B.
 
Biographies of Our Executive Officers and Directors

Carl Palmer.  Mr. Palmer is the President and a Director of the Company. He was the founder of our Company in 1998, innovator of the complete line of Seychelle water filtration products and primary spokesperson worldwide. He is an internationally recognized expert in the field for over 40 years and pioneered the development of the reverse osmosis (RO) home and office pure water business in the U.S. in the late 1970’s. That company, Aq-Ro-Matic, was later sold to Coca-Cola in 1973. He developed the cellulose triacetate membrane, a breakthrough technological development in the industry and subsequently, created and sold pure water companies to Coca Cola Los Angeles as noted previously, AMF/Cuno in 1985 and Shaklee in 1989. Also, in the late 1980’s Mr. Palmer developed the Best Water reverse osmosis business for Shaklee and sold over $53 million in above-the-counter systems. Carl’s 30 years of direct sales experience has led to many significant business relationships, many of which continue today. He is the inventor of thirteen patented products related to water purification. Mr. Palmer received a Bachelors Degree from Whittier College.

Richard Parsons. Mr. Parsons is the Chief Executive Officer, the Secretary and a Director of the Company.  He joined the Company in November 2004.  In March 2005, he assumed additional responsibilities for international sales activities in Asia, including China and India. He has over 40 years of experience in bottled water, reverse osmosis and water filtration with major companies such as Coca-Cola, Arrowhead, Shaklee, and Canadian Glacier. Mr. Parsons was a General Manager at Coca-Cola in 1974, a Vice President at Arrowhead from 1975 to 1985, a consultant with Shaklee in 1988, and Vice President of U.S. Operations for Canadian Glacier from 1989 to 1990.

Mr. Parsons acted as a consultant, and then became chairman of The Beverage Group, Inc. in 2002. In November 2004, he joined the Company as Executive Vice President. Mr. Parsons ran his own successful consulting business in water and related beverages with clients such as General Foods, Coke-USA, The Beverage Group, Coke-Japan and Mitsubishi Industries for many years. He also has over 20 years of experience in direct sales and multilevel marketing with companies such as Avon, Holiday Magic, Arrowhead and National Education. Mr. Parsons has a Bachelors Degree from Principia College.
 

 
 
37

 
 

James Place. Mr. Place is the Chief Operating Officer, Treasurer, and a Director of our Company He joined the Company November 2004 as (COO).   In March 2005, he assumed additional responsibilities for manufacturing, operations and became the Chief Financial Officer (CFO). He has over 40years of experience in food, beverages and bottled water. While at Arrowhead, he took the liter, still and sparkling water business from $5 million to $100 million in 5 years. Mr. Place also had extensive marketing, new product development and operating experience with Fortune 100 companies such as Carnation, Kerr Glass and Hunt-Wesson. Mr. Place was Vice President and General Manager of the Grocery Products Division at Arrowhead from 1981 to 1988, a Vice President of Sales/Marketing - New Products at Kerr Glass from 1988 to 1990, Manager, New Products at Carnation from 1979 to 1981 and Sales/Marketing Manager at Hunt-Wesson Foods from 1970 to 1976.

Mr. Place also has substantial experience in business development, mergers and acquisitions and with the investment community. Mr. Place ran his own consulting business in consumer products including water and other beverages with small to medium sized companies from 1990 to 2004. This included working successfully with these companies on financing plans for both new products and expansion programs. Mr. Place has an MBA from Michigan State University and a Bachelors degree from Albion College.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s outstanding equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

To the Company’s knowledge, based solely on its review of the copies of such reports furnished to the Company during the fiscal year ended February 28, 2013, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with.
 
Code of Ethics for Chief Executive Officer and Senior Financial Officers

On May 20, 2006, the Board of Directors of the Company adopted the Code of Ethics for the Chief Executive Officer and Senior Financial Officers.  The Code is designed to deter wrong-doing and promote honest and ethical behavior, full, fair, timely, accurate and understandable disclosure and compliance with applicable governmental laws, rules and regulations.  It is also designed to encourage prompt internal reporting of violations of the Code to an appropriate person and provides for accountability for adherence to the Code.  We will provide to any person without charge, upon written request to our principal executive offices, a copy of our Code.  Any waiver of the Code pertaining to one of our executive officers will be disclosed in a report on Form 8-K filed with the SEC.

Indemnification of Directors and Officers.
 
The Company's Bylaws provide that it will indemnify its officers and directors to the full extent permitted by Nevada state law. The Company's bylaws likewise provide that it will indemnify and hold harmless its officers and directors for any liability including reasonable costs of defense arising out of any act or omission taken on behalf of the Company, to the full extent allowed by Nevada law, if the officer or director acted in good faith and in a manner the officer or director reasonably believed to be in, or not opposed to, the best interests of the corporation.
 
In so far as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 
 
38

 
 


Item 11. EXECUTIVE COMPENSATION

The following table sets forth the Summary Compensation Table for the President and the executive officers at the end of the last three completed fiscal years. Compensation does not include minor business-related and other expenses paid by us.   
 
SUMMARY COMPENSATION TABLE
 
   
Long Term Compensation
   
 
Annual Compensation
 
Awards
 
Payouts
   
(a)
(b)
(c)
(d)
(e)
 
(f)
(g)
 
(h)
 
(i)
 
 
Name and Principle Position
 
 Fiscal
Year
Salary
($)
Bonus
($)
Other
Annual
Compensation
($)
 
Restricted
Stock
Award(s)
($)
Securities
Underlying
Option/SARs
(#)
 
LTIP
Payouts
($)
 
All
Other
Compensation
($)
                       
Carl Palmer
President
Director
2013
2012
2011
 
$0.00
$157,000(2)
$0.00
 
$0.00
$0.00
$0.00
 
$0.00
$0.00
$0.00
 
 
$0.00
$0.00
$0.00
 
0
0
0
 
 
$0.00
$0.00
$0.00
 
 
$0.00
$0.00
$0.00
 
                       
Richard Parsons (1)
CEO
Director
2013
2012
2011
 
$92,380
$95,071
$49,457
 
$30,114
$6,221
$14,757
 
$0.00
$0.00
$0.00
 
       
$0.00
$0.00
$0.00
 
 
$0.00
$0.00
$ 0.00
 
                       
James Place (1)
COO & CFO
Director
2013
2012
2011
 
$32,393
$72,299
$44,899
 
$10,688
$6,221
$16,041
 
$0.00
$0.00
$0.00
 
       
$0.00
$0.00
$0.00
 
 
$0.00
$0.00
$0.00
 
 
__________________
 
 
(1)
Elected to Board of Directors during November 2004.

 
(2)
During the twelve month period ended February 29, 2012, $157,000 was paid to a plaintiff for a personal lawsuit which the Company was obligated to pay through a court ruling as salary for Carl Palmer.
 
 
 
 
          Name
 
 
Grant date