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 SEPTEMBER 30, 2002.
|_| 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 11,568,416
shares of Common Stock, par value $0.001 per share, outstanding as of September
30, 2002.
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,
2002. 1
(b) Unaudited Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2002 and 2001. 2
(c) Unaudited Consolidated Statements of Stockholders'
Equity for the Period Ended September 30, 2002. 3
(d) Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001. 4
(e) Notes to Unaudited Consolidated Financial Statements for
the Period Ended September 30, 2002. 5
Item 2. Management's Discussion and Analysis or Plan of Operation. 8
Item 3. Controls and Procedures. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 12
Item 3. Defaults Upon Senior Securities. 13
Item 4. Submission of Matters to a Vote of Security Holders. 13
Item 5. Other Information. 13
Item 6. Exhibits. 13
SIGNATURES 14
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, 2002, which was previously filed with the Securities and Exchange
Commission on November 14, 2002.
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 14, 2002 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, 2002 ("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, 2002
(U.S. DOLLARS)
SEPTEMBER 30,
2002
AS RESTATED
(NOTE 3) DECEMBER 31,
(UNAUDITED) 2001
--------------------- -------------------
ASSETS
CURRENT
Cash and cash equivalents $ 5,969,446 $ 190,457
Accounts receivable 75,419 46,374
Income tax receivable 72,298 --
Loan receivable 9,585 9,516
Note receivable -- 9,225
Inventory 163,193 181,698
Prepaid expenses 19,488 59,291
--------------------- -------------------
6,309,429 496,561
PROPERTY AND EQUIPMENT 111,717 72,753
--------------------- -------------------
TOTAL ASSETS $ 6,421,146 $ 569,314
--------------------- -------------------
LIABILITIES
CURRENT
Accounts payable $ 31,606 $ 20,592
Income tax payable -- 18,108
--------------------- -------------------
31,606 38,700
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
11,568,416 and 9,272,816 Common shares 11,568 9,272
CAPITAL IN EXCESS OF PAR VALUE 6,602,775 563,713
SHARE SUBSCRIPTION RECEIVABLE (19,990) --
OTHER COMPREHENSIVE LOSS (18,921) (23,842)
DEFICIT (185,892) (18,529)
--------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 6,389,540 530,614
--------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,421,146 $ 569,314
--------------------- -------------------
-- See Notes to Unaudited Consolidated Financial Statements -
1
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(U.S. DOLLARS -- UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- ---------------------------------------
2002 2002
AS RESTATED AS RESTATED
(NOTE 3) 2001 (NOTE 3) 2001
---------------------- ------------------ -------------------- ------------------
SALES $ 55,257 $ 148,177 $ 1,089,164 $ 1,307,649
COST OF SALES
(Exclusive of depreciation) 54,782 67,358 594,041 642,949
---------------------- ------------------ -------------------- ------------------
GROSS PROFIT 475 80,819 495,123 664,700
---------------------- ------------------ -------------------- ------------------
OPERATING EXPENSES
Consulting (note 2) -- -- 32,608 --
Wages 28,880 33,820 248,933 106,165
Professional fees 37,478 17,131 67,283 37,141
Office 16,898 5,089 60,943 15,438
Rent 16,788 5,624 46,356 16,595
Stock promotion and
transfer agent fee 15,510 (6,406) 41,156 1,802
Travel 13,608 8,900 24,023 18,768
Subcontracting 7,958 11,330 23,667 21,946
Administrative salaries
and benefits 5,202 18,802 77,228 50,605
Currency exchange 4,797 -- 20,205 --
Shipping 3,462 1,846 9,087 7,471
Telephone 2,124 1,322 7,074 4,068
Utilities 1,953 -- 4,159 --
Bad debt expense 1 -- (350) --
Commission -- 694 -- 1,138
Depreciation 6,390 3,400 15,335 8,968
---------------------- ------------------ -------------------- ------------------
161,049 101,552 677,707 290,105
---------------------- ------------------ -------------------- ------------------
INCOME (LOSS) BEFORE OTHER
ITEM AND INCOME TAX (160,574) (20,733) (182,584) 374,595
INTEREST INCOME 15,221 -- 15,221 --
---------------------- ------------------ -------------------- ------------------
INCOME (LOSS) BEFORE
INCOME TAX (145,353) (20,733) (167,363) 374,595
INCOME TAX (RECOVERY) (43,343) 7,827 -- 142,346
---------------------- ------------------ -------------------- ------------------
NET INCOME (LOSS) $ (102,010) $ (28,560) $ (167,363) $ 232,249
---------------------- ------------------ -------------------- ------------------
NET INCOME (LOSS) PER SHARE $ (0.01) $ (0.00) $ (0.02) $ (0.03)
---------------------- ------------------ -------------------- ------------------
WEIGHTED AVERAGE NUMBER
OF SHARES 11,448,128 9,233,816 10,555,256 9,232,705
---------------------- ------------------ -------------------- ------------------
-- See Notes to Unaudited Consolidated Financial Statements --
2
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD ENDED SEPTEMBER 30, 2002
(U.S. DOLLARS -- UNAUDITED)
CAPITAL IN ACCUMULATED TOTAL
EXCESS OF EARNINGS STOCKHOLDERS'
PAR VALUE SHARE (DEFICIENCY) OTHER EQUITY
AS RESTATED SUBSCRIPTION AS RESTATED COMPREHENSIVE AS RESTATED
SHARES PAR VALUE (NOTE 3) RECEIVABLE (NOTE 3) INCOME (LOSS) (NOTE 3)
------------ ----------- -------------- -------------- ---------------- -------------- -------------
BALANCE, DECEMBER 31, 1998 9,131,316 $ 9,131 $ 163,653 -- $ (26,393) $ (376) $ 146,015
------------------------------- ------------ ----------- -------------- -------------- ---------------- -------------- -------------
Translation adjustment -- -- -- -- -- 7,053 7,053
Net income -- -- -- -- 102,848 -- 102,848
------------------------------- ------------ ----------- -------------- -------------- ---------------- -------------- -------------
BALANCE, DECEMBER 31, 1999 9,131,316 9,131 163,653 -- 76,455 6,677 255,916
------------------------------- ------------ ----------- -------------- -------------- ---------------- -------------- -------------
Translation adjustment -- -- -- -- -- (8,516) (8,516)
Net income -- -- -- -- 138,971 -- 138,971
------------------------------- ------------ ----------- -------------- -------------- ---------------- -------------- -------------
BALANCE, DECEMBER 31, 2000 9,131,316 9,131 163,653 -- 215,426 (1,839) 386,371
------------------------------- ------------ ----------- -------------- -------------- ---------------- -------------- -------------
SHARES ISSUED FOR
Cash (October and December 9,500 9 4,116 -- -- -- 4,125
Services (January, July
and November) 132,000 132 139,868 -- -- -- 140,000
Stock option compensation -- -- 256,076 -- -- -- 256,076
Translation adjustment -- -- -- -- -- (22,003) (22,003)
Net loss -- -- -- -- (233,955) -- (233,955)
------------------------------- ------------ ----------- -------------- -------------- ---------------- -------------- -------------
BALANCE, DECEMBER 31, 2001 9,272,816 9,272 563,713 -- (18,529) (23,842) 530,614
------------------------------- ------------ ----------- -------------- -------------- ---------------- -------------- -------------
Issued for cash
Private placement 2,151,600 2,152 6,064,948 -- -- -- 6,067,100
Exercise of stock options 114,000 114 33,386 -- -- -- 33,500
Services 30,000 30 44,370 -- -- -- 44,400
Share issue costs -- -- (200,000) -- -- -- (200,000)
Share subscription -- -- -- (33,000) -- -- (33,000)
Payment of subscriptions
receivable -- -- -- 13,010 -- -- 13,010
Stock option compensation -- -- 96,358 -- -- -- 96,358
Translation adjustment -- -- -- -- -- 4,921 4,921
Net loss, period ended
September 30, 2002 -- -- -- -- (167,363) -- (167,363)
------------------------------- ------------ ----------- -------------- -------------- ---------------- -------------- -------------
BALANCE, SEPTEMBER 30, 2002 11,568,416 $ 11,568 $ 6,602,775 $ (19,990) $ (185,892) $ (18,921) $ 6,389,540
------------------------------- ------------ ----------- -------------- -------------- ---------------- -------------- -------------
- See Notes to Unaudited Consolidated Financial Statements -
3
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(U.S. DOLLARS -- UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
2002
AS RESTATED
(NOTE 3) 2001
------------------ ------------------
OPERATING ACTIVITIES
Net income (loss) $ (167,363) $ 232,249
Adjustments to reconcile net income (loss)
to net cash, provided by operating activities
Stock option compensation 96,358 --
Non-cash services 44,400 --
Depreciation 15,335 8,968
Changes in non-cash working capital
Accounts receivable (29,045) 80,424
Inventory 18,505 (99,939)
Prepaid expenses 39,803 (3,615)
Accounts payable 11,014 27,774
Income tax receivable (90,406) (11,357)
------------------ ------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (61,399) 234,504
------------------ ------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (54,299) (28,448)
Note receivable 9,225 (31,359)
Loan receivable (69) --
------------------ ------------------
CASH USED IN INVESTING ACTIVITIES (45,143) (59,807)
------------------ ------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 5,867,600 --
Subscriptions received 13,010 --
------------------ ------------------
CASH PROVIDED BY FINANCING ACTIVITIES 5,880,610 --
------------------ ------------------
Effect of exchange rate changes on cash 4,921 (6,722)
------------------ ------------------
INFLOW OF CASH 5,778,989 167,975
Cash and cash equivalents, beginning 190,457 192,280
------------------ ------------------
CASH AND CASH EQUIVALENTS, ENDING $ 5,969,446 $ 360,255
------------------ ------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Issue of common stock for service $ 44,400 $ 140,000
------------------ ------------------
- See Notes to Unaudited Consolidated Financial Statements -
4
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2002
(U.S. DOLLARS)
1. BASIS OF PRESENTATION.
These unaudited amended 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 Quarterly Report on Form 10-QSB for the period ended September 30,
2002.
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, 2002 and December 31,
2001, and the consolidated results of operations and the consolidated statements
of cash flows for the nine months ended September 30, 2002 and 2001. The results
of operations for the nine months ended September 30, 2002 are not necessarily
indicative of the results to be expected for the entire fiscal year.
2. STOCKHOLDERS' EQUITY.
(a) During the period, pursuant to the 2002 option plan, the Company
granted an option to purchase a total of 2,000,000 shares of the Company's
common stock at an exercise price of $4.25 per share as to 1,000,000 shares and
$5.50 per share as to an additional 1,000,000 shares that will expire September
1, 2007.
(b) The following table summarizes the Company's stock option activity
for the period:
-----------------------------------------------------------------------------------------------------
2002
Weighted
Exercise Average
Number Price Exercise
of Shares Per Share Price
------------- ------------------ ---------------
Balance, June 30, 2002 1,640,800 $ 0.25 to $ 3.70 $ 3.14
-----------------------------------------------------------------------------------------------------
Granted during the period 1,000,000 $4.25 4.25
Granted during the period 1,000,000 $5.50 5.50
Exercised (114,000) $ 0.25 to $0.30 (0.29)
-----------------------------------------------------------------------------------------------------
Balance, September 30, 2002 3,526,800 $ 0.25 to $5.50 $ 4.22
-----------------------------------------------------------------------------------------------------
The Company applies Accounting Principles Board ("APB") Opinion No. 25
and related interpretations in accounting for its stock options granted to
employees, and accordingly, compensation expense of $21,250 was recognized as
wages expense for the nine months ended September 30, 2002. Had compensation
expense been determined as provided in Statement of Financial Accounting
Standards ("SFAS") No. 123 using the Black-Scholes option-pricing model, the
pro-forma effect on the Company's net loss and per share amounts for the nine
months ended September 30, 2002 would have been as follows:
5
-----------------------------------------------------------------------------------------------
Net loss, as reported $ (167,363)
Net loss, pro-forma $ (343,318)
Net loss per share, as reported $ (0.02)
Net loss per share, pro-forma $ (0.03)
-----------------------------------------------------------------------------------------------
The fair value of each option grant is calculated using the following
weighted-average assumption:
--------------------------------------------------------------------------- ---------------------
Expected life (years) 5 years
Interest rate 3%
Volatility 72.3%
Dividend yield 0
--------------------------------------------------------------------------- ---------------------
(c) During the period, the Company issued common stock as follows:
--------------------------------------------------- ---------------- ---------------------
Number
of Shares Total
---------------- ---------------------
Private placement 1,428,600 $ 5,000,100
Exercise of stock options 114,000 33,500
--------------------------------------------------- ---------------- ---------------------
During the quarter ended September 30, 2002, the Company completed a
private placement whereby 1,428,600 shares of common stock were issued at a
price of $3.50 per share to independent third parties.
(d) Share subscription receivable represents amount due from stock
purchased on exercise of options on June 30, 2002.
3. RESTATEMENTS AS A RESULT OF CORRECTING STOCK COMPENSATION EXPENSE.
In October 2005, while completing a registration statement for
securities issued in the second quarter of 2005, the Company determined that
certain disclosures made in connection with its stock-based compensation expense
required adjustment. In September 2002, the Company entered into a distribution
agreement with Ondeo Nalco Company ("Ondeo") whereby Ondeo agreed to serve as
the exclusive distributor of the Company's WATER$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
6
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 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 quarter ended September 30, 2002:
Balance sheet at September 30, 2002:
--------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- ------------------- ---------------
Capital in excess of par value $ 9,306,775 $ (2,704,000) $ 6,602,775
Accumulated deficiency (2,889,892) 2,704,000 (185,892)
--------------------------------------------------------------------------------------------------------
Statement of operations for the nine months ended September 30, 2002:
--------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- ------------------- ---------------
Expenses $ 3,381,707 $ (2,704,000) $ 677,077
Income (loss) before other item and
income tax (2,886,584) 2,704,000 (182,584)
Income (loss) before income tax (2,871,363) 2,704,000 (167,363)
Net income (loss) (2,871,363) 2,704,000 (167,363)
Net income (loss) per share (0.27) 0.25 (0.02)
--------------------------------------------------------------------------------------------------------
7
Statement of operations for the three months ended September 30, 2002:
--------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- ------------------- ---------------
Expenses $ 2,865,049 $ (2,704,000) $ 161,049
Income (loss) before other item and
income tax (2,864,574) 2,704,000 (160,574)
Income (loss) before income tax (2,849,353) 2,704,000 (145,353)
Net income (loss) (2,806,010) 2,704,000 (102,010)
Net income (loss) per share (0.25) 0.24 (0.01)
--------------------------------------------------------------------------------------------------------
Statement of cash flows for the nine months ended September 30, 2002:
--------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- ------------------- ---------------
Net income (loss) $ (2,871,363) $ 2,704,000 $ (167,363)
Stock option compensation 2,800,358 (2,704,000) 96,358
--------------------------------------------------------------------------------------------------------
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.
During the quarter ended September 30, 2002, we recorded two
significant events. On July 25, 2002, we closed a private placement of 1,428,600
shares at the price of $3.50 per share for gross proceeds of $5,000,100 and net
proceeds of $4,800,100. As a result of this financing and exercise of options
during the period, a net total of $5,880,610 in cash was provided by financing
activities. On September 1, 2002, we signed a distribution agreement with Ondeo
Nalco Company ("Ondeo") of Naperville, Illinois. The agreement assigns Ondeo
exclusive sales rights for our new product WATER$AVR(R) in the North American
municipal market and in the world mining markets, excluding India and Pakistan.
The term of the agreement is five years, and provides for sales totaling $25
million over the term of the agreement. Ancillary to the distribution agreement,
we granted Ondeo an option to purchase one million shares of our common stock at
an exercise price of $4.25 per share and an option to purchase one million
shares of our common stock at an exercise price of $5.50 per share. These
options have been recorded as consultant expenses in the quarter at a cost of
$nil. If the options are exercised, we will receive $9,750,000 in cash to our
treasury as the exercise price.
For the quarter ended September 30, 2002, we experienced a net
after-tax loss of $102,010, as compared to a net after-tax loss of $28,560 for
the quarter ended September 30, 2001. As in the quarter ended September 30,
2001, the end of the Northeastern United States swimming pool season reduces
demand for our products in the usual cyclical manner. This year, the sales
season in the Northeast United States and Eastern Canada was severely affected
by unseasonably cold weather, which led decreased demand for our products. This
was followed by extremely hot weather, decreasing the demand for our
8
products and resulting in very low production requirements in the third quarter
and revenue of $55,257 for the quarter ended September 30, 2002, as compared to
$148,177 in the quarter ended September 30, 2001. In addition, we increased
expenditures in the areas of WATER$AVR(R) sales and marketing and production
equipment development.
Finally, we improved our production estimates in the first and second
quarters of 2002 as a percentage of annual sales, and therefore did not have to
carry high production rates as far into the third quarter of 2002 as was the
case in the third quarter of 2001. As a result, our swimming pool product
distributor is carrying a much lower quantity of inventory as of September 30,
2002, as compared to September 30, 2001.
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, 2002,
as compared to the results of operations for the three month and nine month
periods ended September 30, 2001, and to changes in our financial condition from
December 31, 2001 to September 30, 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
For the third quarter of the current fiscal year ended September 30,
2002, sales were $55,257, compared to $148,177 for the same quarter of the
previous year. The decrease in sales was caused by poor weather in the beginning
of the Northeast United States pool season followed by extremely hot weather,
both of which reduced the demand for our products.
Operating expenses were $161,049 for the quarter ended September 30,
2002, an increase from $101,552 for the third quarter ended September 30, 2001.
This increase is a result of increased expenditures for the sales and marketing
of our WATER$AVR(R) product line and the development of advanced production
machinery used for the manufacture of our products. The largest increases were
in the areas of office and factory rent (33,686) and professional fees
($37,478). The net loss for the quarter ended September 30, 2002 was $102,010,
an increase from the third quarter ended September 30, 2001, when the net loss
was $28,560. The increased loss was almost entirely related to non-cash option
expenses, as the cash flow statement shows only $61,399 in cash consumed by
operations. Cost of sales increased to 99% for the quarter ended September 30,
2002 from 48% for the quarter ended September 30, 2001, as a result of lower
sales without concurrent reduction in costs.
The earnings per share was ($0.01) for the quarter ended September 30,
2002, compared to $0.00 for the quarter ended September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Sales in the nine months ended September 30, 2002 were $1,089,164, as
compared to $1,307,649 for the nine months ended September 30, 2001. The
reduction was the result of decreased demand for our products caused by poor
weather in the Northeastern United States and Eastern Canada.
Our operating expenses were $677,707 for the nine months ended
September 30, 2002, an increase from $290,105 for the nine months ended
September 30, 2001. This increase is a result of increased expenditures for the
sales and marketing of our WATER$AVR(R) product line and the addition of
employees and their related costs in connection with increased manufacturing and
distribution of our products.
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Our net income for the nine months ended September 30, 2002 was
($167,363), as compared to a net income of $232,249 for the nine months ended
September 30, 2001.
Our decrease in income was due to the decrease in sales compared to the
year earlier period and the related costs to develop our products and operate as
a public reporting company.
Our earnings per share were ($0.02) for the nine month period ended
September 30, 2002, as compared to ($0.03) for the nine month period ended
September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
We sold 400,000 shares at a price of $2.50 per share in the second
quarter for net proceeds of $950,000 and 1,428,600 shares at $3.50 per share for
net proceeds of $4.8 million in the quarter ended September 30, 2002. This, in
addition to other paid up capital, resulted in cash on hand of $5,939,446.
As of September 30, 2002, we had working capital of $6,277,823, which
represented an increase of $5,819,962 as compared to the working capital as of
December 31, 2001. The increase was a result of the financings concluded during
the nine months ended September 30, 2002.
We have no external sources of liquidity in the form of credit lines
from banks. We believe that our available cash will be sufficient to fund our
working capital requirements through December 31, 2003. We also believe that
available cash will be sufficient to implement our expansion plans. We have no
investment banking agreements in place and there is no guarantee that we will be
able to raise capital in the future should that become necessary.
RESTATED FINANCIAL STATEMENTS
The accompanying financial statements have been restated to revise
certain stock-based compensation expense. In October 2005, while completing a
registration statement for securities issued in the second quarter of 2005, we
determined that certain disclosures made in connection with our stock-based
compensation expense required adjustment. In September 2002, we entered into a
distribution agreement with Ondeo whereby Ondeo agreed to serve as the exclusive
distributor of our WATER$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.
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.
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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 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
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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.
From time to time we are involved in litigation incidental to the
conduct of our business. While the outcome of lawsuits and other proceedings
against us cannot be predicted with certainty, in the opinion of management, no
such lawsuits, either individually or in the aggregate, are expected to have a
material effect on our financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In July 2002, we issued 1,428,600 shares of restricted common stock for
gross proceeds of $5,000,100 and net proceeds of $4,800,100, in an offering
exempt from registration under the federal securities laws under Rule 506 of
Regulation D of the Securities Act of 1933, as amended. The capital raised in
this financing was used for working capital purposes and was invested in a
certificate of deposit with compounding daily interest of 4.03% that matures on
September 11, 2005.
During the quarter ended September 30, 2002, our employees exercised
options to purchase a total of 114,000 shares of our common stock, for an
aggregate exercise price of $33,500. The capital raised from these exercises was
used for working capital purposes and was invested in a certificate of deposit
with compounding daily interest of 4.03% that matures on September 11, 2005.
During the quarter ended September 30, 2002, we issued two options to
purchase a total of 2,000,000 shares of our common stock pursuant to the terms
of a product distribution agreement. The first option for 1,000,000 shares
contains an exercise price of $4.25 per share and has a term of five years.
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The second option for 1,000,000 shares contains an exercise price of $5.50 per
share and has a term of five years.
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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