Seychelle Environmental Technologies Inc (SYEV) SEC Annual Report (10-K) for 2017

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) : Yes [ ] No [X]

The number of shares outstanding of the registrant's common stock, as of June 12, 2017 was 26,574,313.

The aggregate market value of the voting stock of the Registrant held by non-affiliates as of August 31, 2016 was approximately $1,886,303.

Seychelle markets its portable water filtration bottles throughout the world to customers such as individuals, dealers, distributors, non-governmental organizations and emergency relief organizations such as the Jimmy Bakker Ministry. In addition, the Company has donated thousands of portable bottles to church groups and missionaries worldwide during the life of the Company.

Product design is a constant focus and all products are reviewed annually.

The Company has determined that the production and assembly of some of our product components in China and Mexico through the use of third-party contract manufacturers at a lower cost than in the U.S. will still maintain 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 Aliso Viejo, California.

Currently, the majority of our sales are to customers in the U.S.  For the year ended February 28, 2017, we had three U.S. based customers that accounted for 53% of our total sales.  For the year ended February 29, 2016, we had three customers that accounted for 76% of our total sales.

Backlog

We Have Been Profitable for Six of Our Eight Most Recent Fiscal Years. However, We Cannot Guarantee That We Will Continue to Conduct Profitable Operations. We were not profitable for our most recent fiscal year.

We recorded a net loss and negative cash flows from operations for the most recent fiscal year ending February 28, 2017. We had the following (loss) income for the years ending:

		Net Income (Loss)
February 28, 2017		$	(2,147,224	)
February 29, 2016		$	1,032,941
February 28, 2015		$	(1,405,909	)
February 28, 2014		$	506,797
February 28, 2013		$	635,883
February 29, 2012		$	197,986
February 28, 2011		$	1,711,790
February 28, 2010		$	562,930

While we believe that we have had a successful operating history, we cannot guarantee that we will continue to be profitable.  If we do not continue to be profitable, we may go out of business, and an investor could lose their entire investment.

- 7 -

Our Success as an Organization Depends, in Large Part, Upon Our Ability to Protect Our Intellectual Property Rights. While We Have Several Items of Intellectual Property, Our Two Patents Have Expired.

We hold trademarks and a tradename, but our two patents have expired.  We cannot at this time estimate the financial impact of the expiration of these patents to Seychelle. In general, 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 technology license positions or to defend against infringement claims.

Our Board of Directors and the Majority of the Shares of the Company is Under the Complete Control of Mr. Carl Palmer.

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/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.

The sub-lease was effective September 1, 2016, provides the Company with rental income of $6,505 per month, and will expire the same day as the lease expires on July 31, 2017.

The Company's Aliso Viejo lease was effective August 1, 2016, requires monthly payments of $19,446, with graduated annual increases, and expires in July 2021.

We hold trademarks and a tradename, We previously held two patents which are now expired. We cannot at this time estimate the financial impact of the expiration of these patents to Seychelle. We currently hold no patents.

On March 27, 2017, the Company received a Notice of Filing of Discrimination complaint in the Superior Court of California, County of Orange by a former employee.  The Company also received on June 5, 2017, a Request for Entry of Default filed to Superior Court of California, County of Orange by the same employee. We believe that the complaint is completely without merit and plan to vigorously contest the matter.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, 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 June 12, 2017, the common stock had a closing price of $0.15 per share.

As of February 28, 2017 , there were approximately 353 shareholders of record of our common stock.   

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, 2017. 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 fiscal year 2019.

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 Company will adopt ASU 2014-15 as its current fiscal year-ended February 28, 2017.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . The amendments in this update change existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of this standard.

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.

Sales.  During the year ended February 28, 2017 the decrease in sales of $6.5 million compared to the year ended February 29, 2016 or (60%), was primarily due to our largest customers ceasing ordering in February 2016.  There were no sales to this customer during the year ending February 28, 2017 and the likelihood of this customer purchasing our product in the future is remote.  The loss of business from this customer has had a material adverse effect on our revenues in the short term and may continue to have a material adverse effect on our revenues in the long term if these revenues are not replaced by expanded sales to existing or new customers.

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, 2017 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:

		Total				Less Than 1 Year				1- 3 Years				3-5 Years				More Than 5 Years
Accounts payable and accrued liabilities		$	476,415			$	476,415			$	-			$	-			$	-
Customer deposits			99,677				99,677				-				-				-
Capital lease			18,791				4,047				14,744				-				-
Other contractual commitments (1)			1,063,179				226,988				700,067				136,124				-
Total contractual obligations		$	1,658,062			$	807,127			$	714,811			$	136,124			$	-
(1) Office lease commitments expiring July 2017 and July 2021 and equipment lease expiring in fiscal year 2020.

Liquidity and capital resources.

To the Board of Directors and Stockholders

Seychelle Environmental Technologies, Inc.:

We have audited the accompanying consolidated balance sheet of Seychelle Environmental Technologies, Inc. and subsidiaries (the Company) as of February 28, 2017 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit 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 audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Seychelle Environmental Technologies, Inc. and subsidiaries as of February 28, 2017, and the results of their operations and their cash flows for the year ended February 28, 2017 in conformity with accounting principles generally accepted in the United States of America.

/s/ Squar Milner LLP

Newport Beach, California
June 14, 2017

We have audited the accompanying consolidated balance sheet of Seychelle Environmental Technologies, Inc. and subsidiaries (the Company) as of February 29, 2016, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended February 29, 2016.  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 audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Seychelle Environmental Technologies, Inc. as of February 29, 2016, and the results of their operations and their cash flows for the year ended February 29, 2016 in conformity with accounting principles generally accepted in the United States of America.

Consolidated Statements of Stockholders' Equity

For the Years Ended February 28, 2017 and February 29, 2016

																	Additional
	Common Stock								Treasury Stock								Paid-In				(Accumulated
	Shares				Amount				Shares				Amount				Capital				Deficit)				Total
Balance at February 28, 2015			25,913,646			$	25,914				-			$	-			$	8,457,603			$	(4,806,372	)		$	3,677,145
Stock-based compensation			476,667				477				-				-				369,515				-				369,992
Treasury stock at cost			-				-				36,000				(12,280	)			-				-				(12,280	)
Net income			-				-				-				-				-				1,032,941				1,032,941
Balance at February 29, 2016			26,390,313			$	26,391				36,000				(12,280	)		$	8,827,118			$	(3,773,431	)		$	5,067,798

Stock-based compensation			250,000				250				-				-				117,250				-				117,500
Treasury stock at cost			-				-				30,000				(17,400	)			-				-				(17,400	)
Net loss			-				-				-				-				-				(2,147,224	)			(2,147,224	)
Balance at February 28, 2017			26,640,313			$	26,641				66,000			$	(29,680	)		$	8,944,368			$	(5,920,655	)		$	3,020,674

As of February 28, 2017, the Company had $732,000 in cash and a backlog of $465,000 in unshipped product.

Seychelle has been continuing to develop innovative marketing and product concepts for water purification for the world.  The demand is expanding rapidly due to the health concerns caused by extensive contamination of drinking water by major industrial, agriculture and natural causes.  Seychelle continues to develop new technologies that remove contaminants such as lead, Chromium and others to create products for both here in the U.S. and also around the world to ensure safe drinking water.  With the growing interest for higher alkaline water, referred to as pH, Seychelle now includes a full line of products that meets these demands.

This year, Seychelle products have expanded its sales efforts in the following international markets; Mexico, Sri Lanka, Vietnam, South Korea, Australia, New Zealand, Japan and China to name a few.  It's our intention to expand our marketing activities more strongly to the international market and E-commerce.  In addition, Seychelle is managing cost in line with current revenue.

Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, growth in inventory and servicing clients, and continued development and expansion of our products.  Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and quantity of product orders and shipments; the timing and amount of our operating expenses; the timing and costs of product service requirements; the extent to which our products gain market acceptance; the timing and costs of product development and introductions; the extent of our ongoing and any new research and development programs; and changes in our strategy or our planned activities.

Accounts Receivable

Advertising costs are expensed as incurred.  Total advertising expenses amounted to approximately $ 2,300 and $ 10,700 for the fiscal years ended February 28, 2017 and February 29, 2016 , 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 $1,200 and $2,000 for the fiscal years ended February 28, 2017 and February 29, 2016, respectively. These costs are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

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

		For the year ended
		February 28,				February 29 ,
		2017				2016
Numerator:
Net (loss) income available to common shareholders		$	(2,147,224	)		$	1, 032,941
Weighted average shares – basic			26, 574,313				26,210,545
Net (loss) income per share – basic		$	( 0. 08	)		$	0. 04
Dilutive effect of common stock equivalents:
Warrants			-				3,130,763
Weighted average shares – diluted			26,574,313				29,341,308
Net (loss) income  per share – diluted		$	( 0. 08	)		$	0. 04

The Company utilizes the services of two individuals, one of which is a related party and one of which is third-party, in China to source materials and the manufacturing of component parts with third-party vendors in China. As of February 28, 2017 and February 29, 2016, the Company had deposits for inventory purchases in China of approximately $3,000 and $25,000, respectively.

For the year ended February 28, 2017 we had three customer that accounted for 36%, 9% and 8% (or 53%) of our total sales.  As of February 29, 2016, we had three customers that accounted for 34%, 28% and 14% (or 76% total) of our total sales.  As of February 29, 2017, one of these customers accounted for 68% of net accounts receivable.

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, 2017.    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 fiscal year 2019.

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 Company adopted ASU 2014-15 during the current fiscal year ended February 28, 2017.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the potential impact this standard will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . The amendments in this update change existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of this standard.

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.

The Company's inventory consisted of the following at February 28, 2017 and February 29, 2016:

The Company leases certain equipment under leases classified as capital leases. The leased equipment carried a cost of $26,000 and $50,295 as of February 28, 2017 and February 29, 2016, and is depreciated on a straight-line basis over 5 years. Total accumulated depreciation related to the leased equipment was $32,095 and $23,250 as of February 28, 2017 and February 29, 2016, respectively. Obligations outstanding as of February 28, 2017 and February 29, 2016 consisted of the following:

Future maturities of the capital lease obligation as of February 28, 2017 are:

Fiscal Year Ending
February 28,		Amount
2018		$	4,267
2019			5,403
2020			5,938
2021			3,183
Total		$	18,791

NOTE 7:   RELATED PARTY TRANSACTIONS

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 and current Board member, as well as a daughter of Carl Palmer, an officer and Board member) totaling $37,350 and $138,000 during the years ended February 28, 2017 and February 29, 2016, respectively, which are included as a component of selling, general and administrative expenses on the consolidated statements of operations.

During the years ended February 28, 2017 and February 29, 2016, TAM Trust purchased, on behalf of the Company, $76,704 and $552,000, respectively, of raw materials from a vendor with which it already had a business relationship. During the year ended February 29, 2016, the Company reimbursed TAM for approximately $10,000 of business travel costs incurred on behalf of its CEO, Carl Palmer.

The Company paid commission to Carl Palmer's brother-in-law for sourcing raw materials with third-party vendors in China.  The Company paid approximately $18,000 and $44,000 in direct commissions to the related party during the fiscal years ended February 28, 2017 and February 29, 2016.

The Company had advanced amounts to employees of approximately $27,200 and $28,000 as of February 28, 2017 and February 29, 2016. These amounts are being repaid through direct payroll withdrawals.

NOTE 8:   EQUITY TRANSACTIONS

Restricted Stock Grants

Warrants

A summary of warrant activity for the fiscal years ended February 28, 2017 and February 29, 2016 is shown below.

						Weighted-
						Average
		Warrants				Exercise
		Outstanding				Price
Outstanding at March 1, 2015			8,407,221				0.21
Granted			-				-
Exercised			-				-
Forfeited			(2,000,000)				-
Outstanding at February 29, 2016			6,407,221				0.21
Granted			-				-
Exercised			-				-
Outstanding at February 28, 2017			6,407,221				0.21
Vested at February 28, 2017			6,407,221				0.21
Exercisable at February 28, 2017			6,407,221				0.21

The following table summarizes significant ranges of outstanding warrants as of February 28, 2017:

		Warrants Outstanding						Warrants Exercisable
				Weighted		Weighted				Weighted
				Average		Average				Average
				Remaining		Exercise		Number		Exercise
Exercise Price		Number		Life (Years)		Price		Outstanding		Price
	$0.21		6,407,221		4.79		$0.21		6,407,221		$0.21

Income tax expense (benefit) consists of the following:

		Current				Deferred				Total
Year ended February 29, 2017:
U.S. federal		$	(261,967	)			501,492				239,525
State			(25,884	)			88,498				62,614
Total income tax expense (benefit)		$	(287,851	)			589,990				302,139
Year ended February 28 2016:
U.S. federal		$	256,530				548,162				804,692
State			57,973				96,734				154,708
Total income tax expense		$	314,503				644,896				959,399

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, 2017 and February 29, 2016 as follows:

Deferred tax assets are as follows:

		February 28,				February 29,
		2017				2016
Deferred tax assets:
NOL carryforwards		$	379,326			$	-
Depreciation			(80,545	)			29,725
Reserves and accrued expenses			202,471				160,027
Stock compensation			645,673				564,626
Other			75,728				-
Valuation allowance			(1,222,653	)			(140,655	)
Net deferred tax assets		$	-			$	613,723

NOTE 10:    COMMITMENTS AND CONTINGENCIES

The Company entered into a lease agreement on one facility for its corporate offices, inventory and production at 22 Journey in Aliso Viejo, CA for a term of 5 years at a monthly rental of approximately $19,000, and such amounts are included in the table below. The Company sub leases its facility in San Juan Capistrano, CA.

Fiscal Year Ending
February 28,		Amount
2018			270,000
2019			245,000
2020			252,000
2021			259,000
Thereafter			109,000
Total		$	1,135,000
Rent from SJC			(33,000	)
Total			1,102,000

The Company was not involved in any litigation or legal proceedings as of February 28, 2017.  On March 27, 2017, the Company received a Notice of Filing of Discrimination complaint in the Superior Court of California, County of Orange by a former employee.  The Company also received on June 5, 2017, a Request for Entry of Default filed to Superior Court of California, County of Orange by the same employee. The Company believes that the complaint is completely without merit and plans to vigorously contest the matter.

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, 2017 and February 29, 2016, the Company paid $12,500 and $12,000, respectively, in royalties and licensing fees related under these agreements.

The Company sells its products throughout the United States and internationally. Geographic sales information for the fiscal years ended February 28, 2017 and February 29, 2016 is as follows:

		United States				China				Total
Property and equipment, net		$	75,909			$	89,088			$	164,997
Other assets			81,310				-				81,310
Total		$	157,219			$	89,088			$	246,307

Management has evaluated events subsequent to February 28, 2017 through the date the accompanying consolidated financial statements were filed with the Securities and Exchange Commission for transactions and other events that may require adjustment of and/or disclosure in such financial statements. Based on its review, no material events were identified that require adjustment to the financial statements or additional disclosure.

●	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

●

provide reasonable assurance that the transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors;

●	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 financial statements;

●	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

●

provide reasonable assurance that the transactions are recorded  as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

●	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 financial statements.

(1)	lack of a functioning audit committee and lack of a majority of outside directors on the Company's Board of Directors capable to oversee the audit function;

(2)	inadequate segregation of duties due to limited number of personnel, which makes the reporting process susceptible to management override;

(3)	insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements;

(4)	ineffective controls over period end financial disclosure and reporting processes; and

Management believes that the material weaknesses set forth in items (1) through (4) above did not have an effect on the Company's financial reporting during the year ended February 28, 2017.

We are committed to improving our financial organization. As part of this commitment, we plan to prepare and implement sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements.

We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

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 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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Our Directors and Executive Officers as of June 12, 2017, their ages and positions held in the Company are as follows:

Carl Palmer	83	Chief Executive Officer ("CEO "), President, Chief Financial Officer and Director
Cari Beck	56	Secretary-Treasurer, HR Manager and Director
John Beck	59	Director
Gary Hess	56	Director
Jenevieve Fisher	46	Director

Our Directors have served and will serve in such capacity until the next annual meeting of our shareholders and until their successors have been elected and qualified. The officers serve at the discretion of our Directors. The Board of Directors as a whole serve as the audit committee.  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.Mr. Carl Palmer is the father and father-in-law of Ms. Cari Beck and Mr. John Beck, respectively. Ms. Cari Beck and Mr. John Beck are wife and husband.  Gary Hess and Jenevieve Fisher were elected as Board of Directors effective July 19, 2016.  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

Cari Beck . Secretary-Treasurer, HR Manager and Director. From 1992-2002, Mrs. Beck worked as the production coordinator for Krystal Enterprises, one of the largest limousine manufacturers in the world.  During her time at Krystal Enterprises, Ms. Beck worked collaboratively with major US auto manufacturers to purchase chassis for limousine production.  She was responsible for coordinating all aspects of production and accounts receivable to ensure timely delivery and satisfaction to the customer.  She was instrumental in coordinating the preparation, organization and set up for all quarterly trade shows.  Ms. Beck worked directly with the Executive Vice President handling the company's national accounts and maintaining inventory levels on all finished products. During her tenure, Krystal Enterprises grew from a company producing 20 vehicles to 150 monthly. For the past seven years Ms. Beck has consulted for Seychelle (in her role as the trustee of the TAM Trust), with a focus on manufacturing, assembly and process control. Ms. Beck became a Director in April, 2016.

John Beck . Mr. Beck currently holds the position of Vice President of Operations at Grech Motors, a private company, whose annual sales are currently approximately $50 million.  He has a history of being a part of a team working to help companies grow.  From 1976-1986, Mr. Beck worked for Quality Bowling Corporation where he started as the sixth employee hired and finished his time there as a purchasing agent in a company that had grown to over 40 employees. In 1983, Mr. Beck purchased his first limousine and started a part-time limousine venture that led to a 30-year career with Krystal Enterprises, a private company.  His responsibilities included sales, marketing, and substantial input on design and production.  Over his 30 years at Krystal Enterprises, sales grew from $150,000 a month during the early 1980's to approximately $10 million a month in sales during the late 1990's.  After Krystal Enterprises was sold in 2011, Mr. Beck retired.  Not long after retiring he began consulting and then was hired on as the Vice President of Operations for Grech Motors. Mr. Beck became a Director in May 2016.

Jenevieve Fisher . Ms. Fisher has been devoted, since the age of twenty-two, to helping others negotiate the challenges of dealing with a diagnosis of cancer.  As a cancer survivor of Hodgkin's disease, she has committed herself to bringing health education, encouragement and hope to those living with cancer and their families.  She has been an avid supporter of the American Cancer Society, the Leukemia and Lymphoma Society and the National Childhood Cancer Foundation.  She is also a member of the Society of Children's Book Writers and Illustrators, as well as the Northwest Christian Writer's Association.  She has written and film over one hundred health videos.

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, there were no Section 16(a) filing requirements applicable to its officers, directors or greater than 10% beneficial owners for the fiscal year ended February 28, 2017.

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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																Long Term Compensation
				Annual Compensation												Awards								Payouts
(a)		(b)		(c)				(d)				(e)				(f)				(g)				(h)				(i)
												Other				Restricted				Securities								All
												Annual				Stock				Underlying				LTIP				Other
Fiscal				Salary				Bonus				Compensation				Award(s)				Option/SARs				Payouts				Compensation
Name and Principle Position		Year		($)				($)				($)				($)					(#)			($)				($)
Carl Palmer		2017		$	45,250			$	0.00			$	0.00			$	0.00			$	0.00			$	0.00			$	0.00
President, CEO, CFO		2016			45,000				80,000				0.00				0.00				0.00				0.00				0.00
Director		2015			0.00				0.00				0.00				0.00				0.00				0.00				0.00
Cari Beck (1)		2017			8,219				0.00				0.00				0.00				0.00				0.00				0.00
HR Manager/Sec-Treasurer		2016			0 .00				0 .00				0.00				0.00				0.00				0.00				0.00
Director		2015			0.00				0.00				0.00				0.00				0.00				0.00				0.00
James Place (2)		2017			48,103				0.00				0.00				0.00				0.00				0.00				0.00
Former COO and CFO		2016			40,874				0.00				0.00				0.00				0.00				0.00				0.00
2015				$	39,762			$	4,784			$	0.00			$	0.00			$	0.00			$	0.00			$	0.00