Flexible Solutions International, Inc. - Form 10QSB for the third quarter ended
September 30, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________
FORM
10-QSB
(Mark
one)
|
ý
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
|
For
the quarterly period ended September 30, 2006.
|
|
o
|
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 ý
No
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
ý
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: The Company had 12,998,427 shares of Common
Stock, par value $0.001 per share, outstanding as of October 23,
2006.
Transitional
Small Business Disclosure Format (check one): Yes o
No
ý
Index
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements.
|
|
|
|
|
|
(a)
|
|
1 |
|
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|
|
(b)
|
|
2 |
|
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|
(c)
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|
3 |
|
|
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|
(d)
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|
4 |
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(e)
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|
5 |
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Item
2.
|
|
17 |
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|
Item
3.
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23 |
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|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
|
24 |
|
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|
Item
2.
|
|
25 |
|
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|
Item
3.
|
|
25 |
|
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|
Item
4.
|
|
25 |
|
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|
Item
5.
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|
25 |
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|
Item
6.
|
|
26 |
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|
27 |
|
|
|
i
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
document contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements other than statements
of historical fact are “forward-looking statements” for the purposes of the
federal and state securities laws, including, but not limited to any projections
of earnings, revenue or other financials items; any statements of the plans,
strategies and objectives of management for future operations; any statements
concerning proposed new services or developments; any statements regarding
future economic conditions or performance; any statements regarding future
economic conditions or performance; any statements of belief; and any statements
of assumptions underlying any of the foregoing.
Forward-looking
statements may include the words “may,” “could,” “will,” “estimate,” “intend,”
“continue,” “believe,” “expect” or “anticipate” or other similar words. These
forward-looking statements present our estimates and assumptions only as of
the
date of this report. Except for our ongoing obligation to disclose material
information as required by the federal securities laws, we do not intend, and
undertake no obligation, to update any forward-looking statement.
Although
we believe that the expectations reflected in any of our forward-looking
statements are reasonable, actual results could differ materially from those
projected or assumed in any of our forward-looking statements. Our future
financial condition and results of operations, as well as any forward-looking
statements, are subject to change and inherent risks and uncertainties. The
factors impacting these risks and uncertainties include but are not limited
to:
· |
Increased
competitive pressures from existing competitors and new
entrants;
|
· |
Increases
in interest rate or our cost of borrowing or a default under any
material
debt agreement;
|
· |
Deterioration
in general or regional economic
conditions;
|
· |
Adverse
state or federal legislation or regulation that increases the costs
of
compliance, or adverse findings by a regulator with respect to existing
operations;
|
· |
Loss
of customers or sales weakness;
|
· |
Inability
to achieve future sales levels or other operating
results;
|
· |
The
unavailability of funds for capital expenditures;
and
|
· |
Operational
inefficiencies in distribution or other
systems.
|
For
a
detailed description of these and other factors that could cause actual results
to differ materially from those expressed in any forward-looking statement,
please see “Risk Factors” in our Annual Report on Form 10-KSB for the year ended
December 31, 2005.
PART
I
FINANCIAL
INFORMATION
Item
1. Financial
Statements.
CONSOLIDATED
BALANCE SHEETS
At
September 30, 2006
(U.S.
Dollars)
|
|
September
30,
2006
(Unaudited)
|
|
December
31,
2005
|
|
Assets
|
|
|
|
|
|
Current
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
418,425
|
|
$
|
526,292
|
|
Accounts
receivable
|
|
|
1,243,413
|
|
|
758,463
|
|
Income
tax receivable
|
|
|
-
|
|
|
28,918
|
|
Loan
receivable
|
|
|
36,385
|
|
|
35,228
|
|
Inventory
|
|
|
1,958,553
|
|
|
2,314,979
|
|
Prepaid
expenses
|
|
|
169,628
|
|
|
137,315
|
|
|
|
|
3,826,404
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
equipment and leaseholds
|
|
|
4,250,682
|
|
|
4,657,383
|
|
Patents
|
|
|
154,526
|
|
|
143,822
|
|
Investment
|
|
|
369,000
|
|
|
369,000
|
|
|
|
$
|
8,600,612
|
|
$
|
8,971,400
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
283,406
|
|
$
|
691,105
|
|
|
|
|
283,406
|
|
|
691,105
|
|
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
|
|
|
|
|
|
|
|
12,998,427
(2005: 12,981,316) common shares
|
|
|
12,998
|
|
|
12,981
|
|
Capital
in excess of par value
|
|
|
12,038,749
|
|
|
11,422,219
|
|
Other
comprehensive income
|
|
|
211,364
|
|
|
153,253
|
|
Deficit
|
|
|
(3,945,905
|
)
|
|
(3,308,158
|
)
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
8,317,206
|
|
|
8,280,295
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
8,600,612
|
|
$
|
8,971,400
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Notes 13 & 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
See
Notes to Unaudited Consolidated Financial Statements --
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Three Months Ended September 30, 2006 and 2005
(U.S.
Dollars -- Unaudited)
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
(Restated)
See
Note 3
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,913,958
|
|
$
|
1,302,089
|
|
Cost
of sales
|
|
|
1,027,274
|
|
|
737,938
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
886,684
|
|
|
564,151
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Wages
|
|
|
253,253
|
|
|
202,776
|
|
Administrative
salaries and benefits
|
|
|
155,841
|
|
|
56,760
|
|
Advertising
and
promotion
|
|
|
3,450
|
|
|
17,246
|
|
Investor
relations and transfer agent fee
|
|
|
82,676
|
|
|
41,897
|
|
Office
and miscellaneous
|
|
|
29,815
|
|
|
57,456
|
|
Insurance
|
|
|
67,342
|
|
|
42,087
|
|
Interest
expense
|
|
|
931
|
|
|
-
|
|
Rent
|
|
|
59,179
|
|
|
64,889
|
|
Consulting
|
|
|
94,811
|
|
|
26,069
|
|
Professional
fees
|
|
|
51,564
|
|
|
107,257
|
|
Travel
|
|
|
28,729
|
|
|
26,318
|
|
Telecommunications
|
|
|
9,417
|
|
|
9,097
|
|
Shipping
|
|
|
8,251
|
|
|
11,272
|
|
Research
|
|
|
21,795
|
|
|
20,843
|
|
Commissions
|
|
|
40,206
|
|
|
24,161
|
|
Bad
debt expense (recovery)
|
|
|
(234
|
)
|
|
-
|
|
Currency
exchange
|
|
|
752
|
|
|
64,653
|
|
Utilities
|
|
|
3,628
|
|
|
3,161
|
|
Depreciation
|
|
|
151,849
|
|
|
157,643
|
|
|
|
|
1,063,255
|
|
|
933,585
|
|
|
|
|
|
|
|
|
|
Income
(loss) before other items and income tax
|
|
|
(176,571
|
)
|
|
(369,434
|
)
|
Registration
rights penalty
|
|
|
(326,710
|
)
|
|
-
|
|
Interest
income
|
|
|
832
|
|
|
528
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax
|
|
|
(502,449
|
)
|
|
(368,906
|
)
|
Income
tax (recovery)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(502,449
|
)
|
|
(368,906
|
)
|
Deficit,
beginning
|
|
|
(3,443,456
|
)
|
|
(2,555,526
|
)
|
Deficit,
ending
|
|
$
|
(3,945,905
|
)
|
$
|
(2,924,432
|
)
|
|
|
|
|
|
|
|
|
Net
income (loss) per share
|
|
$
|
(0.04
|
)
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
12,987,799
|
|
|
12,840,446
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Nine Months Ended September 30, 2006 and 2005
(U.S.
Dollars -- Unaudited)
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
(Restated)
See
Note 3
|
|
|
|
|
|
|
|
Sales
|
|
$
|
6,672,791
|
|
$
|
5,189,803
|
|
Cost
of sales
|
|
|
3,797,649
|
|
|
2,869,883
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,875,142
|
|
|
2,319,920
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Wages
|
|
|
851,744
|
|
|
639,601
|
|
Administrative
salaries and benefits
|
|
|
475,982
|
|
|
165,836
|
|
Advertising
and
promotion
|
|
|
35,834
|
|
|
61,931
|
|
Investor
relations and transfer agent fee
|
|
|
146,009
|
|
|
551,486
|
|
Office
and miscellaneous
|
|
|
127,706
|
|
|
126,987
|
|
Insurance
|
|
|
161,050
|
|
|
104,874
|
|
Interest
expense
|
|
|
1,974
|
|
|
62,189
|
|
Rent
|
|
|
176,978
|
|
|
168,560
|
|
Consulting
|
|
|
290,859
|
|
|
117,855
|
|
Professional
fees
|
|
|
212,438
|
|
|
233,708
|
|
Travel
|
|
|
78,217
|
|
|
105,185
|
|
Telecommunications
|
|
|
24,442
|
|
|
31,987
|
|
Shipping
|
|
|
33,835
|
|
|
34,308
|
|
Research
|
|
|
102,059
|
|
|
39,247
|
|
Commissions
|
|
|
130,196
|
|
|
112,159
|
|
Bad
debt expense (recovery)
|
|
|
190
|
|
|
-
|
|
Currency
exchange
|
|
|
5,277
|
|
|
57,786
|
|
Utilities
|
|
|
13,258
|
|
|
14,662
|
|
Depreciation
|
|
|
447,894
|
|
|
488,729
|
|
|
|
|
3,315,942
|
|
|
3,117,090
|
|
|
|
|
|
|
|
|
|
Income
(loss) before other items and income tax
|
|
|
(440,800
|
)
|
|
(797,170
|
)
|
Registration
rights penalty
|
|
|
(326,710
|
)
|
|
-
|
|
Interest
income
|
|
|
2,684
|
|
|
4,145
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax
|
|
|
(764,826
|
)
|
|
(793,025
|
)
|
Income
tax (recovery)
|
|
|
(127,079
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(637,747
|
)
|
|
(793,025
|
)
|
Deficit,
beginning
|
|
|
(3,308,158
|
)
|
|
(2,131,407
|
)
|
Deficit,
ending
|
|
$
|
(3,945,905
|
)
|
$
|
(2,924,432
|
)
|
|
|
|
|
|
|
|
|
Net
income (loss) per share
|
|
$
|
(0.05
|
)
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
12,984,028
|
|
|
12,446,647
|
|
|
|
|
|
|
|
|
|
--
See
Notes to Unaudited Consolidated Financial Statements --
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Nine Months Ended September 30, 2006 and 2005
(U.S.
Dollars -- Unaudited)
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
(Restated)
See
Note 3
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(637,747
|
)
|
$
|
(793,025
|
)
|
Stock
compensation expense
|
|
|
641,358
|
|
|
527,050
|
|
Depreciation
|
|
|
447,894
|
|
|
488,729
|
|
|
|
|
451,505
|
|
|
222,754
|
|
Changes
in non-cash working capital items:
|
|
|
|
|
|
|
|
(Increase)
Decrease in accounts receivable
|
|
|
(484,950
|
)
|
|
(301,238
|
)
|
(Increase)
Decrease in income taxes
|
|
|
28,918
|
|
|
64,044
|
|
(Increase)
Decrease in inventory
|
|
|
356,426
|
|
|
(755,743
|
)
|
(Increase)
Decrease in prepaid expenses
|
|
|
(32,313
|
)
|
|
11,713
|
|
Increase
(Decrease) in accounts payable
|
|
|
(407,699
|
)
|
|
(44,858
|
)
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) operating activities
|
|
|
(88,113
|
)
|
|
(803,328
|
)
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Short-term
investments
|
|
|
-
|
|
|
559,440
|
|
Investments
|
|
|
-
|
|
|
(98,000
|
)
|
Loan
receivable
|
|
|
(1,157
|
)
|
|
(1,157
|
)
|
Development
of
patents
|
|
|
(10,704
|
)
|
|
-
|
|
Acquisition
of
property and equipment
|
|
|
(41,193
|
)
|
|
(130,661
|
)
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) investing activities
|
|
|
(53,054
|
)
|
|
329,622
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Short-term
loan
|
|
|
-
|
|
|
(3,150,000
|
)
|
Proceeds
from
issuance of common stock
|
|
|
(24,809
|
)
|
|
3,426,094
|
|
|
|
|
|
|
|
|
|
Cash
provided by financing activities
|
|
|
(24,809
|
)
|
|
276,094
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
58,109
|
|
|
132,709
|
|
|
|
|
|
|
|
|
|
Inflow
(outflow) of cash
|
|
|
(107,867
|
)
|
|
(64,903
|
)
|
Cash
and cash equivalents, beginning
|
|
|
526,292
|
|
|
558,795
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
|
$
|
418,425
|
|
$
|
493,892
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Registration
rights penalty
|
|
$
|
(326,710
|
)
|
|
-
|
|
Interest
received
|
|
$
|
2,684
|
|
$
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
See
Notes to Unaudited Consolidated Financial Statements --
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For
the Period Ended September 30, 2006
(U.S.
Dollars)
1. Basis
of Presentation.
These
unaudited consolidated financial statements of Flexible Solutions International,
Inc (the “Company”) have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information.
These
financial statements are condensed and do not include all disclosures required
for annual financial statements. The organization and business of the Company,
accounting policies followed by the Company and other information are contained
in the notes to the Company’s audited consolidated financial statements filed as
part of the Company’s December 31, 2005 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, 2006, and the consolidated results of
operations and the consolidated statements of cash flows for the nine months
ended September 30, 2006 and 2005. The results of operations for the nine months
ended September 30, 2006 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., WaterSavr Global Solutions Inc., Nano Detect Technologies Inc.,
and Seahorse Systems Inc. All inter-company balances and transactions have
been
eliminated. The Company was incorporated May 12, 1998 in the State of Nevada
and
had no operations until June 30, 1998, as described below.
On
June
30, 1998, the Company completed the acquisition of all of the shares of Flexible
Ltd. The acquisition was effected through the issuance of 7,000,000 shares
of
common stock by the Company, with the former shareholders of Flexible Ltd.
receiving all of the shares then issued and outstanding of the Company. The
transaction has been accounted for as a reverse-takeover. Flexible Ltd. is
accounted for as the acquiring party and the surviving entity. As Flexible
Ltd.
is the accounting survivor, the consolidated financial statements presented
for
all periods are those of Flexible Ltd. The shares issued by the Company pursuant
to the acquisition have been accounted for as if those shares had been issued
upon the organization of Flexible Ltd.
On
May 2,
2002, the Company established WaterSavr Global Solutions Inc. through the
issuance of 100 shares of its common stock.
Pursuant
to a purchase agreement dated May 26, 2004, the Company acquired the assets
of
Donlar Corporation on June 9, 2004
and
created a new company, NanoChem Solutions Inc. The purchase price of the
transaction was $6,150,000, with consideration being a combination of cash
and
debt. Under the purchase agreement and as part of the consideration, the Company
issued a promissory note bearing interest at 4% to satisfy $3,150,000 of the
purchase price. This note was due June 2, 2005 and upon payment, all former
Donlar assets that were pledged as security were released from their
mortgage.
The
following table summarizes the estimated fair value of the assets acquired
at
the date of acquisition (at 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 established Nano Detect Technologies Inc. through
the issuance of 1,000 shares of common stock from Nano Detect Technologies
Inc.
to the Company.
On
June
21, 2005, the Company established Seahorse Systems Inc. through the issuance
of
1,000 shares of common stock from Seahorse Systems Inc. to the
Company.
2. Significant
Accounting Policies.
These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States applicable to
a
going concern and reflect the policies outlined below.
(a) Cash
and Cash Equivalents.
The
Company considers all highly liquid investments purchased with an original
or
remaining maturity of less than three months at the date of purchase to be
cash
equivalents. Cash and cash equivalents are maintained with several financial
institutions.
(b) Inventory
and Cost of Sales.
The
Company has four major classes of inventory: finished goods, works in progress,
raw materials and supplies. In all classes, 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 using the following annual rates:
Computer
hardware
|
|
30%
Declining balance
|
Furniture
and fixtures
|
|
20%
Declining balance
|
Manufacturing
equipment
|
|
20%
Declining balance
|
Office
equipment
|
|
20%
Declining balance
|
Building
|
|
10%
Declining balance
|
Leasehold
improvements
|
|
Straight-line
over lease term
|
|
|
|
Property
and equipment are written down to net realizable value when management
determines there has been a change in circumstances which indicates its 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 its 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 the Company’s average cost of funds. The assessment of
the recoverability will be impacted if estimated future operating cash flows
are
not achieved. For the quarters ended September 30, 2006 and 2005, no impairment
charges have been recognized.
(e) Investments.
Investment
in corporations subject to significant influence and investments in partnerships
are recorded using the equity method of accounting. On this basis, the
Company’s share of income and losses of the corporations and partnerships is
included in earnings and the Company’s investment therein adjusted by a like
amount. Dividends received from these entities reduce the investment
accounts. Portfolio investments not subject to significant influence are
recorded using the cost method.
The
fair
value of a cost method investment is not estimated if there are no identified
events or changes in circumstances that may have a significant adverse effect
on
the fair value of the investment.
The
Company currently does not have any investments that require use of the equity
method of accounting.
(f) 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 assets and liabilities using exchange rates in effect at the balance sheet
date. 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 are 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.
(g) 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.
(h) 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 trading prices of the Company’s common stock on the
dates of the stock transactions.
(i) Stock-based
Compensation.
In
December 2004, the Financial Accounting Standards Board (“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 has adopted this statement for its first quarter starting January
1,
2006 and will continue to evaluate the impact of adopting this
statement.
(j) 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.
(k) Income
(Loss) Per Share.
Income
(loss) per share is calculated by dividing net income (loss) by the weighted
average number of shares outstanding. Diluted loss per share is computed by
giving effect to all potential dilutive options that were outstanding during
the
year. For
the
three quarters ended September 30, 2006 and the years ended December 31, 2005,
2004 and 2003, all outstanding options were anti-dilutive.
(l) Use
of Estimates.
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States 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.
(m) Financial
Instruments.
The
fair
market value of the Company’s financial instruments comprising cash and cash
equivalents, short-term investments, accounts receivable, loan receivable,
accounts payable and accrued liabilities and amounts due to shareholders were
estimated to approximate their carrying values due to immediate or short-term
maturity of these financial instruments.
The
Company is exposed to foreign exchange and interest rate risk to the extent
that
market value rate fluctuations materially differ from financial assets and
liabilities, subject to fixed long-term rates.
3. Restatements
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
|
)
|
|
(793,025
|
)
|
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
|
|
|
747,549
|
|
|
(183,398
|
)
|
|
564,151
|
|
Net
Income (Loss)
|
|
|
(185,508
|
)
|
|
(183,398
|
)
|
|
(368,906
|
)
|
Earnings
per Share
|
|
|
(0.01
|
)
|
|
(0.02
|
)
|
|
(0.03
|
)
|
Deficit,
beginning
|
|
$
|
(2,555,526
|
)
|
$
|
-
|
|
$
|
(2,555,526
|
)
|
Deficit,
ending
|
|
|
(2,741,034
|
)
|
|
(183,398
|
)
|
|
(2,924,432
|
)
|
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
|
)
|
4. Loan
Receivable.
|
2006
|
2005
|
5%
loan receivable due on demand
|
$
36,385
|
$
35,228
|
5. Prepaid
Expenses.
|
2006
|
2005
|
Security
deposit and prepaids
|
$
169,628
|
$
137,315
|
6. Property,
Equipment and Leaseholds.
|
|
Cost
|
|
Accumulated
Amortization
|
|
2006
Net
|
|
2005
Net
|
|
Buildings
|
|
$
|
3,144,259
|
|
$
|
657,543
|
|
$
|
2,486,716
|
|
$
|
2,688,341
|
|
Computer
hardware
|
|
|
58,407
|
|
|
32,587
|
|
|
25,820
|
|
|
29,962
|
|
Furniture
and fixtures
|
|
|
18,383
|
|
|
8,287
|
|
|
10,096
|
|
|
10,965
|
|
Office
equipment
|
|
|
30,398
|
|
|
17,221
|
|
|
13,177
|
|
|
15,081
|
|
Manufacturing
equipment
|
|
|
2,224,122
|
|
|
927,752
|
|
|
1,296,370
|
|
|
1,488,208
|
|
Trailer
|
|
|
2,080
|
|
|
1,409
|
|
|
671
|
|
|
831
|
|
Leasehold
improvements
|
|
|
41,295
|
|
|
25,242
|
|
|
16,053
|
|
|
21,362
|
|
Trade
show booth
|
|
|
7,792
|
|
|
4,199
|
|
|
3,593
|
|
|
4,447
|
|
Land
|
|
|
398,186
|
|
|
-
|
|
|
398,186
|
|
|
398,186
|
|
|
|
$
|
5,924,922
|
|
$
|
1,674,240
|
|
$
|
4,250,682
|
|
$
|
4,657,383
|
|
7. Patents
In
fiscal
2005, the Company started the patent process for additional WATER$AVR® products.
The amounts recorded represent the fees paid to date. As the patent process
is
not yet completed, amortization has not yet been recognized. Patents are
amortized over their useful lives once granted.
|
|
2006
|
|
2005
|
|
Patents
|
|
$
|
154,526
|
|
|
143,822
|
|
8. Investment.
|
|
2006
|
|
2005
|
|
Tatko
Inc.
|
|
$
|
271,000
|
|
$
|
271,000
|
|
Air
Water Interface Delivery & Detection Inc.
|
|
$
|
98,000
|
|
|
98,000
|
|
|
|
$
|
369,000
|
|
$
|
369,000
|
|
On
May
31, 2003, the Company acquired an option to purchase a 20% interest in the
outstanding shares of Tatko Inc. (“Tatko”) for consideration of the issuance of
100,000 shares of our common stock. The option to purchase the shares of Tatko
expires on May 31, 2008. The cost of the investment has been accounted for
based
on the original fair market value of our common stock on May 31, 2003. See
Contingencies (Note 14).
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 our common stock to
provide incentives to directors, key employees and other persons who contribute
to our success. The exercise price of all incentive options are issued for
not
less than fair market value.
The
following table summarizes stock option activity for the years ended December
31, 2005 and 2004 and for the nine months ended September 30, 2006:
|
|
Number
of shares
|
|
Exercise
price
per
share
|
|
Weighted
average exercise price
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$3.58
- $4.40
|
|
$
|
4.17
|
|
Exercised
|
|
|
(162,000
|
)
|
$1.40
|
|
$
|
1.40
|
|
Expired
|
|
|
(49,000
|
)
|
$3.00
- $4.25
|
|
$
|
3.52
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
1,060,740
|
|
$1.00
- $4.55
|
|
$
|
3.44
|
|
Granted
|
|
|
1,115,000
|
|
$3.25
- $3.50
|
|
$
|
3.25
|
|
Cancelled
|
|
|
(65,889
|
)
|
$1.20
- $4.25
|
|
$
|
2.66
|
|
Exercised
|
|
|
(17,111
|
)
|
$1.40
|
|
$
|
1.40
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2006
|
|
|
2,092,740
|
|
$1.00
- 4.55
|
|
$
|
3.37
|
|
The
fair
value of each option grant is calculated using the following weighted average
assumptions:
|
2005
|
2004
|
2003
|
|
Expected
life - years
|
5.0
|
5.0
|
5.0
|
|
Interest
rate
|
3.65%
|
3.5%
|
2.87%
|
|
Volatility
|
52.0%
|
49.0%
|
49.0%
|
|
Dividend
yield
|
-
%
|
-
%
|
-
%
|
|
|
|
|
|
During
the nine months ended September 30, 2006, the Company granted 440,000 options
to
purchase common stock to outsiders and has applied FAS No. 123(R) using the
Black-Scholes option-pricing model, which resulted in additional expenses of
$104,451 this quarter (recorded as consulting and investor relations expense),
for a total of $263,494 recognized year to date. During the period ended March
31, 2006, the Company granted 675,000 options to employees, resulting in an
additional $125,955 in wages and administrative expenses in each quarter ended
March 31, 2006, June 30, 2006 and September 30, 2006. During the year ended
December 31, 2005, the Company granted 30,000 (2004 - 275,400) stock options
to
consultants and has applied FAS No. 123 using the Black-Scholes option-pricing
model, which resulted in additional expenses of $9,350 (2004 - $299,345). During
the year ended December 31, 2005, the Company recognized $93,600 in expenses
for
90,000 options granted in the year ended December 31, 2004, but which vested
in
the year ended December 31, 2005. During the year ended December 31, 2005,
250,000 options, which were granted in 2004, vested according to the fulfillment
of certain milestones, which resulted in additional expenses of $422,500.
10. Warrants
On
April
14, 2005, the Company announced that it had raised $3,375,000 pursuant to a
private placement of up to 1,800,000 shares of its common stock. The investors
collectively purchased 900,000 shares of the Company’s common stock at a per
share purchase price of $3.75, together with warrants to purchase up to 900,000
additional shares of the Company’s common stock. The warrants have a four-year
term and are immediately exercisable at a price of $4.50 per share.
On
June 8, 2005, the Company announced that it had raised an additional
$327,750 pursuant to a private placement of up to 174,800 shares of its common
stock. An investor purchased 87,400 shares of the Company’s common stock at a
per share price of $3.75, together with a warrant to purchase up to 87,400
additional shares of the Company’s common stock. The warrant has a four-year
term and is immediately exercisable at a price of $4.50 per share.
The
following table summarizes the Company’s warrant option activity for the year
ended December 31, 2005 (no prior or subsequent activity):
|
|
|
Number
of shares
|
|
Exercise
price
per
share
|
|
Weighted
average exercise price
|
|
|
Balance,
December 31, 2004
|
—
|
|
—
|
|
—
|
|
|
Granted
|
|
987,400
|
|
$4.50
|
|
$4.50
|
|
|
Exercised
|
|
—
|
|
—
|
|
—
|
|
|
Cancelled
|
|
—
|
|
—
|
|
—
|
|
|
Balance,
December 31, 2005
|
|
987,400
|
|
$4.50
|
|
$4.50
|
|
11. Capital
Stock.
During
the quarter ended September 30, 2006, the Company amended a stock option
contract issued in 2001. The Company initially issued 20,000 common stock
options with an exercise price of $1.40 to a consultant in exchange for
services, which resulted in a consulting expense of $19,840 in the 2001
financial statements. On September 23, 2006, the Company amended these stock
options and instead issued 11,111 common shares to the consultant for past
services rendered and no other consideration was received. The market value
of
the common shares issued was calculated using the then-current trading price
of
$3.22 per share and totals $35,777. A consulting expense of $15,937, which
represents the difference between the market value of the shares issued and
the
expense recognized in 2001, was recognized in the financial
statements.
During
the quarter ended June 30, 2006, the Company issued 6,000 shares of common
stock
at $1.40 per share upon exercise of stock options.
On
April
14, 2005, the Company announced that it had raised $3,375,000 pursuant to a
private placement of up to 1,800,000 shares of its common stock. The investors
collectively purchased 900,000 shares of the Company’s common stock at a per
share purchase price of $3.75, together with warrants to purchase up to 900,000
additional shares of the Company’s common stock. The warrants have a four-year
term and are immediately exercisable at a price of $4.50 per share.
On
June 8, 2005, the Company announced that it had raised an additional
$327,750 pursuant to a private placement of up to 174,800 shares of its common
stock. An investor purchased 87,400 shares of the Company’s common stock at a
per share price of $3.75, together with a warrant to purchase up to 87,400
additional shares of the Company’s common stock. The warrant has a four-year
term and is immediately exercisable at a price of $4.50 per share.
The
purpose of these transactions was to provide sufficient working capital for
the
Company to retire the debt remaining from its acquisition of certain assets
from
Donlar Corporation in June 2004. Costs associated with these two capital raises,
including the registration rights penalty payment of $326,710, were $847,110,
making the net proceeds $2,855,640.
During
the year ended December 31, 2005 the Company issued 162,000 shares of common
stock at $1.40 per share upon exercise of stock options.
12. 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 which 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.
|
|
Nine
Months Ended September 30th
|
|
|
|
2006
|
|
2005
|
|
Revenue
|
|
|
|
|
|
EWCP
|
|
$
|
1,226,550
|
|
$
|
862,537
|
|
BPCA
|
|
|
5,446,241
|
|
|
4,327,266
|
|
Consolidated
|
|
|
6,672,791
|
|
|
5,189,803
|
|
Interest
revenue
|
|
|
|
|
|
|
|
EWCP
|
|
|
2,684
|
|
|
4,088
|
|
BPCA
|
|
|
0
|
|
|
57
|
|
Consolidated
|
|
|
2,684
|
|
|
4,145
|
|
Interest
expense
|
|
|
|
|
|
|
|
EWCP
|
|
|
301
|
|
|
6,611
|
|
BPCA
|
|
|
1,673
|
|
|
55,578
|
|
Consolidated
|
|
|
1,974
|
|
|
62,189
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
EWCP
|
|
|
42,792
|
|
|
42,452
|
|
BPCA
|
|
|
405,102
|
|
|
446,277
|
|
Consolidated
|
|
|
447,894
|
|
|
488,729
|
|
Segment
profit (loss) prior to other items
|
|
|
|
|
|
|
|
EWCP
|
|
|
(1,084,519
|
)
|
|
(1,417,298
|
)
|
BPCA
|
|
|
643,719
|
|
|
620,128
|
|
Consolidated
|
|
|
(440,800
|
)
|
|
(797,170
|
)
|
Segment
assets
|
|
|
|
|
|
|
|
EWCP
|
|
|
374,305
|
|
|
311,577
|
|
BPCA
|
|
|
4,030,903
|
|
|
4,580,700
|
|
Consolidated
|
|
|
4,405,208
|
|
|
4,892,277
|
|
Expenditures
for segment assets
|
|
|
|
|
|
|
|
EWCP
|
|
|
12,270
|
|
|
118,245
|
|
BPCA
|
|
|
28,923
|
|
|
12,416
|
|
Consolidated
|
|
|
41,193
|
|
|
130,661
|
|
The
EWCP
shows a reduction in expenditures for segment assets due to a credit being
issued on costs associated with development of new patents.
The
sales
generated in the United States of America and Canada is as follows:
|
|
2006
|
|
2005
|
|
Canada
|
|
$
|
199,312
|
|
$
|
154,063
|
|
United
States and abroad
|
|
|
6,473,479
|
|
|
5,035,740
|
|
Total
|
|
$
|
6,672,791
|
|
$
|
5,189,803
|
|
|
|
|
|
|
|
|
|
The
Company’s long-lived assets are located in Canada and the United States as
follows:
|
|
2006
|
|
2005
|
|
Canada
|
|
$
|
369,086
|
|
$
|
311,576
|
|
United
States
|
|
|
4,036,122
|
|
|
4,580,701
|
|
Total
|
|
$
|
4,405,208
|
|
$
|
4,892,277
|
|
|
|
|
|
|
|
|
|
13. Commitments.
The
Company is committed to minimum rental payments for property and premises
aggregating approximately $468,757 over the term of four leases, the last
expiring on September 30, 2009.
Commitments
in each of the next five years are approximately as follows:
2006
|
|
$
|
69,108
|
|
2007
|
|
|
147,948
|
|
2008
|
|
|
150,217
|
|
2009
|
|
|
101,484
|
|
14. Contingencies.
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 the return of 100,000
shares of the Company’s common stock and the repayment of a $25,000 loan, which
were provided to defendants for investment banking services consisting of
securing a $5 million loan and a $25 million stock offering. Such services
were
not performed and in the proceeding 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. On May 24, 2004, there was a hearing on defendant’s motion to set
aside the injunction, which motion was denied by the trial court on May 29,
2004. 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.
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 parties
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 vigorously
disputing the claims. 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 the plaintiff is not determinable
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.,
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 Solutions Ltd. and Mr. O’Brien filed their
defense and filed a counterclaim against Sun Solar. The counterclaim seeks:
(x)
injunctive relief against further use of the “Tropical Fish” trademark by Sun
Solar; (y) a declaration that the “Tropical Fish” trademark is owned by the
Company, or, in the alternative, is not distinctive and should be struck from
the trademark registry; and (z) monetary damages exceeding $50,000. The parties
have completed documentary discovery and examinations for discovery of all
parties. 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.
On
July
23, 2004, the Company filed a breach of contract suit in the Circuit Court
of
Cook County, Illinois against Tatko. The action arises out of a joint product
development agreement entered into between the Company and Tatko in which the
Company agreed to invest $10,000 toward the product development venture and
granted to Tatko 100,000 shares of the Company’s restricted common stock. In
return, Tatko granted the Company a five-year option to purchase 20% of Tatko’s
outstanding capital stock. Tatko has since refused to collaborate on the
agreement and the Company seeks declaratory relief stating that Tatko is not
entitled to the 100,000 shares of the Company’s restricted common stock. The
litigation is still pending at this time.
In
addition, Tatko filed its own suit on September 24, 2004 in the Circuit Court
of
Cook County, Illinois seeking declaratory relief of its entitlement to the
Company’s restricted common stock. On May 23, 2005, the Tatko suit was dismissed
with prejudice by the Circuit 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.
On
January 12, 2005, the Company filed a lawsuit in the Court of the Queen’s Bench
of Alberta, in which our subsidiary, Flexible Solutions Ltd., is
inter-provincially registered. The Company was seeking indeterminate damages
resulting from a breach of contract by Calgary Diecast Corporation (“CDC”). The
contract at issue was never completed and raw materials belonging to the Company
remain in the possession of CDC. On April 25, 2005, the court ordered a judgment
in favor of the Company in the amount of $47,495 and the intention is to collect
on this judgment using all available means.
15. Comparative
Figures.
Certain
of the comparative figures have been reclassified to conform with the current
year’s presentation.
Overview
Flexible
Solutions International, Inc. (“we,” “us,” and “our”) develops, manufactures and
markets specialty chemicals that slow the evaporation of water. Our initial
product, HEAT$AVR®, 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®, is marketed for water conservation in irrigation canals,
aquaculture, and reservoirs where its use slows water loss due to evaporation.
We also make and sell dispensers which automate the deployment of our chemical
products.
Results
of Operations
The
following analysis and discussion pertains to our results of operations for
the
three and nine month periods ended September 30, 2006, as compared to the
results of operations for the three and nine month periods ended September
30,
2005, and to changes in our financial condition from December 31, 2005 to
September 30, 2006.
Nine
Months Ended September 30, 2006, 2005 and 2004
Separate
financial data for each of our operating segments is provided below. We evaluate
the performance of our operating segments based on the following:
|
Nine
Months Ended September 30,
|
%
Change
|
%
Change
|
Sales
|
2006
|
|
2005
|
|
2004
|
|
2006-2005
|
|
2005-2004
|
|
Energy
Segment
|
$
|
1,226,550
|
|
$
|
862,537
|
|
$
|
900,789
|
|
42%
|
|
(4%
|
)
|
Polymer
Segment
|
$
|
5,446,241
|
|
|
4,327,266
|
|
|
1,511,136
|
*
|
26%
|
|
186%
|
*
|
Consolidated
|
$
|
6,672,791
|
|
$
|
5,189,803
|
|
$
|
2,411,925
|
|
29%
|
|
115%
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Segment
|
$
|
632,562
|
|
$
|
393,344
|
|
$
|
458,152
|
|
61%
|
|
(14%
|
)
|
Polymer
Segment
|
$
|
2,242,580
|
|
|
1,926,576
|
|
|
1,124,459
|
*
|
16%
|
|
71%
|
*
|
Consolidated
|
$
|
2,875,142
|
|
$
|
2,319,920
|
|
$
|
1,582,611
|
|
24%
|
|
47%
|
|
SG&A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Segment
|
$
|
1,717,081
|
|
$
|
1,810,643
|
|
$
|
1,470,207
|
|
(5%
|
)
|
23%
|
|
Polymer
Segment
|
$
|
1,598,861
|
|
|
1,306,447
|
|
|
878,107
|
*
|
22%
|
|
49%
|
*
|
Consolidated
|
$
|
3,315,942
|
|
$
|
3,117,090
|
|
$
|
2,348,314
|
|
6%
|
|
33%
|
|
Net
Income (Loss) before other items
|
$
|
(440,800
|
)
|
$
|
(797,170
|
)
|
$
|
(765,703
|
)*
|
45%
|
|
(4%
|
)*
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Segment
|
$
|
2,684
|
|
$
|
4,088
|
|
$
|
33,463
|
|
(34%
|
)
|
(88%
|
)
|
Polymer
Segment
|
$
|
-
|
|
|
57
|
|
|
-
|
*
|
-
|
|
-
|
*
|
Consolidated
|
$
|
2,684
|
|
$
|
4,145
|
|
$
|
33,463
|
*
|
(35%
|
)
|
(88%
|
)*
|
Registration
rights penalty
|
$
|
(326,710
|
)
|
|
-
|
|
|
-
|
|
-
|
|
-
|
|
Net
Income (Loss) after other items
|
$
|
(764,826
|
)
|
$
|
(793,025
|
)
|
$
|
(732,240
|
)*
|
4%
|
|
(8%
|
)*
|
*
Full
nine months of Polymer segment data is not available as indicated. Our polymer
segment was formed after the acquisition of certain assets of the Donlar
Corporation in June 2004.
For
the
nine months ended September 30, 2006 we had a net loss before other items of
$440,800 as compared to a net loss before other items of $797,170 for the nine
months ended September 30, 2005. Due to a contractual agreement from the equity
raise in the spring of 2005, we recorded $326,710 as a registration rights
penalty in the nine months ended September 30, 2006, increasing our loss. After
all other items, our GAAP net loss for the nine months ended September 30,
2006
was $637,747 as compared to a net loss after other items of $793,025 for the
nine months ended September 30, 2005. The $326,710 penalty recorded in the
quarter ended September 30, 2006 is a one time occurrence that management
believes should have been recorded directly against the corresponding capital,
which was raised in 2005. However, at the date of issuance of the capital,
it
was deemed to be very unlikely that any obligation would arise and as such,
we
were not able to make a reasonable estimate of a potential liability. Given
these circumstances, GAAP measures require we record the payment as an other
item on our income statement. All contractual obligations related to the equity
raised in 2005 are now complete and no more amounts will become
due.
Increased
brand recognition, increased sales of our residential swimming pool product,
ECO$AVR®, and increased sales from our NanoChem division resulted in sales of
$6,672,791 in the nine months ended September 30, 2006, as compared to
$5,189,803 in the nine months ended September 30, 2005. Our Energy segment
had
sales of $1,226,550 for nine months ended September 30, 2006, as compared to
$862,537 for the nine months ended September 30, 2005, an increase of 42%.
Our
Polymer segment had sales of $5,446,241 for the nine months ended September
30,
2006, as compared to sales of $4,327,266 for the nine months ended September
30,
2005, an increase of 26%.
Our
management is satisfied with the effect of the acquisition of assets from Donlar
Corporation (“Donlar”), as the NanoChem division (which is comprised of the
former Donlar assets) has contributed greatly to sales and cash flow and is
starting to replace the capital expended to acquire the assets. In addition,
opportunities to synergistically cross-sell all of our divisions’ products have
already generated leads to new business and the swimming pool division has
discovered ways to help NanoChem increase utilization of its Peru, Illinois
factory, while decreasing our costs as a whole. We maintained expenditures
in
the areas of WATER$AVR® product sales and marketing costs and production
equipment development costs. The major factors that contributed to our increased
revenue were greater sales from our HEAT$AVR® and ECO$AVR® swimming pool
division and an increase in sales from our newly-formed NanoChem division.
NanoChem sales are much less seasonal than those of our WATER$AVR® product and
HEAT$AVR® and ECO$AVR® products divisions. As NanoChem sales increase, we
anticipate that we will experience a reduction in the volatility of our sales
over time.
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.
Our
operating expenses were $3,315,942 for the nine months ended September 30,
2006
as compared to $3,117,090 for the nine months ended September 30, 2005. As
sales
increased 29%, a modest increase in operating expenses of 6% is reasonable.
Our
largest increases were in research and development ($102,059 for the nine months
ended September 30, 2006, as compared to $39,247 for the nine months ended
September 30, 2005) and insurance ($161,050 for the nine months ended September
30, 2006 as compared to $104,874 for the nine months ended September 30, 2005).
The insurance increase was unavoidable and is comparable to what others are
experiencing in the industry. Our increase in research is a result of more
money
being spent to better compete in the market with new or improved products.
Consulting expenses increased ($290,859 for the nine months ended September
30,
2006, as
compared
to $117,855 for the nine months ended September 30, 2005) as a direct result
of
recognizing $188,890 for the nine months ended September 30, 2006 (2005 -
$54,600) for stock options granted to consultants. The increase in wages and
administrative salaries are in part due to the application of SFAS 123 (R)
that
now requires companies to apply a fair value based measurement method to
employee stock options. After applying SFAS 123(R) to employee granted stock
options, the company recognized an additional $277,864 in expenses for the
nine
months ended September 30, 2006. Our decreases in advertising ($35,834 for
the
nine months ended September 30, 2006, as compared to $61,931 for the nine months
ended September 30, 2005), travel ($78,217 for the nine months ended September
30, 2006 as compared to $105,185 for the nine months ended September 30, 2005)
and telecommunications ($24,442 for the nine months ended September 30, 2006
as
compared to $31,987 for the nine months ended September 30, 2005) are the result
of better cost-control in these areas instituted by management over the past
year. The decrease in interest expense ($1,974 for the nine months ended
September 30, 2006, as compared to $62,189 in the nine months ended September
30, 2005) is a direct result of the Company paying off the short-term loan
used
for the purchase of assets to create the NanoChem division. The decrease in
investor relations ($146,009 in the nine months ended September 30, 2006 as
compared to $551,486 for the nine months ended September 30, 2005) is a direct
result of large stock option expense in relation to our 2005 equity raise.
During the nine months ended September 30, 2006, the company recognized $74,604
(2005 - $463,100) for stock options granted in relation to investor
relations.
Our
Energy segment generated $1,717,081 in operating expenses in the nine months
ended September 30, 2006, a decrease from $1,810,643 from the nine months ended
September 30, 2005. This five percent decrease is partially attributable to
the
stock options that vested in our quarter ended June 30, 2005 but is not wholly
transparent due to the application of SFAS 123(R) which started in January
2006.
Our Polymer segment generated $1,598,861 in operating expenses in the nine
months ended September 30, 2006, an increase from $1,306,447 for the nine months
ended September 30, 2005. This twenty two percent increase is attributable
to
the twenty six percent increase in sales as well as the application of SFAS
123(R).
Our
net
loss before other items for the nine months ended September 30, 2006 was
$440,800, a decrease from our net loss of $797,170 in the nine months ended
September 30, 2005. The decrease in net loss is attributable to increased sales
in all divisions, as compared to the nine months ended September 30, 2005,
augmented by positive operating cash from our NanoChem division. Our Energy
segment’s net loss before other items for the nine months ended September 30,
2006 was $1,084,519, a decrease from our net loss of $1,417,298 in the nine
months ended September 30, 2005, which is attributable to our increased brand
recognition and sales. Our Polymer segment’s net profit for the nine months
ended September 30, 2006 was $643,719, a modest increase over the net profit
of
$620,128 for the nine months ended September 30, 2005. This increase is not
as
high as could be expected for the 22 % increase of sales and is attributable
to
higher cost of goods sold, a result of the rise in oil prices worldwide, as
well
as the application of SFAS 123 (R).
Our
net
loss after other items and income tax is $637,747 for the nine months ended
September 30, 2006 as compared to a net loss of $793,025 for the nine months
ended September 30, 2005. The $326,710 penalty recorded in the quarter ended
September 30, 2006 is a one time occurrence that management believes should
have
been recorded directly against the corresponding capital, which was raised
in
2005. However, at the date of issuance of the capital, it was deemed to be
very
unlikely that any obligation would arise and as such, we were not able to make
a
reasonable estimate of a potential liability. Given these circumstances, GAAP
measures require we record the payment as an other item on our income statement.
All contractual obligations related to the equity raised in 2005 are now
complete and no more amounts will become due.
Our
loss
per share was $0.05 for the nine months ended September 30, 2006, as compared
to
a loss of $0.06 per share for the nine months ended September 30, 2005. Our
loss
per share prior to the registration rights penalty would have been
$0.02.
Three
Months Ended September 30, 2006 and 2005
For
the
three months ended September 30, 2006, we experienced a net loss before other
items of $176,571, as compared to a net loss before other items of $369,434
for
the three months ended September 30, 2005. Due to a contractual agreement from
the equity raise in the spring of 2005, we recorded $326,710 as a registration
rights penalty in the three months ended September 30, 2006, increasing our
loss. After all other items, our GAAP net loss for the three months ended
September 30, 2006 was $502,449 as compared to a loss of $368,309 for the three
months ended September 30, 2005. The $326,710 penalty recorded in the quarter
ended September 30, 2006 is a one time occurrence that management believes
should have been recorded directly against the corresponding capital, which
was
raised in 2005. However, at the date of issuance of the capital, it was deemed
to be very unlikely that any obligation would arise and as such, we were not
able to make a reasonable estimate of a potential liability. Given these
circumstances, GAAP measures require we record the payment as an other item
on
our income statement. All contractual obligations related to the equity raised
in 2005 are now complete and no more amounts will become due.
Increased
brand recognition, increased sales of our residential swimming pool product,
ECO$AVR®, and increased sales from our NanoChem division resulted in sales of
$1,913,958 in the three months ended September 30, 2006, as compared to
$1,302,089 in the three months ended September 30, 2005. Our Energy segment
had
sales of $229,431 for the three months ended September 30, 2006, as compared
to
$96,916 for the three months ended September 30, 2005, an increase of 137%.
Our
Polymer segment had sales of $1,684,527 for the three months ended September
30,
2006, as compared to sales of $1,205,173 for the three months ended September
30, 2005, an increase of 40%.
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.
Our
operating expenses were $1,063,255 for the three months ended September 30,
2006, a modest increase of $129,670 over the three months ended September 30,
2005 considering the 47 % increase in sales. We continued our sales and
marketing efforts for our WATER$AVR® product line, with the objective of closing
major sales as soon as possible. The largest increases in operating expenses
were in the areas of wages ($253,253 for the three months ended September 30,
2006, as compared to $202,776 in the three months ended September 30, 2005),
administrative salaries ($155,841 for the three months ended September 30,
2006,
as compared to $56,760 in the three months ended September 30, 2005), and
investor relations ($82,676 for the three months ended September 30, 2006 as
compared to $41,897 for the three months ended September 30, 2005). The increase
in wages and administrative salaries are in part due to the application of
SFAS
123 (R) that now requires companies to apply a fair value based measurement
method to employee stock options. After applying SFAS 123(R) to employee granted
stock options, the company recognized an additional $125,955 in expenses this
quarter. These increases are also partially accounted for by the increase in
sales and represent a permanent increase in operating costs related to the
new
level of sales. The increase in consulting ($94,811 for the three months ended
September 30, 2006 as compared to $26,069 for the three months ended September
30, 2005) are a direct result of stock option expenses. The Company recognized
$61,152 in stock option expenses related
to
consulting in the three months ended September 30, 2006 (2005 - $18,200). Our
decreases in advertising ($3,450 for the three months ended September 30, 2006,
as compared to $17,246 in the three months ended September 30, 2005) and office
and miscellaneous ($29,815 for the three months ended September 30, 2006 as
compared to $57,456 for the three months ended September 30, 2005) are the
result of better cost-control in these areas instituted by management over
the
past year.
Our
Energy segment generated $584,287 in operating expenses in the three months
ended September 30, 2006, an increase from $516,723 for the three months ended
September 30, 2005. This 13% increase is attributable to our increase of sales
as well as the application of SFAS 123(R). Our Polymer segment generated
$478,967 in operating expenses in the three months ended September 30, 2006,
an
increase of $62,103. This 15% increase is wholly attributable to the 40% percent
increase in sales as well as the application of SFAS 123(R).
Our
net
loss before other items for the three months ended September 30, 2006 was
$176,571, a decrease from our net loss before other items of $369,434 in the
three months ended September 30, 2005. The decrease in net loss before other
items is attributable to increased sales in all divisions, as compared to the
three months ended September 30, 2005, augmented by positive operating cash
from
our NanoChem division. Our Energy segment’s net loss before other items for the
three months ended September 30, 2006 was $494,698, an increase from our net
loss of $433,933 in the three months ended September 30, 2005, which is
attributable to the application of SFAS 123(R). Our Polymer segment’s net profit
before other items for the three months ended September 30, 2006 was $318,127,
an increase over the net profit before other items of $64,499 for the three
months ended September 30, 2005. This 393% increase in profits is attributable
to the 40% increase in sales, allowing the division to better obtain economies
of scale.
Our
net
loss after other items is $502,449 for the three months ended September 30,
2006
as compared to a net loss after other items of $368,309 for the three months
ended September 30, 2005. The $326,710 penalty recorded in the quarter ended
September 30, 2006 is a one time occurrence that management believes should
have
been recorded directly against the corresponding capital, which was raised
in
2005. However, at the date of issuance of the capital, it was deemed to be
very
unlikely that any obligation would arise and as such, we were not able to make
a
reasonable estimate of a potential liability. Given these circumstances, GAAP
measures require we record the payment as an other item on our income statement.
All contractual obligations related to the equity raised in 2005 are now
complete and no more amounts will become due.
Our
loss
per share was $0.04 for the three months ended September 30, 2006, as compared
to a loss of $0.03 per share for the three months ended September 30, 2005.
Our
loss per share prior to the registration rights penalty would have been
$0.01.
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.
|
September
30, 2006
|
|
December
31, 2005
|
|
Increase
(Decrease)
|
|
Cash
and cash equivalents
|
$418,425
|
|
$526,292
|
|
$(107,867)
|
|
Working
capital
|
3,542,998
|
|
3,110,090
|
|
432,908
|
|
|
|
|
|
|
|
|
We
have
cash on hand of $418,425 as of September 30, 2006, as compared to cash on hand
of $526,292 at December 31, 2005. The overall decrease in cash and cash
equivalents is a result of the increase in working capital.
As
of
September 30, 2006, we had working capital of $3,542,998, as compared to working
capital of $3,101,090 on December 31, 2005. The increase in working capital
is
the result of sales revenue exceeding cash costs of producing the
revenue.
We
expect
that cash provided by operating activities may fluctuate in future periods
as a
result of a number of factors, including the fluctuations in our operating
results, shipments, accounts receivable collections, and inventory management.
As our sales continue to build, our accounts receivable will increase and our
overall inventory levels will also increase.
Because
we repaid the short-term loan due in June 2005 (incurred in connection with
our
purchase of the Donlar assets, used to create the NanoChem division), 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 $500,000 in the next twelve months attempting
to close sales in California, Spain and Australia and to extend certain core
U.S. patents to select other countries. Approximately 80% of these expenditures
will be related to expanding sales for our WATER$AVR® product.
There
can
be no assurance that any of the expenditures will result in additional sales.
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.
Subsequent
Events
There
were no subsequent events.
Restatement
of Financial Statements
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.
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.
|
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 review.
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
During
the first quarter of 2006, upon recommendation of our audit committee, we
implemented a new internal control protocol related to inventory
counts.
As
part
of our internal control protocols our senior management selects for review
in
the next reporting period various numerical data from the previous period.
During the compilation of data to be used in the financial statements contained
in the our Annual Report for the year ended December 31, 2005, senior management
discovered that the number assigned to inventory for the quarter ended September
30, 2005 appeared to be suspect and immediately investigated the issue. Within
fifteen days of senior management's review, a mis-transcription in the inventory
number was identified and corrected.
Our
investigation revealed that, due to a clerical error in transferring the
inventory floor count to computerized spreadsheets, certain inventory data
was
misreported. After correction and disclosure, management referred this matter
to
the audit committee of our board of directors for review, and determination
as
to whether a change to our inventory control protocol was necessary or
advisable. On January 25, 2006, the audit committee of the board of directors
recommended a change to our internal controls related to inventory counts,
which
now requires that quarterly and annual inventory counts be conducted by plant
managers, accompanied by either an equal or more senior level executive from
a
division reporting directly to our head office, or by an independent accountant
reporting in the same manner. This change was implemented and made effective
during the first quarter of 2006.
Although
we modified our internal control procedures related to inventory matters in
the
first quarter of 2006, management, our board of directors, including its audit
committee, and our independent
auditor
each concluded that no change in the assessment of the effectiveness of our
internal controls was necessary based on an isolated event of human error.
We
believe that such errors are uncommon and that it is not possible to design
a
system of internal controls that absolutely prevents against human error.
Nonetheless, we have implemented the protocol changes described above in an
effort to further bolster the accuracy of our inventory data
compilation.
PART
II OTHER
INFORMATION
On
November 13, 2003, Patrick Grant, an ex-employee, filed a lawsuit in the Circuit
Court of Cook County, Illinois against us, WaterSavr Global Solutions Inc.
(“WGS”), our wholly-owned subsidiary, and Daniel B. O’Brien, our 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 parties 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, deny the plaintiffs claims and 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 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 our consolidated financial statements
as
the outcome of the claim filed by the plaintiff is not
determinable.
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 the return of 100,000 shares
of our common stock and the repayment of a $25,000 loan, which were provided
to
defendants for investment banking services consisting of securing a $5 million
loan and a $25 million stock offering. Such services were not performed and
in
the proceeding we seek the return of such shares after defendants’ 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. On May 24, 2004,
there was a hearing on defendants’ motion to set aside the injunction, which
motion was denied by the trial court on May 29, 2004. 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 our consolidated financial statements as the outcome of this claim is not
determinable.
On
May
28, 2004, Sun Solar Energy Technologies, Inc. (“Sun Solar”), filed a lawsuit in
the Federal Court of Canada, against us, Flexible Ltd., 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 us; 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 filed our defenses and
filed
a counterclaim against Sun Solar. The counterclaim seeks: (x) injunctive relief
against further use of the “Tropical Fish” trademark by Sun Solar; (y) a
declaration that the “Tropical Fish” trademark is owned by us, 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. 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.
On
July
23, 2004, we filed a breach of contract suit in the Circuit Court of Cook
County, Illinois against Tatko. The action arises out of a joint product
development agreement entered into between the us and Tatko in which 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 seek 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 Circuit 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.
On
January 12, 2005, we filed a lawsuit in the Court of the Queen’s Bench of
Alberta, seeking indeterminate damages resulting from a breach of contract
by
Calgary Diecast Corporation (“CDC”). The contract at issue 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 $47,495.
None.
None.
None.
None.
Number
|
Description
|
3.1
|
Amended
and Restated Certificate of Incorporation of the registrant.
(1)
|
3.2
|
Bylaws
of the registrant. (1)
|
31.1
|
Certification
of Principal Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act
of 2002.*
|
31.2
|
Certification
of Principal Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act
of 2002.*
|
32.1
|
Certification
of Principal Executive Officer Pursuant to 18 U.S.C. §1350 and §906 of the
Sarbanes-Oxley Act of 2002.*
|
32.2
|
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. §1350 and §906 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
______________
* Filed
with this report.
(1) Incorporated
by reference to the registrant’s Registration Statement on Form 10-SB (SEC File.
No. 000-29649) filed February 22, 2000.
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:
November 14, 2006.
Flexible
Solutions International, Inc.
|
By:
|
/s/
Daniel B.
O’Brien
|
Name:
|
Daniel
B. O’Brien
|
Title:
|
President
and Chief Executive Officer
|
|
|
By:
|
/s/
Daniel B.
O’Brien
|
Name:
|
Daniel
B. O’Brien
|
Title:
|
Chief
Financial and Accounting
Officer
|
27