Item 1. BUSINESS.
History of Seychelle
We are a Nevada corporation. Our principal corporate office address is 32963 Calle Perfecto, San Juan Capistrano, California 92675. Our telephone number at this address is 949-234-1999.
We were incorporated under the laws of the State of Nevada on January 23, 1998 as a change of domicile to Royal Net, Inc., a Utah corporation that was originally incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies, Inc. effective in January 1998.
On January 30, 1998, we entered into an Exchange Agreement with Seychelle Water Technologies, Inc., a Nevada corporation (SWT), whereby we exchanged our issued and outstanding capital shares with the shareholders of SWT on a one share for one share basis. We became the parent company and SWT became a wholly owned subsidiary. SWT had been formed in 1997 to market water filtration systems of Aqua Vision International.
Organization
Our Company is presently comprised of Seychelle Environmental Technologies, Inc., a Nevada corporation, with two wholly-owned subsidiaries, Seychelle Water Technologies, Inc. and Fill 2 Pure International, Inc., also Nevada corporations (collectively, the Company or Seychelle). We use the trade name "Seychelle Water Filtration Products, Inc." in our commercial operations.
Business of Seychelle
General
Seychelle designs, assembles and distributes unique, state-of-the-art ionic adsorption micron filters specifically for portable filter devices that remove up to 99.99% of all pollutants and contaminants found in any fresh water source as well as increase the alkalinity of the water up a pH level of 9.5. Patents or trade secrets cover all proprietary products. Seychelle water filtration products addressing a worldwide problem of access to clean drinking water and makes available low-cost, effective filtration products that will meet the need for safe, great tasting, and high quality drinking water.
Seychelle markets its portable water filtration bottles throughout the world to customers such as individuals, dealers, distributors, governments, militaries, non-governmental organizations and emergency relief organizations such as the Jimmy Bakker Ministry, International Red Cross, Eco-Challenge, Kenya Wild Life Service, La Cruz Roja de Mexico and the N.Y. Institute for the Blind. In addition, the Company has donated thousands of portable bottles to church groups and missionaries worldwide.
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In 2015, Beverage Marketing reported that the bottled water beverage business grew approximately 7.3% in calendar year 2014, far above the overall U.S. liquid refreshment beverage market annual growth of approximately 2.2%. Seychelle products compete in a more limited market; the home and portable filtration product segment which includes such brands as Brita, PUR, KOR Water, Soma and Bobble.
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. The World Health Organization estimates that approximately 2.2 million people, mostly children in developing nations, die annually from water-related 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 absolute filtration for pennies per gallon, with pressure as low as 2 pounds per square inch (PSI). Further, our point of difference filtration systems remove up to 99.99% of pollutants and contaminants most commonly found in fresh drinking water supplies in the five major areas of concern as follows:
AESTHETICS: Taste, chlorine, sand, sediment and odor problems.
BIOLOGICS: Pathogens such as Cryptosporidium, Giardia and E.Coli Bacteria.
CHEMICALS: Pesticides, detergents, toxic chemicals and industrial waste.
DISSOLVED SOLIDS: Heavy metals such as aluminum, asbestos, copper, lead, mercury and chromium 6.
RADIOLOGICAL: Cesium 134 & 137, Radon, Radium, Uranium, Radioactive Iodine, etc.
New pH Product which increases the alkalinity of source water up to 9.0 pH level or more.
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 People's 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 include the test results from selected countries. Selected results from the United States, United Kingdom and South Africa are displayed on our Website at www.seychelle.com. To our knowledge, no other portable water filtration system can achieve removal of up to 99.99% of pollutants and contaminants most commonly found in fresh drinking water supplies in the five major areas of concern defined above. The benefit of such filtration can save lives worldwide as more people become aware of the benefits of using products utilizing 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 99.99% reduction). Sizes are from 20 ounce to 42 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 which consist of 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 a third-party assembler/fulfillment company that could handle large orders.
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On September 1, 2005, we signed an exclusive 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 pursued include: retail, military, government, non-governmental agencies (NGO)'s, foundations, missionaries, multi-level marketing, international, OEM and joint ventures. Several distributors sell the Company's portable water filtration products to customers in specific distribution channels; including: retail, multi-national corporations, foundations, sports, governmental agencies, and the military (both domestically and internationally).
Raw Materials
Seychelle's filters include powdered, activated coconut and other media as components in the porous plastic ionic filter. To date, there is an adequate availability of material for all of our products. We do not expect this situation to change in the near future.
Customers and Competition
Seychelle products compete against companies offering water filtration and bottled water including (1) bottled water and (2) home water treatment systems provided by suppliers (such as independent dealers, distributors, catalogs, internet sellers, etc.) in the form of reverse osmosis systems, distillation, and filtration systems. Therefore, Seychelle's portable and home filtration products compete in a limited segment of the drinking water market as an alternative to other sources of filtered or purified drinking water.
Seychelle has a negligible share of the world's filtered or purified water market. Our products sell in a niche category of the market - portable filtration bottles that use powder-activated carbon filters that compete with our powder-activated coconut filters with various media called ionic adsorption micron filtration technology (IAMF) which remove many organic and inorganic contaminants that simple activated carbon filters cannot. Most powder activated carbon filters on the market remove Chlorine, sediment and dirt thus improving taste and odor, as well as a handful of other contaminants such as Lead, Mercury, Zinc and Copper. This would include leading brands such as Brita, PUR, General Electric and Culligan, who collectively dominate the home market. In the portable segment of the market, there are hundreds of small companies selling a variety of specialized filters, with no one company having a majority share and no industry data available. We believe that our current share of this market is negligible.
Seychelle sells its products in two ways. First, it sells its own brand to individuals, dealers, distributors, multilevel marketing companies and missionaries on a direct basis, and through our internet web site. Second, the Company offers specially designed products to the same customers as a private label supplier if purchasers buy in significant volume. In some instances, we may supply only filters for their bottles or hydration backpacks as opposed to complete products.
Currently, the majority of our sales are to customers in the U.S. However, we are in contact with several overseas distributors and sales could increase in the future in these countries if customers have a greater demand for safe drinking water. For the year ended February 28, 2015, we had four customers that accounted for 76% of our total sales. One was a new customer to the current fiscal year. For the year ended February 28, 2014, we had two customers that accounted for approximately 47% of our total sales.
Backlog
As of February 28, 2015 and 2014, we had a backlog of approximately $350,000 and $585,000 in unshipped orders.
Employees
As of February 28, 2015, we had a President and two (2) executive employees managing the Company with six (6) administrative employees supporting that effort. In assembly, operations and warehousing we had twenty (22) full-time employees and two (2) part-time employees working to fill orders.
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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.
As these patents expire over the next one to two years, the Company cannot at this time estimate the financial impact of the expiration of these patents.
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.
We have filed and received approval for five trademarks with the United States Patent and Trademark Office which were granted: Seychelle®, which has been used in commerce since 1997, along with Pres 2 Pure, Fill 2 Pure, pH20 Plus and Aq-RO-matic.
We have a trade name, "Seychelle Water Filtration Products, Inc.," which we use in our commercial operations.
Government Regulation
We are not, as a company, subject to any material governmental regulation or approvals. However, our products are subject to inspection and evaluation by regulatory authorities that have jurisdiction over water quality standards. Such authorities are on the federal, state, and local level, both in the United States and overseas, where we market our products. Most of our products have already been inspected and evaluated by all applicable governmental authorities in the areas in which we operate or plan to operate in the near future. With respect to our current focus of operations, we do not know if governmental regulation will have a material impact on us in the future.
Research and Development
We did not spend a significant amount for research and development activities during the fiscal year ended February 28, 2015.
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.
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Item 1A.
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 Five of Our Six Most Recent Fiscal Years. However, We Were Not Profitable In Our Most Recent Fiscal Year and We Cannot Guarantee That We Will Continue to Conduct Profitable Operations.
We recorded a profit and positive cash flows from operations for the five years ending February 28, 2014. We had net loss of $1,405,909 for the year ended February 28, 2015 compared to net income of $506,797 for the year ended February 28, 2014, $635,883 for the year ended February 28, 2013, $197,986 for the year ended February 29, 2012, $1,711,790 for the year ended February 28, 2011, and $562,930 for the year ended February 28, 2010. Our fiscal year 2015 net loss was largely due to legal expenses for a lawsuit that was settled subsequent to year end. The fiscal year 2015 net loss increased our accumulated deficit to $4,806,372 as of February 28, 2015. Nevertheless, we believe that we have engaged in enough consistent profitable business activity over a sustained period of time to be said to have a successful operating history. If we do not continue to be profitable, we may go out of business, and an investor could lose his entire investment.
The Water Filtration Business is Subject to Intense Competition and Subject to Numerous Risks. Many of Our Competitors Have Substantially Greater Capabilities and Resources and May be Able to Develop and Commercialize Products Before We Do.
The water filtration business is highly competitive with many companies having access to the same market. Technological competition from larger and more established companies is significant and expected to increase. Most of the companies with which we compete and expect to compete have far greater capital resources and significant research and development staffs, marketing and distribution programs and facilities, and many of them have substantially greater experience in the production and marketing of products. Our ability to compete effectively may be adversely affected by the ability of these competitors to devote greater resources to the sale and marketing of their products than we can. In addition, one or more of our competitors may succeed or may already have succeeded in developing technologies and products that are more effective than any of those we currently offer or are developing. In addition, there can be no guarantee that we will be able to protect our technology from being copied or infringed upon. There can be no assurance that we will have the necessary resources to be competitive. Therefore, investors should consider an investment in us to be an extremely risky venture.
As an Organization, We are Dependent Upon Technology for the Development of Our Products.
We are operating in a business that requires continuing research, development and testing efforts. There can be no assurance that new products will not render our products obsolete or non-competitive at some time in the future.
Our Success as an Organization Depends, in Large Part, Upon Our Ability to Protect Our Intellectual Property Rights.
A successful challenge to the ownership of our technology could materially damage our business prospects. We rely principally on trade secrets as well as trade secret laws, two patents, five trademarks, copyrights, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We currently have two U.S. patents issued and a license on one patent. As these two patents expire over one and two 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.
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Our Success is Dependent Upon the Decision Making of Our Directors and Executive Officers.
Our directors and executive officers have made a full commitment to our business. The loss of any or all of these individuals could have a materially adverse impact on our operations because we have no succession plan for any of them. We will depend on our senior executive officers as well as other key personnel. If any key employee decides to terminate his employment with us, this termination could delay the commercialization of our products or prevent us from sustaining our profitability. Competition for qualified employees is intense among companies in our industry and the loss of qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for the expansion of our activities, could hinder our ability to successfully develop and maintain marketable products.
We Have a Significant Dependence on a Few Customers.
As of February 28, 2015, the Company had four customers who accounted for approximately 76% of net accounts receivable (37%, 14%, 13% and 12%, respectively). These four customers accounted for approximately 7%, 33%, 12% and 14% (or 66% total) of total sales during the fiscal year ended February 28, 2015. 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.
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.
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If We Fail in Maintaining Effective Internal Control Over Financial Reporting, The Price of Our Common Stock May be Adversely Affected.
We are required to establish and maintain appropriate internal control over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosure regarding our business, financial condition or results of operations. In addition, our future assessments of internal control over financial reporting may identify additional weaknesses and conditions that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors. Any material weaknesses that needs to be addressed in management's assessment of our internal control over financial reporting or in the report on the effectiveness of our internal controls by our independent registered public accounting firm, when, and if, applicable, may have an adverse impact of our common stock.
If We Fail to Comply with Section 404 of the Sarbanes-Oxley Act of 2002 in a Timely Manner, Our Business Could Be Harmed and Our Stock Price Could Decline.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require management's annual assessment of our internal control over financial reporting. The standards that must be met for the management to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We have incurred significant expenses and we devote resources to Section 404 compliance on an ongoing basis. In the event that our Chief Executive Officer and Chief Financial Officer determine that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react on how the market prices of our shares will be affected, however, we believe that there is a risk that investor confidence and share value may be negatively impacted.
Maintaining and Improving Our Financial Controls and The Requirements Of Being a Public Company May Strain Our Resources, Divert Management's Attention, and Affect Our Ability to Attract and Retain Qualified Members For Our Board of Directors.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. The requirements of these rules and regulations increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and may also place undue strain on our personnel, systems, and resources. The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Fulfilling this requirement can be difficult to achieve and maintain.
As a result, management's attention may be diverted from other business concerns, which could harm our business, operating results and financial condition. These efforts also involve substantial costs.
We May be Impacted By New Regulatory Requirements as a Result of the Passage of the Dodd-Frank Act.
In July, 2010, Congress enacted the Dodd-Frank Act, which instituted major changes in the regulatory regime for public companies. At the present time, we do not believe that Seychelle will be impacted in a material way by this legislation. However, the implementation of the provisions of the Dodd-Frank Act is subject to regulations which have not yet been written and its statutory provisions have not been the subject of extensive judicial review, so we cannot guarantee that we may not come under its purview at some point in the future and be affected negatively by it.
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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:
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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
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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:
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Future announcements about our Company or our competitors, including the results of testing, technological innovations or new commercial products;
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negative regulatory actions with respect to our potential products or regulatory approvals with respect to our competitors' products;
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changes in government regulations;
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developments in our relationships with our partners including customers, vendors and distributors;
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developments affecting our partners; including customers, vendors and distributors;
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our failure to acquire or maintain proprietary rights to the products we develop;
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litigation; and
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Public concern as to the safety of our products.
The stock market has experienced price and volume fluctuations that have particularly affected the market price for many emerging companies. These fluctuations have often been unrelated to the operating performance of these companies. These broad market fluctuations may cause the market price of our common stock to be lower or more volatile than otherwise expected.
Buying Penny Stocks is Very Risky and Speculative. The Applicability of the "Penny Stock Rules" to Broker-dealer Sales of Our Common Stock Will Have a Negative Effect on the Liquidity and Market Price of Our Common Stock.
Trading in our shares is subject to the "penny stock rules" adopted pursuant to Rule 15g-9 of the Securities and Exchange Act of 1934, as amended, which apply to companies that are not listed on an exchange and whose common stock trades at less than $5.00 per share or which have a tangible net worth of less than $5,000,000 - or $2,000,000 if we have been operating for three or more years. The penny stock rules impose additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the penny stock rules will affect the ability of broker-dealers to sell shares of our common stock and may affect the ability of shareholders to sell their shares in the secondary market, as compliance with such rules may delay and/or preclude certain trading transactions. The rules could also have an adverse effect on the market price of our common stock.
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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 Our 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
A smaller reporting company is not required to provide the information in this Item.
ITEM 2.
ITEM 2. PROPERTIES.
As of February 28, 2015, 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 and an additional facility that houses production and customer service at 32893 Calle Perfecto, San Juan Capistrano, CA 92675. Our office telephone number is 949-234-1999. We pay a total of approximately $14,000 in rent per month for approximately 15,800 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 May 2019. The lease for the 32901 location is with a different unaffiliated third party, was initiated November 2011, and will expire in July 2017. The lease for the 32893 location is with a different unaffiliated third party, was initiated in July 2014, and will expire in July 2017. The Company is currently reviewing its options for lease extensions or for alternate leased property of similar size and use in San Juan Capistrano.
We own two patents and numerous trade secrets (see Proprietary Information and Technology above), and other proprietary information related to our business operations. We have filed for five trademarks with the United States Patent and Trademark Office which were granted: Seychelle®, which has been used in commerce since 1997, along with Pres 2 Pure, Fill 2 Pure, pH20 Plus and Aq-RO-matic.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company previously reported that it was involved in a 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. This case has been transferred to the Orange County Superior Court for the State of California with trial date set for September 2015.
In January 2012, the Company entered into a contract with a distributor in which it granted exclusive distribution rights for certain new product lines. Subsequently there was a contract dispute that has resulted in a lawsuit titled Archette Wellness Group, dba Functional Water Technologies v. Seychelle Environmental Technologies, brought in the U.S. District Court, for the Central District of California, Southern Division. This case was settled on March 4, 2015, and the amounts have been provided for in the fiscal year 2015 consolidated financial statements..
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5.
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 factual transactions. As of May 26, 2015, the common stock had a closing price of $0.29.
Approximate Number of Holders of Common Stock
As of February 28, 2015, 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.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
A smaller reporting company is not required to provide the information in this Item.
ITEM 7.
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 subsidiaries as of and for the fiscal years ended February 28, 2015 and 2014. 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, allowance for doubtful accounts and 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.
Allowance for Doubtful Accounts and Sales Returns Reserves
The Company analyzes is current accounts receivable portfolio and sales returns in accordance with FASB Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. Estimates for potential uncollectible accounts receivable and sales returns are based on a variety of factors, the age of the receivable, historical payment patterns, and 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 its allowance for doubtful accounts and 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.
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Income Taxes
We account for income taxes using the asset and liability method under which deferred tax assets or liabilities are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. This new standard requires the netting of unrecognized tax benefits ("UTBs") against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. UTBs will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. The Company adopted ASU-2013-11 on March 1, 2014, and the adoption did not have a material impact on our consolidated financial statements.
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which is effective for public entities for annual reporting periods beginning after December 15, 2016. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements and has not yet determined the method by which the Company will adopt the standard in 2018.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern-Disclosures of Uncertainties about an entity's Ability to Continue as a Going Concern ("ASU 2014-15") . ASU 2014-15 provides new guidance related to management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards and to provide related footnote disclosures. This new guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The requirements of ASU 2014-15 are not expected to have a significant impact on the consolidated financial statements.
Management does not believe any other recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the Company's present or future consolidated financial statements.
Results of Operations
Our summary historical financial data is presented in the following table to aid you in your analysis. You should read this data in conjunction with this section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations, our consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this annual report. The selected financial data below for the fiscal years ended February 28, 2015 and 2014 are derived from our consolidated financial statements included elsewhere in this annual report.
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Fiscal year ended February 28, 2015 compared to the corresponding period in fiscal 2014.
Selected Financial Data
Sales. During the fiscal year ended February 28, 2015, our President, who has been mainly responsible for sales and relationships with larger customers, began shifting his focus toward materials sourcing and new product development. As a result, we saw sales from five of our larger customers decrease from approximately $1.6 million (31% of total sales) in the prior year to $0.4 million (8% of total sales) in the current year. We also saw a decrease in website sales from approximately $346,000 (8% of total sales) in the prior year to $188,000 (4% of total sales) in the current year. During the third quarter, we hired a National Sales Manager to assume some of the sales and larger customer relations roles, and to develop sales programs with our smaller customers to increase their sales and broaden our customer base. We anticipate sales improvements in the subsequent fiscal year with a return to prior year levels as a result of efforts by our National Sales Manager and as a result of the new product development.
Cost of sales and gross profit percentage. The decrease in cost of sales is largely a direct result of the 16% decrease in sales for the year ended February 28, 2015 as compared to the year ended February 28, 2014. Cost of sales decreased by only 4% from period to period by comparison, resulting in gross profit margin decreasing to 42% from approximately 50% in the prior year. Our profit margin will fluctuate from time to time based on the product mix within sales. During the year ended February 28, 2015, we increased the sales of our regular pitcher and related replacement filters to one of our top customers. Because of the high quantity orders, we agreed on pricing that reduced our gross margin on those products to 34%, compared to 58% in the prior year. Sales of this product increased from $412,000 in the prior year (8% of total sales) to $765,000 in the current year (18% of total sales).
We also extended lower pricing on one of our top selling products to our largest customer in exchange for higher quantity purchases. We sold approximately $96,000 in the prior year (2% of total sales) with a gross margin of 62%. In the current year, we increased our sales of this bottle to approximately $496,000 (12% of total sales) but with a gross margin of 48%.
Additionally, we have experienced an overall increase in materials and freight-in costs that have impacted our costs of goods. Management is implementing changes in product design and materials sourcing that we expect to mitigate this overall increase over the next year, which will improve our gross margins.
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Operating expenses. The total operating expenses increased $2.1 million, or 113%, from prior year. This included an increase of approximately $1,580,000 in legal expenses. $1,255,000 of that increase was directly related to the Archette Wellness case (see Note 10 to our consolidated financial statements included in this Annual Report on Form 10-K), which was settled near year-end. The remainder of the increase was related to another ongoing lawsuit as well as patent defense and general legal costs. The Company spent approximately $50,000 in moving and additional office costs due to the opening of a second location that houses production and customer service. Additionally, the Company hired a Corporate Controller, National Sales Director, and one additional customer service clerk as part of developing infrastructure to increase production and sales capacity, and as a continuity plan for current management, for which payroll and related costs increased approximately $200,000. The increase in personnel was necessary as the Company expanded its efforts in the areas of product development and internal administrative infrastructure in anticipation of future growth. The Company experienced a $38,000 increase in health care costs due to additional hiring and increased health care costs overall.
The increases in expenses related to personnel and office space will be recurring. The Company expects legal expenses to decrease significantly in future years.
Interest income and expense. Interest income and expense was relatively consistent from year to year.
Other income and expense. During the year ended February 28, 2014, one of our customers purchased molds for a product through us for approximately $53,000. As we are not in the business of selling molds and do not anticipate any similar transactions going forward, we recorded the sale as other income. There was no comparable transaction during the year ended February 28, 2015.
Benefit (expense) from income taxes.
In the fiscal year ended February 28, 2015, the Company recorded an income tax benefit of approximately $725,000, all of which was a deferred benefit, and which is net of a $123,000 valuation allowance recorded in the current year. As of February 28, 2015, the Company had approximately $1.6 million and $1.7 million of NOLs available for federal and state tax purposes, respectively. In the fiscal year ended February 28, 2014, the Company recorded income tax expense of approximately $230,000, of which approximately $2,000 was current expense and $228,000 was deferred expense, which is net of a $100,000 benefit from the reversal of the valuation allowance.
For each of the five fiscal years from fiscal year ending February 28, 2010, through the prior year ended February 28, 2014, the Company consistently reported pretax income and was able to utilize NOL carryforwards of approximately $1.0 million, $0.9 million, $0.7 million, $1.4 million and $600,000 in these periods, respectively. The Company has NOL carryforwards of approximately $1.6 million and $1.7 million as of February 28, 2015 for federal and state tax purposes, respectively, which management has estimated the Company is more likely than not to be able to use against future years' profit.
Net Income. The net loss for the fiscal year ended February 28, 2015 was $1,405,909 ($0.05 loss per basic and diluted share) or 377% lower than the year ended February 28, 2014, which was $506,797 ($0.02 per basic and diluted share), primarily due to lower revenues and increased sales, general and administrative expenses discussed above. Our current year results were largely impacted by the legal defense costs in the Archette Wellness case, which legal costs are not expected to be recurring subsequent to the case's settlement in March 2015. The table below reflects adjusted balances for benefit (expense) from income taxes and net income (loss) for the last two years, exclusive of legal defense costs related to the Archette Wellness case during those periods.
(A) exclusive of the legal defense costs related to the Archette Wellness case (see Note 10 to our consolidated financial statements).
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CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTS
The Company has various contractual obligations, which are recorded as liabilities in the consolidated financial statements. Other items, such as certain lease agreements are not recognized as liabilities in our consolidated financial statements but are required to be disclosed. For example, the Company is contractually committed to make certain minimum lease payments to rent its current corporate location.
The following table summarizes our significant contractual obligations on an undiscounted basis as of February 28, 2015 and the future periods in which such obligations are expected to be settled in cash or converted into the Company's common stock. In addition, the table reflects the timing of principal payments on outstanding borrowings. Additional details regarding these obligations are provided in footnotes, as referenced below:
Liquidity and capital resources.
Net cash provided by (used in) operating activities. During the fiscal years ended February 28, 2015 and 2014, the Company funded its operations through sales of products and cash on hand from prior year's operations. Additionally, the Company has been successful in collecting its accounts receivable timely, which also helps with operating cash flow. Total cash used in operations during the year ended February 28, 2015 was $1,237,644, which was mainly due to legal expenditures of $1,254,791 during the fiscal year related to the Archette Wellness case (Note 10). Total cash provided through operations totaled $788,953 in 2014. This year-to-year decrease is primarily due to the net loss and to the legal expenses incurred related to the Archette Wellness case (Note 10) in the fiscal year ending February 28, 2015.
Net cash used in investing activities. The $215,443 of cash used in investment activities during the year ended February 28, 2015 was for the purchase of intellectual property and equipment throughout the year. The $47,006 of cash used in investment activities during the year ended February 28, 2014 was primarily due to purchasing equipment throughout the year.
Net cash used in financing activities. In fiscal 2015 and 2014, we repaid $4,204 and $4,667 in capital leases payable.
The Company currently estimates monthly cash requirements of approximately $220,000 to cover selling, general and administrative costs. Gross profits from sales are expected to provide sufficient cash flows to meet these cash requirements and pay contractual commitments.
As of February 28, 2015, the Company has unrestricted cash of approximately $1,515,000 and a backlog of approximately $350,000 in orders to fill.
Capital expenditures.
We do not expect any major capital expenditures in fiscal 2016. However, minor purchases of additional molds or tooling may be needed to expand our product line. We will be able to fund these purchases from cash on hand and we will not require outside financing.
Employees.
We anticipate no additional executive hiring (see Note 12 for information related to our CEO's retirement subsequent to year-end). We expect to increase our production staffing by approximately 10% to support additional production needs with the launch of new product lines subsequent to year-end.
Any seasonal aspects
We have not experienced seasonal spikes in our sales as a result of our very limited retail store distribution and our sales are not subject to seasonal fluctuation.
Off-Balance Sheet Arrangements : None
ITEM 7A.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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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 subsidiaries (the Company) as of February 28, 2015 and 2014, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended February 28, 2015. Seychelle Environmental Technologies, Inc.'s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.Accordingly, we express no such opinion.An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Seychelle Environmental Technologies, Inc. as of February 28, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the two-year period ended February 28, 2015 in conformity with accounting principles generally accepted in the United States of America.
/s/ Ramirez Jimenez International CPAs
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Statements of Stockholders' Equity
For the Years Ended February 28, 2015 and 2014
The accompanying notes are an integral part of these consolidated financial statements.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
Seychelle Environmental Technologies, Inc. was incorporated under the laws of the State of Nevada on January 23, 1998 as a change in domicile to Royal Net, Inc., a Utah corporation that was originally incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies, Inc. effective in January 1998. Seychelle Water Technologies, Inc., and Fill 2 Pure International, Inc., both wholly owned subsidiaries, were formed as corporations in February 1997 and April 2013, respectively, under the laws of the state of Nevada for the purpose of marketing.
Description of Business
The Company designs, assembles and distributes water filtration systems. These systems include portable water bottles, pumps, home-use pitchers, and related water filtration products that can be filled from nearly any available source of fresh water.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding the Company's consolidated financial statements. The consolidated financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles in the United States and have been consistently applied in the preparation of the consolidated financial statements herein as of and for the years ended February 28, 2015 and 2014.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of Consolidation
The Company is presently comprised of Seychelle Environmental Technologies, Inc., a Nevada corporation, with two wholly-owned subsidiaries, Seychelle Water Technologies, Inc., and Fill 2 Pure International, Inc., also Nevada corporations (collectively, the Company or Seychelle). All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made in preparing the consolidated financial statements include the allowance for doubtful accounts and sales returns, stock-based compensation, inventory reserves, valuation allowances for property and equipment and intangible assets, and the deferred income tax valuation allowance. To the extent there are material differences between estimates and the actual results, future results of operations will be affected. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
Cash and Cash Equivalents
Cash equivalents are comprised of certain highly liquid investments with original maturities of three months or less when purchased. The Company maintains its cash and cash equivalents in bank deposit accounts which at times may exceed federally insured limits of $250,000. The Company has not experienced any losses related to this concentration of risk. Deposits exceeded insured limits by approximately $1,201,000 as of February 28, 2015.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts Receivable
The Company performs periodic credit evaluations of its customers' financial condition and does not require collateral. Trade receivables generally are due in 30 days. An allowance for doubtful accounts is recorded when it is probable that all or a portion of a trade receivable balance will not be collected.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, products are shipped and title has passed, the price to the buyer is fixed or determinable and collectability is reasonably assured. These criteria are typically met when the product is shipped. Revenue is not recognized at the time of shipment if these criteria are not met. Certain of the Company's sales include a right for the customer to return the product if they are not satisfied. The Company has an unconditional return policy for the first 90 days. Customers may return the product for a full refund, or they may receive a replacement at no charge. The same policy applies to any product sold from the period 91 days after purchase to one year, for any defects in materials or workmanship. In accordance with FASB ASC Topic 605, Revenue Recognition, the Company makes periodic assessments of return activity and if necessary records a reserve for product returns.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. Inventory is comprised of raw materials and finished goods. Raw materials consist of fittings, caps and other components necessary to assemble the Company's finished goods. Finished goods consist of water bottles and other filtration systems that are available for shipment to customers. Finished goods and work in process include the costs of materials, labor and an allocation of overhead. Total overhead allocated to inventory as of February 28, 2015 and 2014 amounted to approximately $216,000 and $203,000, respectively.
At each balance sheet date, the Company evaluates its ending inventory for excess quantities and obsolescence. This evaluation includes an analysis of sales levels by product type. Among other factors, the Company considers current product configurations, historical and forecasted demand, market conditions and product life cycles when determining the net realizable value of the inventory. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the excess or obsolete inventory. The Company's reserve for excess and obsolete inventory amounted to approximately $40,000 and $35,000 as of February 28, 2015 and 2014, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. The estimated useful lives used in determining depreciation are three to five years for tooling, five years for computers and vehicles, and five to seven years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the respective asset. Management evaluates useful lives regularly in order to determine recoverability.
Maintenance and repairs are charged to expense as incurred; additions and betterments are capitalized. Upon retirement or sale, the cost and related accumulated depreciation of the disposed assets are removed, and any resulting gain or loss is recorded. Fully depreciated assets are not removed from the accounts until physical disposition.
Intangible Assets
Intangible assets include intellectual property, 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.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets
The carrying value of long-lived assets, such as property and equipment and intangible assets, are evaluated when indicators of impairment are present. Impairment is assessed when the undiscounted future cash flows estimated to be generated by those assets are less than the assets' carrying amount. 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. There were no impairments recognized for the years ended February 28, 2015 and 2014.
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.
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 approximately $3,700 and $1,000 for the fiscal years ended February 28, 2015 and 2014, respectively, and recorded as selling, general and administrative expenses in the accompanying consolidated statements of operations.
Research and Development
Research and development costs are expensed as incurred and amounted to approximately $1,000 and $2,200 for the fiscal years ended February 28, 2015 and 2014, respectively. These costs are included in selling, general and administrative expenses in the accompanying consolidated statements of income.
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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.
The assumptions used in the Black-Scholes model referred to above are based upon the following data: (1) The expected life of the option or warrant is estimated by considering the contractual term, the vesting period and the expected exercise price. (2) The expected stock price volatility of the underlying shares over the expected life is based upon historical share price data. (3) The risk free interest rate is based on published U.S. Treasury Department interest rates for the expected life. (4) Expected dividends are based on historical dividend data and expected future dividend activity.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. The asset and liability method requires that the current or deferred tax consequences of all events recognized in the consolidated 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 also follows ASC 740-10-25, which provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise's financial statements in accordance with ASC 740, "Accounting for Income Taxes". ASC 740-10-25 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) 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.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The denominator for diluted income per share for year ended February 28, 2014 is adjusted to include the effect of warrants totaling 3,127,436. During the years ended February 28, 2015 and 2014, 6,725,776 and 5,044,333 warrants, respectively, were excluded from diluted income (loss) per share as their inclusion would be anti-dilutive.
Concentrations
The Company has an agreement with a third party to manufacture the Company's component parts in China. As of February 28, 2015 and 2014, the Company had deposits for inventory purchases in China with this third party of approximately $37,000 and $18,000, respectively. For the fiscal years ended February 28, 2015 and 2014, this vendor accounted for approximately 46% and 51%, respectively, of total raw material purchases. The Company has two other vendors that respectively accounted for an additional 18% and 12% of total raw material purchases for the fiscal year ended February 28, 2015 and 10% and 7% of total raw material purchases for the fiscal year ended February 28, 2014.
As of February 28, 2015, the Company had four customers who accounted for approximately 76% of net accounts receivable (37%, 14%, 13% and 12%, respectively). These four customers accounted for approximately 7%, 33%, 12% and 14% (or 66% total) of total sales during the fiscal year ended February 28, 2015. As of February 28, 2014, the Company had two customers who accounted for approximately 58% of net accounts receivable. The Company had two customers during the fiscal year ended February 28, 2014 who accounted for approximately 47% of total sales.
Reclassifications
Certain reclassifications have been made to the fiscal 2014 consolidated financial statements to conform to the fiscal 2015 presentation.
Recent Accounting Pronouncements
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. This new standard requires the netting of unrecognized tax benefits ("UTBs") against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. UTBs will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. The Company adopted ASU-2013-11 on March 1, 2014, and the adoption did not have a material impact on its consolidated financial statements.
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which is effective for public entities for annual reporting periods beginning after December 15, 2016. In April 2014, the FASB issued for public comment, a proposed accounting standard update that would defer the effective date of ASU No. 2014-19 for one year. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements and has not yet determined the method by which the Company will adopt the standard.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern-Disclosures of Uncertainties about an entity's Ability to Continue as a Going Concern ("ASU 2014-15") . ASU 2014-15 provides new guidance related to management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards and to provide related footnote disclosures. This new guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The requirements of ASU 2014-15 are not expected to have a significant impact on the consolidated financial statements.
Management does not believe any other recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the Company's present or future consolidated financial statements.
NOTE 3: INVENTORY
The Company's inventory consisted of the following at February 28, 2015 and 2014:
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
NOTE 4: PROPERTY AND EQUIPMENT
Fixed assets outside the United States included approximately $279,000 and $275,000 in tooling and equipment, at cost, located in China with a third party to manufacture the Company's component parts at February 28, 2015 and 2014, respectively. Depreciation expense included in operating expense was $61,426 and $54,569 for the fiscal years ended February 28, 2015 and 2014, respectively.
NOTE 5: INTANGIBLE ASSETS
The following is a summary of intangible assets at February 28, 2015 and 2014:
Intangible assets are amortized over their estimated useful economic lives of five years. Amortization expense related to intangibles was approximately $1,700 and $2,500 during the fiscal years ended February 28, 2015 and 2014, respectively. Amortization expense is expected to be approximately $2,000 in fiscal year 2016 at which time a majority of the amortizable intangible assets will be fully amortized. .
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
NOTE 6: CAPITAL LEASE OBLIGATION
Obligations outstanding as of February 28, 2015 and 2014 consisted of the following:
Future maturities of the capital lease obligation as of February 28, 2015 are $5,639 in fiscal year 2016 and $4,081 in fiscal year 2017.
As of February 28, 2015, the Company had a line of credit agreement totaling $500,000, with no outstanding borrowings as of February 28, 2015. The line expires on September 1, 2015. During the fourth quarter of the fiscal year ending February 28, 2015, our bank notified us that our line of credit would no longer be accessible by us. This situation is not material to our operations. However, we plan to request that our bank restore our line of credit as soon as we return to a net profit position for at least one fiscal quarter.
NOTE 7: RELATED PARTY TRANSACTIONS
During the year ended February 28, 2014, the Company paid certain expenses of approximately $14,000 on behalf of Carl Palmer, Chairman, President and Director of the Company, of which approximately $1,400 was repaid in fiscal year 2015 and the remainder will be repaid in fiscal year 2016. The receivable amount is included in related party receivable on the accompanying 2015 and 2014 consolidated balance sheets.
The Company paid consulting fees to the Company's primary shareholder (the TAM Irrevocable Trust (the TAM Trust), in which Cari Beck is the trustee, as well as a daughter of Carl Palmer, an officer and Board member) totaling $252,000 and $138,000 during the years ended February 28, 2015 and 2014, respectively, which are included as a component of selling, general and administrative expenses on the consolidated statements of operations.
During the year ended February 28, 2015, the Company paid $150,000 to TAM Trust for purchase of intellectual property retained by TAM when the Company was organized in 1998.
During the year ended February 28, 2015, TAM Trust purchased, on behalf of the Company, $40,000 of raw materials, and paid $1,500 for related tooling to a vendor with which it already had a business relationship. The Company reimbursed TAM Trust for this outlay in full during the fiscal year ended February 28, 2015.
NOTE 8: EQUITY TRANSACTIONS
Restricted Stock Grants
During the year ended February 28, 2015, 60,000 shares of restricted stock were issued by the Company to employees. 50,000 shares vest over a two year period, whereby 17,000 shares vested upon issue, and 17,000 and 16,000 shares vest after one and two years, respectively. The value recorded in the accompanying consolidated financial statements related to the portion vested during the fiscal year, based on the estimated fair value of the stock on the date of the grant, was approximately $16,000. The other 10,000 shares were fully vested upon issuance. The value recorded in the accompanying consolidated financial statements was based on the estimated fair value of the stock on the date of the grant was approximately $3,800.
During year ended February 28, 2014, 20,000 shares of restricted common stock were issued by the Company for services rendered valued at $4,600. The shares of restricted stock were fully vested upon issuance but not able to be traded on the open market upon issuance. The value recorded was based on the estimated fair value of the stock on the dates of grant.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
NOTE 8: EQUITY TRANSACTIONS (CONTINUED)
Warrants
A summary of warrant activity for the fiscal years ended February 28, 2015 and 2014 is shown below.
The following table summarizes significant ranges of outstanding warrants as of February 28, 2015:
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. During the year ended February 28, 2014, 60,000 warrants were forfeited upon termination of employment of two employees.
As of February 28, 2015 and 2014, the total outstanding warrants had an intrinsic value of $0 and $3,531,033, respectively.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
NOTE 9: INCOME TAXES
Income tax expense (benefit) consists of the following:
The income tax expense (benefit) differs from the expected amount of income tax expense (benefit) determined by applying a combined U.S. federal and state income tax rate of 40% to pretax income (loss) for the years ended February 28, 2015 and 2014 as follows:
Deferred tax assets are as follows:
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
NOTE 9: INCOME TAXES (CONTINUED)
The valuation allowance for deferred tax assets as of February 28, 2015 and 2014 was $123,225 and $0, respectively. The net change in the total valuation allowance was an increase of $123,225 and a decrease of $100,000 for the years ended February 28, 2015 and 2014, respectively. In assessing the realization of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment.
As of February 28, 2015, the Company had approximately $1.6 million and $1.7 million of NOL carryforwards for federal and state purposes, respectively, which expire in various years through 2035. 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. The amount of the deferred tax assets 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 operations in the provision for income taxes. As of February 28, 2015 and 2014, 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 2011 through 2014 for federal purposes and fiscal years 2010 through 2014 for state purposes.
NOTE 10: COMMITMENTS AND CONTINGENCIES
The Company's office facility lease expires in May 2019. The Company also leases a production facility and warehouse facility that expire in July 2017. The three leases are at a monthly aggregate cost of $14,000. Total rent expense amounted to approximately $189,000 and $163,000 for the fiscal years ended February 28, 2015 and 2014, respectively. The Company also has operating leases for certain equipment at a monthly cost of approximately $400.
Future minimum base lease payments are as follows:
Legal Proceedings
The Company previously reported that it was involved in a 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. This case has been transferred to the Orange County Superior Court for the State of California with trial date set for September 2015.
In January 2012, the Company entered into a contract with a distributor in which it granted exclusive distribution rights for certain new product lines. Subsequently there was a contract dispute that has resulted in a lawsuit titled Archette Wellness Group, dba Functional Water Technologies v. Seychelle Environmental Technologies, brought in the U.S. District Court, for the Central District of California, Southern Division. This case was settled on March 4, 2015, and such amount was fully provided for as of February 28, 2015.
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
NOTE 10: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Otherwise, as of February 28, 2015 we know of no other material 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
The Company has historically entered into licensing agreements with third-parties for product proprietary rights, patent and trademark ownership, and use of product name. In return, the Company agrees to pay licensing fees and/or royalties on sales of those products. During the years ended February 28, 2015 and 2014, the Company paid $0 in royalties and licensing fees related to these agreements.
NOTE 11: GEOGRAPHIC AREAS
The Company sells its products throughout the United States and internationally. Geographic sales information for the fiscal years ended February 28, 2015 and 2014 is as follows:
_____________
(1) Sales are based on the country of residence of the customer.
Long lived assets at February 28, 2015 are in the following geographic areas:
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SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
NOTE 11: GEOGRAPHIC AREAS (CONTINUED)
Long lived assets at February 28, 2014 are in the following geographic areas:
NOTE 12: SUBSEQUENT EVENTS
The Archette case discussed in Note 10 was settled on March 4, 2015, and the settlement amounts were recorded in the consolidated financial statements as of February 28, 2015.
Richard Parsons, then Chief Executive Officer retired on April 30, 2015 and forfeited 2,000,000 warrants that were previously granted to him. His retirement included resignation of his position as a Director and an Officer of the Company. The Company appointed Carl Palmer to the position of Chief Executive Officer, in addition to his positions as President and Director. The Company appointed Ms. Elise Eggett as Secretary and Director as a replacement for Mr. Parsons.
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
We did not have any disagreements on accounting and financial disclosures with our present independent registered public accounting firm during the reporting periods.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). As a result of this evaluation, we identified no material weaknesses in our internal control over financial reporting as of February 28, 2015. Accordingly, we concluded that our disclosure controls and procedures were effective as of February 28, 2015.
Our internal control over financial reporting (ICFR) are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U. S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
i. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
ii. provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our consolidated financial statements in accordance with U. S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
iii. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Management's Annual Report on Internal Control Over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, management has concluded, as of February 28, 2015, we did maintain effective control over the financial reporting process.
Inherent Limitations Over Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Attestation Report of the Registered Public Accounting Firm.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this annual report.
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Changes in Internal Control Over Financial Reporting.
We have made no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Our Directors and Executive Officers, their ages and positions held in the Company are as follows:
*Note: See Note 12 regarding Richard Parsons retirement on April 30, 2015.
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, President and a Director of the Company. He was the founder of our Company in 1998, innovator of the complete line of Seychelle water filtration products and primary spokesperson worldwide. He is an internationally recognized expert in the field for over 40 years and pioneered the development of the reverse osmosis (RO) home and office pure water business in the U.S. in the late 1970's. That company, Aq-Ro-Matic, was later sold to Coca-Cola in 1973. He developed the cellulose triacetate membrane, a breakthrough technological development in the industry and subsequently, created and sold pure water companies to Coca Cola Los Angeles as noted previously, AMF/Cuno in 1985 and Shaklee in 1989. Also, in the late 1980's Mr. Palmer developed the Best Water reverse osmosis business for Shaklee and sold over $53 million in above-the-counter systems. Carl's 30 years of direct sales experience has led to many significant business relationships, many of which continue today. He is the inventor of thirteen patented products related to water purification. Mr. Palmer received a Bachelors Degree from Whittier College. Upon Richard Parsons' retirement on April 30, 2015, Carl Palmer became the Company's President, Director and CEO.
Richard Parsons. Mr. Parsons is the Chief Executive Officer, the Secretary and a Director of the Company. He joined the Company in November 2004. In March 2005, he assumed additional responsibilities for international sales activities in Asia, including China and India. He has over 40 years of experience in bottled water, reverse osmosis and water filtration with major companies such as Coca-Cola, Arrowhead, Shaklee, and Canadian Glacier. Mr. Parsons was a General Manager at Coca-Cola in 1974, a Vice President at Arrowhead from 1975 to 1985, a consultant with Shaklee in 1988, and Vice President of U.S. Operations for Canadian Glacier from 1989 to 1990.
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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. Mr. Parsons retired on April 30, 2015.
James Place. Mr. Place is the Chief Operating Officer (COO), Chief Financial Officer (CFO), Treasurer, and a Director of our Company He joined the Company November 2004 as COO. ). He has over 40 years of experience in food, beverages and bottled water. While at Arrowhead, he took the liter, still and sparkling water business from $5 million to $100 million in 5 years. Mr. Place also had extensive marketing, new product development and operating experience with Fortune 100 companies such as Carnation, Kerr Glass and Hunt-Wesson. Mr. Place was Vice President and General Manager of the Grocery Products Division at Arrowhead from 1981 to 1988, a Vice President of Sales/Marketing - New Products at Kerr Glass from 1988 to 1990, Manager, New Products at Carnation from 1979 to 1981 and Sales/Marketing Manager at Hunt-Wesson Foods from 1970 to 1976.
Mr. Place also has substantial experience in business development, mergers and acquisitions and with the investment community. Mr. Place ran his own consulting business in consumer products including water and other beverages with small to medium sized companies from 1990 to 2004. This included working successfully with these companies on financing plans for both new products and expansion programs. Mr. Place has an MBA from Michigan State University and a Bachelors degree from Albion College.
Elise Eggett. Ms. Eggett joined the Company in April 2014 as the Corporate Controller. On May 1, 2015, she was appointed to the role of COO in addition Corporate Controller and became a Director and Secretary for the Company. Ms. Eggett brings 10 years of experience in SEC reporting, compliance, accounting and finance. Prior to her role at Seychelle, she was the Southern California Divisional Controller with The New Home Company and Manager in the Audit Practice of Windes & McClaughry, where she planned, coordinated and completed financial statement audits in the manufacturing and real estate industries, among others.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's outstanding equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on its review of the copies of such reports furnished to the Company during the fiscal year ended February 28, 2015, 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.
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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.
Item 11.
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.
__________________
(1) Elected to Board of Directors during November 2004.
(2) Retired April 30, 2015 and forfeited his warrants.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR. The Company granted no options during the fiscal year ended February 28, 2015. The Company had no options outstanding as of the fiscal year ended February 28, 2015.
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 28, 2015.
EMPLOYMENT CONTRACTS WITH EXECUTIVE OFFICERS. There are no binding employment contracts with executive officers.
DIRECTOR COMPENSATION. The Company made payments totaling $180,387, $312,428, and $165,575 combined for the fiscal years ended February 28, 2015, 2014 and 2013, 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.
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ITEM 12.
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 28, 2015, 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 28, 2015 there were a total of 25,913,646 common shares outstanding and 8,407,221 outstanding warrants for a total of 34,320,867 common shares and warrants. Upon Mr. Parsons retirement and resignation from all offices of the Company in April, 2015, he forfeited 2,000,000 warrants.
.
_______________
(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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
During the year ended February 28, 2014, the Company paid certain expenses of approximately $14,000 on behalf of Carl Palmer, Chairman, President and Director of the Company, of which approximately $1,400 was repaid in fiscal year 2015 and the remainder will be repaid in fiscal year 2016. The receivable amount is included in related party receivable on the accompanying 2015 and 2014 consolidated balance sheets.
The Company paid consulting fees to the Company's primary shareholder (the TAM Irrevocable Trust (the TAM Trust), in which Cari Beck is the trustee, as well as a daughter of Carl Palmer, an officer and Board member) totaling $252,000 and $138,000 during the years ended February 28, 2015 and 2014, respectively, which are included as a component of selling, general and administrative expenses on the consolidated statements of operations.
During the year ended February 28, 2015, the Company paid $150,000 to TAM Trust for purchase of intellectual property retained by TAM when the Company was organized in 1998.
During the year ended February 28, 2015, TAM Trust purchased, on behalf of the Company, $40,000 of raw materials, and paid $1,500 for related tooling to a vendor with which it already had a business relationship. The Company reimbursed TAM Trust for this outlay in full during the fiscal year ended February 28, 2015.
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ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
On March 2, 2012, our Board of Directors voted to approve Ramirez Jimenez International CPAs (RJI) as our independent registered public accounting firm. 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. 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 RJI 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.
Audit fees. The audit fees in fiscal 2015 and 2014 include $63,500 and $56,500, respectively, of fees billed by RJI related to the audit of our consolidated financial statements, and quarterly reviews.
Tax fees. This represents professional services rendered for tax compliance, tax advice and tax planning.
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ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Exhibits
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___________________
* Previously filed with the Securities and Exchange Commission as indicated and incorporated by reference herein
** Attached hereto
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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.
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, 2015
/s/ Jim Place
Jim Place, Director
May 29, 2015
/s/ Ellise Eggett
May 29, 2015
Ellise Eggett, Director
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