FLEXIBLE SOLUTIONS INTERNATIONAL INC
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SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-K
(Mark
One)
(X)
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
Fiscal Year Ended December 31, 2016
OR
(
)
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission File No.
001-31540
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
(Exact name
of registrant as specified in its charter)
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Nevada
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91-1922863
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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#206
– 920 Hillside Ave
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Victoria, British
Columbia, Canada
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V8T
1Z8
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(Address
of Principal Executive Office)
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Zip
Code
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Registrant's
telephone number, including Area Code: (250) 477-9969
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each
class
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Name of each
exchange on which registered
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Common
Stock, $0.001 par value
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NYSE
MKT
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ]
No [X]
Indicate
by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
[X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes [X] No [
]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K.
[X]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer [ ]
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Accelerated filer [
]
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Non-accelerated
filer [ ]
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Smaller
reporting company [X]
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(Do not
check if a smaller reporting company)
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act): [ ] Yes [X] No
As of
June 30, 2016 the aggregate market value of the Company’s
common stock held by non-affiliates was $9,647,527 based on the
closing price for shares of the Company’s common stock on the
NYSE MKT for that date.
As of
March 30, 2017, the Company had 11,460,991 issued and outstanding
shares of common stock.
Documents
incorporated by reference: None
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K for the year ended December 31, 2016
(“Annual Report”), including the Audited Consolidated
Financial Statements, contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include, without limitation, those
statements relating to development of new products, our financial
condition and our ability to increase distribution of our products.
Forward-looking statements can be identified by the use of
forward-looking terminology, such as “may,”
“will,” “should,” “expect,”
“anticipate,” “estimate,”
“continue,” “plans,” “intends,”
or other similar terminology. These forward-looking statements are
not guarantees of future performance and involve risks,
uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from
what is anticipated or forecasted in these forward-looking
statements due to numerous factors, including, but not limited to,
our ability to generate or obtain sufficient working capital to
continue our operations, changes in demand for our products, the
timing of customer orders and deliveries and the impact of
competitive products and pricing. In addition, such statements
could be affected by general industry and market conditions and
growth rates, and general domestic and international economic
conditions.
Although we believe
that the expectations reflected in these forward-looking statements
are reasonable and achievable, such statements involve risks and
uncertainties and no assurance can be given that our actual results
will be consistent with these forward-looking statements. Except as
otherwise required by applicable securities laws, we undertake no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events,
changed circumstances or any other reason, after the date of this
Annual Report
this Annual Report
is filed with the Securities and Exchange Commission.
-ii-
We were
incorporated as Flexible Solutions Ltd., a British Columbia
corporation on January 26, 1991. On May 12, 1998, we merged
Flexible Solutions Ltd. into Flexible Solutions International,
Inc., a Nevada corporation. In connection with this merger, we
issued 7,000,000 shares of common stock to the former shareholders
of Flexible Solutions Ltd. in exchange for all of the outstanding
shares of Flexible Solutions Ltd.
In June
2004 we purchased 52 U.S. and 139 International patents, as well as
a 56,780 sq. ft. manufacturing plant near Chicago, Illinois from
the bankruptcy estate of Donlar Corporation (“Donlar”)
for $6.15 million. The patents we acquired from Donlar relate to
water-soluble chemicals (“TPAs”) which prevent
corrosion and scaling in water pipes used in the petroleum,
chemical, utility and mining industries. TPAs are also used to
enhance fertilizers and improve crop yields and as additives for
household laundry detergents, consumer care products and
pesticides.
We
operate through a number of wholly-owned subsidiaries which are
mentioned in Note 1 to the consolidated financial statements
included as part of this report. Unless otherwise indicated, all
references to our business include the operations of these
subsidiaries.
Our
website is www.flexiblesolutions.com
Our Products
HEATSAVR®/ECOSAVR
Our
studies indicate that approximately 70% of the energy lost from a
swimming pool occurs through water evaporation. HEATSAVR® is a
chemical product for use in swimming pools and spas that forms a
thin, transparent layer on the water’s surface. The
transparent layer slows the evaporation of water, allowing the
water to retain a higher temperature for a longer period of time
and thereby reducing the energy required to maintain the desired
temperature of the water. We have received reports from our
commercial customers documenting energy savings of between $2,400
to $6,000 per year when using HEATSAVR®.
ECOSAVR® is a
patented, disposable dispenser designed for the residential pool
and spa market. ECOSAVR® is made of molded plastic in the form
of a ten-inch long colorful fish that is filled with enough
HEATSAVR® to cover the surface of a 400 sq. ft. swimming pool
for about one month. The HEATSAVR® solution inside the
ECOSAVR® escapes into the water and rises to the surface to
form a transparent layer on the water’s surface. Once the
ECOSAVR® is empty the dispenser is removed and
replaced.
In
outdoor pools, the HEATSAVR® also provides convenience
compared to pool blankets. Pool blankets are plastic covers which
are cut to the size and shape of the surface of the pool or spa.
Pool blankets float on the surface and, like the HEATSAVR®,
reduce energy costs by inhibiting water evaporation. However, it is
often inconvenient to use conventional pool blankets because a pool
blanket must be removed and stored before the pool can be used.
Pool blankets do not provide any energy savings when not on the
pool. Conversely, HEATSAVR® eliminates the need to install,
remove and store the blanket and works 24 hours a day. In addition,
the use of HEATSAVR® in an indoor pool results in even greater
energy savings since indoor pool locations use energy not only to
heat the pool water, but also 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, less energy is
required to maintain a pool at the desired temperature and there is
a reduced load on the air-conditioning system.
2
HEATSAVR®
retails for between $250 and $300 per four gallon case in the
United States. ECOSAVR® has a suggested retail price of $13.00
in the United States. We market our HEATSAVR® and
ECOSAVR® products to homeowners with swimming pools and spas
as well as operators of swimming pools and spas in hotels, motels,
schools, and municipal and private recreational
facilities.
We also
manufacture and sell products which automatically dispense
HEATSAVR® into commercial size swimming pools or spas at the
rate of one ounce per 400 sq. ft. of water surface per
day.
We
have 18 non-exclusive distributorships in Canada and the
United States for the sale of bulk HEATSAVR® (without the
ECOSAVR® dispenser) and exclusive distributorships in
Australia, Chile, South Africa, and parts of Eastern
and Western Europe. We support our distributors and seek
additional market opportunities by annually attending the major
pool industry trade shows in the United States. We also advertise
in trade magazines and maintain a website which has information
about our products.
WATERSAVR®
This
product utilizes our HEATSAVR technology to reduce water
evaporation in reservoirs, potable water storage tanks, livestock
watering ponds, aqueducts, canals and irrigation ditches. WATERSAVR
may also be used for lawn and turf care and potted and bedding
plants.
WATERSAVR® is
sold in granulated form and can be applied by hand, by fully
automated scheduled metering, or by an automatic
dispenser.
Tests
have indicated that WATERSAVR®:
●
Reduces daily water
evaporation as much as 54%
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Reduces monthly
water evaporation as much as 37%
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Is
odorless
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Has no effect on
invertebrates or vertebrates
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Has no anticipated
effect on any current drinking water treatment processes
and
●
Is
biodegradable
We have
one full-time employee and one part-time employee who are involved
in the sales and marketing of WATERSAVR®.
TPAs (thermal polyaspartate biopolymers)
TPAs for Oilfields
. TPAs are
used to reduce scale and corrosion in various “topside”
water systems. They are used in place of traditional phosphate and
other products when biodegradability is required by environmental
regulations. We have the ability to custom manufacture TPAs
depending on the specific water conditions associated with any oil
well.
3
TPAs for the Agricultural
Industry
. TPAs have the ability to reduce fertilizer
crystallization before, during and after application and can also
prevent crystal formation between fertilizer and minerals present
in the soil. Once crystallized, fertilizer and soil minerals are
not able to provide plant nourishment. As a result, in select
conditions the use of TPAs either blended with fertilizer or
applied directly to crops can increase yields significantly. TPAs
are designated for crop nutrient management programs and should not
be confused with crop protection and pesticides or other
agricultural chemical applications. Depending on the application,
TPA products are marketed under a variety of brands including
Amisorb, LYNX, MAGNET, AmGro and VOLT. Markets of significance
include potatoes, sugar beets, cotton, tomatoes, almonds and other
high value per acre crops.
TPAs for Irrigation
. The
crystallization prevention ability of TPAs can also be useful in
select irrigation conditions. By reducing calcium carbonate scale
propagation, TPAs can prevent early plugging of drip irrigation
ports, reduce maintenance costs and lengthen the life of equipment.
TPAs compete with acid type scale removers, but have the advantage
of a positive yield effect on the plant, as well as an easier
deployment formulation with liquid fertilizers when used as part of
a “fertigation” program. Our TPAs for drip irrigation
scale prevention are at an early stage of commercialization and
will be marketed and sold through the same channels as TPAs used by
the agricultural industry.
TPAs for Detergent
. In
detergents, TPAs are a biodegradable substitute for poly-acrylic
acid. In select markets, the use of this substitute outweighs the
added cost of TPAs, which has allowed for the continued growth of
this TPA product line. However, to increase penetration of this
market beyond specialty detergent manufacturers, we will need to
decrease the cost of this product or wait for legislative
intervention regarding biodegradability of detergent components. In
the meantime, we are researching various methods to reduce
production costs.
TPAs for Personal Care
Products
. TPAs can also be used in shampoo and cosmetic
products for increased hydration that improves the feel of the core
product to consumers. TPA’s may also be used as an additive
to toothpaste with the documented effect of reducing decay bacteria
adhesion to tooth enamel and presumed reduction in total decay. We
do not currently sell TPAs for use in personal care
products.
Principal Customers
The
table below presents our revenue resulting from purchases by our
major customers for the periods presented.
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Year Ended December 31,
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2016
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2015
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Company
A
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$
5,180,333
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$
4,854,764
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Company
B
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$
3,560,645
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$
4,144,707
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Company
C
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$
1,407,064
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$
1,421,694
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Customers
with balances greater than 10% of our receivable balances as of
each of the fiscal year ends presented are shown in the following
table:
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Year Ended December 31,
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2016
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2015
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Company
A
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$
1,822,743
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$
814,848
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Company
B
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-
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$
281,816
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Company
D
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-
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$
202,157
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4
Competition
HEATSAVR® and ECOSAVR™
Although we are
aware of two other companies that manufacture products that compete
with HEATSAVR® and ECOSAVR®, we believe our products are
more effective and safer. We maintain fair pricing equal to or
lower than our competitors and protect our intellectual property
carefully. Our products are expected to maintain or increase market
share in the competitive pool market.
HEATSAVR® also
competes with plastic pool blanket products. However, we believe
that HEATSAVR® is more effective and convenient than pool
blankets.
WATERSAVR®
Ultimate Products
(Aust) Pty Ltd. of Australia has a product called Aquatain that
directly competes with WATERSAVR®. We believe our
WATERSAVR® product is superior for the following reasons: it
is safer, much less expensive and has much better test data.
Aquatain has not expended the capital to test for environmental
effects on insects and other aquatic life whereas WATERSAVR®
has recognized third party environmental safety
documentation.
As
water conservation is an important priority throughout the world,
numerous researchers are working to develop solutions that may
compete with, or be superior to, WATERSAVR.
TPAs
Our TPA
products have direct competition with Lanxess AG (spun out of Bayer
AG), a German manufacturer of TPAs, which uses a patented process
different from ours. We have cross-licensed each other’s
processes and either company can use either process for the term of
the patents involved. We believe that Lanxess has approximately the
same production capacity and product costs as we do. We believe
that we can compete effectively with Lanxess by offering excellent
customer service in oilfield sales, superior distributor support in
the agricultural marketplace and flexibility due to our relative
size. In addition, we intend to continue to seek market niches that
are not the primary targets of Lanxess.
Our TPA
products face indirect competition from other chemicals in every
market in which we are active. For purposes of oilfield scale
prevention, phosphonates, phosphates and molibdonates provide the
same effect. For crop enhancement, increased fertilizer levels or
reduced concentrations can serve as a substitute for TPAs. In
irrigation scale control, acid washes are our prime competitor. In
detergent, poly-acrylic acid is most often used due to price
advantage. Notwithstanding the above, we believe our competitive
advantages include:
●
Biodegradability
compared to competing oil field chemicals;
●
Cost-effectiveness
for crop enhancement compared to increased fertilizer
use;
●
Environmental
considerations, ease of formulation and increased crop yield
opportunities in irrigation scale markets; and
●
Biodegradability
compared to poly-acrylic acid for detergents.
5
Manufacturing
Our
HEATSAVR® and ECOSAVR® products and dispensers are made
from chemicals, plastic and other materials and parts that are
readily available from multiple suppliers. We have never
experienced any shortage in the availability of raw materials and
parts for these products and we do not have any long term supply
contracts for any of these items. We manufactured these products in
our plant in Taber, Alberta, Canada.
Our
WATERSAVR® products are manufactured by a third party. We are
not required to purchase any minimum quantity of this
product.
Our
56,780 sq. ft. facility in Peru, Illinois manufactures our TPA
products. Raw materials for TPA production are sourced from various
manufacturers throughout the world and we believe they are
available in sufficient quantities for any increase in sales. Raw
materials are, however, derived from crude oil and are subject to
price fluctuations related to world oil prices.
In
November 2007, we purchased a building and 3.3 acres of land in
Taber, Alberta, Canada. The price paid was CDN$1,325,000 and was
financed by cash of $660,000 and an interest free mortgage that was
paid in June 2008. The building has been renovated and can be used
for various industrial purposes. It was operated as a fermentation
facility for the production of aspartic acid, a key ingredient in
TPAs. Aspartic acid made in Taber was then shipped to our plant in
Illinois for finishing. In February 2014 we suspended production of
aspartic acid at our Taber plant. The suspension was due to the
fact that since construction of the plant began in 2008, economic
conditions in Alberta and worldwide have changed significantly. In
particular, plant operating costs have risen and the price of
aspartic acid derived from oil was less than forecast.
Subsequent to year
end, the Taber plant was destroyed in a fire.
Government Regulations
HEATSAVR® and
ECOSAVR
®
Chemical products
for use in swimming pools are covered by a variety of governmental
regulations in all countries where we sell these products. These
regulations cover packaging, labeling, and product safety. We
believe our products are in compliance with these
regulations.
WATERSAVR®
Our
WATERSAVR® product is subject to regulation in most countries,
particularly for agricultural and drinking water uses. We do not
anticipate that governmental regulations will be an impediment to
marketing WATERSAVR® because the components in WATERSAVR®
have historically been used in agriculture for many years for other
purposes. Nevertheless, we we may require country or state approval
on a case by case basis to sell WATERSAVR® in the United
States for agricultural and drinking water uses. We have received
National Sanitation Foundation approval for the use of
WATERSAVR® in drinking water in the United
States.
TPAs
In the
oil field and agricultural markets we have received government
approval for all TPAs currently sold. In the detergent market,
there are currently no regulatory requirements for use of TPAs in
detergent formulations. For personal care products such as shampoo
and toothpaste, there are various regulatory bodies, including the
National Sanitation Foundation and the United States Food and Drug
Administration, which regulate TPA use. If we begin to market our
TPA products for personal care use, we will need to satisfy
applicable regulatory requirements.
6
Proprietary Rights
Our
success is dependent, in part, upon our proprietary
technology. We rely on a combination of patent, copyright,
trademarks, trade secrets and nondisclosure agreements to protect
our proprietary technology. We currently hold many U.S.
and International patents which expire at various dates up
to 2032. We also have applied to extend some of
these patents to other countries where we operate. There
can be no assurance that our foreign patent applications will
be granted or that any issued patent will be upheld as valid or
prevent the development of competitive products, which may be
equivalent to 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.
Research and Development
We
spent $95,028 during the year ended December 31, 2016 and $95,265
during year ended December 31, 2015 on research and development.
This work relates primarily to the development of our water and
energy conservation products, as well as new research in connection
with our TPA products.
Employees
As of
December 31, 2016 we had 27 employees, including one officer, nine
sales and customer support personnel, and seventeen manufacturing
personnel. None of our employees is represented by a labor union
and we have not experienced any work stoppages to
date.
This
Form 10-K contains forward-looking information based on our current
expectations. Because our actual results may differ materially from
any forward-looking statements made by us, this section includes a
discussion of important factors that could affect our future
operations and result in a decline in the market price of our
common stock.
We have incurred significant operating losses since inception and
may not sustain profitability in the future.
We have
in the past experienced operating losses and negative cash flow
from operations and we currently have an accumulated deficit. If
our revenues decline, our results of operations and liquidity may
be materially and adversely affected. If we experience slower than
anticipated revenue growth or if our operating expenses exceed our
expectations, we may not be profitable. We may not remain
profitable in future periods.
Fluctuations in our operating results may cause our stock price to
decline.
Given
the nature of the markets in which we operate, we cannot reliably
predict future revenues and profitability. Changes in competitive,
market and economic conditions may cause us to adjust our
operations. A high proportion of our costs are fixed, due in part
to our sales, research and development and manufacturing costs.
Thus, small declines in revenue could disproportionately affect our
operating results. Factors that may affect our operating results
and the market price of our common stock include:
●
demand for and
market acceptance of our products;
●
competitive
pressures resulting in lower selling prices;
7
●
adverse changes in
the level of economic activity in regions in which we do
business;
●
adverse changes in
the oil and gas industry on which we are particularly
dependent;
●
changes in the
portions of our revenue represented by various products and
customers;
●
delays or problems
in the introduction of new products;
●
the announcement or
introduction of new products, services or technological innovations
by our competitors;
●
variations in our
product mix;
●
the timing and
amount of our expenditures in anticipation of future
sales;
●
increased costs of
raw materials or supplies; and
●
changes in the
volume or timing of product orders.
Our operations are subject to seasonal fluctuation.
The use
of our swimming pool products increases in summer months in most
markets and results in our sales from January to June being greater
than in July through December. Markets for our WATERSAVR®
product are also seasonal, depending on the wet versus dry seasons
in particular countries. We attempt to sell into a variety of
countries with different seasons on both sides of the equator in
order to minimize seasonality. Our TPA business is the least
seasonal, however there is a small increase in the spring related
to inventory building for the crop season in the United States and
a small slowdown in December as oilfield customers run down stock
in advance of year end, but otherwise, little seasonal variation.
We believe we are able to adequately respond to these seasonal
fluctuations by reducing or increasing production as
needed.
Interruptions in our ability to purchase raw materials and
components may adversely affect our profitability.
We
purchase certain raw materials and components from third parties
pursuant to purchase orders placed from time to time. Because we do
not have guaranteed long-term supply arrangements with our
suppliers, any material interruption in our ability to purchase
necessary raw materials or components could have a material adverse
effect on our business, financial condition and results of
operations.
Our WATERSAVR® product has not proven to be a revenue
producing product and we may never recoup the cost associated with
its development.
The
marketing efforts of our WATERSAVR® product may result in
continued losses. We introduced our WATERSAVR® product in June
2002 and, to date, we have delivered quantities for testing by
potential customers, but only a few customers have 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 can
offer no assurance 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 have received
National Sanitation Foundation approval for the use of
WATERSAVR® in drinking water in the United States. Neverless,
we may require county or state approval on a case by case basis. We
expect to spend $200,000 on the marketing and production of our
WATERSAVR® product in fiscal 2017.
8
If we do not introduce new products in a timely manner, our
products could become obsolete and our operating results would
suffer.
Without
the timely introduction of new products and enhancements, our
products could become obsolete over time, in which case our revenue
and operating results would suffer. The success of our new product
offerings will depend upon several factors, including our ability
to:
●
accurately
anticipate customer needs;
●
innovate and
develop new products and applications;
●
successfully
commercialize new products in a timely manner;
●
price our products
competitively and manufacture and deliver our products in
sufficient volumes and on time; and
●
differentiate our
products from our competitors’ products.
In
developing any new product, we may be required to make a
substantial investment before we can determine the commercial
viability of the new product. If we fail to accurately foresee our
customers’ needs and future activities, we may invest heavily
in research and development of products that do not lead to
significant revenues.
We are dependent upon certain customers.
Among
our current customers, we have identified three that are sizable
enough that the loss of any one would be significant. Any loss of
one or more of these customers could result in a substantial
reduction in our revenues.
Economic, political and other risks associated with international
sales and operations could adversely affect our sales.
Revenues from
shipments made outside of the United States accounted for
approximately 71% of our revenues in the year ended
December 31, 2016, 75% in the year ended December 31,
2015 and 75% in the year ended December 31, 2014. Since we
sell our products worldwide, our business is subject to risks
associated with doing business internationally. We anticipate that
revenues from international operations will continue to represent a
sizable portion of our total revenue. Accordingly, our future
results could be harmed by a variety of factors,
including:
●
changes in foreign
currency exchange rates;
●
changes in a
country or region’s political or economic conditions,
particularly in developing or emerging markets;
●
longer payment
cycles of foreign customers and difficulty of collecting
receivables in foreign jurisdictions;
●
trade protection
measures and import or export licensing requirements;
●
differing tax laws
and changes in those laws;
9
●
difficulty in
staffing and managing widespread operations;
●
differing laws
regarding
protection of
intellectual property; and
●
differing
regulatory requirements and changes in those
requirements.
We are subject to credit risk and may be subject to substantial
write-offs if one or more of our significant customers default on
their payment obligations to us.
We
currently allow our major customers between 30 and 90 days to pay
for each sale. This practice, while customary, presents an accounts
receivable write-off risk in that if one or more of our significant
customers defaulted on their payment obligations to us, such
write-off, if substantial, would have a material adverse effect on
our business and results of operations.
Our products can be hazardous if not handled, stored and used
properly; litigation related to the handling, storage and safety of
our products would have a material adverse effect on our business
and results of operations.
Some of
our products are flammable and must be stored properly to avoid
fire risk. Additionally, some of our products may cause irritation
to a person’s eyes if they are exposed to the concentrated
product. Although we label our products to warn of such risks, our
sales could be reduced if our products were considered dangerous to
use or if they are implicated in causing personal injury or
property damage. We are not currently aware of any circumstances in
which our products have caused harm or property damage to
consumers. Nevertheless, litigation regarding the handling, storage
and safety of our products would have a material adverse effect on
our business and results of operations.
Our failure to comply with environmental regulations may create
significant environmental liabilities and force us to modify our
manufacturing processes.
We are
subject to various federal, state and local environmental laws,
ordinances and regulations relating to the use, storage, handling
and disposal of chemicals. Under such laws, we may become liable
for the costs of removal or remediation of these substances that
have been used by our consumers or in our operations. Such laws may
impose liability without regard to whether we knew of, or caused,
the release of such substances. Any failure by us to comply with
present or future regulations could subject us to substantial
fines, suspension of production, alteration of manufacturing
processes or cessation of operations, any of which could have a
material adverse effect on our business, financial condition and
results of operations.
Our failure to protect our intellectual property could impair our
competitive position.
While
we own certain patents and trademarks, some aspects of our business
cannot be protected by patents or trademarks. Accordingly, in these
areas there are few legal barriers that prevent potential
competitors from copying certain of our products, processes and
technologies or from otherwise entering into operations in direct
competition with us. In particular, we have been informed that our
former exclusive agent for the sale of our products in North
America is now competing with us in the swimming pool and personal
spa markets. As a former distributor, they were given access to
many of our sales, marketing and manufacturing
techniques.
10
Our products may infringe on the intellectual property rights of
others, and resulting claims against us could be costly and prevent
us from making or selling certain products.
Third
parties may seek to claim that our products and operations infringe
on their patent
s
or other
intellectual property rights. We may incur significant expense in
any legal proceedings to protect our proprietary rights or to
defend infringement claims by third parties. In addition, claims of
third parties against us could result in awards of substantial
damages or court orders that could effectively prevent us from
making, using or selling our products in the United States or
abroad.
A claim for damages could materially and adversely affect our
financial condition and results of operations.
Our
business exposes us to potential product liability risks,
particularly with respect to our consumer swimming pool and
consumer TPA products. There are many factors beyond our control
that could lead to liability claims, including the failure of our
products to work properly and the chance that consumers will use
our products incorrectly or for purposes for which they were not
intended. There can be no assurance that the amount of product
liability insurance that we carry will be sufficient to protect us
from product liability claims. A product liability claim in excess
of the amount of insurance we carry could have a material adverse
effect on our business, financial condition and results of
operations.
Our ongoing success is dependent upon the continued availability of
certain key employees.
Our
business would be adversely affected if the services of Daniel B.
O’Brien ceased to be available to us because we currently do
not have any other employee with an equivalent level of expertise
in and knowledge of our industry. If Mr. O’Brien no longer
served as our President and Chief Executive Officer, we would have
to recruit one or more new executives, with no real assurance that
we would be able to engage a replacement executive with the
required skills on satisfactory terms. The market for skilled
employees is highly competitive, especially for employees in the
fields in which we operate. While our compensation programs are
intended to attract and retain qualified employees, there can be no
assurance that we will be able to retain the services of all our
key employees or a sufficient number to execute our plans, nor can
there be any assurances that we will be able to continue to attract
new employees as required.
Not
applicable.
We
lease 1,100sq.ft. in Victoria, British Columbia that is used for
administration and sales at $968 per month, effective to October
2016. We also have a 6,400 sq. ft. facility in Naperville, Illinois
which we use for offices and laboratories at a cost of $5,440 per
month with a lease effective to December 2020 and 30,600 sq. ft. of
warehouse space in Peru, IL used for storage and extra capacity at
a cost of $10,270 per month with a lease effective to October 2021.
We own a 56,780 sq. ft. facility in Peru, Illinois which is used to
manufacture our TPA line of products as well as a building and 3.3
acres of land in Taber, Alberta, Canad
a. Our building in Taber has been renovated and
can be used for various industrial purposes. In February
2014, we decided to stop aspartic acid production at the Taber
facility.
Subsequent to year
end, the Taber plant was destroyed in a fire.
None.
11
Not
applicable.
Our
common stock is traded on the NYSE MKT under the symbol
“FSI”. The following is the range of high and low
closing prices for our common stock for the periods
indicated:
|
|
|
High
|
Low
|
|
|
|
|
|
|
Year
Ended December 31, 2016
|
First
Quarter
|
$
1.10
|
$
0.75
|
|
|
Second
Quarter
|
1.81
|
0.84
|
|
|
Third
Quarter
|
2.41
|
1.33
|
|
|
Fourth
Quarter
|
2.26
|
1.20
|
|
|
|
High
|
Low
|
|
|
|
|
|
|
Year
Ended December 31, 2015
|
First
Quarter
|
$
1.70
|
$
1.06
|
|
|
Second
Quarter
|
2.86
|
1.16
|
|
|
Third
Quarter
|
2.09
|
0.93
|
|
|
Fourth
Quarter
|
1.00
|
0.66
|
As of
December 31, 2016 we had approximately 2,200
shareholders.
Our
common stock also trades on the Frankfurt stock exchange under the
symbol “FXT.”
We have
not paid any dividends on our common stock and it is not
anticipated that any dividends will be paid in the foreseeable
future. Our board of directors intends to follow a policy of
retaining earnings, if any, to finance our growth. The declaration
and payment of dividends in the future will be determined by our
directors in light of conditions then existing, including our
earnings, financial condition, capital requirements and other
factors.
None of
our officers or directors, nor any of our principal shareholders
purchased, on our behalf, any shares of our common stock from third
parties either in a private transaction or as a result of purchases
in the open market during the years ended December 31, 2015 and
2016.
As of
March 30, 2017 we had 11,460,991 outstanding shares of common
stock. The following table lists additional shares of our common
stock, including shares issuable upon the exercise of options which
have not yet vested, which may be issued as of March 30,
2017:
|
|
Number
|
Note
|
|
|
Of Shares
|
Reference
|
|
Shares
issuable upon exercise of options granted to our officers,
directors, employees, consultants, and third parties
|
743,000
|
A
|
12
A.
Options are
exercisable at prices ranging from $0.75 to $2.00 per share. See
Item 11 of this report for more information concerning these
options.
Not
applicable.
Results of Operations
We have
two product lines.
The
first is a chemical (“EWCP”) used in swimming pools and
spas. The product forms a thin, transparent layer on the
water’s surface. The transparent layer slows the evaporation
of water, allowing the water to retain a higher temperature for a
longer period of time thereby reducing the energy required to
maintain the desired temperature of the water. A modified version
of EWCP can also be used in reservoirs, potable water storage
tanks, livestock watering pods, canals, and irrigation ditches for
the purpose of reducing evaporation.
The
second product, biodegradable polymers (“TPAs”), is
used by the petroleum, chemical, utility and mining industries to
prevent corrosion and scaling in water piping. TPAs can also be
used to increase biodegradability in detergents and in the
agriculture industry to increase crop yields by enhancing
fertilizer uptake.
Material
changes in line items in our Statement of Operations for the year
ended December 31, 2016 as compared to the same period last year,
are discussed below:
|
Item
|
|
Increase (I) or
Decrease (D)
|
|
Reason
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
EWCP
products
|
|
I
|
|
Addition
of new customers
|
|
TPA products
|
|
I
|
|
Increased uptake from new and existing customers and new
agriculture products.
|
|
Gross
Profit, as a %
of
sales
|
|
I
|
|
Lower
oil prices reduced aspartic acid costs.
|
|
Administrative
salaries
and
benefits
|
|
I
|
|
Increased
wages to retain employees.
|
|
Office
and miscellaneous
|
|
D
|
|
Reduced
since the Taber plant is not in operation.
|
|
Rent
|
|
D
|
|
Relocation
to new premises.
|
|
Consulting
|
|
D
|
|
Reduced
since the Taber plant is not in operation.
|
|
Professional
fess
|
|
I
|
|
Increased
legal and accounting costs.
|
|
Travel
|
|
I
|
|
Increased
to build future client base.
|
|
Commissions
|
|
D
|
|
Uncommissionable
sales increased against commissionable sales.
|
13
The
factors that will most significantly affect future operating
results will be:
●
the sale price of
crude oil which is used in the manufacture of aspartic acid we
import from China. Aspartic acid is a key ingredient in our BCPA
product;
●
activity in the oil
and gas industry, as we sell our TPA product to oil and gas
companies; and
●
drought conditions,
since we also sell our TPA product to farmers.
Other
than the foregoing we do not know of any trends, events or
uncertainties that have had, or are reasonably expected to have, a
material impact on our revenues or expenses.
Capital Resources and Liquidity
Our
material sources and <uses> of cash during the year ended
December 31, 2016 were:
|
Cash provided by
operations
|
$
1,775,226
|
|
Long term
deposits
|
(15,925
)
|
|
Net purchases of
equipment
|
(114,270
)
|
|
Investment in ENP
Peru investments LLC
|
(87,500
)
|
|
Advance from short
term line of credit
|
50,000
|
|
Repayment of
loans
|
(201,193
)
|
|
Repurchase of
common stock
|
(1,575,000
)
|
|
Proceeds from
issuance of common stock
|
32,600
|
|
Exchange rate
changes
|
107,390
|
Our
material sources and <uses> of cash during the year ended
December 31, 2015 were:
|
Cash provided by
operations
|
$
2,736,651
|
|
Long term
deposits
|
(4,697
)
|
|
Net purchases of
equipment
|
(59,030
)
|
|
Repayment of short
term line of credit
|
(550,000
)
|
|
Repayment of
loans
|
(343,661
)
|
|
Proceeds from
issuance of common stock
|
8,000
|
|
Exchange rate
changes
|
(36,042
)
|
14
In
2007, we began construction of a plant in Taber, AB, Canada. The
plant came on line during 2012 and we began depreciating the plant
and related equipment effective January 2012.
In
February 2014 we suspended production of aspartic acid at our Taber
plant. The suspension was due to the fact that since construction
of the plant began in 2008, economic conditions in Alberta and
worldwide have changed significantly. In particular, plant
operating costs have risen and the price of aspartic acid derived
from oil was less than forecast.
We have
sufficient cash resources to meets our future commitments and cash
flow requirements for the coming year. As of December 31, 2016, our
working capital was $7,150,606 and we have no substantial
commitments that require significant outlays of cash over the
coming fiscal year.
We are
committed to minimum rental payments for property and premises
aggregating approximately $934,854 over the term of three leases,
the last expiring on October 31, 2021.
Commitments in the
next five year are as follows:
|
2017
|
$
206,934
|
|
2018
|
$
201,840
|
|
2019
|
$
205,580
|
|
2020
|
$
209,400
|
|
2021
|
$
111,100
|
Other
than as disclosed above, we do not anticipate any
material
capital
requirements for the twelve months ending December 31,
2017.
Other
than as disclosed in Item 7 of this report, we do not know of any
trends, demands, commitments, events or uncertainties that will
result in, or that are reasonable likely to result in, our
liquidity increasing or decreasing in any material
way.
Other
than as disclosed in Item 7 of this report, we do not know of any
significant changes in our expected sources and uses of
cash.
We do
not have any commitments or arrangements from any person to provide
us with any equity capital.
See
Note 2 to the consolidated financial statements included as part of
this report for a description of our significant accounting
policies.
15
Critical Accounting Policies And Estimates
Allowances for Product Returns
. We
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 a customer deteriorates resulting in an
impairment of its ability to pay or a pattern of late payment
develops, an allowance 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.
Recent Accounting Pronouncements
We have
evaluated recent accounting pronouncements issued since January 1,
2016 and determined that the adoption of these recent accounting
pronouncements will not have a material effect on our financial
statements.
Not
applicable.
16
FLEXIBLE SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm, MNP
LLP
|
F-1
|
|
Consolidated
Balance Sheets as of December 31, 2016 and 2015
|
F-2
|
|
Consolidated
Statements of Operations and Comprehensive Income for the Years
Ended December 31, 2016 and 2015
|
F-3
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2016 and
2015
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended
December 31, 2016 and 2015
|
F-5
|
|
Notes
to Consolidated Financial Statements
|
F-6
|
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
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. and subsidiaries (the
“Company”) as of December 31, 2016 and 2015, and the
related consolidated statements of operations and comprehensive
income (loss), stockholders’ equity and cash flows for each
of the years in the two year period ended December 31, 2016. The
Company’s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion
on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
the Company as of December 31, 2016 and 2015, and the results of
its operations and its cash flows for each of the years in the two
period ended December 31, 2016 in conformity with accounting
principles generally accepted in the United States of
America.
Emphasis of Matter
Subsequent
to December 31, 2016, the Company’s facility in Taber,
Alberta, was destroyed in a fire. Refer to note 17 of the
consolidated financial statements. Our opinion is not modified with
respect to this matter.
Vancouver,
Canada Chartered Professional Accountants
March
31, 2017
F-1
|
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
|
|
|
|
|
|
|
|
As
at December 31
|
|
|
|
(U.S.
Dollars)
|
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
|
|
|
|
Cash
and cash equivalents
|
$
2,470,066
|
$
2,498,738
|
|
Accounts
receivable (see Note 3)
|
3,008,153
|
1,954,877
|
|
Inventories
(see Note 4)
|
3,786,093
|
3,275,476
|
|
Prepaid
expenses
|
228,699
|
243,342
|
|
Total
current assets
|
9,493,011
|
7,972,433
|
|
|
|
|
|
Property,
equipment and leaseholds, net (see Note 5)
|
3,393,944
|
3,791,109
|
|
Patents
(see Note 6)
|
95,890
|
100,623
|
|
Long
term deposits (see Note 7)
|
26,163
|
10,169
|
|
Investment
(Note 8)
|
122,480
|
-
|
|
Deferred
tax asset (see Note 11)
|
2,026,999
|
2,268,296
|
|
|
|
|
|
Total
Assets
|
$
15,158,487
|
$
14,142,630
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
|
|
|
|
Accounts
payable and accrued liabilities
|
$
902,037
|
$
826,315
|
|
Deferred
revenue
|
95,308
|
40,451
|
|
Income
taxes payable
|
893,867
|
293,238
|
|
Short
term line of credit (Note 9)
|
250,000
|
200,000
|
|
Current
portion of long term debt (see Note 10)
|
201,193
|
201,193
|
|
Total current liabilities
|
2,342,405
|
1,561,197
|
|
Long
term debt (see Note 10)
|
352,089
|
553,282
|
|
Total
liabilities
|
2,694,494
|
2,114,479
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
Capital
stock (see Note 14)
|
|
|
|
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:
|
|
|
|
11,457,991 (2015:
13,177,991) common shares
|
11,458
|
13,178
|
|
Capital
in excess of par value
|
14,842,863
|
16,317,225
|
|
Other
comprehensive income
|
(1,087,208
)
|
(1,205,798
)
|
|
Accumulated
Deficit
|
(1,303,120
)
|
(3,096,454
)
|
|
|
|
|
|
Total
Stockholders’ Equity
|
12,463,993
|
12,028,151
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
$
15,158,487
|
$
14,142,630
|
Commitments
and Subsequent events
(See
Notes 16 and 17)
See
Notes to Consolidated Financial Statements.
F-2
|
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
|
|
|
|
|
|
|
|
For
the Years Ended December 31
|
|
|
|
(U.S.
Dollars)
|
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Sales
|
$
16,246,014
|
$
15,898,547
|
|
Cost
of sales
|
9,256,526
|
9,696,544
|
|
|
|
|
|
Gross
profit
|
6,989,488
|
6,202,003
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
Wages
|
1,528,031
|
1,532,252
|
|
Administrative
salaries and benefits
|
838,837
|
715,773
|
|
Advertising
and promotion
|
21,199
|
34,445
|
|
Investor
relations and transfer agent fee
|
131,037
|
125,917
|
|
Office
and miscellaneous
|
269,800
|
308,016
|
|
Insurance
|
301,856
|
292,460
|
|
Interest
expense
|
41,699
|
55,770
|
|
Rent
|
117,715
|
127,916
|
|
Consulting
|
119,198
|
131,714
|
|
Professional
fees
|
184,931
|
172,414
|
|
Travel
|
140,340
|
109,051
|
|
Telecommunications
|
24,363
|
34,473
|
|
Shipping
|
16,338
|
20,660
|
|
Research
|
95,098
|
95,265
|
|
Commissions
|
66,839
|
122,868
|
|
Currency
exchange
|
(10,602
)
|
(55,892
)
|
|
Utilities
|
17,495
|
28,434
|
|
|
|
|
|
Total
operating expenses
|
3,904,174
|
3,851,536
|
|
|
|
|
|
Operating
income
|
3,085,314
|
2,350,467
|
|
|
|
|
|
Gain
on sale of equipment
|
6,848
|
(45,249
)
|
|
Loss
on investment
|
(15,086
)
|
-
|
|
Interest
income
|
2,184
|
2,963
|
|
Income
before income tax
|
3,079,260
|
2,308,181
|
|
|
|
|
|
Income
taxes (Note 11)
|
|
|
|
Deferred
income (expense) tax recovery
|
(303,793
)
|
(38,157
)
|
|
Income
tax expense
|
(982,133
)
|
(765,328
)
|
|
|
|
|
|
Net
income for the year
|
$
1,793,334
|
$
1,504,696
|
|
|
|
|
|
Other
comprehensive loss
|
118,590
|
(938,246
)
|
|
Comprehensive
income (loss)
|
1,911,924
|
566,450
|
|
|
|
|
|
Income
per share (basic and diluted) (Note 12)
|
$
0.16
|
$
0.11
|
|
Weighted
average number of common shares (basic)
|
11,464,270
|
13,173,827
|
|
Weighted
average number of common shares (diluted)
|
11,635,136
|
13,307,021
|
See
Notes to Consolidated Financial Statements.
F-3
|
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
|
|
|
|
|
|
|
|
For
Years Ended December 31
|
|
|
|
(U.S.
Dollars)
|
|
|
|
|
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Operating
activities
|
|
|
|
Net
income
|
$
1,793,334
|
$
1,504,696
|
|
Adjustments
to reconcile net income to net cash:
|
|
|
|
Stock
based compensation
|
66,318
|
82,112
|
|
Depreciation
and amortization
|
540,079
|
578,338
|
|
Loss
on investment
|
15,086
|
-
|
|
Deferred
tax expense (recovery)
|
303,793
|
38,157
|
|
|
|
|
|
Changes in non-cash
working capital items:
|
|
|
|
Decrease
(Increase) in accounts receivable
|
(1,199,267
)
|
349,470
|
|
Decrease
(Increase) in inventories
|
(506,278
)
|
125,047
|
|
(Increase)
Decrease in prepaid expenses
|
15,793
|
(127,946
)
|
|
Increase
(Decrease) in accounts payable
|
90,111
|
38,523
|
|
Increase
(Decrease) in taxes payable
|
600,629
|
152,396
|
|
(Decrease)
Increase deferred revenue
|
55,628
|
33,786
|
|
|
|
|
|
Cash
provided by operating activities
|
1,775,226
|
2,736,651
|
|
|
|
|
|
Investing
activities
|
|
|
|
Long
term deposits
|
(15,925
)
|
(4,697
)
|
|
Investment
|
(87,500
)
|
-
|
|
Net
purchase of property and equipment
|
(114,270
)
|
(59,030
)
|
|
|
|
|
|
Cash
used in investing activities
|
(217,695
)
|
(63,727
)
|
|
|
|
|
|
Financing
activities
|
|
|
|
Draw on
(repayment) of short term line of credit
|
50,000
|
(550,000
)
|
|
Loan
repayment
|
(201,193
)
|
(343,661
)
|
|
Repurchase
of common stock
|
(1,575,000
)
|
|
|
Proceeds of
issuance of common stock
|
32,600
|
8,000
|
|
|
|
|
|
Cash
used in financing activities
|
(1,693,593
)
|
(885,661
)
|
|
|
|
|
|
Effect of exchange
rate changes on cash
|
107,390
|
(36,042
)
|
|
|
|
|
|
Inflow
of cash
|
(28,672
)
|
1,751,221
|
|
Cash and cash
equivalents, beginning
|
2,498,738
|
747,517
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
$
2,470,066
|
$
2,498,738
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Income taxes
paid
|
452,654
|
785,000
|
|
Interest
paid
|
41,699
|
55,770
|
See Notes to
Consolidated Financial Statements.
F-4
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Stockholders’ Equity
For
the Years Ended December 31, 2016 and 2015
(U.S.
Dollars)
|
|
|
|
Capital
in
|
Accumulated
|
Other
|
Total
|
|
|
|
|
Excess
of
|
Earnings
|
Comprehensive
|
Stockholders’
|
|
|
Shares
|
Par
Value
|
Par
Value
|
(Deficiency)
|
Income
(Loss)
|
Equity
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2014
|
13,169,991
|
$
13,170
|
$
16,227,121
|
$
(4,601,150
)
|
$
(267,552
)
|
$
11,371,589
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
—
|
—
|
—
|
—
|
(938,246
)
|
(938,246
)
|
|
|
|
|
|
|
|
|
|
Net
income
|
—
|
—
|
—
|
1,504,696
|
—
|
1,504,696
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
—
|
—
|
—
|
—
|
—
|
566,450
|
|
|
|
|
|
|
|
|
|
Common stock
issued
|
8,000
|
8
|
7,992
|
—
|
—
|
8,000
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
—
|
—
|
82,112
|
—
|
—
|
82,112
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2015
|
13,177,991
|
$
13,178
|
$
16,317,225
|
$
(3,096,454
)
|
$
(1,205,798
)
|
$
12,028,151
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
—
|
—
|
—
|
—
|
118,590
|
118,590
|
|
|
|
|
|
|
|
|
|
Net
income
|
—
|
—
|
—
|
1,793,334
|
—
|
1,793,334
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
—
|
—
|
—
|
—
|
—
|
1,911,924
|
|
|
|
|
|
|
|
|
|
Common stock
cancelled
|
(1,750,000
)
|
(1,750
)
|
(1,573,250
)
|
—
|
—
|
(1,575,000
)
|
|
|
|
|
|
|
|
|
|
Common stock
issued
|
30,000
|
30
|
32,570
|
—
|
—
|
32,600
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
—
|
—
|
66,318
|
—
|
—
|
66,318
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2016
|
11,457,991
|
$
11,458
|
$
14,842,864
|
$
(1,303,120
)
|
$
(1,087,208
)
|
$
12,463,993
|
See
Notes to Consolidated Financial Statements.
F-5
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
(U.S. Dollars)
1.
Basis of Presentation
.
These
consolidated financial statements include the accounts of Flexible
Solutions International, Inc. (the “Company”), and its
wholly-owned subsidiaries Flexible Fermentation Ltd.
(“Flexible Ltd.”), NanoChem Solutions Inc.
(“NanoChem”), Flexible Solutions Ltd., Flexible Biomass
LP, FS Biomass Inc., NCS Deferred Corp., Conserve H2O Ltd. and
Natural Chem SEZC Ltd. All inter-company balances and transactions
have been eliminated. The Company was incorporated May 12, 1998 in
the State of Nevada and had no operations until June 30,
1998.
Flexible Solutions
International, Inc. and its subsidiaries develop, manufacture and
market specialty chemicals which slow the evaporation of water. One
product, HEATSAVR®, is marketed for use in swimming pools and
spas where its use, by slowing the evaporation of water, allows the
water to retain a higher temperature for a longer period of time
and thereby reduces the energy required to maintain the desired
temperature of the water in the pool. Another product,
WATERSAVR®, is marketed for water conservation in irrigation
canals, aquaculture, and reservoirs where its use slows water loss
due to evaporation. In addition to the water conservation products,
the Company also manufactures and markets water-soluble chemicals
utilizing thermal polyaspartate biopolymers (hereinafter referred
to as “TPAs”), which are beta-proteins manufactured
from the common biological amino acid, L-aspartic. TPAs can be
formulated to prevent corrosion and scaling in water piping within
the petroleum, chemical, utility and mining industries. TPAs are
also used as proteins to enhance fertilizers in improving crop
yields and can be used as additives for household laundry
detergents, consumer care products and pesticides.
2.
Significant Accounting Policies.
These
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
applicable to a going concern and reflect the policies outlined
below.
(a)
Cash and Cash Equivalents
.
The
Company considers all highly liquid investments purchased with an
original or remaining maturity of less than three months at the
date of purchase to be cash equivalents. Cash and cash equivalents
are maintained with several financial institutions.
(b)
Inventories and Cost of Sales
The
Company has four major classes of inventory: finished goods, work
in progress, raw materials and supplies. In all classes, inventory
is valued at the lower of cost or market. Cost is determined on a
first-in, first-out basis. Cost of sales includes all expenditures
incurred in bringing the goods to the point of sale. Inventory
costs and costs of sales include direct costs of the raw material,
inbound freight charges, warehousing costs, handling costs
(receiving and purchasing) and utilities and overhead expenses
related to the Company’s manufacturing and processing
facilities.
F-6
(c)
Allowance
for Doubtful Accounts
The
Company provides an allowance for doubtful accounts when management
estimates collectability to be uncertain. Accounts receivable are
continually reviewed to determine which, if any, accounts are
doubtful of collection. In making the determination of the
appropriate allowance amount, the Company considers current
economic and industry conditions, relationships with each
significant customer, overall customer credit-worthiness and
historical experience.
(d)
Property,
Equipment and Leaseholds
.
The
following assets are recorded at cost and depreciated using the
methods and annual rates shown below:
|
Computer
hardware
|
|
30%
Declining balance
|
|
Furniture
and fixtures
|
|
20%
Declining balance
|
|
Manufacturing
equipment
|
|
20%
Declining balance
|
|
Office
equipment
|
|
20%
Declining balance
|
|
Boat
|
|
20%
Declining balance
|
|
Building
and improvements
|
|
10%
Declining balance
|
|
Technology
|
|
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.
(e)
Impairment
of Long-Lived Assets
.
In
accordance with FASB Codification Topic 360, “Property, Plant
and Equipment (ASC 360), the Company reviews long-lived assets,
including, but not limited to, property and equipment, patents and
other assets, for impairment annually or whenever events or changes
in circumstances indicate the carrying amounts of assets may not be
recoverable. The carrying value of long-lived assets is assessed
for impairment by evaluating operating performance and future
undiscounted cash flows of the underlying assets. If the expected
future cash flows of an asset is less than its carrying value, an
impairment measurement is indicated. Impairment charges are
recorded to the extent that an asset’s carrying value exceeds
its fair value. Accordingly, actual results could vary
significantly from such estimates. There were no impairment charges
during the periods presented.
(f)
Foreign Currency
.
The
functional currency of three of the Company’s subsidiaries is
the Canadian Dollar. The translation of the Canadian Dollar to the
reporting currency of the Company, the U.S. Dollar is performed for
assets and liabilities using exchange rates in effect at the
balance sheet date. Revenue and expense transactions are translated
using average exchange rates prevailing during the year.
Translation adjustments arising on conversion of the
Company’s financial statements from the subsidiary’s
functional currency, Canadian Dollars, into the reporting currency,
U.S. Dollars, are excluded from the determination of income (loss)
and are disclosed as other comprehensive income (loss) in the
condensed interim consolidated statements of operations and
comprehensive income (loss).
Foreign
exchange gains and losses relating to transactions not denominated
in the applicable local currency are included in operating income
(loss) if realized during the year and in comprehensive income
(loss) if they remain unrealized at the end of the
year.
F-7
(g)
Revenue Recognition
.
Revenue
from product sales is recognized at the time the product is shipped
since title and risk of loss is transferred to the purchaser upon
delivery to the carrier. Shipments are made F.O.B. shipping point.
The Company recognizes revenue when there is persuasive evidence of
an arrangement, delivery to the carrier has occurred, the fee is
fixed or determinable, collectability is reasonably assured and
there are no significant remaining performance obligations. When
significant post-delivery obligations exist, revenue is deferred
until such obligations are fulfilled. To date, there have been no
such significant post-delivery obligations.
Since
the Company’s inception, product returns have been
insignificant; therefore, no provision has been established for
estimated product returns.
Deferred
revenues consist of products sold to distributors with payment
terms greater than the Company’s customary business terms due
to lack of credit history or operating in a new market in which the
Company has no prior experience. The Company defers the recognition
of revenue until the criteria for revenue recognition has been met,
and payments become due or cash is received from these
distributors.
(h)
Stock
Issued in Exchange for Services
.
The
Company’s common stock issued in exchange for services is
valued at estimated fair market value based upon trading prices of
the Company’s common stock on the dates of the stock
transactions. The corresponding expense of the services rendered is
recognized over the period that the services are
performed.
(i)
Stock-based
Compensation
.
The Company recognizes compensation expense for
all share-based payments in accordance with FASB Codification Topic
718,
Compensation —
Stock Compensation
, (ASC 718).
Under the fair value recognition provisions of ASC 718, the Company
recognizes share-based compensation expense, net of an estimated
forfeiture rate, over the requisite service period of the
award.
The
fair value at grant date of stock options is estimated using the
Black-Scholes-Merton option-pricing model. Compensation expense is
recognized on a straight-line basis over the stock option vesting
period based on the estimated number of stock options that are
expected to vest. Shares are issued from treasury upon exercise of
stock options.
(j)
Comprehensive Income
(Loss)
.
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 (loss) is primarily comprised of unrealized foreign exchange
gains and losses.
(k)
Income
Per Share
.
Basic
earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding in the period. Diluted earnings per share are
calculated giving effect to the potential dilution of the exercise
of options and warrants. Common equivalent shares, composed of
incremental common shares issuable upon the exercise of stock
options and warrants are included in diluted net income per share
to the extent that these shares are dilutive. Common equivalent
shares that have an anti-dilutive effect on net income per share
have been excluded from the calculation of diluted weighted average
shares outstanding for the years ended December 31, 2016 and
2015.
F-8
(l)
Use of Estimates
.
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates and would impact the results of
operations and cash flows.
Estimates
and underlying assumptions are reviewed at each period end.
Revisions to accounting estimates are recognized in the period in
which the estimates are revised and in any future periods
affected.
Significant
areas requiring the use of management estimates include assumptions
and estimates relating to the asset impairment analysis,
share-based payments and warrants, valuation allowances for
deferred income tax assets, determination of useful lives of
property, plant and equipment, and the valuation of
inventory.
(m)
Financial
Instruments
.
The fair market
value of the Company’s financial instruments comprising cash
and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, and short term line of credit were estimated
to approximate their carrying values due to immediate or short-term
maturity of these financial instruments. The Company maintains cash
balances at financial institutions which at times exceed federally
insured amounts. The Company has not experienced any material
losses in such accounts.
The Company is
exposed to foreign exchange and interest rate risk to the extent
that market value rate fluctuations materially differ from
financial assets and liabilities, subject to fixed long-term
rates.
(n)
Fair
Value of Financial Instruments
In August 2009, an update was
made to
Fair Value
Measurements and Disclosures — “Measuring
Liabilities at Fair Value.”
This update permits entities to
measure the fair value of liabilities, in circumstances in which a
quoted price in an active market for an identical liability is not
available, using a valuation technique that uses a quoted price of
an identical liability when traded as an asset, quoted prices for
similar liabilities or similar liabilities when traded as assets or
the income or market approach that is consistent with the
principles of
Fair Value
Measurements and Disclosures
. Effective upon issuance, the
Company has adopted this guidance with no material impact to the
Company’s consolidated financial
statements
.
Fair
value is defined as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value
must maximize the use of observable inputs and minimize the use of
unobservable inputs. The standard describes a fair value hierarchy
based on three levels of inputs described below, of which the first
two are considered observable and the last unobservable, that may
be used to measure fair value.
●
Level 1
– Quoted prices in active markets for identical assets
or liabilities
●
Level 2 –
Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
●
Level 3 —
Unobservable inputs that are supported by little or no market
activity which is significant to the fair value of the assets or
liabilities.
F-9
The
fair values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities and the short term line of
credit for all periods presented approximate their respective
carrying amounts due to the short term nature of these financial
instruments
(o)
Contingencies
Certain
conditions may exist as of the date the financial statements are
issued which may result in a loss to the Company but which will
only be resolved when one or more future events occur or fail to
occur. The Company's management and its legal counsel assess such
contingent liabilities, and such assessment inherently involves an
exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or
unasserted claims that may result in such proceedings, the
Company's legal counsel evaluates the perceived merits of any legal
proceedings or unasserted claims as well as the perceived merits of
the amount of relief sought or expected to be sought
therein.
If the
assessment of a contingency indicates that it is probable that a
material loss has been incurred and the amount of the liability can
be estimated, the estimated liability would be accrued in the
Company's financial statements. If the assessment indicates that a
potential material loss contingency is not probable but is
reasonably possible, or is probable but cannot be estimated, then
the nature of the contingent liability, together with an estimate
of the range of possible loss if determinable and material, would
be disclosed.
Loss
contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the guarantees would be
disclosed. Legal fees associated with loss contingencies are
expensed as incurred.
(p)
Income
Taxes
Income
taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Deferred tax
assets are reduced by a valuation allowance so that the assets are
recognized only to the extent that when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will be realized.
Per
FASB ASC 740 “Income taxes” under the liability method,
it is the Company’s policy to provide for uncertain tax
positions and the related interest and penalties based upon
management’s assessment of whether a tax benefit is more
likely than not to be sustained upon examination by tax
authorities. At December 31, 2016, the Company believes it has
appropriately accounted for any unrecognized tax benefits. To the
extent the Company prevails in matters for which a liability for an
unrecognized benefit is established or is required to pay amounts
in excess of the liability, the Company’s effective tax rate
in a given financial statement period may be affected. Interest and
penalties associated with the Company’s tax positions are
recorded as interest expense in the condensed interim consolidated
statements of operations and comprehensive income
(loss).
(q)
Risk
Management.
The Company’s credit risk is primarily
attributable to its accounts receivable. The amounts presented in
the accompanying consolidated balance sheets are net of allowances
for doubtful accounts, estimated by the Company’s management
based on prior experience and the current economic
environment.
The Company is exposed to credit-related losses
in the event of non-performance by counterparties to the financial
instruments. Credit exposure is minimized by dealing with only
credit worthy counterparties. Accounts receivable for the
Company’s three primary customers totaled $2,032,646 (67%) at
December 31, 2016 (December 31, 2015 - $1,298,821 or
66%).
F-10
The
credit risk on cash and cash equivalents is limited because the
Company limits its exposure to credit loss by placing its cash and
cash equivalents with major financial institutions.
The
Company is not exposed to significant interest rate risk to the
extent that the long term debt maintained from the foreign
government agencies is subject to a fixed rate of
interest.
In
order to manage its exposure to foreign exchange risks, the Company
is closely monitoring the fluctuations in the foreign currency
exchange rates and the impact on the value of cash and cash
equivalents, accounts receivable, and accounts payable. The Company
has not hedged its exposure to currency fluctuations.
(r)
Equity
Method Investment
We
account for investments using the equity method of accounting if
the investment provides us the ability to exercise significant
influence, but not control, over the investee. Significant
influence is generally deemed to exist if the Company's ownership
interest in the voting stock of the investee ranges between 20% and
50%, although other factors, such as representation on the
investee's board of directors, are considered in determining
whether the equity method of accounting is appropriate. Under the
equity method of accounting, the investment is recorded at cost in
the consolidated balance sheets under other assets and adjusted for
dividends received and our share of the investee's earnings or
losses together with other-than-temporary impairments which are
recorded through interest and other loss, net in the consolidated
statements of operations and comprehensive income
(loss).
(s)
Adoption
of new accounting principles
In June
2014, the FASB issued ASU No. 2014-12, “Compensation –
Stock Compensation”, an update to its accounting guidance
related to share-based compensation. The guidance requires that a
performance target that affects vesting, and that could be achieved
after the requisite service period, be treated as a performance
condition, and therefore not be reflected in determining the fair
value of the award at the grant date. The guidance is effective for
annual and interim periods beginning after December 15, 2015.
Adoption of this guidance did not have any effect on the
Company’s consolidated financial statements.
In
February 2015, the FASB issued ASU No. 2015-02, "Consolidation:
Amendments to the Consolidation Analysis." This update improves
targeted areas of the consolidation guidance and reduces the number
of consolidation models. This update is effective for annual and
interim periods in fiscal years beginning after December 15, 2015.
Adoption of this guidance did not have any effect on the
Company’s consolidated financial statements.
(t)
Accounting
Pronouncements Not Yet Adopted
In January
2017, the FASB issued ASU 2017-04, Simplifying the Test for
Goodwill Impairment. The standard eliminates step two in the
current two-step impairment test under ASC 350. Under the new
standard, a goodwill impairment will be recorded for any excess of
a reporting unit's carrying value over its fair value. A
prospective transition approach is required. The standard is
effective for annual and interim reporting periods beginning after
December 15, 2019 with early adoption permitted for annual and
interim goodwill impairment testing dates after January 1, 2017. We
do not expect the standard to have a material impact on our
consolidated financial statements.
F-11
In
February 2016, the FASB issued ASU 2016-02, Leases. The standard
will require lessees to recognize most leases on their balance
sheet and makes selected changes to lessor accounting. The standard
is effective for annual and interim reporting periods beginning
after December 15, 2018. A modified retrospective transition
approach is required, with certain practical expedients available.
We are currently evaluating the impact the adoption of this
standard will have on our consolidated financial
statements.
In July
2015, the FASB issued ASU 2015-11, Simplifying the Measurement of
Inventory. The standard will require inventory to be measured at
the lower of cost or net realizable value. The guidance will not
apply to inventories for which cost is determined using the
last-in, first-out method or the retail inventory method. The
standard is effective for annual and interim reporting periods
beginning after December 15, 2016. We do not expect the adoption of
this standard to have a material impact on our consolidated
financial statements.
In May
2014, the FASB issued ASU 2014-09, Revenue from Contracts with
Customers, which has been updated through several revisions and
clarifications since its original issuance. The standard will
require revenue recognized to represent the transfer of promised
goods or services to customers at an amount that reflects the
consideration which a company expects to receive in exchange for
those goods or services. The standard also requires new, expanded
disclosures regarding revenue recognition. The standard will be
effective January 1, 2018 with early adoption permissible beginning
January 1, 2017. We are currently evaluating the transition method
we will elect and the effect on our consolidated financial
statements.
3.
Accounts Receivable
|
|
2016
|
2015
|
|
|
|
|
|
Accounts
receivable
|
$
3,044,652
|
$
1,990,283
|
|
Allowances for
doubtful accounts
|
(36,499
)
|
(35,406
)
|
|
|
$
3,008,153
|
$
1,954,877
|
4. Inventories
|
|
2016
|
2015
|
|
|
|
|
|
Completed
goods
|
$
1,646,465
|
$
1,162,571
|
|
Work in
progress
|
2,572
|
10,466
|
|
Raw
materials
|
2,137,056
|
2,102,439
|
|
|
$
3,786,093
|
$
3,275,476
|
F-12
5.
Property, Equipment and Leaseholds
|
|
2016
|
Accumulated
|
2016
|
|
|
Cost
|
Depreciation
|
Net
|
|
Buildings
|
$
4,762,094
|
$
2,967,370
|
$
1,794,724
|
|
Computer
hardware
|
89,480
|
85,784
|
3,696
|
|
Furniture and
fixtures
|
32,439
|
23,142
|
9,297
|
|
Office
equipment
|
17,745
|
16,788
|
957
|
|
Manufacturing
equipment
|
5,236,404
|
4,102,635
|
1,133,769
|
|
Trailer
|
12,859
|
12,250
|
609
|
|
Boat
|
34,400
|
9,632
|
24,768
|
|
Leasehold
improvements
|
85,432
|
15,419
|
70,013
|
|
Technology
|
101,748
|
101,748
|
—
|
|
Land
|
356,111
|
—
|
356,111
|
|
|
$
10,728,712
|
$
7,334,768
|
$
3,393,944
|
|
|
2015
|
Accumulated
|
2015
|
|
|
Cost
|
Depreciation
|
Net
|
|
Buildings
|
$
4,766,282
|
$
2,774,306
|
$
1,991,976
|
|
Computer
hardware
|
88,026
|
82,811
|
5,215
|
|
Furniture and
fixtures
|
29,147
|
20,774
|
8,373
|
|
Office
equipment
|
17,214
|
16,054
|
1,160
|
|
Manufacturing
equipment
|
5,074,079
|
3,770,819
|
1,303,260
|
|
Trailer
|
12,474
|
11,630
|
844
|
|
Boat
|
34,400
|
3,440
|
30,960
|
|
Leasehold
improvements
|
29,604
|
—
|
29,604
|
|
Technology
|
98,701
|
78,961
|
19,740
|
|
Land
|
399,977
|
—
|
399,977
|
|
|
$
10,549,904
|
$
6,758,795
|
$
3,791,109
|
Amount
of depreciation expense for 2016: $524,463 (2015: $562,471) and is
included in cost of sales in the consolidated statements of
operations and comprehensive income (loss).
6.
Patents
|
|
2016
Cost
|
Accumulated
Amortization
|
2016
Net
|
|
Patents
|
$
197,448
|
$
101,558
|
$
95,890
|
F-13
|
|
2015
Cost
|
Accumulated
Amortization
|
2015
Net
|
|
Patents
|
$
191,698
|
$
91,075
|
$
100,623
|
Increase in 2016
cost was due to currency conversion. 2016 cost in Canadian dollars
- $265,102 (2015 - $265,102 in Canadian dollars).
Amount
of amortization for 2016: $15,616 (2015: $15,867) and is included
in cost of sales in the consolidated statements of operations and
comprehensive income (loss).
Estimated
amortization expense over the next five years is as
follows:
|
2017
|
$
16,438
|
|
2018
|
16,438
|
|
2019
|
16,438
|
|
2020
|
16,438
|
|
2021
|
16,438
|
7.
Long Term Deposits
The
Company has reclassified certain security deposits to better
reflect their long term nature. Long term deposits consist of
damage deposits held by landlords and security deposits held by
various vendors.
|
|
2016
|
2015
|
|
|
|
|
|
Long term
deposits
|
$
26,163
|
$
10,169
|
8.
Equity Method Investment
The
Company has a 42% ownership interest in ENP Peru Investments LLC
(“ENP Peru”), which we acquired in fiscal 2016. ENP
Peru is located in the state of Illinois and leases warehouse
space. We account for this investment using the equity method of
accounting. A summary of our investment is as follows:
|
|
December 31,
2016
|
|
January 1, 2016
Balance
|
-
|
|
Capital
contributions
|
$
150,066
|
|
Return of
equity
|
(12,500
)
|
|
Loss in equity
method investment
|
(15,086
)
|
|
December 31, 2016
Balance
|
$
122,480
|
F-14
9.
Short-Term Line of Credit
In May
2016, the Company signed a new agreement with Harris Bank
(“the Bank”) to renew the expiring credit line. The
revolving line of credit is for an aggregate amount of up to the
lesser of (i) $3,000,000, or (ii) 75% of eligible domestic accounts
receivable and certain foreign accounts receivable plus 40% of
inventory. The loan has an annual interest rate of
4.0%.
The
Revolving Line of Credit contains customary affirmative and
negative covenants, including the following: compliance with laws,
provision of financial statements and periodic reports, payment of
taxes, maintenance of inventory and insurance, maintenance of
operating accounts at the Bank, the Bank’s access to
collateral, formation or acquisition of subsidiaries, incurrence of
indebtedness, dispositions of assets, granting liens, changes in
business, ownership or business locations, engaging in mergers and
acquisitions, making investments or distributions and affiliate
transactions. The covenants also require that the Company maintain
a minimum ratio of qualifying financial assets to the sum of
qualifying financial obligations. As of December 31, 2016, Company
was in compliance with all loan covenants.
To
secure the repayment of any amounts borrowed under the Revolving
Line of Credit, the Company granted the Bank a security interest in
substantially all of the assets of NanoChem Solutions Inc.,
exclusive of intellectual property assets.
Short-term
borrowings outstanding under the Revolving Line as of December 31,
2016 were $250,000 (December 31, 2015 - $200,000).
10.
In
September 2014, NanoChem Solutions Inc. signed a $1,005,967
promissory note with
Harris
Bank with a rate of prime plus 0.5% to be repaid over 5 years with
equal monthly installments plus interest. This money was used to
retire the previously issued and outstanding debt obligations. The
balance owing at December 31, 2016 was $553,282 (December 31, 2015
- $754,475).
The
Company has committed to the following repayments:
|
2017
|
$
201,193
|
|
2018
|
$
201,193
|
|
2019
|
$
150,896
|
As of
December 31, 2016, Company was in compliance with all loan
covenants.
|
|
December 31,
2016
|
December 31,
2015
|
|
Continuity
|
|
|
|
Balance,
beginning of period
|
$
754,475
|
$
1,112,689
|
|
Less:
Payments on loan
|
201,193
|
337,631
|
|
Effect
of exchange rate
|
-
|
(20,583
)
|
|
Balance,
end of period
|
$
553,282
|
$
754,475
|
F-15
|
Outstanding
balance at:
|
|
|
|
Long term debt
– Harris
|
553,282
|
754,475
|
|
Long term
debt
|
$
553,282
|
$
754,475
|
|
Less: current
portion
|
(201,193
)
|
(201,193
)
|
|
Balance
|
$
352,089
|
$
553,282
|
11.
Income Tax
The
provision for income tax expense (benefit) is comprised of the
following:
|
|
2016
|
2015
|
|
Current tax,
federal
|
$
787,539
|
$
613,691
|
|
Current tax,
state
|
194,594
|
151,637
|
|
Current tax,
foreign
|
-
|
-
|
|
Current tax,
total
|
982,133
|
765,328
|
|
|
|
|
|
Deferred income
tax, federal
|
41,343
|
77,365
|
|
Deferred income
tax, state
|
10,215
|
19,116
|
|
Deferred income
tax, foreign
|
252,235
|
(58,324
)
|
|
Deferred income
tax, total
|
303,793
|
38,157
|
|
Total
|
$
3,191,056
|
$
803,485
|
The
following table reconciles the income tax benefit at the U.S.
Federal statutory rate to income tax benefit at the Company's
effective tax rates.
|
|
2016
|
2015
|
|
Income
(loss) before taxes
|
3,079,260
|
2,308,181
|
|
US
statutory tax rates
|
39.12
%
|
39.12
%
|
|
Expected
income tax (recovery)
|
1,207,840
|
902,845
|
|
Non-deductible
items
|
(139,975
)
|
39,872
|
|
Change
in estimates
|
228,495
|
12,336
|
|
Change
in enacted tax rate
|
4,437
|
(158,840
)
|
|
Option
expired during the year
|
8,418
|
35,685
|
|
Foreign
tax rate difference
|
(46,498
)
|
(40,393
)
|
|
Change
in valuation allowance
|
22,878
|
11,977
|
|
Total
income taxes (recovery)
|
1,285,595
|
803,483
|
|
|
|
|
|
Current
income tax expenses (recovery)
|
982,133
|
765,328
|
|
Deferred
tax expenses (recovery)
|
303,792
|
38,156
|
|
Total
income taxes (recovery)
|
1,285,925
|
803,484
|
Deferred taxes
reflect the tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes. Deferred tax assets (liabilities) at December 31, 2016
and 2015 are comprised of the following:
F-16
|
Canada
|
2016
|
2015
|
|
Non
capital loss carryforwards
|
830,476
|
1,068,935
|
|
Patents
|
45,351
|
36,070
|
|
Fixed
assets
|
848,843
|
809,404
|
|
Financial
instruments
|
-
|
-
|
|
|
1,724,670
|
1,914,409
|
|
Valuation
Allowance
|
-
|
-
|
|
Net
Deferred tax asset (liability)
|
1,724.670
|
1,914,409
|
|
|
|
|
|
USA
|
|
|
|
|
2016
|
2015
|
|
Fixed
Assets
|
322,634
|
353,907
|
|
Stock-Based
Compensation
|
209,242
|
206,648
|
|
|
531,876
|
560,556
|
|
Deferred
tax asset not recognized
|
229,547
|
206,669
|
|
Net
Deferred tax asset
|
302,329
|
353,886
|
The
Company has non-operating loss carryforwards of approximately
$3,075,838 (2015 - $3,959,018) which may be carried forward to
apply against future year income tax for Canadian income tax
purposes, subject to the final determination by taxation
authorities, expiring in the following years:
|
Expiry
|
Loss
|
|
2030
|
656,645
|
|
2031
|
805,757
|
|
2032
|
927,780
|
|
2033
|
683,283
|
|
2034
|
-
|
|
2035
|
-
|
|
2036
|
-
|
|
2037
|
2,372
|
|
Total
|
3,075,838
|
As at
December 31, 2016, the Company has no net operating losses
carryforward available for US tax purposes.
Accounting for Uncertainty for Income Tax
Effective January
1, 2009, the Company adopted the interpretation for accounting for
uncertainty in income taxes which was an interpretation of the
accounting standard accounting for income taxes. This
interpretation created a single model to address accounting for
uncertainty in tax positions. This interpretation clarifies the
accounting for income taxes, by prescribing a minimum recognition
threshold a tax position is required to meet before being
recognized in the financial statements.
As at December 31, 2016 and 2015, the Company’s consolidated
balance sheets did not reflect a liability for uncertain tax
positions, nor any accrued penalties or interest associated with
income tax uncertainties. The Company has no income tax
examinations in progress.
F-17
12.
Income Per Share
We
present both basic and diluted income per share on the face of our
consolidated statements of operations. Basic and diluted income per
share are calculated as follows:
|
|
2016
|
2015
|
|
|
|
|
|
Net income
(loss)
|
$
1,793,334
|
$
1,504,696
|
|
Weighted average
common shares outstanding:
|
|
|
|
Basic
|
11,464,270
|
13,173,827
|
|
Diluted
|
11,635,136
|
13,307,021
|
|
Net income (loss)
per common share:
|
|
|
|
Basic
and Diluted
|
$
0.16
|
$
0.11
|
Certain
stock options whose terms and conditions are described in Note 12,
“Stock Options” could potentially dilute basic EPS in
the future, but were not included in the computation of diluted EPS
because to do so would have been anti-dilutive. Those anti-dilutive
options are as follows.
|
|
2016
|
2015
|
|
|
|
|
|
Anti-dilutive
options
|
72,000
|
552,000
|
There
were no preferred shares issued and outstanding during the years
ended December 31, 2016 or 2015.
13.
Stock
Options
.
The Company adopted
a stock option plan ("Plan"). The purpose of this Plan is
to provide additional incentives to
key employees, officers, directors and consultants
of the Company and its subsidiaries in order to
help attract and retain the best available
personnel for positions of
responsibility and otherwise promote the success of the
Company’s business. It is intended that options issued
under this Plan constitute non-qualified stock
options. The general terms of awards under the
option plan are that 100% of the options granted will vest the
year following the grant.
The maximum term of options granted is 5
years.
The
Company may issue stock options and stock bonuses for shares of its
common stock to provide incentives to directors, key employees and
other persons who contribute to the success of the Company. The
exercise price of all incentive options are issued for not less
than fair market value at the date of grant.
F-18
The
following table summarizes the Company’s stock option
activity for the years ended December 31, 2016 and
2015:
|
|
Number of
shares
|
Exercise
price
per
share
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
Balance, December
31, 2014
|
1,126,000
|
$
1.21 - $2.45
|
$
1.54
|
|
Granted
|
317,000
|
$
0.75 – 1.05
|
$
0.89
|
|
Cancelled or
expired
|
(245,000
)
|
$
1.05 – 2.22
|
$
1.72
|
|
Exercised
|
8,000
|
$
1.00
|
$
1.00
|
|
Balance, December
31, 2015
|
1,190,000
|
$
0.75 - $2.45
|
$
1.34
|
|
Granted
|
168,000
|
$
1.42
|
$
1.42
|
|
Cancelled or
expired
|
(515,000
)
|
$
0.75 – 2.45
|
$
1.61
|
|
Exercised
|
(30,000
)
|
$
1.00 – 1.21
|
$
1.09
|
|
Balance, December
31, 2016
|
813,000
|
$
0.75 – 2.22
|
$
1.19
|
|
Exercisable,
December 31, 2016
|
647,000
|
$
0.75 – 2.22
|
$
1.13
|
The
weighted-average remaining contractual life of outstanding options
is 2.8 years. The aggregate intrinsic value of options outstanding
at December 31, 2016 is nil (2015 - $418,330).
The
fair value of each option grant is calculated using the following
weighted average assumptions:
|
|
2016
|
2015
|
|
|
|
|
|
Expected life
– years
|
3.0
|
3.0
|
|
Interest
rate
|
1.37
%
|
0.78 – 1.16
%
|
|
Volatility
|
75.64
%
|
57-77
%
|
|
Dividend
yield
|
--
%
|
--
%
|
|
Weighted average
fair value of options granted
|
$
0.7073
|
$
0.36-0.37
|
During
the year ended December 31, 2016, the Company granted 40,000 (2015
– 100,000) stock options to consultants and has applied ASC
718 using the Black-Scholes option-pricing model, which resulted in
additional expenses of $5,658 (2015 - $26,533). Options granted in
other years resulted in additional expenses of $11,879 (2015
– $3,348). During the year ended December 31, 2016, employees
were granted 128,000 (2015 – 217,000) stock options, which
resulted in additional expenses of $17,824 (2015 – $47,788).
Options granted in other years resulted in additional expenses in
the amount of $30,957 for employees during the year ended December
31, 2016 (2015 - $4,591). There were 30,000 employee stock options
exercised during the year ended December 31, 2016 (2015 –
8,000).
As of
December 31, 2016, there was approximately $93,929 of compensation
expense related to non-vested awards. This expense is expected to
be recognized over a weighted average period of 1
year.
14.
Capital Stock
.
On
January 6, 2016, the Company repurchased 1,750,000 shares of its
common stock at $0.90 per share for a total purchase price of
$1,575,000. The shares were returned to treasury and
cancelled.
The
Company issued 30,000 shares upon the exercise of employee stock
options during the year ended December 31, 2016.
F-19
During
the year ended December 31, 2015, the Company issued 8,000 shares
upon the exercise of employee stock options.
15.
Segmented,
Significant Customer Information and Economic
Dependency
.
The
Company operates in two segments:
(a)
Energy and water conservation products (as shown under the column
heading “EWCP” below), which consists of a (i) liquid
swimming pool blanket which saves energy and water by inhibiting
evaporation from the pool surface, and (ii) food-safe powdered form
of the active ingredient within the liquid blanket and which is
designed to be used in still or slow moving drinking water
sources.
(b)
Biodegradable polymers (“BCPA’s”), used by the
petroleum, chemical, utility and mining industries to prevent
corrosion and scaling in water piping. This product can also be
used in detergents to increase biodegradability and in agriculture
to increase crop yields by enhancing fertilizer
uptake.
The
accounting policies of the segments are the same as those described
in Note 2,
Significant Accounting
Policies
. The Company evaluates performance based on profit
or loss from operations before income taxes, not including
nonrecurring gains and losses and foreign exchange gains and
losses.
The
Company’s reportable segments are strategic business units
that offer different, but synergistic products and services. They
are managed separately because each business requires different
technology and marketing strategies.
Year
ended December 31, 2016:
|
|
EWCP
|
BCPA
|
Consolidated
|
|
|
|
|
|
|
Sales
|
$
785,660
|
$
15,460,354
|
$
16,246,014
|
|
Interest
expense
|
59
|
41,640
|
41,699
|
|
Depreciation
|
325,696
|
214,383
|
540,079
|
|
Income tax expense
(recovery)
|
-
|
982,133
|
982,133
|
|
Segment profit
(loss)
|
(417,770
)
|
2,211,104
|
1,793,334
|
|
Segment
assets
|
1,966,564
|
1,523,270
|
3,489,834
|
|
Expenditures
for
segment
assets
|
6,352
|
107,918
|
114,270
|
Year
ended December 31, 2015:
|
|
EWCP
|
BCPA
|
Consolidated
|
|
|
|
|
|
|
Sales
|
$
687,828
|
$
15,210,719
|
$
15,898,547
|
|
Interest
expense
|
1
|
55,769
|
55,770
|
|
Depreciation
|
384,909
|
193,429
|
578,338
|
|
Income tax expense
(recovery)
|
-
|
765,328
|
765,328
|
|
Segment profit
(loss)
|
(1,054,344
)
|
2,559,040
|
1,504,696
|
|
Segment
assets
|
2,211,931
|
1,679,801
|
3,891,732
|
|
Expenditures
for
segment
assets
|
(244,358
)
|
303,388
|
59,030
|
F-20
Sales
by territory are shown below:
|
|
2016
|
2015
|
|
|
|
|
|
Canada
|
$
453,480
|
$
404,880
|
|
United States and
abroad
|
15,792,534
|
15,493,667
|
|
Total
|
$
16,246,014
|
$
15,898,547
|
The
Company’s long-lived assets (property, equipment, leaseholds
and patents) are located in Canada and the United States as
follows:
|
|
2016
|
2015
|
|
|
|
|
|
Canada
|
$
1,966,564
|
$
2,211,348
|
|
United
States
|
1,523,270
|
1,680,384
|
|
Total
|
$
3,489,834
|
$
3,891,732
|
Three
customers accounted for $10,148,042 (63%) of sales made in 2016
(2015 - $10,421,165 or 66%).
16.
Commitments
.
The
Company is committed to minimum rental payments for property and
premises aggregating approximately $934,854 over the term of three
leases, the last expiring on October 31, 2021.
Commitments in the
next five year are as follows:
|
2017
|
$
206,934
|
|
2018
|
$
201,840
|
|
2019
|
$
205,580
|
|
2020
|
$
209,400
|
|
2021
|
$
111,100
|
17.
Subsequent Events.
On
February 11, 2017, a fire started in our Taber, AB Canada plant
where all our swimming pool products are manufactured. The building
and
contents with a
carrying value of $2,511,646 are a total loss.
Insurance was
in place.
In
March 2017, the Company issued 3,000 shares on the exercise of
employee stock options.
F-21
None.
We
maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic
reports to the SEC is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and
regulations, and that such information is accumulated and
communicated to our management, including our principal executive
officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. Our disclosure
controls and procedures are designed to provide a reasonable level
of assurance of reaching our desired disclosure control
objectives.
As of
the end of the period covered by this Annual Report on Form 10-K
for the year ended December 31, 2016, we carried out an
evaluation, under the supervision and with the participation of
management, including our principal executive officer and principal
financial officer, of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined under Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended). Based upon that evaluation, our principal executive
officer and principal financial officer concluded that our
disclosure controls and procedures are effective.
Management’s Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting and for the assessment of
the effectiveness of internal control over financial reporting. As
defined by the Securities and Exchange Commission, internal control
over financial reporting is a process designed by, or under the
supervision of our principal executive officer and principal
financial officer and implemented by our Board of Directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of our financial statements in accordance with U.S.
generally accepted accounting principles.
Our
internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect our
transactions and dispositions of our assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with U.S.
generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations
of our management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In
connection with the preparation of our annual financial statements,
management has undertaken an assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2016,
based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission, or the 2013 COSO Framework.
Management’s assessment included an evaluation of the design
of our internal control over financial reporting and testing of the
operational effectiveness of those controls.
18
Based
on this evaluation, management has concluded that our internal
control over financial reporting was effective as of December 31,
2016.
There
was no change in our internal control over financial reporting that
occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
None.
|
Name
|
Age
|
Position
|
|
|
|
|
|
Daniel
B. O’Brien
|
60
|
President,
Chief Executive Officer, Principal Financial and Accounting Officer
and a Director
|
|
John H.
Bientjes
|
64
|
Director
|
|
Robert
Helina
|
51
|
Director
|
|
Tom
Fyles
|
65
|
Director
|
|
Ben
Seaman
|
36
|
Director
|
|
David
Fynn
|
59
|
Director
|
|
|
|
|
Daniel
B. O’Brien has served as our President, Chief Executive
Officer and Principal Financial and Accounting Officer, as well as
a director since June 1998. He has been involved in the swimming
pool industry since 1990, when he founded our subsidiary, Flexible
Solutions Ltd. 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 director since February 2000. Since 1984, Mr.
Bientjes has served as 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 graduated in 1976 from Simon Fraser
University in Vancouver, British Columbia with a Bachelor of Arts
Degree in Economics and Commerce.
Robert
T. Helina has been a director since October 2011. Mr. Helina
has been involved in the financial services industry for over 25
years which has given him extensive knowledge in business,
economics and finance. His specially is in Corporate Finance
and Capital Markets. Mr. Helina holds a Bachelor of Arts
degree from Trinity Western University.
Thomas
M. Fyles has been a director since August 2012. Since 1979 Dr.
Fyles has been a chemistry professor at the University of Victoria
(Assistant Professor 1979-1984/Associate Professor 1984-1992/and
Professor with Tenure since 1992) Dr. Fyles received his Bachelor
of Science degree (with honors) from the University of Victoria in
1974 and his Ph.D. in chemistry from York University in 1977. Dr.
Fyles was a postdoctoral fellow with Prof. J.M. Lehn, Institut Le
Bel, Universite Louis Pasteur, Strasbourg, France, between
September 1977 and July 1979.
19
Ben
Seaman was elected as a director in 2016. Mr.
Seaman has been the CEO of Eartheasy.com
Sustainable Living Ltd since 2007, growing the company from $50K to
over $25M in annual revenue. His company has contributed over $1M
towards clean water projects in Kenya since 2013, and has been
recognized internationally by the Stockholm Challenge Award and the
Outdoor Industry Inspiration Award in 2016. Prior to that, he
worked in sales and investor relations at Flexible Solutions. Mr.
Seaman graduated from the University of Victoria with a Bachelor of
Science degree in 2004. He has significant experience in launching
new products, marketing, distribution and e-commerce in both the US
and Canada. He’s a strong believer in the triple bottom line
approach to business, giving consideration to social and
environmental issues in addition to financial
performance.
David
Fynn was elected as a director in 2016.
Mr. David Fynn is a Canadian Chartered
Professional Accountant and services individuals/companies in many
sectors including mining and commodities in his private
practice. David worked as a senior manager with KPMG in
Canada and Ernst & Young in the United Kingdom and Saudi
Arabia. Since 1996 he has been the principal of D.A. Fynn &
Associates Inc., an accounting firm.
Directors are
elected annually and hold office until the next annual meeting of
our stockholders and until their successors are elected and
qualified. All executive offices are chosen by the board of
directors and serve at the board’s discretion.
John
Bientjes, Thomas Fyles, Ben Seaman and David Fynn are independent
directors as that term is defined in section 803 of the listing
standards of the NYSE MKT.
Our
Audit Committee, consisting of John Bientjes, Ben Seaman and David
Fynn all of whom are independent directors and have strong
financial backgrounds, facilitates and maintains open
communications with our board of directors, senior management and
our independent auditors. Our Audit Committee also serves as an
independent and objective party which monitors our financial
reporting process and internal control system. In addition, our
Audit Committee reviews and appraises the efforts of our
independent auditors. Our Audit Committee meets periodically with
management and our independent auditors. John Bientjes and David
Fynn meet the SEC’s definition of an audit committee
financial expert. Each member of the Audit Committee is
“independent” as that term is defined in Section 803 of
the listing standards of the NYSE MKT.
Our
Compensation Committee, consisting of John Bientjes, Ben Seaman and
David Fynn, establishes salary, incentive and other forms of
compensation for our Chief Executive Officer and administers our
Stock Option Program. None of our officers participated in
deliberations of the compensation committee concerning executive
officer compensation. During the year ended December 31, 2015, no
director was also an executive officer of another entity, which had
one of our executive officers serving as a director of such entity
or as a member of the compensation committee of such
entity.
We have
adopted a Code of Ethics that applies to our Chief Executive
Officer, our Chief Financial Officer and our Principal Accounting
Officer, as well as our other senior management and financial
staff. Interested persons may obtain a copy of our Code of Ethics
from our website at www.flexiblesolutions.com.
20
We
believe our directors benefit us for the following
reasons:
|
Name
|
Reason
|
|
|
|
|
Daniel
B. O’Brien
|
Long
standing relationship with us.
|
|
John J.
Bientjes
|
Long
standing relationship with us.
|
|
Robert
Helina
|
Corporate finance
experience.
|
|
Dr.
Thomas Fyles
|
Scientific
expertise.
|
|
Ben
Seaman
|
Younger
generation businessman to increase our awareness of internet sales
and add value to our audit and compensation committees
|
|
David
Fynn
|
Experienced
accountant to join our audit and compensation
committees
|
Summary Compensation Table
The
following table shows in summary form the compensation earned by
(i) our Chief Executive Officer and (ii) by each other executive
officer who earned in excess of $100,000 during the two fiscal
years ended December 31, 2016.
|
|
Fiscal
Year
|
Salary
(1)
|
Bonus
(2)
|
Restric ted
Stock Awards
(3)
|
Options
Awards
(4)
|
All Other Annual
Compensation
(5)
|
Total
|
|
|
|
|
|
|
|
|
|
|
Daniel
B. O’Brien
|
2016
|
$
743,042
|
--
|
--
|
--
|
--
|
$
743,042
|
|
President,
Chief Executive Officer and Principal Financial and Accounting
Officer
|
2015
|
$
616,295
|
--
|
--
|
$
2,870
|
--
|
$
619,165
|
(1)
The dollar value of
base salary (cash and non-cash) earned.
(2)
The dollar value of
bonus (cash and non-cash) earned.
(3)
During the periods
covered by the table, the value of the shares of restricted stock
issued as compensation for services to the persons listed in the
table.
(4)
The value of all
stock options granted during the periods covered by the
table.
(5)
All other
compensation received that we could not properly report in any
other column of the table.
During
the year ended December 31, 2012, the Company determined that
Daniel B. O’Brien, the Company’s President and Chief
Executive Officer, was underpaid. Accordingly, the Company
increased Mr. O’Brien’s annual salary to twice that
which was paid to the highest paid employee of the Company. The
Company expects that Mr. O’Brien’s salary for the year
ending December 31, 2017 will again be twice the annual salary paid
to the Company’s highest paid employee, excluding Mr.
O’Brien.
21
Non-Qualified Stock Option Plan
In
August 2014 we adopted a Non-Qualified Stock Option Plan which
authorizes the issuance of up to 1,500,000 shares of our common
stock to persons that exercise options granted pursuant to the
Plan. Our employees, directors and officers, and consultants or
advisors are eligible to be granted options pursuant to the
Non-Qualified Plan.
The
Plan is administered by our Compensation Committee. The Committee
is vested with the authority to determine the number of shares
issuable upon the exercise of the options, the exercise price and
expiration date of the options, and when, and upon what conditions
options granted under the Plan will vest or otherwise be subject to
forfeiture and cancellation.
During
the fiscal year ended December 31, 2016 we issued 168,000 options
pursuant to the Non-Qualified Plan (2015 –
317,000).
Stock Option Program
Prior
to August 2014 we had a Stock Option Program which involved the
issuance of options, from time to time, to our employees,
directors, officers, consultants and advisors. Options were granted
by means of individual option agreements. Each option agreement
specified the shares issuable upon the exercise of the option, the
exercise price, the expiration date and other terms and conditions
of the option.
Options
granted had terms of between one and five years after the date of
grant and had exercise prices equal to the fair market value of a
share of our common stock on the date of grant.
As a
result of the adoption of our Non-Qualified Stock Option Plan in
August 2014, all future options have been granted pursuant to the
Non-Qualified Stock Option Plan.
Summary
The
following table shows the weighted average exercise price of the
outstanding options granted pursuant to our Non-Qualified Stock
Option Plan and our Stock Option Program as of December 31, 2016,
our most recently completed fiscal year.
|
Plan Category
|
Number of
Securities to be Issued Upon Exercise of Outstanding
Options,Warrants and Rights
|
Weighted-AverageExercise
Price ofOutstanding Options,Warrants and Rights
|
Number of
SecuritiesRemaining Available forFuture Issuance UnderEquity
CompensationPlans (Excluding Securities Reflected
in Column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Non-Qualified Stock
Option
Plan
|
450,000
|
$
1.09
|
1,015,000
|
|
|
|
|
|
|
Stock Option
Program
|
363,000
|
$
1.32
|
Not
Applicable
|
|
|
|
|
|
|
Total
|
813,000
|
$
1.19
|
1,015,000
|
22
Our
Non-Qualified Stock Option Plan and all grants made pursuant to our
Stock Option Program have been approved by our
shareholders.
As of
December 31, 2016 options to purchase 450,000 shares of our common
stock were outstanding under our Non-Qualified Stock Option Plan.
The exercise price of these options varies between $0.75 and $1.42
per share and expire at various dates between on December 31, 2019
and December 31, 2021.
As of
December 31, 2016 options to purchase 363,000 shares of our common
stock were outstanding under our Stock Option Program. The exercise
price of these options varies between $1.00 and $2.22 per share.
The options expire at various dates between January 1, 2017 and
December 31, 2018.
No
options were exercised by executives during the fiscal year ended
December 31, 2016.
Director Compensation
We
reimburse directors for any expenses incurred in attending board
meetings. We also compensate directors $5,000 annually for each
year that they serve.
Our
directors received the following compensation in 2016:
|
Name
|
Paid in
Cash
|
Stock Awards
(1)
|
Option Awards
(2)
|
|
|
|
|
|
|
John H.
Bientjes
|
$
5,000
|
--
|
--
|
|
Dale
Friend
|
$
5,000
|
--
|
--
|
|
Robert
Helina
|
$
5,000
|
--
|
--
|
|
Tom
Fyles
|
$
5,000
|
--
|
--
|
(1)
The fair value of
stock issued for services computed in accordance with ASC 718 on
the date of grant.
(2)
The fair value of
options granted computed in accordance with ASC 718 on the date of
grant.
The
terms of outstanding options granted to our directors are shown
below:
|
Name
|
|
Option
Price
|
No. of
Options
|
Expiration
Date
|
|
|
|
|
|
|
|
John H.
Bientjes
|
|
$
1.21
|
5,000
|
December 31,
2017
|
|
John H.
Bientjes
|
|
$
1.00
|
5,000
|
December 31,
2018
|
|
John H.
Bientjes
|
|
$
1.05
|
5,000
|
December 31,
2019
|
|
Robert
Helina
|
|
$
1.21
|
5,000
|
December 31,
2017
|
|
Robert
Helina
|
|
$
1.00
|
5,000
|
December 31,
2018
|
|
Robert
Helina
|
|
$
1.05
|
5,000
|
December 31,
2019
|
|
Thomas
Fyles
|
|
$
1.21
|
5,000
|
December 31,
2017
|
|
Thomas
Fyles
|
|
$
1.00
|
5,000
|
December 31,
2018
|
|
Thomas
Fyles
|
|
$
1.05
|
5,000
|
December 31,
2019
|
Daniel
B. O’Brien was not compensated for serving as directors
during 2016.
23
Item
12.
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
following table shows the beneficial ownership of our common stock
as of March 30, 2016 by (i) each stockholder who is known by us to
own beneficially more than five percent of our outstanding common
stock, (ii) each of our officers and directors, and (iii) by all of
our executive officers and directors as a group.
|
|
Shares
(1)
|
Percentage
Ownership
|
|
|
|
|
|
Daniel B.
O’Brien
|
4,521,900
|
39.5
%
|
|
2614 Queenswood
Dr.
|
|
|
|
Victoria,
BC
|
|
|
|
Canada V8N
1X5
|
|
|
|
|
|
|
|
John
Bientjes
|
15,000
|
0.1
%
|
|
#1-230 West 13th
Street North
|
|
|
|
Vancouver,
B.C.
|
|
|
|
Canada V7M
1N7
|
|
|
|
|
|
|
|
Robert
Helina
|
15,000
|
0.1
%
|
|
933 Seymour Street,
Suite 1101
|
|
|
|
Vancouver, BC V6B
6L6
|
|
|
|
Canada
|
|
|
|
|
|
|
|
Dr. Thomas
Fyles
|
15,000
|
0.1
%
|
|
Box
3065
|
|
|
|
Victoria,
BC
|
|
|
|
Canada V8W
3V6
|
|
|
|
|
|
|
|
Ben
Seaman
|
0
|
0
%
|
|
Unit 605 55 E.
Cordova St.
|
|
|
|
Vancouver
BC
|
|
|
|
Canada V6A
0A5
|
|
|
|
|
|
|
|
David
Fynn
|
0
|
0
%
|
|
202-2526 Yale
Court
|
|
|
|
Abbotsford,
BC
|
|
|
|
Canada, V2S
8G9
|
|
|
|
|
|
|
|
All officers and
directors
|
|
|
|
as a group (6
persons)
|
4,566,900
|
39.8
%
|
(1)
Includes shares
which may be acquired on the exercise of the stock options, all of
which were exercisable as of March 30, 2017, listed
below.
|
Name
|
|
No. of
Options
|
Exercise
Price
|
Expiration
Date
|
|
|
|
|
|
|
|
John
Bientjes
|
|
5,000
|
$
1.21
|
December 31,
2017
|
|
|
|
5,000
|
$
1.00
|
December 31,
2018
|
|
|
|
5,000
|
$
1.05
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Helina
|
|
5,000
|
$
1.21
|
December 31,
2017
|
|
|
|
5,000
|
$
1.00
|
December 31,
2018
|
|
|
|
5,000
|
$
1.05
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Thomas
Fyles
|
|
5,000
|
$
1.21
|
December 31,
2017
|
|
|
|
5,000
|
$
1.00
|
December 31,
2018
|
|
|
|
5,000
|
$
1.05
|
December 31,
2019
|
24
Our
former director, Dr. Robert N. O’Brien, developed
substantially all of our products relating to our energy and water
conservation products and assigned the patent rights to these
products to us. We had no agreement with Dr. O’Brien
requiring him to conduct any research and development activities
for us. Dr. O’Brien did not receive any salary or royalties
from us for any research and development activities. Dr.
O’Brien passed away on March 23, 2015 and was the father of
our Chief Executive Officer, Daniel B. O’Brien.
MNP,
LLP, Chartered Accountants, examined our financial statements for
the years ended December 31, 2016 and 2015.
Audit Fees
MNP was
paid $64,553 and $58,970 for the fiscal years ended December 31,
2016 and 2015, respectively, for professional services rendered in
the audit of our annual financial statements and for the reviews of
the financial statements included in our quarterly reports on Form
10-Q during these fiscal years.
Tax Fees
MNP was
paid $5,663 and $0 for the fiscal years ended December 31, 2016 and
2015, respectively, for professional services rendered for the
preparation and filing of our income tax returns for the fiscal
years ended December 31, 2015 and 2014.
All Other Fees
MNP was
not paid any other fees for professional services during the fiscal
years ended December 31, 2016 and 2015.
Audit Committee Pre-Approval Policies
Rules
adopted by the SEC in order to implement requirements of the
Sarbanes-Oxley Act of 2002 require public company audit committees
to pre-approve audit and non-audit services. Our Audit Committee
has adopted a policy for the pre-approval of all audit,
audit-related and tax services, and permissible non-audit services
provided by our independent auditors. The policy provides for an
annual review of an audit plan and budget for the upcoming annual
financial statement audit, and entering into an engagement letter
with the independent auditors covering the scope of the audit and
the fees to be paid. Our Audit Committee may also from time-to-time
review and approve in advance other specific audit, audit-related,
tax or permissible non-audit services. In addition, our Audit
Committee may from time-to-time give pre-approval for audit
services, audit-related services, tax services or other non-audit
services by setting forth such pre-approved services on a schedule
containing a description of, budget for, and time period for such
pre-approved services. The policies require our Audit Committee to
be informed of each service and the policies do not include any
delegation of our Audit Committee’s responsibilities to
management. Our Audit Committee may delegate pre-approval authority
to one or more of its members. The member to whom such authority is
delegated will report any pre-approval decisions to our Audit
Committee at its next scheduled meeting.
25
During
the year ended December 31, 2016 our Audit Committee approved all
of the fees paid to MNP. Our Audit Committee has determined that
the rendering of all non-audit services by MNP is compatible with
maintaining MNP’s independence. During the year ended
December 31, 2016, none of the total hours expended on our
financial audit by MNP were provided by persons other than
MNP’s full-time permanent employees.
|
Description
|
|
|
|
|
|
3.1
|
Articles
of Incorporation of the Registrant. (1)
|
|
3.2
|
Bylaws
of the Registrant. (1)
|
|
21.1
|
Subsidiaries.
(2)
|
|
Consent
of Independent Accountants.
|
|
|
Certification
of Principal Executive Officer Pursuant to §302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of Principal Financial Officer Pursuant to §302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of Principal Executive and Financial Officer Pursuant to 18 U.S.C.
§1350 and §906 of the Sarbanes-Oxley Act of
2002.
|
(1)
Previously filed as
an exhibit to our Registration Statement on Form 10-SB filed with
the Commission on February 22, 2000, and incorporated herein by
reference.
(2)
Previously filed as
an exhibit to our Registration Statement on Form SB-2 filed with
the Commission on January 22, 2003, and incorporated herein by
reference.
26
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.
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March 31, 2017
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Flexible Solutions International, Inc.
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By:
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/s/
Daniel
B. O’Brien
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Name: |
Daniel B.
O’Brien
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Title: |
President and Chief
Executive Officer
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In
accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
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Signature
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Title
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Date
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/s/ Daniel B. O’Brien
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President,
Principal Executive Officer, Principal Financial and Accounting
Officer and a Director
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March
31, 2017
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| Daniel B. O’Brien |
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/s/
John H. Bientjes
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Director
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March
31, 2017
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| John H. Bientjes |
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/s/
Robert T.
Helina
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Director
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March
31, 2017
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| Robert T. Helina |
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/s/
Thomas
Fyles
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Director
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March
31, 2017
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| Thomas Fyles |
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/s/ Ben
Seaman
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Director
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March
31, 2017
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Ben
Seaman
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/s/
David
Fynn
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Director
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March
31, 2017
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David
Fynn
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27
TABLE OF CONTENTS
Part IItem 1. Description Of BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosurePart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchase Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationItem Increase (i) Or Decrease (d) ReasonItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, Director IndependenceItem 14. Principal Accountant Fees and ServicesItem 15. Exhibits, Financial Statement Schedules