UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-QSB/A
(AMENDMENT NO. 2)
(Mark one)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 11,831,916
shares of Common Stock, par value $0.001 per share, outstanding as of October
29, 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 September 30,
2004. 1
(b) Unaudited Consolidated Statements of Operations for the
Nine Months Ended September 30, 2004 and 2003. 2
(c) Unaudited Consolidated Statements of Operations for the
Three Months Ended September 30, 2004 and 2003. 3
(d) Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2004 and 2003. 4
(e) Notes to Unaudited Consolidated Financial Statements for
the Period Ended September 30, 2004. 5
Item 2. Management's Discussion and Analysis or Plan of Operation. 14
Item 3. Controls and Procedures. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 20
Item 3. Defaults Upon Senior Securities. 20
Item 4. Submission of Matters to a Vote of Security Holders. 20
Item 5. Other Information. 20
Item 6. Exhibits. 20
SIGNATURES 21
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
September 30, 2004, which was previously filed with the Securities and Exchange
Commission on November 12, 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 product 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 November 12, 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 September
30, 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 SEPTEMBER 30, 2004
(U.S. DOLLARS)
SEPTEMBER 30,
2004 DECEMBER 31,
AS RESTATED 2003
(NOTE 7) AS RESTATED
(UNAUDITED) (NOTE 7)
------------------ ------------------
ASSETS
CURRENT
Cash and cash equivalents $ 774,324 $ 237,080
Short-term investments 938,360 5,033,837
Accounts receivable 591,524 294,238
Income tax receivable 85,123 86,243
Loan receivable 17,849 17,585
Inventory 1,009,891 212,938
Prepaid expenses 134,279 36,101
------------------ ------------------
3,551,350 5,918,022
PROPERTY AND EQUIPMENT 5,207,929 167,589
INVESTMENT 303,500 303,500
------------------ ------------------
$ 9,062,779 $ 6,389,111
------------------ ------------------
LIABILITIES
CURRENT
Due to shareholders $ -- $ 7,700
Short-term loan 3,150,000 --
Accounts payable and accrued liabilities 159,817 157,643
------------------ ------------------
3,309,817 165,343
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
11,831,916 (2003: 11,794,916) common shares 11,832 11,794
CAPITAL IN EXCESS OF PAR VALUE 7,347,232 7,082,813
OTHER COMPREHENSIVE INCOME (LOSS) -- 3,023
DEFICIT (1,606,102) (873,862)
------------------ ------------------
TOTAL STOCKHOLDER'S EQUITY 5,752,962 6,223,768
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 9,062,779 $ 6,389,111
------------------ ------------------
- See Notes to Unaudited Consolidated Financial Statements -
1
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(U.S. DOLLARS -- UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
2004 2003
AS RESTATED AS RESTATED
(NOTE 7) (NOTE 7)
------------------ -----------------
SALES $ 2,411,925 $ 1,982,571
COST OF SALES 829,314 1,130,293
------------------ -----------------
GROSS PROFIT 1,582,611 852,278
------------------ -----------------
OPERATING EXPENSES
Wages 606,942 408,658
Administrative salaries and benefits 94,973 60,258
Advertising and promotion 73,258 60,915
Investor relations and transfer agent fee 173,164 120,273
Office and miscellaneous 154,053 59,334
Insurance 33,475 --
Interest expense 29,364 --
Rent 114,711 49,153
Consulting 294,109 176,303
Professional fees 212,146 173,143
Travel 79,831 120,030
Telecommunications 28,464 36,574
Shipping 21,950 14,687
Research 21,000 61,298
Bad debt expense (recovery) (797) 822
Currency exchange 5,666 20,788
Utilities 46,469 13,938
Depreciation 359,536 24,768
------------------ -----------------
2,348,314 1,400,942
------------------ -----------------
INCOME (LOSS) BEFORE INTEREST INCOME AND INCOME TAX (765,704) (548,664)
INTEREST INCOME 33,463 155,195
------------------ -----------------
INCOME (LOSS) BEFORE INCOME TAX (732,240) (393,469)
INCOME TAX (RECOVERY) -- (363)
------------------ -----------------
NET INCOME (LOSS) (732,240) (393,106)
DEFICIT, BEGINNING (873,862) (396,974)
------------------ -----------------
DEFICIT, ENDING $ (1,606,102) $ (790,080)
NET INCOME (LOSS) PER SHARE $ (0.06) $ (0.03)
------------------ -----------------
WEIGHTED AVERAGE NUMBER OF SHARES 11,826,345 11,715,619
------------------ -----------------
- See Notes to Unaudited Consolidated Financial Statements -
2
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(U.S. DOLLARS -- UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
2004 2003
AS RESTATED AS RESTATED
(NOTE 7) (NOTE 7)
------------------ ------------------
SALES $ 1,376,054 $ 40,009
COST OF SALES 418,307 34,944
------------------ ------------------
GROSS PROFIT 957,747 5,065
------------------ ------------------
OPERATING EXPENSES
Wages 349,226 74,786
Administrative salaries and benefits 37,429 20,783
Advertising and promotion 16,466 31,757
Investor relations and transfer agent fee 50,539 51,606
Office and miscellaneous 62,099 24,559
Insurance 28,507 --
Interest expense 29,364 --
Rent 62,495 11,601
Consulting 105,293 39,572
Professional fees 104,432 45,270
Travel 30,317 41,611
Telecommunications 13,750 11,976
Shipping 11,153 6,409
Research 5,158 41,594
Bad debt expense (recovery) -- 822
Currency exchange 2,343 (42,172)
Utilities 32,271 3,711
Depreciation 173,989 8,841
------------------ ------------------
1,114,831 372,726
INCOME (LOSS) BEFORE INTEREST INCOME AND INCOME TAX (157,084) (367,661)
INTEREST INCOME 2,994 50,950
------------------ ------------------
INCOME (LOSS) BEFORE INCOME TAX (154,090) (316,711)
INCOME TAX (RECOVERY) -- (26,457)
------------------ ------------------
NET INCOME (LOSS) (154,090) (290,254)
DEFICIT, BEGINNING (1,452,012) (499,826)
------------------ ------------------
DEFICIT, ENDING $ (1,606,102) $ (790,080)
NET INCOME (LOSS) PER SHARE $ (0.01) $ (0.02)
------------------ ------------------
WEIGHTED AVERAGE NUMBER OF SHARES 11,831,916 11,791,612
------------------ ------------------
- See Notes to Unaudited Consolidated Financial Statements -
3
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(U.S. DOLLARS -- UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
2003
AS RESTATED
2004 (NOTE 7)
------------------ ------------------
OPERATING ACTIVITIES
Net income (loss) $ (732,241) $ (393,106)
Stock compensation expense 206,957 123,078
Depreciation 359,536 24,768
Changes in non-cash working capital items:
Accounts receivable (297,286) (170,996)
Inventory (796,953) (23,462)
Prepaid expenses (98,177) 34,685
Accounts payable 2,174 12,796
Income tax receivable 1,120 60,014
Decrease in due to shareholders (7,700) --
Unrealized foreign exchange gain/loss -- --
------------------ ------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,362,571) (332,223)
------------------ ------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (5,399,876) (49,477)
Short-term investments 4,095,477 (143,683)
Loan receivable (264) (277,625)
Acquisition of investments -- (1,827)
------------------ ------------------
CASH USED IN INVESTING ACTIVITIES (1,304,663) (472,612)
------------------ ------------------
FINANCING ACTIVITIES
Subscriptions received -- 3,000
Short-term loan 3,150,000 --
Proceeds from issuance of common stock 57,500 401,058
------------------ ------------------
CASH PROVIDED BY FINANCING ACTIVITIES 3,207,500 404,058
------------------ ------------------
Effect of exchange rate changes on cash (3,022) (14,576)
------------------ ------------------
INFLOW (OUTFLOW) OF CASH 537,244 (415,353)
Cash and cash equivalents, beginning 237,080 556,789
------------------ ------------------
CASH AND CASH EQUIVALENTS, ENDING $ 774,324 $ 141,436
------------------ ------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ -- $ 58,000
Interest received 33,464 155,196
------------------ ------------------
- See Notes to Unaudited Consolidated Financial Statements -
4
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2004
(U.S. DOLLARS)
1. BASIS OF PRESENTATION.
These unaudited consolidated financial statements of Flexible Solutions
International, Inc (the "Company") 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. This quarterly report should be
read in conjunction with such annual report.
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 September 30, 2004, and the
consolidated results of operations and the consolidated statements of cash flows
for the nine months ended September 30, 2004 and 2003. The results of operations
for the three months ended September 30, 2004 are not necessarily indicative of
the results to be expected for the entire fiscal year.
These consolidated financial statements include the accounts of the
Company, and its wholly-owned subsidiaries Flexible Solutions, Ltd. ("Flexible
Ltd."), NanoChem Solutions Inc. and WaterSavr Global Solutions Inc. All
inter-company balances and transactions have been eliminated. The Company was
incorporated May 12, 1998 in the State of Nevada and had no operations until
June 30, 1998, as described below.
On June 30, 1998, the Company completed the acquisition of all of the
shares of Flexible Ltd. The acquisition was effected through the issuance of
7,000,000 shares of common stock by the Company, with the former shareholders of
Flexible Ltd. receiving all of the shares then issued and outstanding of the
Company. 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 the
Company pursuant to the acquisition have been accounted for as if those shares
had been issued upon the organization of Flexible Ltd.
On May 2, 2002, the Company established WaterSavr Global Solutions Inc.
through the issuance of 100 shares of its common stock.
Pursuant to a purchase agreement dated May 26, 2004, the Company
acquired the assets of Donlar Corporation on June 9, 2004 and created a new
company, NanoChem Solutions Inc. The purchase price of the transaction was
$6,150,000, with consideration being a combination of cash and debt. Under the
purchase agreement and as part of the consideration, the Company issued a
promissory note bearing interest at 4% to satisfy $3,150,000 of the purchase
price. This note is due June 2, 2005 and all of the former Donlar assets were
pledged as security.
5
The following table summarizes the estimated fair value of the 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 the Company 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.
2. SIGNIFICANT ACCOUNTING POLICIES.
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles accepted in the United
States applicable to a going concern and reflect the policies outlined below.
(a) Cash and Cash Equivalents.
The Company considers all highly liquid investments purchased
with an original or remaining maturity of less than three months at the
date of purchase to be cash equivalents. Cash and cash equivalents are
maintained with several financial institutions.
(b) Inventory and Cost of Sales.
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 the Company's manufacturing and processing facilities.
(c) Property, Equipment and Leaseholds.
The following assets are recorded at cost and depreciated
using the following methods 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
Trailer 30% Declining balance
Building 10% Declining balance
Leasehold improvements Straight-line over lease term
--------------------------------- -- ----------------------------------
Property and equipment are written down to net realizable
value when management determines there has been a change in
circumstances which indicates its carrying amount may not be
recoverable. No write-downs have been necessary to date.
6
(d) Foreign Currency.
The functional currency of the Company is the Canadian Dollar.
The translation of the Canadian Dollar to the reporting currency of the
U.S. Dollar is performed for current assets and current liabilities
using exchange rates in effect at the balance sheet date. Non-monetary
assets and liabilities are translated using rates prevailing at the
time of the acquisition of the assets or assumption of the liabilities.
Revenue and expense transactions are translated using average exchange
rates prevailing during the year. Translation adjustments arising on
conversion of the financial statements from the Company's functional
currency, Canadian Dollars, into the reporting currency, U.S. Dollars,
are excluded from the determination of income and disclosed as other
comprehensive income (loss) in stockholders' equity.
Foreign exchange gains and losses relating to transactions not
denominated in the applicable local currency are included in income if
realized during the year and in comprehensive income if they remain
unrealized at the end of the year.
(e) 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. Shipments are made F.O.B.
shipping point. The Company recognizes 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 the Company's
inception, product returns have been insignificant; therefore no
provision has been established for estimated product returns.
(f) Stock Issued in Exchange for Services.
The valuation of the Company's common stock issued in exchange
for services is valued at an estimated fair market value as determined
by officers and directors of the Company based upon trading prices of
the Company's common stock on the dates of the stock transactions.
(g) Stock-based Compensation.
The Company applies the fair value based method of accounting
prescribed by the Statement of Financial Accounting Standards ("FAS")
No. 123 in accounting for stock issued in exchange for services to
consultants and non-employees.
FAS No. 123 encourages, but does not require, companies to
record compensation cost for stock-based compensation plans to
employees at fair value. The Company has chosen to account for
stock-based compensation to employees and directors using Accounting
Principles Board Opinion ("APB") 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 the Company's stock at the date of the grant over the amount an
employee is required to pay for the stock.
The Company adopts the disclosure provisions of SFAS No. 123
for stock options granted to employees and directors. The Company
discloses 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
option-pricing model.
7
(h) Comprehensive Income.
Other comprehensive income refers to revenues, expenses, gains
and losses that under generally accepted accounting principles are
included in comprehensive income, but are excluded from net income as
these amounts are recorded directly as an adjustment to stockholders'
equity. The Company's other comprehensive income is primarily comprised
of unrealized foreign exchange gains and losses.
(i) Income (Loss) Per Share.
Income (loss) per share is calculated by dividing net income
(loss) by the weighted average number of shares outstanding.
(j) Use of Estimates.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United
States 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.
(k) Financial Instruments.
The fair market value of the Company's financial instruments
comprising cash, short-term investment, accounts receivable, income tax
recoverable, loan receivable, accounts payable and accrued liabilities
and amounts due to shareholders were estimated to approximate their
carrying values due to immediate or short-term maturity of these
financial instruments.
The Company is exposed to foreign exchange and interest rate
risk to the extent that market value rate fluctuations materially
differ from financial assets and liabilities subject to fixed long-term
rates.
(l) Recent Accounting Pronouncements.
(i) In June 2001, the Financial Accounting Standards
Board ("FASB") issued 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, the
Company 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 the Company's
financial reporting.
(ii) In October 2001, the 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.
The standard was adopted on January 1, 2002 and did not have
any impact on the Company's financial statements.
8
(iii) In November 2001, the FASB issued Emerging
Issues Task Force ("EITF") Issue No. 01-14, Income Statement
Characterization of Reimbursements Received for "Out of
Pocket" Expenses Incurred. This guidance requires companies to
recognize the recovery of reimbursable expenses such as travel
costs on service contracts as revenue. These costs are not to
be netted as a reduction of cost. This guidance was
implemented January 1, 2002. The Company does not expect this
guidance to have a material impact on its financial
statements.
3. PROPERTY, EQUIPMENT AND LEASEHOLDS.
------------------------------- ------------ ----------------- ------------- -------------
Accumulated September December
Item Cost Amortization 2004 Net 2003 Net
------------------------------- ------------ ----------------- ------------- -------------
Computer hardware $ 36,371 $ 11,692 $ 24,680 $ 9,267
Furniture and equipment 14,278 3,197 11,080 3,293
Office equipment 27,339 9,231 18,108 15,195
Manufacturing equipment 2,037,063 291,093 1,745,970 133,283
Trailer 1,763 577 1,186 1,518
Building 3,144,259 153,754 2,990,507 --
Leasehold improvements 23,610 9,227 14,382 5,033
Trade show display 4,140 310 3,830 --
Land 398,186 -- 398,186 --
------------------------------- ------------ ----------------- ------------- -------------
Total $ 5,687,009 $ 479,081 $ 5,207,929 $ 167,589
------------------------------- ------------ ----------------- ------------- -------------
4. STOCKHOLDERS' EQUITY.
(a) During prior periods, the Company granted stock options to
consultants and has recognized consulting expense applying FAS No. 123 using the
Black-Scholes option-pricing model, which resulted in expense of $71,727 for the
three months ended September 30, 2004.
(b) The following table summarizes the Company's stock option activity
for the period:
-------------------------------------------------------------------------------------------------------
Weighted
Exercise Average
Number Price Exercise
of Shares Per Share Price
--------------- ----------------------- -----------
Balance, June 30, 2004 1,758,740 $ 1.00 to $ 4.55 $ 2.79
-------------------------------------------------------------------------------------------------------
Granted During the Period 5,000 $3.60 3.60
Exercised -- -- --
Cancelled 500,000 $2.50 to $3.50 $ 3.10
-------------------------------------------------------------------------------------------------------
Balance, September 30, 2004 1,263,740 $ 1.00 to $ 4.25 $ 2.67
-------------------------------------------------------------------------------------------------------
5. ACQUISITION OF ASSETS OF DONLAR CORPORATION.
Pursuant to a purchase agreement dated May 26, 2004, the Company
acquired the assets of Donlar Corporation on June 9, 2004.
The purchase price of the transaction was $6,150,000 with consideration
being a combination of cash and debt. Under the purchase agreement and as part
of the consideration, the Company issued a
9
promissory note bearing interest at the prime rate to the vendor to satisfy
$3,150,000 of the purchase price.
The following table summarizes the estimated fair value of the assets
acquired at the date of acquisition (at June 9, 2004):
----------------------------------- --- ----------------------
Current assets $ 1,126,805
Property and equipment $ 5,023,195
----------------------
$ 6,150,000
Acquisitions costs assigned
to property and equipment $ 254,874
----------------------------------- --- ----------------------
Total assets acquired $ 6,404,874
----------------------------------- --- ----------------------
6. 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, tortuous 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 tortuous 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 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.
(c) On May 28, 2004, Sun Solar Energy Technologies, Inc. ("Sun Solar"),
filed a lawsuit in the Federal Court of Canada, against the Company, Flexible
Solutions, Ltd., the Company's wholly-owned subsidiary ("Flexible Ltd."), and
Mr. O'Brien. Sun Solar is seeking: (a) a declaration that the trademark
"Tropical Fish" is available for use by Sun Solar; (b) injunctive relief against
further use of the "Tropical Fish" trademark by the Company; and (c) monetary
damages exceeding $7,000,000 for the alleged infringement by the Company,
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, the Company, Flexible Ltd. and Mr. O'Brien filed their defense and
filed a counterclaim against Sun Solar. The counterclaim seeks: (x) injunctive
relief against further use of the "Tropical Fish" trademark by Sun Solar; (y) a
declaration that the "Tropical Fish" trademark is owned by the Company, or, in
the alternative, is not distinctive and should be struck from the trademark
registry; and (z) monetary damages
10
exceeding $50,000. The parties 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 the Company's 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, the Company filed a breach of contract suit in
the Circuit Court of Cook County, Illinois against Tatko Biotech Inc. ("Tatko").
The action arises out of a joint product development agreement entered into
between the Company and Tatko in which the Company agreed to invest $10,000
toward the product development venture and granted to Tatko 100,000 shares of
the Company's restricted common stock. In return, Tatko granted the Company a
five-year option to purchase 20% of Tatko's outstanding capital stock. Tatko has
since refused to collaborate on the agreement and the Company seeks declaratory
relief stating that Tatko is not entitled to the 100,000 shares of the Company's
restricted common stock. The litigation is still pending at this time.
In addition, Tatko filed its own suit on September 24, 2004 in the
Circuit Court of Cook County, Illinois seeking declaratory relief of its
entitlement to the Company's restricted common stock.
No amounts have been recorded as receivable in the Company's
consolidated financial statements and no amount has been accrued as a loss as
the outcome of the claim against Tatko is not determinable.
7. RESTATEMENTS AS A RESULT OF CORRECTING STOCK COMPENSATION EXPENSE.
In October 2005, while completing a registration statement for
securities issued in the second quarter of 2005, the Company determined that
certain disclosures made in connection with its stock-based compensation expense
required adjustment. In September 2002, the Company entered into a distribution
agreement with Ondeo Nalco Company ("Ondeo") whereby Ondeo agreed to serve as
the exclusive distributor of the Company's WATER$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.
11
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 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 nine months ended September 30, 2004 and 2003, and
the year ended December 31, 2003:
Balance sheet as at September 30, 2004 -
----------------------------------------- -------------------- --------------------- ----------------------
Previously Increase
Reported (Decrease) Restated
-------------------- --------------------- ----------------------
Capital in excess of par value $ 7,571,032 $ (223,800) $ 7,347,232
Accumulated deficiency (1,829,902) 223,800 (1,606,102)
----------------------------------------- -------------------- --------------------- ----------------------
Statement of operations for the nine months ended September 30, 2004 -
----------------------------------------- -------------------- --------------------- ----------------------
Previously Increase
Reported (Decrease) Restated
-------------------- --------------------- ----------------------
Deficit, beginning $ (1,097,662) $ 223,800 $ (873,862)
Deficit, ending (1,829,902) 223,800 (1,606,102)
----------------------------------------- -------------------- --------------------- ----------------------
Statement of operations for the three months ended September 30, 2004 -
----------------------------------------- -------------------- --------------------- ----------------------
Previously Increase
Reported (Decrease) Restated
-------------------- --------------------- ----------------------
Deficit, beginning $ (1,675,812) $ 223,800 $ (1,452,012)
Deficit, ending (1,829,902) 223,800 (1,606,102)
----------------------------------------- -------------------- --------------------- ----------------------
12
Statement of operations for the nine months ended September 30, 2003 -
----------------------------------------- -------------------- --------------------- ----------------------
Previously Increase
Reported (Decrease) Restated
-------------------- --------------------- ----------------------
Expenses $ 1,346,862 $ 54,080 $ 1,400,942
Income (loss) before other item and
income tax (494,584) (54,080) (548,664)
Income (loss) before income tax (339,389) (54,080) (393,469)
Net income (loss) (339,026) (54,080) (393,106)
Net income (loss) per share (0.03) -- (0.03)
Deficit, beginning (3,100,974) 2,704,000 (396,974)
Deficit, ending (3,440,000) 2,649,920 (790,080)
----------------------------------------- -------------------- --------------------- ----------------------
Statement of cash flows for the nine months ended September 30, 2003 -
----------------------------------------- -------------------- --------------------- ----------------------
Previously Increase
Reported (Decrease) Restated
-------------------- --------------------- ----------------------
Net income (loss) $ (339,026) $ (54,080) $ (393,106)
Stock option compensation 68,998 54,080 123,078
----------------------------------------- -------------------- --------------------- ----------------------
Statement of operations for the three months ended September 30, 2003 -
----------------------------------------- -------------------- --------------------- ----------------------
Previously Increase
Reported (Decrease) Restated
-------------------- --------------------- ----------------------
Deficit, beginning $ (3,149,746) $ 2,649,920 (499,826)
Deficit, ending (3,440,000) 2,649,920 (790,080)
----------------------------------------- -------------------- --------------------- ----------------------
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)
----------------------------------------- -------------------- --------------------- ----------------------
13
Item 2. Management's Discussion and Analysis or Plan of Operation.
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.
RESULTS OF OPERATIONS
The following analysis and discussion pertains to our results of
operations for the three month and nine month periods ended September 30, 2004,
as compared to the results of operations for the three month and nine month
periods ended September 30, 2003, and to changes in our financial condition from
December 31, 2003 to September 30, 2004.
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Separate financial data for each of our operating segments is provided
below. We evaluate the performance of our operating segments based on the
following:
----------------------------------- -------------------------------------------------- ------------- -------------
Three Months Ended September 30,
---------------- ---------------- ---------------- % Change % Change
Sales 2004 2003 2002 2004-2003 2003-2002
---------------- ---------------- ---------------- ------------- -------------
Energy Segment $ 141,045 $ 40,009 $ 55,257 253% (28%)
Polymer Segment $ 1,235,009 * * * *
---------------- ---------------- ---------------- ------------- -------------
Consolidated $ 1,376,054 $ 40,009 $ 55,257 3339% (28%)
Gross Profit
Energy Segment $ 100,826 $ 5,065 $ 80,819 1891% (94%)
Polymer Segment $ 856,921 * * * *
---------------- ---------------- ---------------- ------------- -------------
Consolidated $ 957,747 $ 5,065 $ 80,819 18809% (94%)
SG&A
Energy Segment $ 475,315 $ 372,726 $ 101,552 28% 267%
Polymer Segment $ 639,516 * * * *
---------------- ---------------- ---------------- ------------- -------------
Consolidated $ 1,114,831 $ 372,726 $ 101,552 199% 267%
Interest Income
Energy Segment $ 2,994 $ 50,950 $ 15,221 (94%) 235%
Polymer Segment -- * * * *
---------------- ---------------- ---------------- ------------- -------------
Consolidated $ 2,994 $ 50,950 $ 15,221 (94%) 235%
Write-down of Investments
Energy Segment -- -- -- -- --
Polymer Segment -- * * * *
---------------- ---------------- ---------------- ------------- -------------
Consolidated -- -- -- -- --
----------------------------------- ---------------- ---------------- ---------------- ------------- -------------
Net Income (Loss) $ (154,090) $ (290,254) $ (167,363) (47%) 73%
------------------------------------------------------------------------------------------------------------------
* Polymer segment data is not available as indicated. Our polymer segment was
formed after the acquisition of certain assets of Donlar Corporation in June
2004.
14
For the three months ended September 30, 2004, our Energy segment had a
net loss of $371,495, as compared to a net loss of $290,254 for the three months
ended September 30, 2003. Our NanoChem division, formed in June 2004 after our
acquisition of certain assets from Donlar, had a net gain of $217,405 for the
three months ended September 30, 2004. Although swimming pool product sales were
negatively impacted by the end of the swimming pool season in the Northeastern
parts of the United States and Canada, and the transition from outside to inside
distribution, increases in pool product sales outside of North America and a
full quarter of operations from our Polymer segment resulted in revenue of
$1,376,054 for the quarter ended September 30, 2004, as compared to $40,009 for
the quarter ended September 30, 2003. Our Polymer segment had increased sales,
cash flow, and revenue after only 110 days following our commencement of their
activities and is starting to replace the capital expended for it. Additionally,
opportunities to synergistically cross-sell the products of all divisions have
already generated leads to new business, and the swimming pool division has
discovered ways to help our NanoChem division increase utilization of our Peru,
Illinois factory while decreasing our costs as a whole. In addition, our
NanoChem sales are much less seasonal than those of our other divisions, which
should lead to less volatile sales figures in future. We will attempt to reduce
seasonality even further over time.
Operating expenses for our Energy segment were $475,315 for the quarter
ended September 30, 2004, an increase of 28% from $372,725 for the quarter ended
September 30, 2003. Operating expenses for our Polymer segment were $639,516 for
the quarter ended September 30, 2004, as compared to nil for the quarter ended
September 30, 2003. We continued expanding our sales and marketing efforts for
our WATER$AVR(R) product line with the objective of closing the first major
sales as soon as possible and with development of advanced production machinery
for swimming pool products. In our Energy segment, the largest real increases
from the quarter ended September 30, 2003 to the quarter ended September 30,
2004, were in the areas of wages (from $74,786 for the quarter ended September
30, 2003 to $106,280 for the quarter ended September 30, 2004), rent ($11,601
for the quarter ended September 30, 2003 to $36,760 for the quarter ended
September 30, 2004), office ($24,559 for the quarter ended September 30, 2003 to
$54,220 for the quarter ended September 30, 2004), and consulting ($39,572 for
the quarter ended September 30, 2003 to $89,372 for the quarter ended September
30, 2004). These increases are wholly accounted for by the operating costs of
our new NanoChem division and represent a permanent increase in operating costs
related to the new level of sales. The decreases in travel (from $41,611 for the
quarter ended September 30, 2003 to $18,126 for the quarter ended September 30,
2004) and advertising (from $31,757 for the quarter ended September 30, 2003 to
$16,411 for the quarter ended September 30, 2004) are the result of better cost
control in these areas, which we instituted over the past year. Professional
fees increased to $96,927 in the quarter ended September 30, 2004, as compared
to $45,270 in the quarter ended September 30, 2003. This was largely the result
of the one time costs of transferring patent assets in our acquisition of the
assets comprising our NanoChem division. In addition, a substantial amount of
the increase in consulting fees, from $39,572 in the quarter ended September 30,
2003 to $105,293 in the quarter ended September 30, 2004, is the result of
expensing of consultant options. We note that depreciation increased to $173,989
in the quarter ended September 30, 2004, as compared to $8,841 in the quarter
ended September 30, 2003, as a result of the depreciable NanoChem assets
acquired in June 2004.
There is no comparable data for our Polymer segment as it was recently
added in June 2004.
Our Energy segment's loss for the quarter ended September 30, 2004 was
$371,495, an increase from the loss of $290,254 for the quarter ended September
30, 2003. This increase in loss was a result of an increase in our professional
and consulting fees in connection with our acquisition of the Donlar assets. Our
Polymer segment's gain for the quarter ended September 30, 2004 was $217,405,
with no data to compare to from years previous.
15
The loss per share was $0.01 for the quarter ended September 30, 2004,
as compared to a loss of $0.02 for the quarter ended September 30, 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Separate financial data for each of our operating segments is provided
below. We evaluate the performance of our operating segments based on the
following:
----------------------------------- ------------------------------------------------- ------------- --------------
Nine Months Ended September 30,
---------------- ---------------- --------------- % Change % Change
Sales 2004 2003 2002 2004-2003 2003-2002
---------------- ---------------- --------------- ------------- --------------
Energy Segment $ 900,789 $ 1,982,571 $ 1,089,164 (55%) 82%
Polymer Segment $ 1,511,136 * * * *
---------------- ---------------- --------------- ------------- --------------
Consolidated $ 2,411,925 $ 1,982,571 $ 1,089,164 22% 82%
Gross Profit
Energy Segment $ 458,152 $ 852,278 $ 495,123 (46%) 72%
Polymer Segment $ 1,124,459 * * * *
---------------- ---------------- --------------- ------------- --------------
Consolidated $ 1,582,611 $ 852,278 $ 495,123 86% 72%
SG&A
Energy Segment $ 1,470,207 $ 1,400,942 $ 677,707 5% 107%
Polymer Segment $ 878,107 * * * *
---------------- ---------------- --------------- ------------- --------------
Consolidated $ 2,348,314 $ 1,400,942 $ 677,707 68% 107%
Interest Income
Energy Segment $ 33,463 $ 155,195 $ 15,221 (78%) 920%
Polymer Segment -- * * * *
---------------- ---------------- --------------- ------------- --------------
Consolidated $ 33,463 $ 155,195 $ 15,221 (78%) 920%
Write-down of Investments
Energy Segment -- -- -- -- --
Polymer Segment -- * * * *
---------------- ---------------- --------------- ------------- --------------
Consolidated -- -- -- -- --
----------------------------------- ---------------- ---------------- --------------- ------------- --------------
Net Income (Loss) $ (732,240) $ (393,106) $ (167,363) 86% 135%
------------------------------------------------------------------------------------------------------------------
* Polymer segment data is not available as indicated. Our polymer segment was
formed after the acquisition of certain assets of Donlar Corporation in June
2004.
Our Energy segment's sales for the nine months ended September 30, 2004
were $900,789, as compared to $1,982,571 for the nine months ended September 30,
2003. Our Polymer segment's sales for the nine months ended September 30, 2004
were $1,511,136, which accounts for sales in the period from June 10, 2004 to
September 30, 2004. The swimming pool division experienced a decrease in sales
as a result of taking over distribution from an outside group. The product
pipeline was filled prior to the distribution change and the focus of our sales
team was directed toward ensuring sales for the 2005 season and expanding sales
overseas. However, twenty days of revenue in the second quarter and the full
third quarter of fiscal 2004 from the Polymer segment, combined with comparable
sales in the Energy segment, resulted in sales of $2,411,925 for the nine months
ended September 30, 2004, an increase of 22% from the nine months ended
September 30, 2003.
Our Energy segment's operating expenses were $1,470,207 for the nine
months ended September 30, 2004, a slight increase from $1,400,942 for the nine
months ended September 30, 2003. The increase
16
in operating expenses was a result of the increase in professional and
consulting fees in connection with our acquisition of the Donlar assets. The
loss for the nine months ended September 30, 2004 was $1,012,055, as compared to
a loss of $393,106 for the nine months ended September 30, 2003. Of the
increased loss, $117,806 was from expensing of consultant options. Other factors
contributing to the loss were:
o The brand building, marketing and extra staffing costs in
ECO$AVR(TM) sales incurred throughout the year that were not reflected
in sales because dealers that had been sold product by our discontinued
distributor, Sun Solar, still had substantial "Tropical Fish" product.
We believe that very little old product is on the shelves and that
costs and revenue for ECO$AVR(TM) will be better balanced in 2005.
o Litigation costs became significant in 2004 compared to 2003 as a
result of the need to protect our assets from suit. The costs are
manageable, but we will make every effort to reduce these costs going
forward without adversely affecting shareholder value.
Our Polymer segment's operating expenses were $878,107 for the nine
months ended September 30, 2004, as compared to nil for the nine months ended
September 30, 2003. Our net income for the nine months ended September 30, 2004
was $246,352, with no data to compare to from years previous.
The loss per share was $0.06 for the nine months ended September 30,
2004, as compared to a loss of $0.03 for the nine months ended September 30,
2003.
LIQUIDITY AND CAPITAL RESOURCES
We had cash on hand of $774,324 as of September 30, 2004, as compared
to $141,435 as of September 30, 2003.
As of September 30, 2004, we had working capital of $241,553, as
compared to working capital of $5,752,679 as of December 31, 2003. The decrease
was a result of the cash used to purchase the assets comprising our NanoChem
division and the costs associated with that acquisition, combined with the
continuing costs of market development for our WATER$AVR(R) product line.
We have no external sources of liquidity in the form of credit lines
from banks.
We believe that our available cash will be sufficient to fund our
working capital requirements through December 31, 2004. We further believe that
available cash will be sufficient to implement our expansion plans. We have no
investment banking agreements 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 Nalco Company ("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
17
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, 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.
18
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.
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 July 23, 2004, we filed a breach of contract suit in the Circuit
Court of Cook County, Illinois against Tatko Biotech Inc. ("Tatko"). The action
arises out of our joint product development agreement with Tatko in which the 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 have sought 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
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suit on September 24, 2004 in the Circuit Court of Cook County, Illinois seeking
declaratory relief of its entitlement to our restricted common stock. 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
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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