U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 0-29649
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
(Name of Small Business Issuer in its charter)
NEVADA 91-1922863
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2614 QUEENSWOOD DR.
VICTORIA, B.C.
V8N 1X5, CANADA
(Address of principal executive offices)
250-477-9969
(Issuers telephone number)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes(X)
No( )
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10 -
KSB or any amendment to this Form 10 - KSB (X )
Issuer's revenues for its most recent fiscal year $1,112,192
The aggregate market value of the voting common stock held by
non-affiliates of the Company as of March 2, 2003 was approximately $26,083,000
based on the closing price for shares of the Company's common stock on the
American Stock Exchange for that date.
On March 17, 2003, approximately 11,621,919 shares of the Company's
common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
No documents are incorporated by reference.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
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ITEM 1. BUSINESS
Flexible Solutions International, Inc. was incorporated in the State of Nevada
in May 1998. It acquired all of the outstanding shares of Flexible Solutions,
Ltd., a British Columbia corporation, in June 1998 in exchange for 7,000,000
shares of common stock, which represented all of the issued and outstanding
shares of Flexible Solutions International at the conclusion of such
acquisition. Flexible Solutions International had no other business and was
incorporated in order to acquire Flexible Solutions, Ltd. Flexible Solutions,
Ltd. was organized in 1991 to develop and market a swimming pool chemical
product designed to reduce heat loss.
We completed the development of our HEAT$AVR product and introduced it into the
commercial marketplace in 1998, achieving sales of $84,252 that year. Since that
time we have been expanding our distribution network and working to complete the
development of our WATER$AVR product.
In 2002 we established WATER$AVR Global Solutions, Inc., an Illinois
corporation, as a wholly owned subsidiary to concentrate on marketing of
WATER$AVR.
Flexible develops, manufactures and markets specialty chemicals which slow down
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 down water loss due to evaporation. We also make and sell dispensers which
automate the deployment of our chemical products.
OUR HEAT$AVR PRODUCT
The primary product of Flexible is HEAT$AVR which represents substantially all
of our sales. HEAT$AVR is a chemical product for use in swimming pools and spas
that forms a thin, invisible layer on the surface of water which reduces the
amount of water evaporation and heat loss from the pool. The product is marketed
as a cost effective and convenient way to save on the cost of energy required to
heat pools and spas. Approximately 70% of the energy lost from a swimming pool
occurs through evaporation.
HEAT$AVR is a mixture of chemicals which are lighter than water. The solution
floats to the surface when introduced into a pool or spa to form a very thin
layer on the surface of the water which slows down evaporation of water from the
surface of the pool. The product is not visible on the pool surface and it
cannot be seen, felt or tasted by swimmers. After a swimmer stops disturbing the
pool water, the product reforms to a complete layer on the pool surface.
We market HEAT$AVR to the residential market primarily in the form of our
"Tropical Fish" dispenser. Each Tropical Fish dispenser is made of molded
plastic in the form of a ten inch long colorful Tropical Fish that is filled
with enough HEAT$AVR solution to cover the surface of a
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400 square foot swimming pool for about one month. The Tropical Fish is deployed
by snipping the fin and tossing the fish into the pool where it submerges to the
bottom of the pool. Water pressure causes the HEAT$AVR liquid inside to escape
into the water where it rises to the surface and forms an invisible layer on the
surface of the water. The empty dispenser can remain on the bottom of the pool
for decoration and use as a pool toy or be removed. The Tropical Fish product
has a suggested retail price of $9.95 in the United States.
BENEFITS OF HEAT$AVR USE IN OUTDOOR POOLS
In outdoor swimming pools HEAT$AVR provides savings on pool heating costs and
provides convenience of use when compared to pool blankets.
Pool personnel often find it inconvenient to use conventional pool blankets
correctly and consistently. Pool blankets are plastic covers which are cut to
the size and shape of the surface of the pool or spa. They float on the surface
and perform the same purpose as HEAT$AVR of reducing energy cost by inhibiting
evaporation. Of course the blanket must be removed and stored prior to swimmers
entering the pool and provide no energy savings when not in the pool. HEAT$AVR
eliminates the necessity of installing, removing and storing the blanket and
works 24 hours a day. We believe that the ease of use provided by HEAT$AVR
results in more consistent usage.
BENEFITS OF HEAT$AVR USE IN INDOOR POOLS
Use of HEAT$AVR in indoor pools results in even greater energy savings. Indoor
pool locations use energy not only to heat the pool water but to air condition
the pool environment. By slowing the transfer of heat and water vapor from the
pool to the atmosphere of the pool enclosure atmosphere less energy is required
to maintain a pool at the desired temperature, there is a reduced load on the
air--conditioning system because less is heat transferred from the pool water to
the surrounding air and less water vapor will have to be removed from the air to
maintain the required comfort level. Air--conditioned indoor pools are very high
users of energy because swimmers and loungers have differing temperature
expectations which require both water heat, generally by gas, and electric air
cooling to keep both groups happy in the same room.
MARKET FOR HEAT$AVR
We market our HEAT$AVR product to both the residential market made up of
individual homeowners with pools and spas and the commercial market consisting
of operators of commercial swimming pools such as those located in hotels,
motels, schools, and municipal and private recreational facilities.
Pool and Spa Marketing Magazine has published the following estimates concerning
the swimming pool market and their 2002 reference and directory:
2000 U.S in--ground pool sales-- 170,700
2000 U.S. above--ground pool sales-- 345,000
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Existing pools in U.S.-- 4,210,000
Existing above--ground pools in U.S.-- 3,219,000
2000 sales for new pools in U.S.-- $3,950,000,000
1999 residential pool sales in Europe-- 95,740 pools
We have received reports from some of our commercial customers documenting
energy savings of $2,400 to $6,000 per year. We also make and sell programmable
dispenser for automatically dispensing HEAT$AVR into a pool. The dispenser has a
reservoir holding a one week supply of HEAT$AVR. The unit is programmed to
inject the appropriate amount of the product into the pool at the rate of 1 oz.
per 400 square feet of pool surface per day.
MARKETING AND SALES
The HEAT$AVR and Tropical Fish products are sold in Canada and the United States
by Flexible's exclusive distributor, Sun Solar Energy Technologies, and in
Australia by Hydro--Flexible Solutions PTY. Flexible also sells HEAT$AVR
directly into the United States to both wholesale and retail accounts. We have
about 155 active customers. However, in the nine months ended September 30, 2002
Sun Solar Energy Technologies represented 94.7% of our total sales.
OUR AGREEMENT WITH SUN SOLAR ENERGY TECHNOLOGIES
We have a written agreement with Sun Solar Energy Technologies, our exclusive
distributor for our Tropical Fish product in the U.S. and Canada. This customer
represented 95% of our total sales in 2002. In February 1998 we entered into an
exclusive distributorship with Sun Solar Technologies for our Tropical Fish
product. The agreement gives Sun Solar exclusive right to distribute our
Tropical Fish product in the United States and Canada. In order to maintain the
exclusivity of such distribution, Sun Solar must order and pay for at least
720,000 units in the year ending February 28, 2003. Such exclusive agreement
terminates on February 29, 2004. We have agreed to give Sun Solar a right of
first refusal in the event we propose to sell our Flexible Solutions Ltd.
subsidiary. If such subsidiary is sold we must require the purchaser to fulfill
the exclusive distribution contract with Sun Solar and Sun Solar can veto the
proposed sale to an entity which it reasonably believes may have an intent to
discontinue manufacture of our Tropical Fish product. The agreement also
provides that Sun Solar will sell its veto for a reasonable premium arrived at
by mutually agreed upon by a mediator. The agreement also provides that Flexible
has a right of first refusal if Sun Solar proposes to sell its exclusive
distributorship. If such distributorship is sold Sun Solar's sales performance
minimums are required to be binding on the new owner. The agreement also
provides that if such exclusive distribution rights are sold by Sun Solar, the
buyer must advance to Flexible $1.00 US for each Tropical Fish which must be
bought in the year of sale to maintain the distribution agreement exclusivity,
which payment will be credited to future orders of Tropical Fish at the rate of
$1.00 US per fish as the orders are made. We have also agreed to offer
distribution rights on new
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swimming pool products to Sun Solar in the US and Canada if it is up-to-date on
its sales performance requirements. Flexible is satisfied with the performance
of Sun Solar as exclusive distributor of Tropical Fish and believes our
relationship with Sun Solar is satisfactory. There can be no assurance that our
exclusive distributorship with Sun Solar will be renewed past its current
expiration on February 29, 2004. We grant Sun Solar 45 days to pay for product
ordered after shipment.
We also have nonexclusive distributors in Canada and the United States for
HEAT$AVR not packaged in our Tropical Fish dispenser and exclusive distributors
in Australia, Korea and Great Britain. We support our distributors and seek
additional market opportunities by attending the major pool industry trade shows
in the United States yearly. We advertise in trade magazines and directly to
buyer associations. We maintain an Internet presence with a website containing
information about our products. We also write and publish a newsletter to 5,000
customers and potential customers twice a year.
OUR WATER$AVR PRODUCT
We introduced our WATER$AVR product in June 2002. This product utilizes our core
technology to reduce water evaporation. It is marketed as a water conservation
product for use where water is standing or gently flowing and the need for water
conservation can justify the cost of purchase and deployment of the product. We
believe that our WATER$AVR product may find a market for use in
Reservoirs, Potable water storage, Aqueducts and canals, Agricultural
irrigation, Flood water crops, Lawn and turf care, Potted and bedding
plants, Stock watering ponds, Mining
WATER$AVR is sold in granulated form. It can be provided in shaker containers
holding 3/4 pound or in 44 pound weatherproof bags. We also offer a dispenser
for WATER$AVR to automate deployment of the product. The product can be applied
in various ways from hand dispersal to fully automated scheduled metering.
CURRENT STATUS OF OUR WATER$AVR PRODUCT
We anticipate our initial market for WATER$AVR will be in India and China. We
have provided quantities of the product for testing in these countries and if
successful anticipate that substantial orders may be received. The product will
also be marketed in both developed and lesser developed countries to address
water conservation concerns. We are seeking to establish strategic relationships
with companies in the water processing industry who have marketing and
manufacturing operations in countries with water conservation concerns. We have
a full time employee dedicated to establishing sales channels throughout the
world for WATER$AVR.
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In September, 2002 we granted Ondeo Nalco Company, a subsidiary of Suez, of
Naperville, Illinois exclusive and non-exclusive distribution rights as follows:
Exclusive Market Countries
---------------- ---------
Market Canada and USA
Municipal All, except India, Pakistan,
Mineral and Mining Bangladesh, Sri Lanka, Nepal,
Bhutan, Mauritania, Malaysia and
Singapore.
Non-Exclusive Market Countries
-------------------- ---------
All except agriculture All, except India, Pakistan,
and large retail Bangladesh, Sri Lanka, Nepal,
Bhutan, Mauritania, Malaysia and
Singapore.
We have also granted Ondeo Nalco an option to purchase 1,000,000 shares of our
common stock at $4.25 per share and they will receive additional options to
purchase 1,000,000 shares at $5.50 per share by meeting certain sales targets.
The distributor is not required to purchase any quantity of WATER$AVR and there
can be no assurance that we will achieve substantial sales of WATER$AVR to this
distributor. The exclusive markets convert to non-exclusive if the distributor
does not meet certain thresholds of sales.
COMPETITION
We are not aware of any chemical evaporation reduction products on the market or
under development which compete with our HEAT$AVR product. HEAT$AVR does compete
against plastic pool blanket products. We compete against pool blankets on the
basis of convenience of use of HEAT$AVR versus the inconvenience of deploying
and storing pool blankets. Pool owners and operators may also decide that no
evaporation control product is needed for their pools. We are aware of one
chemical product manufactured by Aegis Chemical Industries Ltd. of India which
competes with our WATER$AVR product. We believe WATER$AVR is a superior product
for the following reasons:
o Easier Application. WATER$AVER may be deployed directly to the water
surface by hand. The Aegis product requires premixing to dilute it to
usable strength.
o Cost. In order to achieve comparable water savings levels, the Aegis
product would cost more than the WATER$AVER product.
Specialty chemicals are a highly competitive industry with many huge
multi-national firms with large research and development operations. There are a
number of firms which develop and market chemical products for the pool and spa
industry. Therefore, we can expect competition to arise at any time.
Water conservation is an important priority throughout the world and numerous
researchers in industry and academia are seeking to develop solutions which may
compete with or be superior
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to our products. Climate changes which relieve water shortage conditions or a
technological breakthrough in water desalination could reduce the need for water
conservation products.
MANUFACTURING
Our HEAT$AVR products and dispensers are made from chemicals, plastic and other
materials and parts which are readily available from multiple suppliers. We have
never experienced any shortage in the availability of raw materials and parts
for our products and we do not have any long term supply contracts for any such
items. We manufacture our products in an 11,000 square foot plant in Calgary,
Alberta, Canada.
We have agreed to purchase all our requirements for WATER$AVER from Ondeo Nalco
Company under a five year agreement effective April 2002, but are not required
to purchase any minimum quantity of such product.
GOVERNMENTAL REGULATIONS
Chemical products for use in swimming pools are covered by a variety of
governmental regulations in the countries where we sell our products. Such
regulations cover such matters as packaging, labeling and product safety. We
believe our products are in compliance with such regulations. Our WATER$AVR
product will be subject to additional regulation in some countries particularly
for agricultural and drinking water uses. We will address these issues on a
country--by--country basis. We do not anticipate that governmental regulations
will be an impediment to marketing WATER$AVR because the major ingredient has
been used in agriculture for many years. We will require approval to sell
WATER$AVR in the United States for agricultural or drinking water users. We have
not yet applied for any such approvals in the U.S.
PROPRIETARY RIGHTS
Our success and ability to compete is dependent in part upon our proprietary
technology. We rely on a combination of patent, copyright and trade secret laws
and nondisclosure agreements to protect our proprietary technology. We currently
hold two U.S. patent and are seeking to extend these patents to certain other
countries. We also have seven patent applications pending. There can be no
assurance that our pending patent applications will be granted on that any
issued patent will be upheld as valid or prevent the development of competitive
products which may be equivalent or superior to our products. We have not
received any claims alleging infringement of the intellectual property rights of
others, but there can be no assurance that we may not be subject to such claims
in the future.
EMPLOYEES
As of December 31, 2002, we employed 15 persons including one officer, five
sales and customer support and four in manufacturing. None of our employees is
represented by a labor union and we have experienced no work stoppages to date.
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ITEM 2. DESCRIPTION OF PROPERTY
Our President provides use of space in his residence to conduct his
administrative duties and we do not reimburse him for such use. We rent 1,400
sq. ft. of sales and research space in Victoria BC for $1050 a month and 500 sq.
ft. of office space in Chicago IL for $500 a month. We lease an 11,000 sq. foot
building in Calgary, Alberta, Canada for $3,150 per month until September 2003
for manufacture of our products. We also maintain a warehouse facility in St.
Laurent, Quebec, Canada which is provided by our distributor at no cost.
ITEM 3. LEGAL PROCEEDINGS
On January 15, 2002 we filed a lawsuit in the Supreme Court of British Columbia
against John Wells and Equity Trust, S.A. seeking return of 100,000 shares of
our common stock and repayment of a $25,000 loan which were provided to
defendants for investment banking services to be provided to Flexible consisting
of providing a $5 million loan and a $25 million stock offering. Such services
were not performed and we filed suit for the return of such shares after they
were not returned voluntarily and the note was not paid.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of our shareholders in the quarter
ended December 31, 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR SECURITIES
Our common stock began trading on the American Stock Exchange under the symbol
FSI on November 19, 2002. Prior to that, our stock traded on the
over-the-counter market and was quoted on the NASD Electronic Bulletin Board.
The following is the range of high and low closing sales or bid prices for
Flexible common stock for the periods indicated:
SALES OR BID PRICES
2001 High Low
---- ---- ---
January 2-March 30 $2.75 $ .6875
April 2- June 29 2.30 1.50
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July 2 - September 28 1.75 .67
October 1 - December 31 1.45 .73
2002
----
January 2 - March 28 3.57 1.30
April 1 - June 28 4.10 2.50
July 1 - September 30 3.85 1.95
October 1 - December 31 3.85 2.77
Prices since November 19,2002 represent high and low prices on the American
Stock Exchange. Prices prior to November 19, 2002 represent inter-dealer
quotations which do not include retail mark-ups, markdowns, or commissions, and
do not necessarily represent actual transactions. We had 75 record holders of
our common stock on December 31, 2002. Such shares are owned by approximately
350 beneficial owners.
Our common stock also trades on the Frankfurt Germany stock market under the
symbol FXT.
DIVIDEND POLICY
Flexible has not paid any dividends on its common stock, and it is not
anticipated that any dividends will be paid in the foreseeable future. The Board
of Directors intends to follow a policy of retaining earnings, if any, to
finance the growth of the company. The declaration and payment of dividends in
the future will be determined by the Board of Directors in light of conditions
then existing, including the company's earnings, financial condition, capital
requirements and other factors.
Sales of unregistered shares in 2002
In January 2002 we issued 30,000 shares of our common stock to Patrick Grant, an
employee, for services for the period from January 1, 2002 to June 30, 2002.
Such shares were issued pursuant to an exemption from registration under Section
4(2) of the Securities Act of 1933. Such shares were issued pursuant to an
investment letter under which the shareholder acknowledged that the shares were
restricted securities and would not be sold without registration or an exemption
from registration. The certificate for such shares contained a legend
restricting transfer without such registration or exemption and a stop transfer
order was lodged against the shares with our transfer agent.
In April 2002 we sold 400,000 shares of our common stock in a private placement
to managed accounts of Sprott Asset Management, Inc. for $2.50 per share. We
paid a commission of $50,000 in connection with such placement. Such shares were
issued pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933. Such shares were issued pursuant to an investment letter
under which the shareholder acknowledged that the shares were restricted
securities and would not be sold without registration or an exemption from
registration. The certificate for such shares contained a legend restricting
transfer without such registration or exemption and a stop transfer order was
lodged against the shares with our transfer agent.
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In July 2002 we sold 1,000,000 shares of our common stock in a private placement
to managed accounts of Sprott Asset Management, Inc. and 428,600 shares to
Pictet Global Sector Fund for $3.50 per share. Such shares were issued pursuant
to an exemption from registration under Section 4(2) of the Securities Act of
1933. Such shares were issued pursuant to an investment letter under which the
shareholder acknowledged that the shares were restricted securities and would
not be sold without registration or an exemption from registration. The
certificate for such shares contained a legend restricting transfer without such
registration or exemption and a stop transfer order was lodged against the
shares with our transfer agent.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our operating activities are related primarily to manufacturing and marketing
our swimming pool chemical product called "HEAT$AVR", including the consumer
version packed in our "Tropical Fish" dispenser. In June 2002 we introduced a
fresh water evaporation control chemical product called "WATER$AVR" which has
not achieved substantial sales to date.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The SEC has recently issued Financial Reporting Release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"),
suggesting companies provide additional disclosure and commentary on those
accounting policies considered most critical. A critical accounting policy is
one that is both very important to the portrayal of our financial condition and
results, and requires management's most difficult, subjective or complex
judgments. Typically, the circumstances that make these judgments difficult,
subjective and/or complex have to do with the need to make estimates about the
effect of matters that are inherently uncertain. We believe the accounting
policies below represent our critical accounting policies as contemplated by FRR
60. See Note 3 of the Notes to Consolidated Financial Statements for a detailed
discussion on the application of these and other accounting policies.
Allowances for Product Returns. We still grant certain of our customers the
right to return product which they are unable to sell. Upon sale, we evaluate
the need to record a provision for product returns based on our historical
experience, economic trends and changes in customer demand.
Allowances for Doubtful Accounts Receivable. We evaluate our accounts receivable
to determine if they will ultimately be collected. This evaluation includes
significant judgments and estimates, including an analysis of receivables aging
and a review of large accounts. If, for example, the financial condition of our
customers deteriorates resulting in an impairment of their ability to pay or a
pattern of late payment develops, allowances may be required.
Provisions for Inventory Obsolescence. We may need to record a provision for
estimated obsolescence and shrinkage of inventory. Our estimates would consider
the cost of inventory, the estimated market value, the shelf life of the
inventory and our historical experience. If there are changes to these
estimates, provisions for inventory obsolescence may be necessary.
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RESULTS OF OPERATIONS
Year ended December 31, 2002 and 2001
-------------------------------------
Sales for the year ended December 31, 2002 were $1,112,192 compared to
$1,334,273 for the 2001 period, a decrease of $222,081 or 16.6%. Our sales
decline was primarily the result of poor weather conditions in the Eastern U.S.
and Canada which reduced the outdoor swimming season and therefore the demand
for our tropical fish product. There were no price changes in this period.
Our overall gross profit margin on product sales decreased slightly to 47.7% in
2002 from 50.3% in 2001. This decrease was primarily due to higher fixed costs
related to additional production facilities and equipment which we have added in
the 2002 period.
Operating expenses for fiscal 2002 were $3,701,899, up from $806,020 in 2001. We
issued over 2 million stock options to employees and consultants which resulted
in a non-cash expense recognition of $2,736,608 in 2002. In 2002 we also
increased sales and marketing costs in connection with our WATER$AVR product and
this was reflected in increased wages, office, rent, telephone and travel
expenses. We incurred higher professional fees in the 2002 period primarily due
to increased legal and accounting expenses. Depreciation expense was $24,683 for
the 2002 period compared to $18,910 for the 2001 reflecting depreciation for
additional property and equipment added in 2002. Our expenses to increase
investor awareness of our company was significantly less than in 2001 and this
resulted in a decrease in stock promotion and transfer agent's fee in 2002. We
also had an expense of $19,180 in 2002 for currency exchange. There was income
of $2,368 from such item in 2001.
Our income tax provision for 2002 reflected a benefit of $21,456 due to the net
loss while we had income tax expense of $100,264 in 2001. We had interest income
of $67,228 in 2002 reflecting earnings on the proceeds of stock sales during the
year. There was a net loss of $3,082,445 in the 2002 period compared to a net
loss of $233,955 in 2001.
Year Ended December 31, 2001 and 2000
-------------------------------------
Fiscal 2001 revenue rose 30% to $1,334,273 because of more effective marketing
with the preponderance of sales continuing to be in Canada to our Montreal-based
distributor. The distributor reports that 75% of his sales are in the USA. Gross
profit margins were stable at 50.3%. Product mix shifted little during the year
with a continued emphasis on "Tropical Fish". There were no price changes in
this period.
Operating expenses for 2001 were $806,020 up from $289,860 in the 2000 period.
Wages increased to $313,918 in 2001 from $87,907 in 2000. In 2001 this included
$173,750 related to granting of stock options rather than cash expense. Cash
expense also increased due to increased production levels and to further
introduction of WATER$AVR. In the 2001 period we increased sales and marketing
costs in connection with our WATER$AVR product and this was reflected in
increased wages, office, rent, telephone and travel expenses. We incurred lower
professional
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fees in the 2001 period primarily due decreased legal and accounting expenses.
Depreciation expense was $18,910 for the 2001 period compared to $13,489 for
2000 reflecting additional depreciation for additional property and equipment
added in 2001. We also undertook a program to increase investor awareness of our
company and this program resulted in an increase in stock promotion and transfer
agent's fee in 2001. We also had income of $2,368 in 2001 for currency exchange.
There was $19,344 of such income in 2000.
There was a net loss of $233,955 in 2001 compared to net income of $138,971 in
2000.
Liquidity and Capital Resources
-------------------------------
We sold 1,828,600 shares of common stock to investors in 2002 for net proceeds
of $5,750,000. We believe we have sufficient capital to support our business and
operations for at least the next 12 months. We anticipate utilizing
approximately $2 million in the next twelve months to attempt to increase the
sales of our products by adding sales and marketing professionals, increase
advertising and promotion expenses, improve our products, develop additional
uses for our core technology and make additional patent applications. There can
be no assurance that such expenditures will result in significant increase in
sales of our products. Approximately $1,900,000 of such expenditures are related
to our recently introduced WATER$AVR product. There can be no assurance that any
of the expenditures will result in additional sales revenues.
SEASONALITY
Our operations are subject to seasonal fluctuations. Use of our products
increase in summer months in most markets and result in our sales from January
to June being greater than in July through November. Additionally, cooler summer
weather patterns lead to lower sales volume, particularly of our Tropical Fish
product which is geared to residential pools, due to shorter swimming season
while hotter weather results in increased sales volume due to a longer swimming
season. We believe we are able to adequately respond to these seasonal
fluctuations by reducing or increasing production as needed.
RISK FACTORS
We have identified the following as the most material risks of our business.
Our business would be adversely affected if we lost the services Dan O'Brien,
our chief executive officer.
We are dependent upon the services of Dan O'Brien, who serves as our president
and chief executive officer. Our business would be adversely affected if the
executive services of Mr. O'Brien ceased to be available us because none of our
other employees could take over the management activities of Mr. O'Brien.
Therefore we would have to recruit one or more new executives but there can be
no assurance that we would be able to engage a replacement executive with the
required skills on satisfactory terms. Mr. O'Brien does not have an employment
contract with Flexible. We have a key man life insurance policy in the amount of
CDN $400,000 (currently approximately USD$250,000) on Mr. O'Brien.
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Our revenues would be substantially reduced if we lost the major customer that
accounts for a substantial amount of our sales.
Our exclusive U.S. and Canadian distributor of our HEAT$AVR product packaged in
our Tropical Fish dispenser account for 94% of our sales revenues in 2001 and
95% of our sales revenues in 2002. Although we have an agreement with such firm
which is described above, this agreement does not require the distributor to
purchase any minimum amount of our products, nor does it prevent it from
handling competing products. If our distributor reduced its purchase or ceased
to purchase our products we would suffer substantial reduction in our sales and
would have to make alternative arrangements to distribute our Tropical Fish
product in the U.S. and Canada. There can be no assurance that we would be able
to replace the services of this distributor on satisfactory terms.
We are subject to concentrated credit risk from our major customer.
We allow our major customer 45 days to pay for each shipment of product we make
to them. This represents risk that we would be subject to substantial write-off
of our accounts receivable if this customer defaulted on their payment
obligations to us.
The recent introduction of our Water$avr product may result in losses.
We introduced our WATER$AVR product in June 2002. We have delivered quantities
for testing by potential customers but only one customer has ordered the product
for commercial use. This product can achieve success only if it is ordered in
substantial quantities by commercial customers who have determined that the
water saving benefits of the product exceed the costs of purchase and deployment
of the product. We cannot assure that we will receive sufficient orders of this
product to achieve profits or cover the additional expenses incurred to
manufacture and market this product. We expect to spend $1,900,000 on WATER$AVR
in 2003.
Our products can be hazardous if not handled, stored and used properly.
HEAT$AVR is flammable and must be stored properly to avoid fire risk.
Additionally, it may injure eyes which are exposed to the concentrated product.
Although we label the products to warn of such risks, our sales could be reduced
if our products were to be viewed as being dangerous to use or actually been
implicated in causing personal injury or property damage, which is not currently
the case.
14
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth our directors and officers and their
respective ages and positions:
Name Age Position
Daniel B. O'Brien 46 President, Director
John H. Bientjes 49 Director
Dr. Robert N. O'Brien 81 Director
Dale Friend 47 Director
Daniel B. O'Brien has been president and a director of Flexible since August
1998. He has been involved in the swimming pool industry since 1990 when he
founded our subsidiary, Flexible Solutions Ltd. which was purchased by Flexible
Solutions International, Inc. in August 1998. From 1990 to 1998 Mr. O'Brien was
also a teacher at Brentwood College where he was in charge of outdoor education.
John H. Bientjes has been a member of our Board of Directors since February
2000. Mr. Bientjes has been the manager of the Commercial Aquatic Supplies
Division of D.B. Perks & Associates, Ltd., located in Vancouver, British
Columbia, a company that markets supplies and equipment to commercial swimming
pools which are primarily owned by municipalities. Mr. Bientjes was graduated in
1976 from Simon Fraser University in Vancouver, British Columbia with a Bachelor
of Arts Degree in Economics and Commerce.
Dr. Robert N. O'Brien has been a member of the Company's Board of Directors
since May 1998. Dr. O'Brien was a Professor of Chemistry at the University of
Victoria from 1968 until 1986 at which time he was given the designation of
Professor Emeritus. He held various academic positions since 1957 at the
University of Alberta, the University of California at Berkley, and the
University of Victoria. While teaching, Dr. O'Brien acted as a consultant and
served on the British Columbia Research Council from 1968 to 1990. In 1987, Dr.
O'Brien founded the Vancouver Island Advanced Technology and Research
Association. Dr. O'Brien received his Bachelor of Applied Science in Chemical
Engineering from the University of British Columbia in 1951; his Masters of
Applied Science in Metallurgical Engineering from the University of British
Columbia in 1952; his Ph.D. in Metallurgy from the University of Manchester in
1955; and, was a Post Doctoral Fellow in Pure Chemistry at the University of
Ottawa from 1955 through 1957.
Dale Friend was elected a director in December, 2002. She was a Senior Trust
Analyst for Alderwoods Group, formerly The Loewen Group from August 2002 to
February 2003. She was Advanced Accountant for such firm from 1999 to August
2002. She was with Telus, formerly BC Tel, from 1979 to 1998 in various
accounting, auditing and financial planning positions.
15
Daniel B. O'Brien and Dr. Robert N. O'Brien are father and son.
Directors are elected annually and hold office until the next annual meeting
of our stockholders and until their successors are elected and qualified. The
Board has not established any committees. All executive officers are chosen by
the board of directors and serve at the board's discretion.
We reimburse directors for any expenses incurred in attending board of
directors meetings.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of the copies of Forms 3 and 4 and 5 thereto
furnished to the Company, or written representations that no annual Form 5
reports were required, the Company believes that all filing requirements under
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") applicable to its directors, officers and any persons holding ten percent
(10%) or more of the Company's Common Stock were made with respect to the
Company's fiscal year ended December 31, 2002.
16
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information about the
compensation paid or accrued to the person who was the Company's chief executive
officer during the fiscal year ended December 31, 2002 (the "named executive
officer").
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
AWARDS PAYOUTS
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
YEAR ($) ($) ($) ($) (#) ($) ($)
--------- ----- ------- -------- --------- ---------- ------- ---------
Daniel O'Brien 2002 $40,000 -- -- -- 50,000 shares -- --
--
President, Chief 2001 $18,500 -- -- 100,000 shares -- --
Executive Officer 2000 $18,500 100,000 shares
The following table provides certain information about the stock
options granted to the executive officer named in the Summary Compensation
Table. in the year ended December 31, 2002.
OPTIONS GRANTED IN 2002 FISCAL YEAR
--------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING PERCENT OF TOTAL
OPTIONS GRANTED OPTIONS/SARS GRANTED TO EXERCISE OR BASE PRICE
NAME (#) EMPLOYEES IN FISCAL YEAR ($/SHARE) EXPIRATION DATE
--------------------------- ------------------ -------------------------- ------------------------ -----------------------
Daniel B. O'Brien 50,000 shares 40.4% $4.25 December 31, 2007
--------------------------- ------------------ -------------------------- ------------------------ -----------------------
The following table sets forth certain information about stock options
exercised in 2002 and the value of unexercised stock option held as of December
31, 2002 by the executive officer named in the Summary Compensation Table.
17
AGGREGATE OPTION EXERCISES IN 2002 AND YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE
SHARES OPTIONS AT FY-END (#) MONEY OPTIONS AT FY-END ($)
ACQUIRED ON VALUE ------------------------------ --------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------- -------------- -------------- -------------- -------------- -------------- ----------------
Daniel B. O'Brien 100,000 $330,000 100,000 50,000 $205,000 0
DIRECTOR COMPENSATION
We have agreed to issue our directors who are not also employed by the Company
options to purchase 5,000 shares of our common stock annually for serving as a
director. However, Dr. Robert N. O'Brien will not receive director options in
any year in which he receives options for other services. We pay Dr. Robert
O'Brien additional options for assisting in research and development and patent
prosecution. The amount of such options are determined annually by the Board of
Directors with Dr. O'Brien not voting on such matter. In 2002, Dr. O'Brien
received the following options for such services and he did not receive director
options:
Option Price No. of Options Expiration Date
------------ -------------- ---------------
$4.25 25,000 December 31, 2007
Our other outside directors received the following options in 2002:
Name Option Price No. of Options Expiration Date
---- ------------ -------------- ---------------
John H. Bientjes $4.25 5,000 December 31, 2007
Dale Friend $4.25 5,000 December 31, 2007
18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of March 17, 2003 by (i) each stockholder who is
known by the Company to own beneficially more than five percent of the Company's
outstanding Common Stock, (ii) each director of the Company, (iii) the Company's
executive officers named in the Summary Compensation Table, and (iv) by all
executive officers and directors of the Company as a group. The information as
to each person or entity has been furnished by such person or group.
Shares Beneficially Owned (1)
Common Stock Percentage
Daniel O'Brien(2)(3) 4,606,000 39.3%
John H. Bientjes(2)(3) 40,000 *
Dr. Robert O'Brien(2)(3) 1,800,000 15.4%
Dale Friend(2)(3) -0- -
Sprott Asset Management, Inc.(4) 1,672,800 14.4%
PF Water(5) 678,600 5.8%
Beat Aschmann(6) 700,000 6.0%
All directors and officers
as a group (4 persons) 6,446,000 54.7%
* Less than 2%
(1) Applicable percentage of ownership at March 17, 2003, is based upon
11,621,919 shares of Common Stock outstanding. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and includes voting and investment power with respect to shares shown
as beneficially owned. Shares of Common Stock subject to options or warrants
currently exercisable or exercisable within 60 days of February 3, 2003, are
deemed outstanding for computing the shares and percentage ownership of the
person holding such options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other person or entity.
(2) Address for this shareholder is 2614 Queenswood Drive, Victoria,BC, V8N 1X5,
Canada.
(3) Includes shares which may be acquired on the exercise of stock options as
follows.
Name No. of Options Exercise Price Expiration Date
---- -------------- -------------- ---------------
Daniel O'Brien 100,000 $1.40 December 21, 2006
John H. Bientjes 5,000 $1.40 December 21, 2006
Dr. Robert O'Brien 50,000 $1.40 December 21, 2006
Doesnot include the following shares which may be acquired on the exercise of
stock options which are not exercisable until December 31, 2003.
19
Name No. of Options Exercise Price Expiration Date
---- -------------- -------------- ---------------
Daniel O'Brien 50,000 $4.25 December 31, 2007
John H. Bientjes 5,000 $4.25 December 31, 2007
Dr. Robert O'Brien 25,000 $4.25 December 31, 2007
Dale Friend 5,000 $4.25 December 31, 2007
(4) Address for this shareholder is Suite 3450, South Tower, Royal Bank Plaza,
Toronto, Ontario, M5J 2J2, Canada.
(5) Formerly known as Pictet Global Sector Fund. Address for this shareholder is
Boulevard Georges Favon, Geneva, Switzerland CH-1204.
(6) Address of this shareholder is Laerchenhofweg #3, Bonstetten, Switzerland,
CH-8906.
20
EQUITY COMPENSATION PLAN INFORMATION
The Company issues stock options to purchase common stock the officers,
directors, employees and consultants on an individual basis. The Company adopted
an Option Granting Plan covering options to be issued December 1, 2001 to
December 31, 2002. The plan set guidelines for selecting optionees, option
pricing and authorization of issuance. All issuances are required to be approved
by the Board of Directors. The following table sets forth information about all
of our outstanding options as of December 31, 2002.
----------------------- -- -------------------------------- -- ------------------------ ------------------------------
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE NUMBER OF SECURITIES
ISSUED UPON EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FOR FUTURE ISSUANCE UNDER
WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
(EXCLUDING SECURITIES
REFLECTED IN COLUMN (A))
A B C
----------------------- -- -------------------------------- -- ------------------------ ------------------------------
PLAN CATEGORY
----------------------- -- -------------------------------- -- ------------------------ ------------------------------
EQUITY -0- - -0-
COMPENSATION
PLANS APPROVED
BY SECURITY
HOLDERS
----------------------- -- -------------------------------- -- ------------------------ ------------------------------
EQUITY
COMPENSATION
PLANS NOT 3,671,800 $3.68 -0-
APPROVED BY
SECURITY HOLDERS(1)
----------------------- -- -------------------------------- -- ------------------------ ------------------------------
TOTAL 3,671,800 $3.68 -0-
----------------------- -- -------------------------------- -- ------------------------ ------------------------------
21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
Our director, Dr. Robert O'Brien, developed our products and has assigned his
patent rights to such products to us. We have no agreement with Dr. O'Brien
requiring him to conduct any research and development activities for us but we
anticipate that any future inventions which may be of interest to us will
continue to be assigned to us by Dr. O'Brien, although he has no legal
obligation to do so. Dr. O'Brien does not receive any salary or royalties from
us for any research and development activities. The Board of Directors does
consider such activities undertaken by Dr. O'Brien when it grants stock options
to Dr. O'Brien. Dr. O'Brien is a member of the Board of Directors but does not
participate in the proceedings of the Board concerning his own stock option
grants. See Item 10 above for further information.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
NUMBER DESCRIPTION
3.1 Articles of Incorporation of the Registrant (Incorporated by reference to
Exhibit 3.1 to our Registration Statement on Form 10-SB filed February
22, 2000).
3.2 Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to
Registrant's Registration Statement on Form SB-2 filed February 22, 2000
4.1 Option Granting Plan for Term December 1, 2001 to December 31, 2002
10.1 Distribution Agreement dated June 1, 1998 between Flexible Solutions,
Ltd. and Heliocol Canada Ltd. (now known as Sunsolar Energy
Technologies). Incorporated by reference to Exhibit 10.1 to our
Registration Statement on Form 10-SB filed on April 4, 2000.
10.2 Global Supply and License Agreement between Registrant and Ondeo Nalco
Company. (Incorporated by reference to Exhibit 10.2 to Registrant's
Registration Statement on Form SB-2 filed March 5, 2003.
10.3 Exclusive Distribution Agreement effective September 1, 2002 with Ondeo
Nalco Company. (Incorporated by reference to Exhibit 10.3 to Registrant's
Registration Statement on Form SB-2 filed March 5, 2003)
21 Subsidiaries. (Incorporated by reference to Exhibit 21 to Registrant's
Registration Statement on Form SB-2 filed January 22, 2003)
99.1 Written statement of chief executive officer.
99.2 Written statement of chief financial officer.
22
REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the quarter ended December 31,
2002.
ITEM 14. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
23
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Victoria, British Columbia, on March 21, 2003.
FLEXIBLE SOLUTIONS, INC.
/s/ DANIEL B. O'BRIEN
----------------------------------
Daniel O'Brien
President
In accordance with the requirements of the Exchange Act, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature Title Date
/s/ DANIEL B. O'BRIEN President and Director (principal March 21, 2003
Daniel B. O'Brien executive officer and principal
accounting officer)
/s/ JOHN H. BIENJES Director March 21, 2003
John H. Bienjes
/s/ ROBERT N. O'BRIEN Director March 21, 2003
Robert N. O'Brien
/s/ DALE FRIEND Director March 21, 2003
Dale Friend
24
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Daniel O'Brien, certify that:
1. I have reviewed this annual report on Form 10-KSB of Flexible
Solutions International, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
25
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 12, 2003
/s/ DANIEL O'BRIEN
-------------------------
Daniel O'Brien
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Daniel O'Brien, certify that:
1. I have reviewed this annual report on Form 10-KSB of Flexible
Solutions International, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
26
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 12, 2003
/s/ DANIEL O'BRIEN
-----------------------
Daniel O'Brien
Chief Financial Officer
27
EXHIBIT 99.1
WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. 1350
Solely for the purposes of complying with 18 U.S.C. 1350, I, Daniel
O'Brien, the undersigned Chief Executive Officer of Flexible Solutions
International, Inc.(the "Company"), hereby certify, based on my knowledge, that
the Annual Report on Form 10-KSB of the Company for the year ended December
312002, (the "Report") fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934 and that information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ DANIEL O'BRIEN
------------------------
Daniel O'Brien
March 12, 2003
28
EXHIBIT 99.2
WRITTEN STATEMENT OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350
Solely for the purposes of complying with 18 U.S.C. 1350, I, Daniel O'Brien, the
undersigned Chief Financial Officer of Flexible Solutions International,
Inc.(the "Company"), hereby certify, based on my knowledge, that the Annual
report on Form 10-KSB of the Company for the year ended December 312002,(the
"Report") fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 and that information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ DANIEL O'BRIEN
------------------
Daniel O'Brien
March 12, 2003
29
EXHIBIT 4.1
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
OPTION GRANTING PLAN FOR THE TERM DECEMBER 1ST 2001 TO DEC 31ST 2002
From time to time it is in the best interests of the Company to grant options
to:
1. Directors and Officers
2. Employees
3. Certain consultants not involved in SEC proscribed activities.
The purpose of options in all cases is to:
1. Align the interests of the optionees with those of the Company over time.
2. Provide potential material incentive for effort above and beyond that
normally required by a person in that position.
3. Conserve corporate capital by maintaining lower base salaries than might
otherwise be reasonable.
4. Ensuring, as much as possible, that consultants regard themselves as part
of the ongoing success of the Company and therefore engage more
thoroughly.
Method of setting Option Grants:
The Company's standard option agreement is to be used in every case. It is to be
modified only as needed for special cases. (Sample Attached)
1. Directors and Officers options will be set annually. The number
requested by a director or officer will be proposed to the Board of
Directors by the individual. The compensation committee will adjust as
they see fit and place the revised numbers in front of the full board
for approval. No board member may vote on their personal option grant.
The strike price for options is the market close or higher on the day
of grant.
2. Employees may be granted options in numbers and at times decided by the
CEO. The Board of Directors must approve the grants. No options will be
granted with strike prices below the market close on the day of
granting unless there is a very exceptional reason.
3. Consultants who meet the criteria enforced by the SEC regarding capital
raising, stock sales, promotion and market making can be granted
options at times and in numbers decided by the CEO. The board of
directors must approve the grants. The strike price of the options must
be the market close on the grant date or higher. In rare, unusual
situations, the Company may award options to parties who do not meet
the requirements set by the SEC. Options granted to these parties will
not be registered ever and in the event they are exercised will be
issued as restricted shares and subject to all the rules of restricted
shares.
------------------- -------------------- ----------------
J. H. Bientjes Robert N.O'Brien Dan O"Brien
Director Director Director and
Officer
30
FLEXIBLE SOLUTIONS
INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(U.S. DOLLARS)
INDEX PAGE
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS TO
THE BOARD OF DIRECTORS AND STOCKHOLDERS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-16
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF FLEXIBLE SOLUTIONS INTERNATIONAL INC.
We have audited the accompanying consolidated balance sheets of Flexible
Solutions International Inc. as of December 31, 2002 and 2001 and the
consolidated statements of operations, stockholders' equity and cash flows for
each of the years ended December 31, 2002, 2001 and 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2002
and 2001 and the results of its operations and its cash flows for each of the
years ended December 31, 2002, 2001 and 2000 in conformity with accounting
principles generally accepted in the United States of America.
"Pannell Kerr Forster"
Chartered Accountants
Vancouver, Canada
March 12, 2003
1
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(U.S. DOLLARS)
--------------------------------------------------------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash $556,789 $190,457
Short-term investment (note 14) 5,062,495 0
Accounts receivable 55,222 46,374
Income tax recoverable 118,014 0
Loan receivable (note 4) 10,082 9,516
Note receivable (note 5) 0 9,225
Inventory 203,830 181,698
Prepaid expenses (note 6) 87,321 59,291
--------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 6,093,753 496,561
PROPERTY AND EQUIPMENT (note 7) 128,566 72,753
INVESTMENT (note 8) 32,500 0
--------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,254,819 $569,314
--------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable $53,146 $20,592
Income tax payable 0 18,108
--------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 53,146 38,700
--------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 13)
Authorized
50,000,000 Common shares with a par value of $0.001 each
1,000,000 Preferred shares with a par value of $0.01 each
Issued and Outstanding
11,570,916 and 9,272,816 Common shares 11,570 9,272
CAPITAL IN EXCESS OF PAR VALUE 9,328,648 563,713
SHARE SUBSCRIPTION RECEIVABLE (16,217) 0
OTHER COMPREHENSIVE LOSS (21,354) (23,842)
ACCUMULATED DEFICIENCY (3,100,974) (18,529)
--------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,201,673 530,614
--------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,254,819 $569,314
--------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
2
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(U.S. DOLLARS)
--------------------------------------------------------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
SALES $1,112,192 $1,334,273 $1,029,649
COST OF SALES, (exclusive
of depreciation shown
separately below) 581,422 662,807 509,933
--------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 530,770 671,466 519,716
--------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Wages (note 12) 414,885 246,955 87,907
Consulting (note 12) 2,736,608 66,963 0
Office 122,703 48,398 9,028
Stock promotion and transfer agent fee 96,954 241,573 568
Rent 61,126 28,978 11,445
Subcontracting 53,837 16,630 33,312
Professional fees 53,548 23,338 36,701
Travel and entertainment 50,213 23,125 10,454
Administrative salaries and benefits 45,312 46,639 37,234
Currency exchange 19,180 (2,368) (19,344)
Shipping 10,771 13,563 12,189
Telephone 9,326 5,616 3,613
Research 2,523 0 0
Bad debt expense 230 26,570 51,282
Commission 0 1,130 1,982
Depreciation 24,683 18,910 13,489
--------------------------------------------------------------------------------------------------------------------
3,701,899 806,020 289,860
--------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE OTHER ITEMS
AND INCOME TAX (3,171,129) (134,554) 229,856
--------------------------------------------------------------------------------------------------------------------
OTHER ITEMS
Gain on sale of property and equipment 0 863 0
Interest income 67,228 0 0
--------------------------------------------------------------------------------------------------------------------
67,228 863 0
--------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX (3,103,901) (133,691) 229,856
INCOME TAX (RECOVERY) (21,456) 100,264 90,885
--------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(3,082,445) $(233,955) $138,971
--------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE $ (0.29) $ (0.03) $ 0.02
--------------------------------------------------------------------------------------------------------------------
DILUTED INCOME PER SHARE N/A N/A $ 0.01
--------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES 10,555,754 9,247,949 9,131,316
DILUTIVE EFFECTS OF OPTIONS N/A N/A 220,527
--------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF
SHARES WITH DILUTION 10,555,754 9,247,949 9,351,843
--------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
3
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(U.S. DOLLARS)
---------------------------- ------------ ------------ -------------- --------------- -------------- --------------- ---------------
Capital in Share Accumulated Other Total
Excess of Subscription Earnings Comprehensive Stockholders'
Shares Par Value Par Value Receivable (Deficiency) Income (Loss) Equity
---------------------------- ------------ ------------ -------------- --------------- -------------- --------------- ---------------
BALANCE, DECEMBER 31, 1999 9,131,316 $9,131 $163,653 $0 $76,455 $6,677 $255,916
TRANSLATION ADJUSTMENT 0 0 0 0 0 (8,516) (8,516)
NET INCOME 0 0 0 0 138,971 0 138,971
---------------------------- ------------ ------------ -------------- --------------- -------------- --------------- ---------------
BALANCE, DECEMBER 31, 2000 9,131,316 9,131 163,653 0 215,426 (1,839) 386,371
SHARES ISSUED
For cash 9,500 9 4,116 0 0 0 4,125
For services 132,000 132 139,868 0 0 0 140,000
Stock option compensation 0 0 256,076 0 0 0 256,076
Translation adjustment 0 0 0 0 0 (22,003) (22,003)
Net loss 0 0 0 0 (233,955) 0 (233,955)
---------------------------- ------------ ------------ -------------- --------------- -------------- --------------- ---------------
BALANCE, DECEMBER 31, 2001 9,272,816 9,272 563,713 0 (18,529) (23,842) 530,614
SHARES ISSUED
FOR CASH
Private placement 1,828,600 1,829 5,998,271 0 0 0 6,000,100
Exercise of stock options 439,500 439 150,686 0 0 0 151,125
For services 30,000 30 44,370 0 0 0 44,400
Share issue costs 0 0 (250,000) 0 0 0 (250,000)
Share subscription 0 0 0 (33,000) 0 0 (33,000)
Payment of subscription
receivable 0 0 0 16,783 0 0 16,783
Stock option compensation 0 2,821,608 0 0 0 2,821,608
Translation adjustment 0 0 0 0 0 2,488 2,488
Net loss 0 0 0 0 (3,082,445) 0 (3,082,445)
---------------------------- ------------ ------------ -------------- --------------- -------------- --------------- ---------------
BALANCE, DECEMBER 31, 2002 11,570,916 $11,570 $9,328,648 $(16,217) $(3,100,974) $(21,354) $6,201,673
---------------------------- ------------ ------------ -------------- --------------- -------------- --------------- ---------------
See notes to consolidated financial statements.
4
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(U.S. DOLLARS)
------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $(3,082,445) $(233,955) $138,971
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities
Stock option compensation 2,821,608 256,076 0
Non-cash services 44,400 141,510 0
Depreciation 24,683 18,910 13,489
Gain on sale of property and equipment 0 (863) 0
Changes in Non-Cash Working Capital
Accounts receivable (8,848) 98,009 (31,544)
Inventory (22,132) (88,185) 43,047
Prepaid expenses (28,030) (53,140) (5,631)
Accounts payable 32,554 8,170 (14,589)
Accrued liabilities 0 0 (6,929)
Income tax recoverable (136,122) (72,490) 21,312
Unrealized foreign exchange gain/loss 627 (10,500) (5,033)
------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (353,705) 63,542 153,093
------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Short-term investment (5,062,495) 0 0
Acquisition of property and equipment (80,496) (39,246) (16,771)
Note receivable 9,225 (9,225) 0
Loan receivable (566) (9,516) 0
Investment (32,500) 0 0
------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (5,166,832) (57,987) (16,771)
------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 5,868,225 4,125 0
Subscriptions received 16,783 0 0
------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 5,885,008 4,125 0
------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,861 (11,503) (3,483)
------------------------------------------------------------------------------------------------------------------
INFLOW (OUTFLOW) OF CASH 366,332 (1,823) 132,839
CASH, BEGINNING OF YEAR 190,457 192,280 59,441
------------------------------------------------------------------------------------------------------------------
CASH, END OF YEAR $556,789 $190,457 $192,280
------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY DISCLOSURE OF CASH
FLOW INFORMATION
Income taxes paid $115,472 $85,126 $66,748
------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY DISCLOSURE OF NON-CASH
TRANSACTIONS
Issue of common stock for service $44,400 $140,000 $0
Sale of trailer - exchange for rent $0 $1,510 $0
------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
5
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(U.S. DOLLARS)
--------------------------------------------------------------------------------
1. OPERATIONS AND BASIS OF PRESENTATION
These consolidated financial statements include the accounts of
Flexible Solutions International Inc. ("the Company") and its
wholly-owned subsidiaries Flexible Solutions Ltd. and Water$aver Global
Solutions Inc. All intercompany balances and transactions are
eliminated. The parent 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 100% of the
shares of Flexible Solutions Ltd. The acquisition was effected through
the issuance of 7,000,000 shares of common stock by the Company with
the former shareholders of the subsidiary receiving 100% of the total
shares then issued and outstanding. The transaction has been accounted
for as a reverse take-over.
Flexible Solutions Ltd. is accounted for as the acquiring party and the
surviving entity. Because Flexible Solutions Ltd. is the accounting
survivor, the consolidated financial statements presented for all
periods are those of Flexible Solutions Ltd. The shares issued by
Flexible Solutions International Inc. pursuant to the 1998 acquisition
have been accounted for as if those shares had been issued upon the
organization of Flexible Solutions Ltd.
On May 7, 2002, the Company established Water$aver Global Solutions
Inc. through issuance of 100 shares of common stock to itself.
2. COMPARATIVE FIGURES
Certain of the comparative figures are reclassified to conform with the
current year's presentation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Foreign currency
The functional currency of the Company is the Canadian dollar.
The translation of the Canadian dollar to the reporting
currency of the U.S. dollar is performed for current assets
and current liabilities using exchange rates in effect at the
balance sheet date. Non-monetary assets and liabilities are
translated using rates prevailing at the time of the
acquisition of the assets or assumption of the liabilities.
Revenue and expense transactions are translated using average
exchange rates prevailing during the year. Translation
adjustments arising on conversion of the financial statements
from the Company's functional currency, Canadian dollars, into
the reporting currency, U.S. dollars, are excluded from the
determination of income and disclosed as other comprehensive
income (loss) in stockholders' equity.
Foreign exchange gains and losses relating to transactions not
denominated in the applicable local currency are included in
income if realized during the year and in comprehensive income
if they remain unrealized at the end of the year.
6
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(U.S. DOLLARS)
--------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(b) Use of estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates and would impact future results of
operations and cash flows.
(c) Cash
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.
(d) Inventory
Inventory is valued at the lower of cost and net realizable
value. Cost is determined on a first-in, first-out basis.
(e) Property and equipment
Property and equipment are recorded at cost and depreciated
using the following methods using the following annual rates:
Manufacturing equipment - 20% Declining balance
Computer hardware - 30% Declining balance
Furniture and fixtures - 20% Declining balance
Office equipment - 20% 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.
(f) Revenue recognition
Revenue from product sales is recognized at the time the
product is shipped since title and risk of losses is
transferred to purchaser upon delivery to carrier. Shipments
are made F.O.B. shipping point. Provisions are made at the
time 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.
7
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(U.S. DOLLARS)
--------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Financial instruments
The fair market value of the Company's financial instruments
comprising cash, short-term investment, accounts receivable,
income tax recoverable, loan receivable and accounts payable
were estimated to approximate their carrying values due to
immediate or short-term maturity of these financial
instruments.
The Company is exposed to interest rate risk to the extent
that market value rate fluctuations materially differ from
financial assets and liabilities subject to fixed long-term
rates.
(h) Income (loss) per share calculation
Income (loss) per share is calculated by dividing net income
(loss) by the weighted average number of shares outstanding.
Common share equivalents consisting of stock options are not
considered in the computation because their effect would be
anti-dilutive.
(i) Stock issued in exchange for services
The valuation of the 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.
(j) Stock based compensation
The Company applies APB Opinion No. 25 and related
interpretations in accounting for its employee stock option
plans. Compensation expense is recorded when options are
granted to management at discounts to market.
(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.
8
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(U.S. DOLLARS)
--------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Recent accounting pronouncements
(i) In June 2001, the Financial Accounting Standards
Board (FASB) issued FAS 142, Goodwill and Other
Intangible Assets. Under FAS 142, goodwill and
intangible assets with indefinite lives are no longer
amortized but are reviewed at least annually for
impairment. The amortization provisions of FAS 142
apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the
Company has adopted FAS 142 effective January 1,
2002. Application of the non-amortization provisions
of FAS 142 for goodwill did not have any impact on
its financial reporting.
(ii) In October 2001, the FASB issued Statement of
Financial Accounting Standards FAS 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets."
FAS 144 addresses significant issues relating to the
implementation of FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and develops a single
accounting model, based on the framework established
in FAS 121 for long-lived assets to be disposed of by
sale, whether such assets are or are not deemed to be
a business. FAS 144 also modifies the accounting and
disclosure rules for discontinued operations. The
standard was adopted on January 1, 2002, and did not
have any impact on the financial statements.
In November 2001, the FASB issued EITF Issue No.
01-14, "Income Statement Characterization of
Reimbursements Received for "Out of Pocket" Expenses
Incurred." This guidance requires companies to
recognize the recovery of reimbursable expenses such
as travel costs on service contracts as revenue.
These costs are not to be netted as a reduction of
cost. This guidance was implemented January 1, 2002.
The Company does not expect this guidance to have a
material effect on the financial statements.
9
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(U.S. DOLLARS)
--------------------------------------------------------------------------------
4. LOAN RECEIVABLE
-----------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------------------------------
5% loan receivable due on demand $10,082 $9,516
-----------------------------------------------------------------------------------------------------------
5. NOTE RECEIVABLE
The note receivable had no stated terms of repayment or interest and
was received in full during the year 2002.
6. PREPAID EXPENSES
-----------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------------------------------
Deposits for materials purchase $13,578 $41,436
Security deposit and prepaids 73,743 17,855
-----------------------------------------------------------------------------------------------------------
$87,321 $59,291
-----------------------------------------------------------------------------------------------------------
7. PROPERTY AND EQUIPMENT
-----------------------------------------------------------------------------------------------------------
2002
Accumulated
Cost Depreciation Net
-----------------------------------------------------------------------------------------------------------
Manufacturing equipment $159,885 $61,641 $98,244
Computer hardware 9,834 3,602 6,232
Furniture and fixtures 5,542 2,031 3,511
Office equipment 14,690 1,731 12,959
Leasehold improvements 10,160 2,540 7,620
-----------------------------------------------------------------------------------------------------------
$200,111 $71,545 $128,566
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
2001
Accumulated
Cost Depreciation Net
-----------------------------------------------------------------------------------------------------------
Manufacturing equipment $110,105 $43,303 $66,802
Computer hardware 5,190 1,927 3,263
Furniture and fixtures 3,786 1,372 2,414
Office equipment 534 260 274
-----------------------------------------------------------------------------------------------------------
$119,615 $46,862 $72,753
-----------------------------------------------------------------------------------------------------------
10
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(U.S. DOLLARS)
--------------------------------------------------------------------------------
8. INVESTMENT
-----------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------------------------------
Ideal Business Solutions India
P.Ltd - 2700 equity shares (10%) $32,500 $0
-----------------------------------------------------------------------------------------------------------
The above investment is recorded at cost.
9. COMPREHENSIVE (LOSS) INCOME
-------------------------------------------- ----------------------- ------------------- -------------------
2002 2001 2000
-------------------------------------------- ----------------------- ------------------- -------------------
Net income (loss) $(3,082,445) $(233,955) $138,971
Other comprehensive
income (loss) 2,488 (22,003) (8,516)
-------------------------------------------- ----------------------- ------------------- -------------------
Comprehensive income (loss) $(3,079,957) $(255,958) $130,455
-------------------------------------------- ----------------------- ------------------- -------------------
10. INCOME TAX
Total income tax expense differs from the amounts computed by applying
the combined Canadian federal and provincial statutory rate of 44.62%
to income before income taxes. The income to which this is applied is
as follows:
----------------------------------------------- --------------------- ------------------- -------------------
2002 2001 2000
----------------------------------------------- --------------------- ------------------- -------------------
Income (loss) before income tax
per entity
Flexible Solutions International Inc. $(2,866,021) $(396,470) $0
Flexible Solutions Ltd. (56,264) 62,779 229,856
Water$aver Global Solutions Inc. (181,616) 0 0
----------------------------------------------- --------------------- ------------------- -------------------
Consolidated income (loss) before
income tax (3,103,901) (133,691) 229,856
Permanent difference
Stock option benefit 2,821,608 256,076 0
Other
Stock issued for services 44,400 140,000 0
Miscellaneous 0 394 0
----------------------------------------------- --------------------- ------------------- -------------------
Taxable income (loss) for
tax purposes $(237,893) $262,779 $229,856
----------------------------------------------- --------------------- ------------------- -------------------
11
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(U.S. DOLLARS)
--------------------------------------------------------------------------------
10. INCOME TAX (Continued)
Application of the federal and provincial statutory rate results in the
following:
------------------------------------------------ ------------------- ------------------- ------------------
2002 2001 2000
------------------------------------------------ ------------------- ------------------- ------------------
Expected tax expense (recovery)
at statutory rates
From Canadian operations $(21,456) $100,264 $90,885
From US operations (84,691) 16,988 13,975
Decrease resulting from
manufacturing and
processing deduction 0 (18,395) (16,090)
Other 0 1,407 2,115
------------------------------------------------ ------------------- ------------------- ------------------
Income tax expense (recovery) $(106,147) $100,264 $90,885
------------------------------------------------ ------------------- ------------------- ------------------
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company's deferred tax liability calculated at 35% tax rate consist of
the following:
-----------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------------------------------
Non-capital loss carry-forwards $93,858 $10,595
Book over tax value of fixed assets (1,449) (1,086)
Valuation allowance (92,409) (9,509)
-----------------------------------------------------------------------------------------------------------
$0 $0
-----------------------------------------------------------------------------------------------------------
The Company's losses for U.S. income tax purposes are $268,165 which
may be carried forward to apply against future income for U.S. income
tax purposes, expiring between 2018 and 2022. The future benefit of
these loss carry-forwards has been offset with a full valuation
allowance. These losses expire as follows:
------------------------------------------------------------------------------------- --------------------
Available to Amount
------------------------------------------------------------------------------------- --------------------
2018 $16,858
2019 13,414
2022 237,893
------------------------------------------------------------------------------------- --------------------
$268,165
------------------------------------------------------------------------------------- --------------------
12
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(U.S. DOLLARS)
11. NET INCOME (LOSS) PER SHARE
------------------------------------------- ---------------------- --------------------- ------------------
Net
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------- ---------------------- --------------------- ------------------
2002
Basic net loss per share
Net loss $(3,082,445) 10,555,754 $ (0.29)
2001
Basic net loss per share
Net loss $(233,955) 9,247,949 $ (0.03)
2000
Basic net income per share
Net income $138,971 9,131,316 $ 0.02
------------------------------------------- ---------------------- --------------------- ------------------
There were no preferred shares issued and outstanding for the years
ended December 31, 2002, 2001 and 2000. The 2002 denominator excludes
3,671,800 shares that may be issued upon exercise of options as to do
so would have been anti dilutive for the 2002 per share loss.
12. STOCK OPTIONS
The Company may issue stock options and stock bonuses for common stock
of the Company to provide incentives to directors, key employees and
other persons who contribute to the success of the Company. The
exercise price of the Incentive Options (employees of the Company or
its subsidiaries) is not less than the fair market value of the stock
at the date of the grant and for non-employees the exercise price is no
less than 80% of the fair market value (defined by the most recent
closing sale price reported by AMEX) on the date of the grant.
The following table summarizes the Company's stock option activity for
the year ended December 31, 2002 and 2001:
-------------------------------------- -------------------- ---------------------------- ------------------
Weighted
Number of Exercise Price Average
Shares Per Share Exercise Price
-------------------------------------- -------------------- ---------------------------- ------------------
Balance, December 31, 2000 589,000 $ 0.25 - $0.70 $ 0. 31
Granted during year ended
December 31, 2001 1,309,000 $ 0.25 - $3.50 $ 1. 47
Exercised (9,500) $ 0.25 - $1.00 $ 0. 32
-------------------------------------- -------------------- ---------------------------- ------------------
Balance, December 31, 2001 1,888,500 $ 0.25 - $ 3.50 $ 1. 63
Granted during year ended
December 31, 2002 2,222,800 $ 1.50 - $ 5.50 $ 4.78
Exercised (439,500) $ 0.25 - $ 1.50 $ (0.34)
Balance, December 31, 2002 3,671,800 $ 0.25 - $ 5.50 $ 3.79
-------------------------------------- -------------------- ---------------------------- ------------------
13
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(U.S. DOLLARS)
--------------------------------------------------------------------------------
12. STOCK OPTIONS (Continued)
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options granted to employees, and accordingly,
compensation expense of $85,000 (2001 - $173,750) was recognized as
wages expense. Had compensation expense been determined as provided in
SFAS 123 using Black-Scholes option - pricing model, the pro-forma
effect on the Company's net income (loss) and per share amounts would
have been as follows:
------------------------------------------- ---------------------- --------------------- -------------------
2002 2001 2000
------------------------------------------- ---------------------- --------------------- -------------------
Net income (loss), as reported $(3,082,445) $(233,955) $138,971
Net income (loss), pro-forma (3,704,296) (955,071) 138,971
Net income (loss) per share,
as reported $ (0.29) $ (0.03) $ 0.02
Net income (loss) per share,
pro-forma $(0.35) $ (0.10) $ 0.02
------------------------------------------- ---------------------- --------------------- -------------------
The fair value of each option grant is calculated using the following
weighted average assumptions:
-------------------------------------------------------------------------- --------------- -----------------
2002 2001
-------------------------------------------------------------------------- --------------- -----------------
Expected life (years) 5 3.5
Interest rate 3.00% 4.00%
Volatility 72.3% 58.27%
Dividend yield 0.00% 0.00%
-------------------------------------------------------------------------- --------------- -----------------
During the year, the Company granted 2,097,000 (2001 - 51,000) stock
options to consultants and have been recognized applying SFAS 123 using
the Black-Scholes option pricing model which resulted in additional
consulting expense of $2,736,608 (2001 - $66,963). Of the 2,097,000
options, 75,000 were granted on December 31, 2002 and have a vesting
period of one year, consequently consulting expense related to these
options will be recognized during the year ended December 31, 2003.
14
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(U.S. DOLLARS)
--------------------------------------------------------------------------------
13. CAPITAL STOCK
(a) During the year, the Company:
(i) completed two private placements whereby 400,000
shares of common stock were issued at a price of
$2.50 per share and an additional 1,428,600 shares of
common stock were issued at a price of $3.50 per
share to independent third parties;
(ii) issued 439,500 shares of common stock at prices
ranging from $0.25 to $1.50 per share upon exercise
of stock options;
(iii) issued 30,000 shares of common stock at a price of
$1.48 per share to a officer in lieu of six months of
salary.
(b) The Company is the plaintiff in a lawsuit demanding the return
of the share certificate for 100,000 shares of stock
originally given to the defendant as payment in advance for
services. The services for which the advance was given were
never performed or given to the Company, and the Company
therefore received no consideration or value for such advance.
Return of the share certificate for 100,000 shares was
demanded within ten (10) days, namely by August 22, 2001,
however, to date remains unreturned.
On date of issue, January 4, 2001, the share transaction was
recorded as shares issued for services at fair market value, a
value of $0.80 per share.
14. SHORT-TERM INVESTMENT
Short-term investment consists of a certificate of deposit bearing
interest at 4.11% and maturing September 11, 2005. The Company will
incur a penalty if principal is withdrawn before maturity date. The
amount of penalty equals one half of the remaining days in the terms
daily compounded interest on the total amount withdrawn. If the accrued
interest is less than the calculated penalty at time of withdrawal, the
difference between the penalty and the accrued interest will be
deducted from the principal.
15. SEGMENTED AND SIGNIFICANT CUSTOMER INFORMATION
The Company operates in a single segment, involving the development and
marketing of two lines of energy and water conservation products.
The first line consists of a liquid swimming pool blanket which saves
energy and water by storing evaporation from the pool surface. The
second line consists of a food safe powdered form of the active
ingredient within the liquid blanket and is designed to be used in
still or slow moving drinking water sources.
15
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(U.S. DOLLARS)
--------------------------------------------------------------------------------
15. SEGMENTED AND SIGNIFICANT CUSTOMER INFORMATION (Continued)
The Company's sales in the United States of America and abroad amounted
to 4%, 5% and 3% for the years ended December 31, 2002, 2001 and 2000
respectively. The remainder were earned in Canada.
All the Company's long-lived assets are located in Canada.
The Company had one major customer, Sunsolar Energy Technologies which
comprised 95%, 94% and 96% of total sales for the years ended December
31, 2002, 2001 and 2000 respectively. The Company is exposed to
concentrated credit risk with respect to its trade receivables from
this customer. It seeks to keep this risk to a minimum by granting only
45 days credit terms to this customer.
16. RELATED PARTY TRANSACTION
A director provides use of space of his residence to conduct
administrative duties without reimbursement from the Company.
17. COMMITMENTS
Property and premises leases
The Company is committed to minimum rental payments for property and
premises aggregating approximately $113,800 over the terms of leases
expiring September 29, 2003 and November 1, 2005.
Commitments in each of the next three years are approximately as
follows:
-----------------------------------------------------------------------
2003 $78,600
2004 19,200
2005 16,000
-----------------------------------------------------------------------
16