UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended SEPTEMBER 30, 2005
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
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(Exact name of small business issuer as specified in its charter)
NEVADA
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(State or other jurisdiction of incorporation or organization)
91-1922863
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(IRS Employer Identification No.)
615 Discovery Street, Victoria BC V8T 5G4
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(Address of principal executive offices)
( 250 ) 477 - 9969
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(Issuer's telephone number)
(Former name, former address and former fiscal year if changed since last
report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12,13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes[X] No[ ]
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: Common stock $.001 par value
12,831,316 shares as of July 29, 2005.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
INDEX TO FORM 10-QSB/A
Page
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PART I. FINANCIAL INFORMATION 4
ITEM 1. FINANCIAL STATEMENTS. 4
(a) CONSOLIDATED BALANCE SHEET AT JUNE 30, 2005. 4
(b) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 2005 AND 2004. 5
(c) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JUNE 30, 2005 AND 2004. 6
(d) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED JUNE 30, 2005 AND 2004. 7
(e) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. 17
ITEM 3. CONTROLS AND PROCEDURES. 21
PART II OTHER INFORMATION 22
ITEM 1. LEGAL PROCEEDINGS. 22
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 23
ITEM 5. OTHER INFORMATION. 23
ITEM 6. EXHIBITS. 24
SIGNATURES 25
2
EXPLANATORY NOTE
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Flexible Solutions International, Inc. ("we," "us," and "our") is
filing this Quarterly Report on Form 10-QSB/A to amend and restate in its
entirety its Quarterly Report on Form 10-QSB for the fiscal quarter ended
September 30, 2005, which was previously filed with the Securities and Exchange
Commission on November 14, 2005.
On January 24th 2006, in the course of generating the audited
financial statements for the fourth quarter and full year 2005 the Company
discovered a material inventory error in the financial statements filed as part
of the Company's form 10Q-SB for the quarter ended September 30th 2005. During
the inventory count of September 30th 2005 at the factory belonging to our
NanoChem Solutions subsidiary, the inventory was overstated by $183,398 due
entirely to a clerical error. Reliance on the inventory data led directly to the
inaccuracies since identified in the Company's financials contained in its
10Q-SB for the period ended September 30th 2005. The Company has decided that it
will restate the financial statements for the three months ended September 30th
2005. Accordingly, the Company's previously issued financial statements covering
the three months ended September 30th 2005 should no longer be relied upon.
On January 25, 2006, the Company's management discussed the
conclusion described above with the Company's audit committee of the board of
directors ("Audit Committee") and Cinnamon Jang Willoughby & Company ("CJW"),
the Company's independent registered public accounting firm. CJW informed the
Audit Committee that it concurs with the Company's management's conclusion
described above. As a result, the Company expects to file amended consolidated
financial statements for the Restated Period as soon as practical.
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.
3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB/A for the quarter ended September
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.
4
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
Consolidated Balance Sheets
September 30, 2005
Restated
(U.S. Dollars)
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September 30 December 31
2005 2004
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Assets
Current
Cash and cash equivalents $ 493,892 $ 558,795
Short term investments - 559,440
Accounts receivable 802,611 501,372
Income tax 28,918 92,963
Loan receivable 39,728 38,570
Inventory 2,172,331 1,416,588
Prepaid expenses 119,567 131,280
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3,657,047 3,299,008
Property, equipment and leaseholds 4,892,277 5,250,346
Investment 369,000 271,000
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$ 8,918,324 $ 8,820,354
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Liabilities
Current
Accounts payable and accrued liabilities $ 205,271 $ 250,129
Short term loan - 3,150,000
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205,271 3,400,129
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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
12,831,316 (2004: 11,831,916) Common shares 12,821 11,832
Capital in excess of par Value 11,391,775 7,439,621
Other comprehensive income 232,889 100,179
Deficit (2,924,432) (2,131,407)
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Total Stockholders' Equity 8,713,053 5,420,225
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Total Liabilities and Stockholders' Equity $ 8,918,324 $ 8,820,354
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Commitments and Contingencies (Notes 14 & 15)
-See Notes to Unaudited Consolidated Financial Statements-
5
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
Consolidated Statements of Operations
For Nine Months Ended September 30, 2005 and 2004
Restated
(U.S. Dollars)
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Nine Months Ended September 30
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2005 2004
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Sales $ 5,189,803 $ 2,411,925
Cost of sales 2,869,883 829,314
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Gross profit 2,319,920 1,582,611
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Operating Expenses
Wages 639,601 606,942
Administrative salaries and benefits 165,836 94,973
Advertising and promotion 61,931 73,258
Investor relations and transfer agent fee 551,486 173,164
Office and miscellaneous 126,987 154,053
Insurance 104,874 33,475
Interest expense 62,189 29,364
Rent 168,560 114,711
Consulting 117,855 294,109
Professional fees 233,708 212,146
Travel 105,185 79,831
Telecommunications 31,987 28,464
Shipping 34,308 21,950
Research 39,247 21,000
Commissions 112,159 -
Bad debt expense (recovery) - (797)
Currency exchange 57,786 5,666
Utilities 14,662 46,469
Depreciation 488,729 359,536
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3,117,090 2,348,314
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Income (loss) before other items and income tax (797,170) (765,703)
Interest income 4,145 33,463
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Income (loss) before income tax (793,025) (732,240)
Income tax (recovery) - -
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Net income (loss) $ (793,025) $ (732,240)
Deficit, beginning $ (2,131,407) $ (873,862)
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Deficit, ending $ (2,924,432) $ (1,606,102)
Net income (loss) per share $ (0.06) $ (0.06)
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Weighted average number of shares 12,446,647 11,715,619
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-See Notes to Unaudited Consolidated Financial Statements-
6
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
Consolidated Statements of Operations
For Three Months Ended September 30, 2005 and 2004
Restated
(U.S. Dollars)
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Three Months Ended September 30
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2005 2004
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Sales $ 1,302,089 $ 1,376,054
Cost of sales 737,938 418,307
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Gross profit $ 564,151 957,747
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Operating Expenses
Wages 202,776 349,226
Administrative salaries and benefits 56,760 37,429
Advertising and promotion 17,246 16,466
Investor relations and transfer agent fee 41,897 50,539
Office and miscellaneous 57,456 62,099
Insurance 42,087 28,507
Interest expense - 29,364
Rent 64,889 62,495
Consulting 26,069 105,293
Professional fees 107,257 104,432
Travel 26,318 30,317
Telecommunications 9,097 13,750
Shipping 11,272 11,153
Research 20,843 5,158
Commissions 24,161 -
Bad debt expense (recovery) - -
Currency exchange 64,653 2,343
Utilities 3,161 32,271
Depreciation 157,643 173,989
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933,585 1,114,831
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Income (loss) before other items and income tax $ (369,434) $ (157,084)
Interest income 528 2,994
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Income (loss) before income tax $ (368,906) $ (154,090)
Income tax (recovery) - -
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Net income (loss) $ (368,906) $ (154,090)
Deficit, beginning (2,555,526) (1,452,012)
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Deficit, ending $ (2,924,432) $ (1,606,102)
Net income (loss) per share $ (0.03) $ (0.01)
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Weighted average number of shares 12,840,446 11,791,612
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-See Notes to Unaudited Consolidated Financial Statements-
7
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 2005 and 2004
Restated
(U.S. Dollars)
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Nine Months September 30
2005 2004
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Operating activities
Net income (loss) $ (793,025) $ (732,241)
Stock compensation expense 527,050 206,957
Depreciation 488,729 359,536
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222,754 (165,748)
Changes in non-cash working capital items:
(Increase) Decrease in accounts receivable (301,238) (297,286)
(Increase) Decrease in inventory (755,743) (796,953)
(Increase) Decrease in prepaid expenses 11,713 (98,177)
Increase (Decrease) in accounts payable (44,858) 2,174
Increase (Decrease) in Income taxes 64,044 1,120
Increase (Decrease) in amounts due to shareholders - (7,700)
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Cash (used in) operating activities (803,328) (1,362,571)
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Investing activities
Short-term investments 559,440 (5,399,876)
Investments (98,000) 4,095,477
Loan receivable (1,157) (264)
Acquisition of property and equipment (130,661) -
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Cash provided by (used in) investing activities 329,622 (1,304,663)
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Financing activities
Short term loan (3,150,000) 3,150,000
Proceeds from issuance of common stock 3,426,094 57,500
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Cash provided by financing activities 276,094 3,207,500
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Effect of exchange rate changes on cash 132,709 (3,022)
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Inflow (outflow) of cash (64,903) 537,244
Cash and cash equivalents, beginning 558,795 237,080
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Cash and cash equivalents, ending $ 493,892 $ 774,324
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Supplemental disclosure of cash flow information:
Interest received $ 528 $ 33,464
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-See Notes to Unaudited Consolidated Financial Statements-
8
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period Ended September 30, 2005
(U.S. Dollars - Unaudited)
1. BASIS OF PRESENTATION.
These unaudited consolidated financial statements of Flexible Solutions
International, Inc (the "Company") have been prepared in accordance with
generally accepted accounting principles 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 September 30, 2005 and the
consolidated results of operations and the consolidated statements of cash flows
for the nine months ended September 30, 2005 and 2004. The results of operations
for the three months ended September 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.
9
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.
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.
10
(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
Trailer 30% Declining balance
Leasehold improvements Straight-line over lease term
Property and equipment are written down to net realizable value when
management determines there has been a change in circumstances 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 September 30, 2005, no impairment charges have
been recognized.
11
(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.
12
FAS No. 123 encourages, but does not require, companies to record
compensation cost for stock-based compensation plans to employees at fair value.
The Company has chosen to account for stock-based compensation to employees and
directors using Accounting Principles Board ("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.
13
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.
(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.
14
(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 document for
securities issued in the second quarter of 2005, the Company determined that it
had incorrectly accounted for certain stock compensation expense in connection
with the granting of an option to purchase 2,000,000 shares of common stock to
Ondeo Nalco Company ("Ondeo"). In September 2002, the Company entered into a
consulting 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 1,000,000
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 compensation expense for the nine months ended
September 30, 2002, the Company's expensed the entire fair value of the stock
option believing that the option fully vested upon the signing of the agreement.
In the Company's 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 consulting agreement; and (ii) second, the Company did not consider 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.
15
To correctly account for the stock options granted to Ondeo, the stock
compensation expense, included in consulting expense, 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 compensation
expense for the year would have been nil as no sales had yet been achieved.
Instead, the Company recorded a stock compensation expense of $2,704,000 for the
year.
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 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 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 compensation of 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 and nine months ended September 30, 2004, and
the year ended December 31, 2004:
Statement of operations for the nine months ended September 30, 2004 -
-------------------------------------- ------------------------ -------------------- --------------------------
Previously Increase
-------------------------------------- ------------------------ -------------------- --------------------------
Reported (Decrease) Restated
-------------------------------------- ------------------------ -------------------- --------------------------
Deficit, beginning $ (1,097,662) $ 223,800 $ (873,862)
-------------------------------------- ------------------------ -------------------- --------------------------
Deficit, ending (1,829,902) 223,800 (1,606,102)
-------------------------------------- ------------------------ -------------------- --------------------------
Statement of operations for the three months ended September 30, 2004 -
-------------------------------------- ------------------------ -------------------- --------------------------
Previously Increase
-------------------------------------- ------------------------ -------------------- --------------------------
Reported (Decrease) Restated
-------------------------------------- ------------------------ -------------------- --------------------------
Deficit, beginning $ (1,675,812) $ 223,800 $ (1,452,012)
-------------------------------------- ------------------------ -------------------- --------------------------
Deficit, ending (1,829,902) 223,800 (1,606,102)
-------------------------------------- ------------------------ -------------------- --------------------------
16
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. RESTATEMENT AS A RESULT OF CORRECTING INVENTORY LEVELS
In January 2006, while preparing financials for the year ended December
31, 2005, the Company discovered a material inventory error in the financial
statements filed as part of the Company's form 10Q-SB for the quarter ended
September 30th 2005. During the inventory count of September 30th 2005 at the
factory belonging to our NanoChem Solutions subsidiary, the inventory was
overstated by $183,398 due entirely to a clerical error. Reliance on the
inventory data led directly to the inaccuracies since identified in the
Company's financials contained in its 10Q-SB for the period ended September 30th
2005.
Statement of operations for the nine months ended September 30, 2005 -
---------------------------- ------------------------ -------------------- --------------------------
Previously Increase
Reported (Decrease) Restated
---------------------------- ------------------------ -------------------- --------------------------
Cost of Goods Sold $ 2,686,485 $ 183,398 $ 2,869,883
---------------------------- ------------------------ -------------------- --------------------------
Gross Margin 2,503,318 (183,398) 2,319,920
---------------------------- ------------------------ -------------------- --------------------------
Net Income (Loss) (609,627) (183,398) (793,170)
---------------------------- ------------------------ -------------------- --------------------------
Earnings per Share (0.05) (0.01) (0.06)
---------------------------- ------------------------ -------------------- --------------------------
Deficit, beginning $ (2,131,407) - $ (2,131,407)
---------------------------- ------------------------ -------------------- --------------------------
Deficit, ending (2,741,034) (183,398) (2,924,432)
---------------------------- ------------------------ -------------------- --------------------------
Statement of operations for the three months ended September 30, 2005 -
---------------------------- ------------------------ -------------------- --------------------------
Previously Increase
Reported (Decrease) Restated
---------------------------- ------------------------ -------------------- --------------------------
Cost of Goods Sold $ 554,540 $ 183,398 $ (737,938)
---------------------------- ------------------------ -------------------- --------------------------
Gross Margin 747,547 (183,398) 564,151
---------------------------- ------------------------ -------------------- --------------------------
Net Income (Loss) (185,508) (183,398) (369,906)
---------------------------- ------------------------ -------------------- --------------------------
Earnings per Share (0.01) (0.02) (0.03)
---------------------------- ------------------------ -------------------- --------------------------
Deficit, beginning $ (2,555,526) $ 0 $ (2,555,526)
---------------------------- ------------------------ -------------------- --------------------------
Deficit, ending (2,741,034) (183,398) (2,924,432)
---------------------------- ------------------------ -------------------- --------------------------
17
Balance sheet as at September 30, 2005 -
---------------------------- ------------------------ -------------------- --------------------------
Previously Increase
Reported (Decrease) Restated
---------------------------- ------------------------ -------------------- --------------------------
Inventory $ 2,355,729 $ (183,398) $ 2,172,331
---------------------------- ------------------------ -------------------- --------------------------
Deficit, beginning $ (2,131,407) - $ (2,131,407)
---------------------------- ------------------------ -------------------- --------------------------
Deficit, ending (2,741,034) (183,398) (2,924,432)
---------------------------- ------------------------ -------------------- --------------------------
5. LOAN RECEIVABLE.
------------------------------------- ----------------- -----------------
2005 2004
------------------------------------- ----------------- -----------------
5% loan receivable due on demand $ 39,728 $ 38,570
------------------------------------- ----------------- -----------------
6. PREPAID EXPENSES.
------------------------------------- ----------------- -----------------
2005 2004
------------------------------------- ----------------- -----------------
Security deposit and prepaids $ 119,567 $ 131,280
------------------------------------- ----------------- -----------------
7. PROPERTY, EQUIPMENT AND LEASEHOLDS.
Accumulated 2005 2004
Cost Amortization Net Net
----- ---------------------------- ----------------- ------------------- ----------------- -----------------
Buildings $ 3,144,259 $ 373,917 $ 2,770,342 $ 2,987,046
Computer hardware 48,434 20,651 27,783 27,511
Furniture and fixtures 16,748 5,509 11,239 11,515
Office equipment 29,577 13,602 15,975 18,421
Manufacturing equipment 2,178,344 584,598 1,593,746 1,785,858
Trailer 1,995 1,050 945 1,146
Leasehold improvements 39,285 16,581 22,704 14,533
Trade show booth 7,473 2,415 5,058 6,130
Patents 46,299 - 46,299 46,299
Land 398,186 - 398,186 398,186
----- ---------------------------- ----------------- ------------------- ----------------- -----------------
$ 5,910,600 $ 1,018,323 $ 4,892,277 $ 5,250,346
================================== ================= =================== ================= =================
8. INVESTMENT.
--------------------------------------------------- -------------------- --------------------
2005 2004
--------------------------------------------------- -------------------- --------------------
Tatko Inc. $ 271,000 $ 271,000
--------------------------------------------------- -------------------- --------------------
Air Water Interface Delivery & Detection Inc. $ 98,000 --
--------------------------------------------------- -------------------- --------------------
$ 369,000 $ 271,000
18
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 32.7 shares of equity in Air Water
Interface Delivery and Detection Inc. ("AWD") for a total cost of $98,000. This
investment represents only 3.3% of the issued and outstanding shares of AWD, and
accordingly will be accounted for under the cost method.
9. 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.
19
The following table summarizes stock option activity for the years
ended December 31, 2004 and 2003, and the nine months ended September 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 (12,000) $1.40 $1.40
---------------------------------------- ---------------------- ------------------- ------------------------
Balance, September 30, 2005 1,259,740 $1.00 - $4.60 $3.20
======================================== ====================== =================== ========================
The fair value of each option grant is calculated using the following
weighted average assumptions:
------------------------------------------- --------------------- -------------------- ---------------------
2004 2003 2002
------ ------------------------------------ --------------------- -------------------- ---------------------
Expected life (years) 5.0 5.0 5.0
------ ------------------------------------ --------------------- -------------------- ---------------------
Interest rate 3.50% 2.87% 3.00%
------ ------------------------------------ --------------------- -------------------- ---------------------
Volatility 49.0% 49.0% 72.3%
------ ------------------------------------ --------------------- -------------------- ---------------------
Dividend yield - % - % - %
------ ------------------------------------ --------------------- -------------------- ---------------------
During the quarter ended September 30, 2005, the Company did not grant
any stock options (September 30, 2004: 5,000 stock options) to consultants and
has applied FAS No. 123 using the Black-Scholes option-pricing model, which
resulted in additional consulting expense of nil for the quarter ended September
30, 2005 (September 30, 2004: $71,727 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.
20
10. CAPITAL STOCK.
During the nine months ended September 30, 2005, the Company issued:
(i) 12,000 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.
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.
11. 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.
21
-------------------------------- ----------------------- ------------------------ -----------------------
EWCP BPCA Total
-------------------------------- ----------------------- ------------------------ -----------------------
Revenue $ 862,537 $ 4,327,266 $ 5,189,803
-------------------------------- ----------------------- ------------------------ -----------------------
Interest revenue $ 4,055 $ 57 $ 4,145
-------------------------------- ----------------------- ------------------------ -----------------------
Interest expense $ 6,611 $ 55,578 $ 62,189
-------------------------------- ----------------------- ------------------------ -----------------------
Depreciation and $ 42,452 $ 446,277 $ 488,729
amortization
-------------------------------- ----------------------- ------------------------ -----------------------
Segment profit (loss) $ (1,413,212) $ 620,187 $ (793,025)
-------------------------------- ----------------------- ------------------------ -----------------------
Segment assets $ 311,577 $ 4,580,700 $ 4,892,277
-------------------------------- ----------------------- ------------------------ -----------------------
Expenditures for $ 118,245 $ 12,416 $ 130,661
segment assets
-------------------------------- ----------------------- ------------------------ -----------------------
The sales generated in the United States of America and Canada are as
follows:
-------------------------------------------------- -------------------------- -------------------------
2005 2004
-------------------------------------------------- -------------------------- -------------------------
Canada $ 154,063 $ 630,776
-------------------------------------------------- -------------------------- -------------------------
United States and abroad 5,035,740 1,718,149
-------------------------------------------------- -------------------------- -------------------------
Total $ 5,189,803 $ 2,411,925
-------------------------------------------------- -------------------------- -------------------------
The Company's long-lived assets are located in Canada and the United
States as follows:
-------------------------------------------------- -------------------------- -------------------------
2005 2004
-------------------------------------------------- -------------------------- -------------------------
Canada $ 311,576 $ 238,807
-------------------------------------------------- -------------------------- -------------------------
United States 4,581,284 5,011,539
-------------------------------------------------- -------------------------- -------------------------
Total $ 4,892,277 $ 5,250,346
12. COMMITMENTS.
Property and Premises Leases. The Company is committed to minimum
rental payments for property and premises aggregating approximately $292,966
over the term of three leases, the last expiring on June 30, 2009.
Commitments in each of the next five years are approximately as
follows:
2005 $ 33,573
2006 114,752
2007 55,169
2008 55,654
2009 33,818
22
13. 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 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
23
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 Biotech Inc. ("Tatko").
The action arises out of a joint product development agreement entered into
between the Company and Tatko in which the Company agreed to invest $10,000
toward the product development venture and granted to Tatko 100,000 shares of
the Company's restricted common stock. In return, Tatko granted the Company a
five-year option to purchase 20% of Tatko's outstanding capital stock. Tatko has
since refused to collaborate on the agreement and the Company seeks declaratory
relief stating that Tatko is not entitled to the 100,000 shares of the Company's
restricted common stock. The litigation is still pending at this time.
In addition, Tatko filed its own suit on September 24, 2004 in the
Circuit Court of Cook County, Illinois seeking declaratory relief of its
entitlement to the Company's restricted common stock. 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
$48,723.
14. COMPARATIVE FIGURES.
Certain of the comparative figures have been reclassified to conform
with the current year's presentation.
24
Item 2. Management's Discussion and Analysis or Plan of Operation.
Overview
Flexible Solutions International, Inc. ("we," "us," and "our")
develops, manufactures and markets specialty chemicals that slow down the
evaporation of water. Our initial product, HEAT$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 that
automate the deployment of our chemical products.
Results of Operations
The following analysis and discussion pertains to our results of
operations for the three-month and nine-month periods ended September 30, 2005,
compared to the results of operations for the three-month and nine-month periods
ended September 30, 2004, and to changes in our financial condition from
December 31, 2004 to September 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:
September 30
------------------------------------------------
% Change % Change
2005 2004 2003 2005-2004 2004-2003
----------- ----------- ------------- --------- ---------
Sales
Energy Segment $ 862,537 $ 900,789 $ 1,982,571 (4%) (55%)
Polymer Segment 4,327,266 1,511,136 --* 186% --*
Consolidated 5,189,803 2,411,925 1,982,571 115% 22%
Gross Profit Margin
Energy Segment 393,344 458,152 852,278 (14%) (46%)
Polymer Segment 1,926,576 1,124,459 --* 71% --*
Consolidated 2,319,920 1,582,611 852,278 47% 86%
SG&A
Energy Segment 1,810,644 1,470,207 1,400,942 23% 5%
Polymer Segment 1,306,447 878,107 --* 49% --*
Consolidated 3,117,091 2,348,314 1,400,942 33% 68%
Interest Income
Energy Segment 4,088 33,463 155,195 (88%) (78%)
Polymer Segment 57 -- --* --* --*
Consolidated 4,145 33,463 155,195 (88%) (78%)
Write Down of Investments
Energy Segment -- -- -- -- --
Polymer Segment -- -- --* --* --*
Consolidated -- -- --
Net Income (Loss) $ (793,025) $ (732,240) $ (393,106) (8)% (103)%
* 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.
25
Three Months Ended September 30, 2005 and 2004
Sales for the three months ended September 30, 2005 were $1,302,089, as
compared to $1,376,054 for the three months ended September 30, 2004, a decrease
of $73,965, or 5%. The small decrease in sales was mostly related to the poor
weather in the east coast of the United States reducing sales of our swimming
pool products.
Our Energy segment had sales of $96,917 for the three months ended
September 30, 2005, as compared to $141,045 for the three months ended September
30, 2004, a decrease of 31%. We expect revenue in this segment to increase in
fiscal 2006 as brand recognition of our ECO$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 $1,205,172 for
the three months ended September 30, 2005, as compared to $1,235,009 for the
three months ended September 30, 2004. This small decrease is due to some orders
being shipped in advance of the European summer vacation season this year.
We experienced a loss of $368,906, or $0.03 per share, for the three
months ended September 30, 2005, as compared to a loss of $154,090, or $0.01 per
share for the three months ended September 30, 2004. The three largest
contributing factors to the loss were:
o The brand building, marketing and extra staffing costs in
ECO$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 2006
season.
o All divisions maintained or increased sales and marketing
costs in the quarter in order to increase the probability of sales
increases in 2006. We considered the extra costs necessary to position
us for growth.
o The addition of commission based sales representatives in 2005
to promote our ECOSAVR and HEATSAVR products in areas where we don't
have a physical presence ourselves.
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 September 30, 2005, the largest increases
were in the areas of insurance ($42,087 for the three months ended September 30,
2005, as compared to $28,507 for the three months ended September 30, 2004),
research and development ($20,843 for the three months ended September 30, 2005,
as compared to $5,518 for the three months ended September 30, 2004) and
currency exchange expense ($64,652 for the three months ended September 30,
2005, as compared to $2,343 for the three months ended September 30, 2004). The
addition of commission expense ($24,161 for the three months ended September 30,
2005, as compared to nil
26
for the three months ended September 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 costs related to the new level of sales. The decreases in wages
($202,776 for the three months ended September 30, 2005, a decrease from
$349,226 for the three months ended September 30, 2004) and consulting ($26,069
for the three months ended September 30, 2005, a decrease from $105,293 for the
three months ended September 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 $516,724 in operating expenses in the
three months ended September 30, 2005, an increase of 118% over the three months
ended September 30, 2004. The increase is primarily attributable to increase in
marketing to increase brand awareness of our Ecosavr and Watersavr products. Our
Polymer segment incurred $416,863 in operating expenses for the three months
ended September 30, 2005, an decrease of 53% over the three months ended
September 30, 2004. This is attributable to the fact that our NanoChem
subsidiary is operating in a more even manner after having a year to get up and
running smoothly.
There was no income tax provision for the three months ended September
30, 2005, as no tax installment payments were made during the year, same as for
the three months ended September 30, 2004.
Our Energy segment reported interest income of $528 in the three months
ended September 30, 2005, as compared to $2,994 in the three months ended
September 30, 2004, a decrease of approximately 82%. This decrease in interest
income is due to our use of capital to purchase assets and develop our business.
Nine Months Ended September 30, 2005 and 2004
Sales for the nine months ended September 30, 2005 were $5,189,803, as
compared to $2,411,925 for the nine months ended September 30, 2004, an increase
of $2,777,878, or 115%. 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 $862,537 for the nine months ended
September 30, 2005, as compared to $900,789 for the nine months ended September
30, 2004, a decrease of 4%. We expect revenue in this segment to increase in
2006 as brand recognition of our ECO$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 $4,327,266 for the nine
months ended September 30, 2005, as compared to $1,511,136 for the nine months
ended September 30, 2004, an increase of 186%. This increase is due to a full
nine months of sales from our new NanoChem subsidiary.
We experienced a loss of $793,025, or $0.06 per share, for the nine
months ended September 30, 2005, as compared to a loss of $732,240, or $0.06 per
share, for the nine months ended September 30, 2004. The three largest
contributing factors to the loss were:
o The brand building, marketing and extra staffing costs in
ECO$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
27
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 2006 season.
o All divisions maintained or increased sales and marketing
costs in the period in order to increase the probability of sales
increases in 2006. 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 nine months ended September 30, 2005
o The addition of commission based sales representatives in 2005
to promote our ECOSAVR and HEATSAVR products in areas where we don't
have a physical presence ourselves.
Our overall gross profit margin on product sales decreased to 45% for
the nine months ended September 30, 2005 from 67% for the nine months ended
September 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 nine months ended September 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, rent, telecommunications, research and
travel-related expenses. We incurred higher professional fees in the nine months
ended September 30, 2005 primarily due to increased legal and accounting
expenses. Depreciation expense was $488,729 for the nine months ended September
30, 2005, as compared to $359,536 for the nine months ended September 30, 2004,
reflecting depreciation for additional property and equipment added during
fiscal 2004.
Our Energy segment generated $1,810,644 in operating expenses for the
nine months ended September 30, 2005, an increase of 24% over the nine months
ended September 30, 2004. The increase is wholly attributable to our
extraordinary stock option expense related to our raising of capital in the nine
months ended September 30, 2005. Our Polymer segment incurred $1,306,447 in
operating expenses for the nine months ended September 30, 2005, an increase of
49% over the nine months ended September 30, 2004. This is attributable to the
fact that our NanoChem subsidiary operated for the entire nine-month period
ended September 30, 2005, as compared to only 112 days during the same period
ended September 30, 2004.
28
There was no income tax provision for the nine months ended September
30, 2005, as no tax installment payments were made during the year, same as for
the nine months ended September 30, 2004.
Our Energy segment reported interest income of $4,088 for the nine
months ended September 30, 2005, as compared to $33,463 for the nine months
ended September 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 ($61,931for the nine
months ended September 30, 2005, a decrease from $73,258 for the nine months
ended September 30, 2004) and consulting ($117,855 for the nine months ended
September 30, 2005, a decrease from $294,109 for the nine months ended September
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 ($551,486 for the nine months
ended September 30, 2005, as compared to $173,164 for the nine months ended
September 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.
Increase
September 30, 2005 December 31, 2004 (Decrease)
------------------------- ------------------------ --------------
Cash and cash equivalents $ 493,892 $ 558,795 $ (64,903)
Short-term investments - 559,440 (559,440)
Working capital 3,451,776 (101,121) 3,552,897
Short-term loan - 3,150,000 (3,150,000)
We had cash on hand of $493,892 as of the quarter ended September 30,
2005, as compared to $558,795 for the period ended December 31, 2004. As of
September 30, 2005, we had working capital of $3,451,776, 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 September 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.
29
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 September 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 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 correct
stock compensation expense and inventory levels.
In October 2005, while completing a registration document for
securities issued in the second quarter of 2005, we determined that we had
incorrectly accounted for certain stock compensation expense in connection with
the granting of an option to purchase 2,000,000 shares of common stock to Ondeo.
In September 2002, we entered into a consulting agreement with Ondeo whereby
Ondeo agreed to serve as the exclusive distributor of our WATER$AVR(R) products
for so long as Ondeo maintained a certain threshold sales level as defined in
the agreement. As consideration for signing the agreement, Ondeo was granted an
option to purchase 2,000,000 shares of our common stock. Half of the option for
one million shares was exercisable immediately at an exercise price of $4.25 for
each common share. The remaining half of the option for 1,000,000 shares was
exercisable after certain threshold sales targets were achieved at a price of
$5.50 for each common share.
In determining the stock 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 consulting 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 compensation expense of
30
$54,080. However, since the entire stock 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 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 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 will be reversed;
2. Approximately $54,080 in stock compensation expense will be recorded
in the quarter ended March 31, 2003, as Ondeo met the first sales threshold
under the agreement;
3. Approximately $54,080 in stock compensation expense will be 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 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 will be 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.
In January 2006, while preparing financials for the year ended December
31, 2005, it came to our attention that our inventory levels had been overstated
by $183,398 in our quarter ended September 30, 2005. As a result, our Cost of
Goods Sold was understated by the same amount. This was a result of a weakness
in our internal controls and measures have been taken to correct this and
prevent it from happening again.
In light of the above, the net effect of the adjustments to the
financials statements is as follows:
1. $183,398 decrease in Inventory at September 30, 2005.
2. $183,398 increase in Cost of Goods Sold for the three months ended
September 30, 2005.
31
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. The audit committee of the board of directors is working with
us and our accountants to assure that we are taking the appropriate approaches
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.
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
32
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 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.
33
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None during the Quarter ended September 30, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
34
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.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
Date: February 1, 2006 By: /s/ DANIEL B. O'BRIEN
-------------------------------------
Daniel B. O'Brien
President and Chief Executive Officer