UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10QSB/A
AMENDMENT NUMBER 1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended JUNE 30, 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
------
(State or other jurisdiction of incorporation or organization)
91-1922863
----------
(IRS Employer Identification No.)
615 Discovery Street, Victoria BC 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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12,13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes[X] No[ ]
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
12,831,316 shares as of July 29, 2005.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
INDEX TO FORM 10-QSB/A
Page
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PART I. FINANCIAL INFORMATION 4
ITEM 1. FINANCIAL STATEMENTS. 4
(a) CONSOLIDATED BALANCE SHEET AT JUNE 30, 2005. 4
(b) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 2005 AND 2004. 5
(c) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JUNE 30, 2005 AND 2004. 6
(d) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED JUNE 30, 2005 AND 2004. 7
(e) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. 17
ITEM 3. CONTROLS AND PROCEDURES. 21
PART II OTHER INFORMATION 22
ITEM 1. LEGAL PROCEEDINGS. 22
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 23
ITEM 5. OTHER INFORMATION. 23
ITEM 6. EXHIBITS. 24
SIGNATURES 25
2
EXPLANATORY NOTE
Flexible Solutions International, Inc. is filing this Amendment No. 1 to the our
Quarterly report on Form 10-QSB for the quarter ended June 30, 2005 to reflect
revised disclosures we have agreed to make in our reports based on comments that
we received from the Securities and Exchange Commission to our registration
statement on Form S-3 (File No. 333-124751), filed on May 10,2005, and to file
certain exhibits inadvertently omitted from the original report.
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements other
than statements of historical fact are "forward-looking statements" for purposes
of federal and state securities laws, including, but not limited to, any
projections of earnings, revenue or other financial items; any statements of the
plans, strategies and objectives of management for future operations; any
statements concerning proposed new services or developments; any statements
regarding future economic conditions or performance; any statements of belief;
and any statements of assumptions underlying any of the foregoing.
Forward-looking statements may include the words "may," "could,"
"will," "estimate," "intend," "continue," "believe," "expect" or "anticipate" or
other similar words. These forward-looking statements present our estimates and
assumptions only as of the date of this report. Except for our ongoing
obligation to disclose material information as required by the federal
securities laws, we do not intend, and undertake no obligation, to update any
forward-looking statement.
Although we believe that the expectations reflected in any of our
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and inherent risks and
uncertainties. The factors impacting these risks and uncertainties include, but
are not limited to:
o increased competitive pressures from existing competitors and new
entrants;
o increases in interest rates or our cost of borrowing or a default
under any material debt agreements;
o deterioration in general or regional economic conditions;
o adverse state or federal legislation or regulation that increases
the costs of compliance, or adverse findings by a regulator with
respect to existing operations;
o loss of customers or sales weakness;
o inability to achieve future sales levels or other operating
results;
o the unavailability of funds for capital expenditures; and
o operational inefficiencies in distribution or other systems.
For a detailed description of these and other factors that could cause
actual results to differ materially from those expressed in any forward-looking
statement, please see "Risk Factors" in our Annual Report on Form 10-KSB for the
year ended December 31, 2004.
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
Consolidated Balance Sheets
June 30, 2005
(U.S. Dollars)
---------------------------------------------------------------------------------------------------------
June 30 December 31
2005 2004
(Unaudited)
---------------------------------------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 752,130 $ 558,795
Short term investments - 559,440
Accounts receivable 1,028,236 501,372
Income tax 27,033 92,963
Loan receivable 38,286 38,570
Inventory 1,912,912 1,416,588
Prepaid expenses 117,979 131,280
---------------------------------------------------------------------------------------------------------
3,876,576 3,299,008
Property, equipment and leaseholds 4,984,801 5,250,346
Investment 347,000 271,000
---------------------------------------------------------------------------------------------------------
$9,208,377 $8,820,354
------------------------------------------------------------------==========------------------==========-
Liabilities
Current
Accounts payable and accrued liabilities $ 286,066 $ 250,129
Short term loan 3,150,000
---------------------------------------------------------------------------------------------------------
286,066 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
12,821,316 (2004: 11,831,916) Common shares 11,832 11,832
Capital in excess of par Value 11,616,621 7,663,421
Other comprehensive income 73,184 100,179
Deficit (2,779,326) (2,355,207)
---------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 8,922,311 5,420,225
---------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $9,208,377 $8,820,354
------------------------------------------------------------------==========------------------==========-
Commitments and Contingencies (Notes 14 & 15)
See accompanying condensed notes to unaudited interim consolidated financial
statements.
4
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
Consolidated Statements of Operations
For Six Months Ended June 30, 2005 and 2004
(U.S. Dollars)
--------------------------------------------------------------------------------
Six Months Ended June 30
--------------------------------------------------------------------------------
2005 2004
(Unaudited) (Unaudited)
--------------------------------------------------------------------------------
Sales $ 3,887,714 $ 1,035,871
Cost of sales 2,131,945 411,007
--------------------------------------------------------------------------------
Gross profit 1,755,769 624,864
--------------------------------------------------------------------------------
Operating Expenses
Wages 436,825 257,716
Administrative salaries and benefits 109,076 57,544
Advertising and promotion 44,685 56,792
Investor relations and transfer agent fee 509,588 122,625
Office and miscellaneous 69,531 96,922
Insurance 62,787 -
Interest expense 62,189 -
Rent 103,672 52,216
Consulting 91,787 188,816
Professional fees 126,449 107,714
Travel 78,866 49,514
Telecommunications 22,890 14,714
Shipping 23,036 10,797
Research 18,404 15,842
Commissions 87,998 -
Bad debt expense (recovery) - (797)
Currency exchange (6,867) 3,324
Utilities 11,502 14,198
Depreciation 331,086 185,547
--------------------------------------------------------------------------------
2,183,504 1,233,484
--------------------------------------------------------------------------------
Income (loss) before other items and income tax (427,735) (608,620)
Interest income 3,616 30,470
--------------------------------------------------------------------------------
Income (loss) before income tax (424,119) (578,150)
Income tax (recovery) - -
--------------------------------------------------------------------------------
Net income (loss) $ (424,119) $ (578,150)
Deficit, beginning $(2,355,207) $(1,097,662)
--------------------------------------------------------------------------------
Deficit, ending $(2,779,326) $(1,675,812)
------------------------------------------------============--------============
Net income (loss) per share $ (0.03) $ (0.05)
------------------------------------------------============--------============
Weighted average number of shares 12,256,208 11,819,916
------------------------------------------------============--------============
See accompanying condensed notes to unaudited interim consolidated financial
statements.
5
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
Consolidated Statements of Operations
For Three Months Ended June 30, 2005 and 2004
(U.S. Dollars)
--------------------------------------------------------------------------------
Three Months Ended June 30
-------------------------------------------------------------------------------
2005 2004
(Unaudited) (Unaudited)
-------------------------------------------------------------------------------
Sales $ 1,868,133 $ 547,761
Cost of sales 1,053,644 105,088
-------------------------------------------------------------------------------
Gross profit $ 814,489 $ 442,673
-------------------------------------------------------------------------------
Operating Expenses
Wages 202,388 143,246
Administrative salaries and benefits 71,071 32,697
Advertising and promotion 13,414 49,062
Investor relations and transfer agent fee 484,950 57,947
Office and miscellaneous 28,076 62,332
Insurance 34,468 -
Interest expense 24,514 -
Rent 47,866 30,867
Consulting 47,535 114,138
Professional fees 65,607 71,206
Travel 41,101 25,938
Telecommunications 12,602 9,014
Shipping 10,397 7,655
Research 2,896 6,681
Commissions 47,073 -
Bad debt expense (recovery) - (797)
Currency exchange (7,585) 2,902
Utilities 4,336 8,833
Depreciation 162,983 175,595
-------------------------------------------------------------------------------
1,293,692 797,316
-------------------------------------------------------------------------------
Income (loss) before other items and income tax $ (479,203) $ (354,643)
Interest income 886 27,354
-------------------------------------------------------------------------------
Income (loss) before income tax $ (478,317) $ (327,289)
Income tax (recovery) - -
-------------------------------------------------------------------------------
Net income (loss) $ (478,317) $ (327,289)
Deficit, beginning (2,301,009) (1,348,523)
-------------------------------------------------------------------------------
Deficit, ending $(2,779,326) $(1,675,812)
-------------------------------------------------============------============
Net income (loss) per share $ (0.04) $ (0.03)
-------------------------------------------------============------============
Weighted average number of shares 12,675,837 11,819,916
-------------------------------------------------============------============
See accompanying condensed notes to unaudited interim consolidated financial
statements.
6
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
Consolidated Statements of Cash Flows
For The Six Months Ended June 30, 2005 and 2004
(U.S. Dollars)
-------------------------------------------------------------------------------
Six Months June 30
2005 2004
(Unaudited) (Unaudited)
-------------------------------------------------------------------------------
Operating activities
Net income (loss) $ (424,119) $ (578,150)
Stock compensation expense 503,650 135,230
Depreciation 331,086 185,547
-------------------------------------------------------------------------------
410,617 (257,373)
Changes in non-cash working capital items:
(Increase) Decrease in accounts receivable (526,864) (238,982)
(Increase) Decrease in inventory (496,324) (628,460)
(Increase) Decrease in prepaid expenses 13,301 (33,719)
Increase (Decrease) in accounts payable 35,937 31,552
Increase (Decrease) in Income taxes 65,930 2,240
Increase (Decrease) in amounts due to shareholders - (7,700)
-------------------------------------------------------------------------------
Cash (used in) operating activities (497,405) (1,132,442)
-------------------------------------------------------------------------------
Investing activities
Short-term investments 559,440 3,699,188
Investments (76,000) -
Loan receivable 284 45
Acquisition of property and equipment (65,541) (5,270,011)
-------------------------------------------------------------------------------
Cash provided by (used in) investing activities 418,183 (1,570,778)
-------------------------------------------------------------------------------
Financing activities
Short term loan (3,150,000) 3,150,000
Proceeds from issuance of common stock 3,449,550 57,500
-------------------------------------------------------------------------------
Cash provided by financing activities 299,550 3,207,500
-------------------------------------------------------------------------------
Effect of exchange rate changes on cash (26,993) (3,023)
-------------------------------------------------------------------------------
Inflow (outflow) of cash 193,335 501,257
Cash and cash equivalents, beginning 558,795 237,080
-------------------------------------------------------------------------------
Cash and cash equivalents, ending $ 752,130 $ 738,337
-----------------------------------------------------===========---============
Supplemental disclosure of cash flow information:
Interest received $ 2,730 $ 30,470
-----------------------------------------------------===========---============
See accompanying condensed notes to unaudited interim consolidated financial
statements.
7
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ($$USD)
1. BASIS OF PRESENTATION.
These consolidated financial statements include the accounts of
Flexible Solutions International, Inc. ("we," "us" or "our"), and its
wholly-owned subsidiaries Flexible Solutions Ltd. ("Flexible Ltd."), NanoChem
Solutions Inc. ("NanoChem"), and Water$aver Global Solutions Inc. ("Water$avr").
All intercompany balances and transactions have been eliminated. We were
incorporated on May 12, 1998 in the State of Nevada and had no operations until
June 30, 1998.
On June 30, 1998, we completed the acquisition of all of the shares of
Flexible Ltd. through the issuance of 7,000,000 shares of our common stock, with
the former shareholders of Flexible Ltd. receiving 100% of the total shares then
issued and outstanding. The transaction has been accounted for as a
reverse-takeover.
Flexible Ltd. is accounted for as the acquiring party and the surviving
entity. As Flexible Ltd. is the accounting survivor, the consolidated financial
statements presented for all periods are those of Flexible Ltd. The shares
issued by us pursuant to the June 1998 acquisition have been accounted for as if
those shares had been issued upon the organization of Flexible Ltd.
On May 2, 2002, we established Water$aver through the issuance of 100
shares of common stock.
Pursuant to an asset purchase agreement dated May 26, 2004, we acquired
certain of the assets of Donlar Corporation ("Donlar") and, on June 9, 2004, we
distributed those assets to our newly-formed and wholly-owned subsidiary,
NanoChem. The purchase price of the transaction was $6,150,000, with
consideration consisting of a combination of cash and debt. Under the asset
purchase agreement, and as part of the consideration, we issued a promissory
note bearing interest at 4% to the principal secured holder of the assets of
Donlar to satisfy $3,150,000 of the purchase price. This promissory note was due
June 2, 2005 and all of the former Donlar assets were pledged as security. On
May 28, 2005, we retired the remaining debt owed under this promissory note by
paying such amount to the holder. The remainder of the purchase price, or
$3,000,000, was paid directly in cash.
The following table summarizes the estimated fair value of the Donlar
assets acquired at the date of acquisition (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
==================================================== ============
The acquisition costs assigned to property and equipment are all direct
costs incurred by us to purchase the assets. These costs include due diligence
fees paid to outside parties investigating and identifying the assets, legal
costs directly attributable to the purchase of the assets, plus applicable
transfer taxes. These costs have been assigned to the individual assets based on
their proportional fair values and will be amortized based on the rates
associated with the related assets.
On February 7, 2005, we incorporated two new subsidiaries in Nevada.
SeaHorse Systems Inc. was incorporated to research new applications of our
patented dispensing mechanism currently used for
8
our Eco$avr product. NanoDetect Technologies Inc. ("NanoDetect") was
incorporated to focus on ways to use our current technologies to detect
pathogens.
2. SIGNIFICANT ACCOUNTING POLICIES.
These unaudited 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. We consider 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. Cost of
sales includes all expenditures incurred in bringing the goods to the point of
sale. Inventorial costs and costs of sales include direct costs of the raw
material, inbound freight charges, warehousing costs, handling costs (receiving
and purchasing) and utilities and overhead expenses related to our manufacturing
and processing facilities.
(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
our management determines there has been a change in circumstances that
indicates that their carrying amount may not be recoverable. No write downs have
been necessary to date.
(d) Impairment of Long Lived Assets. We assess the recoverability of
our 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 in our average cost
of funds. The assessment of the recoverability will be impacted if estimated
future operating cash flows are not achieved. For the quarter ended June 30,
2005, no impairment charges have been recognized.
(e) Foreign Currency. Our functional currency 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 our financial statements from our 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 loss is transferred to
the purchaser upon delivery to the carrier.
9
Shipments are made F.O.B. shipping point. We recognize revenue when there is
persuasive evidence of an arrangement, delivery has occurred, the fee is fixed
or determinable, collectibility is reasonably assured, and there are no
significant remaining performance obligations. When significant post-delivery
obligations exist, revenue is deferred until such obligations are fulfilled.
Provisions are made at the time the related revenue is recognized for estimated
product returns. Since our 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 our common
stock issued to non-employees in exchange for services is valued at an estimated
fair market value as determined by our officers and directors based upon the
trading prices of our common stock on the dates of the stock transactions.
(h) Stock Based Compensation. We apply the fair value based method of
accounting prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 123 in accounting for stock issued in exchange for services to consultants
and non-employees.
SFAS No. 123 encourages, but does not require, companies to record
compensation cost for stock-based compensation plans to employees at fair value.
We have chosen to account for stock-based compensation to employees and
directors using Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, compensation cost for stock options
for employees is measured as the excess, if any, of the quoted market price of
our common stock at the date of the grant over the amount an employee is
required to pay for the stock.
We adopted the disclosure provisions of SFAS No. 123 for stock options
granted to employees and directors. We disclose on a supplemental basis, the
pro-forma effect of accounting for stock options awarded to employees and
directors, as if the fair value based method had been applied, using the
Black-Scholes model.
(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. Our other comprehensive income is primarily comprised of unrealized
foreign exchange gains and losses.
(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 investments, accounts
receivable, loans receivable, accounts payable and accrued liabilities,
and short-term loans payable were estimated to approximate their
carrying values due to immediate or short-term maturity of these
financial instruments.
10
(ii) Foreign Exchange and Interest Rate Risks. We are 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 Financial Accounting Standard ("FAS") No. 142,
"Goodwill and Other Intangible Assets." Under FAS No. 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 No. 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, we adopted FAS No. 142 effective
January 1, 2002. Application of the non-amortization provisions of FAS
No. 142 for goodwill did not have any impact on our financial
reporting.
(ii) In October 2001, FASB issued FAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." FAS No. 144 addresses
significant issues relating to the implementation of FAS No. 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 No. 121, for long-lived
assets to be disposed of by sale, whether such assets are or are not
deemed to be a business. FAS No. 144 also modifies the accounting and
disclosure rules for discontinued operations. FAS No. 144 was adopted
on January 1, 2002 and did not have any impact on our financial
statements.
(iii) In November 2001, FASB issued Emerging Issue Task Force
("EITF") 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. We do not expect this guidance to have a
material impact on our financial statements.
(iv) In December 2004, FASB issued revised SFAS No. 123(R),
"Share-Based Payment," which replaces SFAS No. 123, "Accounting for
Stock-Based Compensation," which superseded APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123(R) requires
the cost of all share-based payment transactions to be recognized in an
entity's financial statements, establishes fair value as the
measurement objective and requires entities to apply a fair-value-based
measurement method in accounting for share-based payment transactions.
SFAS No. 123(R) applies to all awards granted, modified, repurchased or
cancelled after July 1, 2005, and unvested portions of previously
issued and outstanding awards. We are currently evaluating the impact
of adopting this statement.
(v) In November 2004, FASB issued SFAS No. 151, "Inventory
Costs - an Amendment of ARB No. 43, Chapter 4," which clarifies the
accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage), and also requires that
the allocation of fixed production overhead be based on the normal
capacity of an entity's production facilities. SFAS No. 151 is
effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. We are currently evaluating the impact of adopting
this statement.
11
3. LOAN RECEIVABLE.
2005 2004
--------------------------------------------------------------------------------
5% loan receivable due on demand $ 38,286 $ 38,570
================================================================================
4. PREPAID EXPENSES.
2005 2004
--------------------------------------------------------------------------------
Security deposit and prepaids $ 117,969 $ 131,280
================================================================================
5. PROPERTY, EQUIPMENT AND LEASEHOLDS.
Accumulated 2005 2004
Cost Amortization Net Net
----------------------- ----------- ------------ ----------- -----------
Buildings $ 3,144,259 $ 303,488 $ 2,840,771 $ 2,987,046
Computer hardware 44,302 18,068 26,234 27,511
Furniture and fixtures 15,265 4,674 10,591 11,515
Office equipment 28,322 12,233 16,089 18,421
Manufacturing equipment 2,141,071 491,376 1,649,695 1,785,858
Trailer 1,865 912 953 1,146
Leasehold improvements 30,560 13,786 16,774 14,533
Trade show booth 6,985 1,885 5,100 6,130
Patents 20,408 - 20,408
-
Land 398,186 - 398,186 398,186
----------------------- ----------- ------------ ----------- -----------
$ 5,831,223 $ 846,422 $ 4,984,801 $ 5,250,346
======================= =========== ============ =========== ===========
6. INVESTMENT.
--------------------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------------------
Tatko Inc. $ 271,000 $ 271,000
Air Water Interface Delivery & Detection Inc. 76,000 -
$ 347,000 $ 271,000
================================================================================
On May 31, 2003, we acquired an option to purchase a 20% interest in
the outstanding shares of Tatko Inc. ("Tatko") in exchange for the issuance to
Tatko of 100,000 shares of our common stock. The option to purchase the shares
of Tatko expires on May 31, 2008. The purchase of the option also included the
right to use the bio-chemicals and patents of Tatko in our products. As part of
the agreement, Tatko was required to supply us with samples of its specific
technologies so that we could adapt its processes to incorporate the
technologies of Tatko. Since then, we came to believe that Tatko had breached
its agreement and we demanded the return of our shares. Tatko refused and we
filed a lawsuit against Tatko. For further information on the status of this
lawsuit, please see Note 11(d) to these Notes to Unaudited Consolidated
Financial Statements (Contingencies). We believe that the patents developed by
Tatko are extremely beneficial to our future operations. Once the litigation
involving the return of the shares has been settled, we intend to negotiate with
Tatko to either enter into a normal supplier/customer relationship to acquire
Tatko's products or we intend to negotiate to acquire Tatko.
12
We have accounted for the cost of the investment in Tatko based on the
original fair market value of our common stock on May 31, 2003. We rely on the
accounting policies of SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" and the guidelines of EITF No. 30-01, "The Meaning of
Other-Than-Temporary Impairment of Certain Investments" for assessing the
accounting treatment and carrying value of our investment in Tatko. In
accordance with these pronouncements, the investment is reviewed on a continuous
basis by analyzing the technology and operations of Tatko to ensure that the
carrying value is justified. We consider the investment to be impaired when the
fair value is less than its carrying amount. Since the investment does not have
a readily determinable fair value, we have taken the position that the fair
value assessment will be measured when an impairment indicator is present.
In 2005, NanoDetect purchased 25.3 shares of equity in Air Water
Interface Delivery and Detection Inc. ("AWIDD") for a total cost of $76,000.
This investment represents only 2.5% of the issued and outstanding shares of
AWIDD, and accordingly will be accounted for under the cost method.
7. STOCK OPTIONS.
We may issue stock options and stock bonuses for our common stock to
provide incentives to directors, key employees and other persons who contribute
to our success. The exercise price of all incentive options are issued for not
less than fair market value.
The following table summarizes stock option activity for the years
ended December 31, 2004 and 2003, and the six months ended June 30, 2005:
Number Exercise Price Weighted Average
of 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
Granted 30,000 3.85 3.85
Exercised (2,000) 1.40 1.40
-------------------------- ----------- -------------- -----------------
Balance, June 30, 2005 1,269,740 $1.00 - $4.60 $3.19
========================== =========== ============== =================
13
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 quarter ended June 30, 2005, we granted 255,000 stock
options (June 30, 2004: 25,000 stock options) to consultants and have been
applying SFAS No. 123 using the Black-Scholes Option Pricing Model, which
resulted in additional consulting expense of $503,650 for the quarter ended June
30, 2005 (June 30, 2004: $ 135,230 additional consulting expense). During the
year ended December 31, 2003, we cancelled 2,000,000 stock options to
consultants pursuant to the terms of the underlying contract, resulting in a
recovery of consulting expense of $2,480,200.
8. CAPITAL STOCK.
During the six months ended June 30, 2005, we issued:
(i) 2,000 shares of common stock with exercise prices per share equal
to $1.40;
(ii) 900,000 shares of common stock, along with warrants to purchase up
to 900,000 shares of common stock at the exercise price of $3.75
per share; and
(iii) 87,400 shares of common stock, along with a warrant to purchase
up to 87,400 shares of common stock at the exercise price of $3.75
per share.
During the year ended December 31, 2004, we issued:
(i) 37,000 shares of common stock at prices ranging from $1.00 to
$2.50 per share upon the exercise of stock options.
During the year ended December 31, 2003, we issued:
(i) 100,000 shares of common stock valued at $271,000 to acquire an
option to purchase a 20% interest in Tatko (see Note 7 to these
Notes to Unaudited Consolidated Financial Statements (Stock
Options)); and
(ii) 124,000 shares of common stock at prices ranging from $0.25 to
$2.28 per share upon the exercise of stock options.
9. SEGMENTED, SIGNIFICANT CUSTOMER INFORMATION AND ECONOMIC DEPENDENCY.
We operate in two segments: (a) energy and water conservation products,
and (b) biodegradable polymers and chemical additives, as summarized below:
(a) The first line consists of a liquid swimming pool blanket which
saves energy and water by restricting 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
14
drinking water sources.
(b) 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 accounting policies of the segments are the same as those described
in Note 2 to these Unaudited Consolidated Financial Statements (Significant
Accounting Policies). We evaluate performance based on profit or loss from
operations before income taxes, not including nonrecurring gains and losses and
foreign exchange gains and losses.
Our reportable segments are strategic business units that offer
different, but synergistic products and services. They are managed separately
because each business requires different technology and marketing strategies.
For more information on the financial performance of our operating segments,
please see Item 2 (Management's Discussion and Analysis or Plan of Operation) of
Part I of this Quarterly Report on Form 10-QSB.
Our sales in the United States and abroad amounted to 79% (2003: 28%).
The remainder was earned in Canada.
Our long-lived assets are located in Canada and the United States as
follows:
2005 2004
---- ----
Canada $ 273,130 $ 238,807
United States 4,711,671 5,011,539
---------------------------------------- ------------- -------------
Total $ 4,984,801 $ 5,250,346
======================================== ============= =============
10. COMMITMENTS.
Property and Premises Leases. We are committed to minimum rental
payments for property and premises aggregating approximately $326,538 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 $ 67,145
2006 114,752
2007 55,169
2008 55,654
2009 33,818
11. CONTINGENCIES.
(a) On November 13, 2003, Patrick Grant filed a lawsuit in the Circuit
Court of Cook County, Illinois against us, Water$avr and Daniel B. O'Brien, our
Chief Executive Officer. The plaintiff claims damages for breach of contract,
tortious interference with an agreement and various wrongful discharge claims.
The plaintiff seeks monetary damages in excess of $1,020,000 for the breach of
contract and tortious interference claims and unspecified compensatory and
punitive damages in the wrongful discharge claims. We completed mandatory
mediation ordered by the Circuit Court and will next appear in court for case
management, at which time the court will set discovery deadlines. We
15
consider the case to be without merit and are planning to dispute the
matter vigorously. In addition, we intend to file counterclaims against
the plaintiff for failure to repay financial obligations owed to us of
almost $40,000, as well as unspecified damages arising out of
plaintiff's disclosure of confidential information to a client during
his employment at Water$avr. No amounts have been recorded as
receivable and no accrual has been made for any loss in our
consolidated financial statements as the outcome of the claim filed by
the plaintiff is not determinable.
(b) On May 1, 2003, we filed a lawsuit in the Supreme Court of British
Columbia, Canada, against John Wells and Equity Trust, S.A. seeking the return
of 100,000 shares of our common stock and the repayment of a $25,000 loan, which
were provided to defendants for investment banking services consisting of
securing a $5 million loan and a $25 million stock offering. Such services were
not performed and we seek the return of such shares after defendant's failure to
both return the shares voluntarily and repay the note. On May 7, 2003, we
obtained an injunction freezing the transfer of the shares. On May 24, 2004,
there was a hearing on defendant's motion to set aside the injunction, which
motion was denied by the trial court on May 29, 2004. The proceeding is still in
a discovery phase. On the date of issuance, the share transaction was recorded
as shares issued for services at fair market value, a value of $0.80 per share.
No amounts have been recorded as receivable in our consolidated financial
statements as the outcome of this claim is not determinable.
(c) On May 28, 2004, Sunsolar Energy Technologies Inc. ("SET"), filed a
lawsuit in the Federal Court of Canada, against us, Flexible Ltd., and Mr.
O'Brien. SET is seeking: (a) a declaration that the trademark "Tropical Fish" is
available for use by SET; (b) injunctive relief against further use of the
"Tropical Fish" trademark by us; and (c) monetary damages exceeding $7,000,000
for the alleged infringement by us, Flexible Ltd., and Mr. O'Brien of the
"Tropical Fish" trademark, as well as any other "confusingly similar trademarks"
or proprietary trade dresses. On August 9, 2004, we, Flexible Ltd. and Mr.
O'Brien filed our defenses and filed a counterclaim against SET. The
counterclaim seeks: (x) injunctive relief against further use of the "Tropical
Fish" trademark by SET; (y) a declaration that the "Tropical Fish" trademark is
owned by us, or, in the alternative, is not distinctive and should be struck
from the trademark registry; and (z) monetary damages exceeding $50,000. We have
completed documentary discovery, and examinations for discovery of all parties
have been scheduled for July 2005. No amounts have been recorded as receivable
in our consolidated financial statements and no amounts have been accrued as
potential losses as the outcome of this claim is not determinable.
(d) On July 23, 2004, we filed a breach of contract suit in the Circuit
Court of Cook County, Illinois against Tatko. The action arises out of a joint
product development agreement entered into between us and Tatko in which we
agreed to invest $10,000 toward the product development venture and granted to
Tatko 100,000 shares of our restricted common stock. In return, Tatko granted us
a five-year option to purchase 20% of Tatko's outstanding capital stock. Tatko
has since refused to collaborate on the agreement and we are seeking declaratory
relief stating that Tatko is not entitled to the 100,000 shares of our
restricted common stock. The litigation is still pending at this time.
In addition, Tatko filed its own suit on September 24, 2004 in the
Circuit Court of Cook County, Illinois seeking declaratory relief of its
entitlement to our restricted common stock. On May 23, 2005, the Tatko suit was
dismissed with prejudice by the District Court.
No amounts have been recorded as receivable in our consolidated
financial statements and no amount has been accrued as a loss as the outcome of
the claim against Tatko is not determinable.
(e) In 2005, we filed a lawsuit in the Court of the Queen's Bench of
Alberta seeking indeterminate damages resulting from a breach of contract
against Calgary Diecast Corp. The contract was never completed and our raw
materials remain in the possession Calgary Diecast Corp. On April 25,
16
2005, the
Court ordered a judgment in favor of us in the amount of $48,723.
12. COMPARATIVE FIGURES.
Certain of the comparative figures have been reclassified to conform
with the current year's presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
The following analysis and discussion pertains to our results of
operations for the three-month and six-month periods ended June 30, 2005,
compared to the results of operations for the three-month and six-month periods
ended June 30, 2004, and to changes in our financial condition from December 31,
2004 to June 30, 2005.
Separate financial data for each of the Company's operating segments is
provided below. The Company evaluates the performance of the Company's operating
segments based on the following:
JUNE 30
% CHANGE % CHANGE
2005 2004 2003 2005-2004 2004-2003
Sales
Energy Segment $ 765,621 $ 759,744 $ 1,942,562 1% (61%)
Polymer Segment 3,122,093 276,127 -- * 1031% -- *
Consolidated 3,887,714 1,035,871 1,942,562 275% (47%)
Gross Profit Margin
Energy Segment 310,557 357,257 846,660 (13%) (58%)
Polymer Segment 1,445,212 267,537 -- * 440% -- *
Consolidated 1,755,769 624,864 846,660 181% (26%)
SG&A
Energy Segment 1,293,921 994,893 974,108 30% 2%
Polymer Segment 889,583 238,591 -- * 273% -- *
Consolidated 2,183,504 1,233,484 974,108 77% 27%
Interest Income
Energy Segment 3,616 30,470 102,246 (88%) (70%)
Polymer Segment 0 0 -- * 0% -- *
Consolidated 3,616 30,470 102,246 (88%) (70%)
Write Down of Investments
Energy Segment 0 0 0 0 0
Polymer Segment 0 0 -- * -- * -- *
Consolidated 0 0 0
Net Income (Loss) $ (424,119) $ (578,150) $ (49,297) 27% (1072%)
* Polymer segment data is not available as indicated. The Company's polymer
segment was formed after the acquisition of certain assets of the Donlar
Corporation in June 2004.
17
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
Sales for the three months ended June 30, 2005 were $1,868,133,
compared to $547,761 for the six months ended June 30, 2004, an increase of
$1,320,372, or 241%. The increase in sales was primarily attributable to the new
revenue provided by the Company's wholly-owned subsidiary, NanoChem Solutions
Inc., which was formed as the corporate entity used to acquire certain assets
from the bankruptcy estate of the Donlar Corporation.
The Company's Energy segment had sales of $334,726 for the three months
ended June 30, 2004, compared to $271,634 for the three months ended June 30,
2004, an increase of 23%. The Company expects revenue in this segment to
increase in 2006 as brand recognition of its ECO$AVR(R) product line continues
to grow and the Company's marketing efforts of its WATER$AVR(R) product line
begin to produce increased sales. The Company's Polymer segment achieved sales
of $1,533,407 for the three months ended June 30, 2005, compared to $276,127 for
the three months ended June 30, 2004. This increase is in part due to a full
three months of sales from the new NanoChem Solutions subsidiary.
The Company had a loss of 478,317, or $0.04 per share, compared to a
loss of $327,289, or $0.03 per share in the same period in 2004. The three
largest contributing factors to the loss were:
o The brand building, marketing and extra staffing costs in connection
with sales of the Company's ECO$AVR(R) product incurred throughout the
year that were not reflected in sales because there was still
substantial "Tropical Fish" product with dealers that had been sold by
the Company's discontinued distributor, Sunsolar Technologies.
Management believes that very little old product is on shelves and that
costs and revenue for the ECO$AVR(R) product will be better balanced in
2006.
o All divisions maintained or increased sales and marketing costs in the
fourth quarter in order to increase the probability of sales increases
in all of fiscal 2005. The extra costs were considered to be necessary
to position the Company for future growth.
o Non cash transactions such as stock option expense significantly
increased. This was a one time only event, related to the private
placement in April 2005.
Gross profit margin represents sales less cost of sales and producing.
The major categories of costs included in cost of sales and producing are cost
of goods, distribution costs, and costs of the Company's buying department.
Distribution costs consist of all warehouse receiving and inspection costs,
warehousing costs, all transportation costs associated with shipping goods from
the Company's facilities to its customers, and other costs of distribution. The
Company does not exclude any portion of distribution costs from cost of sales.
The Company's gross margins may not be comparable to those of other entities
because some entities include all of the costs related to their overhead in cost
of sales, as compared to the Company, which excludes a portion of cost of sales
from gross profit and instead includes such costs as a line item in operating
expenses.
For the three months ended June 30, 2005, the largest increases
were in the areas of wages ($202,388 versus $143,246), administrative salaries
($71,071 versus $32,697) and rent expense ($47,886 versus $30,867). The addition
of commission expense ($47,073 versus zero) is a result of successfully using
sales representatives for our swimming pool products and the Company feels the
increase in sales justifies this added expense. These increases are wholly
accounted for by the operating costs of the new divisions and represent a
permanent increase in operating costs related to the new level of sales. The
large increase in investor relations ($484,950 versus $57,947) has to do with
the stock options that vested in relation to the capital raising that closed on
April 14, 2005. This resulted in a non-cash transaction of $447,500 and without
this, the Company would have seen a decrease in this expense. The decreases in
advertising ($13,414 down from $49,062) and consulting ($47,535 down from
$114,138) are the result of
18
better cost control in these areas instituted by management over the past year
and are expected to maintain at these levels.
The Company's Energy segment generated $883,544 in operating expenses
in the three months ended June 30, 2005, an increase of 58% over the same 2004
period. The increase is primarily attributable to the Company's extraordinary
stock option expense related to the capital raising in the six months ended June
30, 2005. The Company's Polymer segment incurred $410,148 in operating expenses
in the three months ended June 30, 2005, and an increase of 72% over the same
period the previous year. This is attributable to the fact that the NanoChem
Solutions subsidiary operated for the full 3 months period ending June 30, 2005
compared to 20 days in 2004, during the same period.
There was no income tax provision for the three months ended June 30,
2005, as no tax installment payments were made during the year, same as the same
period in the previous year.
The Company's Energy segment reported interest income of $886 in the
three month period ending June 30, 2005, compared to $27,354 in the same period
in 2004, a decrease of approximately 97% from 2004. This decrease in interest
income is due to the Company's use of capital to purchase assets and develop its
business.
The Company reported a net loss of $478,317 for the three months ended
June 30, 2005, compared to a net loss of $327,289 for the three months ended
June 30, 2004.
With the addition of the assets acquired from the Donlar Corporation,
the Company became a much larger Company with commensurate increases in most
expense segments. However, the Company was able to reduce certain expenses such
as advertising ($13,414 down from $49,062) and consulting ($47,535 down from
$114,138) as a direct result of better cost control in these areas instituted by
management over the past year and are expected to maintain at these levels. The
large increase in investor relations ($484,950 versus $57,947) has to do with
the stock options that vested in relation to the capital raising that closed on
April 14, 2005. This resulted in a non-cash transaction of $447,500 and without
this the Company would have seen a decrease in this expense.
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Sales for the six months ended June 30, 2005 were $3,887,714, compared
to $1,035,871 for the six months ended June 30, 2004, an increase of $2,851,843,
or 275%. The increase in sales was primarily attributable to the new revenue
provided by the Company's wholly-owned subsidiary, NanoChem Solutions Inc.,
which was formed as the corporate entity used to acquire certain assets from the
bankruptcy estate of the Donlar Corporation.
The Company's Energy segment had sales of $765,621 for the six months
ended June 30, 2005, compared to $759,744 for the six months ended June 30,
2004, an increase of 1%. The Company expects revenue in this segment to increase
in 2006 as brand recognition of its ECO$AVR(R) product line continues to grow
and the Company's marketing efforts of its WATER$AVR(R) product line begin to
produce increased sales. The Company's Polymer segment achieved sales of
$3,122,093 for the six months ended June 30, 2005, compared to $276,127 for the
six months ended June 30, 2004. This increase is in part due to a full six
months of sales from the new NanoChem Solutions subsidiary.
The Company had a loss of $424,119, or $0.03 per share, compared to a
loss of $578,150, or $0.05 per share in the same period in 2004. The three
largest contributing factors to the loss were:
o The brand building, marketing and extra staffing costs in connection
with sales of the Company's ECO$AVR(R) product incurred throughout the
year that were not reflected in sales because there was still
substantial "Tropical Fish" product with dealers that had been sold by
the Company's
19
discontinued distributor, Sunsolar Technologies. Management believes
that very little old product is on shelves and that costs and revenue
for the ECO$AVR(R) product will be better balanced in 2006.
o All divisions maintained or increased sales and marketing costs in the
fourth quarter in order to increase the probability of sales increases
in all of fiscal 2005. The extra costs were considered to be necessary
to position the Company for future growth.
o Non cash transactions such as stock option expense significantly
increased. This was a one time only event, related to the private
placement in April 2005.
The Company's overall gross profit margin on product sales decreased to
45% in the six months ended June 30, 2005, down from 60% in the six months ended
June 30, 2004. This decrease in gross margin was primarily due to the rise in
oil and its affect on raw material pricing and shipping. There were also extra
costs related to the labor and material inputs for the Company's swimming pool
products as a result of the significant rise of the Canadian dollar versus the
U.S. dollar. For more information regarding this result, see Note 2(e) to the
Company's Notes to Consolidated Financial Statements, Foreign Currency.
Gross profit margin represents sales less cost of sales and producing.
The major categories of costs included in cost of sales and producing are cost
of goods, distribution costs, and costs of the Company's buying department.
Distribution costs consist of all warehouse receiving and inspection costs,
warehousing costs, all transportation costs associated with shipping goods from
the Company's facilities to its customers, and other costs of distribution. The
Company does not exclude any portion of distribution costs from cost of sales.
The Company's gross margins may not be comparable to those of other entities
because some entities include all of the costs related to their overhead in cost
of sales, as compared to the Company, which excludes a portion of cost of sales
from gross profit and instead includes such costs as a line item in operating
expenses.
For the six months ended June 30, 2005, there was an increase in sales
and marketing costs in connection with the Company's WATER$AVR(R) product, which
was reflected in increased wages, office, rent, telephone and travel expenses.
The Company incurred higher professional fees in the six months ended June 30,
2005 primarily due to increased legal and accounting expenses and increased
consultant expenses resulting from the cost of integrating the functions and
sales of the Company's NanoChem subsidiary as quickly as possible. Depreciation
expense was $388,086 for the six months ended June 30, 2005, compared to
$185,547 for the six months ended June 30, 2004, reflecting depreciation for
additional property and equipment added mid 2004.
The Company's Energy segment generated $1,293,291 in operating expenses
in the six months ended June 30, 2005, an increase of 30% over the same 2004
period. The increase is primarily attributable to the Company's extraordinary
stock option expense related to the capital raising in the six months ended June
30, 2005. The Company's Polymer segment incurred $889,583 in operating expenses
in the six months ended June 30, 2005, an increase of 77% over the same period
the previous year. This is attributable to the fact that the NanoChem Solutions
subsidiary operated for the full 6 months in 2005 compared to 20 days in 2004,
during the same period.
There was no income tax provision for the six months ended June 30,
2005, as no tax installment payments were made during the year, same as the same
period in the previous year.
The Company's Energy segment reported interest income of $3,616 in the
first six months of 2005, compared to $30,470 in the same period in 2004, a
decrease of approximately 88% from 2004. This decrease in interest income is due
to the Company's use of capital to purchase assets and develop its business.
20
The Company reported a net loss of $424,119 for the six months ended
June 30, 2005, compared to a net loss of $578,150 for the six months ended June
30, 2004.
With the addition of the assets acquired from the Donlar Corporation,
the Company became a much larger Company with commensurate increases in most
expense segments. However, the Company was able to reduce certain expenses such
as advertising ($44,685 down from $56,792) and consulting ($91,787 down from
$188,816) as a direct result of better cost control in these areas instituted by
management over the past year and are expected to maintain at these levels. The
large increase in investor relations ($509,588 versus $122,625) has to do with
the stock options that vested in relation to the capital raising that closed on
April 14, 2005. This resulted in a non-cash transaction of $447,500 and without
this, the Company would have seen a decrease in this expense.
LIQUIDITY AND CAPITAL RESOURCES
The following section discusses the effects of changes in our balance
sheet and cash flow on our liquidity and capital resources.
We had cash on hand of $752,130 as of the quarter ended June 30, 2005,
as compared to $558,795 for the period ended December 31, 2004. This increase is
primarily the result of the cashed raised in our private placement transactions
that closed during this quarter.
As of June 30, 2005, we had working capital of $3,590,510, as compared
to a working capital deficit of $101,121 for the period ended December 31, 2004.
The increase in working capital primarily results from the cash raised in our
private placement transactions that closed during this quarter, as well as from
our increase in sales. The cash raised from the private placement transactions
was used to pay off the loan taken out for the purchase of the Donlar assets.
For more information on these private placement transactions, please see Item 2
(Unregistered Sales of Equity Securities and Use of Proceeds) of Part II of this
Quarterly Report on Form 10-QSB.
We have no external sources of liquidity in the form of credit lines
from banks.
Our management believes that our available cash will be sufficient to
fund our working capital requirements through December 31, 2005. Our management
further believes that available cash will be sufficient to implement our
expansion plans. No investment banking agreements are in place and there is no
guarantee that we will be able to raise capital in the future should that become
necessary.
ITEM 3. CONTROLS AND PROCEDURES.
We carried out an evaluation, under the supervision and with the
participation of management, including our principal executive officer and
principal financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined under Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end
of the period covered by this quarterly report. Based upon that evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiary) that
is required to be included in our periodic reports filed with the Securities and
Exchange Commission.
During the quarter ended June 30, 2005, there was 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.
21
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On November 13, 2003, Patrick Grant filed a lawsuit in the Circuit
Court of Cook County, Illinois against us, Water$avr and Daniel B. O'Brien, our
Chief Executive Officer. The plaintiff claims damages for breach of contract,
tortious interference with an agreement and various wrongful discharge claims.
The plaintiff seeks monetary damages in excess of $1,020,000 for the breach of
contract and tortious interference claims and unspecified compensatory and
punitive damages in the wrongful discharge claims. We completed mandatory
mediation ordered by the Circuit Court and will next appear in court for case
management, at which time the court will set discovery deadlines. We consider
the case to be without merit and are planning to dispute the matter vigorously.
In addition, we intend to file counterclaims against the plaintiff for failure
to repay financial obligations owed to us of almost $40,000, as well as
unspecified damages arising out of plaintiff's disclosure of confidential
information to a client during his employment at Water$avr. No amounts have been
recorded as receivable and no accrual has been made for any loss in our
consolidated financial statements as the outcome of the claim filed by the
plaintiff is not determinable.
On May 1, 2003, we filed a lawsuit in the Supreme Court of British
Columbia, Canada, against John Wells and Equity Trust, S.A. seeking the return
of 100,000 shares of our common stock and the repayment of a $25,000 loan, which
were provided to defendants for investment banking services consisting of
securing a $5 million loan and a $25 million stock offering. Such services were
not performed and we seek the return of such shares after defendant's failure to
both return the shares voluntarily and repay the note. On May 7, 2003, we
obtained an injunction freezing the transfer of the shares. On May 24, 2004,
there was a hearing on defendant's motion to set aside the injunction, which
motion was denied by the trial court on May 29, 2004. The proceeding is still in
a discovery phase. On the date of issuance, the share transaction was recorded
as shares issued for services at fair market value, a value of $0.80 per share.
No amounts have been recorded as receivable in our consolidated financial
statements as the outcome of this claim is not determinable.
On May 28, 2004, Sunsolar Energy Technologies Inc. ("SET"), filed a
lawsuit in the Federal Court of Canada, against us, Flexible Ltd., and Mr.
O'Brien. SET is seeking: (a) a declaration that the trademark "Tropical Fish" is
available for use by SET; (b) injunctive relief against further use of the
"Tropical Fish" trademark by us; and (c) monetary damages exceeding $7,000,000
for the alleged infringement by us, Flexible Ltd., and Mr. O'Brien of the
"Tropical Fish" trademark, as well as any other "confusingly similar trademarks"
or proprietary trade dresses. On August 9, 2004, we, Flexible Ltd. and Mr.
O'Brien filed our defenses and filed a counterclaim against SET. The
counterclaim seeks: (x) injunctive relief against further use of the "Tropical
Fish" trademark by SET; (y) a declaration that the "Tropical Fish" trademark is
owned by us, or, in the alternative, is not distinctive and should be struck
from the trademark registry; and (z) monetary damages exceeding $50,000. We have
completed documentary discovery, and examinations for discovery of all parties
have been scheduled for July 2005. No amounts have been recorded as receivable
in our consolidated financial statements and no amounts have been accrued as
potential losses as the outcome of this claim is not determinable.
On July 23, 2004, we filed a breach of contract suit in the Circuit
Court of Cook County, Illinois against Tatko. The action arises out of a joint
product development agreement entered into between us and Tatko in which we
agreed to invest $10,000 toward the product development venture and granted to
Tatko 100,000 shares of our restricted common stock. In return, Tatko granted us
a five-year option to purchase 20% of Tatko's outstanding capital stock. Tatko
has since refused to collaborate on the agreement and we are seeking declaratory
relief stating that Tatko is not entitled to the 100,000 shares of our
restricted common stock. The litigation is still pending at this time.
22
In addition, Tatko filed its own suit on September 24, 2004 in the
Circuit Court of Cook County, Illinois seeking declaratory relief of its
entitlement to our restricted common stock. On May 23, 2005, the Tatko suit was
dismissed with prejudice by the District Court.
No amounts have been recorded as receivable in our consolidated
financial statements and no amount has been accrued as a loss as the outcome of
the claim against Tatko is not determinable.
In 2005, we filed a lawsuit in the Court of the Queen's Bench of
Alberta seeking indeterminate damages resulting from a breach of contract
against Calgary Diecast Corp. The contract was never completed and our raw
materials remain in the possession Calgary Diecast Corp. On April 25, 2005, the
Court ordered a judgment in favor of us in the amount of $48,723.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On April 8, 2005, we sold 900,000 shares of our common stock, at a per
share price of $3.75, to several accredited investors in a private placement
transaction exempt from the federal securities laws under Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. In
connection with the private placement, we also issued warrants to the purchasers
to purchase up to an additional 900,000 shares of our common stock, at exercise
prices of $3.75 per share. When issued, the warrants were immediately
exercisable through April 8, 2009.
On June 8, 2005, we sold 84,700 shares of our common stock, at a per
share price of $3.75, to an accredited investor in a private placement
transaction exempt from the federal securities laws under Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. In
connection with the private placement, we also issued a warrant to the purchaser
to purchase up to an additional 84,700 shares of our common stock, at an
exercise price of $3.75 per share. When issued, the warrant was immediately
exercisable through June 8, 2009.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
For the voting results of our 2005 Annual Shareholders Meeting held on
June 10, 2005, please refer to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 29, 2005.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
The following exhibits are attached hereto and filed herewith:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.1 Securities Purchase Agreement, dated as of April 8, 2005, by and
between the Registrant and the parties set forth therein. (1)
10.2 Form of Warrant, issued as of April 8, 2005. (1)
10.3 Registration Rights Agreement, Dated as of June 8, 2005, by and
Between the Registrant and the Party Set Forth Therein. *
10.4 Subscription Agreement, dated as of May 24, 2005, by and
between the Registrant and the parties set forth therein. *
10.5 Form of Warrant, issued as of June 8, 2005. *
10.6 Registration Rights Agreement, Dated as of June 8, 2005, by and
Between the Registrant and the Party Set Forth Therein. *
31.1 Certification of Principal Executive Officer Pursuant to ss.302 of the
Sarbanes-Oxley Act of 2002.*
31.2 Certification of Principal Financial Officer Pursuant to ss.302 of the
Sarbanes-Oxley Act of 2002.*
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
ss.1350 and ss.906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
ss.1350 and ss.906 of the Sarbanes-Oxley Act of 2002.*
----------
* Filed herewith.
(1) Incorporated herein by reference to the registrant's registration
statement on form S-3/A (Amendment No. 1), filed with the Securities
and Exchange Commission on June 27, 2005.
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SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
Date: September 21, 2005 By: /s/ Daniel B. O'Brien
-------------------------------------
Daniel B. O'Brien
President and Chief Executive Officer
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