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EX-31.1 - EXHIBIT 31.1 - SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CAsey10k2292012x311_5242012.htm
EX-32.2 - EXHIBIT 32.2 - SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CAsey10k2292012x322_5242012.htm
EX-31.2 - EXHIBIT 31.2 - SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CAsey10k2292012x312_5242012.htm
EX-32.1 - EXHIBIT 32.1 - SEYCHELLE ENVIRONMENTAL TECHNOLOGIES INC /CAsey10k2292012x321_5242012.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 29, 2012

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

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


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

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

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

Common Stock, $0.001 per share par value

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months(or such shorter period that the registrant was required to submit and post such files. Yes []  No [X]

Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained herein to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [X]
 
Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer []    
Accelerated filer []
Non-accelerated filer   [] (Do not check if a smaller reporting company)     
Smaller reporting company  [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) : Yes [ ] No [X]
 
The number of shares outstanding of the registrant's common stock, as of May 27, 2012 was 25,800,146.
 
References in this document to "us," "we," or "Company" refer to Seychelle Environmental Technologies, Inc., a Nevada corporation and our wholly-owned subsidiary, Seychelle Water Technologies, Inc., also 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
35
   
      Item 9A(T). Controls and Procedures
35
   
      Item 9B. Other Information
36
      
 
PART III
 
   
     Item 10. Directors, Executive Officers and Corporate Governance
36
   
     Item 11. Executive Compensation
39
   
     Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
     Stockholder Matters
41
   
     Item 13. Certain Relationships and Related Transactions, and Director Independence
41
   
     Item 14. Principal Accounting Fees and Services
42
   
     Item 15. Exhibits, Financial Statement Schedules
43
   
Financial Statements
17-34
   
Signatures
45
 

 
 
 
- 2 -

 

 PART I

Item 1. BUSINESS.

History of Seychelle

We are a Nevada corporation. Our principal business address is 32963 Calle Perfecto, San Juan Capistrano, California 92675. Our telephone number at this address is 949-234-1999.
 
We were incorporated under the laws of the State of Nevada on January 23, 1998 as a change of domicile to Royal Net, Inc., a Utah corporation that was originally incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies, Inc. effective in January 1998.
 
On January 30, 1998, we entered into an Exchange Agreement with Seychelle Water Technologies, Inc., a Nevada corporation (SWT), whereby we exchanged our issued and outstanding capital shares with the shareholders of SWT on a one share for one share basis. We became the parent company and SWT became a wholly owned subsidiary. SWT had been formed in 1997 to market water filtration systems of Aqua Vision International.
 
Organization
 
Our Company is presently comprised of Seychelle Environmental Technologies, Inc., a Nevada corporation, with 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 29, 2012, 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.

 
 
 
 
 
- 3 -

 

Seychelle filters have been tested by independent and government laboratories throughout the world and are approved for sale and distribution in the following countries: United States, Mexico, Canada, Slovenia, Czech Republic, India, Tanzania, United Kingdom, Korea, Malaysia, Japan, The Peoples Republic of China, Vietnam, New Zealand, Australia, Brazil, Venezuela, Argentina, South Africa, and Pakistan. In the United States, Seychelle filters have been certified by independent government laboratories using EPA/ANSI protocols and NSF Standards 42 and 53 by Broward Testing Labs. Additionally, we offer a test pack for potential customers that includes the test results from selected countries. In addition, selected results from the United States, United Kingdom and South Africa are displayed on our Website: www.seychelle.com. To our knowledge, no other portable water filtration system can achieve removal of up to 99.99% of pollutants and contaminants most commonly found in fresh drinking water supplies in the 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, Stainless Steel bottles, In-Line Filter, Pure Water Bag, Pump N’ Pure, Pure Water Pouch and   Pure Water Straws.  They include regular, standard or advanced filters (for virus and bacteria control up to 99.9999% reduction). Sizes are from 18 ounce to 38 ounces, and provide up to 150 gallons of pure drinking water from any fresh water source; running or stagnant (such as rivers, lakes, ponds and streams).

New Products

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

 Manufacturing

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

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

Sales Channels

Sales channels to be pursued will include: retail, military, government, non-governmental agencies (NGO)’s, foundations, missionaries, multi-level marketing, international, OEM and joint ventures. At present, we are talking to a large multi-level marketing company 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 Korea and Japan.

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.

 
 
 
 
 
- 4 -

 

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

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

Currently, the majority of our sales are to customers in the U.S.  However, we are in contact with several overseas distributors and sales could increase in the future in these countries if customers have a greater demand for safe drinking water  As of February 29, 2012, we had two customers that accounted for 36% and 20%, respectively, of our total sales.

Backlog
 
As of February 29, 2012, we had a backlog of $136,324 in unshipped orders.

Employees

As of February 29, 2012, we had a President and two (2) executive employees managing the Company with four (4) administrative employees supporting that effort.  In assembly, operations and warehousing we had eighteen (18) full-time employees and two (2) part-time employees working to fill orders.
 
Proprietary Information and Technology

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

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

 
 
 
 
 
- 5 -

 


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

We have filed for three trademarks with the United States Patent and Trademark Office which were granted:  Seychelle®, which has been used in commerce since 1997, along with Pres 2 Pure and Fill 2 Pure. 

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 29, 2012.  Virtually all research, development and testing are performed by Carl Palmer, the Company’s President, 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 been profitable in our three most recent fiscal years. However, we cannot guarantee that we will continue to conduct profitable operations.

Through February 28, 2009, we had incurred significant losses. However, sales activity for thirty six months ended February 29, 2012 increased significantly, and we have recorded profits and positive cash flows from operations. We had net income for the year ended February 29, 2012 of $197,986 compared to a net income for the year ended February 28, 2011 of $1,711,790 and net income for the year ended February 28, 2010 of $562,930.  This reduced our accumulated deficit to $4,543,143.  Nevertheless, we believe that we have not engaged in enough consistent profitable business activity over a sustained period of time to be said to have a successful operating history. .If we do not continue to be profitable, we may go out of business, and an investor could lose his entire investment.

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

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

 
 
 
 
 
- 6 -

 

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. As these two patents expire over 4 and 5 years, respectively, we cannot at this time estimate the financial impact of the expiration of these patents.  Any issued patent may be challenged and invalidated. Patents may not be issued from any of our future applications. Any claims allowed from existing or future pending patents may not be of sufficient scope or strength to provide significant protection for our products. Patents may not be issued in all countries where our products can be sold so as to provide meaningful protection or any commercial advantage to us. Our competitors may also be able to design around our patents or the patents that we license.
 
Vigorous protection and pursuit of intellectual property rights or positions characterize our industry, which has resulted in significant and often protracted and expensive litigation. Therefore, our competitors may assert that our technologies or products infringe on their patents or proprietary rights. Problems with patents or other rights could increase the cost of our products or delay or preclude new product development and commercialization by us. If infringement claims against us are deemed valid, we may not be able to obtain appropriate licenses on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our future patent and/or technology license positions or to defend against infringement claims.
 
Our success is dependent upon the decision making of our directors and executive officers.

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

For the year ended February 29, 2012, two customers collectively accounted for approximately 56% 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.

 
 
 
 
 
- 7 -

 

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

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

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

 
 
 
 
 
- 8 -

 

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

We have added a stock broker to create or maintain a market in our common stock, which could favorably impact the price and liquidity of our securities.
 
We do not expect to pay dividends on common stock.

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

ITEM 1B. UNRESOLVED STAFF COMMENTS.

A smaller reporting company is not required to provide the information in this Item.
 

ITEM 2. DESCRIPTION OF PROPERTY.
 
As of February 29, 2012, our business office was located at 32963 Calle Perfecto, San Juan Capistrano, CA 92675 with an additional warehouse located at 32901 Calle Perfecto, San Juan Capistrano, CA 92675. Our office telephone number is 949-234-1999. We pay a total of approximately $13,200 in rent per month for approximately 17,200 square feet of office, operations and warehousing. We have a lease for the 32963 location with an unaffiliated third party, which was initiated in June 2009 and will expire in June 2014.   The lease for the 32901 location is with a different unaffiliated third party, was initiated November 2011, and will expire in July 2014.  . 
 
We own two patents,   and numerous trade secrets, see Proprietary Information and Technology above, and other proprietary information related to our business operations. We have filed for three trademarks with the United States Patent and Trademark Office which were granted:  Seychelle®, which has been used in commerce since 1997, along with Pres 2 Pure and Fill 2 Pure. 
 
 
ITEM 3. LEGAL PROCEEDINGS.

In the case titled Letty Garcia v. Carl Palmer; Seychelle Environmental Technologies, Inc., et, al., brought in the Superior Court for the State of California, San Diego County District, the court found against the Company in May, 2012 for approximately $157,000.  This amount has been reflected in our February 29, 2012 consolidated financial statements. The Company has evaluated the ruling and has appealed the verdict.
 
There is an additional unrelated lawsuit, Patricia Edwards v Seychelle Environmental Technologies, Inc., brought in the Superior Court for the State of California, Orange County District, from a former employee of the Company regarding a claim of $280,000 for wrongful termination based on discrimination.  The Company is vigorously contesting the claim.  It is too early to make an opinion as to whether we prevail.
 
Otherwise, as of February 29, 2012, we know of no other legal proceedings pending or threatened, or judgments entered against the Company or any of our directors or officers in their capacity as such.
 
 
 
 
 
 
- 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 29, 2012, the common stock had a High bid price of $0.65 and a Low bid price of $0.22.
 
 
Fiscal Year 2012
High Bid
Low Bid
     
Quarter Ended:
   
     
First Quarter May 2011
$0.35
$0.30
     
     
Second Quarter August 2011
$0.35
$0..26
     
     
Third Quarter November 2011
$0.62
$0.22
     
     
Fourth Quarter February 2012
$0.65
$0..40
     
        
 
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
     
Approximate Number of Holders of Common Stock
 
As of February 29, 2012, there were approximately 349 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 29, 2012 and February 28, 2011, 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.  

Sales Returns Reserves

The Company analyzes sales returns in accordance with FASB Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. Estimates for sales returns are based on a variety of factors, including actual return experience of specific products or similar products. The Company also reviews its estimates for product returns based on expected return data communicated to us by customers.  Management is able to make reasonable and reliable estimates of product returns based on our history in this business.  

Stock Based Compensation

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

 
 
 
 
 
- 12 -

 

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 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 Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

In September 2011, the FASB issued guidance on ASC 350, Intangibles-Goodwill and Other, for testing goodwill for impairment. The new guidance provides a company the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company’s assessment determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment to be recognized for that reporting unit, if any. If the company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. The adoption of this guidance is effective for the Company beginning March 1, 2012.  The Company does not believe the adoption of this guidance will have a material impact on its financial statements.

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

In May 2011, the FASB issued Accounting Standards Update No. 2011-04 (“ASU 2011-04”), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) . This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The new guidance will be effective for the Company beginning March 1, 2012 and will not have a significant impact on the balance sheet, results of operations or cash flow. 

Results of Operations

Our summary historical financial data is presented in the following table to aid you in your analysis.  You should read this data in conjunction with this section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations, our consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this annual report.  The selected financial data below for the fiscal years ended February 29, 2012 and February 28, 2011 are derived from our consolidated financial statements included elsewhere in this annual report.

 
 
 
 
 
- 13 -

 

Fiscal year ended February 29, 2012 compared to the corresponding period in fiscal 2011.

Selected Financial Data
 
   
Years Ended
             
   
February 29,
   
February 28,
         
Percentage
 
   
2012
   
2011
   
Difference
   
Change
 
                         
Sales
 
$
5,142,260
   
$
4,470,090
     
672,170
     
15
%
Cost of sales
   
2,651,007
     
2,189,101
     
461,906
     
21
%
Gross profit
   
2,491,253
     
2,280,989
     
210,264
     
9
%
Gross profit percentage
   
48
%
   
51
%
           
(3
)%
                                 
Selling, general and administrative expenses
   
1,998,224
     
1,057,612
     
940,632
     
89
%
Income from operations
   
450,111
     
1,177,139
     
(727,028
   
(62
)%
Interest expense (including related party)
   
(1,649
)
   
(13,336
)
   
11,687
     
88
%
Interest income
   
1,221
     
1,030
     
191
     
19
%
Other income (expense)
   
(12,284
)
   
(17,211
)
   
4,927
     
29
%
Benefit (expense) from income taxes
   
(239,413
   
564,168
     
(803,581
 )
   
(142
)%
Net Income
   
197,986
     
1,711,790
     
(1,513,804
   
(88
)%
                                 
Net cash provided by operating activities
   
83,930
     
1,302,532
     
(1,218,602
   
(94
)%
Net cash used in investing activities
   
(115,778
)
   
(59,905
)
   
(55,873
)
   
93
%
Net cash used in financing activities
   
(63,447
)
   
(500,504
)
   
437,057
     
87
%
 
Sales.  Our customer concentration is constantly changing which contributes to much of the fluctuation in revenues.   The current period increase in revenues is largely due to sales to two customers who accounted for approximately $2,927,000 of net sales, or 56% of revenues for the year ended February 29, 2012 compared to 41% in the year ended February 28, 2011.  This was increased further by website sales which contributed $552,000 in the year ended February 29, 2012 compared to $407,000 for the year ended February 28, 2011.  The increase in sales is also the net result of a shift in our product mix.  Significant changes were experienced within a few product lines: missionary packs (which increased to $851,000 in the current year as compared to $836,000 in sales for the comparable period), pitchers (which increased to $1,384,000 from $672,000), stainless steel bottles(which increased to $426,000 from $364,000), straws (increased to $233,000 from $150,000), countertop units (increased to $93,000 from $15,000), replacement filters (decreased to $383,000 from $502,000), and plastic bottles (which decreased to $1,108,000 from $1,247,000).   There were also increased revenues from the introduction of new product lines, such as the Aqua Mist and shower lines, which combined for $136,000 of current year revenue as compared to zero in the comparable period of the prior year.
 
Cost of sales and gross profit percentage.  The increase in cost of revenues is largely a direct result of the 15% increase in sales for the year ended February 29, 2012 from the year ended February 28, 2011.  Cost of revenues increased by 21% from period to period by comparison, resulting in a decrease in gross profit margin to 48% from 51%.  Our profit margin will fluctuate from time to time based on the product mix within sales.   The fiscal 2011 gross margin was also impacted by the inventory reserves established for certain products that management concluded were necessary at that time.  As mentioned in the sales discussion, a large reason for the increase in sales was a $712,000 increase in sales of pitchers compared to the same period in the prior year.  The sales of pitchers typically result in a lower margin per unit than most of the Company’s other product lines. However, there will be a benefit in the increased sale of replacement filter packs.  We continue to review our gross margins and are continuing to pursue efficiencies in the production process, and we are negotiating for better filter prices and believe that gross margins will improve further if we are successful in these plans.  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. The increase in cost of sales and corresponding increase in gross profit dollars is primarily due to an increase in sales of countertop units versus the prior year.   We are currently considering redesigning the countertop units once our current stock is depleted to improve unit cost and increase sales opportunities. 
 
 
 
 
 
- 14 -

 

 
Selling, General and administrative expenses. The increase in general and administrative expenses was primarily due to the increase in sales commission of approximately $182,000 resulting from an increase in commissionable sales, stock based compensation and consulting fees  of approximately $310,000 largely resulting from warrant amortization costs,  along with $157,000 included in officer salaries as a result of the lawsuit  noted in the legal proceedings footnote.    SG&A expenses in future periods are expected to increase from a total dollar standpoint, but we do not foresee an increase as a percentage of sales.  

Interest expense. Interest expense decreased due to the Company paying off the Company’s outstanding debt during the fiscal year ended 2012.

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.   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 29, 2012 and February 28, 2011 and 2010, the Company achieved pretax income and was able to utilize NOL carryforwards of approximately  $0.7 million, $1.4 million and $600,000 in these periods, respectively.   Given that the Company now has reported pretax income in the last three years and expectations of continued profitability in the future, there is currently a more optimistic outlook as to whether the Company will be able to utilize the NOL’s before expiration.  As a result, the Company reversed a portion of the valuation allowance during the year ended February 28, 2011, resulting in a deferred tax benefit of approximately $695,000.  In the fiscal year ended February 29, 2012, the Company recorded income tax expense of approximately $239,000, of which approximately $70,000 was current and $169,000 was deferred.
 
Net Income. The net income for the fiscal year ended February 29, 2012 was $197,986 ($0.01 per basic share) or 88% less than February 28, 2011, which was $1,711,790 ($0.07 per basic share) due to the increase general and administrative expenses recorded in fiscal year ended February 29, 2012, as discussed above.   Our expenses were higher than anticipated in the fiscal year ended February 29, 2012,  It was the result of increased headcount, the  State of California suspending the utilization of state NOL’s, delays in negotiating three major new distributor agreements, delays in shipments to Japan, Mexico and Saudi Arabia, and the launch of the new pH product line.  As a result of the beginning of shipments to Japan, and Saudi Arabia and the new pH product line in June and July, we expect continued improvement in the profitability of the Company going forward.   Once the supply catches up with demand 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.

The following table summarizes our significant contractual obligations on an undiscounted basis as of February 29, 2012 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
 
$
158,758
   
$
158,758
   
$
-
   
$
-
   
$
-
   
$
-
 
Customer deposits
   
197,696
     
197,696
     
-
     
-
     
-
     
-
 
Capital lease
   
22,922
     
4,331
     
15,117
     
3,474-
     
-
     
-
 
     
379,376
     
360,785
     
15,117
     
3,474
     
-
     
-
 
Other contractual commitments (1)
   
389,453
     
165,011
     
224,442
     
-
     
-
     
-
 
Total contractual obligations
 
$
768,829
   
$
525,796
   
$
239,559
   
$
3,474
   
$
-
   
$
-
 
                                                 
(1) Office lease commitment expiring June 2014 and equipment lease expiring 2015.
                         
 
 
 
 
 
 
- 15 -

 

Liquidity and capital resources.
 
Net cash provided by operating activities. During the fiscal years ended February 29, 2012 and February 28, 2011, the Company funded its operations through sales of products and a minimal level of borrowings. Additionally, the Company has been successful in collecting its accounts receivable timely, which also helps with operating cash flow.  Total cash provided through operations totaled $83,930 in 2012 and $1,302,532 in 2011.  This decrease is primarily due to the decrease in the Company’s profitability from 2011 to 2012, along with an increase in inventory, and restricted cash being held as mentioned in the legal proceeding footnote.
 
Net cash used in investing activities. The $115,778 and $59,905 of cash used in investment activities during fiscal 2012 and 2011 is primarily due to purchasing equipment throughout each year.
 
Net cash used in financing activities. In 2011, we repaid $482,921 in notes payable and $50,034 in related accrued interest. In 2012, we repaid $38,447 in notes payable. 
 
The Company currently estimates monthly cash requirements of approximately $135,000 to cover selling, general and administrative costs. Gross profits from sales are expected to provide sufficient cash flows to meet these cash requirements and pay contractual commitments.

As of February 29, 2012, the Company has unrestricted cash of $1,148,995 and a backlog of $136,000 in orders to fill.  The Company does not believe that additional funding will be required in the form of related party notes or other shareholder investment.   The TAM Trust has committed to providing up to $250,000 in additional funding, if required.  
 
Capital expenditures.

We do not expect any major capital expenditures in fiscal 2013.  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.

Research and development.

We are operating in a business that requires research, development and testing efforts.  .   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 seasonal aspects
 
We have not experienced seasonal spikes in our sales as a result of our very limited retail store distribution.
 
Off-Balance Sheet Arrangements : None
 
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
 
A smaller reporting company is not required to provide the information in this Item.
 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


 
 
 
 
 
- 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 29, 2012 and February 28, 2011, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the two-year period ended February 29, 2012.  Seychelle Environmental Technologies, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Seychelle Environmental Technologies, Inc. as of February 29, 2012 and February 28, 2011, and the results of their operations and their cash flows for each of the years in the two-year period ended February 29, 2012 in conformity with accounting principles generally accepted in the United States of America.
 

 
/s/ Ramirez Jimenez International CPA’s
   
Irvine, California
   
May 29, 2012
 
   

 
 
 
 
 
- 17 -

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Balance Sheets
  
 
ASSETS
     
       
   
February 29,
2012
   
February 28,
2011
 
CURRENT ASSETS
           
Cash and cash equivalents
 
$
1,148,995
   
$
1,244,290
 
Restricted cash
   
146,081
     
-
 
Accounts receivable, net of allowance for doubtful accounts and sales returns  of $78,885 and $99,406, respectively
   
61,782
     
53,710
 
Inventory, net
   
964,580
     
447,489
 
Deferred tax assets
   
120,242
     
192,285
 
Prepaid expenses, deposits and other current assets
   
179,347
     
77,520
 
      Total current assets
   
2,621,027
     
2,015,294
 
                 
PROPERTY AND EQUIPMENT, NET
   
171,304
     
98,977
 
                 
OTHER ASSETS
               
Intangible assets, net
   
5,799
     
7,243
 
Deferred tax assets
   
406,039
     
502,548
 
Other assets
   
8,514
     
8,514
 
                 
         TOTAL ASSETS     
 
$
3,212,683
   
$
2,632,576
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
   Accounts payable and accrued expenses
 
$
158,758
   
$
230,732
 
   Customer deposits
   
197,696
     
65,454
 
   Notes payable and capital lease obligation
   
4,331
     
53,037
 
      Total current liabilities
   
360,785
     
349,223
 
                 
LONG-TERM LIABILITIES
               
     
               
     Capital lease obligation
   
18,591
     
-
 
      Total long-term liabilities
   
18,591
     
-
 
                 
      Total liabilities
   
379,376
     
349,223
 
                 
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, 25,800,146 and 25,825,146 shares
               
issued , respectively
   
25,800
     
25,883
 
Treasury stock, 57,500 shares in 2011
   
-
     
(17,549)
 
Additional paid-in capital
   
7,350,650
     
7,016,148
 
Accumulated deficit
   
(4,543,143
)
   
(4,741,129
)
                 
      Total Stockholders' Equity
   
2,833,307
     
2,283,353
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
3,212,683
   
$
2,632,576
 
 
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 29,
   
February 28,
 
   
2012
   
2011
 
             
SALES
 
$
5,142,260
   
$
4,470,090
 
COST OF SALES
   
2,651,007
     
2,189,101
 
GROSS PROFIT
   
2,491,253
     
2,280,989
 
                 
OPERATING EXPENSES
               
Selling, general and administrative expenses
   
1,998,244
     
1,057,612
 
Depreciation and amortization
   
42,898
     
46,238
 
                 
     Total operating expenses
   
2,041,142
     
1,103,850
 
                 
INCOME FROM OPERATIONS
   
450,111
     
1,177,139
 
                 
OTHER INCOME (EXPENSES)
               
Interest income
   
1,221
     
1,030
 
Interest expense-related party
   
-
     
(9,004
)
Interest expense
   
(1,649
)
   
(4,332
)
Other
   
(12,284
)
   
(17,211
)
                 
     Total other income (expenses)
   
(12,712
   
(29,517
)
                 
INCOME BEFORE INCOME TAX BENEFIT (EXPENSE)
   
437,399
     
1,147,622
 
                 
Income tax benefit (expense)
   
(239,413
)
   
 564,168
 
                 
NET INCOME
 
$
197,986
   
$
1,711,790
 
NET INCOME PER SHARE
               
  Basic
 
$
0.01
   
$
0.07
 
  Diluted
 
$
0.01
   
$
0.07
 
WEIGHTED AVERAGE NUMBER OF
               
SHARES OUTSTANDING
               
  Basic
   
25,932,373
     
25,861,076
 
  Diluted
   
26,000,358
     
25,861,076
 
                 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
 
 
 
 
- 19 -

 



SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Statements of Stockholders' Equity
For the Years Ended February 29, 2012 and February 28, 2011
 
 
                                     
                     
Additional
             
   
Common Stock
   
Treasury
   
Paid-In
   
(Accumulated
       
   
Shares
   
Amount
   
Stock
   
Capital
   
Deficit)
   
Total
 
                                     
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
 
                                                 
Issuance of common stock for compensation
   
75,000
     
75
             
21,675
             
21,750
 
Common stock repurchased
                   
(25,000
)
                   
(25,000
)
Common stock cancelled
   
(157,500
)
   
(158
)
   
42,549
     
(42,391
)
           
-
 
Stock-based compensation
                           
355,218
             
355,218
 
Net income
   
-
     
-
                     
197,986
     
197,986
 
Balance at February 29, 2012
   
25,800,146
   
$
25,800
   
$
-
   
$
7,350,650
   
$
(4,543,143
)
 
$
2,833,307
 
 
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 29,
   
February 28.
 
   
2012
   
2011
 
             
CASH FLOW FROM OPERATING ACTIVITIES:
           
Net income
 
$
197,986
   
$
1,711,790
 
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation and amortization
   
42,898
     
46,238
 
Loss on sale of assets
   
12,292
     
34,205
 
Gain on extinguishment of debt
   
(1,963
)
   
-
 
Contributed services
   
-
     
10,000
 
Stock-based compensation
   
376,968
     
80,273
 
Provision for doubtful accounts
   
8,547
     
(2,046
Increase (decrease) in inventory reserve
   
(257,570
)
   
  194,623
 
Deferred tax provision (benefit)
   
168,552
     
(694,833
Changes in operating assets and liabilities:
               
Accounts receivable
   
(16,619
)
   
172,804
 
Inventory
   
(259,521
)
   
(258,437
Prepaid expenses, deposits and other current assets
   
(101,827
)
   
(43,441
)
Restricted cash deposits
   
(146,081
)
   
-
 
Accounts payable and accrued expenses
   
(71,974
)
   
96,440
 
                 
Customer deposits
   
132,242
     
(45,084
)
                 
Net Cash Provided by Operating Activities
   
83,930
     
1,302,532
 
                 
CASH FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
   
(111,773
)
   
(57,200
)
Purchase of intangible assets
   
(4,005
)
   
(2,705
)
                 
Net Cash Used in Investing Activities
   
(115,778
)
   
(59,905
)
                 
CASH FROM FINANCING ACTIVITIES:
               
Repayment of related party notes payable
   
-
     
(471,088
Accrued interest payable to related party
   
-
     
(50,034
)
Proceeds from notes payable
   
-
     
50,000
 
Repayment of notes payable and capital lease obligation
   
(38,447
)
   
(11,833
)
Repurchase of common stock
   
(25,000
)
   
(17,549
)
                 
Net Cash Used in Financing Activities
   
(63,447
)
   
(500,504
)
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
(95,295
)
   
742,123
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
   
1,244,290
     
502,167
 
                 
CASH AND CASH EQUIVALENTS AT END OF YEAR
 
$
1,148,995
   
$
1,244,290
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:
               
Acquisition of equipment under capital lease
 
$
24,295
   
$
-
 
CASH PAID DURING THE YEAR FOR:
               
Interest
 
$
1,649
   
$
63,370
 
Income taxes
 
$
407,965
   
$
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 fresh water. 


NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES
 
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements.  The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles in the United States and have been consistently applied in the preparation of the consolidated financial statements herein as of and for the years ended February 29, 2012 and February 28, 2011.
 
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 and sales returns, stock-based compensation, inventory reserves, valuation allowances for property and equipment and intangible assets, and the deferred income tax valuation allowance. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.  The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
 
Cash and Cash Equivalents
 
Cash equivalents are comprised of certain highly liquid investments with original maturities of three months or less when purchased.  The Company maintains its cash and cash equivalents in bank deposit accounts which at times may exceed federally insured limits of $250,000.  The Company has not experienced any losses related to this concentration of risk. Deposits exceeded insured limits by approximately $628,000 as of February 29, 2012.

 
 
 
 
 
- 22 -

 

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


NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

Inventory

Inventory is stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. Inventory is comprised of raw materials and finished goods.  Raw materials consist of fittings, caps and other components necessary to assemble the Company’s finished goods.  Finished goods consist of water bottles and other filtration systems that are available for shipment to customers.  Finished goods and work in process include the costs of materials, labor and an allocation of overhead.  Total overhead allocated to inventory as of February 29, 2012 and February 28, 2011 amounted to $198,629 and $154,001, 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 $7,715 and $265,285 as of February 29, 2012 and February 28, 2011, respectively.

Property and Equipment

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

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

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

 
 
 
 
 
- 23 -

 

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


NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

Customer Deposits

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

Fair Value of Financial Instruments

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

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

Shipping and Handling

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

Sales Tax

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

Advertising

Advertising costs are expensed as incurred.  Total advertising expenses amounted to $10,767 and $1,364 for the fiscal years ended February 29, 2012 and February 28, 2011, respectively, and recorded as selling, general and administrative expenses.

Research and Development

Research and development costs are expensed as incurred and amounted to $1,109 and $619 for the fiscal years ended February 29, 2012 and February 28, 2011, respectively. These costs are included in selling, general and administrative expenses in the accompanying consolidated statements of income.

 
 
 
 
 
- 24 -

 

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


NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Stock-Based Compensation

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

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

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

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

Income Taxes

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

The Company recognizes and measures uncertain tax positions using a “more-likely-than-not” approach. The Company had no material uncertain tax positions at February 29, 2012 or February 28, 2011.

Income Per Common Share

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

 
 
 
 
 
- 25 -

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

NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
   
For the years ended
 
   
February 29
   
February 28
 
   
2012
   
2011
 
Numerator:
           
Net Income available to common shareholders
 
$
197,986
   
$
1,711,790
 
Weighted average shares – basic
   
25,932,373
     
25,861,076
 
Net income per share – basic
 
$
0.01
   
$
0.07
 
                 
Dilutive effect of common stock equivalents:
               
Warrants
   
67,985
     
-
 
Weighted average shares – diluted
   
26,000,358
     
25,861,076
 
Net income (loss) per share – diluted
 
$
0.01
   
$
0.07
 
 
Concentrations

The Company has an agreement with a third party to manufacture the Company’s component parts in China. As of February 29, 2012 and February 28, 2011, the Company had deposits for inventory purchases in China of approximately $65,560 and $65,100, respectively. For the fiscal years ended February 29, 2012 and February 28, 2011, this vendor accounted for approximately 46% and 57%, respectively, of total raw material purchases.

As of February 29, 2012, the Company had two customers which accounted for approximately 41% of net accounts receivable.  The Company had two customers during the fiscal year ended February 29, 2012 that accounted for approximately 56% of total sales.  As of February 28, 2011, the Company had four customers which accounted for approximately 57% of net accounts receivable.  The Company had three customers during the fiscal year ended February 28, 2011 that accounted for approximately 61% of total sales.

Reclassifications

Certain reclassifications have been made to the fiscal 2011 consolidated financial statements to conform to the fiscal 2012 presentation.

Recent Accounting Pronouncements

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 Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

In September 2011, the FASB issued guidance on ASC 350, Intangibles-Goodwill and Other, for testing goodwill for impairment. The new guidance provides a company the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company’s assessment determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment to be recognized for that reporting unit, if any. If the company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. The adoption of this guidance is effective for the Company beginning March 1, 2012.  The Company does not believe the adoption of this quidance will have a material impact on its consolidated financial statements.

 
 
 
 
 
- 26 -

 

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

NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

In May 2011, the FASB issued Accounting Standards Update No. 2011-04 (“ASU 2011-04”), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) . This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The new guidance will be effective for the Company beginning March 1, 2012 and will not have a significant impact on the balance sheet, results of operations or cash flow. 


NOTE 3:   INVENTORY

The Company’s inventory consisted of the following at February 29, 2012 and February 28, 2011:
 
   
February 29,
   
February 28,
 
   
2012
   
2011
 
Raw materials
 
$
589,774
   
$
503,265
 
 
               
Finished goods
   
382,521
     
209,509
 
     
972,295
     
712,774
 
Reserve for obsolete and slow moving inventory
   
 (7,715
)
   
 (265,285)
 
   
$
964,580
   
$
447,489
 
 
 
 
 
 
 
- 27 -

 

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


NOTE 4:   PROPERTY AND EQUIPMENT
 
The following is a summary of property and equipment at February 29, 2012 and  February 28, 2011:
     
   
February 29,
   
February 28,
 
   
2012
   
2011
 
Tooling
 
$
233,138
   
$
163,659
 
Equipment
   
45,203
     
43,555
 
Vehicles
   
13,000
     
-
 
Computer equipment
   
28,672
     
26,933
 
Leasehold equipment
   
11,129
     
3,218
 
     
331,142
     
237,365
 
 Less: accumulated depreciation
   
(159,838
)
   
(138,388
)
   
$
171,304
   
$
98,977
 

Fixed assets outside the United States included $170,197 and $109,507 in tooling and equipment, at cost, located in China with a third party to manufacture the Company’s component parts at February 29, 2012 and February 28, 2011, respectively. Depreciation expense included in cost of sales was $31,363 and $36,294 for the fiscal years ended February 29, 2012 and February 28, 2011 respectively.  Depreciation expense included in operating expense was $6,186 and $4,740 for the fiscal years ended February 29, 2012 and February 28, 2011, respectively.


NOTE 5:    INTANGIBLE ASSETS
 
The following is a summary of intangible assets at February 29, 2012 and February 28, 2011: 
 
       
   
February 29,
   
February 28,
 
   
2012
   
2011
 
Trademarks
 
$
24,100
   
$
24,100
 
Patents
   
20,602
     
16,697
 
     
44,702
     
40,797
 
Less: accumulated amortization
   
(38,903
)
   
(33,554
)
   
$
5,799
   
$
7,243
 

Intangible assets are amortized over their estimated useful economic lives of five years. Amortization expense related to intangibles was $5,349 and $5,204 during the fiscal years ended February 29, 2012 and February 28, 2011, respectively.  Amortization expense is expected to be approximately $5,000 in fiscal year 2012 and insignificant amounts thereafter.

 
 
 
 
 
- 28 -

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
 
 
NOTE 6:    NOTES PAYABLE AND CAPITAL LEASE OBLIGATION
 
Obligations outstanding as of February 29, 2012 and February 28, 2011 consisted of the following:
 
       
   
February 29,
   
February 28,
 
   
2012
   
2011
 
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. Automatically renews every year.  
 
$
-
   
$
50,000
 
                 
Capital lease for equipment requiring monthly payments of principal and interest of $491 through October 2016 bearing interest at an annual rate of 7.5%
   
22,922
         
                 
Bagging machine financed for production. Lease term is 27 months at an annual interest rate of 33% and was due January 2011.
   
-
     
3,037
 
     
22,922
     
53,037
 
  Less current portion
   
(4,331)
     
(53,037)
 
  Long term portion
 
$
18,591
   
$
-
 

As of February 29, 2012, the Company has a separate line of credit with a bank for borrowings up to $300,000, with no outstanding borrowings as of February 29, 2012, however the line will expire on June 1, 2012 and the Company has no intent to renew.ire on June 1, 2012 and the Company has no intent to renew.
 
Future maturities of the capital lease obligation as of February 29, 2012 are $4,331 in 2013, $4,667 in 2014, $5,030 in 2015, $5,420 in 2016 and $3,474 in 2017.
 

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 during fiscal years 2011 and 2010at 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.  No additional funds were borrowed or outstanding during fiscal year ended February 29, 2012.
 
The Company paid consulting fees to the Company’s primary shareholder (the TAM  Irrevocable Trust, in which Cari Beck, is the trustee as well as a daughter of Carl Palmer an officer and Board member) totaling $108,000 and $83,500 during the years ended February 29, 2012 and February 28, 2011, 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 2012, 75,000 shares of restricted common stock were issued by the Company for services rendered valued at $21,750.  During fiscal year 2011, 28,500 shares of restricted common stock were issued by the Company for services rendered valued at $6,270.  All shares of restricted stock were fully vested upon issuance but not able to be traded on the open market upon issuance.  The values recorded were based on the estimated fair value of the stock on the dates of grant.

 
 
 
 
 
- 29 -

 


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

 
NOTE 8:   EQUITY TRANSACTIONS (CONTINUED)

Repurchase of Common Shares

During fiscal year 2011, the Company purchased 57,500 shares of common stock from the public market for $17,549.  These shares were held by the Company in treasury at February 28, 2011. During fiscal year 2012, the Company purchased an additional 100,000 shares of common stock from the public market for $25,000.  The total number of shares purchased through both fiscal years was cancelled on February 29, 2012.

Warrants

A summary of warrant activity for the fiscal years ended February 29, 2012 and February 28, 2011 is shown below.

         
Weighted-
 
         
Average
 
   
Warrants
   
Exercise
 
   
Outstanding
   
Price
 
             
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
 
Granted
               
Exercised
   
-
     
-
 
Forfeited
               
Outstanding at February 29, 2012
   
8,467,221
     
0.21
 
Vested at February 29, 2012
   
1,693,444
     
0.21
 
Exercisable at February 29, 2012
   
1,693,444
     
0.21
 

 The following table summarizes significant ranges of outstanding warrants as of February 29, 2012:

     
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
   
8.79
   
$   0.21
   
1,693,444
   
$   0.21
 
                                 
During the year ended February 28, 2011, 8,467,221 warrants were issued to employees and related parties for future services to be rendered, with a vesting term of five (5) years and an exercise price of $0.21.  The fair value of these warrants on the date of grant totaled approximately $1.7 million and is being amortized to income over the vesting period.

As of February 29, 2012 the total outstanding warrants had an intrinsic value of $2,032,133.  

Contributed Executive Services
 
The President of the Company has historically elected that he would not accept his salary until the Company had become profitable.  Even though the Company achieved profitable operations, he continued to not accept his salary for the year ended February 28, 2011. Accordingly, as it had in earlier years, the Company recorded expense of $10,000, the contractual value of his services, and additional paid in capital in the accompanying consolidated statements of stockholders’ equity.  A similar expense was not recorded for the year ended February 29, 2012, as a result of the resolution of the legal matter discussed in Note 10.   Effective May 15, 2012 this employment agreement with the President was terminated.

 
 
 
 
 
- 30 -

 
 
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 29, 2012:
                 
U.S. federal
 
$
     
143,269
     
143,269
 
State
   
70,861 
     
25,283
     
96,144
 
  Total income tax expense (benefit)
 
$
70,861
     
168,552
     
239,413
 
Year ended February 28, 2011:
                       
U.S. federal
 
$
     
(586,693
)
   
(586,693
)
State
   
130,665 
     
(108,140
)
   
22,525 
 
 Total income tax expense (benefit)
 
$
130,665
     
(694,833
)
   
(564,168
)
 
The income tax provision differs from the expected amount of income tax expense determined by applying a combined U.S. federal and state income tax rate of 39% to pretax income for the years ended February 29, 2012 and February 28, 2011 as follows:
 
   
2012
   
2011
 
Expected tax expense
 
$
170,585
   
$
451,463
 
Permanent differences
   
6,276
     
19,199
 
True up of state tax payable
   
62,552
     
--
 
Change in valuation allowance
   
--
     
(1,034,830
)
  Income tax expense (benefit)
 
$
239,413
   
$
(564,168
)
 
Deferred tax assets are as follows:
 
   
February 29, 2012
   
February 28, 2011
 
Deferred tax assets:
           
NOL carryforwards
 
$
722,140
   
$
966,293
 
Allowance for doubtful accounts
   
-
     
3,781
 
Inventory reserves
   
3,073
     
105,675
 
Depreciation
   
(12,972
)
   
(15,805
)
Accrued expenses
   
13,157
     
38,381
 
Stock compensation
   
177,650
     
29,479
 
Legal claim
   
62,552
        -  
State taxes
   
-
     
44,426
 
Other
   
43,826
     
5,748
 
Valuation allowance
   
(483,145
)
   
(483,145
)
Net deferred tax asset
 
$
526,281
   
$
694,833
 
 
 
 
 
 
 
- 31 -

 
 
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 significant net operating loss carryforwards (NOL’s). Due to the uncertainty of the Company’s ability to utilize these NOL’s, a full valuation allowance was provided against deferred tax assets as of February 28, 2010.  For the years ended February 29, 2012 and February 28, 2011, the Company achieved pretax income and was able to utilize U.S. federal NOL carryforwards of approximately $700,000 and $1.4 million, respectively.  As the Company now has reported pretax income in the last three years and anticipates continued profitability in the future, there is currently a more optimistic outlook as to whether the Company will be able to utilize the NOL’s before expiration. As a result, the Company reversed a portion of the valuation allowance, resulting in recognition of a tax benefit of approximately $564,000 for the year ended February 28, 2011.  As of February 29, 2012, the Company has approximately $1.6 million and $2.8 million of remaining NOL carryforwards for federal and state purposes, respectively, which expire in various years through 2027.  Based upon the level of historical taxable income and projections for future taxable income over the periods in which the items underlying the Company’s deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at February 28, 2012. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced.

The Company includes interest and penalties, if any, arising from the underpayment of income taxes in the consolidated statements of income in the provision for income taxes. As of February 28, 2012 and 2011, 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 2008 through 2011 for federal purposes and fiscal years 2007 through 2011 for state purposes.

 
NOTE 10:    COMMITMENTS AND CONTINGENCIES
 
The Company’s office and production facility leases expire in June 2014.  All three leases are at a monthly cost of $3,622, $4,954 and $4,566, respectively. Total rent expense amounted to $106,335 and $105,506 for the fiscal years ended February 29, 2012 and February 28, 2011, respectively.  The Company also has operating leases for certain equipment at a monthly cost of approximately $285.
 
Future minimum base lease payments are as follows:
 
Fiscal Year Ending
   
 February 28,
Amount
 
     
2013
 
$
165,011
 
2014
   
169,592
 
2015
   
54,850
 
Total
 
$
389,453
 
 
Legal Proceedings

In the case titled Letty Garcia v. Carl Palmer; Seychelle Environmental Technologies Inc., et, al., brought in the Superior Court for the State of California, San Diego County District. The court found against the Company in May, 2012 for approximately $157,000.  This amount has been reflected in the February 29, 2012 consolidated financial statements.  The Superior Court had previously garnished approximately $303,000 of the Company’s cash and deposited it in an escrow account out of control of the Company.  The court finding has reduced this restricted cash amount to $146,081 as of February 29, 2012.  The Company anticipates this balance being returned to it.  The Company has evaluated the ruling and has appealed the verdict.

 
 
 
 
 
- 32 -

 

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


NOTE 10:    COMMITMENTS AND CONTINGENCIES (CONTINUED)

There is an additional unrelated lawsuit from a former employee of the Company regarding a claim of wrongful termination based on discrimination.  The Company is vigorously contesting the claim for $280,000.  It is too early to make an opinion as to whether the Company will prevail.  Accordingly, there has been no provision established under FASB ASC Topic 450, Contingencies for this matter.
 
Otherwise, as of February 29, 2012 we know of no other legal proceedings pending or threatened or judgments entered against the Company or any of our directors or officers in their capacity as such.
 
Significant Agreements
 
In June 2002 the Company entered into a license agreement for a product known as the “Hand Held Pump Technology.”  The Company licensed all proprietary rights associated with this technology.  The Company will pay a 2% royalty on its gross sales resulting from use of the technology during the term of the license agreement. The license agreement was for an initial term of five years, with five successive five-year renewals.  This technology has resulted in a product called Pump N’ Pure which allows the user to draw filtered water from virtually any container or location.  The Company has commenced marketing the Hand Held Pump as part of its Aqua Gear product line to the United States sporting goods industry. During the years ended February 29, 2012 and February 28, 2011 the Company paid $-0- in license fees.
 
During July 2006, the Company signed a second exclusive license agreement for a patent and ownership of the trademark Aqua Gear. The Company will pay a 2% royalty on net sales resulting from use of this technology up to $120,000, and 1% thereafter. The license agreement shall continue indefinitely unless terminated due to a default or breach of the agreement. Products affected include all Aqua Gear trademarked filter bottles and flip up bottles sold in the product line.  As of the date of this document, approximately $30,300 in royalties has been paid under these license agreements. During the years ended February 29, 2012 and February 28, 2011 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 29, 2012 and February 28, 2011 the Company paid $-0- in license fees.
 
 
 
 
 
 
- 33 -

 

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 29, 2012 and February 28, 2011 is as follows:
 
  
 
2012
   
2011
 
Water filtration products sold to
           
   external customers (1) in:
           
The United States
 
$
4,567,066
   
$
3,962,420
 
Asia
   
303,124
     
388,575
 
United Kingdom
   
70,577
     
74,582
 
Other countries
   
201,493
     
44,513
 
                 
Total
 
$
5,142,260
   
$
4,470,090
 
         _____________
 
           (1)    Sales to external customers are based on the country of residence of the customer.
 
Long lived assets at February 29, 2012 are in the following geographic areas:

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

NOTE 12:  SUBSEQUENT EVENTS

On May 15, 2012, the court found against the Company for $157,000 as discussed in Note 10.  The $157,000 is reflected in these February 29, 2012 consolidated financial statements.

 
 
 
 
 
- 34 -

 

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 29, 2012.  Accordingly, we concluded that our disclosure controls and procedures were effective as of February 29, 2012.

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 29, 2012, 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.
 

 
 
 
 
 
- 35 -

 



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.

Remediation Plan for Material Weakness in Internal Control over Financial Reporting

In light of a material weakness noted in during the third quarter and reported on Form 10-Q/A for the period ended November 30, 2011, we have introduced and implemented a number of remediation measures to address the noted weaknesses.  Many of these measures are entity level in nature and we believe that the organizational and process changes we adopted will improve our internal controls and governance environment. Management recognizes that many of these enhancements require continual monitoring and evaluation for effectiveness. The development of these actions is an iterative process and will evolve as the Company continues to evaluate and improve our internal controls over financial reporting. Initially, we may be unable to implement some of the more obvious measures, such as retaining additional accounting personnel who have particular areas of expertise, given our resource constraints. However, as we grow, we expect to adopt and implement those measures and to retain additional qualified personnel as management deems necessary to satisfy our control and governance requirements.

Specifically, we have:

·
In mid-February 2012, we implemented a policy of monthly meetings among the members of the accounting department, along with the third-party professional hired to fill certain areas of expertise, with the intent of bringing the group up to date with developments within the organization. This will include a detailed review of the Company’s monthly financial statements and discussion of any significant transactions or events that may not be overtly evident from a review of the financial information. It is our feeling that this policy will enable timely discussion of transactions and events and prevent them from remaining undetected. Management believes that this policy will mitigate the potential for accounting and reporting lapses resulting from a lack of communication or understanding regarding the significance of transactions, events, or balances.

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  are as follows:

   NAME
AGE
                    POSITION HELD
 
       
Carl Palmer
77
President,  and Director
 
Richard Parsons
77
Chief Executive Officer, Secretary and Director
 
James Place
73
Chief Operating Officer, Chief Financial Officer, Treasurer and Director
 
       

 
 
 
 
 
- 36 -

 

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

Carl Palmer.  Mr. Palmer is the Chairman of the Board, the President and a Director of the Company.. He was the founder of our Company in 1998, innovator of the complete line of Seychelle water filtration products and primary spokesperson worldwide. He is an internationally recognized expert in the field for over 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 is the Chief Executive Officer, the Secretary  and a Director of the Company  He joined the Company in November 2004.  In March 2005, he assumed additional responsibilities for international sales activities in Asia, including China and India. He has over 30 years of experience in bottled water, reverse osmosis and water filtration with major companies such as Coca-Cola, Arrowhead, Shaklee, and Canadian Glacier. Mr. Parsons was a General Manager at Coca-Cola in 1974, a Vice President at Arrowhead from 1975 to 1985, a consultant with Shaklee in 1988, and Vice President of U.S. Operations for Canadian Glacier from 1989 to 1990.

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 of experience in direct sales and multilevel marketing with companies such as Avon, Holiday Magic, Arrowhead and National Education. Mr. Parsons has a Bachelors Degree from Principia College.
 
James Place. Mr. Place is the Chief Operating Officer, Treasurer, and a Director of our Company He joined the Company November 2004 as (COO)..   In March 2005, he assumed additional responsibilities for manufacturing, operations and became the Chief Financial Officer (CFO). He has over 30 years of 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.

 
 
 
 
 
- 37 -

 

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 29, 2012, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with.

Code of Ethics for Chief Executive Officer and Senior Financial Officers

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

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

 
 
 
 
 
- 38 -

 

Item 11. EXECUTIVE COMPENSATION

The following table sets forth the Summary Compensation Table for the President and the executive officers at the end of the last three completed fiscal years. Compensation does not include minor business-related and other expenses paid by us.   
 
SUMMARY COMPENSATION TABLE
 
   
Long Term Compensation
   
 
Annual Compensation
 
Awards
 
Payouts
   
(a)
(b)
(c)
(d)
(e)
 
(f)
(g)
 
(h)
 
(i)
 
 
Name and Principle Position
 
 Fiscal
Year
Salary
($)
Bonus
($)
Other
Annual Compensation
($)
 
Restricted
Stock
Award(s)
($)
Securities
Underlying
Option/SARs
(#)
 
LTIP
Payouts
($)
 
All
Other
Compensation
($)
                       
Carl Palmer
President
Director
2012
2011
2010
 
$157,000(3)
$0.00
$0.00
 
$0.00
$0.00
$0.00
 
$0.00
$0.00
$0.00
 
 
$0.00
$0.00
$0.00
 
0
0
0
 
 
$0.00
$0.00
$0.00
 
 
$0.00
$0.00
$0.00
 
                       
Richard Parsons (1)
CEO
Director
2012
2011
2010
 
$95,071
$49,457
$36,000
 
$6,221
$14,757
$0.00
 
$0.00
$0.00
$0.00
 
       
$0.00
$0.00
$0.00
 
 
$0.00
$ 0.00
$7,158(2)
 
                       
James Place (1)
COO & CFO
Director
2012
2011
2010
 
$72,299
$44,899
$24,000
 
$6,221
$16,041
$0.00
 
$0.00
$0.00
$0.00
 
       
$0.00
$0.00
$0.00
 
 
$0.00
$0.00
$2,104(2)
 
__________________
 
 
(1)
Elected to Board of Directors during November 2004.

 
(2)
During October 2006, the Company commenced paying an initial monthly stipend of $2,500 to J. Place and D. Parsons through December 2007.  For the fiscal year ended February 28, 2010, amounts paid to the directors totaled $69,262 consisting of salary and other.  For the fiscal year ended February 28, 2011, amounts paid to the directors totaled $94,356 for salaries and bonuses totaling $30,798.  For the fiscal year ended February 29, 2012, amounts paid to the directors totaled $324,370 for salaries and bonuses totaling $12,442.

 
(3)
During the twelve month period ended February 29, 2012, $157,000 was paid to a plaintiff for a personal lawsuit which the Company was obligated to pay through a court ruling as salary for Carl Palmer.
 
 
 
 
 
 
- 39 -

 
 
 
 
          Name
 
 
Grant date
 
 
Type
 
      Vesting
      Schedule
 
Restricted
Shares
Awarded
Grant
Date
Price
 
Grant
Date
Value
Total
Restricted
Shares at
February 29, 2012
 
Year
End
Value
                 
Richard Parsons
11/30/04
RS
100% vested
240,000
$0.03
$112,800
240,000
$ 108,000
                 
Richard Parsons
3/2905
RS
100% vested
316,312
$0.03
$ 79,100
316,312
$142,340
                 
James Place
11/30/04
RS
100% vested
240,000
$0.03
$112,800
240,000
$ 108,000
 
OPTION/SAR GRANTS IN LAST FISCAL YEAR. The Company granted no options during the fiscal years ended February 29, 2012. The Company had no options outstanding as of the fiscal year ended February 29, 2012.
 
AGGREGATED OPTIONS/SARS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES. There were no outstanding options as of the fiscal year ended February 29, 2012.
 
EMPLOYMENT CONTRACTS WITH EXECUTIVE OFFICERS.  Effective December 1, 2001, the Company entered into an employment agreement with the President of the Company. The agreement was for five years and provided 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 was automatically renewable for successive one-year terms unless the Company or employee provided written notice of non-renewal.  For the year ended February 29, 2012, even though the Company recognized a net after tax profit, the President declined to take the compensation as specified in the agreement; therefore, an accrual was not deemed necessary.  Effective May 15, 2012 this employment agreement with the President was terminated.

DIRECTOR COMPENSATION. The Company made payments totaling $336,812, $94,356 and $69,262 combined for the fiscal years ended February 29, 2012, February 28, 2011 and 2010 respectively. 

The Board of Directors as a whole acts as a compensation committee. We have no retirement, pension, sharing, stock option, insurance or other similar programs.
 
We do not have a separately designated audit, compensation or nominating committee of our Board of Directors.   We are not a “listed company” under SEC rules and are therefore not required to have separate committees comprised of independent directors. 

 
 
 
 
 
- 40 -

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following sets forth the number of shares of our $0.001 par value common stock beneficially owned by (i) each person who, as of February 29, 2012, was known by us to own beneficially more than five percent (5%) of its common stock; (ii) our individual Directors and (iii) our Officers and Directors as a group. As of February 29, 2012  there were a total of 25,800,146  common shares  i outstanding and 8,467,221 outstanding warrants.
 
NAME AND ADDRESS
AMOUNT AND NATURE OF   
 
PERCENT OF
 
OF BENEFICIAL OWNER
BENEFICIAL OWNERSHIP (1)(2)(4)
 
CLASS
 
         
The TAM Irrevocable Trust
15,097,799 (3)
 
 43.95%
 
4012 S. Rainbow #K111
       
Las Vegas, NV 80103-2012
       
         
Carl Palmer
-0-
 
-0-
 
251 Jeanell Dr., Ste 3
       
Carson City, NV 89703
       
         
Richard Parsons  (Parsons Family Trust)
2,609,783
 
7.80%
 
251 Jeanell Dr., Ste 3
       
Carson City, NV 89703
       
         
James Place  (The Place Trust)
 1,755,000
 
5.11%
 
251 Jeanell Dr., Ste 3
       
Carson City, NV 89703
       
         
All officers and directors as a Group (three persons)
 4,364,783
 
12.91%
 
_______________

(1)
All ownership is beneficial and of record, unless indicated otherwise.
 
(2)
Beneficial owners listed above have sole voting and investment power with respect to the shares shown, unless otherwise indicated.
 
(3)
The TAM  Irrevocable Trust is an irrevocable trust for the benefit of certain family members of Mr. Carl Palmer. Mr. Palmer disclaims any beneficial ownership or interest in this Trust. Cari Beck, his daughter, is the Trustee of the Trust and has total beneficiary rights, including all voting rights and investment power as the Trustee. The Trust is held in her name (50%) as well as that of Lindsay Helvey (25%) and Casey Helvey (25%), both granddaughters.

(4)
There are no other financial instruments, including stock warrants, etc. that are issuable within sixty days from the filing of this document.
 
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

At February 28, 2010, the Company had outstanding notes payable from the Company’s primary shareholder (the TAM Trust, in which Cari Beck is the trustee as well as a daughter of Carl Palmer, an officer and Board member) totaling $471,088. A portion ($299,175) of these notes bore interest at 10% per annum, while $171,913 of the notes payable bore interest at a rate of 3.25%.  The advances were not repayable until after March 1, 2011 and the repayment was subordinate to the Company’s line of credit and note payable to a financial institution.  These amounts and related accrued interest were repaid in full during the fiscal year ended February 28, 2011.
 
 
 
 
 
 
- 41 -

 

The Company paid consulting fees to the Company’s primary shareholder (the TAM Irrevocable Trust, in which Cari Beck, is the trustee as well as a daughter of Carl Palmer an officer and Board member) totaling $108,000 and $83,500 during the years ended February 29, 2012 and February 28, 2011, respectively, which are included as a component of selling, general and administrative expenses on the consolidated statements of income.
 
 
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
On March 2, 2012, our Board of Directors voted to dismiss our independent registered public accounting firm, Windes & McClaughry Accountancy Corporation (Windes & McClaughry), of Irvine, California and replaced them with Ramirez Jimenez International CPAs (RJI International).  As of that date, RJI International formally accepted us as a client for the audit of our consolidated financial statements for the fiscal year ending February 29, 2012, which are included in our fiscal 2012 annual report included on this Form 10-K. Our Board of Directors does not have an audit committee.  The functions customarily delegated to an audit committee are performed by our full Board of Directors.  Our Board of Directors approves in advance, all services performed by RJI International, Windes & McClaughry, and GBH CPAs, PC (prior to their dismissal).  Our Board of Directors considers whether the provision of non-audit services is compatible with maintaining the principal accountant’s independence.  
 
The following table sets forth fees billed by Windes & McClaughry and GBH CPAs, PC during the last two fiscal years for services rendered for the audit of our annual consolidated financial statements and the review of our quarterly financial statements, services by our independent registered public accounting firm that are reasonably related to the performance of the audit or review of our consolidated financial statements and that are not reported as audit fees, services rendered in connection with tax compliance, tax advice and tax planning, and all other fees for services rendered.
 
   
February 29,
2012
   
February 28,
2011
 
             
Audit fees
 
$
51,250,
   
$
50.400,
 
Audit related fees
   
-0-
     
-0-
 
Tax fees
   
16,407
     
-0-
 
All other fees
   
-0-
     
-0-
 
                 
There were no fees paid to RJI International during the fiscal years ended February 29, 2012 or February 28, 2011.
 
The audit fees in fiscal 2012 include $67,657 of fees billed by Windes & McClaughry related to the audit of our consolidated financial statements and quarterly reviews.
 
The audit fees in fiscal 2011 include $30,000 of fees billed by Windes & McClaughry and $20,400 of fees billed by GBH CPA’s related to the audit of our consolidated financial statements and quarterly reviews.

 
 
 
 
 
- 42 -

 
 
ITEM 15. EXHIBITS FINANCIAL STATEMENT SCHEDULES.
 
Exhibits

Exhibit No.
                                                                       Description
   
2A*
Plan of Exchange between Seychelle Environmental Technologies, Inc. and Seychelle Water Technologies, Inc. dated January 30, 1998 as filed with Form 10-SB 12 G on February 8, 2000.
   
3A*
Articles of Incorporation dated January 23, 1998 as filed with Form 10-SB 12 G on February 8, 2000.
   
3B*
Articles of Merger of Royal Net, Inc. into Seychelle Environmental Technologies, Inc as filed with Form 10-SB 12 G on February 8, 2000.
   
3C*
Amendment to Articles of Incorporation re: Series "A" Preferred Stock as of January 31, 1998 as filed with Form 10-SB 12 G on February 8, 2000.
   
3D*
Amendment to Articles of Incorporation re: Series "AA" Preferred Stock as of June 5, 1998 as filed with Form 10-SB 12 G on February 8, 2000.
   
3E*
Amendment to Articles of Incorporation re: Series "AAA" Preferred Stock as of February 18, 1999 as filed with Form 10-SB 12 G on February 8, 2000.
   
3F*
Bylaws as filed with Form 10-SB 12 G on February 8, 2000.
   
10A*
Purchase Agreement with Aqua Vision as filed with Form 10-SB 12 G on February 8, 2000.
   
10B*
Amended Purchase Agreement with Aqua Vision as filed with Form 10-SB 12 G on February 8, 2000.
   
10C*
2000 Stock Compensation Plan I, dated July 1, 2000 as filed with Registration Statement on Form S-8 on August 31, 2000.
   
10D*
2002 Stock Compensation Plan I, dated February 12, 2002 as filed with Registration Statement on Form S-8 on February 27, 2002.
   
10E*
Purchase Agreement with Aqua Gear as filed with Annual Report on Form 10-K on June 14, 2002.
   
10F*
Employment Contract with Carl Palmer as filed with Annual Report on Form 10-K on June 14, 2002.
   
10G*
Management Consulting Contract with Richard Parsons
   
10H*
Management Consulting Contract with James Place
   
10I*
Joint Venture Agreement with Huanghua Plastic Co. Ltd. dated September 1, 2005
   
10J*
ABMS Health Care Pvt. Ltd. Distribution Rights Agreement dated April 1, 2006
   
10K*
Confident, Inc. Exclusive Distribution Rights Agreement dated January 1, 2006
 

 
 
 
 
 
- 43 -

 

 
 
Exhibit No.
                                                                       Description
   
   
10L*
Continental Technologies. Inc., Purchase Agreement dated April 26, 2006
   
10M*
Promissory Note to TAM Irrevocable Trust dated May 1, 2001
   
10N*
Promissory Note to TAM Irrevocable Trust dated February 28, 2002
   
10O*
Promissory Note to TAM Irrevocable Trust dated February 28, 2003
   
10P*
Promissory Note to TAM Irrevocable Trust dated November 1, 2003
   
10Q*
Promissory Note to TAM Irrevocable Trust dated February 28, 2004
   
10R*
Food For Health Purchase Agreement
   
10S*
Food For Health Distribution Agreement
   
10T*
Seychelle Environmental Technologies, Inc. License Agreement with Mr. Gary Hess
   
31.1**
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes Oxley Act of 2002)
   
31.1**
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)
   
32.1**
Certification of the Chief Executive Officer pursuant to 18 U.S.C.ss.1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
   
32.2**
Certification of the Chief Financial Officer pursuant to 18 U.S.C.ss.1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
   
99*
Code of Ethics for Chief Executive Officer and Senior Financial Officers
   
___________________
 
*  Previously filed with the Securities and Exchange Commission as indicated and incorporated by reference herein

** Attached hereto

 
 
 
 
 
- 44 -

 

 
SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
     
 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
  
  
  
Date: May 29, 2012
By:   
/s/ Richard Parsons
 
Richard Parsons
Chief Executive Officer
 
 
     
   
  
  
  
Date: May 29, 2012
By:   
/s/ Jim Place
 
Jim Place
Chief Financial Officer



In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
       
/s/ Carl Palmer
     
Carl Palmer, Director
 
May 29, 2012
 
       
/s/  Jim Place
     
Jim Place, Director
 
May 29, 2012
 
       
/s/  Richard Parsons
     
Richard Parsons, Director
 
May 29, 2012
 
 
 

 
- 45 -