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EX-31.2 - EXHIBIT 31.2 - SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CAseychelle10k22810x312_52411.htm
EX-32.2 - EXHIBIT 32.2 - SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CAseychelle10k22810x322_52411.htm
EX-31.1 - EXHIBIT 31.1 - SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CAseychelle10k22810x311_52411.htm
EX-32.1 - EXHIBIT 32.1 - SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CAseychelle10k22810x321_52411.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, 2011

( ) 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 
 
logo
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 [ ]

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 February 28, 2011 was 25,882,646.  Moreover, the aggregate market value of the voting stock of the Registrant held by non-affiliates as of May 25, 2011 was approximately $4,587,000.
 
The number of shares outstanding of the registrant's common stock, as of May 27, 2011 was 25,882,646.
 
References in this document to "us," "we," “Seychelle,” “SYEV,” or "the Company" refer to Seychelle Environmental Technologies, Inc., its predecessor and its subsidiary, Seychelle Water Technologies, Inc., a Nevada corporation.
 

 
 

 

 

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
11
   
PART II
 
   
      Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
      of Equity Securities
11
   
      Item 6. Selected Financial Data
12
   
      Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
12
   
      Item 7A. Quantitative and Qualitative Disclosures About Market Risk
16
   
      Item 8. Financial Statements and Supplementary Data
16
   
      Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
33
   
      Item 9A(T). Controls and Procedures
33
   
      Item 9B. Other Information
34
      
 
PART III
 
   
     Item 10. Directors, Executive Officers and Corporate Governance
34
   
     Item 11. Executive Compensation
36
   
     Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
     Stockholder Matters
38
   
     Item 13. Certain Relationships and Related Transactions, and Director Independence
38
   
     Item 14. Principal Accounting Fees and Services
43
   
     Item 15. Exhibits, Financial Statement Schedules
40
   
Financial Statements
17-32
   
Signatures
42



 
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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 one wholly-owned subsidiary, Seychelle Water Technologies, Inc., also a Nevada corporation (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, 2011, Seychelle has sold over 4 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 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 2001, the World Bank placed the value of the world water market at close to $400 billion annually. Bottled water, according to Water Facts, has emerged as the second largest commercial beverage category by volume in the U.S. However, Seychelle products compete in a more limited market: the portable filtration product segment

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 2-micron filtration at 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 all known pollutants and contaminants most commonly found in fresh drinking water supplies in the four 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.
 
 
 
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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, 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 California and Florida in approved independent laboratories implementing the Environmental Protection Agency, American National Standards Institute, and National Sanitation Foundation protocol, procedures, standards and methodology. Additionally, we offer a test pack for potential customers that include the test results from selected countries. In addition, results from the United States, United Kingdom and South Africa are displayed on our Website: www.seychelle.com. To our knowledge, no other 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 four 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 Seychelle’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, Bottoms-Up bottles, Stainless Steel bottles, In-Line Filter, Pure Water Bag, Pump N’ Pure and   Pure Water Straws.  They include either standard or advanced filters (for virus and bacteria control). Sizes are from 18 ounce to 38 ounces, and provide up to 100 gallons of pure drinking water from any fresh water source; running or stagnant (such as rivers, lakes, ponds and streams).

New Products

We have re-engineered the Flip Top bottle to eliminate parts, reduce costs, provide a more streamlined look, and add a disinfectant capability. Additionally, the In-Line Filter has been changed to provide greater filter media, and meet field conditions that require a longer, narrower design. Our straw filter line has been re-designed so that consumers actually  see the filter in the straw; and we have changed the base on the water pitcher to a more clear plastic which greatly enhances the looks of the pitcher on a kitchen counter.

 Manufacturing

The Company has determined that the production and assembly of some of our product components can be achieved in China 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 our products is completed at our facility in San Juan Capistrano, California.

On September 1, 2005, we signed an exclusive agreement with Huanghua Plastic Co., Ltd, a non-related third party, to manufacture 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. At present, we are talking to several multi-level marketing companies with over one million distributors worldwide who currently do not have a water product in their line.

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). We have recently added new distributors in Brazil, Mexico, Slovenia, Colombia, Norway and Korea.

Raw Materials

Seychelle’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, Seychelles’ 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.
 
 
 
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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  As of February 28, 2011, we had three customers, each respectively accounting for 21%, 19% and 19%, respectively, of our total sales.

Backlog

As of February 28, 2011, we had a backlog of $796,978 in unshipped orders.

Employees

As of February 28, 2011, we had a President and two (2) executive employees managing the Company with two (2) administrative employees supporting that effort.  In assembly, operations and warehousing we had twelve (12) full-time employees and four (4) independent contractors 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 that 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 own a second patent for a water filtration bottle, Patent # 6,004,460 that expires December 21, 2016. It is a combination filter assembly and flexible, portable bottle having a bottom opening with a sealing cap attached thereto, to filter out substantially all inorganics, organics, radiological chemicals and microbiology held in water in the bottle. The filter assembly may be attached to an adapter sealed to the top of the flexible bottle. Water in the bottle passes through the filter assembly and out a top nozzle or valve when the flexible bottle is squeezed. The flexible bottle is filled with water through the bottom opening.
 
We also own a third patent, Patent #6,058,971 that 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.  However, as of this date we have replaced the Redi Chlor product with the integration of BIOSAFE® antimicrobial media to all Seychelle water filters.  Seychelle has been granted a worldwide exclusive license for the BIOSAFE® technology.  BIOSAFE® is an effective antimicrobial polymer that physically disrupts the target organism’s cell membrane, thereby reducing microbial contamination by 99.99%.  BIOSAFE is safe, non-toxic and non-leaching, EPA approved and has been reviewed by the FDA as a modifier of medical devices.  Tests were performed under NSF standards.  BIOSAFE patented technology has proven to be effective against bacteria, fungi (mold and mildew), yeast, algae and certain viruses.  BIOSAFE® is colorless, tasteless, and odorless and has an indefinite shelf life.
 
 
 
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As these patents expire over 6 and 7 years, the Company cannot at this time estimate the financial impact of the expiration of these patents.

Trademark registrations filed with the United States Patent and Trademark Office for Seychelle, Aqua Gear and Pres 2 Pure have been approved.

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

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, 2011.  Virtually all research, development and testing are performed by Carl Palmer, the Company’s CEO, as part of his day-to-day duties.  

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 become profitable in our two most recent fiscal years. We cannot guarantee that we will continue to conduct profitable operations.

Through February 28, 2009, we had incurred significant losses. However, sales activity for the twelve months ended February 28, 2011 increased significantly over the past year, and we have recorded profits and positive cash flows from operations. We had net income for the year ended February 28, 2011 of $1,711,790 compared to a net income for the year ended February 28, 2010 of $562,930.  This reduced the accumulated deficit to $4,741,129.  Nevertheless, we have a limited history of profitable financial results upon which an investor may judge our potential. The Company has not engaged in enough consistent profitable business activity over a sustained period of time to be said to have a successful operating history.

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..
 
 
 
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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.

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, three patents, three trademarks, copyrights, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We currently have three U.S. patents issued and a license on one patent.  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. 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.

For the year ended February 28, 2011, three customers collectively accounted for approximately 60% of our 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.
 
 
 
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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 measure at their grant date fair value and recognized over the requisite service period, if any.  We may, as a result of these accounting principles, record and present compensation costs, change our equity compensation strategy that could affect our ability to attract, retain and motivate employees, which could materially and adversely affect our business, operating results and financial condition.
 
If We Fail in Maintaining Effective Internal Control Over Financial Reporting, The Price of Our Common Stock May be Adversely Affected.  However, We Have Determined That Our Internal Control Over Financial Reporting Are Effective as of February 28, 2011.

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 need 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 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 to devote resources to Section 404 compliance during fiscal year 2011 and on an ongoing basisIn the event that our Chief Executive Officer, Chief Financial Officer determines 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 Managements 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.
 
 
 
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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 are 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.
 
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.
 
 
 
- 9 -

 

 
Buying low-priced 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.

The lack of a broker or dealer to create or maintain a market in our common stock could adversely impact the price and liquidity of our securities.

We continue to have no agreements with any broker or dealer to act as a market maker for our securities and there is no assurance that we will be successful in obtaining any market makers. The lack of a market maker for our securities could adversely influence the market for and price of our securities, as well as your ability to dispose of, or to obtain accurate information about, and/or quotations as to the price of, our securities.

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
  

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, 2011, our business office was located at 32963 Calle Perfecto, San Juan Capistrano, CA 92675. Our telephone number at this address is 949-234-1999. We pay a total of approximately $8,300 in rent per month for approximately 9,900 square feet of office, operations and warehousing. We have a lease with an unaffiliated third party, which was initiated in June 2009 will expire in June 2014.   The Company is uncertain as to whether this lease will be renewed again upon expiration. 
 
We own three patents,  a license on a forth and numerous trade secrets, see Proprietary Information and Technology above, and other proprietary information related to our business operations. We have filed for three trademarks which were granted.  Seychelle® which has been used in commerce since 1997 and Aqua Gear®, which had been previously abandoned by Aqua Gear USA, to capitalize on the license agreements we secured from them in 2002 and 2006.  During 2009 we filed for and were granted a trademark for Pres 2 Pure.  
 
 
ITEM 3. LEGAL PROCEEDINGS.
 
As of the date of this document, we know of no legal proceedings pending or threatened or judgments entered against the Company or any of our directors or officers in his or her capacity as such.
 
 
 
- 10 -

 


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, 2011, the common stock was at a High bid price of $0.34 and a Low bid price of $0.18.
 
 
Fiscal Year 2011
High Bid
Low Bid
     
Quarter Ended:
   
     
First Quarter May 2010
$0.34
$0.23
     
     
Second Quarter August 2010
$0..33
$0..22
     
     
Third Quarter November 2010
$0.31
$0..18
     
     
Fourth Quarter February 2011
$0.30
$0..20
     
        
 
   Fiscal Year 2010
High Bid
Low Bid
     
Quarter Ended:
   
     
First Quarter May 2009
$0.40
$0.10
     
     
Second Quarter August 2009
$0.40
$0.22
     
     
Third Quarter November 2009
$0.30
$0.18
     
     
Fourth Quarter February 2010
$0.31
$0.15
     
Approximate Number of Holders of Common Stock
 
As of February 28, 2011, there were approximately 360 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.
 
 
 
- 11 -

 

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, 2011 and 2010, respectively.  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.
 
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.  The Company’s reserve for excess and obsolete inventory amounted to $265,285 as of February 28, 2011 and $70,662 as of February 28, 2010.

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.  The company recorded an allowance for sales returns of approximately $90,000 as of February 28, 2011.

Share Based Payment

FASB ASC Topic 718, Compensation – Stock Compensationt, requires companies to estimate the fair value of share based payments 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 April 2010, the FASB issued an update to its accounting guidance regarding Stock Based Compensation. The guidance addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. This update amends the guidance to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this update should be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the amendments are initially applied. Management is currently evaluating the potential impact of this guidance on its consolidated financial statements.
 
 
 
- 12 -

 


In 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement and results in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” ASU 2011-04 is effective during interim and annual periods beginning after December 15, 2011.   The effect of adoption of these provisions on the Company’s consolidated financial statements has not yet been analyzed.

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 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 consolidated statements of operations data for the fiscal years ended February 28, 2011 and 2010 are derived from our consolidated financial statements included elsewhere in this annual report
 
Fiscal year ended February 28, 2011 compared to the corresponding period in fiscal 2010.

Selected Financial Data
 
   
Years Ended
             
   
February 28,
   
February 28,
         
Percentage
 
   
2011
   
2010
   
Difference
   
Change
 
                         
Sales
 
$
4,470,090
   
$
2,743,671
     
1,726,419
     
63
%
Cost of sales
   
2,189,101
     
1,354,121
     
834,980
     
62
%
Gross profit
   
2,280,989
     
1,389,550
     
891,439
     
64
%
Gross profit percentage
   
51
%
   
51
%
           
0
%
                                 
Selling, general and administrative expenses
   
1,057,612
     
755,333
     
302,279
     
40
%
Income from operations
   
1,187,139
     
615,271
     
571,868
     
93
%
Interest expense (including related party)
   
(13,336
)
   
(50,281
)
   
36,945
     
73
%
Interest income
   
1,030
     
551
     
479
     
87
%
Other income (expense)
   
(17,211
)
   
(2,611
)
   
(14,600
)
   
559
%
Benefit from income taxes
   
564,168
     
-
     
564,168
     
100
%
Net Income
   
1,711,790
     
562,930
     
1,148,860
     
204
%
Net income percentage
   
38
%
 
21
%
           
17
%
                                 
Net cash provided by operating activities
   
1,252,498
     
490,666
     
761,832
     
155
%
Net cash used in investing activities
   
(59,905
)
   
(36,982
)
   
(22,923
)
   
62
%
Net cash used in financing activities
   
(450,470
)
   
(111,932
)
   
(338,538
)
   
302
%
 
* Net income before the current year benefit from income taxes as a percentage of sales is 26%.
 
 
 
- 13 -

 

Sales. The increase in sales is primarily attributable to growth in the sales of our plastic drinking bottles, water pitchers, replacement filter, and mission packs, which include a bottle and a replacement filter, throughout fiscal year ended February 28, 2011.  Four product groups accounted for the bulk of the increase.  Overall, these product groups accounted for 73% of the sales:  plastic drinking bottles (28%), bottle and replacement filter packs  (19%), replacement filters(11%), and pitchers  (15%).  Customer concentration is constantly changing which contributes to much of the fluctuation in sales.  During the fiscal year ended 2011, three customers accounted for 59% of total sales.  Management is actively pursuing additional sales opportunities by contacting potential new customers and we expect sales in the year ending February 28, 2012 to be comparable to or higher than the level in the year ended February 28, 2011.
 
Cost of sales and gross profit percentage.  The increase in cost of sales and corresponding increase in gross profit dollars is primarily due to an increase in sales of plastic drinking bottles, water pitchers, replacement filter, and mission packs versus prior year.  We are negotiating for better filter prices and believe that gross margins will improve further if we are successful in our negotiations and receive discounts due to higher volume purchases.
 
Selling, General and administrative expenses. The increase in general and administrative expenses was primarily due to the increase in consulting fees of approximately $87,000.  This increase was further increased by higher wages of $20,000 due to hiring more employees during the year, utilities increasing by $15,000 at our new facility, a $12,000 increase in legal expense, a $15,000 in the Company’s worker’s comp insurance policy, a $10,000 increase in medical insurance, a $30,000 increase in sales commission, a $10,000 increase in printing fees, and a $14,000 increase in merchant fees due to increase sales..  There were no individual accounts that had variances which were material except those mentioned above.  SG&A expenses should increase from a total dollar standpoint, but not a s a percentage of sales.  If anything, the percentage will be flat to down.

Interest expense. Interest expense decreased due to the Company paying off most of the Company’s outstanding debt in the fiscal year ended 2011.

Interest income. The increase in interest income was due to higher balances being carried in interest bearing accounts at the bank.
 
Benefit from income taxes.  The increase in benefit from income taxes is primarily due to the reversal of a portion of the valuation allowance provided against deferred tax assets.  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, 2011 and 2010, the Company achieved increasing pretax income and was able to utilize NOL carryforwards of  approximately  $1.4 million and $600,000 in these periods, respectively.  The provision for income taxes in the consolidated statements of income for those periods would have reflected tax expense related to the utilization of NOL’s, however, the reversal of a portion of the previously recorded valuation allowance provided a tax benefit that offset the expense for reporting purposes.  Given that the Company now has reported pretax income in the last two 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 has reversed a portion of the valuation allowance, resulting in a current year tax benefit of approximately $695,000.  Usage of net operating loss carryforwards has been temporarily suspended by the state of California, thus provision for state income taxes of  $131,000 was recorded, which reduces the net benefit  to approximately $564,000..
 
Net Income. The net income for the fiscal year ended February 28, 2011 was $1,711,790 ($0.07 per basic share) or 204% more than 2010, which was $562,930 ($0.02 per basic share) due to the increase in sales during the year and the tax benefit recorded in fiscal year ended February 28, 2011, as discussed above.  Without the tax benefit of $564,168 the increase over prior year would have been $584,692 or 104%.   In addition, this improvement in net income was also the result of better overall control of expenses and the continued emphasis on higher gross margin items. Further, we expect continued improvement in the profitability of the Company.  
 
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.

 
 
 
- 14 -

 

The following table summarizes our significant contractual obligations on an undiscounted basis as of February 28, 2011 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 and interest payments on outstanding borrowings. Additional details regarding these obligations are provided in footnotes, as referenced below:
 
   
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
 
$
230,732
   
$
230,732
   
$
-
   
$
-
   
$
-
   
$
-
 
Customer deposits
   
65,454
     
65,454
     
-
     
-
     
-
     
-
 
Note payable
   
53,037
     
53,037
     
-
     
-
     
-
     
-
 
     
349,223
     
349,223
     
-
     
-
     
-
     
-
 
Other contractual commitments (1)
   
331,241
     
99,718
     
231,523
     
-
     
-
     
-
 
Total contractual obligations
 
$
680,464
   
$
448,941
   
$
231,523
   
$
-
   
$
-
   
$
-
 
                                                 
(1) Office lease commitment expiring June 2014 and office equipment lease expiring 2015.
                         
 
Liquidity and capital resources.
 
Net cash provided by operating activities. During the fiscal years ended February 28, 2011 and 2010, the Company funded its operations through sales of products and a minimal level of borrowings. Additionally, the Company has historically paid its related party interest expense in stock purchase warrants. These activities conserve cash. 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 $1,252,498 in 2011 and $490,666 in 2010.  This increase is primarily due to the increase in sales from 2010 to 2011, along with controlled operating expenses and increased profitability.
 
Net cash used in investing activities. The $59,905 and $36,982 of cash used in investment activities during fiscal 2011 and 2010 cash used is due to purchasing equipment throughout each year.

Net cash used in financing activities. In 2010, we repaid $111,932 in notes payable. In 2011, we repaid $471,088 in notes payable. 
 
The Company currently estimates monthly cash requirements of $60,000 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, 2011, the Company has unrestricted cash of approximately $1,240,000 and a backlog of $797,000 in orders to fill.  The Company does not believe that additional funding will still be required in the form of related party notes or other shareholder investment.   During April 2008, the TAM Trust committed to providing up to $250,000 in additional funding, if required.  As of February 28, 2011, $250,000 of this commitment was available to us, if needed

Capital expenditures.

We do not expect any major capital expenditures in fiscal 2012.  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.
 
 
 
- 15 -

 

Research and development.

We are operating in a business that requires research, development and testing efforts.  However, there is no separate allocation of salaries for Carl Palmer in research and development from his responsibility as the Company’s President.   The portable filtration bottles are continuously being redesigned to find the most efficient way to produce the product while making all products as high quality as possible.

Employees.  

We anticipate no additional executive and non-executive hiring.  Any projected increase in the business can be handled through the addition of variable and independent contractors and outside consultants.

Any seasonal aspects
 
We have not experienced seasonal sales spikes in our sales as a result of our very limited retail store distribution.
 
Off-Balance Sheet Arrangements : None
 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 
 
 
- 16 -

 

 
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, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity (deficit), and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  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 audits 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. and subsidiary as of February 28, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 
/s/ Windes & McClaughry
Windes & McClaughry

Irvine, California
May 27, 2011

 
 
 
 
- 17 -

 



SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Balance Sheets
 
 
ASSETS
     
   
February, 28
 
   
2011
   
2010
 
CURRENT ASSETS
           
Cash and cash equivalents
 
$
1,244,290
   
$
502,167
 
Accounts receivable, net of allowance for doubtful accounts and sales returns  of $99,406 and $11,537, respectively
   
53,710
     
224,468
 
Inventory, net
   
447,489
     
383,675
 
Prepaids, deposits and other current assets
   
77,520
     
34,079
 
      Total current assets
   
1,823,009
     
1,144,389
 
                 
PROPERTY AND EQUIPMENT, NET
   
98,977
     
117,016
 
                 
OTHER ASSETS
               
Intangible assets, net
   
7,243
     
9,742
 
Deferred tax assets
   
694,833
     
-
 
Other assets
   
8,514
     
8,514
 
                 
         TOTAL ASSETS     
 
$
2,632,576
   
$
1,279,661
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
   Accounts payable and accrued expenses
 
$
230,732
   
$
134,292
 
   Customer deposits
   
65,454
     
110,538
 
   Accrued interest payable to related party
   
-
     
50,034
 
   Notes payable and capital lease obligation
   
53,037
     
14,870
 
      Total current liabilities
   
349,223
     
309,734
 
                 
LONG-TERM LIABILITIES
               
     
               
     Long-term notes payable – related party
   
-
     
471,088
 
      Total long-term liabilities
   
-
     
471,088
 
                 
      Total liabilities
   
349,223
     
780,822
 
                 
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, 25,882,646 and 25,854,146 shares
               
issued and outstanding, respectively
   
25,883
     
25,854
 
Treasury stock
   
(17,549)
     
-
 
Additional paid-in capital
   
7,016,148
     
6,925,904
 
Accumulated deficit
   
(4,741,129
)
   
(6,452,919
)
                 
      Total Stockholders' Equity
   
2,283,353
     
498,839
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
2,632,576
   
$
1,279,661
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
- 18 -

 



SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Statements of Income
 
       
       
   
For the Years Ended
 
   
February 28,
 
             
   
2011
   
2010
 
             
SALES
 
$
4,470,090
   
$
2,743,671
 
COST OF SALES
   
2,189,101
     
1,354,121
 
GROSS PROFIT
   
2,280,989
     
1,389,550
 
                 
OPERATING EXPENSES
               
Selling, general and administrative expenses
   
1,057,612
     
755,333
 
Depreciation and amortization
   
46,238
     
18,946
 
                 
     Total operating expenses
   
1,103,850
     
774,279
 
                 
INCOME FROM OPERATIONS
   
1,177,139
     
615,271
 
                 
OTHER INCOME (EXPENSES)
               
Interest income
   
1,030
     
551
 
Interest expense-related party
   
(9,004
)
   
(37,829
)
Interest expense
   
(4,332
)
   
(12,452
)
Other (expense)
   
(17,211
)
   
(2,611
 )
                 
     Total other (expenses)
   
(29,517
)
   
(52,341
)
                 
INCOME BEFORE INCOME TAX BENEFIT
   
1,147,622
     
562,930
 
                 
Income tax benefit
   
564,168
     
 -
 
                 
NET INCOME
 
$
1,711,790
   
$
562,930
 
NET INCOME PER SHARE
               
Basic
 
$
0.07
   
$
0.02
 
Diluted
 
$
0.06
   
$
0.02
 
WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
               
Basic
   
25,861,076
     
25,833,105
 
Diluted
   
26,698,158
     
26,825,605
 
                 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
- 19 -

 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended February 28, 2011 and 2010
 
 
                           
Retained
       
   
 
         
 
   
Additional
   
Earnings:
       
   
Common Stock
    Treasury    
Paid-In
    (Accumulated        
   
Shares
   
Amount
   
Stock
   
Capital
   
Deficit)
   
Total
 
                                     
Balance at March 1, 2009
    25,824,146     $ 25,824     $ -     $ 6,907,637     $ (7,015,849 )   $ (82,388 )
                                                 
Issuance of common stock for compensation
    30,000       30               6,570       -       6,600  
Warrants issued for services
                            1,697               1,697  
Contributed services
                            10,000               10,000  
Net income
    -       -               -       562,930       562,930  
Balance at February 28, 2010
    25,854,146       25,854       -       6,925,904       (6,452,919 )     498,839  
                                                 
Issuance of common stock for compensation
    28,500       29               6,241       -       6,270  
Contributed services
                            10,000               10,000  
Common stock repurchased
    -       -       (17,549 )     -       -       (17,549 )
Stock-based compensation
                            74,003               74,003  
Net income
    -       -               -       1,711,790       1,711,790  
Balance at February 28, 2011
    25,882,646     $ 25,883     $ (17,549 )   $ 7,016,148     $ (4,741,129 )   $ 2,283,353  
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
- 20 -

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
 
   
For the Years Ended
 
   
February 28,
 
             
   
2011
   
2010
 
             
CASH FLOW FROM OPERATING ACTIVITIES:
           
Net income
 
$
1,711,790
   
$
562,930
 
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation and amortization
   
46,238
     
54,671
 
Loss on sale of assets
   
34,205
     
-
 
Contributed services
   
10,000
     
10,000
 
Stock-based compensation
   
80,273
     
8,297
 
Provision for doubtful accounts
   
(2,046
)
   
7,551
 
Change in deferred taxes
   
(694,833
)
   
-
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
172,804
     
(170,572
)
Inventory
   
(63,814
)
   
25,678
 
Prepaids, deposits and other current assets
   
(43,441
)
   
(12,495
 )
Accounts payable and accrued expenses
   
96,440
     
41,474
 
Accrued interest payable to related party
   
(50,034
)
   
29,919
 
Customer deposits
   
(45,084
)
   
(66,787
 )
                 
Net Cash Provided by Operating Activities
   
1,252,498
     
490,666
 
                 
CASH FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
   
(57,200
)
   
(34,152
)
Purchase of intangible assets
   
(2,705
)
   
(940
 )
Other long-term assets
   
-
     
(1,890
 )
                 
Net Cash Used in Investing Activities
   
(59,905
)
   
(36,982
)
                 
CASH FROM FINANCING ACTIVITIES:
               
Repayment of related party notes payable
   
(471,088
)
   
-
 
Proceeds from notes payable
   
50,000
     
-
 
Repayment of notes payable and capital lease obligation
   
(11,833
)
   
(111,932
)
Repurchase of common stock
   
(17,549
)
   
-
 
                 
Net Cash Used in Financing Activities
   
(450,470
)
   
(111,932
 )
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
742,123
     
341,752
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
   
502,167
     
160,415
 
                 
CASH AND CASH EQUIVALENTS AT END OF YEAR
 
$
1,244,290
   
$
502,167
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
                 
CASH PAID DURING THE YEAR FOR:
               
Interest
 
$
36,698
   
$
20,362
 
Income taxes
 
$
58,194
   
$
-
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
- 21 -

 


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., a wholly owned subsidiary, was formed as a corporation in February 1997 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 that can be filled from nearly any available source of 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, 2011 and 2010.
 
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 one wholly-owned subsidiary, Seychelle Water Technologies, Inc., also a Nevada corporation (collectively, the Company or Seychelle). All significant intercompany transactions and balances have been eliminated in consolidation.

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, sales returns, stock based compensation, inventory reserves, valuation allowances for property and equipment and intangible assets, and the deferred income tax valuation allowances. 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 $797,000 as of February 28, 2011.

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 trade receivables balance will not be collected. The Company’s allowance for doubtful accounts was $9,491 and $11,537, as of February 28, 2011 and 2010, respectively.

 
 
 
- 22 -

 

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


NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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, work in process 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, 2011 and 2010 amounted to $154,001 and $128,875, 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 $265,285 and $70,662 as of February 28, 2011 and 2010, 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. 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.

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.

 
 
 
- 23 -

 


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


NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Warranty

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. As of February 28, 2011, the reserve was approximately $90,000 which is recorded as an allowance against accounts receivable in the accompanying consolidated balance sheet.  As of February 28, 2010, the reserve was not significant.

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.

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. Any difference between what it collected and what it remits to the taxing authorities is recorded on a net basis into operations.

Advertising

Advertising costs are expensed as incurred.  Total advertising expenses amounted to $1,364 and $126,272 for the fiscal years ended February 28, 2011 and 2010, respectively, and recorded as selling, general and administrative expenses.

Research and Development

Research and development costs are expensed as incurred and amounted to $619 and $589 for the fiscal years ended February 28, 2011 and 2010, respectively. These costs are included in general and administrative expenses in the accompanying consolidated statements of income.

Share Based Payment

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.
 
 
 
- 24 -

 

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



NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Share Based Payment (Continued)

The fair value of options 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 share based payment 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 share based payment expense in future periods.

The Company’s fair value calculations for share based compensation awards for the fiscal years ended February 28, 2011 and 2010 were based on the following assumptions.
 
     
 Years Ended
 
     
 February 28,
 
 February 28,
 
     
 2011
 
 2010
 
Expected life in years
   
 7
 
 2
 
Stock price volatility
   
144%
 
139-161%
 
Risk free interest rate
   
2.9%
 
2.3 - 3.1%
 
Expected dividends
   
None
 
None
 

The assumptions used in the Black Scholes models referred to above are based upon the following data: (1) The expected life of the warrant is estimated by considering the contractual term of the warrant, the vesting period and the expected exercise price. (2) The expected stock price volatility of the underlying shares over the expected term 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 terms. (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 are 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 of uncertain tax positions using a “more-likely-than-not” approach, requiring the recognition and measurement of uncertain tax positions. The Company had no material uncertain tax positions at February 28, 2011 or 2010.

Income Per Common Share

Basic net income per common share is computed by dividing the net income by the weighted average number of outstanding common shares during 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. 

 
 
 
- 25 -

 

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

 
NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
   
For the years ended
 
   
February 28,
 
   
2011
   
2010
 
Numerator:
           
Net Income (loss) available to common shareholders
 
$
1,711,790
   
$
562,930
 
Weighted average shares – basic
   
25,861,076
     
25,833,105
 
Net income (loss) per share – basic
 
$
0.07
   
$
0.02
 
                 
Dilutive effect of common stock equivalents:
               
Warrants
   
837,082
     
992,500
 
Weighted average shares – diluted
   
26,698,158
     
26,825,605
 
Net income (loss) per share – diluted
 
$
0.06
   
$
0.02
 
 
Concentrations

The Company has an agreement with an unrelated third party to manufacture the Company’s component parts in China. As of February 28, 2011 and 2010, the Company had deposits for inventory purchases in China of approximately $65,100 and $29,600, respectively. For the fiscal years ended February 28, 2011 and 2010, this vendor accounted for approximately 56% and 62%, respectively, of total raw material purchases.

As of February 28, 2011, the Company had four customers which accounted for approximately 51% of net accounts receivable.  The Company had three customers during the fiscal year ended February 28, 2011 that accounted for approximately 59% of total sales.  As of February 28, 2010, the Company had three customers which accounted for approximately 66% of net accounts receivable.  The Company had three customers during the fiscal year ended February 28, 2010 that accounted for approximately 51% of total sales.  

Recent Accounting Pronouncements

In April 2010, the FASB issued an update to its accounting guidance regarding Stock Based Compensation. The guidance addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. This update amends the guidance to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this update should be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the amendments are initially applied. Management is currently evaluating the potential impact of this guidance on its consolidated financial statements.

In 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement and results in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” ASU 2011-04 is effective during interim and annual periods beginning after December 15, 2011.   The effect of adoption of these provisions on the Company’s consolidated financial statements has not yet been analyzed.
 
 
 
 
- 26 -

 

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



NOTE 3:   INVENTORY

The Company’s inventory consisted of the following at February 28, 2011 and 2010:
 
   
February 28,
 
   
2011
   
2010
 
Raw materials
 
$
503,265
   
$
197,231
 
Work in Progress
           
98,950
 
Finished goods
   
209,509
     
158,156
 
     
712,774
     
454,337
 
Reserve for obsolete and slow moving inventory
   
 (265,285
)
   
 (70,662)
 
   
$
447,489
   
$
383,675
 
 
 
NOTE 4:   PROPERTY AND EQUIPMENT
 
The following is a summary of property and equipment at February 28, 2011 and  2010:
 
February 28,
 
   
2011
   
2010
 
Tooling
 
$
163,659
   
$
339,852
 
Equipment
   
43,555
     
59,654
 
Vehicles
   
-
     
10,000
 
Furniture and fixtures
   
-
     
15,775
 
Computer equipment
   
26,933
     
16,520
 
Leasehold equipment
   
3,218
     
7,928
 
     
237,365
     
449,729
 
 Less: accumulated depreciation
   
(138,388
)
   
(332,713
)
   
$
98,977
   
$
117,016
 

Fixed assets outside the United States included $109,507 and $143,349 in tooling and equipment, at cost, located in China with an unrelated third party to manufacture the Company’s component parts at February 28, 2011 and 2010, respectively. Depreciation expense included in cost of sales was $36,294 and $35,725 for the fiscal years ended February 28, 2011 and 2010 respectively.  Depreciation expense included in operating expense was $4,740 and $11,375 for the fiscal years ended February 28, 2011 and 2010, respectively.


NOTE 5:    INTANGIBLE ASSETS
 
The following is a summary of intangible assets at February 28, 2011 and  2010: 
 
   
February 28,
 
   
2011
   
2010
 
Trademarks
 
$
24,100
   
$
24,100
 
Patents
   
16,697
     
13,992
 
     
40,797
     
38,092
 
Less: accumulated amortization
   
(33,554
)
   
(28,350
)
   
$
7,243
   
$
9,742
 

Intangible assets are amortized over their estimated useful economic lives of five years. Amortization expense related to intangibles was $5,204 and $7,571 during the fiscal years ended February 28, 2011 and 2010, respectively.  Amortization expense is expected to be approximately $5,000 in fiscal year 2012 and insignificant amounts thereafter.
 
 
 
 
- 27 -

 



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

NOTE 6:    NOTES PAYABLE AND CAPITAL LEASE OBLIGATION
 
Notes payable outstanding as of February 28, 2011 and 2010 consisted of the following:
 
   
February 28,
 
   
2011
   
2010
 
Line of credit with a bank with a maximum borrowing of $100,000 is collateralized by all business assets. Any principal amounts outstanding accrue interest at the bank's index rate (approximately 5.00% as of February 28, 2011) plus 2% per annum and automatically renews every year.  
 
$
50,000
   
$
-
 
                 
Bagging machine financed for production. Lease term is 27 months at an annual interest rate of 33% and was due January 2011.
   
3,037
     
14,870
 
     
53.037
     
14,870
 
  Less current portion
   
(53,037)
     
(14,870)
 
  Long term portion
 
$
-
   
$
-
 

 
NOTE 7:   RELATED PARTY NOTES PAYABLE AND ACCRUED INTEREST
 
At February 28, 2010, the Company had five outstanding notes payable from the Company’s primary shareholder, the TAM Irrevocable Trust, totaling $471,088. Three of these notes payable totaling $299,275 bore interest at 10% per annum.  The remaining two notes payable totaling $171,193 bore interest at a rate in accordance with the note agreement.  The rate was dependent upon the rate which the TAM Irrevocable Trust receives upon its line of credit with its bank.  During fiscal 2011 and 2010, this rate equaled 3.25%.  As of February 28, 2010, accrued interest on the related party notes payable amounted to $50,034.  During the year ended February 28, 2011, an additional $9,004 of interest was accrued on these notes, All of these notes and related accrued interest were repaid in full prior to February 28, 2011.

The Company paid 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 $83,500 and $87,136 during the years ended February 28, 2011 and February 28, 2010, 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 2011, 28,500 shares of restricted common stock were issued by the Company for services rendered valued at $6,270.   During fiscal 2010, the Company issued 30,000 shares of restricted common stock for services valued at $6,600.  All shares of restricted stock in the table above 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.
 
 
 
- 28 -

 

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.
Warrants

A summary of warrant activity for the fiscal years ended February 28, 2011 and 2010 is shown below.

         
Weighted-
 
         
Average
 
   
Warrants
   
Exercise
 
   
Outstanding
   
Price
 
             
Outstanding at February 28, 2009
   
6,549,721
     
0.25
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Forfeited
   
-
     
-
 
Outstanding at February 28, 2010
   
6,549,721
     
0.25
 
Granted
   
8,467,221
     
0.21
 
Exercised
   
-
     
-
 
Forfeited
   
(6,549,721
)
   
0.25
 
Outstanding at February 28, 2011
   
8,467,221
     
0.21
 
Vested at February 28, 2011
   
-
     
0.21
 
Exercisable at February 28, 2011
   
-
     
0.21
 

The following table summarizes significant ranges of outstanding warrants as of February 28, 2011:

     
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
     
9.79
   
$
0.21
     
-
   
$
0.21
 
                                             
During the period ended February 28, 2011, 8,467,221 warrants were issued for serviced rendered to related parties, and employees for services 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.

As of February 28, 2011 the total outstanding warrants had an intrinsic value of $677,400.  

Contributed Executive Services
 
The President of the Company elected to not accept his salary until the Company had become profitable.  Even though the Company has achieved profitable operations, he continued to not accept this salary.  Accordingly,  the Company recorded $10,000, the contractual value of these services, as additional paid in capital in the accompanying consolidated statements of stockholders’ equity (deficit) for the fiscal years ended February 28, 2011 and 2010.
 
 
 
 
- 29 -

 


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, 2011:
                 
U.S. federal
  $       (586,693 )       (586,693 )  
State and local
    130,665        (108,140 )       22,525   
    $ 130,665       (694,833 )       (564,168 )  
Year ended February 28, 2010:
                       
U.S. federal
  $              
State and local
                 
    $              
 
The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rates of 39% to pretax income from continuing operations for the years ended February 28, 2011 and 2010. The components of income tax expense (benefit) are as follows:
 
   
2011
   
2010
 
Expected tax expense
 
$
451,472
   
$
219,152
 
Permanent differences
   
19,199
     
30,596
 
Change in valuation allowance
   
(1,034,830
)
   
(249,748
)
   
$
(564,168
)
 
$
-
 
 
Deferred tax assets are as follows:
 
   
February 28,
 
   
2011
   
2010
 
Deferred tax assets:
           
NOL carryforwards
 
$
966,293
   
$
1,440,997
 
Allowance for doubtful accounts
   
3,781
     
4,596
 
Inventory reserves
   
105,675
     
28,148
 
Depreciation
   
(15,805
)
   
(2,122
)
Accrued expenses
   
38,381
     
23,974
 
Stock compensation
   
29,479
     
3,305
 
State taxes
   
44,426
     
19,086
 
Other
   
5,748
     
-
 
Valuation allowance
   
(483,145
)
   
(1,517,984
)
Net deferred tax asset
 
$
694,833
   
$
-
 
 
 
 
 
- 30 -

 

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

 
NOTE 9:   INCOME TAXES (CONTINUED)
 
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 credits, a full valuation allowance was provided against deferred tax assets as of February 28, 2010.  For the years ended February 28, 2011 and 2010, the Company achieved increasing pretax income and was able to utilize NOL carryforwards of  approximately $1.4 million and $600,000, respectively.  Given that the Company now has reported pretax income in the last two years and anticipated 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 has reversed a portion of the  valuation allowance, amounting to a current year tax benefit of approximately $564,000.  As of February 28, 2011, the Company has approximately $2.4 million and $2.8 million of remaining NOL carryforwards for federal and state purposes, respectively, which expire at various years through 2027.    Based upon the level of historical taxable income and projections for future taxable income over the periods in which the 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, 2011. 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 period are reduced.

The Company includes interest and penalties arising from the underpayment of income taxes in the consolidated statements of income in the provision for income taxes.  As of February 28, 2011 and 2010, 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 2010, 2009, and 2008 for federal purposes and .fiscal years 2010, 2009, 2008 and 2007 for state purposes.

 
NOTE 10:    COMMITMENTS AND CONTINGENCIES
 
The Company’s office and production facility leases expire in June 2014.  Both leases are for a term of 60 months each, at a monthly cost of $3,622 and $4,566, respectively. Total rent expense amounted to $105,506 and $123,029 for the fiscal years ended February 28, 2011 and 2010, respectively.
 
Future minimum base lease payments are as follows:
 
Fiscal Year Ending
   
 February 28,
Amount
 
     
2012
 
$
99,718
 
2013
   
101,712
 
2014
   
103,747
 
2015
   
26,064
 
Total
 
$
331,241
 
 
Legal Proceedings

From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business.  In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

Significant Agreements
 
Effective December 1, 2001, the Company entered into an employment agreement with the President of the Company. The agreement is for five years and provides for a salary of $10,000 per year plus one percent of the net after tax profits of the Company as reported in the Company's Form 10-K. The agreement shall be automatically renewed for successive one-year terms unless the Company or employee provides written notice of non-renewal.   As the President chose not to accept this salary for the years ended February 28, 2011 and 2010, $10,000 has been recorded as contributed services in the accompanying consolidated financial statements.
 
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 for the technology during the term of the license agreement. The license agreement is 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, 2011 and 2010 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 for 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, 2011 and 2010 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, 2011 and 2010 the Company paid $-0-, in license fees.
 
The Company has back orders for sales of $796,978 as of February 28, 2011.

 
 
 
- 31 -

 

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, 2011 and 2010 is as follows:
 
  
 
2011
   
2010
 
Water filtration products sold to
           
   external customers (1) in:
           
The United States
 
$
3,962,420
   
$
2,689,555
 
China
           
102
 
Asia, except China
   
388,575
     
5,350
 
United Kingdom
   
74,582
     
27,528
 
Other countries
   
44,513
     
21,136
 
                 
Total
 
$
4,470,090
   
$
2,743,671
 
          _____________________
 
           (1)    Sales to external customers are based on the country of residence of the customer.
 
Long lived assets at February 28, 2011 are in the following geographic areas:

   
United
             
   
States
   
China
   
Total
 
                   
Property and equipment, net
 
$
42,497
   
$
56,480
   
$
98,977
 
                         
Intangible assets
   
7,243
     
                 -
     
7,243
 
                         
Other assets
   
8,514
     
                 -
     
8,514
 
   
$
58,254
   
$
56,480
   
$
114,734
 
 
Long lived assets at February 28, 2010 are in the following geographic areas:
 
   
United
             
   
States
   
China
   
Total
 
                   
Property and equipment, net
 
$
48,183
   
$
68,833
   
$
117,016
 
                         
Intangible assets
   
9,742
     
                 -
     
9,742
 
                         
Other assets
   
8,514
     
                 -
     
8,514
 
   
$
66,439
   
$
68,833
   
$
135,272
 
 
 
 
 
 
- 32 -

 

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 period.


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, 2011.  Accordingly, we concluded that our disclosure controls and procedures were effective as of February 28, 2011.

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, 2011, 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.
 
 
 
 
- 33 -

 


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 temporary rules of the SEC that permit us to provide only management's report in this annual report.

Changes in Internal Control Over Financial Reporting.

Except as previously disclosed, 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.


PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Our Directors and Executive Officers, their ages and positions held in the Company as of February 28, 2011 are as follows:

   NAME
AGE
                    POSITION HELD
 
       
Carl Palmer
76
President, Chief Executive Officer and Director
 
Richard Parsons
76
Executive Vice President, Secretary and Director
 
James Place
72
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 has been the President, CEO and a Director of the Company since January 1998. He is the founder of our Company, 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 35 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 has been Secretary, Executive Vice President and a Director of the Company since November 2004. In March 2005, he assumed additional responsibilities for international sales activities in Asia, including China and India. He has over 30 years 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.

 
 
 
- 34 -

 


For the past five years, 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 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.
 
James Place. Mr. Place has been Treasurer, COO and a Director of our Company since November 2004. In March 2005, he assumed additional responsibilities for manufacturing, operations and became the Chief Financial Officer (CFO). In November 2004, he joined the Company as Chief Operating Officer.   He has over 30 years experience in food, beverages and bottled water. While at Arrowhead, he took the liter, still and sparkling water business from $10 million to $75 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, 2010, 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.

 
 
 
- 35 -

 


 Item 11. EXECUTIVE COMPENSATION

The following table sets forth the Summary Compensation Table for the Chief Executive Officer 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 & CEO
Director
2011
2010
2009
 
$0.00
$0.00
$0.00
 
$0.00
$0.00
$0.00
 
$0.00
$0.00
$0.00
 
 
$0.00
$0.00
$0.00