UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-QSB/A
(AMENDMENT NO. 1)
(Mark one)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003.
|_| Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to .
--------------- --------------
Commission File Number 000-29649
-------------------
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
(Name of Small Business Issuer as Specified in Its Charter)
NEVADA 91-1922863
(State of Incorporation) (IRS Employer Identification No.)
615 DISCOVERY STREET
VICTORIA, BRITISH COLUMBIA, CANADA V8T 5G4
(Address of Principal Executive Offices) (Zip Code)
(250) 477-9969
(Issuer's Telephone Number, Including Area Code)
-------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: The Company had 11,792,916
shares of Common Stock, par value $0.001 per share, outstanding as of September
30, 2003.
Transitional Small Business Disclosure Format (check one): Yes |_| No
|X|
FORM 10-QSB/A
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
(a) Unaudited Consolidated Balance Sheets at September 30,
2003. 1
(b) Unaudited Consolidated Statements of Operations for the
Nine Months Ended September 30, 2003 and 2002. 2
(c) Unaudited Consolidated Statements of Operations for the
Three Months Ended September 30, 2003 and 2002. 3
(d) Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002. 4
(e) Notes to Unaudited Consolidated Financial Statements for
the Period Ended September 30, 2003. 5
Item 2. Management's Discussion and Analysis or Plan of Operation. 8
Item 3. Controls and Procedures. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 12
Item 3. Defaults Upon Senior Securities. 12
Item 4. Submission of Matters to a Vote of Security Holders. 12
Item 5. Other Information. 12
Item 6. Exhibits. 12
SIGNATURES 13
i
EXPLANATORY NOTE
----------------
Flexible Solutions International, Inc. ("we," "us," and "our") is
filing this Quarterly Report on Form 10-QSB/A to amend and restate in its
entirety its Quarterly Report on Form 10-QSB for the fiscal quarter ended
September 30, 2003, which was previously filed with the Securities and Exchange
Commission on November 14, 2003.
In October 2005, while completing a registration statement for
securities issued in the second quarter of 2005, we determined that certain
disclosures made in connection with our stock-based compensation expense
required adjustment. As such, on October 5, 2005, upon the recommendation of our
management, our board of directors and its audit committee, and our independent
accountants, we determined to restate our consolidated financial statements for
each of the periods ended since September 30, 2002, including each of the years
ended December 31, 2002 through 2004, and for both of the quarters in the six
months ended June 30, 2005 (the "Restated Periods").
In accordance with this determination to restate the Restated Periods,
we revised the disclosures for stock-based compensation expense as required
under Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services; EITF No. 00-18, Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees; and EITF No. 01-9, Accounting for Consideration Given by a
Vendor to a Customer. In particular, we adjusted the stock-based compensation
expense in our financial statements and notes thereto recorded in connection
with our grant of an option to purchase 2,000,000 shares of our common stock in
September 2002 pursuant to the terms of a product distribution agreement.
Additional information on this restatement and its effects on our financial
condition and results of operations can be found in our Notes to Unaudited
Consolidated Financial Statements contained herein.
This Form 10-QSB/A does not reflect events occurring after the filing
of our Form 10-QSB on November 14, 2003 or modify any of the disclosures
contained therein, or in the accompanying financial statements and notes
thereto, in any way other than by the amendments identified above and as set
forth herein. Notwithstanding the above, and for the convenience of the reader,
this entire report has been amended as a result of, and to reflect, the
restatement, as well as to revise the disclosure of our management's discussion
and analysis, unregistered sales of equity securities, and legal proceedings, as
well as to generally reflect the current disclosure requirements of Form 10-QSB.
This Form 10-QSB/A should be read in conjunction with our periodic
filings made with the Securities and Exchange Commission subsequent to the date
of their original filings, including any amendments to those filings. In
addition, in accordance with Rule 12b-15 under the Securities Exchange Act of
1934, as amended, and certain other rules, this Form 10-QSB/A includes updated
certifications from our Chief Executive Officer and Chief Financial Officer.
We are presently unaware of any evidence that the restatements
described above are due to any material noncompliance by us, as a result of
misconduct, with any financial reporting requirement under the federal
securities laws. Our audit committee of the board of directors is working with
our management and our accountants to assure that we are taking the appropriate
approach to resolving the issues related to the restatements, as well as any
further issues that may be identified during the course of its review. The
filing of this Form 10-QSB/A shall not be deemed an admission that the original
filing, when made, included any untrue statement of a material fact or omitted
to state a material fact necessary to make a statement not misleading.
ii
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB/A for the quarter ended September
30, 2003 ("Quarterly Report"), including the Notes to Unaudited Consolidated
Financial Statements, contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
include, without limitation, those statements relating to development of new
products, our financial condition, our ability to increase distribution of our
products, integration of businesses we acquire, and disposition of any of our
current business. Forward-looking statements can be identified by the use of
forward-looking terminology, such as "may," "will," "should," "expect,"
"anticipate," "estimate," "continue," "plans," "intends," or other similar
terminology. These forward-looking statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual outcomes and results may differ materially from
what is anticipated or forecasted in these forward-looking statements due to
numerous factors, including, but not limited to, our ability to generate or
obtain sufficient working capital to continue our operations, changes in demand
for our products, the timing of customer orders and deliveries, and the impact
of competitive products and pricing. In addition, such statements could be
affected by general industry and market conditions and growth rates, and general
domestic and international economic conditions.
Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, such statements
involve risks and uncertainties and no assurance can be given that the actual
results will be consistent with these forward-looking statements. Except as
otherwise required by Federal securities laws, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events, changed circumstances or any other reason, after
the date of this Quarterly Report.
iii
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements.
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 2003
(U.S. DOLLARS)
SEPTEMBER 30,
2003 DECEMBER 31,
AS RESTATED 2002
(NOTE 4) AS RESTATED
(UNAUDITED) (NOTE 4)
------------------- -------------------
ASSETS
CURRENT
Cash and cash equivalents $ 141,435 $ 556,789
Short-term investments 5,206,178 5,062,495
Accounts receivable 226,218 55,222
Income tax receivable 58,000 118,014
Loan receivable 11,909 10,082
Inventory 227,292 203,830
Prepaid expenses 52,636 87,321
------------------- -------------------
5,923,670 6,093,753
PROPERTY AND EQUIPMENT 153,275 128,566
INVESTMENT 310,125 32,500
------------------- -------------------
$ 6,387,070 $ 6,254,819
------------------- -------------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 65,943 $ 53,146
STOCKHOLDERS' EQUITY
CAPITAL STOCK
Authorized
50,000,000 Common shares with a par value of $0.001 each
1,000,000 Preferred shares with a par value of $0.01 each
Issued and outstanding
11,792,916 (2002: 11,570,916) common shares 11,793 11,570
CAPITAL IN EXCESS OF PAR VALUE 7,079,563 6,624,648
SHARE SUBSCRIPTION RECEIVABLE (13,217) (16,217)
OTHER COMPREHENSIVE INCOME (LOSS) 33,068 (21,354)
DEFICIT (790,080) (396,974)
------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 6,321,127 6,201,673
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,387,070 $ 6,254,819
------------------- -------------------
- See Notes to Unaudited Consolidated Financial Statements -
1
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED -- U.S. DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
2003 2002
AS RESTATED AS RESTATED
(NOTE 4) (NOTE 4)
-------------------- --------------------
SALES $ 1,982,571 $ 1,089,164
COST OF SALES 1,130,293 594,041
-------------------- --------------------
GROSS PROFIT 852,278 495,123
-------------------- --------------------
OPERATING EXPENSES
Wages 408,658 248,933
Administrative salaries and benefits 60,258 77,228
Advertising and promotion 60,915 37,739
Investor relations and transfer agent fee 120,273 41,156
Office and miscellaneous 59,334 23,204
Rent 49,153 46,356
Consulting 176,303 56,275
Professional fees 173,143 67,283
Travel 120,030 24,023
Telecommunications 36,574 7,074
Shipping 14,687 9,087
Research and development 61,298 --
Bad debt expense (recovery) 822 (350)
Currency exchange 20,788 20,205
Utilities 13,938 4,159
Depreciation 24,768 15,335
-------------------- --------------------
1,400,942 677,707
-------------------- --------------------
INCOME (LOSS) BEFORE INTEREST INCOME AND INCOME TAX (548,664) (182,584)
INTEREST INCOME 155,195 15,221
-------------------- --------------------
INCOME (LOSS) BEFORE INCOME TAX (393,469) (167,363)
INCOME TAX RECOVERY (363) --
-------------------- --------------------
NET INCOME (LOSS) $ (393,106) $ (167,363)
-------------------- --------------------
NET INCOME (LOSS) PER SHARE $ (0.03) $ (0.02)
-------------------- --------------------
WEIGHTED AVERAGE NUMBER OF SHARES 11,715,619 10,555,256
-------------------- --------------------
- See Notes to Unaudited Consolidated Financial Statements -
2
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED -- U.S. DOLLARS)
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
2002
AS RESTATED
2003 (NOTE 4)
------------------ -------------------
SALES $ 40,009 $ 55,257
COST OF SALES 34,944 54,782
------------------ -------------------
GROSS PROFIT 5,065 475
------------------ -------------------
OPERATING EXPENSES
Wages 74,786 28,880
Administrative salaries and benefits 20,783 5,202
Advertising and promotion 31,757 8,976
Investor relations and transfer agent fee 51,606 15,510
Office and miscellaneous 24,559 7,922
Rent 11,601 16,788
Consulting 39,572 7,958
Professional fees 45,270 37,478
Travel 41,611 13,608
Telecommunications 11,976 2,124
Shipping 6,409 3,462
Research and development 41,594 --
Bad debt expense (recovery) 822 1
Currency exchange (42,172) 4,797
Utilities 3,710 1,953
Depreciation 8,841 6,390
------------------ -------------------
372,725 161,049
------------------ -------------------
INCOME (LOSS) BEFORE INTEREST INCOME AND INCOME TAX (367,660) (160,574)
INTEREST INCOME 50,949 15,221
------------------ -------------------
INCOME (LOSS) BEFORE INCOME TAX (316,711) (145,353)
INCOME TAX (RECOVERY) (26,457) (43,343)
------------------ -------------------
NET INCOME (LOSS) $ (290,254) $ (102,010)
------------------ -------------------
NET INCOME (LOSS) PER SHARE $ (0.02) $ (0.01)
------------------ -------------------
WEIGHTED AVERAGE NUMBER OF SHARES 11,791,612 11,448,128
------------------ -------------------
- See Notes to Unaudited Consolidated Financial Statements -
3
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED -- U.S. DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2003 2002
AS RESTATED AS RESTATED
(NOTE 4) (NOTE 4)
------------------ ------------------
OPERATING ACTIVITIES
Net income (loss) $ (393,106) $ (167,363)
Stock compensation expense 123,078 140,758
Depreciation 24,768 15,335
Changes in non-cash working capital items:
Accounts receivable (170,996) (29,045)
Inventory (23,462) 18,505
Prepaid expenses 34,685 39,803
Accounts payable 12,796 11,014
Income tax receivable 60,014 (90,406)
------------------ ------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (332,223) (61,399)
------------------ ------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (49,477) (54,299)
Purchase of short-term investments (143,683) 9,225
Acquisition of investments (277,626) --
Loan receivable (1,827) (69)
------------------ ------------------
CASH USED IN INVESTING ACTIVITIES (472,613) (45,143)
------------------ ------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 401,058 5,867,600
Subscriptions received 3,000 13,010
------------------ ------------------
CASH PROVIDED BY FINANCING ACTIVITIES 404,058 5,880,610
------------------ ------------------
Effect of exchange rate changes on cash (14,576) 4,921
------------------ ------------------
INFLOW (OUTFLOW) OF CASH (415,354) 5,778,989
Cash and cash equivalents, beginning 556,789 190,457
------------------ ------------------
CASH AND CASH EQUIVALENTS, ENDING $ 141,435 $ 5,969,446
------------------ ------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 58,000 $ 74,067
Interest received 155,196 15,221
------------------ ------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Issue of common stock for investment $ 271,000 $ 44,400
------------------ ------------------
- See Notes to Unaudited Consolidated Financial Statements -
4
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2003
(U.S. DOLLARS)
1. BASIS OF PRESENTATION.
These unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information. These financial statements are condensed and
do not include all disclosures required for annual financial statements. The
organization and business of the Company, accounting policies followed by the
Company and other information are contained in the notes to the Company's
audited consolidated financial statements filed as part of the Company's
December 31, 2002 Form 10-KSB.
In the opinion of the Company's management, these consolidated
financial statements reflect all adjustments necessary to present fairly the
Company's consolidated financial position at September 30, 2003, and the
consolidated results of operations and the consolidated statements of cash flows
for the nine months ended September 30, 2003 and 2002. The results of operations
for the three months ended September 30, 2003 are not necessarily indicative of
the results to be expected for the entire fiscal year.
2. STOCKHOLDERS' EQUITY.
(a) During the period, the Company granted 30,000 stock options to
consultants and has recognized consulting expense applying Statement of
Financial Accounting Standard ("FAS") No. 123 using the Black-Scholes
option-pricing model, which resulted in expense of $12,407 for the three months
ended June 30, 2003.
(b) The following table summarizes the Company's stock option activity
for the period:
-------------------------------------------------------------------------------------------------
2003
--------------------------------------------------------------
Weighted
Exercise Average
Number Price Exercise
of Shares Per Share Price
------------------- ----------------------- ---------------
Balance, March 31, 2003 3,620,800 $ 0.25 to $ 5.50 $ 3.79
-------------------------------------------------------------------------------------------------
Granted During the Period 2,000 $ 4.25 4.25
Exercised (5,000) $ 0.25 to $ 2.28 (1.40)
-------------------------------------------------------------------------------------------------
Balance, June 30, 2003 3,617,800 $ 0.25 to $ 5.50 $ 3.81
-------------------------------------------------------------------------------------------------
(c) Share subscription receivable represents amount due for stock
purchased on exercise of options on June 30, 2002.
3. SUBSEQUENT EVENTS.
On October 9, 2003, the Company announced the modification of the
distribution agreement with Ondeo Nalco Company ("Ondeo"). Ondeo fell short of
sales targets to maintain exclusive distributorship of WATER$AVR(R), opening
other avenues for the Company to pursue key markets internally. This resulted in
the return of two million incentive stock options, which will be accounted for
in the next quarter.
5
4. RESTATEMENTS AS A RESULT OF CORRECTING STOCK COMPENSATION EXPENSE.
In October 2005, while completing a registration statement for
securities issued in the second quarter of 2005, the Company determined that
certain disclosures made in connection with its stock-based compensation expense
required adjustment. In September 2002, the Company entered into a distribution
agreement with Ondeo whereby Ondeo agreed to serve as the exclusive distributor
of the Company's WATER$AVR(R) products for so long as Ondeo maintained a certain
threshold sales level as defined in the agreement. As consideration for signing
the agreement, Ondeo was granted an option to purchase 2,000,000 shares of the
Company's common stock. Half of the option for one million shares was
exercisable immediately at an exercise price of $4.25 for each common share. The
remaining half of the option for 1,000,000 shares was exercisable after certain
threshold sales targets were achieved at a price of $5.50 for each common share.
In determining the stock-based compensation expense for the nine months
ended September 30, 2002, the Company expensed the entire fair value of the
stock option believing that the option fully vested upon the signing of the
agreement. In its October 2005 review, however, the Company determined that: (i)
first, as stated above, half of the option to purchase 1,000,000 shares of
common stock did not vest and was not exercisable until the threshold sales
target had been met, which would not be until five years after the signing of
the distribution agreement; and (ii) second, the Company did not consider
Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services; EITF No. 00-18, Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than Employees; and
EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer.
To correctly account for the stock options granted to Ondeo, the
stock-based compensation expense, included in consulting expenses, should have
been measured at the date the performance obligation was complete and then
recognized on a rational and systematic manner in relation to the sales achieved
by Ondeo. Had the Company correctly accounted for these stock options,
stock-based compensation expense for the quarter would have been nil as no sales
had yet been achieved. Instead, the Company recorded a stock-based compensation
expense of $2,704,000 for the quarter.
During the three months ended March 31, 2003, Ondeo achieved the first
threshold sales target, and, accordingly, the Company should have recorded a
corresponding stock-based compensation expense of $54,080. However, since the
entire stock-based compensation expense had been recorded in the September 30,
2002 interim financial statements and in the year ended December 31, 2002, the
Company did not record any additional stock-based compensation expense as a
result of the attained first threshold level.
In the fourth quarter of the year ended December 31, 2003, it was
determined that Ondeo was not going to attain the minimum sales targets
stipulated in the exclusive distributorship agreement. Consequently the
exclusive distributorship agreement and corresponding stock options were
cancelled. The Company accounted for the cancellation of the stock options in
accordance with FAS No. 123 similar to a forfeiture of stock options and
reversed $2,480,200 of the stock compensation expense previously recorded in
2002. Had the Company accounted for the cancellation of the stock options
correctly, it would have reversed the stock-based compensation expense of
$54,080 that was recorded in the first quarter ended March 31, 2003.
The following presents the effect on the Company's previously issued
financial statements for the nine months ended September 30, 2003, the nine
months ended September 30, 2002, the three months ended September 30, 2003 and
the year ended December 31, 2002:
6
Balance sheet as at September 30, 2003 -
-----------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
--------------------------------------------------------
Capital in excess of par value $ 9,729,483 $ (2,649,920) $ 7,079,563
Accumulated deficiency (3,440,000) 2,649,920 (790,080)
-----------------------------------------------------------------------------------------------------
Statement of operations for the nine months ended September 30, 2003 -
-----------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
--------------------------------------------------------
Expenses $ 1,346,862 $ 54,080 $ 1,400,942
Income (loss) before other item and
income tax (494,584) (54,080) (548,664)
Income (loss) before income tax (339,389) (54,080) (393,469)
Net income (loss) (339,026) (54,080) (393,106)
Net income (loss) per share (0.03) -- (0.03)
-----------------------------------------------------------------------------------------------------
Statement of cash flows for the nine months ended September 30, 2003 -
-----------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
--------------------------------------------------------
Net income (loss) $ (339,026) $ (54,080) $ (393,106)
Stock option compensation 68,998 54,080 123,078
-----------------------------------------------------------------------------------------------------
Statement of operations for the nine months ended September 30, 2002 -
-----------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
--------------------------------------------------------
Expenses $ 3,381,707 $ (2,704,000) $ 677,707
Income (loss) before other item and
income tax (2,886,584) 2,704,000 (182,584)
Income (loss) before income tax (2,871,363) 2,704,000 (167,363)
Net income (loss) (2,871,363) 2,704,000 (167,363)
Net income (loss) per share (0.27) 0.25 (0.02)
-----------------------------------------------------------------------------------------------------
Statement of cash flows for the nine months ended September 30, 2002 -
-----------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
--------------------------------------------------------
Net income (loss) $ (2,871,363) $ 2,704,000 $ (167,363)
Stock option compensation 2,844,758 (2,704,000) 140,758
-----------------------------------------------------------------------------------------------------
Statement of operations for the three months ended September 30, 2002 -
-----------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
--------------------------------------------------------
Expenses $ 2,865,049 $ (2,704,000) $ 161,049
Income (loss) before other item and
income tax (2,864,574) 2,704,000 (160,574)
Income (loss) before income tax (2,849,353) 2,704,000 (145,353)
Net income (loss) (2,806,010) 2,704,000 (102,010)
Net income (loss) per share (0.25) 0.24 (0.01)
-----------------------------------------------------------------------------------------------------
7
Statement of operations for the three months ended September 30, 2002 -
-----------------------------------------------------------------------------------------------------
Previously Increase Restated
Reported (Decrease)
--------------------------------------------------------
Capital in excess of par value $ 9,328,648 $ (2,704,000) $ 6,624,648
Accumulated deficiency (3,100,974) 2,704,000 (396,974)
-----------------------------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis or Plan of Operation.
OVERVIEW
Flexible Solutions International, Inc. ("we," "us," and "our")
develops, manufactures and markets specialty chemicals which slow down the
evaporation of water. Our initial product, HEAT$AVR(R), is marketed for use in
swimming pools and spas where its use, by slowing the evaporation of water,
allows the water to retain a higher temperature for a longer period of time and
thereby reduces the energy required to maintain the desired temperature of the
water in the pool. Our newest product, WATER$AVR(R), is marketed for water
conservation in irrigation canals, aquaculture, and reservoirs where its use
slows down water loss due to evaporation. We also make and sell dispensers which
automate the deployment of our chemical products.
For the three months ended September 30, 2003, we experienced a net
loss of $290,254, as compared to a net loss of $102,010 for the three months
ended September 30, 2002. As in the quarter ended September 30, 2002, the end of
the swimming pool season in the Northeastern parts of the United States and
Canada reduces demand for our products and results in low production
requirements for the third quarter, which resulted in revenue of $40,009 for the
quarter ended September 30, 2003, as compared to revenue of $55,257 for the
quarter ended September 30, 2002. In addition, we increased our expenditures in
the sales and marketing of our WATER$AVR(R) product line, as well as for
production equipment development. Finally, we produced an accurate amount of
product in the quarters ended March 31, 2003 and June 30, 2003 as a percentage
of annual sales and, therefore, did not have to carry high production rates into
the quarter ended September 30, 2002.
RESULTS OF OPERATIONS
The following analysis and discussion pertains to our results of
operations for the three and nine month periods ended September 30, 2003, as
compared to the results of operations for the three and nine month periods ended
September 30, 2002, and to changes in our financial condition from December 31,
2002 to September 30, 2003.
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
For the three months ended September 30, 2003, we achieved sales of
$40,009, as compared to $55,257 for the quarter ended September 30, 2002. These
results were as expected because our third fiscal quarter is typically our
slowest quarter as most sales to the residential pool market are completed by
the end of second quarter each year.
Our operating expenses were $372,725 for the quarter ended September
30, 2003, an increase from $161,049 in the quarter ended September 30, 2002. We
continued to increase spending on sales and marketing for our WATER$AVR(R)
product line and we increased our spending on advanced production machinery. The
largest real increases were in the areas of wages ($74,786 for the quarter ended
8
September 30, 2003, as compared to $28,880 in the quarter ended September 30,
2002), advertising and promotion ($31,757 for the quarter ended September 30,
2003, as compared to $8,976 in the quarter ended September 30, 2002), investor
relations and transfer agent fees ($51,606 for the quarter ended September 30,
2003, as compared to $15,510 in the quarter ended September 30, 2002), travel
($41,611 for the quarter ended September 30, 2003, as compared to $13,608 in the
quarter ended September 30, 2002), and research and development (from $61,298 in
the quarter ended September 30, 2003, as compared to nil in the quarter ended
September 30, 2002). These increases were primarily related to promoting,
developing and marketing our new WATER$AVR(R) products. Additional personnel
were hired for these purposes and travel-related costs increased in order to
promote our products throughout North America and around the world.
Our net loss for the quarter ended September 30, 2003 was $290,254, an
increase from $102,010 in the quarter ended September 30, 2002. Our cost of
sales decreased to 87% for the quarter ended September 30, 2003, as compared to
99% in the quarter ended September 30, 2002, as a result of lower sales with a
concurrent larger reduction in costs.
Our net loss per share was $0.02 for the quarter ended September 30,
2003, as compared to a net loss of $0.01 for the quarter ended September 30,
2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Sales in the nine months ended September 30, 2003 were $1,982,571, as
compared to $1,089,164 for the nine months ended September 30, 2002. This 82%
increase was a result of the increase in sales in our swimming pool division in
the first two quarters combined with our first significant sales from our
WATER$AVR(R) product line.
Our operating expenses for the nine months ended September 30, 2003
were $1,400,942, as compared to $677,707 for the nine months ended September 30,
2002. The cash increase in operating expenses was a result of increases in sales
and marketing costs for WATER$AVR(R) product line.
Our net loss for the nine months ended September 30, 2003 was $393,106,
as compared to a net loss of $167,363 for the nine months ended September 30,
2002. Our cash flow (loss) from operations decreased substantially to ($332,223)
in the nine months ended September 30, 2003, as compared to ($61,399) in the
nine months ended September 30, 2002, as costs related to the sales and
marketing of our WATER$AVR(R) product line increased.
Our net loss per share for the nine months ended September 30, 2003 was
$0.03, as compared to $0.02 for the nine months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
We have cash on hand of $5,347,613 as of September 30, 2003. In
addition, for the quarter ended September 30, 2003, we had working capital of
$5,857,728, as compared to working capital of $6,040,607 as of December 31,
2002. The decrease was a result of operational costs incurred in the sales and
marketing of our WATER$AVR(R) product line during the nine months ended
September 30, 2003. We have no external sources of liquidity in the form of
credit lines from banks.
Our management believes that our available cash will be sufficient to
fund our working capital requirements through December 31, 2003. Our management
further believes that available cash will be sufficient to implement our
expansion plans. No investment banking agreements are in place and there is no
guarantee that we will be able to raise capital in the future should that become
necessary.
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RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying financial statements have been restated to revise
certain stock-based compensation expense. In October 2005, while completing a
registration statement for securities issued in the second quarter of 2005, we
determined that certain disclosures made in connection with our stock-based
compensation expense required adjustment. In September 2002, we entered into a
distribution agreement with Ondeo Nalco Company ("Ondeo") whereby Ondeo agreed
to serve as the exclusive distributor of our WATER$AVR(R) products for so long
as Ondeo maintained a certain threshold sales level as defined in the agreement.
As consideration for signing the agreement, Ondeo was granted an option to
purchase 2,000,000 shares of our common stock. Half of the option for one
million shares was exercisable immediately at an exercise price of $4.25 for
each common share. The remaining half of the option for 1,000,000 shares was
exercisable after certain threshold sales targets were achieved at a price of
$5.50 for each common share.
In determining the stock-based compensation expense for the nine months
ended September 30, 2002, we expensed the entire fair value of the stock option
believing that the option fully vested upon the signing of the agreement. In our
October 2005 review, however, we determined that: (i) first, as stated above,
half of the option to purchase 1,000,000 shares of common stock did not vest and
was not exercisable until the threshold sales target had been met, which would
not be until five years after the signing of the distribution agreement; and
(ii) second, we did not consider Emerging Issues Task Force ("EITF") No. 96-18,
Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services; EITF No. 00-18,
Accounting Recognition for Certain Transactions involving Equity Instruments
Granted to Other Than Employees; and EITF No. 01-9, Accounting for Consideration
Given by a Vendor to a Customer.
During the three months ended March 31, 2003, Ondeo achieved the first
threshold sales target, and accordingly, we should have recorded a corresponding
stock-based compensation expense of $54,080. However, since the entire
stock-based compensation expense had been recorded in the September 30, 2002
interim financial statements and in the year ended December 31, 2002, we did not
record any additional stock-based compensation expense as a result of the
attained first threshold level.
In the fourth quarter of the year ended December 31, 2003, we
determined that Ondeo was not going to attain the minimum sales targets
stipulated in the agreement. Consequently, the agreement and corresponding stock
option was cancelled. We accounted for the cancellation of the stock option in
accordance with Statement of Financial Accounting Standard No. 123 similar to a
forfeiture of stock options and reversed $2,480,200 of the stock compensation
expense previously recorded in fiscal 2002. Had we accounted for the
cancellation of the stock option correctly, we would have reversed the amended
stock-based compensation expense of $54,080 that was recorded in the first
quarter ended March 31, 2003.
In light of the above, the net effect of the adjustments to the
financial statements is as follows:
1. Approximately $2,704,000 in stock compensation expense recorded in
September 2002 has been reversed;
2. Approximately $54,080 in stock-based compensation expense has been
recorded in the quarter ended March 31, 2003, as Ondeo met the first sales
threshold under the agreement;
3. Approximately $54,080 in stock-based compensation expense has been
reversed in the year ended December 31, 2003, as Ondeo failed to meet subsequent
sales thresholds under the agreement, resulting in the cancellation of the stock
option;
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4. As stated above, we recorded a stock-based compensation expense of
$2,704,000 in December 2002. As a result of canceling the stock option, we
previously recorded a recovery of $2,480,000 of stock compensation expense at
December 31, 2003. This $2,480,000 recovery has been reversed, in conjunction
with the reversal of $2,704,000 in stock compensation expense originally
recorded; and
5. For the periods ended March 31, 2004 to June 30, 2005, the net
effect of these adjustments is to decrease capital in excess of par value by
approximately $223,800 and increase retained earnings by approximately $223,800.
We are presently unaware of any evidence that the restatements
described above are due to any material noncompliance by us, as a result of
misconduct, with any financial reporting requirement under the federal
securities laws. Our audit committee of the board of directors is working with
our management and our accountants to assure that we are taking the appropriate
approach to resolving the issues related to the restatements, as well as any
further issues that may be identified during the course of its review.
Item 3. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic reports to the
Securities and Exchange Commission ("SEC") is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and
regulations, and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. Our disclosure controls and procedures are designed to provide a
reasonable level of assurance of reaching our desired disclosure control
objectives.
As of the end of the period covered by this Quarterly Report, we
carried out an evaluation, under the supervision and with the participation of
management, including our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended). Based upon that evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
that is required to be included in our periodic reports.
The prior accounting treatment of our stock-based compensation expense
was done in consultation and in accordance with the advice of our independent
accountants. Accordingly, management does not believe that this restatement of
our Quarterly Report indicates or results from a material weakness with respect
to our disclosure controls and procedures or our internal controls over
financial reporting.
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.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time we are involved in litigation incidental to the
conduct of our business. While the outcome of lawsuits and other proceedings
against us cannot be predicted with certainty, in the opinion of management, no
such lawsuits, either individually or in the aggregate, are expected to have a
material effect on our financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended September 30, 2003, our employees exercised
options to purchase 5,000 shares of our common stock, for an aggregate exercise
price of $7,000.00. The capital raised from these exercises was used for working
capital purposes.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits are attached hereto and filed herewith:
NUMBER DESCRIPTION
------ -----------
31.1 Certification of Principal Executive Officer Pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
ss.1350 and ss.906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
ss.1350 and ss.906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: December 5, 2005.
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
By:/s/ DANIEL B. O'BRIEN
-----------------------------------------
Name: Daniel B. O'Brien
Title: President and Chief Executive Officer
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