UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(AMENDMENT NO. 2)
(Mark one)
|X| Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003.
|_| Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to .
--------------- --------------
Commission File Number 000-29649
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FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 91-1922863
(State of Incorporation) (IRS Employer Identification No.)
615 DISCOVERY STREET
VICTORIA, BRITISH COLUMBIA, CANADA V8T 5G4
(Address of Principal Executive Offices) (Zip Code)
(250) 477-9969
(Issuer's Telephone Number, Including Area Code)
---------------------
NONE
(Securities registered pursuant to Section 12(b) of the Exchange Act)
COMMON STOCK, $0.001 PAR VALUE
(Securities registered pursuant to Section 12(g) of the Exchange Act)
---------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State issuer's revenues for its most recent fiscal year: $2,321,120.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such common
equity, as of a specified date within the past 60 days. As of March 19, 2004,
the aggregate market value of the Company's common stock held by non-affiliates
was approximately $27,225,440 based on the closing price for shares of the
registrant's common stock on the American Stock Exchange for that date.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of March 19, 2004, there
were 11,794,916 shares of the Company's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference.
Transitional Small Business Disclosure Format (check one): Yes |_| No
|X|
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-KSB/A
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
PAGE
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PART I
Item 1. Description of Business. 1
Item 2. Description of Property. 6
Item 3. Legal Proceedings. 6
Item 4. Submission of Matters to a Vote of Security Holders. 7
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity
Securities. 7
Item 6. Management's Discussion and Analysis or Plan of Operation. 9
Item 7. Financial Statements. 17
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 18
Item 8A. Controls and Procedures. 18
Item 8B. Other Information. 19
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the
Exchange Act. 19
Item 10. Executive Compensation. 20
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 22
Item 12. Certain Relationships and Related Transactions. 23
Item 13. Exhibits. 24
Item 14. Principal Accountant Fees and Services. 24
SIGNATURES 26
i
EXPLANATORY NOTE
----------------
Flexible Solutions International, Inc. ("we," "us," and "our") is
filing this Annual Report on Form 10-KSB/A to amend and restate in its entirety
its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003,
which was previously filed with the Securities and Exchange Commission on March
29, 2004.
In October 2005, while completing a registration statement for
securities issued in the second quarter of 2005, we determined that certain
disclosures made in connection with our stock-based compensation expense
required adjustment. As such, on October 5, 2005, upon the recommendation of our
management, our board of directors and its audit committee, and our independent
accountants, we determined to restate our consolidated financial statements for
each of the periods ended since September 30, 2002, including each of the years
ended December 31, 2002 through 2004, and for both of the quarters in the six
months ended June 30, 2005 (the "Restated Periods").
In accordance with this determination to restate the Restated Periods,
we revised the disclosures for stock-based compensation expense as required
under Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services; EITF No. 00-18, Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees; and EITF No. 01-9, Accounting for Consideration Given by a
Vendor to a Customer. In particular, we adjusted the stock-based compensation
expense in our financial statements and notes thereto recorded in connection
with our grant of an option to purchase 2,000,000 shares of our common stock in
September 2002 pursuant to the terms of a product distribution agreement.
Additional information on this restatement and its effects on our financial
condition and results of operations can be found in our Notes to Consolidated
Financial Statements contained herein.
This Form 10-KSB/A does not reflect events occurring after the filing
of our Form 10-KSB on March 29, 2004 or modify any of the disclosures contained
therein, or in the accompanying financial statements and notes thereto, in any
way other than by the amendments identified above and as set forth herein.
Notwithstanding the above, and for the convenience of the reader, this entire
report has been amended as a result of, and to reflect, the restatement, as well
as to revise the disclosure of our description of business, legal proceedings,
management's discussion and analysis, as well as our risk factors, change in
accountants, unregistered sales of equity securities, directors and executive
officers, and principal accountant fees and services, as well as to generally
reflect the current disclosure requirements of Form 10-KSB.
This Form 10-KSB/A should be read in conjunction with our periodic
filings made with the Securities and Exchange Commission subsequent to the date
of their original filings, including any amendments to those filings. In
addition, in accordance with Rule 12b-15 under the Securities Exchange Act of
1934, as amended, and certain other rules, this Form 10-KSB/A includes an
updated Auditor's Report and Consent of Independent Registered Public Accounting
Firm and updated certifications from our Chief Executive Officer and Chief
Financial Officer.
We are presently unaware of any evidence that the restatements
described above are due to any material noncompliance by us, as a result of
misconduct, with any financial reporting requirement under the federal
securities laws. Our audit committee of the board of directors is working with
our management and our accountants to assure that we are taking the appropriate
approach to resolving the issues related to the restatements, as well as any
further issues that may be identified during the course of its review. The
filing of this Form 10-KSB/A shall not be deemed an admission that the original
filing, when made, included any untrue statement of a material fact or omitted
to state a material fact necessary to make a statement not misleading.
ii
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB/A for the year ended December 31,
2003 ("Annual Report"), including the Notes to Unaudited Consolidated Financial
Statements, contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include, without limitation, those statements relating to development of new
products, our financial condition, our ability to increase distribution of our
products, integration of businesses we acquire, and disposition of any of our
current business. Forward-looking statements can be identified by the use of
forward-looking terminology, such as "may," "will," "should," "expect,"
"anticipate," "estimate," "continue," "plans," "intends," or other similar
terminology. These forward-looking statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual outcomes and results may differ materially from
what is anticipated or forecasted in these forward-looking statements due to
numerous factors, including, but not limited to, our ability to generate or
obtain sufficient working capital to continue our operations, changes in demand
for our products, the timing of customer orders and deliveries, and the impact
of competitive products and pricing. In addition, such statements could be
affected by general industry and market conditions and growth rates, and general
domestic and international economic conditions.
Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, such statements
involve risks and uncertainties and no assurance can be given that the actual
results will be consistent with these forward-looking statements. Except as
otherwise required by Federal securities laws, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events, changed circumstances or any other reason, after
the date of this Annual Report.
iii
PART I
Item 1. Description of Business.
OUR COMPANY
Flexible Solutions International, Inc. ("we," "us," and "our")
develops, manufactures and markets specialty chemicals which slow down the
evaporation of water. Our initial product, HEAT$AVR(R), is marketed for use in
swimming pools and spas where its use, by slowing the evaporation of water,
allows the water to retain a higher temperature for a longer period of time and
thereby reduces the energy required to maintain the desired temperature of the
water in the pool. Our newest product, WATER$AVR(R), is marketed for water
conservation in irrigation canals, aquaculture, and reservoirs where its use
slows down water loss due to evaporation. We also make and sell dispensers which
automate the deployment of our chemical products.
We were incorporated as Flexible Solutions, Ltd. (referred to
hereinafter as "Flexible Ltd."), a British Columbia corporation, on January 26,
1991. On May 12, 1998, we merged Flexible Ltd. with and into Flexible Solutions
International, Inc., a Nevada corporation, and, in exchange for all of the
outstanding shares of Flexible Ltd., we issued 7,000,000 shares of common stock,
which represented all of our then-issued and then-outstanding shares, to the
former shareholders of Flexible Ltd. Flexible Ltd. is now our wholly-owned
subsidiary. At the time of our merger with Flexible Ltd., we had no other
business and were incorporated solely in order to acquire Flexible Ltd. The
merger facilitated the establishment of a public trading market for our common
stock. Trading in our common stock commenced on October 12, 1999, through the
OTC Bulletin Board under the trading symbol "FXSO". Since November 2002, our
common stock has traded on the American Stock Exchange under the trading symbol
"FSI". Since the merger, we have been expanding our distribution network and
working to complete the development of our WATER$AVR(R) product.
OUR SUBSIDIARIES
We are the parent holding company of Flexible Ltd. and WaterSavr Global
Solutions Inc. (hereinafter referred to as "WaterSavr").
Flexible Solutions, Ltd.
Flexible Ltd., a British Columbia corporation, was organized to develop
and market swimming pool chemical products designed to reduce heat loss.
HEAT$AVR(R) is Flexible Ltd.'s principal product. For further information on
this product, see "Our Products" below.
WaterSavr Global Solutions Inc.
In 2002, we established WaterSavr Global Solutions, Inc. to concentrate
on the marketing of our WATER$AVR(R) product. WATER$AVR(R) is a patented powder
that, when deployed onto a water surface of any size, will significantly reduce
evaporation. For further information on our WATER$AVR(R) products, see "Our
Products" below.
1
OUR PRODUCTS
HEAT$AVR
Our principal product consists of our HEAT$AVR(R) branded chemical
solutions. HEAT$AVR(R) is a chemical product for use in swimming pools and
personal spas that forms a thin, transparent layer on the water's surface that
reduces water evaporation and heat loss. We market the HEAT$AVR(R) product as a
cost-effective and convenient way to save on the cost of energy required to heat
pools and spas. Our studies indicate that approximately 70% of the energy lost
from a swimming pool occurs through water evaporation. By using our HEAT$AVR(R)
product, we can minimize that heat loss and save our customers money on their
pool and spa energy needs. In addition, the product is not visible on the pool
surface and it cannot be seen, felt or tasted by swimmers. After a swimmer stops
disturbing the pool water, the product reforms to a complete layer on the pool
surface.
We completed the development of our HEAT$AVR(R) product and introduced
it to the commercial marketplace in 1998, achieving initial sales of $84,252
that year. Since that time, we have expanded our marketing of the HEAT$AVR(R)
product to include the residential marketplace. We found that by designing the
HEAT$AVR(R) product to be "residential-friendly," we could increase sales.
We market HEAT$AVR(R) to the residential marketplace primarily in the
form of our "Tropical Fish" dispenser. Each Tropical Fish dispenser is made of
molded plastic in the form of a ten-inch long colorful Tropical Fish that is
filled with enough HEAT$AVR(R) solution to cover the surface of a 400
square-foot swimming pool for about one month. The Tropical Fish is deployed by
snipping the fin and tossing the fish into the pool where it submerges to the
bottom of the pool. Water pressure causes the HEAT$AVR(R) liquid inside to
escape into the water where it rises to the surface and forms an invisible layer
on the surface of the water.
In outdoor swimming pools, our HEAT$AVR(R) product can provide savings
on pool heating costs and provides convenience of use when compared to pool
blankets. Pool blankets are plastic covers, which are cut to the size and shape
of the surface of the pool or spa. They float on the surface and perform the
same function as our HEAT$AVR(R) product: reducing energy cost by inhibiting
water evaporation. Pool personnel often find it inconvenient to use conventional
pool blankets because a pool blanket must be removed and stored prior to
entering the pool and provides no energy savings when not on the pool.
Conversely, our HEAT$AVR(R) product eliminates the necessity of installing,
removing and storing the blanket and works 24 hours a day. We believe that the
ease of use provided by HEAT$AVR(R) results in more consistent pool and spa
usage. In addition, the use of HEAT$AVR(R) in an indoor pool results in even
greater energy savings. Indoor pool locations use energy not only to heat the
pool water, but also to air condition the pool environment. By slowing the
transfer of heat and water vapor from the pool to the atmosphere of the pool
enclosure, less energy is required to maintain a pool at the desired temperature
and there is a reduced load on the air-conditioning system because less is heat
transferred from the pool water to the surrounding air and less water vapor will
have to be removed from the air to maintain the required comfort level.
Marketing and Sales
We market our HEAT$AVR(R) product to both residential and commercial
markets, consisting of individual homeowners with swimming pools and personal
spas and commercial consumers consisting of operators of swimming pools and
personal spas located in hotels, motels, schools, and municipal and private
recreational facilities.
2
Our HEAT$AVR(R) and Tropical Fish products are sold in Canada and the
United States by our exclusive distributor, Sun Solar Energy Technologies ("Sun
Solar"), and in Australia by Hydro-Flexible Solutions Pty. We also sell
HEAT$AVR(R) directly into the United States to both wholesale and retail
accounts. We have approximately 259 active customers. In the year ended December
31, 2003, Sun Solar represented approximately 73% of our total sales.
We also have nonexclusive distributors in Canada and the United States
for HEAT$AVR(R) (without the Tropical Fish) and exclusive distributors in
Australia, Korea and Great Britain. We support our distributors and seek
additional market opportunities by attending the major pool industry trade shows
in the United States yearly. We advertise in trade magazines and directly to
buyer associations. We also maintain an internet presence with a website
containing information about our products. In addition, we publish a semi-annual
newsletter that is distributed by us to approximately 5,000 customers and
potential customers.
Our Agreement With Sun Solar Energy Technologies
In February 1998, we entered into a distributorship agreement with Sun
Solar, which grants Sun Solar an exclusive distributorship for our Tropical Fish
product in the United States and Canada. In order to maintain the exclusivity of
such distribution, Sun Solar must order and pay for at least 860,000 units in
the year ending February 29, 2004. Such exclusive agreement terminates on
February 29, 2004. We have agreed to give Sun Solar a right of first refusal in
the event we propose to sell Flexible Ltd. If such subsidiary is sold we must
require the purchaser to fulfill the exclusive distribution contract with Sun
Solar and Sun Solar can veto the proposed sale to an entity which it reasonably
believes may have an intent to discontinue manufacture of our Tropical Fish
product. The agreement also provides that Sun Solar will sell its veto for a
reasonable premium arrived at a price mutually agreed upon with a mediator. The
agreement also grants Flexible the right of first refusal if Sun Solar proposes
to sell its exclusive distributorship. If such distributorship is sold, Sun
Solar's sales performance minimums are required to be binding on the new owner.
The agreement also provides that if such exclusive distribution rights are sold
by Sun Solar, the buyer must advance to us $1.00 for each Tropical Fish which
must be bought in the year of sale to maintain the distribution agreement
exclusivity, which payment will be credited to future orders of Tropical Fish at
the rate of $1.00 per fish as the orders are made. In connection with this
agreement, we have also agreed to offer distribution rights on new swimming pool
products to Sun Solar in the United States and Canada if it is in compliance
with its sales performance requirements. There can be no assurance that our
exclusive distributorship with Sun Solar will be renewed past its current
expiration on February 29, 2004. We grant Sun Solar 45 days to pay for product
ordered after shipment.
WATER$AVR(R)
We introduced our WATER$AVR(R) product in June 2002. This product
utilizes our core technology to reduce water evaporation. We market it as a
water conservation product for use where water is standing or gently flowing and
the need for water conservation can justify the cost of purchase and deployment
of the product. We believe that our WATER$AVR(R) product may find a market for
use in the following markets: reservoirs, potable water storage, aqueducts and
canals, agricultural irrigation, flood water crops, lawn and turf care, potted
and bedding plants, stock watering ponds, and mining.
WATER$AVR(R) is sold in granulated form and can be provided in shaker
containers holding 3/4 lbs. or in 50 lbs. weatherproof bags. WATER$AVR(R) can be
applied in various ways from hand dispersal to fully automated scheduled
metering, and we also offer an automatic dispenser for WATER$AVR(R) to automate
deployment of the product.
3
We anticipate our initial market for WATER$AVR(R) will be in India,
Spain, Australia and the United States. We have provided quantities of the
product for testing in these countries and, if successful, we anticipate that
substantial orders may be received. We also anticipate marketing WATER$AVR(R) to
both developed and drought stricken countries to address water conservation
concerns. In this regard, we are seeking to establish strategic relationships
with companies in the water processing industry who have marketing and
manufacturing operations in countries with water conservation concerns. We have
two full-time employees and two other employees more than fifty percent assigned
to establishing sales channels throughout the world for WATER$AVR(R).
In September 2002, we granted Ondeo Nalco Company ("Ondeo") the
following distribution rights:
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Exclusive Market Countries
---------------- ---------
Market Canada and USA
Municipal mineral and mining All, except India, Pakistan,
Bangladesh, Sri Lanka, Nepal, Bhutan,
Mauritania, Malaysia and Singapore.
Non-Exclusive Market (1) Countries
------------------------ ---------
All except agriculture and large retail All, except India, Pakistan,
Bangladesh, Sri Lanka, Nepal, Bhutan,
Mauritania, Malaysia and Singapore.
------------------------------------------ -------------------------------------
--------------------
(1) The exclusive markets granted to Ondeo convert to non-exclusive if Ondeo is
unable to meet the sales thresholds.
Upon entering into the distribution agreement with Ondeo, we also
granted Ondeo an option to purchase 1,000,000 shares of our common stock at
$4.25 per share, which vests immediately, and an additional option to purchase
1,000,000 shares at $5.50 per share, which option vests upon the satisfaction of
certain sales targets.
Ondeo was successful in satisfying the sales thresholds until September
30, 2003, at which time it missed a milestone payment. As a result, the
exclusive rights reverted to non-exclusive and the option grants were cancelled
and accounted for as cancelled in the year 2003.
Ondeo continues to distribute WATER$AVR(R) on a non-exclusive basis and
to manufacture WATER$AVR(R) in accordance with our manufacturing agreement that
is separate from distribution.
COMPETITION
HEAT$AVR(R)
We are aware of only one other company that manufactures a chemical
evaporation reduction product that competes with our HEAT$AVR(R) product. This
other product has had limited sales to date and does not have the convenience
factor of our Tropical Fish dispenser.
As mentioned above, HEAT$AVR(R) also competes against plastic pool
blanket products. We compete against pool blankets on the basis of convenience
of use of HEAT$AVR(R) versus the inconvenience of deploying and storing pool
blankets. Pool owners and operators may also decide that evaporation control
products are not needed for their pools.
4
WATER$AVR(R)
Aegis Chemical Industries Ltd. of India directly competes with our
WATER$AVR(R) product. We believe our WATER$AVR(R) product is superior for the
following reasons:
o Easier Application. WATER$AVR(R) may be deployed directly to the
water surface by hand or machine. Our competition requires
premixing to dilute the product to usable strength, followed by
extensive pumping.
o Cost. In order to achieve comparable water savings levels, other
products would cost more than the WATER$AVR(R) product.
Water conservation is an important priority throughout the world, and
numerous researchers in industry and academia are seeking to develop solutions
that may compete with, or be superior to our products. Climate changes that
relieve water shortage conditions or a technological breakthrough in water
desalination could reduce the need for water conservation products.
Specialty chemicals are a highly competitive industry with many
multi-national firms with large research and development operations. There are a
number of firms which develop and market chemical products for the pool and spa
industry. Therefore, we can expect competition to arise at any time.
MANUFACTURING
Our HEAT$AVR(R) products and dispensers are made from chemicals,
plastic and other materials and parts that are readily available from multiple
suppliers. We have never experienced any shortage in the availability of raw
materials and parts for our products and we do not have any long term supply
contracts for any such items. We manufacture our products in an approximately
11,000 sq. ft. plant in Calgary, Alberta, Canada.
Our WATER$AVR(R) products are manufactured under contract with Ondeo
under a five-year agreement effective as of April 2002, with a five-year
extension available. We are not required to purchase any minimum quantity of
such product.
GOVERNMENTAL REGULATIONS
HEAT$AVR(R)
Chemical products for use in swimming pools are covered by a variety of
governmental regulations in the countries where we sell our products. These
regulations cover such matters as packaging, labeling, and product safety. We
believe our products are in compliance with such regulations.
WATER$AVR(R)
Our WATER$AVR(R) product is subject to additional regulation in most
countries, particularly for agricultural and drinking water uses. As we continue
to develop this product, and prior to its full-scale commercial roll-out, we
will address these issues on a country-by-country basis. We do not anticipate
that governmental regulations will be an impediment to marketing our
WATER$AVR(R) product because the ingredients have historically been used in
agriculture for many years for other purposes. Nevertheless, we will need to
obtain approval to sell WATER$AVR(R) in the United States for agricultural or
drinking water users. To date, we have already applied for and received National
Sanitation Foundation approval for drinking water in the United States.
5
PROPRIETARY RIGHTS
Our success and ability to compete is dependent, in part, upon our
proprietary technology. We rely on a combination of patent, copyright and trade
secret laws and nondisclosure agreements to protect our proprietary technology.
We currently hold three United States patents and are seeking to extend these
patents to certain other countries. We also have seven United States patent
applications pending. There can be no assurance that our pending 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
During the last two fiscal years, we have spent approximately $70,138
on research and development activities. This work relates primarily to the
development of our water and energy conservation products.
EMPLOYEES
As of December 31, 2003, we employed 20 persons, including one officer,
nine sales and customer support employees, and eleven employees in our
manufacturing department. None of our employees is represented by a labor union
and we have experienced no work stoppages to date.
Item 2. Description of Property.
Our Chief Executive Officer provides use of space in his residence to
conduct his administrative duties and we do not reimburse him for such use. We
rent 1,400 sq. ft. of sales and marketing space in Victoria, British Columbia at
a cost of $1,050 a month. This lease is effective through October 2006. We lease
an 11,000 sq. ft. building in Calgary, Alberta at a cost of $3,150 per month for
the manufacture of our products. This lease is effective through September 2006.
Subsequent to year end, we leased 1,900 sq. ft. in Richmond, British Columbia as
additional space for sales and customer support at a cost of $1,640 per month.
This lease is effective through January 2007. We also lease an additional 2,000
sq. ft. of research space in Victoria, British Columbia at a cost of $1,171 per
month. This lease is effective through October 2005.
Item 3. Legal Proceedings.
On May 1, 2003, we filed a lawsuit in the Supreme Court of British
Columbia, Canada, against John Wells and Equity Trust, S.A. seeking return of
100,000 shares of our common stock and repayment of a $25,000 loan, which were
provided to defendants for investment banking services consisting of securing a
$5 million loan and a $25 million stock offering. Such services were not
performed and in the proceeding, we seek return of such shares after defendant's
failure to both return the shares voluntarily and repay the note. On May 7,
2003, we obtained an injunction freezing the transfer of the shares. The
proceeding is still in a discovery phase. On the date of issuance, the share
transaction was recorded as shares issued for services at fair market value, a
value of $0.80 per share. No amounts have been recorded as receivable in the
Company's consolidated financial statements as the outcome of this claim is not
yet determinable.
On November 13, 2003, an ex-employee, Patrick Grant, filed a lawsuit in
the Circuit Court of Cook County, Illinois against us, WaterSavr, and our Chief
Executive Officer, Daniel B. O'Brien. The
6
plaintiff claims damages for breach of contract, tortious interference with an
agreement and various wrongful discharge claims. The plaintiff seeks monetary
damages in excess of $1,020,000 for the breach of contract and tortious
interference claims and unspecified compensatory and punitive damages in the
wrongful discharge claims. We consider the case to be without merit and are
planning to dispute the matter vigorously. In addition, we intend to file
counterclaims against the plaintiff for failure to repay financial obligations
owed to us of almost $40,000, as well as unspecified damages arising out of
plaintiff's disclosure of confidential information to a client during his
employment at WaterSavr. No amounts have been recorded as receivable and no
accrual has been made for any loss in our consolidated financial statements as
the outcome of the claim filed by Mr. Grant is not yet determinable.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of our shareholders in the
quarter ended December 31, 2003.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock began trading on the American Stock Exchange under the
symbol FSI on November 19, 2002. Prior to that, our stock traded on the
over-the-counter market and was quoted on the NASD Electronic Bulletin Board.
The following is the range of high and low closing sales or bid prices
for our common stock for the periods indicated:
--------------------------------------------------------------------------------
HIGH LOW
------- -------
YEAR ENDED DECEMBER 31, 2003 First Quarter $3.40 $2.25
---------------------------- Second Quarter 3.40 2.39
Third Quarter 3.60 2.90
Fourth Quarter 5.35 3.00
YEAR ENDED DECEMBER 31, 2002 First Quarter 3.57 1.30
---------------------------- Second Quarter 4.10 2.50
Third Quarter 3.85 1.95
Fourth Quarter 3.85 2.77
--------------------------------------------------------------------------------
Prices since November 19, 2002 represent high and low prices on the
American Stock Exchange. Prices prior to November 19, 2002 represent
inter-dealer quotations which do not include retail mark-ups, markdowns, or
commissions, and do not necessarily represent actual transactions. As of
December 31, 2003, we had 23 record holders of our common stock. Such shares are
owned by an estimated 582 beneficial owners.
Our common stock also trades on the Frankfurt stock market under the
symbol FXT.
7
DIVIDEND POLICY
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 the board of directors in light of conditions then existing,
including our earnings, financial condition, capital requirements and other
factors.
EQUITY COMPENSATION PLAN INFORMATION
The following table contains certain information relating to
outstanding options to purchase the Company's common stock granted pursuant to
individual compensation arrangements as of December 31, 2003, the Company's most
recently completed fiscal year.
------------------------------- --------------------------- ------------------------- --------------------------------------
NO. OF SECURITIES REMAINING
NO. OF SECURITIES TO BE WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE OF EXERCISE PRICE OF UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
--------------------------- ------------------------- --------------------------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders (1) -- -- --
Equity compensation
plans not approved by
security holders (2) 1,699,000 $2.84 --
------------------------------- --------------------------- ------------------------- --------------------------------------
TOTAL 1,699,000 $2.84 --
------------------------------- --------------------------- ------------------------- --------------------------------------
-------------------------
(1) We have not granted any shares to purchase our common stock pursuant to
equity compensation plans that have been approved by our shareholders.
(2) (a) Consists of non-qualified options to purchase our common stock that have
been granted pursuant to individual compensation arrangements and not pursuant
to any equity compensation plan. All of the grants made during our fiscal year
are submitted for shareholder approval at such fiscal year's annual shareholder
meeting and, to date, our shareholders have approved all of the grants.
(b) If the grantee is an employee, and if he or she ceases to be employed by
us, the grantee may, during the 30-day period following termination of
employment, exercise the option to the extent that the option was exercisable on
the date of termination. In the case of death or disability, the grantee (or his
or her administrator) has twelve months from the date of death or disability to
exercise the option to the extent that the option was exercisable on the date of
death or disability.
(c) The options are subject to adjustment by reason of a recapitalization,
reclassification, stock split, combination of shares, dividend or other
distribution payable in capital stock. Upon a merger, liquidation, dissolution
or other consolidation, we shall provide each grantee with one-months' prior
written notice informing the grantee that he or she may exercise the option in
full (to the extent it has not been previously exercised) within such one-month
period. Following such date, the options shall be terminated.
(d) The options may not be transferred, assigned, pledged or hypothecated in
any way (except by will or the laws of descent) and are not subject to
execution, attachment or similar process.
(e) All of the options granted have terms of between one and six years from
and after the date of grant and reflect exercise prices equal to the fair market
value of a share of our common stock as determined by our board of directors on
the date of grant thereof.
8
Item 6. Management's Discussion and Analysis or Plan of Operation
Our operating activities are related primarily to manufacturing and
marketing our swimming pool chemical products. In June 2002, we introduced a
fresh water evaporation control chemical product called WATER$AVR(R), which has
recorded sales of just over $500,000 in 2003. This figure represents
approximately 22% of our sales and 20% of our total revenue.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Securities and Exchange Commission ("SEC") has recently issued
Financial Reporting Release ("FRR") No. 60, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, suggesting companies provide
additional disclosure and commentary on those accounting policies considered
most critical. A critical accounting policy is one that is both important to the
portrayal of our financial condition and results, and requires management's most
difficult, subjective or complex judgments. Typically, the circumstances that
make these judgments difficult, subjective and/or complex have to do with the
need to make estimates about the effect of matters that are inherently
uncertain. We believe the accounting policies below represent our critical
accounting policies as contemplated by FRR No 60 (see Note 3 of the Notes to
Consolidated Financial Statements for a detailed discussion on the application
of these and other accounting policies):
Allowances for Product Returns. We grant certain of our customers the
right to return product which they are unable to sell. Upon sale, we evaluate
the need to record a provision for product returns based on our historical
experience, economic trends and changes in customer demand.
Allowances for Doubtful Accounts Receivable. We evaluate our accounts
receivable to determine if they will ultimately be collected. This evaluation
includes significant judgments and estimates, including an analysis of
receivables aging and a review of large accounts. If, for example, the financial
condition of our customers deteriorates resulting in an impairment of their
ability to pay or a pattern of late payment develops, allowances may be
required.
Provisions for Inventory Obsolescence. We may need to record a
provision for estimated obsolescence and shrinkage of inventory. Our estimates
would consider the cost of inventory, the estimated market value, the shelf life
of the inventory and our historical experience. If there are changes to these
estimates, provisions for inventory obsolescence may be necessary.
RESULTS OF OPERATIONS
Year ended December 31, 2003 and 2002
Sales for the year ended December 31, 2003 were $2,321,120, as compared
to $1,112,192 for the year ended December 31, 2002, an increase of $1,208,928,
or 109%. Our sales increase was primarily the result of increased sales in
residential swimming pool products, increased sales in the commercial swimming
pool division, and the fiscal 2003 sales attributed to our WATER$AVR(R) product.
In addition, we increased the price of our residential swimming pool product by
12.5% in the third quarter of fiscal 2003.
For the year ended December 31, 2003, our overall gross profit margin
on product sales decreased to 41.3%, as compared to 47.7% for the year ended
December 31, 2002. This decrease was primarily due to higher costs for
employees, travel and product awareness efforts at our WaterSavr division in
Illinois. There were also extra costs related to the labor and material inputs
for our swimming pool products as a result of the significant rise of the
Canadian Dollar versus the United States Dollar.
9
We incurred operating expenses for the year ended December 31, 2003 of
$1,664,146, as compared to operating expenses of $997,899 in the year ended
December 31, 2002. In the year ended December 31, 2003, we increased sales and
marketing costs in connection with our WATER$AVR(R) product and this was
reflected in increased wages, office, rent, telecommunications and travel
expenses. We also incurred increased professional fees in fiscal 2002 primarily
due to increased legal and accounting expenses and specific consultants directed
at increasing WATER$AVR(R) sales as quickly as possible in countries outside the
United States. Depreciation expense was $37,712 for the year ended December 31,
2003, as compared to $24,683 for the year ended December 31, 2002, which
reflects depreciation for additional property and equipment added in the year
ended December 31, 2003. Our expenses to increase investor awareness were
significantly more than in the year ended December 31, 2002 and this resulted in
an increase in investor relations and transfer agent fees in the year ended
December 31, 2003. We also had a credit of $31,955 in the year ended December
31, 2003 for currency exchange, as compared to an expense of $19,180 for such
item in the year ended December 31, 2002.
Our income tax provision for the year ended December 31, 2003 reflected
a benefit of $25,892, an increase over the income tax benefit of $21,456 for the
year ended December 31, 2002. In the year ended December 31, 2003, we had
interest income of $203,310, as compared to interest income of $67,228 for the
year ended December 31, 2002.
We incurred a net loss of $476,888 in fiscal 2003, as compared to a net
loss of $378,445 in fiscal 2002.
Year Ended December 31, 2002 and 2001
Revenue decreased to $1,112,192 for the year ended December 31, 2002,
as compared to $1,334,273 in the year ended December 31, 2001, as a result of
seasonal weather issues that caused a shortening of the pool season in the
eastern United States and Canada. There were no price changes in the period and
product mix did not shift significantly. Tropical Fish was responsible for
approximately 94% of sales during the period.
Operating expenses for the year ended December 31, 2002 were $997,899,
as compared to $806,020 in the year ended December 31, 2001. Cash expense
increased due to increased production levels and to further introduction of our
WATER$AVR(R) product. In the year ended December 31, 2002, we increased sales
and marketing costs in connection with our WATER$AVR product and this was
reflected in increased wages, office, rent, telephone and travel expenses. We
also incurred increased professional fees in the year ended December 31, 2002
due to increased legal and accounting expenses. Depreciation expense was $24,683
for the year ended December 31, 2002, as compared to $18,910 for the year ended
December 31, 2001, which reflects greater depreciation for additional property
and equipment added in fiscal 2002. We also undertook efforts to better organize
our investor awareness program, which resulted in a decrease in investor
relations and transfer agent fees in the year ended December 31, 2002, as
compared to 2001.
We incurred a net loss of $378,445 in the year ended December 31, 2002,
as compared to a net loss of $233,955 in the year ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
We sold 1,828,600 shares of common stock to investors in the year ended
December 31, 2002 for net proceeds of $5,750,000. During the year ended December
31, 2003, we consumed $369,542 of this capital while introducing and building
awareness of our new WATER$AVR(R) product. We believe we have sufficient capital
to support our business and operations for at least the next 12 months. We
10
anticipate utilizing approximately $1 million in the next twelve months in an
attempt to increase the sales of our products by adding sales and marketing
professionals, increasing advertising and promotion expenses, improving our
products, developing additional uses for our core technology, and in preparing
and filing additional patent applications. There can be no assurance that such
expenditures will result in a significant increase in sales of our products.
SEASONALITY
Our operations are subject to seasonal fluctuation. Use of our products
increases in summer months in most markets and results in our sales from January
to June being greater than in July through November. Additionally, cooler summer
weather patterns lead to lower sales volume, particularly of our Tropical Fish
product, which is geared to residential pools, due to a shorter swimming season,
while warmer weather results in increased sales volume due to a longer swimming
season. We believe we are able to adequately respond to these seasonal
fluctuations by reducing or increasing production as needed.
RESTATED FINANCIAL STATEMENTS
The accompanying financial statements have been restated to correct
certain stock-based compensation expense. In October 2005, while completing a
registration statement for securities issued in the second quarter of 2005, we
determined that certain disclosures made in connection with stock-based
compensation expense required adjustment. In September 2002, we entered into a
distribution agreement with Ondeo whereby Ondeo agreed to serve as the exclusive
distributor of our WATER$AVR(R) products for so long as Ondeo maintained a
certain threshold sales level as defined in the agreement. As consideration for
signing the agreement, Ondeo was granted an option to purchase 2,000,000 shares
of our common stock. Half of the option for one million shares was exercisable
immediately at an exercise price of $4.25 for each common share. The remaining
half of the option for 1,000,000 shares was exercisable after certain threshold
sales targets were achieved at a price of $5.50 for each common share.
In determining the stock-based compensation expense for the nine months
ended September 30, 2002, we expensed the entire fair value of the stock option
believing that the option fully vested upon the signing of the agreement. In our
October 2005 review, however, we determined that: (i) first, as stated above,
half of the option to purchase 1,000,000 shares of common stock did not vest and
was not exercisable until the threshold sales target had been met, which would
not be until five years after the signing of the distribution agreement; and
(ii) second, we did not consider Emerging Issues Task Force ("EITF") No. 96-18,
Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services; EITF No. 00-18,
Accounting Recognition for Certain Transactions involving Equity Instruments
Granted to Other Than Employees; and EITF No. 01-9, Accounting for Consideration
Given by a Vendor to a Customer.
During the three months ended March 31, 2003, Ondeo achieved the first
threshold sales target, and accordingly, we should have recorded a corresponding
stock-based compensation expense of $54,080. However, since the entire
stock-based compensation expense had been recorded in the September 30, 2002
interim financial statements and in the year ended December 31, 2002, we did not
record any additional stock-based compensation expense as a result of the
attained first threshold level.
In the fourth quarter of the year ended December 31, 2003, we
determined that Ondeo was not going to attain the minimum sales targets
stipulated in the agreement. Consequently, the agreement and corresponding stock
option was cancelled. We accounted for the cancellation of the stock option in
accordance with Statement of Financial Accounting Standard No. 123 similar to a
forfeiture of stock options and reversed $2,480,200 of the stock-based
compensation expense previously recorded in fiscal
11
2002. Had we accounted for the cancellation of the stock option correctly, we
would have reversed the amended stock-based compensation expense of $54,080 that
was recorded in the first quarter ended March 31, 2003.
In light of the above, the net effect of the adjustments to the
financial statements is as follows:
1. Approximately $2,704,000 in stock-based compensation expense
recorded in September 2002 has been reversed;
2. Approximately $54,080 in stock-based compensation expense has been
recorded in the quarter ended March 31, 2003, as Ondeo met the first sales
threshold under the agreement;
3. Approximately $54,080 in stock-based compensation expense has been
reversed in the year ended December 31, 2003, as Ondeo failed to meet subsequent
sales thresholds under the agreement, resulting in the cancellation of the stock
option;
4. As stated above, we previously recorded a stock-based compensation
expense of $2,704,000 in December 2002. As a result of canceling the stock
option, we previously recorded a recovery of $2,480,000 of stock-based
compensation expense at December 31, 2003. This $2,480,000 recovery has been
reversed, in conjunction with the reversal of $2,704,000 in stock-based
compensation expense originally recorded; and
5. For the periods ended March 31, 2004 to June 30, 2005, the net
effect of these adjustments is to decrease capital in excess of par value by
approximately $223,800 and increase retained earnings by approximately $223,800.
We are presently unaware of any evidence that the restatements
described above are due to any material noncompliance by us, as a result of
misconduct, with any financial reporting requirement under the federal
securities laws. Our audit committee of the board of directors is working with
our management and our accountants to assure that we are taking the appropriate
approach to resolving the issues related to the restatements, as well as any
further issues that may be identified during the course of its review.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO EVALUATE OUR
POTENTIAL FOR FUTURE SUCCESS.
Although we were incorporated in 1991, we have been operating in our
present form only since May 1998. To date, we have generated limited revenues
from the sale of our products and do not expect to generate significant revenues
until we sell a significantly larger number of our products. Accordingly, we
have only a limited operating history upon which you can base an evaluation of
our business and prospects. The likelihood of our success must be considered in
light of the risks and uncertainties frequently encountered by middle stage
companies like ours in an evolving market. If we are unsuccessful in addressing
these risks and uncertainties, our business will be materially harmed.
WE HAVE INCURRED SIGNIFICANT OPERATING LOSSES SINCE INCEPTION AND MAY
NOT SUSTAIN PROFITABILITY IN THE FUTURE.
We have experienced operating losses and negative cash flow from
operations since our inception and we currently have an accumulated deficit. To
the extent that our revenues do not increase, our results of operations and
liquidity will be materially adversely affected. If we experience slower than
anticipated
12
revenue growth or if our operating expenses exceed our expectations, we may not
achieve profitability. Even if we achieve profitability in the future, we may
not be able to sustain it.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
Given the nature of the markets in which we participate, 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:
o demand for and market acceptance of our products;
o competitive pressures resulting in lower selling prices;
o adverse changes in the level of economic activity in regions in
which we do business;
o adverse changes in industries, such as swimming pool construction,
on which we are particularly dependent;
o changes in the portions of our revenue represented by various
products and customers;
o delays or problems in the introduction of new products;
o the announcement or introduction of new products, services or
technological innovations by our competitors;
o variations in our product mix;
o the timing and amount of our expenditures in anticipation of
future sales;
o increased costs of raw materials or supplies; and
o changes in the volume or timing of product orders.
WE HAVE NOT PAID, AND DO NOT EXPECT TO PAY, DIVIDENDS ON OUR COMMON
STOCK.
We have not paid any dividends on our common stock since our inception
and do not intend to pay any dividends to our common shareholders in the
foreseeable future. We intend to reinvest any earnings in the development and
expansion of our business.
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 WATER$AVR(R) product are also seasonal,
dependent 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. We believe we are able to adequately
respond to these seasonal fluctuations by reducing or increasing production as
needed.
13
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.
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:
o accurately anticipate customer needs;
o innovate and develop new products and applications;
o successfully commercialize new products in a timely manner;
o price our products competitively and manufacture and deliver our
products in sufficient volumes and on time; and
o 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.
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
to be viewed as being 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 certain of our chemical substances. 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
the imposition of substantial fines, suspension of production, alteration of
14
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.
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 their patent 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 personal spa
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 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 the employees required for it to be successful,
there can be no assurance that we will be able to retain the services of all of
our key employees or a sufficient number to execute on our plans, nor can there
be any assurances that we will be able to continue to attract new employees as
required. Mr. O'Brien does not have an employment contract with us. We have
key-man life insurance policy in the amount of CDN $400,000 on Mr. O'Brien.
OUR REVENUES WOULD BE SUBSTANTIALLY REDUCED IF WE LOST THE MAJOR
CUSTOMER THAT ACCOUNTS FOR A SUBSTANTIAL AMOUNT OF OUR SALES.
Our exclusive United States and Canadian distributor of our HEAT$AVR(R)
product packaged in our Tropical Fish dispenser accounted for 73% of our sales
revenues in fiscal 2003 and 94% of our sales revenues in fiscal 2002. Although
we have an agreement with such firm which is described above, this agreement
does not require the distributor to purchase any minimum amount of our products,
nor does it
15
prevent it from handling competing products. If our distributor reduced its
purchase or ceased to purchase our products, we would likely suffer substantial
reduction in our sales and would have to make alternative arrangements to
distribute our Tropical Fish product in the United States and Canada. There can
be no assurance that we would be able to replace the services of this
distributor on satisfactory terms. Subsequent to the year ended December 31,
2003, on February 29, 2004, the distribution contract with Sun Solar ended and
was not renegotiated. We have decided to retain responsibility for distribution
internally and have hired new, experienced staff to execute worldwide
distribution from our Richmond, British Columbia office. Sun Solar ordered
sufficient product through the winter to ensure that retail merchants have stock
on hand for the start of the summer season. We will be responsible for
restocking during the summer and all sales in the future.
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 45 days to pay
for each shipment of product we make to them. 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. While we have exposure to this type of risk, we are
no longer subject to the concentrated credit risk that we were previously
subject to because of our relationship with Sun Solar. In addition, while our
exposure to a bad debts and write-offs credit risk may increase as we service a
larger number of customers in the swimming pool and personal spa and water
evaporation industries, the effect of any such bad debts and write-offs will be
minimized as a result of the increase in the numbers of our customers and
overall revenues.
THE RECENT INTRODUCTION OF OUR WATER$AVR(R) PRODUCT LINE MAY RESULT IN
LOSSES.
We introduced our WATER$AVR(R) product in fiscal 2002. We have
delivered quantities for testing by potential customers, but only one customer
has ordered the product for commercial use. This product can achieve success
only if it is ordered in substantial quantities by commercial customers who have
determined that the water saving benefits of the product exceed the costs of
purchase and deployment of the product. We cannot assure that we will receive
sufficient orders of this product to achieve profits or cover the additional
expenses incurred to manufacture and market this product. We expect to incur
$800,000 in development, marketing and manufacture of our WATER$AVR(R) product
line in fiscal 2004.
16
Item 7. Financial Statements.
Our consolidated financial statements and notes thereto appear on pages F-1
to F-18 of this Annual Report.
FLEXIBLE SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Chartered Accountants, Cinnamon Jang Willoughby & Company F-1
Report of Independent Chartered Accountants, Pannell Kerr Forster F-2
Consolidated Balance Sheets as of December 31, 2003 F-3
Consolidated Statements of Operations for the Year Ended December 31, 2003 F-4
Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 2003 F-5
Consolidated Statements of Cash Flows for the Year Ended December 31, 2003 F-6
Notes to Consolidated Financial Statements F-7
17
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the board of directors and stockholders of Flexible Solutions International,
Inc.:
We have audited the consolidated balance sheet of Flexible Solutions
International, Inc. as at December 31, 2003 and the consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. The
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
In our opinion the consolidated financial statements present fairly, in
all material respects, the financial position of the company as at December 31,
2003 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles in the United
States of America.
As described in note 2 to the consolidated financial statements, the
accompanying consolidated financial statements of Flexible Solutions
International, Inc. as of December 31, 2003 and for the year then ended have
been restated.
On March 15, 2004 (September 30, 2005 as to the effects of the
restatements described in note 2) we reported separately to the shareholders of
Flexible Solutions International, Inc. on consolidated financial statements for
the same period, audited in accordance with auditing standards generally
accepted in the United States of America and prepared in accordance with
accounting principles generally accepted in the United States of America.
The financial statements as at December 31, 2002 and 2001 and for the
years then ended were audited by another firm of chartered accountants who
expressed an opinion without reservation on those statements in their report
dated March 12, 2003.
Cinnamon Jang Willoughby & Company
Chartered Accountants
Burnaby, British Columbia
March 15, 2004 (September 30, 2005 as to the effects of the restatements
described in note 2)
F-1
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the board of directors and stockholders of FLEXIBLE SOLUTIONS INTERNATIONAL,
INC.:
We have audited the accompanying consolidated balance sheets of
Flexible Solutions International, Inc. as of December 31, 2002 and 2001 and the
consolidated statements of operations, stockholders' equity and cash flows for
each of the years ended December 31, 2002, 2001 and 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2002 and 2001 and the results of its operations and its cash flows for each
of the years ended December 31, 2002, 2001 and 2000 in conformity with
accounting principles generally accepted in the United States of America.
As described in note 2 to the consolidated financial statements, the
accompanying consolidated financial statements of Flexible Solutions
International, Inc. as of December 31, 2002 and for the year then ended have
been restated.
On March 12, 2003 (September 30, 2005 as to the effects of the
restatements described in note 2), we reported separately to the shareholders of
Flexible Solutions International, Inc. on consolidated financial statements for
the same period, audited in accordance with auditing standards generally
accepted in the United States of America and prepared in accordance with
accounting principles generally accepted in the United States of America.
Pannell Kerr Forster,
Chartered Accountants
Vancouver, Canada
March 12, 2003 (September 30, 2005 as to the effects of the restatements
described in note 2)
F-2
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2003
(U.S. DOLLARS)
December 31, December 31,
2003 2002
As Restated As Restated
ASSETS (Note 2) (Note 2)
---------------- ----------------
CURRENT
Cash and cash equivalents $ 237,080 $ 556,789
Short-term investments (Note 5) 5,033,837 5,062,495
Accounts receivable 294,238 55,222
Income taxes recoverable 86,243 118,014
Loan receivable (Note 6) 17,585 10,082
Inventory 212,938 203,830
Prepaid expenses (Note 7) 36,101 87,321
---------------- ----------------
5,918,022 6,093,753
PROPERTY, EQUIPMENT AND LEASEHOLDS (NOTE 8) 167,589 128,566
INVESTMENTS (NOTE 9) 303,500 32,500
---------------- ----------------
$ 6,389,111 $ 6,254,819
---------------- ----------------
LIABILITIES
Current:
Accounts payable and accrued liabilities $ 157,643 $ 53,146
Due to shareholders 7,700 --
---------------- ----------------
165,343 53,146
STOCKHOLDERS' EQUITY
Capital Stock
Authorized
50,000,000 Common shares with a par value of $0.001 each
1,000,000 Preferred shares with a par value of $0.01 each
Issued and outstanding
11,794,916 (2002: 11,570,916) common shares (Note 14) 11,794 11,570
CAPITAL IN EXCESS OF PAR VALUE 7,082,813 6,624,648
SHARE SUBSCRIPTION RECEIVABLE -- (16,217)
OTHER COMPREHENSIVE INCOME (LOSS) 7,094,607 6,620,001
---------------- ----------------
DEFICIT 3,023 (21,354)
873,862 396,974
COMMITMENTS (NOTE 16) 6,223,768 6,201,673
CONTINGENCIES (NOTE 17) $ 6,389,111 $ 6,254,819
---------------- ----------------
- See Notes to Consolidated Financial Statements -
F-3
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
(U.S. DOLLARS)
Year Ended December 31,
-------------------------------------------------
2003 2002
As Restated As Restated
(Note 2) (Note 2) 2001
-------------- -------------- --------------
SALES $ 2,321,120 $ 1,112,192 $ 1,334,273
COST OF SALES 1,363,064 581,422 662,807
GROSS PROFIT 958,056 530,770 671,466
OPERATING EXPENSES
Administrative salaries and benefits 80,999 45,312 46,639
Advertising and promotion 63,871 45,000 --
Bad debts 24,747 230 26,570
Commission -- -- 1,130
Consulting (recovery) 197,918 86,445 83,593
Currency exchange (gain) loss (31,955) 19,180 (2,368)
Depreciation 37,712 24,683 18,910
Investor relations and transfer agent fee 173,268 96,954 241,573
Office and miscellaneous 83,854 77,703 48,398
Professional fees 190,638 53,548 23,338
Rent 70,538 61,126 28,978
Research and development 67,615 2,523 --
Shipping 19,203 10,771 13,563
Telecommunications 41,445 9,326 5,616
Travel 150,116 50,213 23,125
Utilities 17,246 -- --
Wages 476,931 414,885 246,955
1,664,146 997,899 806,020
-------------- -------------- --------------
INCOME (LOSS) BEFORE OTHER INCOME (706,090) (467,129) (134,554)
OTHER INCOME
Interest 203,310 67,228 --
Gain on disposal of property and equipment -- -- 863
-------------- -------------- --------------
203,310 67,228 863
INCOME (LOSS) BEFORE INCOME TAXES (502,780) (399,901) (133,691)
INCOME TAXES (RECOVERY) (25,892) (21,456) 100,264
-------------- -------------- --------------
NET INCOME (LOSS) $ (476,888) $ (378,445) $ (233,955)
NET INCOME (LOSS) PER SHARE (NOTE 12) $ (0.04) $ (0.04) $ (0.03)
-------------- -------------- --------------
WEIGHTED AVERAGE NUMBER OF SHARES 11,734,880 10,555,754 9,247,949
-------------- -------------- --------------
- See Notes to Consolidated Financial Statements -
F-4
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2003
(U.S. DOLLARS)
Capital in Accumulated Total
Excess of Earnings Stockholders'
Par Value Share Other (Deficiency) Equity
As Restated Subscription Comprehensive As Restated As Restated
Shares Par Value Note 2) Receivable Income (Loss) (Note 2) (Note 2)
------------ ----------- ----------- ------------- -------------- ------------- -------------
Balance December 31, 2001 $ 9,272,816 $ 9,272 $ 563,713 $ -- $ (23,842) $ (18,529) $ 530,614
Shares issued:
For cash
Private placement 1,828,600 1,829 5,998,271 -- -- -- 6,000,100
Exercise of stock options 439,500 439 150,686 -- -- -- 151,125
For services 30,000 30 44,370 -- -- -- 44,400
Share issue costs -- -- (250,000) -- -- -- (250,000)
Share subscription -- -- -- (33,000) -- -- (33,000)
Payment of subscription receivable 16,783 16,783
Stock option compensation -- -- 117,608 -- -- -- 117,608
Translation adjustment -- -- -- -- 2,488 -- 2,488
Net loss -- -- -- -- -- (378,445) (378,445)
------------ ----------- ----------- ------------- -------------- ------------- -------------
Comprehensive income (375,957)
Balance December 31, 2002 11,570,916 11,570 6,624,648 (16,217) (21,354) (396,974) 6,201,673
Shares issued:
Exercise of stock options 124,000 124 64,695 -- -- -- 64,819
For investment 100,000 100 270,900 -- -- -- 271,000
Payment of subscription receivable -- -- -- 16,217 -- -- 16,217
Stock option compensation reversal -- -- 122,570 -- -- -- 122,570
Translation adjustment -- -- -- -- 24,377 24,377
Net income -- -- -- -- -- (476,888) (476,888)
------------ ----------- ----------- ------------- -------------- ------------- -------------
Comprehensive income (452,511)
Balance December 31, 2003 11,794,916 11,794 7,082,813 -- 3,023 (873,862) 6,223,768
------------ ----------- ----------- ------------- -------------- ------------- -------------
- See Notes to Consolidated Financial Statements -
F-5
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
(U.S. DOLLARS)
Year Ended December 31,
-------------------------------------------------
2003 2002
As Restated As Restated
(Note 2) (Note 2) 2001
-------------- --------------- --------------
Operating activities:
Net income (loss) $ (476,888) $ (378,445) $ (233,955)
Adjustments for
Depreciation 37,712 24,683 18,910
Stock compensation expense 122,570 117,608 256,076
Gain on disposal of property and equipment -- -- (863)
Non-cash services -- 44,400 141,510
-------------- --------------- --------------
Changes in non-cash working capital (316,606) (191,754) 181,678
Accounts receivable (239,016) (8,848) 98,009
Income tax recoverable 31,771 (136,122) (72,490)
Inventory (9,108) (22,132) (88,185)
Prepaid expenses 51,220 (28,030) (53,140)
Accounts payable and accrued liabilities 104,497 32,554 8,170
Unrealized foreign exchange (gain) loss -- 627 (10,500)
Increase in amounts due to shareholders 7,700 --
Cash flows from (used in) operating activities (369,542) (353,705) 63,542
-------------- --------------- --------------
Investing activities
Acquisition (disposal) short-term investments 28,658 (5,062,495) --
Loan receivable (7,503) (566) (9,516)
Acquisition of property and equipment (76,735) (80,496) (39,246)
Acquisition of investments -- (32,500) --
Note receivable -- 9,225 (9,225)
Cash flows (used in) investing activities (55,580) (5,166,832) (57,987)
-------------- --------------- --------------
Financing activities
Proceeds from issuance of common shares 64,819 5,868,225 4,125
Subscriptions received 16,217 16,783 --
Cash flows from financing activities 81,036 5,885,008 4,125
Effect of exchange rate changes on cash 24,377 1,861 (11,503)
Net increase (decrease) in cash (319,709) 366,332 (1,823)
Cash and cash equivalents, beginning 556,789 190,457 192,280
Cash and cash equivalents, ending $ 237,080 $ 556,789 $ 190,457
-------------- --------------- --------------
Supplemental disclosure of cash flow information:
Additional information
Interest $ 203,310 $ 67,228 $ --
Income taxes 60,351 115,472 85,126
Non-cash transactions
Issue of common stock for investment
(2002 - services) 271,000 44,400 140,000
Sale of trailer - exchange for rent -- -- 1,510
-------------- --------------- --------------
- See Notes to Consolidated Financial Statements -
F-6
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(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 Solutions, Ltd. ("Flexible Ltd.") and WaterSavr Global
Solutions Inc. All inter-company balances and transactions have been eliminated.
The parent company was incorporated May 12, 1998 in the State of Nevada and had
no operations until June 30, 1998 as described below.
On June 30, 1998, the Company completed the acquisition of all of the
shares of Flexible Ltd. The acquisition was effected through the issuance of
7,000,000 shares of common stock by the Company with former shareholders of the
subsidiary receiving all of the total shares then issued and outstanding. The
transaction has been accounted for as a reverse-takeover.
Flexible Ltd. is accounted for as the acquiring party and the surviving
entity. As Flexible Ltd. is the accounting survivor, the consolidated financial
statements presented for all periods are those of Flexible Ltd. The shares
issued by the Company pursuant to the 1998 acquisition have been accounted for
as if those shares had been issued upon the organization of Flexible Ltd.
On May 2, 2002, the Company established WaterSavr Global Solutions Inc.
through the issuance of 100 shares of common stock.
2. RESTATEMENTS AS A RESULT OF CORRECTING STOCK COMPENSATION EXPENSE.
In October 2005, while completing a registration statement for
securities issued in the second quarter of 2005, the Company determined that
certain disclosures made in connection with stock-based compensation expense
required adjustment. In September 2002, the Company entered into a distribution
agreement with Ondeo Nalco Company ("Ondeo") whereby Ondeo agreed to serve as
the exclusive distributor of the Company's WATER$AVR(R) products for so long as
Ondeo maintained a certain threshold sales level as defined in the agreement. As
consideration for signing the agreement, Ondeo was granted an option to purchase
2,000,000 shares of the Company's common stock. Half of the option for 1,000,000
shares was exercisable immediately at an exercise price of $4.25 for each common
share. The remaining half of the option for 1,000,000 shares was exercisable
after certain threshold sales targets were achieved at a price of $5.50 for each
common share.
In determining the stock-based compensation expense for the nine months
ended September 30, 2002, the Company's expensed the entire fair value of the
stock option believing that the option fully vested upon the signing of the
agreement. In the Company's October 2005 review, however, the Company determined
that: (i) first, as stated above, half of the option to purchase 1,000,000
shares of common stock did not vest and was not exercisable until the threshold
sales target had been met, which would not be until five years after the signing
of the distribution agreement; and (ii) second, the Company did not consider
Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services; EITF No. 00-18, Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than Employees; and
EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer.
F-7
To correctly account for the stock options granted to Ondeo, the
stock-based compensation expense, included in consulting expense, should have
been measured at the date the performance obligation was complete and then
recognized on a rational and systematic manner in relation to the sales achieved
by Ondeo. Had the Company correctly accounted for these stock options,
stock-based compensation expense for the year would have been nil as no sales
had yet been achieved. Instead, the Company recorded stock-based compensation
expense of $2,704,000 for the year.
During the three months ended March 31, 2003, Ondeo achieved the first
threshold sales target, and, accordingly, the Company should have recorded a
corresponding stock-based compensation expense of $54,080. However, since the
entire stock-based compensation expense had been recorded in the September 30,
2002 interim financial statements and in the year ended December 31, 2002, the
Company did not record any additional stock-based compensation expense as a
result of the attained first threshold level.
In the fourth quarter of the year ended December 31, 2003, it was
determined that Ondeo was not going to attain the minimum sales targets
stipulated in the exclusive distributorship agreement. Consequently the
exclusive distributorship agreement and corresponding stock options were
cancelled. The Company accounted for the cancellation of the stock options in
accordance with Statement of Financial Accounting Standards ("FAS") No. 123
similar to a forfeiture of stock options and reversed $2,480,200 of the stock
compensation expense previously recorded in 2002. Had the Company accounted for
the cancellation of the stock options correctly, it would have reversed the
stock-based compensation of expense of $54,080 that was recorded in the first
quarter ended March 31, 2003.
The following presents the effect on the Company's previously issued
financial statements for the years ended December 31, 2003 and 2002:
Balance sheet as at December 31, 2003 -
----------------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
----------------- ---------------- ----------------
Capital in excess of par value $ 7,306,613 $ (223,800) $ 7,082,813
Accumulated deficiency (1,097,662) 223,800 (873,862)
----------------------------------------------------------------------------------------------------------------------
Statement of operations for the year ended December 31, 2003 -
----------------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
----------------- ---------------- ----------------
Expenses $ (816,054) $ 2,480,200 $ 1,664,146
Income (Loss) before other item 1,774,110 (2,480,200) (706,090)
Income (Loss) before income taxes 1,977,420 (2,480,200) (502,780)
Net Income (Loss) 2,003,312 (2,480, 200) (476,888)
Net Income (Loss) per share 0.17 (0.21) (0.04)
----------------------------------------------------------------------------------------------------------------------
F-8
Statement of cash flow for the year ended December 31, 2003 -
----------------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
----------------- ---------------- ----------------
Net Income (Loss) $ 2,003,312 $ (2,480,200) $ (476,888)
Stock option compensation (2,357,630) 2,480,200 122,570
----------------------------------------------------------------------------------------------------------------------
Balance sheet as at December 31, 2002 -
----------------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
----------------- ---------------- ----------------
Capital in excess of par value $ 9,328,648 $ (2,704,000) $ 6,624,648
Accumulated deficiency (3,100,974) 2,704,000 (396,974)
----------------------------------------------------------------------------------------------------------------------
Statement of operations for the year ended December 31, 2002 -
----------------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
----------------- ---------------- ----------------
Expenses $ 3,701,899 $ (2,704,000) $ 997,899
Income (Loss) before other item (3,171,129) 2,704,000 (467,129)
Income (Loss) before income taxes (3,103,901) 2,704,000 (399,901)
Net Income (Loss) (3,082,445) 2,704,000 (378,445)
Net Income (Loss) per share (0.29) 2,704,000 (0.04)
----------------------------------------------------------------------------------------------------------------------
Statement of cash flows for the year ended December 31, 2002 -
----------------------------------------------------------------------------------------------------------------------
Previously Increase
Reported (Decrease) Restated
----------------- ---------------- ----------------
Net Income (Loss) $ (3,082,445) $ 2,704,000 $ (378,445)
Stock option compensation 2,821,608 (2,704,000) 117,608
----------------------------------------------------------------------------------------------------------------------
3. COMPARATIVE FIGURES.
Certain of the comparative figures have been reclassified to conform
with the current year's presentation.
F-9
4. SIGNIFICANT ACCOUNTING POLICIES.
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles accepted in the United
States of America applicable to a going concern and reflect the policies
outlined below.
(a) Cash and Cash Equivalents.
The Company considers all highly liquid investments purchased with an
original or remaining maturity of less than three months at the date of purchase
to be cash equivalents. Cash and cash equivalents are maintained with several
financial institutions.
(b) Inventory and Cost of Sales.
Inventory is valued at the lower of cost and net realizable value. Cost
is determined on a first-in, first-out basis. Cost of sales includes all
expenditures incurred in bringing the goods to the point of sale. Inventorial
costs and costs of sales include direct costs of the raw material, inbound
freight charges, warehousing costs, handling costs (receiving and purchasing)
and utilities and overhead expenses related to the Company's manufacturing and
processing facilities.
(c) Property, Equipment and Leaseholds.
The following assets are recorded at cost and depreciated using the
following methods using the following annual rates:
---------------------------------------- ---------------------------------------
Computer hardware 30% Declining balance
Furniture and fixtures 20% Declining balance
Manufacturing equipment 20% Declining balance
Office equipment 20% Declining balance
Leasehold improvements Straight-line over lease term
---------------------------------------- ---------------------------------------
Property and equipment are written down to net realizable value when
management determines there has been a change in circumstances which indicates
its carrying amount may not be recoverable. No write-downs have been necessary
to date.
(d) Foreign Currency.
The functional currency of the Company is the Canadian Dollar. The
translation of the Canadian Dollar to the reporting currency of the U.S. Dollar
is performed for current assets and current liabilities using exchange rates in
effect at the balance sheet date. Non-monetary assets and liabilities are
translated using rates prevailing at the time of the acquisition of the assets
or assumption of the liabilities. Revenue and expense transactions are
translated using average exchange rates prevailing during the year. Translation
adjustments arising on conversion of the financial statements from the Company's
functional currency, Canadian Dollars, into the reporting currency, U.S.
Dollars, are excluded from the determination of income and disclosed as other
comprehensive income (loss) in stockholders' equity.
Foreign exchange gains and losses relating to transactions not
denominated in the applicable local currency are included in income if realized
during the year and in comprehensive income if they remain unrealized at the end
of the year.
F-10
(e) Revenue Recognition.
Revenue from product sales is recognized at the time the product is
shipped since title and risk of loss is transferred to the purchaser upon
delivery to the carrier. Shipments are made F.O.B. shipping point. The Company
recognizes revenue when there is persuasive evidence of an arrangement, delivery
has occurred, the fee is fixed or determinable, collectibility is reasonably
assured, and there are no significant remaining performance obligations. When
significant post-delivery obligations exist, revenue is deferred until such
obligations are fulfilled.
Provisions are made at the time the related revenue is recognized for
estimated product returns. Since the Company's inception, product returns have
been insignificant; therefore no provision has been established for estimated
product returns.
(f) Stock Issued in Exchange for Services.
The valuation of the Company's common stock issued in exchange for
services is valued at an estimated fair market value as determined by officers
and directors of the Company based upon trading prices of the Company's common
stock on the dates of the stock transactions.
(g) Stock-based Compensation.
The Company applies the fair value based method of accounting
prescribed by FAS No. 123 in accounting for stock issued in exchange for
services to consultants and non-employees.
FAS No. 123 encourages, but does not require, companies to record
compensation cost for stock-based compensation plans to employees at fair value.
The Company has chosen to account for stock-based compensation plans to
employees and directors using Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees. Accordingly, compensation cost for
stock options for employees is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the amount an
employee is required to pay for the stock.
The Company adopts the disclosure provisions of FAS No. 123 for stock
options granted to employees and directors. The Company discloses on a
supplemental basis, the pro-forma effect of accounting for stock options awarded
to employees and directors, as if the fair value based method had been applied,
using the Black-Scholes option-pricing model.
(h) Comprehensive Income.
Other comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are included in
comprehensive income, but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders' equity. The Company's other
comprehensive income is primarily comprised of unrealized foreign exchange gains
and losses.
(i) Income (Loss) Per Share.
Income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares outstanding. Diluted loss per share is
computed by giving effect to all potential dilutive options that were
outstanding during the year. For the year ending December 31, 2003, 2002 and
2001, all outstanding options were anti-dilutive.
F-11
(j) 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.
(k) Financial Instruments.
The fair market value of the Company's financial instruments comprising
cash, short-term investment, accounts receivable, income tax recoverable, loan
receivable, accounts payable and accrued liabilities and amounts due to
shareholders were estimated to approximate their carrying values due to
immediate or short-term maturity of these financial instruments.
The Company 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.
(m) Recent Accounting Pronouncements.
(i) In June 2001, the Financial Accounting Standards Board
("FASB") issued FAS No. 142, Goodwill and Other Intangible Assets.
Under FAS No. 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are reviewed at least annually for
impairment. The amortization provisions of FAS No. 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1,
2001, the Company adopted FAS No. 142 effective January 1, 2002.
Application of the non-amortization provisions of FAS No. 142 for
goodwill did not have any impact on the Company's financial reporting.
(ii) In October 2001, the FASB issued FAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. FAS No. 144
addresses significant issues relating to the implementation of FAS No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and develops a single accounting
model, based on the framework established in FAS No. 121 for long-lived
assets to be disposed of by sale, whether such assets are or are not
deemed to be a business. FAS No. 144 also modifies the accounting and
disclosure rules for discontinued operations. The standard was adopted
on January 1, 2002 and did not have any impact on the Company's
financial statements.
(iii) In November 2001, the FASB issued EITF Issue No. 01-14,
Income Statement Characterization of Reimbursements Received for "Out
of Pocket" Expenses Incurred. This guidance requires companies to
recognize the recovery of reimbursable expenses such as travel costs on
service contracts as revenue. These costs are not to be netted as a
reduction of cost. This guidance was implemented January 1, 2002. The
Company does not expect this guidance to have a material impact on its
financial statements.
5. SHORT-TERM INVESTMENT.
Short-term investment consists of a certificate of deposit bearing
interest at 4.03% and maturing September 11, 2005. The Company will incur a
penalty if principle is withdrawn before the maturity date. The amount of the
penalty equals one-half of the remaining days in the term daily compounded
interest on the total amount withdrawn. If the accrued interest is less than the
calculated penalty at the time of withdrawal, the difference between the penalty
and the accrued interest will be deducted from the principal.
F-12
6. LOAN RECEIVABLE.
----------------------------------------- -------------- -- -----------
2003 2002
-------------- -----------
5% loan receivable due on demand $ 17,585 $ 10,082
----------------------------------------- -------------- -- -----------
7. PREPAID EXPENSES.
----------------------------------------- -------------- -- -----------
2003 2002
-------------- -----------
Deposits for materials purchases $ -- $ 13,578
Security deposit and prepaids 36,101 73,743
-------------- -- -----------
$ 36,101 $ 87,321
----------------------------------------- -------------- -- -----------
8. PROPERTY, EQUIPMENT AND LEASEHOLDS.
--------------------------------------------------------------------------------------------------------------
Accumulated 2003 2002
Cost Amortization Net Net
----------------- ------------------ ---------------- -------------
Computer hardware $ 15,983 $ 6,716 $ 9,267 $ 6,232
Furniture and fixtures 5,126 1,833 3,293 3,511
Office equipment 22,061 6,866 15,195 12,959
Manufacturing equipment 232,108 98,825 133,283 98,244
Trailer 1,786 268 1,518 --
Leasehold improvements 12,279 7,246 5,033 7,620
-----------------------------------------------------------------------
$ 289,343 $121,754 $167,589 $128,566
--------------------------------------------------------------------------------------------------------------
9. INVESTMENTS.
------------------------------------------------- -------------- -- -----------
2003 2002
-------------- -----------
Ideal Business Solutions India Pty. Ltd. $ 32,500 $ 32,500
Tatko Inc. 271,000 --
-------------- -- -----------
$ 303,500 $ 32,500
------------------------------------------------- -------------- -- -----------
The Company's purchase of 2,700 shares (or 10% of the total
outstanding) of Ideal Business Solutions India Pty. Ltd. has been recorded at
cost.
On May 31, 2003, the Company acquired an option to purchase a 20%
interest in the outstanding shares of Tatko Inc. ("Tatko") for consideration of
the issuance of 100,000 shares of its common stock. The option to purchase the
shares of Tatko expires on May 31, 2008. The cost of the investment has been
accounted for based on the fair market value of the Company's common stock on
May 31, 2003.
10. COMPREHENSIVE INCOME (LOSS).
--------------------------------------------------------------------------------------------------------------
2003 2002
As Restated As Restated
(Note 2) (Note 2) 2001
------------------ ----------------- -------------
Net income (loss) $ (476,888) $ (378,445) $ (233,955)
Other comprehensive income 24,377 2,488 (22,003)
----------------------------------------------------
$ (452,511) $ (375,957) $ (255,958)
--------------------------------------------------------------------------------------------------------------
F-13
11. INCOME TAX.
Total income tax expense differs from the amounts computed by applying
the combined Canadian federal and provincial statutory rate of 36% to income
before income taxes. The income to which this is applied is as follows:
--------------------------------------------------------------------------------------------------------------
2003 2002
As Restated As Restated
(Note 2) (Note 2) 2001
----------------- ----------------- -------------
Income (loss) before income tax per entity $ (170,369) $ (162,021) $ (396,470)
Flexible Solutions International, Inc. 16,616 (56,264) 62,779
Flexible Solutions, Ltd. (349,027) (181,616) --
WaterSavr Global Solutions Inc.
Consolidated income (loss) before income tax (502,780) (399,901) (333,691)
Permanent difference
Stock option benefit 122,570 117,608 256,076
Other
Stock issued for services -- 44,400 140,000
Miscellaneous -- -- 394
---------------------------------------------------
Taxable income (loss) for tax purposes $ (380,210) $ (237,893) $ 62,779
--------------------------------------------------------------------------------------------------------------
Application of the federal and provincial statutory rate results in the
following:
--------------------------------------------------------------------------------------------------------------
2003 2002 2001
--------------- ----------------- -------------
Expected tax expense (recovery) at statutory rates
From Canadian operations $ (25,892) $ (21,456) $ 100,264
From U.S. operations (110,984) (84,691) 16,988
Decrease resulting from manufacturing and processing
deduction -- -- (18,395)
Other -- -- 1,407
-------------------------------------------------
Income tax expense (recovery) $ (136,876) $ (106,147) $ 100,264
--------------------------------------------------------------------------------------------------------------
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company's deferred
tax liability calculated at a 35% tax rate consists of the following:
------------------------------------------------------------------------------- -------------- -- -----------
2003 2002
-------------- -----------
Non-capital loss carry-forwards $ 226,931 $ 93,858
Book over tax value of property and equipment (17,063) (1,449)
Valuation allowance (209,868) (92,409)
-------------- -- -----------
$ -- $ --
------------------------------------------------------------------------------- -------------- -- -----------
F-14
The Company's losses for income tax purposes are $648,375 (2002 -
$268,165), which may be carried forward to apply against future income tax,
expiring between 2010 and 2023 The future tax benefit of these loss
carry-forwards has been offset with a full valuation allowance. These losses
expire as follows:
----------------------------- -------------------
2010 $ 79,113
2018 16,858
2019 13,414
2022 237,893
2023 301,097
----------------------------- -------------------
12. NET INCOME (LOSS) PER SHARE.
----------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Shares
(Numerator) (Denominator)
As Restated As Restated Per Share
(Note 2) (Note 2) Amount
----------------------- -------------------- ----------------
2003 basic net income $ (476,888) 11,734,880 (0.04)
2002 basic net loss $ (378,445) 10,555,754 (0.04)
2001 basic net loss $ (233,955) 9,247,949 (0.03)
----------------------------------------------------------------------------------------------------------------------
There were no preferred shares issued and outstanding for the years
ended December 31, 2003, 2002 or 2001. The 2002 denominator excludes 3,671,800
shares that may be issued upon exercise of options as to do so would have been
anti-dilutive for the 2002 per share loss.
13. STOCK OPTIONS.
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 for incentive
options (which may be granted to employees of the Company or its subsidiaries)
is not less than the fair market value of the stock at the date of the grant,
and the exercise price for non-qualified options (which may be granted to
non-employees of the Company) is not less than 80% of the fair market value on
the date of the grant. The fair market value is defined by the most recent
closing sale price reported by the American Stock Exchange.
F-15
The following table summarizes the Company's stock option activity for
the years ended December 31, 2003 and 2002:
-------------------------------------------------------------------------------------------------------------------
Number of Exercise Price Weighted Average
Shares Per Share Exercise Price
----------------- ------------------- -------------------
Balance, December 31, 2001 1,888,500 $0.25 - $3.50 $1.63
-------------------------------------------------------------------------------------------------------------------
Granted 2,222,800 $1.50 - $5.50 $4.78
Exercised (439,500) $0.25 - $1.50 $0.34
Balance, December 31, 2002 3,671,800 $0.25 - $5.50 $3.79
-------------------------------------------------------------------------------------------------------------------
Granted 256,000 $3.60 - $4.25 $3.61
Exercised (124,000) $0.25 - $2.28 $0.48
Expired (2,109,800 $0.25 - $5.50 $4.72
-------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 1,694,000 $1.00 - $4.25 $2.84
-------------------------------------------------------------------------------------------------------------------
The Company applies APB Opinion No. 25 and related interpretations in
accounting for it stock options granted to employees, and accordingly,
compensation expense of nil (2002 - $85,000) was recognized as wages expense.
Had compensation expense been determined as provided in FAS No. 123 using the
Black-Scholes option-pricing model, the pro forma effect on the Company's net
income (loss) and per share amounts would be as follows:
-------------------------------------------------------------------------------------------------------------------
2003 2002
As Restated As Restated
(Note 2) (Note 2) 2001
----------------- ------------------- -------------------
Net income (loss), as reported $ (476,888) $ (378,445) $ (233,955)
Net income (loss), pro forma (557,767) (1,000,296) (955,071)
Net income (loss) per share, as reported (0.04) (0.04) (0.03)
Net income (loss) per share, pro forma (0.05) (0.09) (0.10)
-------------------------------------------------------------------------------------------------------------------
The fair value of each option grant is calculated using the following
weighted average assumptions:
-------------------------------------------------------------------------------------------------------------------
2003 2002 2001
----------------- ------------------- -------------------
Expected life - years 5.00 5.00 3.50
Interest rate 2.87% 3.00% 4.00%
Volatility 49.00% 72.30% 58.30%
Dividend yield --% --% --%
-------------------------------------------------------------------------------------------------------------------
During the year ended December 31, 2003, the Company granted 205,000
(2002 - 2,097,000) stock options to consultants and has applied FAS No. 123
using the Black-Scholes option-pricing model, which resulted in additional
consulting expense of $122,570 (2002 - $117,608). During the year ended December
31, 2003, the Company cancelled 2,000,000 stock options to consultants pursuant
to the terms of the contract.
14. CAPITAL STOCK.
During the year ended December 31, 2003, the Company: (i) issued
100,000 shares of common stock valued at $271,000 to acquire an option to
purchase a 20% interest in Tatko (see Note 8); and (ii)
F-16
issued 124,000 shares of common stock at prices ranging from $0.25 to $2.28 per
share upon exercise of stock options.
During the year ended December 31, 2002, the Company: (i) completed two
private placements whereby 400,000 shares of common stock were issued at prices
ranging from $0.25 to $1.50 per share upon exercise of stock options; (ii)
issued 439,500 shares of common stock at prices ranging from $0.25 to $1.50 per
share upon exercise of stock options; and (iii) issued 30,000 shares of common
stock at a price of $1.48 per share to an officer in lieu of six months of
salary.
15. SEGMENTED, SIGNIFICANT CUSTOMER INFORMATION AND ECONOMIC DEPENDENCY.
The Company operates in a single segment, involving the development and
marketing of two lines of energy and water conservation products, which consists
of a (i) liquid swimming pool blanket which saves energy and water by storing
evaporation from the pool surface, and (ii) food-safe powdered form of the
active ingredient within the liquid blanket and is designed to be used in still
or slow moving drinking water sources.
The Company's sales in the United States and abroad amounted to 28%
(2002 - 4%) of its total sales. The remainder was earned in Canada.
All of the Company's long-lived assets are located in Canada.
The Company had two major customers, Sun Solar and Ondeo, which
comprised 97% of total sales for the year ended December 31, 2003 (2002 - 95%).
The Company is exposed to concentrated credit risk with respect to its trade
receivables from Sun Solar. It seeks to keep this risk to a minimum by granting
only 45 days credit terms to the customer.
16. COMMITMENTS.
The Company is committed to minimum rental payments for property and
premises aggregating approximately $201,482 over the term of a lease expiring
September 30, 2006.
Commitments in each of the next three years are approximately as
follows:
-------------------------- --------------------
2004 $73,266
2005 73,266
2006 54,950
-------------------------- --------------------
17. CONTINGENCIES.
On May 1, 2003, the Company filed a lawsuit in the Supreme Court of
British Columbia, Canada, against John Wells and Equity Trust, S.A. seeking the
return of 100,000 shares of the Company's common stock and the repayment of a
$25,000 loan, which were provided to defendants for investment banking services
consisting of securing a $5 million loan and a $25 million stock offering. Such
services were not performed and in the proceeding the Company seeks return of
such shares after defendant's failure to both return the shares voluntarily and
repay the note. On May 7, 2003, the Company obtained an injunction freezing the
transfer of the shares. The proceeding is still in a discovery phase.
On November 13, 2003, Patrick Grant, an ex-employee, filed a lawsuit in
the Circuit Court of Cook County, Illinois against the Company, WaterSavr Global
Solutions Inc. ("WGS"), the wholly-owned subsidiary of the Company, and Daniel
B. O'Brien , the Company's Chief Executive Officer. The
F-17
plaintiff claims damages for breach of contract, tortious interference with an
agreement and various wrongful discharge claims. The plaintiff seeks monetary
damages in excess of $1,020,000 for the breach of contract and tortious
interference claims and unspecified compensatory and punitive damages in the
wrongful discharge claims. The Company considers the case without merit and is
planning to dispute the matter vigorously. In addition, the Company intends to
file counterclaims against the plaintiff for failure to repay financial
obligations owed to the Company of almost $40,000, as well as unspecified
damages arising out of the plaintiff's disclosure of confidential information to
a client during his employment at WGS. No amounts have been recorded as
receivable and no accrual has been made for any loss in the Company's
consolidated financial statements as the outcome of the claim filed by the
plaintiff is not determinable.
F-18
Item 8. Changes in and Disagreements With Accountants On Accounting
and Financial Disclosure.
Effective April 2003, we engaged Cinnamon Jang Willoughby & Company,
Certified Public Accountants, to serve as the principal accountant to audit our
financial statements for the fiscal year ending December 31, 2003. Pannell Kerr
Forster ("PKF"), our former accountant, continued to serve as the principal
accountant to audit our financial statements for the fiscal year ended December
31, 2002, through the completion of that audit and the date of our Annual Report
on Form 10-K for that period, as well as through the three months ended March
31, 2003 and the date of our Quarterly Report on Form 10-QSB for that period.
The change in our principal accountant was approved by the Audit Committee.
During the fiscal years ended December 31, 2001 and December 31, 2002
and the period from December 31, 2002 to the date of the filing with the SEC of
our Quarterly Report on Form 10-QSB for the three months ended March 31, 2003,
we did not have any disagreements, as defined in Item 304(a)(1)(iv) of
Regulation S-B under the Securities Exchange Act of 1934, as amended, with PKF,
whether or not resolved, on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to PKF's satisfaction, would have caused it to make reference to the
subject matter of the disagreements in connection with its report.
Item 8A. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic reports to the
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, we carried
out an evaluation, under the supervision and with the participation of
management, including our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended). Based upon that evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
that is required to be included in our periodic reports.
The prior accounting treatment of our stock-based compensation expense
was done in consultation and in accordance with the advice of our independent
accountants. Accordingly, management does not believe that this restatement of
our Annual Report indicates or results from a material weakness with respect to
our disclosure controls and procedures or our internal controls over financial
reporting.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting
that occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
18
Item 8B. Other Information.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(A) of the Exchange Act.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth our directors and officers and their
respective ages and positions:
----------------------- ------- ------------------------------------------------
Name Age Position
---- --- --------
Daniel B. O'Brien 47 President, Chief Executive Officer, Director
John H. Bientjes 51 Director
Dr. Robert N. O'Brien 82 Director
Dale Friend 47 Director
----------------------- ------- ------------------------------------------------
Daniel B. O'Brien has served as the President and Chief Executive
Officer, as well as a director, of our company since June 1998. He has been
involved in the swimming pool industry since 1990, when he founded our
subsidiary, Flexible Ltd., which was purchased by us in 1998. From 1990 to 1998,
Mr. O'Brien was also a teacher at Brentwood College where he was in charge of
outdoor education.
John H. Bientjes has been a member of our board of directors since
February 2000. 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 was graduated in 1976 from Simon Fraser University in Vancouver,
British Columbia with a Bachelor of Arts Degree in Economics and Commerce.
Dr. Robert N. O'Brien has been a member of our board of directors since
June 1998. Dr. O'Brien was a Professor of Chemistry at the University of
Victoria from 1968 until 1986 at which time he was given the designation of
Professor Emeritus. He held various academic positions since 1957 at the
University of Alberta, the University of California at Berkley, and the
University of Victoria. While teaching, Dr. O'Brien acted as a consultant and
served on the British Columbia Research Council from 1968 to 1990. In 1987, Dr.
O'Brien founded the Vancouver Island Advanced Technology and Research
Association. Dr. O'Brien received his Bachelor of Applied Science in Chemical
Engineering from the University of British Columbia in 1951; his Masters of
Applied Science in Metallurgical Engineering from the University of British
Columbia in 1952; his Ph.D. in Metallurgy from the University of Manchester in
1955; and was a Post Doctoral Fellow in Pure Chemistry at the University of
Ottawa from 1955 through 1957. Dr. Robert N. O'Brien and Daniel B. O'Brien are
father and son.
Dale Friend was elected a director in December 2002. She was a Senior
Trust Analyst for Alderwoods Group, a company engaged in funeral and mortuary
services, from August 2002 to February 2003. She also served as an Advanced
Accountant for such firm from 1999 to August 2002. From 1979 to 1998, Ms. Friend
was with Telus in various accounting, auditing and financial planning positions.
Directors are elected annually and hold office until the next annual
meeting of our stockholders and until their successors are elected and
qualified. We reimburse directors for any expenses incurred in
19
attending board of directors meetings. There have been no material changes to
the procedures by which security holders may recommend nominees to our board of
directors.
BOARD COMMITTEES
Our board of directors has established an Audit Committee and a
Compensation Committee.
Audit Committee
Our Audit Committee, consisting of John Bientjes and Dale Friend, both
of whom are independent directors and have strong financial backgrounds,
facilitates and maintains open communications among our board of directors, our
Audit Committee, senior management and our independent auditors. Our Audit
Committee also serves as an independent and objective party to monitor 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.
The Audit Committee held four meetings in fiscal 2003 and all members
participated. Our board of directors has determined that Mr. Bientjes meets the
SEC's definition of audit committee financial expert. Both of the members of the
Audit Committee are "independent," as such term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Securities Exchange Act of 1934, as amended.
Compensation Committee
Our Compensation Committee, consisting of Dr. Robert O'Brien and John
Bientjes, establishes salary, incentive and other forms of compensation for our
Chief Executive Officer, and administers our stock option programs. Our
Compensation Committee meets periodically with management and our independent
auditors. The Compensation Committee did not hold any meetings in fiscal 2003.
CODE OF ETHICS
Between the year ended December 31, 2003 and July 2005, we had not
adopted a written Code of Ethics applicable to our senior management and senior
financial staff. However, effective as of August 2005, our board of directors
has adopted a Code of Ethics that applies to our Chief Executive Officer, our
Chief Financial Officer and our Principal Accounting Officer, as well as to the
other senior management and senior financial staff of our company. Our Code of
Ethics complies with the requirements imposed by the Sarbanes-Oxley Act of 2002
and the rules and regulations issued thereunder for codes of ethics applicable
to such officers. Our board of directors has reviewed and will continue to
evaluate its role and responsibilities with respect to the new legislative and
other requirements of the SEC. Interested persons can obtain a copy of our Code
of Ethics, without charge and upon request, by writing to: Investor Relations,
c/o Flexible Solutions International, Inc. 615 Discovery St., Victoria, British
Columbia, V8T 5G4, CANADA. Interested persons may also obtain a copy of our Code
of Ethics by printing it from the "Investor Info--Insider Trading Reports" page
of our website, at http://www.flexiblesolutions.com.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of our records, we are not aware of any of
our officers, directors or beneficial owners of more than 10% of our securities
that failed to timely file one or more reports disclosing beneficial ownership
of our securities as required under Section 16(a) of the Securities Exchange Act
of 1934, as amended, during the fiscal year ended December 31, 2003.
20
Item 10. Executive Compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information about the
compensation paid or accrued to the person who was our Chief Executive Officer
(the "named executive officer") during the fiscal year ended December 31, 2003.
----------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------------------------------------------------------------------------------------
AWARDS PAYOUTS
-------------------------- ----------------------------
NAME AND YEAR SALARY BONUS OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP OTHER
PRINCIPAL POSITION COMPENSATION AWARDS OPTION/ SARS PAYOUTS COMPENSATION
----------------------------------------------------- --------------------------- ------------- ----------------------------
($) ($) ($) ($) (#) ($) ($)
Daniel B. O'Brien 2003 $40,000 -- -- -- 20,000 -- --
President, Chief
Executive Officer 2002 $40,000 -- -- -- 50,000 -- --
2001 $18,500 -- -- -- 100,000 -- --
----------------------------------------------------------------------------------------------------------------------------
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
The following table provides certain information about the stock
options granted to the named executive officer for the year ended December 31,
2003.
---------------------- -- ------------------------ -- ----------------------------- -- --------------- -- ----------------------
NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS / EXERCISE OR
UNDERLYING OPTIONS SARS GRANTED TO BASE PRICE
NAME GRANTED (#) EMPLOYEES IN FISCAL YEAR ($/SHARE) EXPIRATION DATE
---------------------- ------------------------ ----------------------------- --------------- ----------------------
Daniel B. O'Brien 20,000 shares 15.3% $3.60 December 31, 2008
---------------------- -- ------------------------ -- ----------------------------- -- --------------- -- ----------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth certain information about stock options
exercised in fiscal 2003 and the value of unexercised stock options held as of
December 31, 2003 by the named executive officer.
------------------------------------------------------------------------------------------------------------------------
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE MONEY
AT FY-END (#) OPTIONS AT FY-END ($)
-------------------------------- ----------------- ------------------
NAME SHARES VALUE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
ACQUIRED ON REALIZED
EXERCISE (#) ($)
------------------ ------------- ------------ ------------------
Daniel B. O'Brien 150,000 20,000 $391,500 0
------------------------------------------------------------------------------------------------------------------------
COMPENSATION OF DIRECTORS
We have agreed to issue to our non-employee directors options to
purchase 5,000 shares of our common stock annually for serving as a director.
However, Dr. Robert N. O'Brien will not receive director options in any year in
which he receives options for other services. We currently pay Dr. O'Brien
additional options for assisting in research and development and patent
prosecution. The amount of such options are determined annually by the Board of
Directors with Dr. O'Brien abstaining from the
21
vote on such matter. In fiscal 2003, Dr. O'Brien received the following options
for such services and he did not receive director options:
OPTION PRICE NO. OF OPTIONS EXPIRATION DATE
------------ -------------- ---------------
$3.60 20,000 December 31, 2008
Our outside directors received the following options in fiscal 2003:
NAME OPTION PRICE NO. OF OPTIONS EXPIRATION DATE
---- ------------ -------------- ---------------
John H. Bientjes $3.60 5,000 December 31, 2008
Dale Friend $3.60 5,000 December 31, 2008
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
We have not entered into any employment agreements or change in control
agreements with the named executive officer.
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of March 17, 2004 by (i) each
stockholder who is known by us to own beneficially more than five percent of our
outstanding common stock, (ii) each member of our board of directors, (iii) the
named executive officer, and (iv) by all of our executive officers and directors
as a group. The information as to each person or entity has been furnished by
such person or group.
--------------------------------------------------- ---------------------------------------------------------
SHARES BENEFICIALLY OWNED (1)
---------------------------------------------------------
COMMON STOCK PERCENTAGE
--------------------------- --------------------------
Daniel B. O'Brien (2)(3) 4,756,000 40.3%
John H. Bientjes (2)(3) 40,000 *
Dr. Robert N. O'Brien (2)(3) 1,825,000 15.5%
Dale Friend (2)(3) -- --
Sprott Asset Management, Inc. (4) 1,089,099 9.2%
All directors and officers as a group (3 persons) 6,621,000 56.1%
--------------------------------------------------- --------------------------- -- --------------------------
-----------------------------
* Less than 2%
(1) Applicable percentage of ownership at March 17, 2004, is based upon
11,794,919 shares of our common stock outstanding. Beneficial ownership
is determined in accordance with the rules of the SEC and includes
voting and investment power with respect to shares shown as
beneficially owned. Shares of our common stock subject to options or
warrants currently exercisable or exercisable within 60 days of
February 3, 2004, are deemed outstanding for computing the shares and
percentage ownership of the person holding such options or warrants,
but are not deemed outstanding for computing the percentage ownership
of any other person or entity.
(2) Address for this shareholder is 615 Discovery Street, Victoria, British
Columbia, V8T 5G4, CANADA.
22
(3) Includes shares which may be acquired on the exercise of stock options
as follows:
-------------------------------- --------------------- ------------------------- ---------------------------
Name No. of Options Exercise Price Expiration Date
---- -------------- -------------- ---------------
Daniel O'Brien 100,000 $1.40 December 21, 2006
50,000 $4.25 December 31, 2007
Dr. Robert O'Brien 50,000 $1.40 December 21, 2006
25,000 $4.25 December 31, 2007
John Bientjes 5,000 $4.25 December 31, 2007
Dale Friend 5,000 $4.25 December 31, 2007
-------------------------------- --------------------- ------------------------- ---------------------------
The total does not include the following shares which may be acquired
on the exercise of stock options which are not exercisable until December 31,
2004.
-------------------------------- --------------------- ------------------------- ---------------------------
Name No. of Options Exercise Price Expiration Date
---- -------------- -------------- ---------------
Daniel O'Brien 20,000 $3.60 December 31, 2008
John Bientjes 5,000 $3.60 December 31, 2008
Dr. Robert O'Brien 20,000 $3.60 December 31, 2008
Dale Friend 5,000 $3.60 December 31, 2008
-------------------------------- --------------------- ------------------------- ---------------------------
(4) Address for this shareholder is Suite 3450, South Tower, Royal Bank
Plaza, Toronto, Ontario, M5J 2J2, CANADA.
Item 12. Certain Relationships and Related Transactions.
Our director, Dr. Robert N. O'Brien, developed our substantially all of
products and has assigned his patent rights to such products to us. We have no
agreement with Dr. O'Brien requiring him to conduct any research and development
activities for us, but we anticipate that any future inventions which may be of
interest to us will continue to be assigned to us by Dr. O'Brien, although he
has no legal obligation to do so. Dr. O'Brien does not receive any salary or
royalties from us for any research and development activities, although our
board of directors does consider such activities undertaken by Dr. O'Brien when
it grants stock options to Dr. O'Brien. Dr. O'Brien is a member of our board of
directors, but abstains from all proceedings of the board concerning his stock
option grants. See Item 10 above for further information. Dr. O'Brien is the
father of our Chief Executive Officer, Daniel B. O'Brien.
23
Item 13. Exhibits.
Number Description
------ -----------
3.1 Articles of Incorporation of the Registrant. (1)
3.2 Bylaws of the Registrant. (1)
4.1 Option Granting Plan for the Term December 31, 2002 to December
31, 2003. (2)
10.1 Distribution Agreement dated June 1, 1998 between Flexible
Solutions, Ltd. and Heliocol Canada Ltd. (now known as Sun
Solar Energy Technologies). (1)
10.2 Global Supply and License Agreement between Registrant and
Ondeo Nalco Company. (3)
10.3 Exclusive Distribution Agreement effective September 1, 2002
with Ondeo Nalco Company. (3)
21.1 Subsidiaries. (4)
23.1 Consent of Independent Accountants.*
23.2 Consent of Independent Accountants.*
31.1 Certification of Principal Executive Officer Pursuant to ss.302
of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Principal Financial Officer Pursuant to ss.302
of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. ss.1350 and ss.906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. ss.1350 and ss.906 of the Sarbanes-Oxley Act of 2002.*
------------------
* Filed herewith.
(1) Previously filed as an exhibit to the Company's 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 the Company's Form 10-KSB for
the year ended December 31, 2003 filed with the Commission on
March 29, 2004, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 filed with the Commission on March 5, 2003,
and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 filed with the Commission on January 22,
2003, and incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Cinnamon Jang Willoughby & Company, Certified Public Accountants
("CJW"), are our independent auditors and have examined our financial statements
for the fiscal year ended December 31, 2003. Pannell Kerr Forster, Certified
Public Accountants ("PKF"), were our independent auditors for the fiscal year
ended December 31, 2002.
AUDIT FEES AND TAX FEES
CJW was paid aggregate audit fees of $19,293.00 for the fiscal year
ended December 31, 2003, for professional services rendered for the audit of our
annual financial statements and for the reviews of the financial statements
included in our quarterly reports on Form 10-QSB during this fiscal year, and
aggregate tax fees of $1,400.00 for professional services rendered for tax
compliance, tax advice and tax planning, including calculation and filing of
income tax returns for the fiscal year ended December 31, 2003.
PKF was paid aggregate audit and tax fees of $14,966 for the fiscal
year ended December 31, 2002, for professional services rendered for the audit
of our annual financial statements and for the reviews of the financial
statements included in our quarterly reports on Form 10-QSB during this fiscal
year, as well as for professional services rendered for tax compliance, tax
advice and tax planning, including calculation and filing of income tax returns
for the fiscal year ended December 31, 2002.
24
AUDIT-RELATED FEES
Neither CJW nor PKF was paid any additional fees for either of the
fiscal years ended December 31, 2003 or December 31, 2002, respectively, for
assurance and related services reasonably related to the performance of the
audit or review of our financial statements.
OTHER FEES
Neither CJW nor PKF was paid any other fees for professional services
during the fiscal years ended December 31, 2003 or December 31, 2002,
respectively.
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. Effective as of December 2002, 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. The 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, the 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 the Audit Committee to be informed
of each service, and the policies do not include any delegation of the Audit
Committee's responsibilities to management. The 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 the Audit
Committee at its next scheduled meeting.
During the year ended December 31, 2003, the Audit Committee approved
100% of the total fees that were paid to CJW. The Audit Committee has determined
that the rendering of all other non-audit services by CJW is compatible with
maintaining CJW's independence. During the year ended December 31, 2003, none of
the total hours expended on our financial audit by CJW were provided by persons
other than CJW's full-time permanent employees.
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: December 5, 2005.
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
By:/s/ DANIEL B. O'BRIEN
-----------------------------------------
Name: Daniel B. O'Brien
Title: President and Chief Executive Officer
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:
Signature Title Date
/s/ DANIEL B. O'BRIEN President and Chief Executive December 5, 2005
----------------------- Officer (principal executive
Daniel B. O'Brien officer), Interim Chief Financial
Officer (principal accounting
officer), Director
Director
-----------------------
John H. Bientjes
/s/ ROBERT N. O'BRIEN Director December 5, 2005
-----------------------
Robert N. O'Brien
/s/ DALE FRIEND Director December 5, 2005
-----------------------
Dale Friend
/s/ ERIC G. HODGES Director December 5, 2005
-----------------------
Eric G. Hodges
26