UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
-------------------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 91-1922863
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
615 Discovery Street, Victoria BC CANADA V8T 5G4
-------------------------------------------------
(Address of principal executive offices)
( 250 ) 477 - 9969
(Issuer's telephone number)
(Former name, former address and former fiscal year if changed since last
report)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common stock $.001 par value
12,733,916 shares as of April 30, 2005.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Attached hereto and incorporated herein by reference.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information contains certain forward-looking statements that
anticipate future trends or events. These statements are based on certain
assumptions that may prove to be erroneous and are subject to certain risks
including but not limited to the risks of increased competition in the Company's
industry and other risks detailed in the Company's Securities and Exchange
Commission filings. Accordingly, actual results may differ, possibly materially,
from the predictions contained herein.
RESULTS OF OPERATIONS
The following analysis and discussion pertains to the Company's results of
operations for the three month period ended March 31st 2005, compared to the
results of operations for the three month period ended March 31st 2004, and to
changes in the Company's financial condition from December 31st 2004 to March
31st 2005.
THREE MONTHS ENDED MARCH 31ST 2005 AND 2004
For the three months ended March 31st 2005, the Company experienced a profit of
$54,198 as compared to a loss of $250,861 for the three months ended March 31st
2004. Increased brand recognition and increased sales of our residential pool
product, Ecosavr, as well as a full quarter of operations from the NanoChem
division has resulted in revenue of $2,019,581 compared to $488,110 in the year
earlier quarter. Management is extremely satisfied with the effect of the
acquisition as the NanoChem division had contributed greatly to sales and cash
flow and is starting to replace the capital expended for it. As well,
opportunities to synergistically cross sell the products of all divisions have
already generated leads to new business and the swimming pool division has
discovered ways to help NanoChem increase utilization of the Peru, IL factory
while decreasing costs for the Company as a whole. The Company maintained
expenditures in the areas of WaterSavr sales and marketing and production
equipment development. The major changes that resulted in the large revenue
increase were greater sales from our swimming pool division into new overseas
markets and increase in sales from the recently acquired NanoChem division.
NanoChem sales are much less seasonal than those of our WaterSavr and Flexible
Solutions Ltd divisions which should lead to less volatile sales figures in
future. Management will attempt to reduce seasonality even further over time.
Operating expenses were $889,812 for the first quarter, up from $374, 987 for
the first quarter of 2004. Flexible Solutions continued its sales and marketing
efforts for WaterSavr with the objective of closing the first major sales as
soon as possible and with development of advanced production machinery for
swimming pool products. The largest real increases were in the areas of wages
($234,436 versus $53,289), rent ($55,806 versus $21,349), advertising ($31,271
from $7,730), and commissions ($40,925 versus zero). These increases are wholly
accounted for by the operating costs of the new division and represent a
permanent increase in operating costs related to the new level of sales. The
decreases in investor relations ($24,638 down from $64,678) and consulting
($44,252 down from $74,678) are the result of better cost-control in these areas
instituted by management over the past year. Professional fees increased to
$60,843 from $36,508 in the quarter. This is the result of the company
protecting its intellectual property assets vigorously. Note should be made that
depreciation increased to $168,103 from $9,952 as a result of the depreciable
NanoChem assets acquired in June 2004.
1
The profit for the quarter was $54,198, an increase from first quarter last year
when the loss was $250,861. The gain was realized through increased sales in
swimming pool products compared to the year earlier quarter augmented by
positive operating cash from the NanoChem division.
The profit per share was $0.00 for the three months ended March 31st, 2005
compared to a loss of $0.02 for the three months ended March 31st, 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company has cash on hand of $495,520 as of the end of March 2005 compared to
$558,795 on December 31st, 2004.
As of March 31st 2005, the Company had working capital of $36,925 as compared to
working capital of $(101,121) on December 31st 2004. The increase in working
capital is the result of increase sales and profits.
The Company has no external sources of liquidity in the form of credit lines
from banks.
Management believes that its available cash will be sufficient to fund the
Company's working capital requirements through December 31st 2005. Management
further believes that available cash will be sufficient to implement the
Company's expansion plans. No investment banking agreements are in place and
there is no guarantee that the Company will be able to raise capital in the
future should that become necessary.
SUBSEQUENT EVENTS
On April 4th, 2005 the Company announced that it had raised $3.375 million in
capital through a private placement. Participating investors are a select group
of investment funds, and the terms are one common share at $3.75 and a warrant
to acquire a further share at $4.50. The total number of shares subscribed for
was limited to 900,000, in order to minimize shareholder dilution while
providing sufficient funds to retire the debt remaining from the acquisition of
our NanoChem division in June 2004
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS:
The Company does not have any derivative financial instruments as of March 31st
2005. However, the Company is exposed to interest rate risk.
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. and Canadian interest rates. In this regard, changes in
U.S. and Canadian interest rates affect the interest paid on the Company's cash
equivalents as well as the interest paid on debt.
FOREIGN CURRENCY RISK
The Company operates extensively in both Canada and the USA. Therefore, the
Company's business and financial condition is sensitive to currency exchange
rates or any other restriction imposed on its currency.
2
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
a) The company has been named as defendant in a lawsuit filed in the state of
Illinois by a former employee. In November 2003, an ex-employee, Patrick Grant,
filed suit against Flexible Solutions International Inc. in Cook County Circuit
Court, Cook County, IL, claiming wrongful dismissal and seeking return of
options rights or cash. The company believes these allegations are without merit
and intends to vigorously defend against them.
b) The company is plaintiff in a lawsuit demanding return of the share
certificate of 100,000 shares of stock originally given to the defendant as
payment in advance for services. The services for which the advance was given
were never performed or given to the company, and the company therefore received
no consideration or value for such advance. Return of the share certificate for
100,000 shares was demanded within ten (10) days, namely August 22, 2001,
however, to date remains unreturned. On date of issue, January 4, 2001, the
share transaction was recorded as shares issued for services at fair market
value, a value of $0.80 per share.
c) The company has been named the defendant in a lawsuit filed in the Federal
Court of Canada as well as the plaintiff in a countersuit in the same court. In
July 2004, a former distributor, Sunsolar Energy Technologies, filed suit
claiming trademark infringement. The company believes these allegations are
without merit and intends to vigorously defend against them.
d) The company is plaintiff in a lawsuit demanding the return of the share
certificate of 100,000 shares of stock originally given as payment in advance
for services, $10,000 and undetermined damages resulting from a breach of
contract. The suite has been filed in the Circuit Court of Cook County, IL
against Tatko Biotech Inc. of Peoria, IL. The services for which the advance was
given were never performed or given to the company, and the company therefore
received no consideration or value for such advance. The shares were recorded at
fair market value less 10%, resulting in an expense of $271,000 recognized in
June 2003.
e) The Company is the plaintiff in a lawsuit filed in the Court of the Queen's
Bench of Alberta, where the subsidiary Flexible Solutions Ltd. is
inter-provincially registered. The company is seeking undetermined damages
resulting from breach of contract against Calgary Diecast Corporation. The
contract was never completed and the Company's raw materials remain in the
possession Calgary Diecast Corp. On April 25th, 2005, the Court ordered a
judgment in favor of Flexible Solutions Ltd. in the amount of $47,495 and FSL
intends to collect using all available means.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
3
ITEM 6.
(b) Reports on Form 8-K
April 14, 2005 - Private placement announcment
April 6, 2005 - 2005 sales prediction
March 24, 2005 - 2004 financials results and distributor
announcement
January 10, 2005 - Owens Lakes trial results
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
(Registrant)
Dated: May 13th 2005 /s/ DAN O'BRIEN
President and Director
4
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
Consolidated Balance Sheets
March 31, 2004
(U.S. Dollars)
------------------------------------------------------------------------------------------------
March 31 December 31
2005 2004
---------- ----------
Assets
Current
Cash and cash equivalents $ 495,520 $ 558,795
Short term investments - 559,440
Accounts receivable 1,111,374 501,372
Income tax 27,799 92,963
Loan receivable 38,652 38,570
Inventory 1,705,890 1,416,588
Prepaid expenses 96,764 131,280
---------- ----------
3,475,999 3,299,008
Property, equipment and leaseholds 5,122,341 5,250,346
Investment 325,000 271,000
---------- ----------
$8,923,340 $8,820,354
========== ==========
Liabilities
Current
Accounts payable and accrued liabilities $ 289,074 $ 250,129
Short term loan 3,150,000 3,150,000
---------- ----------
3,439,074 3,400,129
---------- ----------
Stockholders' Equity
Capital stock
Authorized
50,000,000 Common shares with a par value of $0.001 each
1,000,000 Preferred shares with a par value of $0.01 each
Issued and Outstanding
11,831,916 (2003: 11,794,916) Common shares 11,832 11,832
Capital in excess of par Value 7,686,820 7,663,421
Other comprehensive income 86,623 100,179
Deficit (2,301,009) (2,355,207)
---------- ----------
Total Stockholders' Equity 5,484,266 5,420,225
---------- ----------
Total Liabilities and Stockholders' Equity $8,923,340 $8,820,354
========== ==========
Commitments and Contingencies (Notes 14 & 15)
See accompanying notes to financial statements.
5
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
Consolidated Statements of Operations
For Three Months Ended December 31, 2004 and 2003
(U.S. Dollars)
------------------------------------------------------------------------------
Three Months Ended March 31
2005 2004
----------- -----------
Sales $ 2,019,581 $ 488,110
Cost of sales 1,078,301 367,100
----------- -----------
Gross profit 941,280 121,010
----------- -----------
Operating Expenses
Wages 234,436 53,289
Administrative salaries and benefits 38,005 24,847
Advertising and promotion 31,271 7,730
Investor relations and transfer agent fee 24,638 64,678
Office and miscellaneous 41,457 34,590
Insurance 28,318 -
Interest expense 37,674 -
Rent 55,806 21,349
Consulting 44,252 74,678
Professional fees 60,843 36,508
Travel 37,765 23,576
Telecommunications 10,288 5,700
Shipping 12,639 3,142
Research 15,508 9,161
Commissions 40,925 -
Bad debt expense (recovery) - -
Currency exchange 718 422
Utilities 7,166 5,365
Depreciation 168,103 9,952
----------- -----------
889,812 374,987
----------- -----------
Income (loss) before other items and income tax 51,468 (253,977)
Interest income 2,730 3,116
----------- -----------
Income (loss) before income tax 54,198 (250,861)
Income tax (recovery) - -
----------- -----------
Net income (loss) 54,198 (250,861)
Deficit, beginning (2,355,207) (1,097,662)
----------- -----------
Deficit, ending $(2,301,009) $(1,348,523)
=========== ===========
Net income (loss) per share $ 0.00 $ (0.02)
=========== ===========
Weighted average number of shares 11,831,916 11,807,801
=========== ===========
See accompanying notes to financial statements.
6
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
Consolidated Statements of Cash Flows
For The Years Ended December 31, 2004 and 2003
(U.S. Dollars)
--------------------------------------------------------------------------------
Three Months March 31
2005 2004
---------- -----------
Operating activities
Net income (loss) $ 54,198 $ (250,861)
Stock compensation expense 23,400 66,935
Depreciation 168,103 9,952
---------- -----------
245,701 (173,974)
Changes in non-cash working capital items:
(Increase) Decrease in accounts receivable (610,002) 166,617
(Increase) Decrease in inventory (289,302) 29,118
(Increase) Decrease in prepaid expenses 34,516 (15,809)
Increase (Decrease) in accounts payable 38,945 (32,987)
Increase (Decrease) in Income taxes 65,164 1,120
Increase (Decrease) in amounts due to shareholders - (7,700)
---------- -----------
Cash (used in) operating activities (514,977) (33,615)
---------- -----------
Investing activities
Short-term investments 559,440 1,525,735
Investments (54,000) -
Loan receivable (81) (14,868)
Acquisition of property and equipment (40,099) (18,338)
Incurred acquisition costs - (90,912)
---------- -----------
Cash provided by (used in) investing activities 465,260 1,401,617
---------- -----------
Financing activities
Proceeds from issuance of common stock - 40,500
---------- -----------
Cash provided by financing activities - 40,500
---------- -----------
Effect of exchange rate changes on cash (13,559) 12,348
---------- -----------
Inflow (outflow) of cash (63,276) 1,420,850
Cash and cash equivalents, beginning 558,795 237,080
---------- -----------
Cash and cash equivalents, ending $ 495,520 $1,657,930
========== ===========
Supplemental disclosure of cash flow information:
Interest received $ 2,730 $ 3,116
========== ===========
See accompanying notes to financial statements.
7
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(US DOLLARS)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION:
These consolidated financial statements include the accounts of Flexible
Solutions International Inc., and its wholly owned subsidiaries Flexible
Solutions Ltd., NanoChem Solutions Inc. and Water$aver Global Solutions
Inc. All intercompany balances and transactions have been eliminated. The
parent company was incorporated May 12, 1998 in the State of Nevada and
had no operations until June 30, 1998 as described below.
On June 30, 1998 the company completed the acquisition of 100% of the
shares of Flexible Solutions Ltd. The acquisition was effected through the
issuance of 7,000,000 shares of common stock by the company with former
shareholders of the subsidiary receiving 100% of the total shares then
issued and outstanding. The transaction has been accounted for as a
reverse-takeover.
Flexible Solutions Ltd. is accounted for as the acquiring party and the
surviving entity. As Flexible Solutions Ltd. is the accounting survivor,
the consolidated financial statements presented for all periods are those
of Flexible Solutions Ltd. The shares issued by Flexible Solutions
International Inc. pursuant to the 1998 acquisition have been accounted
for as if those shares had been issued upon the organization of Flexible
Solutions Ltd.
On May 2, 2002, the company established Water$aver Global Solutions Inc.
through issuance of 100 shares of common stock.
Pursuant to a purchase agreement dated May 26, 2004, the company acquired
the assets of Donlar Corporation on June 9, 2004 and created a new
company, NanoChem Solutions Inc.
The purchase price of the transaction was $6,150,000 with consideration
being a combination of cash and debt. Under the purchase agreement and as
part of the consideration, the company issued a promissory note bearing
interest at 4 % to the vendor to satisfy $3,150,000 of the purchase price.
This note is due June 2, 2005 and all of the former Donlar assets are used
as security.
The following table summarizes the estimated fair value of the assets
acquired at the date of acquisition:
As at June 9, 2004:
Current assets $ 1,126,805
Property and equipment 5,023,195
------------
6,150,000
Acquisition costs assigned to property and equipment 314,724
------------
Total assets acquired $ 6,464,724
============
On February 7, 2005 the Company incorporated two new subsidiaries in Nevada.
SeaHorse Systems Inc. was incorporated to research new applications of our
patented dispensing mechanism currently used for Ecosavr. NanoDetect
Technologies Inc. is focusing on ways to use our current technologies to detect
pathogens.
8
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(US DOLLARS)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES:
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles accepted in the United
States of America applicable to a going concern and reflect the policies
outlined below.
a) Cash and Cash Equivalents -
The company considers all highly liquid investments purchased with an
original or remaining maturity of less than three months at the date
of purchase to be cash equivalents. Cash and cash equivalents are
maintained with several financial institutions.
b) Inventory -
Inventory is valued at the lower of cost and net realizable value.
Cost is determined on a first-in, first-out basis.
c) Property, Equipment and Leaseholds -
The following assets are recorded at cost and depreciated using the
following methods and using the following annual rates:
Computer hardware 30% Declining balance
Furniture and fixtures 20% Declining balance
Manufacturing equipment 20% Declining balance
Office equipment 20% Declining balance
Building 10% Declining balance
Leasehold improvements Over lease term
Property and equipment are written down to net realizable value when
management determines there has been a change in circumstances which
indicates its carrying amount may not be recoverable. No write downs
have been necessary to date.
d) Impairment of Long Lived Assets -
The company assesses the recoverability of its long lived assets by
determining whether the carrying value of the long lived assets can
be recovered over their remaining lives through undiscounted future
operating cash flows using a discount rate reflecting the company's
average cost of funds. The assessment of the recoverability will be
impacted if estimated future operating cash flows are not achieved.
For the year ended December 31, 2004, no impairment charges have been
recognized.
9
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(US DOLLARS)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
e) Foreign Currency -
The functional currency of Flexible Solutions Ltd. is the Canadian
dollar. The translation of the Canadian dollar to the reporting
currency of the U.S. dollar is performed for assets and liabilities
using exchange rates in effect at the balance sheet date. Revenue and
expense transactions are translated using average exchange rates
prevailing during the year. Translation adjustments arising on
conversion of the financial statements from the company's functional
currency, Canadian dollars, into the reporting currency, U.S.
dollars, are excluded from the determination of income and disclosed
as other comprehensive income (loss) in stockholders' equity.
Foreign exchange gains and losses relating to transactions not
denominated in the applicable local currency are included in income
if realized during the year and in comprehensive income if they
remain unrealized at the end of the year.
f) Revenue Recognition -
Revenue from product sales is recognized at the time the product is
shipped since title and risk of losses is transferred to purchaser
upon delivery to the carrier. Shipments are made F.O.B. shipping
point. Provisions are made at the time the related revenue is
recognized for estimated product returns. Since the company's
inception, product returns have been insignificant, therefore no
provision has been established for estimated product returns.
g) Stock Issued in Exchange for Services -
The valuation of the common stock issued to non-employees in exchange
for services is valued at an estimated fair market value as
determined by officers and directors of the company based upon
trading prices of the company's common stock on the dates of the
stock transactions.
h) Stock Based Compensation -
The company applies the fair value based method of accounting
prescribed by the Statement of Financial Accounting Standards
("SFAS") No. 123 in accounting for stock issued in exchange for
services.
i) Comprehensive Income -
Other comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are
included in comprehensive income but are excluded from net income as
these amounts are recorded directly as an adjustment to stockholders'
equity. The company's other comprehensive income is primarily
comprised of unrealized foreign exchange gains and losses.
10
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
--------------------------------------------------------------------------------
(US DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
j) Income (Loss) Per Share -
Income (loss) per share is calculated by dividing net income (loss)
by the weighted average number of shares outstanding. Diluted income
(loss) per share is computed by giving effect to all potential
dilutive options that were outstanding during the year. For the years
ending December 31, 2004, 2003 and 2002 all outstanding options were
anti-dilutive.
k) Use of Estimates -
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of
the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates and would impact the results of
operations and cash flows.
l) Financial Instruments
i) Fair Values
The fair market value of the financial instruments comprising
cash, short-term investment, accounts receivable, loan
receivable, accounts payable and accrued liabilities, and
short-term loan payable were estimated to approximate their
carrying values due to immediate or short-term maturity of these
financial instruments.
ii) Foreign Exchange and Interest Rate Risks -
The company is exposed to foreign exchange and interest rate
risk to the extent that market value rate fluctuations
materially differ from financial assets and liabilities subject
to fixed long-term rates.
m) Recent Accounting Pronouncements -
i) In June 2001, the Financial Accounting Standards Board (FASB)
issued FAS 142, Goodwill and Other Intangible Assets. Under FAS
142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed at least annually for
impairment. The amortization provisions of FAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the company adopted FAS 142 effective January 1,
2002. Application of the non-amortization provisions of FAS 142
for goodwill did not have any impact on its financial reporting.
11
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(US DOLLARS)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ii) In October 2001, the FASB issued Statement of Financial
Accounting Standards for FAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." FAS 144 addresses significant
issues relating to the implementation of FAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and develops a single accounting
model, based on the framework established in FAS 121 for
long-lived assets to be disposed of by sale, whether such assets
are or are not deemed to be a business. FAS 144 also modifies
the accounting and disclosure rules for discontinued operations.
The standard was adopted on January 1, 2002 and did not have any
impact on the financial statements.
iii) In November 2001, the FASB issued EITF Issue No. 01-14,. "Income
Statement Characterization of Reimbursements Received for "Out
of Pocket" Expenses Incurred." This guidance requires companies
to recognize the recovery of reimbursable expenses such as
travel costs on service contracts as revenue. These costs are
not to be netted as a reduction of cost. This guidance was
implemented January 1, 2002. The company does not expect this
guidance to have a material impact on the financial statements.
3. LOAN RECEIVABLE:
2005 2004
--------- ---------
5% loan receivable due on demand $ 38,652 $ 38,570
========= =========
4. PREPAID EXPENSES:
2005 2004
--------- ---------
Security deposit and prepaids $ 96,764 $ 131,280
========= =========
12
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(US DOLLARS)
--------------------------------------------------------------------------------
5. PROPERTY, EQUIPMENT AND LEASEHOLDS:
Accumulat 2005 2004
Cost Amortization Net Net
----------------------- ----------- ---------- ----------- -----------
Buildings $ 3,144,259 $ 231,268 $ 2,912,991 $ 2,987,046
Computer hardware 44,370 15,854 28,516 27,511
Furniture and fixtures 15,609 4,238 11,371 11,515
Office equipment 28,905 11,390 17,515 18,421
Manufacturing equipment 2,139,918 411,712 1,728,206 1,785,858
Trailer 1,926 864 1,062 1,146
Leasehold improvements 31,551 12,739 18,812 14,533
Trade Show Booth 7,212 1,530 5,682 6,130
Land 398,186 - 398,186 398,186
----------- ---------- ----------- -----------
$ 5,811,936 $ 689,595 $ 5,122,341 $ 5,250,346
=========== ========== =========== ===========
6. INVESTMENT:
2005 2004
--------- ---------
Tatko Inc. Option to purchase 20%
interest in common stock $ 271,000 $ 271,000
Air Water Interface Delivery & Detection Inc. 54,000 -
--------- ---------
$ 325,000 $ 271,000
========= =========
On May 31, 2003 the company acquired an option to purchase a 20% interest
in the outstanding shares of Tatko Inc. for consideration of the issuance
of 100,000 shares of Flexible Solutions International Inc. common stock.
The option to purchase the shares of Taiko Inc. expires on May 31, 2008.
The cost of the investment has been accounted for based on the original
fair market value of Flexible Solutions International Inc. stock on May
31, 2003.
See Contingencies (Note 11d)
On February 8, 2005, NanoDetect Technologies Inc., a new subsidiary of
Flexible Solutions International Inc., purchased 18 shares in Air Water
Interface Delivery and Detection Inc. for a total cost of $54,000. This
investment represents only 1.8% of the issued and outstanding shares of
AWD, and accordingly will be accounted for under the cost method.
13
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(US DOLLARS)
--------------------------------------------------------------------------------
7. STOCK OPTIONS:
The company may issue stock options and stock bonuses for common stock of
the company to provide incentives to directors, key employees and other
persons who contribute to the success of the company. The exercise price
of all incentive options are issued for not less than fair market value.
There was no stock options issued in the quarter ending March 31, 2005.
The following table summarizes stock option activity for the years ended
December 31, 2004 and 2003 and the three months ended March 31, 2005:
Number of Exercise price Weighted average
shares per share exercise price
----------- ------------- ----------------
Balance, December 31, 2002 3,686,800 $0.25 - $3.50 $3.79
Granted 256,000 $3.60 - $4.25 $3.61
Exercised (124,000) $0.25 - $2.28 $0.48
Expired (2,107,800) $0.25 - $5.50 $4.72
----------- ------------- ----------------
Balance, December 31, 2003 1,711,000 $1.00 - $4.25 $2.84
Granted 572,740 $3.00 - $4.60 $3.46
Exercised (37,000) $1.00 - $2.50 $1.55
Expired (5,000) $4.25 $4.25
Cancelled (1,000,000) $1.50 - $3.50 $2.50
----------- ------------- ----------------
Balance, December 31, 2004 1,241,740 $1.00 - $4.60 $2.87
=========== ============= ================
The fair value of each option grant is calculated using the following
weighted average assumptions:
2004 2003 2002
Expected life - years 5.0 5.0 5.0
Interest rate 3.50% 2.87% 3.00%
Volatility 49.0% 49.0% 72.3%
Dividend yield - % - % - %
During the previous year, the company granted 275,400 (2003 - 205,000)
stock options to consultants and have been recognized applying SFAS 123
using the Black-Scholes Option Pricing Model which resulted in additional
consulting expense of $299,345 (2003 - $122,570). During the year ended
December 31, 2003, the company cancelled 2,000,000 stock options to
consultants pursuant to the terms of the contract, resulting in a recovery
of consulting expense of $2,480,200.
14
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(US DOLLARS)
--------------------------------------------------------------------------------
8. CAPITAL STOCK:
No stock was issued in the quarter ending March 31, 2005.
During the year ended December 31, 2004 the company:
(i) issued 37,000 shares of common stock at prices ranging from
$1.00 to $2.50 per share upon exercise of stock options.
During the year ended December 31, 2003 the company:
(i) issued 100,000 shares of common stock valued at $271,000 to
acquire an option to purchase a 20% interest in Tatko Inc. (Note
7); and
(ii) issued 124,000 shares of common stock at prices ranging from
$0.25 to $2.28 per share upon exercise of stock options.
9. SEGMENTED, SIGNIFICANT CUSTOMER INFORMATION AND ECONOMIC DEPENDENCY:
The company operates in two segments:
(a) Development and marketing of two lines of energy and water
conservation products:
The first line consists of a liquid swimming pool blanket which saves
energy and water by storing evaporation from the pool surface. The
second line consists of a food safe powdered form of the active
ingredient within the liquid blanket and is designed to be used in
still or slow moving drinking water sources.
(b) Manufacture of biodegradable polymers and chemical additives:
Biodegradable polymers are used within the petroleum, chemical,
utility and mining industries to prevent corrosion and scaling in
water piping. Chemical additives are manufactured for use in laundry
and dish detergents, as well as in products to reduce levels of
insecticides, herbicides and fungicides.
The sales in the United States of America and abroad amounted to 79% (2003
- 28%) . The remainder was earned in Canada.
The long-lived assets are located in Canada and the United States as
follows:
2005 2004
------------------- ------------- -------------
Canada $ 254,579 $ 238,807
United States 4,867,762 5,011,539
------------------- ------------- -------------
Total $ 5,122,341 $ 5,250,346
=================== ============= =============
15
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(US DOLLARS)
--------------------------------------------------------------------------------
10. COMMITMENTS:
Property and Premises Leases -
The company is committed to minimum rental payments for property and
premises aggregating approximately $360,111 over the term of two leases,
the last expiring on June 30, 2009.
Commitments in each of the next five years are approximately as follows:
2005 $100,718
2006 114,752
2007 55,169
2008 55,654
2009 33,818
11. CONTINGENCIES:
a) The company has been named as a plaintiff in a lawsuit filed in the
state of Illinois by a former employee. In November 2003, an
ex-employee, Patrick Grant, filed suit against Flexible Solutions
International Inc. in Cook County Circuit Court, Cook County, IL,
claiming wrongful dismissal and seeking return of options rights or
cash. The company believes these allegations are without merit and
intends to vigorously defend against them.
b) The company is plaintiff in a lawsuit demanding return of the share
certificate of 100,000 shares of stock originally given to the defended
as payment in advance for services. The services for which the advance
was given were never performed or given to the company, and the company
therefore received no consideration or value for such advance. Return
of the share certificate for 100,000 shares was demanded within ten
(10) days, namely August 22, 2001, however, to date remains unreturned.
On date of issue, January 4, 2001, the share transaction was recorded
as shares issued for services at fair market value, a value of $0.80
per share.
c) The company has been named the defendant in a lawsuit filed in the
Federal Court of Canada as well as the plaintiff in a countersuit in
the same court. In July 2004, a former distributor, Sunsolar Energy
Technologies, filed suit claiming trademark infringement. The company
believes these allegations are without merit and intends to vigorously
defend against them.
16
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(US DOLLARS)
--------------------------------------------------------------------------------
11. CONTINGENCIES: (CONTINUED)
d) The company is plaintiff in a lawsuit demanding the return of the share
certificate of 100,000 shares of stock originally given as payment in
advance for services, $10,000 and undetermined damages resulting from a
breach of contract. The suite has been filed in the Circuit Court of
Cook County, IL against Tatko Biotech Inc. of Peoria, IL. The services
for which the advance was given were never performed or given to the
company, and the company therefore received no consideration or value
for such advance.
The shares were recorded at fair marker value less 10%, resulting in an
expense of $271,000 recognized in June 2003.
e) The Company is the plaintiff in a lawsuit filed in the Court of the
Queen's Bench of Alberta, where the subsidiary Flexible Solutions Ltd.
is inter-provincially registered. The company is seeking undetermined
damages resulting from breach of contract against Calgary Diecast
Corporation. The contract was never completed and the Company's raw
materials remain in the possession Calgary Diecast Corp.
On April 25th, 2005, the Court ordered a judgment in favor of Flexible
Solutions Ltd. in the amount of $47,495 and intents to collect using
all available means.
12. COMPARATIVE FIGURES:
Certain of the comparative figures have been reclassified to conform with
the current year's presentation.
17