fsi_10qsb-70630.htm
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 June 30, 2007.
|
|
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 14,157,567 shares
of Common Stock, par value $0.001 per share, outstanding as of August 8,
2007.
Transitional
Small Business Disclosure Format (check one): Yes
o No
ý
FORM
10-QSB
Index
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
5
|
|
|
|
|
|
17
|
|
|
|
|
|
21
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
|
21
|
|
|
|
|
|
22
|
|
|
|
|
|
22
|
|
|
|
|
|
22
|
|
|
|
|
|
23
|
|
|
|
|
|
23
|
|
|
|
|
|
24
|
|
|
|
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, 2006.
PART
I
|
FINANCIAL
INFORMATION
|
Item
1.
|
Financial
Statements.
|
CONSOLIDATED
BALANCE SHEETS
At
June 30, 2007
(U.S.
Dollars)
|
|
June
30,
2007
(Unaudited)
|
|
|
December
31,
2006
|
|
Assets
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
3,913,094
|
|
|
$ |
450,759
|
|
Accounts
receivable
|
|
|
1,376,196
|
|
|
|
1,319,575
|
|
Inventory
|
|
|
1,916,522
|
|
|
|
1,904,315
|
|
Prepaid
expenses
|
|
|
136,640
|
|
|
|
124,360
|
|
|
|
|
7,342,452
|
|
|
|
3,799,009
|
|
|
|
|
|
|
|
|
|
|
Property,
equipment and leaseholds
|
|
|
3,864,737
|
|
|
|
4,100,553
|
|
Patents
|
|
|
204,530
|
|
|
|
169,758
|
|
Investment
|
|
|
369,000
|
|
|
|
369,000
|
|
Long
term deposits
|
|
|
48,628
|
|
|
|
47,220
|
|
|
|
$ |
11,829,347
|
|
|
$ |
8,485,540
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
305,558
|
|
|
$ |
423,030
|
|
Deferred
revenue
|
|
|
-
|
|
|
|
20,559
|
|
|
|
|
305,558
|
|
|
|
443,589
|
|
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
|
|
|
|
|
|
|
|
|
14,157,567
(2006: 13,058,427) common shares
|
|
|
14,158
|
|
|
|
13,058
|
|
Capital
in excess of par value
|
|
|
15,812,776
|
|
|
|
12,370,418
|
|
Other
comprehensive income
|
|
|
264,073
|
|
|
|
131,002
|
|
Deficit
|
|
|
(4,567,218 |
) |
|
|
(4,472,527 |
) |
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
11,523,789
|
|
|
|
8,041,951
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
11,829,347
|
|
|
$ |
8,485,540
|
|
|
|
|
|
|
|
|
|
|
Commitments,
Contingencies and Subsequent events (Notes 12, 13 &
14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
See
Notes to Unaudited Consolidated Financial Statements --
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Three Months Ended June 30, 2007 and 2006
(U.S.
Dollars -- Unaudited)
|
|
Three
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
2,143,107
|
|
|
$ |
2,250,388
|
|
Cost
of sales
|
|
|
1,260,324
|
|
|
|
1,579,739
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
882,783
|
|
|
|
670,649
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Wages
|
|
|
259,272
|
|
|
|
332,092
|
|
Administrative
salaries and benefits
|
|
|
124,485
|
|
|
|
159,192
|
|
Advertising
and promotion
|
|
|
6,146
|
|
|
|
13,437
|
|
Investor
relations and transfer agent fee
|
|
|
119,647
|
|
|
|
31,034
|
|
Office
and miscellaneous
|
|
|
65,578
|
|
|
|
73,971
|
|
Insurance
|
|
|
52,236
|
|
|
|
51,214
|
|
Interest
expense
|
|
|
159
|
|
|
|
-
|
|
Rent
|
|
|
56,738
|
|
|
|
59,266
|
|
Consulting
|
|
|
62,682
|
|
|
|
108,248
|
|
Professional
fees
|
|
|
42,477
|
|
|
|
67,938
|
|
Travel
|
|
|
48,287
|
|
|
|
30,735
|
|
Telecommunications
|
|
|
9,845
|
|
|
|
8,029
|
|
Shipping
|
|
|
15,151
|
|
|
|
12,119
|
|
Research
|
|
|
22,974
|
|
|
|
42,661
|
|
Commissions
|
|
|
38,894
|
|
|
|
32,765
|
|
Bad
debt expense (recovery)
|
|
|
775
|
|
|
|
(165 |
) |
Currency
exchange
|
|
|
19,683
|
|
|
|
(990 |
) |
Utilities
|
|
|
4,439
|
|
|
|
4,638
|
|
|
|
|
949,468
|
|
|
|
1,016,184
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before other items and income tax
|
|
|
(66,685 |
) |
|
|
(345,535 |
) |
Other
expenses
|
|
|
(5,570 |
) |
|
|
|
|
Interest
income
|
|
|
1,778
|
|
|
|
908
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax
|
|
|
(70,477 |
) |
|
|
(344,627 |
) |
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(70,477 |
) |
|
|
(344,627 |
) |
|
|
|
|
|
|
|
|
|
Net
income (loss) per share (basic and diluted)
|
|
$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares
|
|
|
13,841,489
|
|
|
|
12,982,898
|
|
|
|
|
|
|
|
|
|
|
--
See
Notes to Unaudited Consolidated Financial Statements --
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Six Months Ended June 30, 2007 and 2006
(U.S.
Dollars -- Unaudited)
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
4,433,008
|
|
|
$ |
4,758,833
|
|
Cost
of sales
|
|
|
2,726,675
|
|
|
|
3,066,420
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,706,333
|
|
|
|
1,692,413
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Wages
|
|
|
516,458
|
|
|
|
598,492
|
|
Administrative
salaries and benefits
|
|
|
256,282
|
|
|
|
320,141
|
|
Advertising
and promotion
|
|
|
38,024
|
|
|
|
32,384
|
|
Investor
relations and transfer agent fee
|
|
|
177,838
|
|
|
|
63,332
|
|
Office
and miscellaneous
|
|
|
103,506
|
|
|
|
97,891
|
|
Insurance
|
|
|
107,065
|
|
|
|
93,708
|
|
Interest
expense
|
|
|
1,184
|
|
|
|
1,044
|
|
Rent
|
|
|
111,031
|
|
|
|
117,799
|
|
Consulting
|
|
|
127,679
|
|
|
|
196,049
|
|
Professional
fees
|
|
|
81,271
|
|
|
|
160,873
|
|
Travel
|
|
|
82,030
|
|
|
|
49,488
|
|
Telecommunications
|
|
|
19,461
|
|
|
|
15,026
|
|
Shipping
|
|
|
23,244
|
|
|
|
25,585
|
|
Research
|
|
|
55,668
|
|
|
|
80,264
|
|
Commissions
|
|
|
75,597
|
|
|
|
89,990
|
|
Bad
debt expense (recovery)
|
|
|
1,851
|
|
|
|
424
|
|
Currency
exchange
|
|
|
9,590
|
|
|
|
4,523
|
|
Utilities
|
|
|
10,046
|
|
|
|
9,630
|
|
|
|
|
1,797,825
|
|
|
|
1,956,623
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before other items and income tax
|
|
|
(91,492 |
) |
|
|
(264,230 |
) |
Other
expenses
|
|
|
(5,570 |
) |
|
|
|
|
Interest
income
|
|
|
2,371
|
|
|
|
1,853
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax
|
|
|
(94,691 |
) |
|
|
(262,377 |
) |
Income
tax (recovery)
|
|
|
-
|
|
|
|
(127,079 |
) |
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(94,691 |
) |
|
|
(135,298 |
) |
|
|
|
|
|
|
|
|
|
Net
income (loss) per share (basic and diluted)
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares
|
|
|
13,485,482
|
|
|
|
12,982,112
|
|
|
|
|
|
|
|
|
|
|
--
See
Notes to Unaudited Consolidated Financial Statements --
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Six Months Ended June 30, 2007 and 2006
(U.S.
Dollars -- Unaudited)
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(94,691 |
) |
|
$ |
(135,298 |
) |
Stock
compensation expense
|
|
|
278,976
|
|
|
|
408,236
|
|
Depreciation
|
|
|
256,206
|
|
|
|
296,045
|
|
|
|
|
440,491
|
|
|
|
568,983
|
|
Changes
in non-cash working capital items:
|
|
|
|
|
|
|
|
|
(Increase)
Decrease in accounts receivable
|
|
|
(56,621 |
) |
|
|
(562,174 |
) |
(Increase)
Decrease in inventory
|
|
|
(12,207 |
) |
|
|
625,440
|
|
(Increase)
Decrease in prepaid expenses
|
|
|
(12,280 |
) |
|
|
19,372
|
|
Increase
(Decrease) in accounts payable
|
|
|
(117,472 |
) |
|
|
(286,964 |
) |
Increase
(Decrease) in deferred revenue
|
|
|
(20,559 |
) |
|
|
-
|
|
Increase
(Decrease) in income taxes
|
|
|
-
|
|
|
|
28,918
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) operating activities
|
|
|
221,353
|
|
|
|
393,575
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Long
term deposits
|
|
|
(1,408 |
) |
|
|
-
|
|
Investments
|
|
|
-
|
|
|
|
-
|
|
Loan
receivable
|
|
|
-
|
|
|
|
(974 |
) |
Development
of patents
|
|
|
(34,772 |
) |
|
|
(8,204 |
) |
Acquisition
of property and equipment
|
|
|
(20,390 |
) |
|
|
(15,025 |
) |
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) investing activities
|
|
|
(56,570 |
) |
|
|
(24,203 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
3,164,481
|
|
|
|
(38,029 |
) |
|
|
|
|
|
|
|
|
|
Cash
provided by financing activities
|
|
|
3,164,481
|
|
|
|
(38,029 |
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
133,072
|
|
|
|
55,616
|
|
|
|
|
|
|
|
|
|
|
Inflow
(outflow) of cash
|
|
|
3,462,336
|
|
|
|
386,959
|
|
Cash
and cash equivalents, beginning
|
|
|
450,759
|
|
|
|
526,292
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
|
$ |
3,913,094
|
|
|
$ |
913,251
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
1,184
|
|
|
$ |
1,084
|
|
|
|
|
|
|
|
|
|
|
--
See
Notes to Unaudited Consolidated Financial Statements --
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Period Ended June 30, 2007
(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, 2006 Annual Report on Form 10-KSB. This quarterly report
should be read in conjunction with such annual report.
In
the
opinion of the Company’s management, these consolidated financial statements
reflect all adjustments necessary to present fairly the Company’s consolidated
financial position at June 30, 2007, and the consolidated results of operations
and the consolidated statements of cash flows for the six months ended June
30,
2007 and 2006. The results of operations for the six months ended
June 30, 2007 are not necessarily indicative of the results to be expected
for
the entire fiscal year.
These
consolidated financial statements include the accounts of Flexible Solutions
International, Inc. (the “Company”), and its wholly-owned subsidiaries Flexible
Solutions, Ltd. (“Flexible Ltd.”), NanoChem Solutions Inc., WaterSavr Global
Solutions Inc., NanoDetect Technologies Inc. and Seahorse Systems
Inc. All inter-company balances and transactions have been
eliminated. The parent company was incorporated May 12, 1998 in the
State of Nevada and had no operations until June 30, 1998 as described further
below.
Flexible
Solutions International, Inc. and its subsidiaries develop, manufactures and
markets specialty chemicals which slow down the evaporation of
water. The companies primary product, HEAT$AVR®, is marketed for use
in swimming pools and spas where its use, by slowing the evaporation of water,
allows the water to retain a higher temperature for a longer period of time
and
thereby reduces the energy required to maintain the desired temperature of
the
water in the pool. Another product, WATER$AVR®, is marketed for water
conservation in irrigation canals, aquaculture, and reservoirs where its use
slows down water loss due to evaporation. In addition to the water
conservation products, the Company also manufacturers and markets water-soluble
chemicals utilizing thermal polyaspartate biopolymers (hereinafter referred
to
as “TPAs”), which are beta-proteins manufactured from the common biological
amino acid, L-aspartic. TPAs can be formulated to prevent corrosion
and scaling in water piping within the petroleum, chemical, utility and mining
industries. TPAs are also used as proteins to enhance fertilizers in
improving crop yields and as additives for household laundry detergents,
consumer care products and pesticides.
On
May 2,
2002, the Company established WaterSavr Global Solutions Inc. through the
issuance of 100 shares of common stock from WaterSavr Global Solutions Inc.
to
the Company.
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.
Pursuant
to a purchase agreement dated May 26, 2004, the Company acquired the assets
of
Donlar Corporation (“Donlar”) on June 9, 2004 and
created a new company, NanoChem Solutions Inc. as the operating entity for
such
assets. 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 Donlar’s largest creditor to satisfy
$3,150,000 of the purchase price. This note was paid June 2, 2005 and
upon payment, all former Donlar assets that were pledged as security were
released from their mortgage. The remainder of the consideration
given was cash.
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
|
|
There
was
no goodwill or other intangible assets accept certain patents recorded at nil
fair value, acquired as a result of the acquisition. The
acquisition costs assigned to property and equipment include all direct costs
incurred by the Company to purchase the Donlar 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.
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) Inventories
and Cost of Sales
The
Company has three 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 market. 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.
In
2004,
the FASB issued SFAS No. 151, “Inventory Costs”, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material. This standard requires that such items be recognized as
current-period charges. The standard also establishes the concept of
“normal capacity” and requires the allocation of fixed production overhead to
inventory based on the normal capacity of the production
facilities. Any unallocated overhead must be recognized as an expense
in the period incurred. This standard is effective for inventory
costs incurred starting January 1, 2006. The adoption of this
standard did not have a material impact on its financial position, results
of
operations or cash flows for 2006 or 2007.
(c) Allowance
for Doubtful Accounts
The
Company provides an allowance for doubtful accounts when management estimates
collectibility to uncertain. Accounts receivable are continually
reviewed to determine which, if any, accounts are doubtful of
collection. In making the determination of the appropriate allowance
amount, the Company considers current economic and industry conditions,
relationships with each significant customer, overall customer credit-worthiness
and historical experience.
(d) 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
|
Depreciation
is recorded at half for the year the assets are first
purchase. 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.
(e) Impairment
of Long-Lived Assets.
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, the Company reviews long-lived assets, including, but not
limited to, property and equipment, patents and other assets, for impairment
annually or whenever events or changes in circumstances indicate the carrying
amounts of assets may not be recoverable. The carrying value of
long-lived assets is assessed for impairment by evaluating operating performance
and future undiscounted cash flows of the underlying assets. If the
sum of the expected future cash flows of an asset, is less than its carrying
value, an impairment measurement is indicated. Impairment charges are
recorded to the extent that an asset’s carrying value exceeds its fair
value. Accordingly, actual results could vary significantly from such
estimates. There were no impairment charges during the periods
presented.
(f) 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.
(g) Foreign
Currency.
The
functional currency of one of the subsidiaries 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 loss 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 the operating loss if realized during
the year and in comprehensive income if they remain unrealized at the end of
the
year.
(h) 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. To date
there have been no such significant post-delivery obligations.
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.
(i) 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. The corresponding expense of the
services rendered is recognized over the period that the services are
performed.
(j) Stock-based
Compensation.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued revised
SFAS No. 123(R), Share-Based Payment, which replaces SFAS 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. SFAS 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 adopted this
statement for its first quarter starting January 1, 2006 and will continue
to
evaluate the impact of adopting this statement.
Prior
to
2006, the Company adopted the disclosure provisions of SFAS No. 123 for stock
options granted to employees and directors. The Company disclosed on
a supplemental basis, the pro-forma effect of accounting for stock options
awarded to employees and directors, as if the fair value based method had been
applied, using the Black-Scholes option-pricing model. The Company
has always recognized the fair value of options granted to
consultants.
(k) 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.
(l) 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 periods ended June
30, 2007, 2006 and 2005, all outstanding options were
anti-dilutive.
(m) 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.
(n) Financial
Instruments.
The
fair market value of the
Company’s financial instruments comprising cash, short-term investment, accounts
receivable, income tax recoverable, loan receivable, accounts payable and
accrued liabilities and amounts due to shareholders were estimated to
approximate their carrying values due to immediate or short-term maturity of
these financial instruments. The Company maintains cash balances at
financial institutions which at times, exceed federally insured amounts. The
Company has not experienced any material losses in such accounts.
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.
The
Company is exposed to
credit-related losses in the event of non-performance by counterparties to
the
financial instruments. Credit exposure is minimized by dealing with only credit
worthy counterparties. Accounts receivable for the three primary customers
totals $466,031 (34%) as at June 30, 2007 (2006 - $657,220 or 50%).
(o) Contingencies
Certain
conditions may exist as of the
date the financial statements are issued, which may result in a loss to the
Company but which will only be resolved when one or more future events occur
or
fail to occur. The Company's management and its legal counsel assess such
contingent liabilities, and such assessment inherently involves an exercise
of
judgment. In assessing loss contingencies related to legal proceedings that
are
pending against the Company or unasserted claims that may result in such
proceedings, the Company's legal counsel evaluates the perceived merits of
any
legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein.
If
the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, the
estimated liability would be accrued in the Company's financial statements.
If
the assessment indicates that a potentially material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material, would be
disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve
guarantees, in which case the guarantees would be disclosed.
3. Inventories
|
|
2007
|
|
|
2006
|
|
Completed
goods
|
|
$ |
878,579
|
|
|
$ |
970,780
|
|
Works
in progress
|
|
|
344,726
|
|
|
|
397,995
|
|
Raw
materials
|
|
|
693,217
|
|
|
|
535,540
|
|
|
|
$ |
1,916,522
|
|
|
$ |
1,904,315
|
|
4. Property,
Plant & equipment
|
|
2007
|
|
|
Accumulated
|
|
|
2007
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
Buildings
|
|
$ |
3,144,259
|
|
|
$ |
845,727
|
|
|
$ |
2,298,532
|
|
Computer
hardware
|
|
|
72,493
|
|
|
|
45,669
|
|
|
|
26,824
|
|
Furniture
and fixtures
|
|
|
19,884
|
|
|
|
10,296
|
|
|
|
9,588
|
|
Office
equipment
|
|
|
23,165
|
|
|
|
14,737
|
|
|
|
8,428
|
|
Manufacturing
equipment
|
|
|
2,241,547
|
|
|
|
1,133,981
|
|
|
|
1,107,566
|
|
Trailer
|
|
|
2,178
|
|
|
|
1,638
|
|
|
|
540
|
|
Leasehold
improvements
|
|
|
26,911
|
|
|
|
14,723
|
|
|
|
12,188
|
|
Trade
show booth
|
|
|
8,156
|
|
|
|
5,271
|
|
|
|
2,885
|
|
Land
|
|
|
398,186
|
|
|
|
—
|
|
|
|
398,186
|
|
|
|
$ |
5,936,779
|
|
|
$ |
2,072,042
|
|
|
$ |
3,864,737
|
|
|
|
2006
|
|
|
Accumulated
|
|
|
2006
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
Buildings
|
|
$ |
3,144,259
|
|
|
$ |
724,752
|
|
|
$ |
2,419,507
|
|
Computer
hardware
|
|
|
60,576
|
|
|
|
34,200
|
|
|
|
26,376
|
|
Furniture
and fixtures
|
|
|
18,576
|
|
|
|
8,608
|
|
|
|
9,968
|
|
Office
equipment
|
|
|
29,533
|
|
|
|
17,488
|
|
|
|
12,045
|
|
Manufacturing
equipment
|
|
|
2,207,781
|
|
|
|
990,959
|
|
|
|
1,216,822
|
|
Trailer
|
|
|
1,991
|
|
|
|
1,411
|
|
|
|
580
|
|
Leasehold
improvements
|
|
|
39,517
|
|
|
|
25,551
|
|
|
|
13,966
|
|
Trade
show booth
|
|
|
7,456
|
|
|
|
4,353
|
|
|
|
3,103
|
|
Land
|
|
|
398,186
|
|
|
|
—
|
|
|
|
398,186
|
|
|
|
$ |
5,907,875
|
|
|
$ |
1,807,322
|
|
|
$ |
4,100,553
|
|
5. Patents
In
fiscal
2005, the Company started the patent process for additional WATER$AVR®
products. Patents associated with these costs were granted in 2006
and they have been amortized over their legal life of 17 years.
Of
the
patents costs listed below, $67,028 are not subject to amortization as of yet,
as the patents are still in the process of being approved.
|
|
2007
Cost
|
|
|
Accumulated
Amortization
|
|
|
2007
Net
|
|
Patents
|
|
$ |
212,393
|
|
|
$ |
7,863
|
|
|
$ |
204,530
|
|
|
|
2006
Cost
|
|
|
Accumulated
Amortization
|
|
|
2006
Net
|
|
Patents
|
|
$ |
172,938
|
|
|
$ |
3,180
|
|
|
$ |
169,758
|
|
6. Investments
|
|
2007
|
|
|
2006
|
|
Tatko
Inc.
|
|
$ |
271,000
|
|
|
$ |
271,000
|
|
Air-Water
Interface Delivery and 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 the Company’s 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 fair market value of the
Company’s common stock on May 31, 2003. For further information on
this option, see Contingencies (Note 13) below.
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.
7. Long
Term Deposits
The
Company has reclassified certain
security deposits to better reflect there long term nature. Long term
deposits consist of damage deposits held by landlords and security deposits
held
by various vendors.
|
|
2007
|
|
|
2006
|
|
Long
term deposits
|
|
$ |
48,628
|
|
|
$ |
47,220
|
|
8. Stock
Options
The Company adopted
a stock option plan ("Plan"). The purpose of this Plan is to
provide additional incentives to key employees,
officers, directors and consultants of the Company and
its subsidiaries in order to help attract and retain the best
available personnel for positions of
responsibility and otherwise promoting the success of the business
activities. It is intended that options issued
under this Plan constitute non-qualified stock options.
The general terms of awards under the option plan are that 100%
of the options granted will vest the year following the grant.
The maximum term of options granted is 5 years.
The
Company may issue stock options and stock bonuses for shares of its common
stock
to provide incentives to directors, key employees and other persons who
contribute to the success of the Company. The exercise price of all
incentive options are issued for not less than fair market value at the date
of
grant.
The
following table summarizes the Company’s stock option activity for the years
ended December 31, 2005 and 2006 and the period ended June 30,
2007:
|
|
Number
of shares
|
|
|
Exercise
price
per
share
|
|
|
Weighted
average exercise price
|
|
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
|
|
Cancelled
or expired
|
|
|
(49,000 |
) |
|
$3.00
- $4.25
|
|
|
$ |
3.52
|
|
Balance,
December 31, 2005
|
|
|
1,060,740
|
|
|
$1.40
- $4.60
|
|
|
$ |
3.44
|
|
Granted
|
|
|
1,191,000
|
|
|
$3.25
- $3.60
|
|
|
$ |
3.25
|
|
Exercised
|
|
|
(46,000 |
) |
|
$1.40
|
|
|
$ |
1.40
|
|
Cancelled
or expired
|
|
|
(79,000 |
) |
|
$1.40
- $4.25
|
|
|
$ |
2.46
|
|
Balance,
December 31, 2006
|
|
|
2,126,740
|
|
|
$1.40
– 4.55
|
|
|
$ |
3.44
|
|
Granted
|
|
|
200,700
|
|
|
$1.50
– 3.60
|
|
|
$ |
2.14
|
|
Exercised
|
|
|
(163,000 |
) |
|
$1.50
– 3.25
|
|
|
$ |
1.77
|
|
Cancelled
or expired
|
|
|
(79,000 |
) |
|
$3.00
– 4.25
|
|
|
$ |
3.36
|
|
Balance,
June 30, 2007
|
|
|
2,085,440
|
|
|
$3.00
- 4.60
|
|
|
$ |
3.45
|
|
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 adopted this statement for
its first quarter starting January 1, 2006 and will continue to evaluate the
impact of adopting this statement.
Prior
to
2006, the Company applied APB Opinion No. 25 and related interpretations in
accounting for stock options granted to its employees and, accordingly, stock
compensation expense of nil was recognized as wages expense in 2005 and
2004.
The
fair
value of each option grant is calculated using the following weighted average
assumptions:
|
|
2007
|
|
|
2006
|
|
Expected
life – years
|
|
|
5.0
|
|
|
|
5.0
|
|
Interest
rate
|
|
|
5.02 |
% |
|
|
3.85 |
% |
Volatility
|
|
|
52 |
% |
|
|
52.0 |
% |
Dividend
yield
|
|
|
— |
% |
|
|
— |
% |
Weighted
average fair value of options granted
|
|
$ |
2.14
|
|
|
$ |
1.69
|
|
During
the six months ended June 30, 2007, the Company granted 150,000 stock options
to
Mr. Grant as a part of the litigation settlement made January 3,
2007. As the options were previously granted and expensed in 2001, no
expense was recorded in this period related to this
transaction. During the same period, the Company granted 50,700
options to consultants and has applied FAS No. 123(R) using the Black-Scholes
option-pricing model, which resulted in additional expenses of $29,130 during
the three months ended June 30, 2007. Options granted in previous
quarters but not yet vested realized expenses of $94,128 for outsiders and
$155,718 for employees for the six months ended June 30, 2007.
During
the six months ended June 30, 2006, the Company granted 410,000 options to
purchase common stock to consultants and has applied FAS No. 123(R) using the
Black-Scholes option-pricing model, which resulted in additional expenses of
$159,043. During the same period, the Company granted 675,000 options
to employees, resulting in an additional $251,910 in wages and administrative
expenses.
9. 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.
In
May
2007 the Company closed a $3,042,455 private placement with select institutional
investors. The terms are 936,140 units with each unit consisting of
one share at $3.25 and one half warrant with a three year term and a strike
price of $4.50 per share. The Company also issued 21,970 warrants
with the same terms for investment banking services related to this
transaction.
The
following table summarizes the Company’s warrant option activity for the year
period ended June 30, 2007:
|
|
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
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance,
December 31, 2006
|
|
|
987,400
|
|
|
$ |
4.50
|
|
|
$ |
4.50
|
|
Granted
|
|
|
490,040
|
|
|
$ |
4.50
|
|
|
$ |
4.50
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance,
June 30, 2007
|
|
|
1,477,440
|
|
|
$ |
4.50
|
|
|
$ |
4.50
|
|
10. Capital
Stock.
During
the six months ended June 30, 2007, the Company issued 200,700 shares of common
stock upon the exercise of stock options. The strike price varied
from $1.50 – 3.25 per share.
In
May
2007 the Company closed a $3,042,455 private placement with select institutional
investors. The terms are 936,140 units with each unit consisting of
one share at $3.25 and one half warrant with a three year term and a strike
price of $4.50 per share. The proceeds will be used to build a
biomass conversion facility that will use renewable agriculture crops to produce
aspartic acid.
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.
11. Segmented,
Significant Customer Information and Economic Dependency.
The
Company operates in two segments:
(a) Development
and marketing of two lines of energy and water conservation products (as shown
under the column heading “EWCP” below), which consists of a (i) liquid swimming
pool blanket which saves energy and water by inhibiting evaporation from the
pool surface, and (ii) food-safe powdered form of the active ingredient within
the liquid blanket and 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). These
chemical additives are also manufactured for use in laundry and dish detergents,
as well as in products to reduce levels of insecticides, herbicides and
fungicides.
The
Company’s traditional operating activities related to the production and sale of
its energy conversation product line. Upon acquiring the Donlar
assets, the Company formed NanoChem, which was formed as its wholly-owned
subsidiary in exchange for the capital contribution necessary to purchase the
Donlar assets. The assets the Company acquired from Donlar include
domestic and international patents and business processes relating to the
production of TPAs and other environmental products and technologies, as well
as
a manufacturing plant. These assets are currently used by NanoChem
for its revenue-producing activities.
The
accounting policies of the segments are the same as those described in Note
2 to
the Company’s consolidated financial statements, Significant Accounting
Policies. The Company evaluates performance based on profit or
loss from operations before income taxes, not including nonrecurring gains
and
losses and foreign exchange gains and losses.
The
Company’s reportable segments are strategic business units that offer different,
but synergistic products and services. They are managed separately
because each business requires different technology and marketing
strategies.
|
|
EWCP
|
|
|
BPCA
|
|
|
Total
|
|
Revenue
|
|
$ |
998,289
|
|
|
$ |
3,434,719
|
|
|
$ |
4,433,008
|
|
Interest
revenue
|
|
|
1,517
|
|
|
|
854
|
|
|
|
2,371
|
|
Interest
expense
|
|
|
523
|
|
|
|
661
|
|
|
|
1,184
|
|
Depreciation
and amortization
|
|
|
26,256
|
|
|
|
229,950
|
|
|
|
256,206
|
|
Segment
profit (loss)
|
|
|
633,516
|
|
|
|
538,825
|
|
|
|
(94,691 |
) |
Segment
assets
|
|
|
193,507
|
|
|
|
3,671,230
|
|
|
|
3,864,737
|
|
Expenditures
for segment
assets
|
|
|
20,153
|
|
|
|
237
|
|
|
|
20,390
|
|
The
sales
generated in the United States and Canada are as follows:
|
|
2007
|
|
|
2006
|
|
Canada
|
|
$ |
58,587
|
|
|
$ |
186,168
|
|
United
States and abroad
|
|
|
4,374,421
|
|
|
|
4,572,665
|
|
Total
|
|
$ |
4,433,008
|
|
|
$ |
4,758,833
|
|
The
Company’s long-lived assets are located in Canada and the United States as
follows:
|
|
2007
|
|
|
2006
|
|
Canada
|
|
$ |
387,285
|
|
|
$ |
364,487
|
|
United
States
|
|
|
3,681,982
|
|
|
|
3,905,824
|
|
Total
|
|
$ |
4,069,267
|
|
|
$ |
4,270,311
|
|
Three
customers account for $1,799,725 (41%) of sales made in the period (2006 -
$2,495,053 or 52%).
12. Commitments.
The
Company is committed to minimum rental payments for property and premises
aggregating approximately $434,489 over the term of four leases, the last
expiring on December 31, 2011.
Commitments
in each of the next five years are approximately as follows:
2007
|
|
$ |
105,933
|
|
2008
|
|
|
174,159
|
|
2009
|
|
|
122,785
|
|
2010
|
|
|
15,806
|
|
2011
|
|
|
15,806
|
|
13. 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
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 $10,000 toward the product development
venture and granted to Tatko 100,000 shares of the Company’s restricted common
stock. In return, Tatko granted the Company a five-year option to
purchase 20% of Tatko’s outstanding capital stock. Tatko has since
refused to collaborate on the agreement and the Company seeks declaratory relief
stating that Tatko is not entitled to the 100,000 shares of the Company’s
restricted common stock. The litigation is still pending at this
time.
In
addition, Tatko filed its own suit on September 24, 2004 in the Circuit Court
of
Cook County, Illinois seeking declaratory relief of its entitlement to the
Company’s restricted common stock. On May 23, 2005, the Tatko suit
was dismissed with prejudice by the Circuit Court.
No
amounts have been recorded as receivable in the Company’s consolidated financial
statements and no amount has been accrued as a loss as the outcome of the claim
against Tatko is not determinable.
14. Subsequent
Events.
There
have been no subsequent events.
15. Comparative
Figures.
Certain
of the comparative figures have been reclassified to conform with the current
year’s presentation.
Overview
Flexible
Solutions International, Inc. (“we,” “us,” and “our”) develops, manufactures and
markets specialty chemicals that slow the evaporation of water. Our
initial product, HEAT$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. Using the same technology, WATER$AVR®, is marketed for water
conservation in irrigation canals, aquaculture, and reservoirs where its use
slows water loss due to evaporation. We also manufacture and market
TPA’s for use in the oilfields to reduce scale and corrosion in many ‘topside’
water systems and in the agriculture industry to reduce fertilizer crystallization
before, during and after application.
Results
of Operations
Material
changes in our Statement of Operations for the periods presented are discussed
below:
Six
Months Ended June 30, 2007
Item |
|
Increase
(I) or
Decrease (D)
|
|
Reason |
|
|
|
|
|
Gross
profit
|
|
I
|
|
Increased
due to sales consisting of a different product mix.
|
|
|
|
|
|
Wages
|
|
D
|
|
Five
year stock options plans granted to several key employees in 2006
resulted
in higher expenses in 2006. Granting of stock options plans
resulted in an expense of $38,077 in first six months of 2007 as
compared
to $58,718 in the same period 2006.
|
|
|
|
|
|
Administrative
salaries and benefits
|
|
D
|
|
Five
year stock option plans granted to several long term employees in
2006
resulted in higher expenses in 2006. Granting of stock options
plans resulted in an expense of $102,301 in first six months of 2007
as
compared to $184,996 in the same period 2006.
|
|
|
|
|
|
Investor
relations and transfer agent fee
|
|
I
|
|
Increase
in external investor relations and transfer agent fees as well as
options
granted in relation to the private placement in May 2007 increased
our
investor relations costs.
|
|
|
|
|
|
Consulting
|
|
D
|
|
The
granting of stock options to long term consultants in 2006 resulted
in a
stock option expense of $122,304 in first quarter 2006 as compared
to
$65,609 in the same period 2007.
|
|
|
|
|
|
Professional
fees
|
|
D
|
|
The
Company experienced reduced professional fees after the conclusion
of two
lawsuits in December 2006 and January 2007.
|
|
|
|
|
|
Travel
|
|
I
|
|
Increased
international sales have required increased
travel.
|
Six
Months Ended June 30, 2006
Item |
|
Increase
(I) or
Decrease (D)
|
|
Reason |
|
|
|
|
|
Wages
|
|
I
|
|
The
Company adopted FAS No. 123(R) for its first quarter starting January
1,
2006. This 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. Five year stock options plans
granted to several key employees in 2006 resulted in higher expenses
in
2006. Granting of stock options plans resulted in an expense of
$58,718 in first six months of 2006 as compared to $0 in the same
period
2005.
|
|
|
|
|
|
Administrative
salaries and benefits
|
|
I
|
|
The
Company adopted FAS No. 123(R) for its first quarter starting January
1,
2006. This 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. Five year stock options plans
granted to several key employees in 2006 resulted in higher expenses
in
2006. Granting of stock options plans resulted in an expense of
$184,996 in first six months of 2006 as compared to $0 in the same
period
2005.
|
|
|
|
|
|
Investor
relations and transfer agent fees
|
|
D
|
|
In
2005, the stock options vested in relation to the capital raised
on April
14th. This
resulted in a non-cash transaction of $447,500. Without this,
the expense would be about the same.
|
|
|
|
|
|
Interest
expense
|
|
D
|
|
The
decrease in interest expense is a direct result of the Company
paying off the short-term loan used for the purchase of assets to
create
the NanoChem division.
|
|
|
|
|
|
Consulting
|
|
I
|
|
The
granting of stock options to long term consultants in 2006 resulted
in a
stock option expense of $122,304 in first quarter 2006 as compared
to
$36,400 in the same period 2005.
|
|
|
|
|
|
Professional
fees
|
|
I
|
|
This
is the result of costs incurred in intellectual property prosecution
and
protection.
|
|
|
|
|
|
Travel
|
|
D
|
|
Is
the direct the result of better cost-control in these areas instituted
by
management over the past year
|
Quarter
Ended June 30, 2007
Item |
|
Increase
(I) or
Decrease (D)
|
|
Reason |
|
|
|
|
|
Wages
|
|
D
|
|
Five
year stock options plans granted to several key employees in 2006
resulted
in higher expenses in 2006. Granting of stock options plans
resulted in an expense of $19,038 in second quarter 2007 as compared
to
$29,359 in the same period 2006.
|
|
|
|
|
|
Administrative
salaries and benefits
|
|
D
|
|
Five
year stock option plans granted to several long term employees in
2006
resulted in higher expenses in 2006. Granting of stock options
plans resulted in an expense of $51,150 in second quarter 2007 as
compared
to $92,498 in the same period 2006.
|
|
|
|
|
|
Investor
relations and transfer agent fee
|
|
I
|
|
Increase
in external investor relations and transfer agent fees as well as
options
granted in relation to the private placement in May 2007 increased
our
investor relations costs.
|
|
|
|
|
|
Travel
|
|
I
|
|
Increased
international sales have required increased travel.
|
|
|
|
|
|
Consulting
|
|
D
|
|
The
granting of stock options to long term consultants in 2006 resulted
in a
stock option expense of $61,152 in second quarter 2006 as compared
to
$32,805 in the same period 2007.
|
|
|
|
|
|
Professional
fees
|
|
D
|
|
The
Company experienced reduced professional fees after the conclusion
of two
lawsuits in December 2006 and January
2007.
|
Quarter
Ended June 30, 2006
Item |
|
Increase
(I) or
Decrease (D)
|
|
Reason |
|
|
|
|
|
Wages
|
|
I
|
|
In
2005 the Company was not required to record the expense of stock
options
for employees. The expense, for financial report purposes for
employee stock options, added $29,359 to wages in second quarter
2006.
|
|
|
|
|
|
Administrative
salaries and benefits
|
|
I
|
|
In
2005 the Company was not required to record the expense of stock
options
for employees. The expense, for financial report purposes for
employee stock options, added $92,498 to administrative salaries
in
secondt quarter 2006.
|
|
|
|
|
|
Investor
relations and transfer agent fee
|
|
D
|
|
In
2005, the stock options vested in relation to the capital raised
on April
14th. This
resulted in a non-cash transaction of $447,500. Without this,
the expense would be about the same.
|
|
|
|
|
|
Consulting
|
|
I
|
|
The
granting of stock options to long term consultants resulted in a
stock
option expense of $61,152 in second quarter 2006 as compared to $18,200
in
the same period 2005.
|
|
|
|
|
|
Interest
expense
|
|
D
|
|
The
decrease in interest expense is a direct result of the Company paying
off
the short-term loan used for the purchase of assets to create the
NanoChem
division.
|
Capital
Resources and Liquidity
The
sources and uses of funds are
directly obtainable from our Consolidated Statement of Cash Flows found on
Page
3 of this document.
The
Company has sufficient cash
resources to meets its future commitments and cash flow requirements for the
coming year. As of June 30, 2007 working capital was $7,036,894 (2006
- $3,355,420) and the Company has no substantial commitments that require
significant outlays of cash over the coming fiscal year.
The
Company is committed to minimum rental payments for property and premises
aggregating approximately $434,489 over the term of four leases, the last
expiring on December 31, 2011.
Commitments
in each of the next five years are approximately as follows:
2007
|
|
$ |
105,933
|
|
2008
|
|
|
174,159
|
|
2009
|
|
|
122,785
|
|
2010
|
|
|
15,806
|
|
2011
|
|
|
15,806
|
|
The
Company doesn’t anticipate any capital requirements for the twelve months ending
December 31, 2007.
The
Company does not have any
commitments or arrangements from any person to provide with any additional
capital.
See
Note 2 to the financial statements
included as part of this report for a description of our significant accounting
policies and recent accounting pronouncements.
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.
PART
II
|
OTHER
INFORMATION
|
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
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.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds.
|
In
May 2007 the Company
completed the sale of 936,140 Units, at a price of $3.25 per Unit, to a
group of private investors. Each Unit consisted of one share of the
Company's common stock and one-half of a warrant. Each whole warrant
permits the holder to purchase one share of the Company's common stock at a
price of $4.50 at any time prior to May 3, 2010.
The
Company relied upon the
exemption provided by Section 4(2) of the Securities Act of 1933 for the sale
of
these securities.
The
shares sold to the
private investors, as well as the shares issuable upon the exercise of the
warrants, and included as a component of the Units, were subsequently registered
for public sale by means of a registration statement filed with the Securities
and Exchange Commission.
|
Defaults
Upon Senior Securities.
|
None.
|
Submission
of Matters to a Vote of Security
Holders.
|
The
Company had its Annual General Meeting on June 21, 2007 and the following items
were voted on and approved:
|
1.
|
Vote
to re-elect the five (5) directors to the Board of Directors in accordance
with the Company’s Constitution, for the upcoming
year:
|
|
2.
|
Vote
to approve the granting of the following options to officers and
directors:
|
|
John H.
Bientjes
|
5,000
options to buy common shares with a strike price of $3.60/share,
vesting
on December 31, 2007 and expiring on December 18,
2012.
|
|
Dale
Friend
|
5,000
options to buy common shares with a strike price of $3.60/share,
vesting
on December 31, 2007 and expiring on December 18,
2012.
|
|
Eric
Hodges
|
5,000
options to buy common shares with a strike price of $3.60/share,
vesting
on December 31, 2007 and expiring on December 18,
2012.
|
|
3.
|
Approval
of Annual Report
|
We
have
enclosed our 10KSB as filed with the SEC on Mar 29, 2007.
|
4.
|
Vote
to ratify the selection of Cinnamon Jang Willoughby & Company as the
Company’s independent registered public accountants for the year ending
December 31, 2007.
|
None.
Number
|
Description
|
3.1
|
Amended
and Restated Certificate of Incorporation of the registrant.
(1)
|
3.2
|
Bylaws
of the registrant. (1)
|
31.1
|
|
31.2
|
|
32.1
|
|
32.2
|
|
|
|
______________
* 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: August
14, 2007
|
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
|
|
|
|
|
|
24