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 JUNE 30, 2005.
|_| 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 12,831,316
shares of Common Stock, par value $0.001 per share, outstanding as of July 29,
2005.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
INDEX TO FORM 10-QSB/A
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
(a) Unaudited Consolidated Balance Sheets at June 30, 2005. 1
(b) Unaudited Consolidated Statements of Operations for the
Six Months Ended June 30, 2005 and 2004. 2
(c) Unaudited Consolidated Statements of Operations for the
Three Months Ended June 30, 2005 and 2004. 3
(d) Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2005 and 2004. 4
(e) Notes to Unaudited Consolidated Financial Statements for
the Period Ended June 30, 2005. 5
Item 2. Management's Discussion and Analysis or Plan of Operation. 17
Item 3. Controls and Procedures. 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 25
Item 3. Defaults Upon Senior Securities. 25
Item 4. Submission of Matters to a Vote of Security Holders. 25
Item 5. Other Information. 25
Item 6. Exhibits. 26
SIGNATURES 27
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 June
30, 2005, which was previously filed with the Securities and Exchange Commission
on August 12, 2005.
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 August 12, 2005 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 June 30,
2005 ("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 JUNE 30, 2005
(U.S. DOLLARS)
JUNE 30,
2005 DECEMBER 31,
AS RESTATED 2004
(NOTE 3) AS RESTATED
(UNAUDITED) (NOTE 3)
-------------------- --------------------
ASSETS
CURRENT
Cash and cash equivalents $ 752,130 $ 558,795
Short-term investments -- 559,440
Accounts receivable 1,028,236 501,372
Income tax 27,033 92,963
Loan receivable 38,286 38,570
Inventory 1,912,912 1,416,588
Prepaid expenses 117,979 131,280
-------------------- --------------------
3,876,576 3,299,008
PROPERTY, EQUIPMENT AND LEASEHOLDS 4,984,801 5,250,346
INVESTMENT 347,000 271,000
-------------------- --------------------
$ 9,208,377 $ 8,820,354
-------------------- --------------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 286,066 $ 250,129
Short-term loan -- 3,150,000
-------------------- --------------------
286,066 3,400,129
STOCKHOLDERS' EQUITY
CAPITAL STOCK
Authorized
50,000,000 Common shares with a par value of $0.001 each
1,000,000 Preferred shares with a par value of $0.01 each
Issued and outstanding
12,821,316 (2004: 11,831,916) common shares 11,832 11,832
CAPITAL IN EXCESS OF PAR VALUE 11,392,821 7,439,621
OTHER COMPREHENSIVE INCOME (LOSS) 73,184 100,179
DEFICIT (2,555,526) (2,131,407)
-------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 8,922,311 5,420,225
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,208,377 $ 8,820,354
-------------------- --------------------
COMMITMENTS AND CONTINGENCIES (NOTES 11 & 12)
- See Notes to Unaudited Consolidated Financial Statements -
1
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(U.S. DOLLARS -- UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2005 2004
AS RESTATED AS RESTATED
(NOTE 3) (NOTE 3)
-------------------- --------------------
SALES $ 3,887,714 $ 1,035,871
COST OF SALES 2,131,945 411,007
-------------------- --------------------
GROSS PROFIT 1,755,769 624,864
-------------------- --------------------
OPERATING EXPENSES
Wages 436,825 257,716
Administrative salaries and benefits 109,076 57,544
Advertising and promotion 44,685 56,792
Investor relations and transfer agent fee 509,588 122,625
Office and miscellaneous 69,531 96,922
Insurance 62,787 --
Interest expense 62,189 --
Rent 103,672 52,216
Consulting 91,787 188,816
Professional fees 126,449 107,714
Travel 78,866 49,514
Telecommunications 22,890 14,714
Shipping 23,036 10,797
Research 18,404 15,842
Commissions 87,998 --
Bad debt expense (recovery) -- (797)
Currency exchange (6,867) 3,324
Utilities 11,502 14,198
Depreciation 331,086 185,547
-------------------- --------------------
2,183,504 1,233,484
-------------------- --------------------
INCOME (LOSS) BEFORE OTHER ITEMS AND INCOME TAX (427,735) (608,620)
INTEREST INCOME 3,616 30,470
-------------------- --------------------
INCOME (LOSS) BEFORE INCOME TAX (424,119) (578,150)
INCOME TAX (RECOVERY) -- --
-------------------- --------------------
NET INCOME (LOSS) (424,119) (578,150)
DEFICIT, BEGINNING (2,131,407) (873,862)
-------------------- --------------------
DEFICIT, ENDING $ (2,555,526) $ (1,452,012)
NET INCOME (LOSS) PER SHARE $ (0.03) $ (0.05)
-------------------- --------------------
WEIGHTED AVERAGE NUMBER OF SHARES 12,256,208 11,819,916
-------------------- --------------------
- See Notes to Unaudited Consolidated Financial Statements -
2
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(U.S. DOLLARS -- UNAUDITED)
THREE MONTHS ENDED JUNE 30,
-------------------------------------------
2005 2004
AS RESTATED AS RESTATED
(NOTE 3) (NOTE 3)
-------------------- --------------------
SALES $ 1,868,133 $ 547,761
COST OF SALES 1,053,644 105,088
-------------------- --------------------
GROSS PROFIT $ 814,489 442,673
-------------------- --------------------
OPERATING EXPENSES
Wages 202,388 143,246
Administrative salaries and benefits 71,071 32,697
Advertising and promotion 13,414 49,062
Investor relations and transfer agent fee 484,950 57,947
Office and miscellaneous 28,076 62,332
Insurance 34,468 --
Interest expense 24,514 --
Rent 47,866 30,867
Consulting 47,535 114,138
Professional fees 65,607 71,206
Travel 41,101 25,938
Telecommunications 12,602 9,014
Shipping 10,397 7,655
Research 2,896 6,681
Commissions 47,073 --
Bad debt expense (recovery) -- (797)
Currency exchange (7,585) 2,902
Utilities 4,336 8,833
Depreciation 162,983 175,595
-------------------- --------------------
1,293,692 797,316
-------------------- --------------------
INCOME (LOSS) BEFORE OTHER ITEMS AND INCOME TAX $ (479,203) $ (354,643)
INTEREST INCOME 886 27,354
-------------------- --------------------
INCOME (LOSS) BEFORE INCOME TAX $ (478,317) $ (327,289)
INCOME TAX (RECOVERY) -- --
-------------------- --------------------
NET INCOME (LOSS) $ (478,317) $ (327,289)
DEFICIT, BEGINNING (2,077,209) (1,124,723)
-------------------- --------------------
DEFICIT, ENDING $ (2,555,526) $ (1,452,012)
NET INCOME (LOSS) PER SHARE $ (0.04) $ (0.03)
-------------------- --------------------
WEIGHTED AVERAGE NUMBER OF SHARES 12,675,837 11,819,916
-------------------- --------------------
- See Notes to Unaudited Consolidated Financial Statements -
3
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(U.S. DOLLARS -- UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2005 2004
AS RESTATED AS RESTATED
(NOTE 3) (NOTE 3)
-------------------- --------------------
OPERATING ACTIVITIES
Net income (loss) $ (424,119) $ (578,150)
Stock compensation expense 503,650 135,230
Depreciation 331,086 185,547
-------------------- --------------------
410,617 (257,373)
Changes in non-cash working capital items:
(Increase) Decrease in accounts receivable (526,864) (238,982)
(Increase) Decrease in inventory (496,324) (628,460)
(Increase) Decrease in prepaid expenses 13,301 (33,719)
Increase (Decrease) in accounts payable 35,937 31,552
Increase (Decrease) in income taxes 65,930 2,240
-- (7,700)
-------------------- --------------------
CASH (USED IN) OPERATING ACTIVITIES (497,405) (1,132,442)
-------------------- --------------------
INVESTING ACTIVITIES
Short-term investments 559,440 3,699,188
Investments (76,000) --
Loan receivable 284 45
Acquisition of property and equipment (65,541) (5,270,011)
-------------------- --------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 418,183 (1,570,778)
-------------------- --------------------
FINANCING ACTIVITIES
Short-term loan (3,150,000) 3,150,000
Proceeds from issuance of common stock 3,449,550 57,500
-------------------- --------------------
CASH PROVIDED BY FINANCING ACTIVITIES 299,550 3,207,500
-------------------- --------------------
Effect of exchange rate changes on cash (26,993) (3,023)
-------------------- --------------------
INFLOW (OUTFLOW) OF CASH 193,335 501,257
Cash and cash equivalents, beginning 558,795 237,080
-------------------- --------------------
CASH AND CASH EQUIVALENTS, ENDING $ 752,130 $ 738,337
-------------------- --------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest received $ 2,730 $ 30,470
-------------------- --------------------
- See Notes to Unaudited Consolidated Financial Statements -
4
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2005
(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, 2004 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 June 30, 2005 and the consolidated
results of operations and the consolidated statements of cash flows for the six
months ended June 30, 2005 and 2004. The results of operations for the three
months ended June 30, 2005 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 was due June 2, 2005 and all of the former Donlar assets were
pledged as security. On May 28, 2005, the Company retired the remaining debt
owed under this promissory note by paying such amount to the holder. The
remainder of the purchase price, or $3,000,000, was paid directly in cash.
5
The following table summarizes the estimated fair value of the Donlar
assets acquired at the date of acquisition (June 9, 2004):
---- ----------------------------------------------------- ---------------------
Current assets $ 1,126,805
Property and equipment 5,023,195
---------------------
6,150,000
Acquisition costs assigned to property and equipment 314,724
---------------------
Total assets acquired $ 6,464,724
---- ----------------------------------------------------- ---------------------
The acquisition costs assigned to property and equipment are all direct
costs incurred by 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.
On February 7, 2005 the Company incorporated two new subsidiaries in
Nevada: (a) SeaHorse Systems Inc. was incorporated to research new applications
for ECO$AVR(R), our patented swimming pool dispensing mechanism; and (b)
NanoDetect Technologies Inc. was incorporated to focus on ways to use our
current technologies to detect pathogens.
2. SIGNIFICANT ACCOUNTING POLICIES.
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles accepted in the United
States 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 and using the following annual rates:
--------------------------------------------------------------------------------
Computer hardware 30% Declining balance
Furniture and fixtures 20% Declining balance
Manufacturing equipment 20% Declining balance
Office equipment 20% Declining balance
Building 10% Declining balance
Leasehold improvements Straight-line over lease term
--------------------------------------------------------------------------------
6
Property and equipment are written down to net realizable value when
management determines there has been a change in circumstances that indicates
that their carrying amount may not be recoverable. No write-downs have been
necessary to date.
(d) Impairment of Long-Lived Assets.
The Company assesses the recoverability of long-lived assets by
determining whether the carrying value of the long-lived assets can be recovered
over their remaining lives through undiscounted future operating cash flows
using a discount rate reflecting average cost of funds. The assessment of the
recoverability will be impacted if estimated future operating cash flows are not
achieved. For the quarter ended June 30, 2005, no impairment charges have been
recognized.
(e) Foreign Currency.
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.
(f) Revenue Recognition.
Revenue from product sales is recognized at the time the product is
shipped since title and risk of loss is transferred to the purchaser upon
delivery to the carrier. 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.
(g) 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 the trading prices of our common stock
on the dates of the stock transactions.
(h) Stock-based Compensation.
The Company applies the fair-value-based method of accounting
prescribed by Financial Accounting Standard ("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-
7
based compensation to employees and directors using Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly,
compensation cost for stock options for employees is measured as the excess, if
any, of the quoted market price of the Company's common stock at the date of the
grant over the amount an employee is required to pay for the stock.
The Company adopted the disclosure provisions of FAS 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.
(i) Comprehensive Income.
Other comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are included in
comprehensive income, but are excluded from net income, as these amounts are
recorded directly as an adjustment to stockholders' equity. The Company's other
comprehensive income is primarily comprised of unrealized foreign exchange gains
and losses.
(j) Income (Loss) Per Share.
Income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares outstanding. Diluted income (loss) per
share is computed by giving effect to all potential dilutive options that were
outstanding during the year. For the years ending December 31, 2004, 2003 and
2002, all outstanding options were anti-dilutive.
(k) Use of Estimates.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and would
impact the results of operations and cash flows.
(l) Financial Instruments.
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.
(m) 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.
8
(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.
(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.
(iv) In November 2004, the FASB issued FAS No. 151, Inventory
Costs - an Amendment of ARB No. 43, Chapter 4, which clarifies the
accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage), and also requires that
the allocation of fixed production overhead be based on the normal
capacity of an entity's production facilities. FAS No. 151 is effective
for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company is currently evaluating the impact of adopting
this statement.
(v) In December 2004, the FASB issued revised FAS No. 123(R),
Share-Based Payment, which replaces FAS No. 123, Accounting for
Stock-Based Compensation, which superseded APB Opinion No. 25,
Accounting for Stock Issued to Employees. FAS No. 123(R) requires the
cost of all share-based payment transactions to be recognized in an
entity's financial statements, establishes fair value as the
measurement objective and requires entities to apply a fair-value-based
measurement method in accounting for share-based payment transactions.
FAS No. 123(R) applies to all awards granted, modified, repurchased or
cancelled after July 1, 2005, and unvested portions of previously
issued and outstanding awards. The Company is currently evaluating the
impact of adopting this statement.
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
9
Task Force ("EITF") No. 96-18, Accounting for Equity Instruments That are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services; EITF No. 00-18, Accounting Recognition for Certain Transactions
involving Equity Instruments Granted to Other Than Employees; and EITF No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer.
To correctly account for the stock options granted to Ondeo, the
stock-based compensation expense, included in consulting expenses, should have
been measured at the date the performance obligation was complete and then
recognized on a rational and systematic manner in relation to the sales achieved
by Ondeo. Had the Company correctly accounted for these stock options,
stock-based compensation expense for the quarter would have been nil as no sales
had yet been achieved. Instead, the Company recorded a stock-based compensation
expense of $2,704,000 for the quarter.
During the three months ended March 31, 2003, Ondeo achieved the first
threshold sales target, and, accordingly, the Company should have recorded a
corresponding stock-based compensation expense of $54,080. However, since the
entire stock-based compensation expense had been recorded in the September 30,
2002 interim financial statements and in the year ended December 31, 2002, the
Company did not record any additional stock-based compensation expense as a
result of the attained first threshold level.
In the fourth quarter of the year ended December 31, 2003, it was
determined that Ondeo was not going to attain the minimum sales targets
stipulated in the exclusive distributorship agreement. Consequently the
exclusive distributorship agreement and corresponding stock options were
cancelled. The Company accounted for the cancellation of the stock options in
accordance with FAS No. 123 similar to a forfeiture of stock options and
reversed $2,480,200 of the stock compensation expense previously recorded in
2002. Had the Company accounted for the cancellation of the stock options
correctly, it would have reversed the stock-based compensation expense of
$54,080 that was recorded in the first quarter ended March 31, 2003.
The following presents the effect on the company's previously issued
financial statements for the three months ended June 30, 2005 and 2004, and the
year ended December 31, 2004:
Balance sheet as at June 30, 2005:
-----------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------------------------------------------------------
Capital in excess of par value 11,616,621 (223,800) 11,392,821
Accumulated deficiency (2,779,326) 223,800 (2,555,526)
-----------------------------------------------------------------------------------------------------------
Statement of operations for the six months ended June 30, 2005:
-----------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------------------------------------------------------
Deficit, beginning (2,355,207) 223,800 (2,131,407)
Deficit, ending (2,779,326) 223,800 (2,555,526)
-----------------------------------------------------------------------------------------------------------
10
Statement of operations for the three months ended June 30, 2005:
-----------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------------------------------------------------------
Deficit, beginning (2,301,009) 223,800 (2,077,209)
Deficit, ending (2,779,326) 223,800 (2,555,526)
-----------------------------------------------------------------------------------------------------------
Statement of operations for the three months ended June 30, 2004:
-----------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------------------------------------------------------
Deficit, beginning (1,348,523) 223,800 (1,124,723)
Deficit, ending (1,675,812) 223,800 (1,452,012)
-----------------------------------------------------------------------------------------------------------
Balance sheet as at December 31, 2004:
-----------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------------------------------------------------------
Capital in excess of par value $ 7,663,421 $ (223,800) $ 7,439,621)
Accumulated deficiency (2,355,207) 223,800 (2,131,407)
-----------------------------------------------------------------------------------------------------------
4. LOAN RECEIVABLE.
----------------------------------- -------------------- -----------------------
2005 2004
-------------------- -----------------------
5% loan receivable due on demand $ 38,286 $ 38,570
----------------------------------- -------------------- -----------------------
5. PREPAID EXPENSES.
----------------------------------- -------------------- -----------------------
2005 2004
-------------------- -----------------------
Security deposit and prepaids $ 117,969 $ 131,280
----------------------------------- -------------------- -----------------------
6. PROPERTY, EQUIPMENT AND LEASEHOLDS.
---------------------------- --------- ------------------- ------------------- ------------------- ------------------
Accumulated 2005 2004
Cost Amortization Net Net
------------------- ------------------- ------------------- ------------------
Buildings $ 3,144,259 $ 303,488 $ 2,840,771 $ 2,987,046
Computer hardware 44,302 18,068 26,234 27,511
Furniture and fixtures 15,265 4,674 10,591 11,515
Office equipment 28,322 12,233 16,089 18,421
Manufacturing equipment 2,141,071 491,376 1,649,695 1,785,858
Trailer 1,865 912 953 1,146
Leasehold improvements 30,560 13,786 16,774 14,533
Trade show booth 6,985 1,885 5,100 6,130
Patents 20,408 -- 20,408 --
Land 398,186 -- 398,186 398,186
------------------- ------------------- ------------------- ------------------
$ 5,831,223 $ 846,422 $ 4,984,801 $ 5,250,346
-------------------------------------- ------------------- ------------------- ------------------- ------------------
11
7. INVESTMENT.
--------------------------------------------------- -------------------- --------------------
2005 2004
-------------------- --------------------
Tatko Inc. $ 271,000 $ 271,000
Air Water Interface Delivery & Detection Inc. $ 76,000 --
-------------------- --------------------
$ 347,000 $271,000
--------------------------------------------------- -------------------- --------------------
On May 31, 2003, the Company acquired an option to purchase a 20%
interest in the outstanding shares of Tatko Inc. ("Tatko") in exchange for the
issuance to Tatko of 100,000 shares of common stock. The option to purchase the
shares of Tatko expires on May 31, 2008. The purchase of the option also
included the right to use the bio-chemicals and patents of Tatko in the
Company's products. As part of the agreement, Tatko was required to supply to
the Company samples of specific technologies so that the Company could adapt its
processes to incorporate the technologies of Tatko. Since then, the Company
believes that Tatko breached the agreement and demanded the return of the
Company's shares. Tatko refused and the Company filed a lawsuit against Tatko.
For further information on the status of this lawsuit, please see Note 12(d) to
these Notes to Consolidated Financial Statements (Contingencies).
The Company believes that the patents developed by Tatko are extremely
beneficial to future operations. Once the litigation involving the return of the
shares has been settled, the Company intends to negotiate with Tatko to either
enter into a normal supplier/customer relationship to acquire Tatko's products
or to negotiate to acquire Tatko.
The Company has accounted for the cost of the investment in Tatko based
on the original fair market value of common stock on May 31, 2003. The Company
relies on the accounting policies of FAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and the guidelines of EITF No. 30-01,
The Meaning of Other-Than-Temporary Impairment of Certain Investments, for
assessing the accounting treatment and carrying value of the Company's
investment in Tatko. In accordance with these pronouncements, the investment is
reviewed on a continuous basis by analyzing the technology and operations of
Tatko to ensure that the carrying value is justified. The Company considers the
investment to be impaired when the fair value is less than its carrying amount.
Since the investment does not have a readily determinable fair value, the
Company has taken the position that the fair value assessment will be measured
when an impairment indicator is present.
In 2005, NanoDetect purchased 25.3 shares of equity in Air Water
Interface Delivery and Detection Inc. ("AWD") for a total cost of $76,000. This
investment represents only 2.5% of the issued and outstanding shares of AWD, and
accordingly will be accounted for under the cost method.
12
8. STOCK OPTIONS.
The Company may issue stock options and stock bonuses for common stock
to provide incentives to directors, key employees and other persons who
contribute to its success. The exercise price of all incentive options are
issued for not less than fair market value.
The following table summarizes stock option activity for the years
ended December 31, 2004 and 2003, and the six months ended June 30, 2005:
------------------------------------------------------------------------------------------------------------------
Exercise Price Weighted Average
Number of Shares per Share Exercise Price
-----------------------------------------------------------------------------
Balance, December 31, 2002 3,686,800 $0.25 - $3.50 $ 3.79
Granted 256,000 $3.60 - $4.25 $ 3.61
Exercised (124,000) $0.25 - $2.28 $ 0.48
Expired (2,107,800) $0.25 - $5.50 $ 4.72
------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 1,711,000 $1.00 - $4.25 $ 2.84
Granted 572,740 $3.00 - $4.60 $ 3.46
Exercised (37,000) $1.00 - $2.50 $ 1.55
Expired (5,000) $4.25 $ 4.25
Cancelled (1,000,000) $1.50 - $3.50 $ 2.50
------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 1,241,740 $1.00 - $4.60 $ 2.87
Granted 30,000 3.85 3.85
Exercised (2,000) 1.40 1.40
------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2005 1,269,740 $1.00 - $4.60 $ 3.19
------------------------------------------------------------------------------------------------------------------
The fair value of each option grant is calculated using the following
weighted average assumptions:
------------------------------------------------ --------------------- ----------------------- ----------------------
2004 2003 2002
---- ---- ----
Expected life (years) 5.00% 5.00% 5.00%
Interest rate 3.50% 2.87% 3.00%
Volatility 49.00% 49.00% 72.30%
Dividend yield 0.00% 0.00% 0.00%
----------------------------------------------- ---------------------- ----------------------- ----------------------
During the quarter ended June 30, 2005, the Company granted 255,000
stock options (June 30, 2004: 25,000 stock options) to consultants and has
applied FAS No. 123 using the Black-Scholes option-pricing model, which resulted
in additional consulting expense of $503,650 for the quarter ended June 30, 2005
(June 30, 2004: $135,230 additional consulting expense). During the year ended
December 31, 2003, the Company cancelled 2,000,000 stock options to consultants
pursuant to the terms of the underlying contract, resulting in a recovery of
consulting expense of $2,480,200.
9. CAPITAL STOCK.
During the six months ended June 30, 2005, the Company issued: (i)
2,000 shares of common stock with exercise prices per share equal to $1.40; (ii)
900,000 shares of common stock, along with warrants to purchase up to 900,000
shares of common stock at the exercise price of $3.75 per share; and (iii)
87,400 shares of common stock, along with a warrant to purchase up to 87,400
shares of common stock at the exercise price of $3.75 per share.
During the year ended December 31, 2004, the Company issued 37,000
shares of common stock at prices ranging from $1.00 to $2.50 per share upon the
exercise of stock options.
13
During the year ended December 31, 2003, the Company issued: (i)
100,000 shares of common stock valued at $271,000 to acquire an option to
purchase a 20% interest in Tatko (see Note 8 to these Notes to Unaudited
Consolidated Financial Statements (Stock Options)); and (ii) 124,000 shares of
common stock at prices ranging from $0.25 to $2.28 per share upon the exercise
of stock options.
10. SEGMENTED, SIGNIFICANT CUSTOMER INFORMATION AND ECONOMIC DEPENDENCY.
The Company operates in two segments:
(a) Development and marketing of two lines of energy and water
conservation products (as shown under the column heading "EWCP" below), which
consists of a (i) liquid swimming pool blanket which saves energy and water by
storing evaporation from the pool surface, and (ii) food-safe powdered form of
the active ingredient within the liquid blanket and is designed to be used in
still or slow moving drinking water sources.
(b) Manufacture of biodegradable polymers and chemical additives used
within the petroleum, chemical, utility and mining industries to prevent
corrosion and scaling in water piping (as shown under the column heading "BPCA"
below). Chemical additives are manufactured for use in laundry and dish
detergents, as well as in products to reduce levels of insecticides, herbicides
and fungicides.
The accounting policies of the segments are the same as those described
in Note 2 to these Consolidated Financial Statements (Significant Accounting
Policies). The Company evaluates performance based on profit or loss from
operations before income taxes, not including nonrecurring gains and losses and
foreign exchange gains and losses.
The Company's reportable segments are strategic business units that
offer different, but synergistic products and services. They are managed
separately because each business requires different technology and marketing
strategies.
----------------------------------------------------------------------------------------------------------
EWCP BPCA Total
--------------------------------------------------------------------------
Revenue $ 765,621 $ 3,122,093 $ 3,887,714
Interest revenue 3,616 -- 3,616
Interest expense 6,611 55,578 62,189
Depreciation and
amortization 28,197 302,889 331,086
Segment profit (loss) (979,805) 555,686 (424,119)
Segment assets 273,130 4,711,671 4,984,801
Expenditures for
segment assets 65,541 -- 65,541
----------------------------------------------------------------------------------------------------------
There is no segment data for the quarter ended March 31, 2004 as our
additional segment was added in June 2004.
14
The sales generated in the United States of America and Canada are as
follows:
-------------------------------------------------------- --------------------------- ---------------------------
2005 2004
--------------------------- ---------------------------
Canada 126,254 565,714
United States and abroad 3,761,460 470,157
-------------------------------------------------------- --------------------------- ---------------------------
Total 3,887,714 1,035,871
-------------------------------------------------------- --------------------------- ---------------------------
The Company's long-lived assets are located in Canada and the United
States as follows:
-------------------------------------------------------- --------------------------- ---------------------------
2005 2004
--------------------------- ---------------------------
Canada $ 273,130 $ 238,807
United States 4,711,671 5,011,539
-------------------------------------------------------- --------------------------- ---------------------------
Total $ 4,984,801 $ 5,250,346
-------------------------------------------------------- --------------------------- ---------------------------
11. COMMITMENTS.
Property and Premises Leases. The Company is committed to minimum
rental payments for property and premises aggregating approximately $326,538
over the term of two leases, the last expiring on June 30, 2009.
Commitments in each of the next five years are approximately as
follows:
----------- ----------------
2005 $ 67,145
2006 114,752
2007 55,169
2008 55,654
2009 33,818
----------- ----------------
12. CONTINGENCIES.
(a) On November 13, 2003, Patrick Grant, an ex-employee, filed a
lawsuit in the Circuit Court of Cook County, Illinois against the Company,
WaterSavr Global Solutions Inc. ("WGS"), the wholly-owned subsidiary of the
Company, and Daniel B. O'Brien , the Company's Chief Executive Officer. The
plaintiff claims damages for breach of contract, tortious interference with an
agreement and various wrongful discharge claims. The plaintiff seeks monetary
damages in excess of $1,020,000 for the breach of contract and tortious
interference claims and unspecified compensatory and punitive damages in the
wrongful discharge claims. The Company completed mandatory mediation ordered by
the Circuit Court and will next appear in court for case management, at which
time the court will set discovery deadlines. 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
15
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. ("Flexible Ltd."), the Company's wholly-owned subsidiary, 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 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. 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. On May 23, 2005, the Tatko
suit was dismissed with prejudice by the District Court.
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.
(e) In fiscal 2005, the Company filed a lawsuit in the Court of the
Queen's Bench of Alberta against Calgary Diecast Corp. ("CDC"), seeking
indeterminate damages resulting from a breach of contract. The contract was
never completed and the Company's raw materials remain in the possession of CDC.
On April 25, 2005, the Court ordered a judgment for the Company in the amount of
$48,723.
13. COMPARATIVE FIGURES.
Certain of the comparative figures have been reclassified to conform
with the current year's presentation.
16
Item 2. Management's Discussion and Analysis or Plan of Operation.
OVERVIEW
Flexible Solutions International, Inc. ("we," "us," and "our")
develops, manufactures and markets specialty chemicals which slow down the
evaporation of water. Our initial product, HEAT$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.
RESULTS OF OPERATIONS
The following analysis and discussion pertains to our results of
operations for the three-month and six-month periods ended June 30, 2005,
compared to the results of operations for the three-month and six-month periods
ended June 30, 2004, and to changes in our financial condition from December 31,
2004 to June 30, 2005.
Separate financial data for each of our operating segments is provided
below. We evaluate the performance of our operating segments based on the
following:
--------------------------- ----------- -------------------------------- ------- ------------------ -------------------
JUNE 30
% CHANGE % CHANGE
2005 2004 2003 2005-2004 2004-2003
---- ---- ---- --------- ---------
Sales
Energy Segment $ 765,621 $ 759,744 $ 1,942,562 1% (61%)
Polymer Segment 3,122,093 276,127 --* 1031% --*
-------------------------------------------------------------------------------------------
Consolidated 3,887,714 1,035,871 1,942,562 275% (47%)
Gross Profit Margin
Energy Segment 310,557 357,327 846,660 (13%) (58%)
Polymer Segment 1,445,212 267,537 --* 440% --*
-------------------------------------------------------------------------------------------
Consolidated 1,755,769 624,864 846,660 181% (26%)
SG&A
Energy Segment 1,293,921 994,893 974,108 30% 2%
Polymer Segment 889,583 238,591 --* 273% --*
-------------------------------------------------------------------------------------------
Consolidated 2,183,504 1,233,484 974,108 77% 27%
Interest Income
Energy Segment 3,616 30,470 102,246 (88%) (70%)
Polymer Segment -- -- --* 0% --*
-------------------------------------------------------------------------------------------
Consolidated 3,616 30,470 102,246 (88%) (70%)
Write Down of Investments
Energy Segment -- -- -- -- --
Polymer Segment -- -- --* --* --*
-------------------------------------------------------------------------------------------
Consolidated -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------
Net Income (Loss $ (424,119 ) $ (578,150) $ (49,297) 27% (1072%)
-----------------------------------------------------------------------------------------------------------------------
* Polymer segment data is not available as indicated. The Company's polymer
segment was formed after the acquisition of certain assets of the Donlar
Corporation in June 2004.
17
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
Sales for the three months ended June 30, 2005 were $1,868,133, as
compared to $547,761 for the three months ended June 30, 2004, an increase of
$1,320,372, or 241%. The increase in sales was primarily attributable to the new
revenue provided by our wholly-owned subsidiary, NanoChem Solutions Inc.
("NanoChem"), which was formed as the corporate entity used to acquire certain
assets from the bankruptcy estate of the Donlar Corporation ("Donlar").
Our Energy segment had sales of $334,726 for the three months ended
June 30, 2005, as compared to $271,634 for the three months ended June 30, 2004,
an increase of 23%. We expect revenue in this segment to increase in fiscal 2006
as brand recognition of our ECO$AVR(TM) product line continues to grow and our
marketing efforts for the WATER$AVR(R) product line begin to produce increased
sales. Our Polymer segment achieved sales of $1,533,407 for the three months
ended June 30, 2005, as compared to $276,127 for the three months ended June 30,
2004. This increase is in part due to a full three months of sales from our new
NanoChem subsidiary.
We experienced a loss of $478,317, or $0.04 per share, for the three
months ended June 30, 2005, as compared to a loss of $327,289, or $0.03 per
share for the three months ended June 30, 2004. The three largest contributing
factors to the loss were:
o The brand building, marketing and extra staffing costs in ECO$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 for the
remainder of fiscal 2005.
o All divisions maintained or increased sales and marketing costs in the
quarter in order to increase the probability of sales increases in all
of 2005. We considered the extra costs necessary to position us for
growth.
o Non-cash transactions such as stock option expense significantly
increased as a result of two private placements of shares of our common
stock in the quarter.
Gross profit margin represents sales less cost of sales and producing.
The major categories of costs included in cost of sales and producing are cost
of goods, distribution costs, and costs of our buying department. Distribution
costs consist of all warehouse receiving and inspection costs, warehousing
costs, all transportation costs associated with shipping goods from our
facilities to our customers, and other costs of distribution. We do not exclude
any portion of distribution costs from cost of sales. Our gross margins may not
be comparable to those of other entities because some entities include all of
the costs related to their overhead in cost of sales. However, we exclude a
portion of cost of sales from gross profit and instead include such costs as a
line item in operating expenses.
For the three months ended June 30, 2005, the largest increases were in
the areas of wages ($202,388 for the three months ended June 30, 2005, as
compared to $143,246 for the three months ended June 30, 2004), administrative
salaries ($71,071 for the three months ended June 30, 2005, as compared to
$32,697 for the three months ended June 30, 2004) and rent expense ($47,886 for
the three months ended June 30, 2005, as compared to $30,867 for the three
months ended June 30, 2004). The addition of commission expense ($47,073 for the
three months ended June 30, 2005, as compared to nil for the three months ended
June 30, 2004) is a result of successfully using sales representatives for our
swimming pool products and we feel the increase in sales justifies this added
expense. These increases are wholly accounted for by the operating costs of the
new divisions and represent a permanent increase in operating
18
costs related to the new level of sales. The large increase in investor
relations costs ($484,950 for the three months ended June 30, 2005, as compared
to $57,947 for the three months ended June 30, 2004) is attributable to the
stock options that vested in relation to the capital raising that closed on
April 14, 2005. This resulted in a non-cash transaction of $447,500 and, without
this, we would have experienced a decrease in this expense. The decreases in
advertising ($13,414 for the three months ended June 30, 2005, a decrease from
$49,062 for the three months ended June 30, 2004) and consulting ($47,535 for
the three months ended June 30, 2005, a decrease from $114,138 for the three
months ended June 30, 2004) are the result of better cost control in these areas
instituted by management over the past year and are expected to maintain at
these levels.
Our Energy segment generated $883,544 in operating expenses in the
three months ended June 30, 2005, an increase of 58% over the three months ended
June 30, 2004. The increase is primarily attributable to our extraordinary stock
option expense related to our raising of capital in the six months ended June
30, 2005. Our Polymer segment incurred $410,148 in operating expenses for the
three months ended June 30, 2005, an increase of 72% over the three months ended
June 30, 2004. This is attributable to the fact that our NanoChem subsidiary
operated for the full three months ended June 30, 2005, as compared to only
twenty days during the same period ended June 30, 2004.
There was no income tax provision for the three months ended June 30,
2005, as no tax installment payments were made during the year, same as for the
three months ended June 30, 2004.
Our Energy segment reported interest income of $886 in the three months
ended June 30, 2005, as compared to $27,354 in the three months ended June 30,
2004, a decrease of approximately 97%. This decrease in interest income is due
to our use of capital to purchase assets and develop our business.
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Sales for the six months ended June 30, 2005 were $3,887,714, as
compared to $1,035,871 for the six months ended June 30, 2004, an increase of
$2,851,843, or 275%. The increase in sales was primarily attributable to the new
revenue provided by our NanoChem subsidiary, which was formed as the corporate
entity used to acquire certain assets from the bankruptcy estate of Donlar.
Our Energy segment had sales of $765,621 for the six months ended June
30, 2005, as compared to $759,744 for the six months ended June 30, 2004, an
increase of 1%. We expect revenue in this segment to increase in 2006 as brand
recognition of our ECO$AVR(TM) product line continues to grow and our marketing
efforts for the WATER$AVR(R) product line begin to produce increased sales. Our
Polymer segment achieved sales of $3,122,093 for the six months ended June 30,
2005, as compared to $276,127 for the six months ended June 30, 2004. This
increase is due to a full six months of sales from our new NanoChem subsidiary.
We experienced a loss of $424,119, or $0.03 per share, for the six
months ended June 30, 2005, as compared to a loss of $578,150, or $0.05 per
share, for the six months ended June 30, 2004. The three largest contributing
factors to the loss were:
o The brand building, marketing and extra staffing costs in ECO$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$AVR(TM) will be better balanced for the
remainder of fiscal 2005.
19
o All divisions maintained or increased sales and marketing costs in the
period in order to increase the probability of sales increases in all
of 2005. We considered the extra costs necessary to position us for
growth.
o Non-cash transactions such as stock option expense significantly
increased as a result of two private placements of shares of our common
stock in the period.
Our overall gross profit margin on product sales decreased to 45% for
the six months ended June 30, 2005 from 60% for the six months ended June 30,
2004. This decrease in gross margin was primarily due to the rise in oil and its
affect on raw material pricing and shipping. There were also extra costs related
to the labor and material inputs for our swimming pool products as a result of
the significant rise of the Canadian Dollar versus the U.S. Dollar. For more
information regarding this result, see Note 2(e) to the Company's Notes to
Consolidated Financial Statements, Foreign Currency.
Gross profit margin represents sales less cost of sales and producing.
The major categories of costs included in cost of sales and producing are cost
of goods, distribution costs, and costs of our buying department. Distribution
costs consist of all warehouse receiving and inspection costs, warehousing
costs, all transportation costs associated with shipping goods from our
facilities to our customers, and other costs of distribution. We do not exclude
any portion of distribution costs from cost of sales. Our gross margins may not
be comparable to those of other entities because some entities include all of
the costs related to their overhead in cost of sales. However, we exclude a
portion of cost of sales from gross profit and instead includes such costs as a
line item in operating expenses.
For the six months ended June 30, 2005, there was an increase in sales
and marketing costs in connection with our WATER$AVR(R) product, which was
reflected in increased wages, office, rent, telecommunications and
travel-related expenses. We incurred higher professional fees in the six months
ended June 30, 2005 primarily due to increased legal and accounting expenses and
increased consultant expenses resulting from the cost of integrating the
functions and sales of our NanoChem subsidiary as quickly as possible.
Depreciation expense was $331,086 for the six months ended June 30, 2005, as
compared to $185,547 for the six months ended June 30, 2004, reflecting
depreciation for additional property and equipment added during fiscal 2004.
Our Energy segment generated $1,293,291 in operating expenses for the
six months ended June 30, 2005, an increase of 30% over the six months ended
June 30, 2004. The increase is primarily attributable to our extraordinary stock
option expense related to our raising of capital in the six months ended June
30, 2005. Our Polymer segment incurred $889,583 in operating expenses for the
six months ended June 30, 2005, an increase of 77% over the six months ended
June 30, 2004. This is attributable to the fact that our NanoChem subsidiary
operated for the entire six-month period ended June 30, 2005, as compared to
only twenty days during the same period ended June 30, 2004.
There was no income tax provision for the six months ended June 30,
2005, as no tax installment payments were made during the year, same as for the
six months ended June 30, 2004.
Our Energy segment reported interest income of $3,616 for the six
months ended June 30, 2005, as compared to $30,470 for the six months ended June
30, 2004, a decrease of approximately 88%. This decrease in interest income is
due to our use of capital to purchase assets and develop our business.
With the addition of the assets acquired from Donlar, we became a much
larger company with commensurate increases in most expense segments. However, we
were able to reduce certain expenses such as advertising ($44,685 for the six
months ended June 30, 2005, a decrease from $56,792 for the six months ended
June 30, 2004) and consulting ($91,787 for the six months ended June 30, 2005, a
decrease
20
from $188,816 for the six months ended June 30, 2004) as a direct result of
better cost control in these areas instituted by management over the past year
and these costs are expected to maintain at these levels. The large increase in
investor relations ($509,588 for the six months ended June 30, 2005, as compared
to $122,625 for the six months ended June 30, 2004) is a result of stock options
that vested in relation to the capital raising that closed on April 14, 2005.
This resulted in a non-cash transaction of $447,500, without which, we would
have seen a decrease in this expense.
LIQUIDITY AND CAPITAL RESOURCES
The following section discusses the effects of changes in our balance
sheet and cash flow on our liquidity and capital resources. The following table
summarizes our cash, cash equivalents and working capital that directly have an
impact on our immediate and future cash needs and sources.
------------------------------------------------------------------------------------------------------
JUNE 30, 2005 DECEMBER 31, 2004 INCREASE (DECREASE)
----------------- -------------------- -----------------------
Cash and cash equivalents $ 752,130 $ 558,795 $ 193,335
Short-term investments -- 559,440 (559,440)
Working capital 3,590,510 (101,121) 3,691,631
Short-term loan -- 3,150,000 (3,150,000)
------------------------------------------------------------------------------------------------------
We had cash on hand of $752,130 as of the quarter ended June 30, 2005,
as compared to $558,795 for the period ended December 31, 2004. As of June 30,
2005, we had working capital of $3,590,510, as compared to a working capital
deficit of $101,121 for the period ended December 31, 2004. The increases in
cash on hand and working capital primarily results from the cash raised in our
private placement transactions that closed during the quarter ended June 30,
2005, as well as from our increase in sales. The cash raised from the private
placement transactions was used to pay off the loan taken out for the purchase
of the Donlar assets.
Historically, prior to fiscal 2004, our operations have been cash flow
positive after considering the add back to net income of the stock compensation
expense and depreciation. In fiscal 2004, our operations generated negative cash
flow as we acquired a large amount of inventory and we financed the purchase of
the Donlar assets through the redemption of short-term investments. In order to
build our business, develop and research our products and sustain our start-up
operations, we have relied mainly on external equity financing.
We expect that cash provided by operating activities may fluctuate in
future periods as a result of a number of factors, including the fluctuations in
our operating results, shipments, accounts receivable collections, and inventory
management. As our sales continue to build, our accounts receivable will
increase and our overall inventory levels will also increase.
Because we repaid the short-term loan due in June 2005 (incurred in
connection with our purchase of the Donlar assets), we have no other commitments
or guarantees in the next 12 months that will materially affect our cash
position or needs. We believe we have sufficient capital to support our business
and operations for at least the next 12 months. We anticipate utilizing
approximately $500,000 in the next twelve months attempting to close sales in
California, Spain and Australia and to extend certain core U.S. patents to
select other countries. Approximately 80% of such expenditures are related to
expanding sales for our WATER$AVR(R) product.
There can be no assurance that any of the expenditures will result in
additional sales revenues. In
21
the event that our capital resources are not sufficient for the continued
expansion of the Company, new capital will be needed or marketing expenses will
have to be curtailed until capital is available. There is no guarantee that
capital will be available on terms acceptable to the Company or at all. We have
no investment banking agreements in place at this time.
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 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
22
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
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.
23
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 May 1, 2003, we 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 our 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, we seek return of such shares after defendant's
failure to both return the shares voluntarily and repay the note. On May 7,
2003, we obtained an injunction freezing the transfer of the shares. The
proceeding is still in a discovery phase. On the date of issuance, the share
transaction was recorded as shares issued for services at fair market value, a
value of $0.80 per share. No amounts have been recorded as receivable in the
Company's consolidated financial statements as the outcome of this claim is not
yet determinable.
On November 13, 2003, an ex-employee, Patrick Grant, filed a lawsuit in
the Circuit Court of Cook County, Illinois against us, WaterSavr, and our Chief
Executive Officer, Daniel B. O'Brien. The plaintiff claims damages for breach of
contract, tortious interference with an agreement and various wrongful discharge
claims. Mr. Grant seeks monetary damages in excess of $1,020,000 for the breach
of contract and tortious interference claims and unspecified compensatory and
punitive damages in the wrongful discharge claims. We completed mandatory
mediation ordered by the Circuit Court and will next appear in court for case
management, at which time the court will set discovery deadlines. We consider
the case to be without merit and are planning to dispute the matter vigorously.
In addition, we intend to file counterclaims against the plaintiff for failure
to repay financial obligations owed to us of almost $40,000, as well as
unspecified damages arising out of plaintiff's disclosure of confidential
information to a client during his employment at WaterSavr. No amounts have been
recorded as receivable and no accrual has been made for any loss in our
consolidated financial statements as the outcome of the claim filed by Mr. Grant
is not yet determinable.
On May 28, 2004, Sun Solar filed a lawsuit in the Federal Court of
Canada, against us, Flexible Ltd., and our Chief Executive Officer, Daniel B.
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 our
further use of the "Tropical Fish" trademark; and (c) monetary damages exceeding
$7,000,000 for the alleged infringement by us, Flexible Ltd. and Mr. O'Brien of
the "Tropical Fish" trademark, as well as any other "confusingly similar
trademarks" or proprietary trade dresses. On August 9, 2004, we, Flexible Ltd.
and Mr. O'Brien filed our defense and 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 we own the "Tropical Fish"
trademark, or, in the alternative, the trademark is not distinctive and should
be struck from the trademark registry; and (z) monetary damages 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 our consolidated financial statements and no amounts
have been accrued as potential losses as the outcome of this claim is not
determinable.
On July 23, 2004, we filed a breach of contract suit in the Circuit
Court of Cook County, Illinois against Tatko Biotech Inc. ("Tatko"). The action
arises out of our joint product development agreement
24
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 suit on September
24, 2004 in the Circuit Court of Cook County, Illinois seeking declaratory
relief of its entitlement to our restricted common stock. On May 23, 2005, the
Tatko suit was dismissed with prejudice by the District Court. No amounts have
been recorded as receivable in our consolidated financial statements and no
amount has been accrued as a loss as the outcome of the claim against Tatko is
not determinable.
In fiscal 2005, we filed a lawsuit in the Court of the Queen's Bench of
Alberta against Calgary Diecast Corp ("CDC") seeking indeterminate damages
resulting from a breach of contract. The contract was never completed and our
raw materials remain in the possession of CDC. On April 25, 2005, the Court
ordered a judgment in our favor in the amount of $48,723.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On April 8, 2005, we sold 900,000 shares of our common stock at a per
share price of $3.75 to several accredited investors in a private placement
transaction exempt from the federal securities laws under Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. In
connection with the private placement, we also issued warrants to the purchasers
to purchase up to an additional 900,000 shares of our common stock, at exercise
prices of $4.50 per share. When issued, the warrants were immediately
exercisable through April 8, 2009.
On June 8, 2005, we sold 84,700 shares of our common stock at a per
share price of $3.75 to an accredited investor in a private placement
transaction exempt from the federal securities laws under Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. In
connection with the private placement, we also issued a warrant to the purchaser
to purchase up to an additional 84,700 shares of our common stock, at an
exercise price of $4.50 per share. When issued, the warrant was immediately
exercisable through June 8, 2009.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
For the voting results of our 2005 Annual Shareholders Meeting held on
June 10, 2005, please refer to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 29, 2005.
Item 5. Other Information.
None.
25
Item 6. Exhibits.
The following exhibits are attached hereto and filed herewith:
EXHIBIT DESCRIPTION OF EXHIBIT
NUMBER
10.1 Securities Purchase Agreement, dated as of April 8, 2005, by and
between the Registrant and the parties set forth therein. (1)
10.2 Form of Warrant, issued as of April 8, 2005. (1)
10.3 Registration Rights Agreement, dated as of April 8, 2005, by and
between the Registrant and the parties set forth therein. (2)
10.4 Securities Purchase Agreement, dated as of June 8, 2005, by and
between the Registrant and the investor set forth therein. (2)
10.5 Form of Warrant, issued as of June 8, 2005. (2)
10.6 Registration Rights Agreement, dated as of June 8, 2005, by and
between the Registrant and the party set forth therein. (2)
31.1 Certification of Principal Executive Officer Pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002. *
31.2 Certification of Principal Financial Officer Pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002. *
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
ss.1350 and ss.906 of the Sarbanes-Oxley Act of 2002. *
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
ss.1350 and ss.906 of the Sarbanes-Oxley Act of 2002. *
* Filed herewith.
(1) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-3/A (Amendment No. 1), filed with the Securities
and Exchange Commission on June 27, 2005.
(2) Incorporated herein by reference to the Registrant's Quarterly Report
on Form 10-QSB/A (Amendment No. 1), filed with the Securities and
Exchange Commission on September 21, 2005.
26
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
27