UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)
OCTOBER 5, 2005
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Nevada 001-31540 91-1922863
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(State of incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
615 Discovery Street
Victoria, British Columbia V8T 5G4
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(Address of principal executive offices) (Zip Code)
(250) 477-9969
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications
pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
ITEM 4.02. NON-RELIANCE ON PREVIOUSLY ISSUED FINANCIAL STATEMENTS OR A RELATED
AUDIT REPORT OR COMPLETED INTERIM REVIEW.
(a) On October 11, 2005, after consideration given to a series of
comments related to the grant of a certain stock option by the Accounting Staff
of the Securities and Exchange Commission in connection with a Registration
Statement on Form S-3 submitted by Flexible Solutions International, Inc. (the
"Company"), the Company determined that it will restate its financial statements
for each of the periods ended since September 30, 2002, including each of the
years ended December 31, 2002 through 2004, and for each of the quarters in the
six months ended June 30, 2005 (the "Restated Periods"). This decision to
restate the financial statements for the Restated Periods follows the
determination by the Company's management, on October 5, 2005, that the Company
did not correctly account for stock compensation expense in connection with the
granting of an option to purchase 2,000,000 shares of common stock to Ondeo
Nalco ("Nalco"), a consultant to the Company. Accordingly, the Company's
previously issued financial statements covering such Restated Periods should no
longer be relied upon.
On October 5, 2005, the Company's management discussed the conclusion
described above with the Company's audit committee of the board of directors
("Audit Committee") and Cinnamon Jang Willoughby & Company ("CJW"), the
Company's independent registered public accounting firm. CJW informed the Audit
Committee that it concurs with the Company's management's conclusion described
above. As a result, the Company expects to file amended consolidated financial
statements for the Restated Periods prior to, or contemporaneously with, the
filing of its Quarterly Report on Form 10-QSB for the interim period ended
September 30, 2005.
In September 2002, the Company entered into a consulting agreement with
Nalco whereby Nalco agreed to serve as the exclusive distributor of the
Company's Water$avr products for so long as Nalco maintained a certain threshold
sales level as defined in the consulting agreement. As consideration for signing
the consulting agreement, Nalco was granted an option to purchase 2,000,000
shares of common stock of the Company. Half of the option for one million shares
was exercisable immediately at an exercise price of $4.25 for each common share.
The remaining half of the option for 1,000,000 shares was exercisable after
certain threshold sales targets were achieved at a price of $5.50 for each
common share.
In determining the stock compensation expense for the nine months ended
September 30, 2002, the Company expensed the entire fair value of the stock
option believing that the option fully vested upon the signing of the consulting
agreement. In its review, the Company determined that: (i) first, as stated
above, half of the option to purchase 1,000,000 shares of common stock did not
vest and was not exercisable until the threshold sales target had been met,
which would not be until five years after the signing of the consulting
agreement; and (ii) second, the Company did not consider Emerging Issues Task
Force ("EITF") No. 96-18, Accounting for Equity Instruments That are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services; EITF No. 00-18, Accounting Recognition for Certain Transactions
involving Equity Instruments Granted to Other Than Employees; and EITF No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer. To correctly
account for the stock option granted to Nalco, the stock compensation expense
should have been measured at the date the performance obligation was complete
(i.e. the end of the initial term of the agreement) and then recognized on a
rational and systematic manner in relation to the sales achieved by Nalco. Also,
since the consideration given to Nalco was an equity instrument and not cash,
the Company has determined to expense the cost rather than deducting the amount
from revenue.
In light of the above, the net effect of the adjustments to the
financial statements for the Restated Periods is as follows:
1. Approximately $2,704,000 in stock compensation expense recorded in September
2002 will be reversed;
2. Approximately $54,080 in stock compensation expense will be recorded in the
quarter ended March 31, 2003, as Nalco met the first sales threshold under the
consulting agreement;
3. Approximately $54,080 in stock compensation expense will be reversed in the
year ended December 31, 2003, as Nalco failed to meet subsequent sales
thresholds under the consulting agreement, resulting in the cancellation of the
stock option;
4. As stated above, the Company recorded a stock compensation expense of
$2,704,000 in December 2002. As a result of canceling the stock option, the
Company previously recorded a recovery of $2,480,000 of stock compensation
expense at December 31, 2003. This $2,480,000 recovery will be reversed, in
conjunction with the reversal of $2,704,000 in stock compensation expense
originally recorded; and
5. For the periods ended March 31, 2004 to June 30, 2005, the net effect of
these adjustments is to decrease capital in excess of par value by approximately
$223,800 and increase retained earnings by approximately $223,800.
The Company is presently unaware of any evidence that the restatements
described above are due to any material noncompliance by the Company, as a
result of misconduct, with any financial reporting requirement under the federal
securities laws. The Audit Committee is working with CJW to assure that the
Company is taking the appropriate approach to resolving the issues related to
the restatements, as well as any further issues that may be identified during
the course of its review.
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 hereunto duly authorized.
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
Date: October 11, 2005 By: /s/DANIEL B. O'BRIEN
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Daniel B. O'Brien
Chief Executive Officer