UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-QSB/A
(AMENDMENT NO. 1)
(Mark one)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004.
|_| Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to .
--------------- --------------
Commission File Number 000-29649
---------------------------
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
(Name of Small Business Issuer as Specified in Its Charter)
NEVADA 91-1922863
(State of Incorporation) (IRS Employer Identification No.)
615 DISCOVERY STREET
VICTORIA, BRITISH COLUMBIA, CANADA V8T 5G4
(Address of Principal Executive Offices) (Zip Code)
(250) 477-9969
(Issuer's Telephone Number, Including Area Code)
---------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
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: The Company had 11,819,916
shares of Common Stock, par value $0.001 per share, outstanding as of April 30,
2004.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
FORM 10-QSB/A
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
(a) Unaudited Consolidated Balance Sheets at March 31, 2004. 1
(b) Unaudited Consolidated Statements of Operations for the Three
Months Ended March 31, 2004 and 2003. 2
(c) Unaudited Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2004 and 2003. 3
(d) Notes to Unaudited Consolidated Financial Statements for the
Period Ended March 31, 2004. 4
Item 2. Management's Discussion and Analysis or Plan of Operation. 7
Item 3. Controls and Procedures. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 11
Item 3. Defaults Upon Senior Securities. 11
Item 4. Submission of Matters to a Vote of Security Holders. 11
Item 5. Other Information. 11
Item 6. Exhibits. 11
SIGNATURES 12
i
EXPLANATORY NOTE
----------------
Flexible Solutions International, Inc. ("we," "us," and "our") is
filing this Quarterly Report on Form 10-QSB/A to amend and restate in its
entirety its Quarterly Report on Form 10-QSB for the fiscal quarter ended March
31, 2004, which was previously filed with the Securities and Exchange Commission
on May 14, 2004.
In October 2005, while completing a registration statement for
securities issued in the second quarter of 2005, we determined that certain
disclosures made in connection with our stock-based compensation expense
required adjustment. As such, on October 5, 2005, upon the recommendation of our
management, our board of directors and its audit committee, and our independent
accountants, we determined to restate our consolidated 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 both of the quarters in the six
months ended June 30, 2005 (the "Restated Periods").
In accordance with this determination to restate the Restated Periods,
we revised the disclosures for stock-based compensation expense as required
under 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. In particular, we adjusted the stock-based compensation
expense in our financial statements and notes thereto recorded in connection
with our grant of an option to purchase 2,000,000 shares of our common stock in
September 2002 pursuant to the terms of a distribution agreement. Additional
information on this restatement and its effects on our financial condition and
results of operations can be found in our Notes to Unaudited Consolidated
Financial Statements contained herein.
This Form 10-QSB/A does not reflect events occurring after the filing
of our Form 10-QSB on May 14, 2004 or modify any of the disclosures contained
therein, or in the accompanying financial statements and notes thereto, in any
way other than by the amendments identified above and as set forth herein.
Notwithstanding the above, and for the convenience of the reader, this entire
report has been amended as a result of, and to reflect, the restatement, as well
as to revise the disclosure of our management's discussion and analysis,
unregistered sales of equity securities, and legal proceedings, as well as to
generally reflect the current disclosure requirements of Form 10-QSB.
This Form 10-QSB/A should be read in conjunction with our periodic
filings made with the Securities and Exchange Commission subsequent to the date
of their original filings, including any amendments to those filings. In
addition, in accordance with Rule 12b-15 under the Securities Exchange Act of
1934, as amended, and certain other rules, this Form 10-QSB/A includes updated
certifications from our Chief Executive Officer and Chief Financial Officer.
We are presently unaware of any evidence that the restatements
described above are due to any material noncompliance by us, as a result of
misconduct, with any financial reporting requirement under the federal
securities laws. Our audit committee of the board of directors is working with
our management and our accountants to assure that we are 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. The
filing of this Form 10-QSB/A shall not be deemed an admission that the original
filing, when made, included any untrue statement of a material fact or omitted
to state a material fact necessary to make a statement not misleading.
ii
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB/A for the quarter ended March 31,
2004 ("Quarterly Report"), including the Notes to Unaudited Consolidated
Financial Statements, contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
include, without limitation, those statements relating to development of new
products, our financial condition, our ability to increase distribution of our
products, integration of businesses we acquire, and disposition of any of our
current business. Forward-looking statements can be identified by the use of
forward-looking terminology, such as "may," "will," "should," "expect,"
"anticipate," "estimate," "continue," "plans," "intends," or other similar
terminology. These forward-looking statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual outcomes and results may differ materially from
what is anticipated or forecasted in these forward-looking statements due to
numerous factors, including, but not limited to, our ability to generate or
obtain sufficient working capital to continue our operations, changes in demand
for our products, the timing of customer orders and deliveries, and the impact
of competitive products and pricing. In addition, such statements could be
affected by general industry and market conditions and growth rates, and general
domestic and international economic conditions.
Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, such statements
involve risks and uncertainties and no assurance can be given that the actual
results will be consistent with these forward-looking statements. Except as
otherwise required by Federal securities laws, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events, changed circumstances or any other reason, after
the date of this Quarterly Report.
iii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 2004
(U.S. DOLLARS)
MARCH 31,
2004 DECEMBER 31,
AS RESTATED 2003
(NOTE 4) AS RESTATED
(UNAUDITED) (NOTE 4)
----------------- -----------------
ASSETS
CURRENT
Cash and cash equivalents $ 1,657,930 $ 237,080
Short term investments 3,508,102 5,033,837
Accounts receivable 127,621 294,238
Income tax receivable 85,123 86,243
Loan receivable 32,453 17,585
Inventory 183,820 212,938
Prepaid expenses 51,910 36,101
----------------- -----------------
5,646,958 5,918,022
PROPERTY AND EQUIPMENT 175,975 167,589
INVESTMENT 303,500 303,500
DEFERRED ACQUISITION COSTS 90,912 --
----------------- -----------------
$ 6,217,346 $ 6,389,111
----------------- -----------------
LIABILITIES
CURRENT
Due to shareholders $ -- $ 7,700
Accounts payable and accrued liabilities 124,656 157,643
----------------- -----------------
124,656 165,343
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
11,819,916 (2003: 11,794,916) common shares 11,817 11,794
CAPITAL IN EXCESS OF PAR VALUE 7,190,225 7,082,813
OTHER COMPREHENSIVE INCOME (LOSS) 15,371 3,023
DEFICIT (1,124,723) (873,862)
----------------- -----------------
TOTAL STOCKHOLDER'S EQUITY 6,092,690 6,223,768
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 6,217,346 $ 6,389,111
----------------- -----------------
- See Notes to Unaudited Consolidated Financial Statements -
1
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(U.S. DOLLARS -- UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2004 2003
AS RESTATED AS RESTATED
(NOTE 4) (NOTE 4)
------------------ -----------------
SALES $ 488,110 $ 1,281,266
COST OF SALES 305,919 687,067
------------------ -----------------
GROSS PROFIT 182,191 594,199
------------------ -----------------
OPERATING EXPENSES
Wages 114,470 138,670
Administrative salaries and benefits 24,847 17,642
Advertising and promotion 7,730 --
Investor relations and transfer agent fee 64,678 33,120
Office and miscellaneous 34,590 46,022
Rent 21,349 14,398
Consulting 74,678 106,012
Professional fees 36,508 23,063
Travel 23,576 34,184
Telecommunications 5,700 8,762
Shipping 3,142 3,692
Research 9,161 17,531
Currency exchange 422 16,167
Utilities 5,365 --
Depreciation 9,952 7,811
------------------ -----------------
436,168 467,074
------------------ -----------------
INCOME (LOSS) BEFORE INTEREST INCOME AND INCOME TAX (253,977) 127,125
INTEREST INCOME 3,116 50,268
------------------ -----------------
INCOME (LOSS) BEFORE INCOME TAX (250,861) 177,393
INCOME TAX (RECOVERY) -- 50,692
------------------ -----------------
NET INCOME (LOSS) (250,861) 126,701
------------------ -----------------
DEFICIT, BEGINNING (873,862) (396,974)
------------------ -----------------
DEFICIT, ENDING $ (1,124,723) $ (270,273)
------------------ -----------------
NET INCOME (LOSS) PER SHARE $ (0.02) $ 0.01
------------------ -----------------
WEIGHTED AVERAGE NUMBER OF SHARES 11,807,801 11,610,138
------------------ -----------------
- See Notes to Unaudited Consolidated Financial Statements -
2
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(U.S. DOLLARS -- UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
2004 2003
AS RESTATED AS RESTATED
(NOTE 4) (NOTE 4)
---------------------- ---------------------
OPERATING ACTIVITIES
Net income (loss) $ (250,861) $ 126,701
Stock compensation expense 66,935 98,264
Depreciation 9,952 7,811
Changes in non-cash working capital items:
Accounts receivable 166,617 (701,638)
Inventory 29,118 99,814
Prepaid expenses (15,809) 10,867
Accounts payable (32,987) 105,070
Income tax receivable 1,120 31,239
Decrease in due to shareholders (7,700) --
Unrealized foreign exchange gain/loss -- 37,277
---------------------- ---------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (33,615) (184,595)
---------------------- ---------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (18,338) (12,226)
Purchase of short-term investments 1,525,735 --
Loan receivable (14,868) (882)
Incurred acquisition costs (90,912) --
---------------------- ---------------------
CASH USED IN INVESTING ACTIVITIES 1,401,617 (13,108)
---------------------- ---------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 40,500 38,500
---------------------- ---------------------
CASH PROVIDED BY FINANCING ACTIVITIES 40,500 38,500
---------------------- ---------------------
Effect of exchange rate changes on cash 12,348 7,906
---------------------- ---------------------
INFLOW (OUTFLOW) OF CASH 1,420,850 (151,297)
Cash and cash equivalents, beginning 237,080 556,789
---------------------- ---------------------
CASH AND CASH EQUIVALENTS, ENDING $ 1,657,930 $ 405,492
---------------------- ---------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ -- $ 50,692
Interest received 3,116 50,268
---------------------- ---------------------
- See Notes to Unaudited Consolidated Financial Statements -
3
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2004
(U.S. DOLLARS)
1. BASIS OF PRESENTATION.
These unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information. These financial statements are condensed and
do not include all disclosures required for annual financial statements. The
organization and business of the Company, accounting policies followed by the
Company and other information are contained in the notes to the Company's
audited consolidated financial statements filed as part of the Company's
December 31, 2003 Annual Report on Form 10-KSB.
In the opinion of the Company's management, these consolidated
financial statements reflect all adjustments necessary to present fairly the
Company's consolidated financial position at March 31, 2004, and the
consolidated results of operations and the consolidated statements of cash flows
for the three months ended March 31, 2004 and 2003. The results of operations
for the three months ended March 31, 2004 are not necessarily indicative of the
results to be expected for the entire fiscal year.
2. STOCKHOLDERS' EQUITY.
(a) The Company has previously granted stock options to consultants and
has recognized consulting expense applying Statement of Financial Accounting
Standard ("FAS") No. 123 using the Black-Scholes option-pricing model, which
resulted in expense of $66,935.15 for the three months ended March 31, 2004.
(b) The following table summarizes the Company's stock option activity
for the period:
----------------------------------------------------------------------------------------------------------
2004
Weighted
Exercise Average
Number Price Exercise
of Shares Per Share Price
------------------- --------------------- -----------------
Balance, December 31, 2004 1,694,000 $ 1.00 to $ 4.25 $ 2.84
Granted During the Period -- -- --
Exercised (25,000) $ (1.40 to $ 2.50) (1.62)
----------------------------------------------------------------------------------------------------------
Balance, March 31, 2004 1,669,000 $ 1.00 to $ 4.25 $ 3.06
----------------------------------------------------------------------------------------------------------
3. CONTINGENCIES.
(a) On November 13, 2003, Patrick Grant filed a lawsuit in the Circuit
Court of Cook County, Illinois against the Company, WaterSavr Global Solutions
Inc. ("WGS"), the wholly-owned subsidiary of the Company, and Daniel B. O'Brien
, the Company's 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. The Company
considers the case without merit and is planning to dispute the matter
vigorously. In addition, the Company intends to file counterclaims against the
plaintiff for failure
4
to repay financial obligations owed to the Company of almost $40,000, as well as
unspecified damages arising out of the plaintiff's disclosure of confidential
information to a client during his employment at WGS. No amounts have been
recorded as receivable and no accrual has been made for any loss in the
Company's consolidated financial statements as the outcome of the claim filed by
Mr. Grant is not determinable.
(b) On May 1, 2003, the Company filed a lawsuit in the Supreme Court of
British Columbia, Canada, against John Wells and Equity Trust, S.A. seeking
return of 100,000 shares of the Company's common stock and 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 in the proceeding, the Company seeks return of
such shares after defendant's failure to both return the shares voluntarily and
repay the note. On May 7, 2003, the Company obtained an injunction freezing the
transfer of the shares. 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 $0.80 per share. No amounts have been
recorded as receivable in the Company's consolidated financial statements as the
outcome of this claim is not determinable.
4. RESTATEMENTS AS A RESULT OF CORRECTING STOCK COMPENSATION EXPENSE.
In October 2005, while completing a registration statement for
securities issued in the second quarter of 2005, the Company determined that
certain disclosures made in connection with its stock-based compensation expense
required adjustment. In September 2002, the Company entered into a distribution
agreement with Ondeo Nalco Company ("Ondeo") whereby Ondeo agreed to serve as
the exclusive distributor of the Company's WATER$AVR(R) products for so long as
Ondeo maintained a certain threshold sales level as defined in the agreement. As
consideration for signing the agreement, Ondeo was granted an option to purchase
2,000,000 shares of the Company's common stock. 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-based 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
agreement. In its October 2005 review, however, 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 distribution 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 options granted to Ondeo, the
stock-based compensation expense, included in consulting expenses, should have
been measured at the date the performance obligation was complete and then
recognized on a rational and systematic manner in relation to the sales achieved
by Ondeo. Had the Company correctly accounted for these stock options,
stock-based compensation expense for the quarter would have been nil as no sales
had yet been achieved. Instead, the Company recorded a stock-based compensation
expense of $2,704,000 for the quarter.
During the three months ended March 31, 2003, Ondeo achieved the first
threshold sales target, and, accordingly, the Company should have recorded a
corresponding stock-based compensation expense of $54,080. However, since the
entire stock-based compensation expense had been recorded in the
5
September 30, 2002 interim financial statements and in the year ended December
31, 2002, the Company did not record any additional stock-based compensation
expense as a result of the attained first threshold level.
In the fourth quarter of the year ended December 31, 2003, it was
determined that Ondeo was not going to attain the minimum sales targets
stipulated in the exclusive distributorship agreement. Consequently the
exclusive distributorship agreement and corresponding stock options were
cancelled. The Company accounted for the cancellation of the stock options in
accordance with FAS No. 123 similar to a forfeiture of stock options and
reversed $2,480,200 of the stock compensation expense previously recorded in
2002. Had the Company accounted for the cancellation of the stock options
correctly, it would have reversed the stock-based compensation expense of
$54,080 that was recorded in the first quarter ended March 31, 2003.
The following presents the effect on the Company's previously issued
financial statements for the three months ended March 31, 2004 and 2003, and the
year ended December 31, 2003:
Balance sheet as at March 31, 2004 -
----------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- -------------------- --------------------
Capital in excess of par value $ 7,414,025 $ (223,800) $ 7,190,225
----------------------------------------------------------------------------------------------------------------
Accumulated deficiency (1,348,523) 223,800 (1,124,723)
----------------------------------------------------------------------------------------------------------------
Statement of operations for the three months ended March 31, 2004 -
----------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- -------------------- --------------------
Deficit, beginning $ (1,097,662) $ (223,800) $ (873,862)
----------------------------------------------------------------------------------------------------------------
Deficit, ending (1,348,523) 223,800 (1,124,723)
----------------------------------------------------------------------------------------------------------------
Statement of operations for the three months ended March 31, 2003 -
----------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- -------------------- --------------------
Expenses $ 412,994 $ 54,080 $ 467,074
Income (loss) before other item and
income tax 181,205 (54,080) 127,125
Income (loss) before income tax 231,473 (54,080) 177,393
Net income (loss) 180,781 (54,080) 126,701
----------------------------------------------------------------------------------------------------------------
Net income (loss) per share 0.02 (0.01) 0.01
----------------------------------------------------------------------------------------------------------------
Statement of cash flows for the three months ended March 31, 2003 -
----------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- -------------------- --------------------
Net income (loss) $ 180,781 $ (54,080) $ 126,701
----------------------------------------------------------------------------------------------------------------
Stock option compensation 44,184 54,080 98,264
----------------------------------------------------------------------------------------------------------------
6
Balance sheet as at December 31, 2003 -
----------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- -------------------- --------------------
Capital in excess of par value $ 7,306,613 (223,800) $ 7,082,813
----------------------------------------------------------------------------------------------------------------
Accumulated deficiency (1,097,662) 223,800 (873,862)
----------------------------------------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis or Plan of Operation.
OVERVIEW
Flexible Solutions International, Inc. ("we," "us," and "our")
develops, manufactures and markets specialty chemicals which slow down the
evaporation of water. Our initial product, HEAT$AVR(R), is marketed for use in
swimming pools and spas where its use, by slowing the evaporation of water,
allows the water to retain a higher temperature for a longer period of time and
thereby reduces the energy required to maintain the desired temperature of the
water in the pool. Our newest product, WATER$AVR(R), is marketed for water
conservation in irrigation canals, aquaculture, and reservoirs where its use
slows down water loss due to evaporation. We also make and sell dispensers which
automate the deployment of our chemical products.
For the three months ended March 31, 2004, we experienced a loss of
$250,861, as compared to net income of $126,701 for the three months ended March
31, 2003. We increased expenditures in the areas of WATER$AVR(R) product sales
and marketing, as well as in investor relations. In addition, we regained the
distribution of our residential swimming pool products and, as a result, added
personnel, office space, equipment and marketing resources during the quarter.
RESULTS OF OPERATIONS
The following analysis and discussion pertains to our results of
operations for the three month periods ended March 31, 2004, as compared to the
results of operations for the three month periods ended March 31, 2003, and to
changes in our financial condition from December 31, 2003 to March 31, 2004.
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
For the three months ended March 31, 2004, sales were $488,110, as
compared to $1,281,266 for the three months ended March 31, 2003. This decrease
in sales is the result of a decrease in sales of our Tropical Fish product,
which occurred because our former exclusive distributor, Sun Solar Energy
Technologies ("Sun Solar") continued to make sales to its customers of our
Tropical Fish product after we terminated the relationship with Sun Solar. In
addition, we experienced a reduction in sales in our WATER$AVR(R) product line
division. During the quarter ended March 31, 2004, we changed the name of our
residential swimming pool product from Tropical Fish to ECO$AVR(R) and have
decided to distribute this product in-house. The product launch is scheduled for
May 2004. We also had $479,000 in WATER$AVR(R) product sales to Ondeo Nalco
Company ("Ondeo") in the quarter ended March 31, 2003 that were not repeated in
the quarter ended March 31, 2004. In addition, the last shipment of our Tropical
Fish product to Sun Solar ($108,000) was delayed through the quarter end and
shipped on April 1, 2004. These items account for all of the quarter over
quarter revenue change.
Our cost of sales for the quarter ended March 31, 2004 was $305,919, a
decrease from $687,067 for the quarter ended March 31, 2003. This represents an
increase from 54% to 63% as a result of lower
7
sales without an equivalent reduction in costs. This reduction can be attributed
to the lack of WATER$AVR(R) product sales and consequent lower raw material
input costs. The largest increases were in the area of consulting costs in
connection with the overseas sales of our WATER$AVR(R) product line ($74,678 in
the quarter ended March 31, 2004, as compared to $106,012 in the quarter ended
March 31, 2003). In addition, professional fees increased from $23,063 in the
quarter ended March 31, 2003 to $36,508 in the quarter ended March 31, 2004, in
connection with an increase in fees payable to outside counsel for
litigation-related services, and investor relations fees increased to $64,678 in
the quarter ended March 31, 2004, as compared to $33,120 in the quarter ended
March 31, 2003, as a result of increased efforts to raise awareness in the
investing community. There were also decreases in the areas of wages ($114,470
in the quarter ended March 31, 2004, as compared to $138,670 in the quarter
ended March 31, 2003), research and development ($9,161 in the quarter ended
March 31, 2004, as compared to $17,531 in the quarter ended March 31, 2003), and
travel-related costs ($23,576 in the quarter ended March 31, 2004, as compared
to $34,184 in the quarter ended March 31, 2003). These decreases are related to
the closing of the separate office housing personnel for our WATER$AVR(R)
product line in Illinois, laying off non-performing sales staff and relocating
such office to Victoria, British Columbia.
Our operating expenses were $436,168 for the three months ended March
31, 2004, a marginal decrease from $467,074 for the three months ended March 31,
2003. Our loss for the quarter ended March 31, 2004 of $250,861, was a
significant decrease from the profit of $126,701 for the quarter ended March 31,
2003. This loss was caused by decreased sales in our WATER$AVR(R) product
division, combined with continued efforts to close new direct sales of our
WATER$AVR(R) product in Asia and the United States. Our loss per share was $0.02
for the three months ended March 31, 2004, as compared to a profit of $0.01 for
the three months ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, we had cash on hand of $1,657,930, which
represents an increase as compared to our cash on hand of $405,492 for the
quarter ended March 31, 2003. As of March 31, 2004, we had working capital of
$5,522,302, which represented a decrease in comparison to our working capital of
$5,752,679 for the period ended December 31, 2003. This decrease was a result of
operational costs incurred to market our WATER$AVR(R) product line during the
three months ended March 31, 2004. 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, 2004. 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.
RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying financial statements have been restated to revise
certain stock-based compensation expense. In October 2005, while completing a
registration statement for securities issued in the second quarter of 2005, we
determined that certain disclosures made in connection with our stock-based
compensation expense required adjustment. In September 2002, we entered into a
distribution agreement with Ondeo whereby Ondeo agreed to serve as the exclusive
distributor of our WATER$AVR(R) products for so long as Ondeo maintained a
certain threshold sales level as defined in the agreement. As consideration for
signing the agreement, Ondeo was granted an option to purchase 2,000,000 shares
of our common stock. 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.
8
In determining the stock-based compensation expense for the nine months
ended September 30, 2002, we expensed the entire fair value of the stock option
believing that the option fully vested upon the signing of the agreement. In our
October 2005 review, however, we 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 distribution agreement; and
(ii) second, we 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.
During the three months ended March 31, 2003, Ondeo achieved the first
threshold sales target, and accordingly, we should have recorded a corresponding
stock-based compensation expense of $54,080. However, since the entire
stock-based compensation expense had been recorded in the September 30, 2002
interim financial statements and in the year ended December 31, 2002, we did not
record any additional stock-based compensation expense as a result of the
attained first threshold level.
In the fourth quarter of the year ended December 31, 2003, we
determined that Ondeo was not going to attain the minimum sales targets
stipulated in the agreement. Consequently, the agreement and corresponding stock
option was cancelled. We accounted for the cancellation of the stock option in
accordance with Statement of Financial Accounting Standard No. 123 similar to a
forfeiture of stock options and reversed $2,480,200 of the stock compensation
expense previously recorded in fiscal 2002. Had we accounted for the
cancellation of the stock option correctly, we would have reversed the amended
stock-based compensation expense of $54,080 that was recorded in the first
quarter ended March 31, 2003.
In light of the above, the net effect of the adjustments to the
financial statements is as follows:
1. Approximately $2,704,000 in stock compensation expense recorded in
September 2002 has been reversed;
2. Approximately $54,080 in stock-based compensation expense has been
recorded in the quarter ended March 31, 2003, as Ondeo met the first sales
threshold under the agreement;
3. Approximately $54,080 in stock-based compensation expense has been
reversed in the year ended December 31, 2003, as Ondeo failed to meet subsequent
sales thresholds under the agreement, resulting in the cancellation of the stock
option;
4. As stated above, we recorded a stock-based compensation expense of
$2,704,000 in December 2002. As a result of canceling the stock option, we
previously recorded a recovery of $2,480,000 of stock compensation expense at
December 31, 2003. This $2,480,000 recovery has been 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.
We are presently unaware of any evidence that the restatements
described above are due to any material noncompliance by us, as a result of
misconduct, with any financial reporting requirement under the federal
securities laws. Our audit committee of the board of directors is working with
our
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management and our accountants to assure that we are 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.
Item 3. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic reports to the
Securities and Exchange Commission ("SEC") is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and
regulations, and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. Our disclosure controls and procedures are designed to provide a
reasonable level of assurance of reaching our desired disclosure control
objectives.
As of the end of the period covered by this Quarterly Report, 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). 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 subsidiaries)
that is required to be included in our periodic reports.
The prior accounting treatment of our stock-based compensation expense
was done in consultation and in accordance with the advice of our independent
accountants. Accordingly, management does not believe that this restatement of
our Quarterly Report indicates or results from a material weakness with respect
to our disclosure controls and procedures or our internal controls over
financial reporting.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting
that occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
On November 13, 2003, Patrick Grant, an ex-employee, filed a lawsuit in
the Circuit Court of Cook County, Illinois against us, WaterSavr Global
Solutions Inc. ("WGS"), our wholly-owned subsidiary, 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 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 the plaintiff's disclosure of confidential information to
a client during his employment at WGS. No amounts have been recorded as
receivable
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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 yet
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 the defendants for investment banking services consisting of
securing a $5 million loan and a $25 million stock offering. Such services were
not performed and in the proceeding we seek 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. 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 yet
determinable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended March 31, 2004, our employees exercised
options to purchase a total of 15,000 shares of our common stock, for an
aggregate exercise price of $21,000.00. In addition, during the quarter ended
March 31, 2004, our non-employee consultants exercised options to purchase a
total of 10,000 shares of our common stock, for an aggregate exercise price of
$19,500.00. The capital raised from these exercises was used for working capital
purposes.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits are attached hereto and filed herewith:
NUMBER DESCRIPTION
------ -----------
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.
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: December 5, 2005.
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
By: /s/ DANIEL B. O'BRIEN
-------------------------------------
Name: Daniel B. O'Brien
Title: President and Chief Executive Officer
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