UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-QSB/A
(AMENDMENT NO. 1)
(Mark one)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003.
|_| 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 11,671,916
shares of Common Stock, par value $0.001 per share, outstanding as of March 31,
2003.
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 Sheet at March 31, 2003. 1
(b) Unaudited Consolidated Statements of Operations for the
Three Months Ended March 31, 2003 and 2002. 2
(c) Unaudited Consolidated Statements of Stockholders'
Equity for the Period Ended March 31, 2003. 3
(d) Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002. 4
(e) Notes to Unaudited Consolidated Financial Statements for
the Period Ended March 31, 2003. 5
Item 2. Management's Discussion and Analysis or Plan of Operation. 9
Item 3. Controls and Procedures. 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 13
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 March
31, 2003, which was previously filed with the Securities and Exchange Commission
on May 14, 2003.
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 May 14, 2003 or modify any of the disclosures contained
therein, or in the accompanying financial statements and notes thereto, in any
way other than by the amendments identified above and as set forth herein.
Notwithstanding the above, and for the convenience of the reader, this entire
report has been amended as a result of, and to reflect, the restatement, as well
as to revise the disclosure of our management's discussion and analysis,
unregistered sales of equity securities, and legal proceedings, as well as to
generally reflect the current disclosure requirements of Form 10-QSB.
This Form 10-QSB/A should be read in conjunction with our periodic
filings made with the Securities and Exchange Commission subsequent to the date
of their original filings, including any amendments to those filings. In
addition, in accordance with Rule 12b-15 under the Securities Exchange Act of
1934, as amended, and certain other rules, this Form 10-QSB/A includes updated
certifications from our Chief Executive Officer and Chief Financial Officer.
We are presently unaware of any evidence that the restatements
described above are due to any material noncompliance by us, as a result of
misconduct, with any financial reporting requirement under the federal
securities laws. Our audit committee of the board of directors is working with
our management and our accountants to assure that we are taking the appropriate
approach to resolving the issues related to the restatements, as well as any
further issues that may be identified during the course of its review. The
filing of this Form 10-QSB/A shall not be deemed an admission that the original
filing, when made, included any untrue statement of a material fact or omitted
to state a material fact necessary to make a statement not misleading.
ii
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB/A for the quarter ended March 31,
2003 ("Quarterly Report"), including the Notes to Unaudited Consolidated
Financial Statements, contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
include, without limitation, those statements relating to development of new
products, our financial condition, our ability to increase distribution of our
products, integration of businesses we acquire, and disposition of any of our
current business. Forward-looking statements can be identified by the use of
forward-looking terminology, such as "may," "will," "should," "expect,"
"anticipate," "estimate," "continue," "plans," "intends," or other similar
terminology. These forward-looking statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual outcomes and results may differ materially from
what is anticipated or forecasted in these forward-looking statements due to
numerous factors, including, but not limited to, our ability to generate or
obtain sufficient working capital to continue our operations, changes in demand
for our products, the timing of customer orders and deliveries, and the impact
of competitive products and pricing. In addition, such statements could be
affected by general industry and market conditions and growth rates, and general
domestic and international economic conditions.
Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, such statements
involve risks and uncertainties and no assurance can be given that the actual
results will be consistent with these forward-looking statements. Except as
otherwise required by Federal securities laws, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events, changed circumstances or any other reason, after
the date of this Quarterly Report.
iii
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 2003
(U.S. DOLLARS)
MARCH 31, 2003
AS RESTATED DECEMBER 31, 2002
(NOTE 3) AS RESTATED
(UNAUDITED) (NOTE 3)
---------------------------------------------------
ASSETS
CURRENT
Cash $ 405,492 $ 556,789
Short-term investment 5,112,762 5,062,495
Accounts receivable 706,593 55,222
Income tax recoverable 86,775 118,014
Loan receivable 10,964 10,082
Inventory 104,016 203,830
Prepaid expenses 76,454 87,321
------------------------- ------------------------
6,503,056 6,093,753
PROPERTY AND EQUIPMENT 132,981 128,566
INVESTMENT 32,500 32,500
------------------------- ------------------------
$ 6,668,537 $ 6,254,819
------------------------- ------------------------
LIABILITIES
CURRENT
Accounts payable $ 158,216 $ 53,146
------------------------- ------------------------
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
11,691,916 and 11,570,916 11,671 11,570
CAPITAL IN EXCESS OF PAR VALUE 6,761,311 6,624,648
SHARE SUBSCRIPTION RECEIVABLE (16,217) (16,217)
OTHER COMPREHENSIVE INCOME (LOSS) 23,829 (21,354)
ACCUMULATED DEFICIENCY (270,273) (396,947)
------------------------- ------------------------
TOTAL STOCKHOLDERS' EQUITY 6,510,321 6,201,673
------------------------- ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,668,537 $ 6,254,819
------------------------- ------------------------
- See Notes to Unaudited Consolidated Financial Statements -
1
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(U.S. DOLLARS -- UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------------------
2003 2002
AS RESTATED
(NOTE 3)
------------------ --------------------
SALES $ 1,281,266 $ 376,620
COST OF SALES
(Exclusive of depreciation shown separately below) 687,067 187,410
------------------ --------------------
GROSS PROFIT 594,199 189,210
------------------ --------------------
OPERATING EXPENSES
Wages 138,670 31,755
Professional fees 23,063 26,952
Office 46,022 29,149
Consulting (note 2) 95,764 --
Travel 34,184 7,611
Administration salaries
and benefits 17,642 25,014
Research and development 17,531 --
Currency exchange 16,167 --
Rent 14,398 15,772
Subcontracting 10,248 6,035
Telecommunications 8,762 2,257
Shipping 3,692 3,164
Stock promotion and
transfer agent fee 33,120 3,820
Bad debt expense (recovery) -- (410)
Depreciation 7,811 4,188
------------------ --------------------
467,074 155,307
------------------ --------------------
INCOME BEFORE OTHER ITEM AND INCOME TAX 127,125 33,903
INTEREST INCOME 50,268 --
------------------ --------------------
INCOME BEFORE INCOME TAX 177,393 33,903
INCOME TAX 50,692 12,882
------------------ --------------------
NET INCOME $ 126,701 $ 21,021
------------------ --------------------
NET INCOME PER SHARE $ 0.01 $ 0.00
------------------ --------------------
DILUTED INCOME PER SHARE $ 0.01 $ 0.00
------------------ --------------------
WEIGHTED AVERAGE NUMBER OF SHARES 11,610,138 9,378,338
DILUTIVE EFFECTS OF OPTIONS 2,716,200 791,500
------------------ --------------------
WEIGHTED AVERAGE NUMBER OF SHARES WITH DILUTION 14,326,338 10,169,838
------------------ --------------------
- See Notes to Unaudited Consolidated Financial Statements -
2
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD ENDED MARCH 31, 2003
(U.S. DOLLARS -- UNAUDITED)
Capital in Accumulated Total
Excess of Par Earnings Stockholders'
value Share (Deficiency) Other Equity
As Restated Subscription As Restated Compensation As Restated
Shares Par Value (Note 3) Receivable (Note 3) Income (Loss) (Note 3)
----------- ---------- ------------- ------------ ------------ ------------- -----------
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
=========== ========== ============= ============ ============ ============= ===========
UNAUDITED INFORMATION
Issued for cash
Private placement 1,828,600 1,829 5,998,271 -- -- -- 6,000,100
Exercise of stock options 439,500 439 150,686 -- -- -- 151,125
Services 30,000 30 44,370 -- -- -- 44,400
Share issue costs -- -- (250,000) -- -- -- (250,000)
Share subscription -- -- -- (33,000) -- -- (33,000)
Payment of subscription
Receivable -- -- -- 16,783 -- -- 16,783
Stock option compensation -- -- 117,608 -- -- -- 117,608
Translation adjustment -- -- -- -- -- 2,488 2,488
Net loss, period ended
September 30, 2002 -- -- -- -- (378,445) -- (378,445)
----------- ---------- ------------- ------------ ------------ ------------- -----------
BALANCE, SEPTEMBER 30, 2002 11,570,916 $ 11,570 $ 6,624,648 $ (16,217) $ (396,974) $ (21,354) $ 6,201,673
=========== ========== ============= ============ ============ ============= ===========
SHARES ISSUED FOR CASH
Exercise of stock options 101,000 101 38,399 -- -- -- 38,500
Stock option compensation -- -- 98,264 -- -- -- 98,264
Translation adjustment -- -- -- -- -- 45,183 45,183
Net income -- -- -- -- 126,701 -- 126,701
----------- ---------- ------------- ------------ ------------ ------------- -----------
BALANCE, MARCH 31, 2003 11,671,916 $ 11,671 $ 6,761,311 $ (16,217) $ (270,273) $ 23,829 $ 6,510,321
=========== ========== ============= ============ ============ ============= ===========
- See Notes to Unaudited Consolidated Financial Statements -
3
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(U.S. DOLLARS -- UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2003
AS RESTATED
(NOTE 3) 2002
------------------ ------------------
OPERATING ACTIVITIES
Net income $ 126,701 $ 21,021
Adjustment to reconcile net income to net cash, provided by
operating activities
Stock option compensation 98,264 --
Depreciation 7,811 4,168
Accrued interest income (50,267) --
Changes in non-cash working capital
Accounts receivable (651,371) (369,187)
Inventory 99,814 48,076
Prepaid expenses 10,867 27,916
Accounts payable 105,070 140,299
Income tax receivable 31,239 25,543
Unrealized foreign exchange gain (loss) 37,277 --
------------------ ------------------
CASH USED IN OPERATING ACTIVITIES (184,595) (102,144)
------------------ ------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (12,226) (12,355)
Note receivable -- 9,403
Loan receivable (882) --
------------------ ------------------
CASH USED IN INVESTING ACTIVITIES (13,108) (2,952)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 38,500 61,500
------------------ ------------------
Effect of exchange rate changes on cash 7,906 (9,986)
------------------ ------------------
OUTFLOW OF CASH (151,297) (53,582)
Cash, beginning of period 556,789 190,457
------------------ ------------------
CASH, ENDING $ 405,492 $ 136,875
------------------ ------------------
- See Notes to Unaudited Consolidated Financial Statements -
4
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2003
(U.S. DOLLARS)
1. BASIS OF PRESENTATION.
These unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information. These financial statements are condensed and
do not include all disclosures required for annual financial statements. The
organization and business of the Company, accounting policies followed by the
Company and other information are contained in the notes to the Company's
audited consolidated financial statements filed as part of the Company's
December 31, 2002 Form 10-KSB.
In the opinion of the Company's management, these consolidated
financial statements reflect all adjustments necessary to present fairly the
Company's consolidated financial position at March 31, 2003, and the
consolidated results of operations and the consolidated statements of cash flows
for the three months ended March 31, 2003 and 2002. The results of operations
for the three months ended March 31, 2003 are not necessarily indicative of the
results to be expected for the entire fiscal year.
2. STOCKHOLDERS' EQUITY.
(a) During the period, the Company granted 50,000 stock options to
consultants and has recognized consulting expense applying Statement of
Financial Accounting Standard ("FAS") No. 123 using the Black-Scholes
option-pricing model, which resulted in consulting expense of $20,625 for the
three months ended March 31, 2003. Additional consulting expense of $21,059 has
also been recognized on the 75,000 stock options granted on December 31, 2002,
which have a vesting period of one year.
(b) The following table summarizes the Company's stock option activity
for the period:
---------------------------------------------------------------------------------------------------
2003 Weighted
Number of Exercise Price Per Average
Shares Share Exercise Price
---------------------------------------------------------------------------------------------------
Balance, December 31, 2002 3,671,800 $0.25 to $5.50 $ 3.79
Granted during the period 50,000 $3.25 3.25
Exercised (101,000) $0.25 to $1.50 (0.38)
---------------------------------- --------------- --------------------- -----------------------
Balance, March 31, 2003 3,620,800 $0.25 to $5.50 $ 3.79
---------------------------------------------------------------------------------------------------
5
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 $2,500 was recognized as
wages expense for the three months ended March 31, 2003. Had compensation
expense been determined as provided in FAS No. 123 using the Black-Scholes
option-pricing model, the pro-forma effect on the Company's net income and per
share amounts for the three months ended March 31, 2003 would have been as
follows:
------------------------------------- --------------------------------
Net income, as reported $ 126,701
Net income, pro-forma $ 33,958
Net income per share, as reported $ 0.01
Net income per share, pro-forma $ 0.01
------------------------------------- --------------------------------
The fair value of each option grant is calculated using the following
weighted average assumption:
------------------------------------- --------------------------------
Expected life (years) 5 years
Interest rate 3%
Volatility 36.55%
Dividend yield 0
------------------------------------- --------------------------------
(c) Share subscription receivable represents amount due for 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 whereby Ondeo agreed to serve as the exclusive distributor
of the Company's WATER$AVR(R) products for so long as Ondeo maintained a certain
threshold sales level as defined in the agreement. As consideration for signing
the agreement, Ondeo was granted an option to purchase 2,000,000 shares of the
Company's common stock. Half of the option for one million shares was
exercisable immediately at an exercise price of $4.25 for each common share. The
remaining half of the option for 1,000,000 shares was exercisable after certain
threshold sales targets were achieved at a price of $5.50 for each common share.
In determining the stock-based compensation expense for the nine months
ended September 30, 2002, the Company expensed the entire fair value of the
stock option believing that the option fully vested upon the signing of the
agreement. In its October 2005 review, however, the Company determined that: (i)
first, as stated above, half of the option to purchase 1,000,000 shares of
common stock did not vest and was not exercisable until the threshold sales
target had been met, which would not be until five years after the signing of
the distribution agreement; and (ii) second, the Company did not consider
Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services; EITF No. 00-18, Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than Employees; and
EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer.
To correctly account for the stock options granted to Ondeo, the
stock-based compensation expense, included in consulting expenses, should have
been measured at the date the performance obligation was complete and then
recognized on a rational and systematic manner in relation to the sales achieved
by Ondeo. Had the Company correctly accounted for these stock options,
stock-based
6
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 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 March 31, 2003 and the year
ended December 31, 2002:
Balance sheet as at March 31, 2003 -
----------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- -------------------- --------------------
Capital in excess of par value $ 9,411,231 $ (2,649,920) $ 6,761,311
----------------------------------------------------------------------------------------------------------------
Accumulated deficiency (2,920,193) 2,649,920 (270,273)
----------------------------------------------------------------------------------------------------------------
Statement of operations for the three months ended March 31, 2003 -
----------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- -------------------- --------------------
Expenses $ 412,994 $ 54,080 $ 467,074
Income (loss) before other item and
income tax 181,205 (54,080) 127,125
Income (loss) before income tax 231,473 (54,080) 177,393
Net income (loss) 180,781 (54,080) 126,701
----------------------------------------------------------------------------------------------------------------
Net income (loss) per share 0.02 (0.01) 0.01
----------------------------------------------------------------------------------------------------------------
Statement of cash flows for the three months ended March 31, 2003 -
----------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- -------------------- --------------------
Net income (loss) $ 180,781 $ (54,080) $ 126,701
----------------------------------------------------------------------------------------------------------------
Stock option compensation 44,184 54,080 98,264
----------------------------------------------------------------------------------------------------------------
7
Balance sheet as at December 31, 2002 -
----------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
-------------------- -------------------- --------------------
Capital in excess of par value $ 9,328,648 $ (2,704,000) $ 6,624,648
----------------------------------------------------------------------------------------------------------------
Accumulated deficiency (3,100,974) 2,704,000 (396,974)
----------------------------------------------------------------------------------------------------------------
8
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 first quarter of fiscal 2003, gross sales increased
$904,646, as compared to the first quarter of fiscal 2002. The increase was a
result of increased production and sales in our swimming pool division as well
as the first significant revenue generated by our WATER$AVR(R) product division.
During the first quarter of fiscal 2003, we experienced an increase in net
income of $105,680, as compared to the first quarter of fiscal 2002. The
increase in net income was the result of the increase in revenue referred to
above.
RESULTS OF OPERATIONS
The following analysis and discussion pertains to our results of
operations for the three month period ended March 31, 2003, as compared to the
results of operations for the three month period ended March 31, 2002.
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
For the quarter ended March 31, 2003, sales increased approximately
240% to $1,281,266, as compared to $376,620 for the same quarter of the previous
year. We experienced a higher volume of sales during the quarter ended March 31,
2003 because our "Tropical Fish" product continued to gain market share, we
increased sales of our HEAT$AVR(R) product to the commercial pool sector, and
our new WATER$AVR(R) product had its first significant quarter of revenue. Our
management expects that these trends will continue in the future.
Our general and administrative expenses were $467,074 for the quarter
ended March 31, 2003, an increase from $155,307 for the quarter ended March 31,
2002. This increase was the result of the continued growth in both our
WATER$AVR(R) product division and our HEAT$AVR(R) product division. Notable
increases included: (a) an increase in wages to $138,670 for the quarter ended
March 31, 2003, as compared to $31,755 for the quarter ended March 31, 2002,
resulting directly from new employees in our WATER$AVR(R) product division and
an increase of employees at our Alberta, Canada factory that allowed for
increased production of our products; (b) an increase in office costs for the
quarter ended March 31, 2003 to $46,022, as compared to $29,149 for the quarter
ended March 31, 2002, a result of the acquisition of new office space for our
WATER$AVR(R) product division; (c) an increase in travel-related expenses for
the quarter ended March 31, 2003 to $34,184, as compared to $7,611 for the
quarter ended March 31, 2002, a result of increased worldwide sales efforts in
the WATER$AVR(R) products division; (d) an increase in research and development
expenses to $17,531 for the quarter ended March 31, 2003, as compared to nil for
the quarter ended March 31, 2002, a result of breaking out the category; (e) an
increase in currency exchange for the quarter ended March 31, 2003 to $16,167,
as compared to nil for the quarter ended March 31, 2002, for the same reasons;
(f) an increase in telecommunications charges for the quarter ended March 31,
2003 to $8,762, as compared to $2,257 for the quarter ended March 31,
9
2002, as a result of the general increase in corporate activity and consulting,
and (g) an increase in consulting expenses of $95,764 for the quarter ended
March 31, 2003, as compared to nil for the quarter ended March 31, 2002, as a
result of expensing options granted to consultants (this is a non-cash expense
generated for accounting requirements).
Our management attributes the increase in general and administrative
expenses to the fact that we have expanded our manufacturing and sales
activities for our entire product line. Excluding the non-cash option expense,
our operating costs increased approximately 139% for the quarter ended March 31,
2003 to $467,074, as compared to $155,307 for the quarter ended March 31, 2002,
while revenue increased approximately 254%.
Net income for the quarter ended March 31, 2003 was $126,701, which
represents an approximate increase of 603% over the quarter ended March 31,
2002, when net income was $21,021. As stated earlier, the increase in net income
was due to an increase in sales of all our product lines and increased sales in
our WATER$AVR(R) products division.
Our earnings per share were $0.01 (basic) and $0.01 (fully diluted) for
the quarter ended March 31, 2003, as compared to $0.00 (basic) and $0.00 (fully
diluted) for the quarter ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, we had working capital of $6,344,840, which
represented an increase of $5,810,013 as compared to our working capital
position of $534,827 for the quarter ended March 31, 2002. The increase in
working capital was due to net financings of $5,750,000 in April and July 2002
through the private placement of shares of our common stock, capital realized
from the exercise of stock options in the twelve months prior to March 31, 2003,
and the positive cash flow from operations over the prior twelve month period.
For the quarter ended March 31, 2003, our accounts receivable and
inventory represented approximately 12.5% of our current assets and both
continue to turn over at acceptable rates.
RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying financial statements have been restated to revise
certain stock-based compensation expense. In October 2005, while completing a
registration statement for securities issued in the second quarter of 2005, we
determined that certain disclosures made in connection with our stock-based
compensation expense required adjustment. In September 2002, we entered into a
distribution agreement with Ondeo Nalco Company ("Ondeo") whereby Ondeo agreed
to serve as the exclusive distributor of our WATER$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
10
signing of the distribution agreement; and (ii) second, we did not consider
Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services; EITF No. 00-18, Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than Employees; and
EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer.
During the three months ended March 31, 2003, Ondeo achieved the first
threshold sales target, and accordingly, we should have recorded a corresponding
stock-based compensation expense of $54,080. However, since the entire
stock-based compensation expense had been recorded in the September 30, 2002
interim financial statements and in the year ended December 31, 2002, we did not
record any additional stock-based compensation expense as a result of the
attained first threshold level.
In the fourth quarter of the year ended December 31, 2003, we
determined that Ondeo was not going to attain the minimum sales targets
stipulated in the agreement. Consequently, the agreement and corresponding stock
option was cancelled. We accounted for the cancellation of the stock option in
accordance with Statement of Financial Accounting Standard No. 123 similar to a
forfeiture of stock options and reversed $2,480,200 of the stock compensation
expense previously recorded in fiscal 2002. Had we accounted for the
cancellation of the stock option correctly, we would have reversed the amended
stock-based compensation expense of $54,080 that was recorded in the first
quarter ended March 31, 2003.
In light of the above, the net effect of the adjustments to the
financial statements is as follows:
1. Approximately $2,704,000 in stock compensation expense recorded in
September 2002 has been reversed;
2. Approximately $54,080 in stock-based compensation expense has been
recorded in the quarter ended March 31, 2003, as Ondeo met the first sales
threshold under the agreement;
3. Approximately $54,080 in stock-based compensation expense has been
reversed in the year ended December 31, 2003, as Ondeo failed to meet subsequent
sales thresholds under the agreement, resulting in the cancellation of the stock
option;
4. As stated above, we recorded a stock-based compensation expense of
$2,704,000 in December 2002. As a result of canceling the stock option, we
previously recorded a recovery of $2,480,000 of stock compensation expense at
December 31, 2003. This $2,480,000 recovery has been reversed, in conjunction
with the reversal of $2,704,000 in stock compensation expense originally
recorded; and
5. For the periods ended March 31, 2004 to June 30, 2005, the net
effect of these adjustments is to decrease capital in excess of par value by
approximately $223,800 and increase retained earnings by approximately $223,800.
We are presently unaware of any evidence that the restatements
described above are due to any material noncompliance by us, as a result of
misconduct, with any financial reporting requirement under the federal
securities laws. Our audit committee of the board of directors is working with
our 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.
11
Item 3. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic reports to the
Securities and Exchange Commission ("SEC") is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and
regulations, and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. Our disclosure controls and procedures are designed to provide a
reasonable level of assurance of reaching our desired disclosure control
objectives.
As of the end of the period covered by this Quarterly Report, we
carried out an evaluation, under the supervision and with the participation of
management, including our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended). Based upon that evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
that is required to be included in our periodic reports.
The prior accounting treatment of our stock-based compensation expense
was done in consultation and in accordance with the advice of our independent
accountants. Accordingly, management does not believe that this restatement of
our Quarterly Report indicates or results from a material weakness with respect
to our disclosure controls and procedures or our internal controls over
financial reporting.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting
that occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
In December 2001, we filed a lawsuit in the Supreme Court of British
Columbia, Canada, against John Wells and Equity Trust, S.A. seeking the return
of 100,000 shares of our common stock and the repayment of a $25,000 loan, which
were provided to 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 are seeking the return of such shares
after defendant's failure to both return the shares voluntarily and repay the
note. Since the filing of the suit, we have 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.
12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended March 31, 2003, our employees exercised
options to purchase a total of 31,000 shares of our common stock, for an
aggregate exercise price of $21,000.00. The capital raised from these exercises
was used for working capital purposes.
During the quarter ended March 31, 2003, our non-employee consultants
exercised options to purchase a total of 70,000 shares of our common stock, for
an aggregate exercise price of $17,500.00. The capital raised from these
exercises was used for working capital purposes.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits are attached hereto and filed herewith:
NUMBER DESCRIPTION
------ -----------
31.1 Certification of Principal Executive Officer Pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
ss.1350 and ss.906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
ss.1350 and ss.906 of the Sarbanes-Oxley Act of 2002.
13
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
14