Director
Compensation
The
Company reimburses directors for any expenses incurred in attending board meetings. Prior to 2016, and except for Daniel B. O’Brien,
the Company compensated directors $2,500 annually and granted directors, other than Mr. O’Brien, options to purchase shares
of common stock each year that they serve. For 2016 and 2017, the Company compensated the directors with an annual payment of
$5,000 and no stock options.
The
Company’s directors received the following compensation during the year ended December 31, 2017:
Name
|
|
Paid
in Cash
|
|
|
Stock
Awards (1)
|
|
|
Option
Awards (2)
|
|
|
|
|
|
|
|
|
|
|
John H. Bientjes
|
|
$
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
Name
|
|
Paid
in Cash
|
|
|
Stock
Awards (1)
|
|
|
Option
Awards (2)
|
|
|
|
|
|
|
|
|
|
|
|
Robert Helina
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Dr. Thomas Fyles
|
|
$
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
Ben Seaman
|
|
$
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
David Fynn
|
|
$
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
The
fair value of stock issued for services computed on the date of grant.
|
(2)
|
The
fair value of options granted computed in accordance with on the date of grant.
|
The
terms of outstanding options held by the following persons as of August 15, 2018 are shown below:
Name
|
|
Option Price
|
|
|
No. of Options
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
John H. Bientjes
|
|
$
|
1.00
|
|
|
|
5,000
|
|
|
December 31, 2018
|
John H. Beintjes
|
|
$
|
1.05
|
|
|
|
5,000
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Robert Helina
|
|
$
|
1.00
|
|
|
|
5,000
|
|
|
December 31, 2018
|
Robert Helina
|
|
$
|
1.05
|
|
|
|
5,000
|
|
|
December 31, 2019
|
Robert Helina
|
|
$
|
1.42
|
|
|
|
5,000
|
|
|
December 31, 2021
|
Robert Helina
|
|
$
|
1.70
|
|
|
|
5,000
|
|
|
December 31, 2022
|
As
of April 30, 2018, options to purchase 685,000 shares of the Company’s common stock were outstanding under the Non-Qualified
Stock Option Plan and the Stock Option Program. The exercise price of these options varies between $0.75 and $1.70 per share.
The options expire at various dates between December 31, 2018 and December 31, 2022.
Compensation
Committee
The
Company’s Compensation Committee consists of John Bientjes, Ben Seaman and David Fynn, all of whom are independent as that
term is defined in Section 803 of the listing standards of the NYSE MKT.
The
Compensation Committee is empowered to review and approve the annual compensation and compensation procedures for the Company’s
officers and determines the total compensation level for the Company’s Chief Executive Officer. The total proposed compensation
of the Company’s Chief Executive Officer is formulated and evaluated by its Chief Executive Officer and submitted to the
Company’s Compensation Committee for consideration.
During
the year ended December 31, 2017 the Compensation Committee met once. All members of the Compensation Committee attended this
meeting.
During
the year ended December 31, 2017, Daniel B. O’Brien, the Company’s only executive officer, did not participate in
deliberations of the Company’s Compensation Committee concerning executive officer compensation.
During
the year ended December 31, 2017, no director of the Company was also an executive officer of another entity, which had an executive
officer of the Company serving as a director of such entity or as a member of the Compensation Committee of such entity.
The
following is the report of the Compensation Committee:
The
key components of the Company’s executive compensation program include annual base salaries and long-term incentive compensation
consisting of stock options. It is the Company’s policy to target compensation (i.e., base salary, stock option grants and
other benefits) at approximately the median of comparable companies in the industries in which the Company competes. Accordingly,
data on compensation practices followed by other companies in the industries in which the Company competes is considered.
The
Company’s long-term incentive program consists exclusively of periodic grants of stock options with an exercise price equal
to the fair market value of the Company’s common stock on the date of grant. To encourage retention, the ability to exercise
options granted under the program may be subject to vesting restrictions. Decisions made regarding the timing and size of option
grants take into account the performance of both the Company and the employee, “competitive market” practices, and
the size of the option grants made in prior years. The weighting of these factors varies and is subjective. Current option holdings
are not considered when granting options.
Audit
Committee
The
Company’s Audit Committee presently consists of John Bientjes, Ben Seaman and David Fynn, all of whom and have strong financial
backgrounds. The purpose of the Audit Committee is to review and approve the selection of the Company’s auditors and review
the Company’s financial statements with the Company’s independent registered public accounting firm. The Audit Committee
also serves as an independent and objective party to monitor the Company’s financial reporting process and internal control
systems. The Audit Committee meets periodically with management and the Company’s independent auditors.
During
the fiscal year ended December 31, 2017, the Audit Committee met four times. All members of the Audit Committee attended these
meetings.
The
following is the report of the Audit Committee:
|
(1)
|
The
Audit Committee reviewed and discussed the Company’s audited financial statements
for the year ended December 31, 2017 with the Company’s management.
|
|
(2)
|
The
Audit Committee discussed with the Company’s independent registered public accounting
firm the matters required to be discussed by Statement on Accounting Standards (SAS)
No. 61 “Communications with Audit Committee” as amended by SASs 89 and 90.
|
|
(3)
|
The
Audit Committee has received the written disclosures and the letter from the Company’s
independent registered public accounting firm required by PCAOB (Public Company Accounting
Oversight Board) standards, and had discussed with the Company’s independent registered
public accounting firm the independent registered public accounting firm’s independence.
|
|
(4)
|
Based
on the review and discussions referred to above, the Audit Committee recommended to the
Board of Directors that the audited financial statements be included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2017 for filing with the Securities
and Exchange Commission.
|
|
(5)
|
During
the year ended December 31, 2017 the Company paid Meyers Norris Penny LLP, the Company’s
independent registered public accounting firm, audit and audit related fees of $72,375
for professional services rendered for the audit of the Company’s annual financial
statements and the reviews of the financial statements included in the Company’s
10-Q reports for the fiscal year and all regulatory filings.
|
|
(6)
|
The
Audit Committee is of the opinion that these fees are consistent with maintaining its
independence from the Company.
|
The
foregoing report has been approved by the members of the Audit Committee:
John
Bientjes
Ben
Seaman
David
Fynn
The
Company’s Board of Directors has adopted a written charter for the Audit Committee, a copy of which is available on the
Company’s website:
www.flexiblesolutions.com
.
Our
board of directors recommends that you vote FOR the nominees to the Board of Directors
PROPOSAL
2 - ADVISORY VOTE ON EXECUTIVE COMPENSATION
The
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, enables the Company’s shareholders
to vote to approve, on a nonbinding advisory basis, the compensation of the Company’s executive officers.
Accordingly,
the Company will ask shareholders to vote for the following resolution at the annual meeting:
“RESOLVED,
that the Company’s shareholders approve, on a nonbinding advisory basis, the compensation of the Company’s executive
officers, as disclosed in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held __________, 2018
pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Summary Compensation Table
and the other related tables and narrative disclosure in the Company’s proxy statement.”
To
the extent there is any significant vote against the named executive officer compensation as disclosed in this proxy statement,
the Company’s Board of Directors and its Compensation Committee will consider shareholders’ concerns and the Compensation
Committee will evaluate whether any actions are necessary to address those concerns.
The
Board of Directors recommends that the shareholders approve on a nonbinding advisory basis the resolution approving the compensation
of the Company’s executive officers set forth in this proxy statement.
PROPOSAL
3 - RATIFICATION OF THE APPOINTMENT
OF
THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors has selected Meyers, Norris, Penny, LLP, an independent registered public accounting firm, to audit the books
and records of the Company for the fiscal year ending December 31, 2018. Meyers, Norris, Penny served as the Company’s independent
registered public accounting firm for the fiscal years ended December 31, 2017 and 2016. A representative of Meyers, Norris, Penny
is not expected to be present at the shareholders’ meeting.
The
following table shows the aggregate fees billed to the Company during the years ended December 31, 2017 and 2016 by Meyers Norris
Penny LLP:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Audit Fees
|
|
$
|
72,375
|
|
|
$
|
64,553
|
|
Audit-Related Fees
|
|
|
—
|
|
|
|
—
|
|
Tax Fees
|
|
|
—
|
|
|
$
|
5,663
|
|
All Other Fees
|
|
|
—
|
|
|
|
—
|
|
Audit
fees represent amounts billed for professional services rendered for the audit of the Company’s annual financial statements
and the reviews of the financial statements included in the Company’s 10-Q reports for the fiscal year and all regulatory
filings. Audit-related fees represent amounts billed for reviewing amendments to the Company’s 10-K and 10-Q reports. Before
Meyers Norris Penny was engaged by the Company to render audit or non-audit services, the engagement was approved by the Company’s
audit committee. The Company’s Board of Directors is of the opinion that the audit fees charged by Meyers Norris Penny are
consistent with that firm maintaining its independence from the Company.
Our
board of directors recommends that you vote FOR the ratification of
Meyers,
Norris, Penny, LLP as our auditors for our upcoming fiscal year.
PROPOSAL
4 – THE CHANGE IN DOMICILE
General
On
December 19, 2017, our board of directors determined that it would be in the best interest of our company to change our corporate
jurisdiction from the State of Nevada to Canada. We intend to change the corporate jurisdiction of FSI from Nevada to Canada by
means of a process called a “conversion” under the
Nevada Revised Statutes
(“NRS”) and a “continuation”
under the
Canadian Business Corporations Act
(“CBCA”).
If
our stockholders approve the proposed continuation then we intend to file articles of conversion with the Secretary of State of
Nevada and a continuation application with the Registrar of Companies of Canada. Upon receipt of a certificate of continuation
from the Registrar of Companies of Canada, we will be continued as a Canadian corporation and will be governed by the laws of
Canada. The assets and liabilities of the Canadian corporation immediately after the continuation will be identical to the assets
and liabilities of the Nevada corporation immediately prior to the continuation. The officers and directors of FSI immediately
before the continuation becomes effective will be the officers and directors of the Canadian corporation. The change of our corporate
jurisdiction will not result in any material change to our business and will not have any effect on the relative equity or voting
interests of our stockholders. Each previously outstanding share of our common and preferred stock will become one common or preferred
share, as the case may be, of Canadian corporation.
The
change of our corporate jurisdiction will result in changes in the rights and obligations of our current stockholders under applicable
corporate laws. For an explanation of these differences see the discussion of “Material Differences of the Rights of Our
Stockholders After the Change of Our Corporate Jurisdiction” beginning on page 28 of this proxy statement/prospectus. In
addition, the change of our corporate jurisdiction may have material tax consequences to stockholders which may or may not be
adverse to any particular stockholder depending on the stockholder’s particular circumstances. For a more detailed explanation
of the tax consequences.
Plan
of Conversion
A
summary of the material terms of the plan of conversion is set forth below. The full text of the plan of conversion is attached
as Schedule “A” to this proxy statement/prospectus.
Principal
Terms of the Conversion
The
plan of conversion provides that at the effective time of the conversion, FSI will be converted into FSCA, a Canadian corporation
continued under the CBCA. At the effective time of the conversion, the continuation application and articles of FSCA, in the forms
attached as Appendix “A” and Appendix “B”, respectively, of the plan of conversion will replace the articles
of incorporation and bylaws of FSI.
Effective
Time of the Conversion
The
plan of conversion provides that, as promptly as practicable after the approval of the plan of conversion by the holders of a
majority of the outstanding shares of common stock of FSI, FSI will file the articles of conversion with the Secretary of State
of Nevada and a continuation application with the Registrar of Companies of Canada. The plan of conversion provides that the effective
date and time of the conversion will be the date and time on and at which the continuation becomes effective under the NRS or
the date and time on and at which the continuation becomes effective under the CBCA, whichever occurs later.
Manner
and Basis of Converting Shares of Common Stock
At
the effective time of the conversion, each share of common stock of FSI, with a par value of $0.001 per share, issued and outstanding
immediately before the effective time of the conversion will, by virtue of the conversion and without any action on the part of
the holder thereof, be converted into and become one validly issued, fully paid and non-assessable common share, without par value,
of FSCA.
Manner
and Basis of Converting Options and Other Rights
At
the effective time of the conversion, each option, warrant or other right to acquire shares of common stock of FSI Nevada that
is or was outstanding immediately before the effective time of the conversion will, by virtue of the conversion and without any
action on the part of the holder thereof, be converted into and become an option, warrant or right, respectively, to acquire,
upon the same terms and conditions, the number of common shares of FSCA that such holder would have received had such holder exercised
such option, warrant or right, respectively, in full immediately before the effective time of the conversion (whether or not such
option, warrant or right was then exercisable) and the exercise price per share under each such option, warrant or right, respectively
will be equal to the exercise price per share thereof immediately before the effective time of the conversion, unless otherwise
provided in the instrument or agreement granting such option, warrant or right, respectively.
Effect
of the Conversion
At
the effective time of the conversion, FSI will cease to exist as a Nevada corporation, and the title to all real estate vested
by deed or otherwise under the laws of any jurisdiction, and the title to all other property, real and personal, owned by FSI,
and all debts due to FSI on whatever account, as well as all other things in action or belonging to FSI immediately before the
conversion, will be vested in FSCA, without reservation or impairment. FSCA will have all of the debts, liabilities and duties
of FSI, and all rights of creditors accruing and all liens placed upon any property of FSI up to the effective time of the conversion
will be preserved unimpaired, and all debts, liabilities and duties of FSI immediately before the conversion will attach to FSCA
and may be enforced against it to the same extent as if it had incurred or contracted such debts, liabilities and duties. Any
proceeding pending against FSI may be continued as if the conversion had not occurred or FSCA may be substituted in the proceeding
in place of FSI.
Amendment
The
boards of directors of FSI may amend the plan of conversion at any time before the effective time of conversion, provided, however,
that an amendment made subsequent to the approval of the conversion by the stockholders of FSI must not (a) alter or change the
manner or basis of exchanging a stockholder’s shares of FSI for a stockholder’s shares, rights to purchase a stockholder’s
shares, or other securities of FSCA, or for cash or other property in whole or in part or (b) alter or change any of the terms
and conditions of the plan of conversion in a manner that adversely affects the stockholders of FSI.
Termination
At
any time before the effective time of the conversion, the plan of conversion may be terminated and the conversion may be abandoned
by the board of directors of FSI, notwithstanding approval of the plan of conversion by the stockholders of FSI. We anticipate
that the plan of conversion will be terminated if the proposed conversion is not approved by our stockholders at the annual and
special meeting.
Appraisal
Rights
Pursuant
to the NRS §§ 78.3793, 92A.300 – 92A.500 (inclusive) (the “
Dissenters Rights Provisions
”) our
stockholders are entitled, after complying with certain requirements of Nevada law, to dissent from approval of the continuation
pursuant to Chapter 92A of the NRS and to be paid the “fair value” of their shares of our common stock exclusive of
any element of value arising from the accomplishment or expectation of the continuation, if the continuation is completed. Stockholders
electing to exercise these appraisal rights must comply with the provisions of Chapter 92A of the NRS in order to perfect their
rights. We will require strict compliance with the statutory procedures.
In
the context of the continuation, the Dissenters’ Rights Provisions provides that the former stockholders may elect to have
our company purchase their shares held by the former stockholders for a cash price that is equal to the “fair value”
of such shares, as determined in a judicial proceeding in accordance with the Dissenters’ Rights Provisions. The fair value
of the shares of any former stockholder means the value of such shares immediately before the effectuation of the continuation
excluding any appreciation or depreciation in anticipation of the continuation, unless exclusion of any appreciation or depreciation
would be inequitable.
A
copy of the Dissenters’ Rights Provisions is attached as Schedule “B” hereto. If you wish to exercise your dissenters’
rights or preserve the right to do so, you should carefully review Schedule “B” hereto. IF YOU FAIL TO COMPLY WITH
THE PROCEDURES SPECIFIED IN THE DISSENTERS’ RIGHTS PROVISIONS IN A TIMELY MANNER, YOU MAY LOSE YOUR DISSENTERS’ RIGHTS.
BECAUSE OF THE COMPLEXITY OF THOSE PROCEDURES, YOU SHOULD SEEK THE ADVICE OF COUNSEL IF YOU ARE CONSIDERING EXERCISING YOUR DISSENTERS’
RIGHTS. Former stockholders who perfect their dissenters’ rights by complying with the procedures set forth in the Dissenters’
Rights Provisions will have the fair value of their Shares determined by a Nevada state district court and will be entitled to
receive a cash payment equal to such fair value. Any such judicial determination of the fair value of shares could be based upon
any valuation method or combination of methods the court deems appropriate. The value so determined could be more or less than
the continuation to be paid in connection with the continuation. In addition, former stockholders who invoke dissenters’
rights may be entitled to receive payment of a fair rate of interest from the effective time of the continuation on the amount
determined to be the fair value of their shares. If you do NOT plan to seek an appraisal of all of your shares, please execute
(or, if you are not the record holder of such shares, to arrange for such record holder or such holder’s duly authorized
representative to execute) and mail postage paid the enclosed Letter of Transmittal to the agent at the address set forth in the
Letter of Transmittal. You should note that surrendering to FSI certificates for your shares will constitute a waiver of your
appraisal rights under the NRS.
All
demands for appraisal should be addressed to Dan O’Brien at FSI, 6001 54 Ave., Taber, Alberta, Canada T1G 1X4, before the
vote on the continuation is taken at the annual and special meeting, and should be executed by, or on behalf of, the record holder
of the shares of the common stock. The demand must reasonably inform us of the identity of the stockholder and the intention of
the stockholder to demand appraisal of his, her or its shares of our common stock.
In
view of the complexity of the Dissenter’s Rights Provisions in Chapter 92A of the NRS, stockholders desiring to dissent
from the continuation and pursue appraisal rights should consult their legal advisers. A copy of Chapter 92A of the NRS is attached
as Schedule “B” to this proxy statement/prospectus.
Reasons
for the Continuation
We
believe that the change of our corporate jurisdiction to Canada will more accurately reflect our operations, which are headquartered
in and managed from Canada. We also believe that changing our corporate jurisdiction to Canada more accurately reflects the identity
of our company. Furthermore, the majority of our officers and directors are located in Canada, and a large amount of our issued
and outstanding stock is owned of record by persons not residents in the United States.
In
addition to the potential benefits described above, the continuation will impose some moderate costs on our company and will expose
us and our stockholders to some risk, including the risk of liability for taxation and the potential for greater impediments to
enforcement of judgments and orders of United States courts and regulatory authorities against our company following the consummation
of the continuation. Please see the section entitled “Risk Factors Pertaining to our Change in Domicile” for a more
comprehensive discussion regarding the risk factors of the continuation. There are also differences between the laws of Nevada
and the laws of Canada. Regardless of the risks and costs associated with the change of our corporate jurisdiction, our board
of directors has determined that the potential advantages of the change of our corporate jurisdiction outweigh the risks and costs.
Although
our board of directors evaluated variations in the basic structure of the continuation, our board of directors believes, based
on advice from management and its professional advisors, that the proposed structure of our company as a Canadian corporation
is the best structure to provide the advantages which our company is seeking without substantial operational or financial risks.
No assurance can be given, however, that the anticipated benefits of the continuation will be realized.
Corporate
Law Requirements
In
order for our company to carry out the continuation, it will be necessary for us to comply with the provisions of the NRS and
the CBCA.
The
NRS allows a corporation that is incorporated under the Nevada corporate law to convert into a foreign entity pursuant to a conversion
approved by the stockholders of the Nevada corporation. Pursuant to the Nevada corporate law, the board of directors of FSI has
adopted the plan of conversion attached as Schedule “A” to this proxy statement/prospectus and FSI, subject to approval
by our stockholders.
If
holders of a majority of the voting power of our stockholders vote to approve the plan of conversion, we intend to file articles
of conversion with the Nevada Secretary of State. After we file the articles of conversion and pay to the Secretary of State of
the State of Nevada all prescribed fees, and we comply with all other requirements, the conversion will become effective in accordance
with the Nevada corporate law.
As
we are proposing to continue into the jurisdiction of Canada, we must also comply with the applicable provisions of the CBCA in
order to successfully complete the continuation.
A
foreign corporation is permitted to continue from a foreign jurisdiction into Canada by filing with the Registrar of Companies
of Canada a continuation application and providing to the Registrar of Companies certain records and information that the Registrar
of Companies may require. We expect that the continuation of FSI into Canada will be effective on the date and time that the continuation
application, the form of which is attached hereto as Appendix “A” of the plan of conversion, is filed with the Registrar
of Companies, assuming we provide the Registrar of Companies with any records and information it may require. After FSI Nevada
is continued into Canada, the Registrar of Companies must issue a certificate of continuation showing the name of the continued
company (expected to be “Flexible Solutions, Inc.”) and the date and time on which it is continued into Canada as
a continued company.
Our
Authorized Capital after the Change of Our Corporate Jurisdiction
Our
Certificate of Incorporation presently provides that our authorized capital is 50,000,000 shares of common stock with a par value
of $0.001 per share, and 1,000,000 shares of preferred stock with a par value of $0.01 per share.
Our
authorized share capital following the completion of the change in domicile will consist of an unlimited number of common and
preferred shares without nominal or par value. The authorized share capital may be increased or decreased by a resolution approved
by the affirmative vote of the holders of 66 2/3% of the voting power of the issued and outstanding shares entitled to vote on
such matter, voting together as a single class. The Board will be authorized to issue new post-Redomicile common shares without
Stockholder approval.
Exchange
of Share Certificates
Upon
the effectiveness of the continuation, FSI will mail a letter of transmittal with instructions to each holder of record of shares
of common stock of FSI outstanding immediately before the effective time for use in exchanging certificates formerly representing
shares of common stock of FSI for certificates representing shares of FSCA. Certificates should not be surrendered by the holder
thereof until they have received the letter of transmittal from FSI.
Material
Differences of the Rights of Our Stockholders After the Change of Our Corporate Jurisdiction
You
will continue to hold the same number of shares you now hold following the change of our corporate jurisdiction from the State
of Nevada to Canada. However, the rights of stockholders under the NRS differ in certain substantive ways from the rights of stockholders
under the CBCA. The NRS differs in many respects from the CBCA. The following is a summary description of the principal differences
that could affect the rights of our stockholders.
Common
Shares
The
holders of common shares of FSCA will be entitled to dividends, if, as and when declared by the board of directors of FSCA, entitled
to one vote per share at meetings of shareholders or FSCA and, upon dissolution, entitled to share equally in such assets of FSI
as are distributable to the holders of common shares of FSI and subject to the rights of the holders of preferred shares.
Preferred
Shares
FSCA
will be authorized to issue preferred shares in one or more series. Subject to the CBCA, the directors of FSCA may, by resolution,
if none of the shares of any particular series are issued, alter articles of FSCA and authorize the alteration of the notice of
articles of FSCA, as the case may be, to do one or more of the following:
|
●
|
determine
the maximum number of shares of that series that FSCA is authorized to issue, determine that there is no such maximum number,
or alter any such determination;
|
|
●
|
create
an identifying name for the shares of that series, or alter any such identifying name; and
|
|
●
|
attach
special rights or restrictions to the shares of that series, or alter any such special rights or restrictions.
|
The
holders of preferred shares will be entitled, on the liquidation or dissolution of FSCA, whether voluntary or involuntary, or
on any other distribution of the assets of FSCA among shareholders of FSCA for the purpose of winding up its affairs, to receive,
before any distribution is made to the holders of common shares of FSCA or any other shares of FSCA ranking junior to the preferred
shares with respect to the repayment of capital on the liquidation or dissolution of FSCA, whether voluntary or involuntary, or
on any other distribution of the assets of FSCA among shareholders of FSCA for the purpose of winding up its affairs, the amount
paid up with respect to each preferred share held by them, together with the fixed premium (if any) thereon, all accrued and unpaid
cumulative dividends (if any and if preferential) thereon, which for such purpose will be calculated as if such dividends were
accruing on a day-to-day basis up to the date of such distribution, whether or not earned or declared, and all declared and unpaid
non-cumulative dividends (if any and if preferential) thereon. After payment to the holders of the preferred shares of the amounts
so payable to them, they will not, as such, be entitled to share in any further distribution of the property or assets of FSCA,
except as specifically provided in the special rights and restrictions attached to any particular series. All assets remaining
after payment to the holders of preferred shares as aforesaid will be distributed rateably among the holders of common shares
of FSCA.
Except
for such rights relating to the election of directors on a default in payment of dividends as may be attached to any series of
the preferred shares by the directors, holders of preferred shares will not be entitled, as such, to receive notice of, or to
attend or vote at, any general meeting of shareholders of FSCA.
Voting
Rights
Stockholders
will be entitled to one vote for each post-Redomicile common share held of record on all matters submitted to a vote of the Stockholders,
will have the right to vote for the election of directors and will not have cumulative voting rights. Except as otherwise required
by law, Stockholders will not be entitled to vote on any amendment to the articles of incorporation that relates solely to the
terms of any future outstanding series if the holders of such affected series are entitled, either separately or together with
the holders of one or more other such series, to vote thereon pursuant to the and articles of incorporation or pursuant to the
CBCA.
Dividends
Stockholders
will be entitled to receive in proportion to the number of post-Redomicile common shares held by them such dividends (payable
in cash, post-Redomicile common shares or otherwise), if any, as may be declared from time to time by the Board out of funds available
for dividend payments. Dividends will not be declared where there are reasonable grounds for believing the Company is insolvent
or the payment of dividends would render the company insolvent. There will not be a fixed rate of dividends.
Conversion,
Redemption, Liquidation and Pre-Emption Rights
Stockholders
will have no preferences or rights of conversion, exchange, pre-emption or other subscription rights attached to post-Redomicile
common shares. There will be no redemption or sinking fund provisions applicable to such common shares. In the event of any voluntary
or involuntary liquidation, dissolution or winding-up of the Company’s affairs, Stockholders will be entitled to share ratably
in the Company’s assets in proportion to such common shares held by them that are remaining after payment or provision for
payment of all of the Company’s debts and obligations.
Directors
The
NRS requires that a corporation have a minimum of one director. The number of directors must be fixed by, or in the manner provided
in, the bylaws, unless the certificate of incorporation fixes the number of directors, in which case a change in the number of
directors must be made only by amendment to the certificate, which requires stockholder approval. The number of directors may
be changed by resolution of the board of directors if the certificate of incorporation or bylaws so provide. The certificate of
incorporation of FSI provides that the board of directors of FSI must determine the number of directors, subject to the bylaws
of FSI. The bylaws of FSI provide that the number of directors must be a minimum of 1 and a maximum of 8 unless and until otherwise
determined by a vote of a majority of the board of directors of FSI. Within these limits, the number of directors must be determined
from time to time by resolution of the board of directors or by the stockholders at a meeting. The bylaws of FSI provide that
generally all elections must be decided by the vote of a majority in interest of the stockholders present in person or represented
by proxy and entitled to vote at the meeting.
Under
the CBCA, a public company must have no fewer than three directors at least two of whom are not officers or employees of the corporation
or its affiliates and whereby at least twenty-five per cent of the directors of a corporation must be resident Canadians and if
a corporation has less than four directors, at least one director must be a resident Canadian. The directors are elected at the
annual meeting of shareholders of the Company for a term expiring at the end of the next annual meeting. Under the CBCA, the directors
may also, if the articles so provide, appoint one or more additional directors, who shall also hold office for a term expiring
at the end of the next annual meeting, provided that the total number of directors so elected shall not exceed one third of the
number of directors elected at the previous annual meeting.
Canadian
law allows a corporation to have a staggered board of directors (also known as a classified board of directors) if provided for
in the articles or by-laws of the corporation.
Under
the CBCA, subject to certain exceptions, a quorum of directors may fill a vacancy among the directors, except a vacancy resulting
from an increase in the number or the minimum or maximum number of directors or a failure to elect the number or minimum number
of directors provided for in the articles.
Under
the CBCA, a corporation may indemnify a director or officer of the corporation, a former director or officer of the corporation
or another individual who acts or acted at the corporation’s request as a director or officer, or an individual acting in
a similar capacity, of another entity, (an “
Indemnifiable Person
”) against all costs, charges and expenses,
including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the Indemnifiable Person in respect
of any civil, criminal administrative, investigative or other proceeding in which the Indemnifiable Person is involved because
of that association with the corporation or other entity.
A
corporation may not indemnify an Indemnifiable Person under the CBCA unless the individual:
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(i)
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acted
honestly and in good faith with a view to the best interests of the corporation, or, as the case may be, to the bests interests
of the other entity for which the individual acted as director or officer or in a similar capacity at the corporation’s
request; and
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(ii)
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in
the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the individual had reasonable
grounds for believing that the individual’s conduct was lawful.
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A
corporation may, with the approval of a court, also indemnify an Indemnifiable Person in respect of an action by or on behalf
of the corporation or other entity to procure a judgment in its favour, to which the individual is made a party because of the
individual’s association with the corporation or other entity, against all costs, charges and expenses reasonably incurred
by the individual in connection with such action, if the Indemnifiable Person fulfils all of the conditions set out above.
Under
the CBCA, the directors are entitled to be reimbursed for reasonable expenses they may incur in and about the business of the
corporation.
Under
the CBCA, directors have fiduciary obligations to the corporation. Under the CBCA, directors, when exercising the powers and discharging
their duties, must act honestly and in good faith with a view to the best interests of the corporation and exercise the care,
diligence and skill that a reasonably prudent individual would exercise in comparable circumstances.
Removal
of Directors
Under
the CBCA, the shareholders of a corporation may by ordinary resolution at a special meeting remove any director or directors from
office. However, there are certain exceptions. Where the corporation’s articles provide for cumulative voting, a director
may be removed from office only if the number of votes cast in favour of the director’s removal is greater than the product
of the number of directors required by the articles and the number of votes cast against the motion. In addition, where the holders
of any class or series of shares of a corporation have an exclusive right to elect one or more of the directors, a director so
elected may only be removed by an ordinary resolution at a meeting of the shareholders of that class or series.
Under
the NRS, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of
the shares then entitled to vote at an election of directors.
Personal
Liability of Directors and Derivative Actions
The
CBCA imposes specific statutory liabilities on directors of corporations in certain situations. Directors can be held liable,
for example, for the authorization of share issues at less than fair market value, or for unpaid wages and vacation pay owed to
employees. Under numerous other provisions in federal and provincial statutes, directors may also face personal liability for,
among other things, environmental offences, source deductions from payrolls, and tax remittances. Corporate directors have a number
of defenses to legal actions in which it is alleged that they have breached their statutory or fiduciary duties, including:
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(i)
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dissenting
from a resolution passed or action taken at a board meeting, which may relieve the director of any liability for the results
of that decision;
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(ii)
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raising
a “good faith reliance” defense to an accusation of breach of a fiduciary duty, whereby the director is entitled
to rely in good faith on financial statements or reports made by an officer of the corporation, the corporation’s auditor,
or by other professionals, such as a lawyer, an accountant, or an engineer; and
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(iii)
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availing
themselves of a due diligence defense that permits directors to avoid a number of statutory liabilities, including breach
of fiduciary duty, where the directors exercise the same degree of care, diligence and skill as a reasonably prudent person
in comparable circumstances.
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Interested
Shareholder Transactions and Anti-Takeover Provisions
Some
powers granted to companies under the NRS may allow a Nevada corporation to make itself potentially less vulnerable to hostile
takeover attempts. These powers include the ability to:
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require
that notice of nominations for directors be given to the corporation prior to a meeting where directors will be elected, which
may give management an opportunity to make a greater effort to solicit its own proxies;
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only
allow the board of directors to call a special meeting of stockholders, which may thwart a raider’s ability to call
a meeting to make disruptive changes;
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provide
that the power to determine the number of directors and to fill vacancies be vested solely in the board, so that the incumbent
board, not a raider, would control vacant board positions;
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provide
for supermajority voting in some circumstances, including mergers and certificate of incorporation amendments;
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There
is no similar provision under the CBCA.
Amendments
to the Governing Documents
Under
the CBCA, the amendment of the articles of a corporation generally requires the approval by special resolution of the shareholders.
Unless the articles or by-laws otherwise provide, the directors may, by resolution, make, amend or repeal any by-law that regulates
the business or affairs of a corporation. Where the directors make, amend or repeal a by-law, they are required under the CBCA
to submit the by-law, amendment or repeal to the shareholders at the next meeting of shareholders, and the shareholders may confirm,
reject or amend the by-law, amendment or repeal by an ordinary resolution, which is a resolution passed by a majority of the votes
cast by shareholders who voted in respect of the resolution. If the directors of a corporation do not submit a by-law, an amendment
or a repeal to the shareholders at the next meeting of shareholders, the by-law, amendment or repeal will cease to be effective
on the date of the meeting of shareholders at which it should have been submitted, and no subsequent resolution of the directors
to adopt, amend or repeal a by-law having substantially the same purpose and effect is effective until it is confirmed or confirmed
as amended by the shareholders.
Shareholder
Quorum and Voting Requirements
Under
the NRS, a corporation’s certificate of incorporation and bylaws may specify the number of shares necessary to constitute
a quorum at any meeting of shareholders; provided, however, that a quorum may not consist of less than one-third of the shares
entitled to vote at the meeting. The bylaws of FSI provide that the presence in person or by proxy of stockholders entitled to
cast at least one third of the shares entitled to vote at the meetings of stockholders constitutes a quorum.
Under
the CBCA, unless waived by the shareholders, a corporation must send notice of the date, time and location of a general meeting
of the shareholders not less than 21 days and not more than 60 days before the meeting.
Under
the CBCA, the record date for a meeting of shareholders is set by the board of directors. Subject to certain exceptions, a corporation
is required to file on SEDAR a notice of record date and meeting date at least 25 days before the record date for the meeting.
The record date for a meeting of the corporation’s shareholders must not precede the date on which the meeting is to be
held by more than 60 days or by less than 30 days.
Under
the CBCA, unless otherwise provided in the articles or by-laws of the corporation, a quorum of shareholders is present at a meeting
of shareholder, irrespective of the number of persons actually present at the meeting, if the holders of a majority of the shares
entitled to vote at the meeting are present in person of represented by proxy.
Under
the CBCA, shareholders carry out actions such as the election of directors, appointment of auditors and approval of amendments
to by-laws by ordinary resolution. Ordinary resolutions require a simple majority of votes cast by shareholders in order to pass.
Certain extraordinary fundamental changes, such as, among others, amalgamations, continuances, and sales, leases or other dispositions
of all or substantially all of the undertakings of a corporation other than in the ordinary course of business, and other extraordinary
corporate actions such as liquidations, dissolutions and (if ordered by a court) arrangements, are required to be approved by
special resolution. Under the CBCA, a special resolution means a resolution passed by a majority of not less than two-thirds of
the votes cast by the shareholders who voted in respect of that resolution.
Under
the CBCA, there is no prescriptive period for which a proxy is valid, but a proxy is only valid at the meeting in respect of which
it is given or any adjournment thereof.
Under
the CBCA, cumulative voting on the election of directors is permitted if provided for in the articles of the corporation. Where
the articles provide for cumulative voting certain protocols must be followed.
Under
the CBCA, where a written statement is submitted by a director or auditor: (i) a resolution in writing signed by all the shareholder
entitled to vote on that resolution at a meeting of shareholders is as valid as if it had been passed at a meeting of the shareholders;
and (ii) a resolution in writing dealing with all matters required by the CBCA to be dealt with at a meeting of shareholders,
and signed by all the shareholder entitled to vote at that meeting, satisfies all the requirements of the CBCA relating to meetings
of shareholders.
Except
where the CBCA or the articles require approval by a special resolution or unanimous resolution, a simple majority of the votes
cast by shareholders voting shares that carry the right to vote at a meeting is required to approve any resolution properly brought
before the stockholders.
The
bylaws of FSI provide that generally all elections and questions must be decided by the vote of a majority in interest of the
stockholders present in person or represented by proxy and entitled to vote at the meeting.
Under
the CBCA, notice of an adjourned meeting of directors is not required to be given if the time and place of the adjourned meeting
is announced at the original meeting.
The
NRS provide that the vote of holders of a majority of the outstanding shares entitled to vote is required to alter, amend, change
or repeal a corporation’s certificate of incorporation, unless otherwise specified in a corporation’s certification
of incorporation or bylaws. In addition, if the amendment to the certificate of incorporation would increase or decrease the aggregate
number of authorized shares of a class, increase or decrease the par value of the shares of such class, or alter or change the
powers, preferences or special rights of the shares of such class so as to affect them adversely, that class is entitled to vote
separately on the amendment whether or not it is designated as voting stock. Furthermore, if the proposed amendment would alter
or change the powers, preferences or special rights of one or more series of any class so as to affect them adversely, but will
not so affect the entire class, then only the shares of the series so affected by the amendment will be considered a separate
class for purposes of the class vote. The NRS reserves the power to the stockholders to adopt, amend or repeal the bylaws unless
the certificate of incorporation confers such power on the board of directors in addition to the stockholders. The certificate
of incorporation of FSI provides that the board of directors of FSI is expressly authorized to make, alter or repeal our bylaws.
Special
Meeting of Shareholders
Under
the CBCA, a special meeting of shareholders may be called by the board of directors at any time or by the court upon application
of a director or shareholder. Further, the holders of not less than 5% of the issued shares of the corporation that carry the
right to vote at a meeting sought to be held may requisition the directors to call a meeting of shareholders for the purposes
stated in the requisition. If the directors do not call a meeting within 21 days after receiving the requisition to call a meeting,
any shareholder who signed the requisition may call the meeting.
Under
the NRS, a special meeting may be called by a board of directors or by any other person authorized to do so in the corporation’s
certificate of incorporation or bylaws. The bylaws of FSI provide that special meetings of the stockholders or of any class or
series thereof entitled to vote may be called by the President or by the chairman of the board of directors, or at the request
in writing by stockholders of record owning at least 20% percent of the issued and outstanding voting shares of common stock of
FSI.
Votes
Required for Extraordinary Transactions
Under
the CBCA, approvals of amalgamations (except amalgamations between a corporation and wholly owned subsidiaries), consolidations,
and sales, leases, or exchanges of substantially all the property of a corporation, other than in the ordinary course of business
of the corporation requires approval by the stockholders by a special resolution at a duly called meeting. The special resolution
means a resolution passed at a meeting of shareholders by at least 2/3 of the votes cast by shareholders voting shares that carry
the right to vote at a meeting.
Under
the NRS, mergers or consolidations generally require the approval of the holders of a majority of the outstanding stock of the
corporation entitled to vote and stockholder approval is not required by a Nevada corporation:
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if
it is the surviving corporation in a merger requiring the issuance of common stock not exceeding 20% of the corporation’s
common stock outstanding immediately prior to the merger, the merger agreement does not amend in any respect the survivor’s
certification of incorporation, and stockholder approval is not specifically mandated in the survivor’s certification
of incorporation;
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●
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if
it is the surviving corporation in a merger with a subsidiary in which it ownership was 90% or greater.
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Unless
a greater percentage is required by the certificate of incorporation, a sale, lease, or exchange of all or substantially all the
property or assets of a Nevada corporation or an amendment to its certificate of incorporation also requires the approval of the
holders of a majority of the outstanding stock entitled to vote on the matter.
Shareholder
Action by Written Consent (In Lieu of a Meeting)
Under
the CBCA, any action required or permitted to be taken at a meeting of the stockholders by an ordinary resolution may be taken
by a written resolution signed by a special majority of the stockholders entitled to vote on such resolution. The proposed articles
of FSI provide that a special majority is two-thirds of the votes cast on the resolution. Any action required or permitted to
be taken at a meeting of the stockholders by a special resolution may be taken by a written resolution signed by all the shareholders
entitled to vote on such resolution.
Under
the NRS, stockholders may execute an action by written consent in lieu of a stockholder meeting, unless such right is eliminated
in the corporation’s certificate of incorporation or bylaws, if holders of outstanding stock representing not less than
the minimum number of votes that would be necessary to take the action at an annual or special meeting execute a written consent
providing for the action.
Under
the CBCA, in certain circumstances, a registered shareholder who disagrees with a proposed corporate action can require the company
to purchase his or her shares for their fair value. The actions giving rise to a right of dissent are as follows:
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an
alteration in the articles of a company by altering the restrictions on the business carried on or to be carried on by the
company, or in its powers;
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various
forms of corporation reorganizations, amalgamation, or arrangements (where permitted);
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a
proposed sale, lease or exchange of all or substantially all of the corporation’s assets; or
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in
respect of any resolution or court order or arrangement permitting dissent.
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Under
the NRS, stockholders have the right to dissent and exercise appraisal rights only with respect to forms of corporate mergers
and consolidations and not in the case of other fundamental change such as the sale of all or substantially all of the assets
of the corporation or amendments to the certification of incorporation, unless so provided in the corporation’s certificate
of incorporation. Stockholders who have neither voted in favor of nor consented to the merger or consolidation have the right
to seek appraisal of their shares by demanding payment in cash for their shares equal to the fair value of such shares. Fair value
is determined by a court in an action timely brought by the stockholders who have properly demanded appraisal of their shares.
In determining fair value, the court may consider all relevant factors, including the rate of interest which the resulting or
surviving corporation would have had to pay to borrow money during the pendency of the court proceedings. In addition, under the
NRS, appraisal rights are not available for any shares of the surviving corporation if the merger did not require the vote of
the stockholders of the surviving corporation.
Oppression
Remedies
Under
the CBCA, a shareholder of a corporation has the right to apply to a court on the grounds that the corporation is acting or proposes
to act in a way that is prejudicial to the shareholder. After the application is filed, the court may make any order as it sees
fit, including an order to prohibit any act proposed by the corporation.
There
are no equivalent statutory remedies under the NRS; however, stockholders may be entitled to remedies for a violation of a director’s
fiduciary duties under Nevada common law.
Inspection
of Corporate Books and Records
Under
the CBCA, current shareholders of a corporation are entitled to inspect, without charge, all of the records the corporation is
required to maintain under the BCBCA, except for minutes of directors’ meetings and directors’ consent resolutions
(and those of committees of directors) and written dissents to resolutions of directors. However, shareholders have the right
to inspect the portions of minutes of directors’ meetings, or of directors’ consent resolutions and other records
that contain disclosures of conflicts of interest by directors and senior officers, and the right to inspect disclosures of certain
financial assistance made by the corporation.
Under
NRS, stockholders have the right for any proper purpose to inspect, upon written demand under oath stating the purpose for such
inspection, the corporation’s stock ledger, list of stockholders and its other books and records, and to make copies or
extracts of the same. A proper purpose means a purpose reasonably related to a person’s interests as a stockholder.
Accounting
Treatment of the Change of Our Corporate Jurisdiction
For
United States accounting purposes, the change of our corporate jurisdiction from Nevada to Canada by means of the continuation
represents a non-substantive exchange to be accounted for in a manner consistent with a transaction between entities under common
control. All assets, liabilities, revenues and expenses will be reflected in the accounts of FSI based on existing carrying values
at the date of the exchange. The historical comparative figures of FSI will be those of FSCA.
We
will continue to prepare our financial statements in accordance with the United States Generally Accepted Accounting Principles
after the consummation of the change of our corporate jurisdiction.
Certain
United States Federal Income Tax Consequences of the Change of Our Corporate Jurisdiction
Neither
FSI nor FSCA will recognize a gain or loss in as a result of our change in domicile.
The
following is a general summary of certain U.S. federal income tax considerations applicable to Shareholders resulting from the
change of our corporate jurisdiction from the State of Nevada to Canada by means of the continuation (the “Continuation”)
and the ownership and disposition of FSI Shares.
This
summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S.
federal income tax considerations that may apply to a Shareholder. For example, it does not take into account the individual facts
and circumstances of any particular Shareholder that may affect the U.S. federal income tax considerations applicable to such
holder, nor does it address the state and local, federal estate and gift, federal alternative minimum tax or foreign tax consequences
to a Shareholder relating to the Continuation and the ownership and disposition of FSI Shares acquired thereby. Accordingly, this
summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any Shareholder.
Each Shareholder is urged to consult its own tax advisor regarding the U. S. federal tax consequences which may apply as a result
of the Continuation and the ownership and disposition of FSI and FSCA shares.
No
ruling from the Internal Revenue Service (the “IRS”) has been requested, or will be obtained, regarding the U.S. federal
income tax consequences to Shareholders as a result of the of the Continuation. This summary is not binding on the IRS, and the
IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition,
because the authorities on which this summary are based are subject to various interpretations, the IRS and the U.S. courts could
disagree with one or more of the positions taken in this summary.
This
summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations (whether final,
temporary, or proposed), published rulings of the IRS, published administrative positions of the IRS, the Convention Between Canada
and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended (the “Canada-U.S.
Tax Convention”), and U.S. court decisions that are applicable and, in each case, as in effect and available, as of the
date of this registration statement. Any of the authorities on which this summary is based could be changed in a material and
adverse manner at any time, and any such change could be applied on a retroactive or prospective basis which could affect the
U.S. federal income tax considerations described in this summary. This summary does not discuss the potential effects, whether
adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive or prospective basis.
As
used in this summary, the term “U.S. Holder” means a beneficial owner of FSI Shares (or, after the Continuation has
been consummated, a beneficial owner of FSCA Shares) that is for U.S. federal income tax purposes:
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(a)
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an
individual who is a citizen or resident of the U.S.;
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(b)
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a
corporation, or other entity classified as a corporation that is created or organized
in or under the laws of the U.S. or any state in the U.S., including the District of
Columbia;
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(c)
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an
estate if the income of such estate is subject to U.S. federal income tax regardless
of the source of such income; or
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(d)
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a
trust if (i) such trust has validly elected to be treated as a U.S. person for U.S. federal
income tax purposes; or (ii) is subject to the supervision of a court within the United
States and the control of one or more U.S. persons as described in the Code.
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For
purposes of this summary, a “Non-U.S. Holder” is a beneficial owner of FSI Shares (or, after the Continuation, a beneficial
owner of FSCA Shares) that is neither a U.S. Holder nor a partnership.
This
summary does not address the U.S. federal income tax considerations of the Continuation to Shareholders that are subject to special
provisions under the Code, including: (a) Shareholders that are tax-exempt organizations, qualified retirement plans, individual
retirement accounts, or other tax-deferred accounts; (b) Shareholders that are financial institutions, underwriters, insurance
companies, real estate investment trusts, or regulated investment companies; (c) Shareholders that are broker-dealers, dealers,
or traders in securities or currencies that elect to apply a mark-to-market accounting method; (d) Shareholders that have a “functional
currency” other than the U.S. dollar; (e) Shareholders that own FSI Shares (or after the Continuation is consummated, FSCA
Shares) as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving
more than one position; (f) Shareholders that acquired FSI Shares (or after the Continuation is consummated, FSCA Shares) in connection
with the exercise of employee stock options or otherwise as compensation for services; (g) Shareholders that hold FSI Shares (or
after the Continuation is consummated, FSCA Shares) other than as a capital asset within the meaning of Section 1221 of the Code
(generally, property held for investment purposes); and (h) partnerships and other pass-through entities (and investors in such
partnerships and entities).
This
summary also does not address the U.S. federal income tax considerations applicable to Shareholders who are: (a) U.S. expatriates
or former long-term residents of the U.S.; (b) persons that have been, are, or will be a resident or deemed to be a resident in
Canada for purposes of the
Income Tax Act
(Canada) (the “Canadian Act”); (c) persons that use or hold, will
use or hold, or that are or will be deemed to use or hold FSI Shares (or after the Continuation is consummated, FSCA Shares) in
connection with carrying on a business in Canada; (d) persons whose FSI Shares (or after the Continuation is consummated, FSCA
Shares) constitute “taxable Canadian property” under the Canadian Act; or (e) persons that have a permanent establishment
in Canada for the purposes of the Canada-U.S. Tax Convention. Shareholders that are subject to special provisions under the Code,
including Shareholders described immediately above, should consult their own tax advisor regarding the U.S. federal, U.S. federal
alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences relating to the Continuation
and the ownership and disposition of FSCA Shares received pursuant to the Continuation.
Finally,
this summary does not address the U.S. federal income tax consequences of transactions effected prior or subsequent to, or concurrently
with the Continuation, including, without limitation: any vesting, conversion, assumption, disposition, exercise, exchange or
other transaction involving any rights to acquire FSI Shares or FSCA Shares, including any options or warrants of FSI; and any
transaction, other than the Continuation, in which securities of FSI or FSCA are acquired.
If
an entity that is classified as a partnership (or “pass-through” entity) for U.S. federal income tax purposes holds
FSI Shares (or after the Continuation is consummated, FSCA Shares), the U.S. federal income tax consequences to such partnership
and the partners of such partnership of participating in the Continuation and the ownership of FSCA Shares received pursuant to
the Continuation generally will depend on the activities of the partnership and the status of such partners. Partners of entities
that are classified as partnerships for U.S. federal income tax purposes should consult their own tax advisors regarding the U.S.
federal income tax consequences of the Continuation and the ownership and disposition of FSCA Shares received thereby.
This
discussion provides general information only and is not intended to be tax advice to any particular Shareholder. Any U.S. Federal,
state, or local tax advice included in this discussion was not intended or written to be used, and it cannot be used by any Shareholder,
for the purpose of avoiding any penalties that may be imposed by any U.S. Federal, state or local governmental taxing authority
or agency. This discussion was written solely to support the promotion or marketing of the transactions or matters addressed in
this Memorandum. Investors should consult their own independent tax advisors in determining the application to them of the U.S.
federal income tax consequences set forth below and any other U.S. federal, state, local foreign or other tax consequences to
them of the purchase, ownership and disposition of FSI and FSCA shares. Investors should note that no rulings have been or will
be sought from the IRS with respect to any of the U.S. federal income tax consequences discussed below and no assurance can be
given that the IRS will not take positions contrary to the conclusions stated below.
The
U.S. Anti-Inversion Rules
FSI
may be treated as a U.S. corporation for U.S. federal income tax purposes. FSCA, a non-U.S. corporation generally would be classified
as a non-U.S. entity (and, therefore, non-U.S. tax residents) under general rules of U.S. federal income taxation. However, Section
7874 of the Internal Revenue Code of 1986, as amended (the “Code”), contains rules that can result in a non-U.S. corporation
being taxed as a U.S. corporation for U.S. federal income tax purposes, unless certain specific tests regarding the level of business
activities are satisfied. Based on the anticipated level of business activities of the Company and its relevant affiliates, it
is unclear whether the tests would be satisfied. Satisfaction of these tests will not be finally determined until after the time
of the Change of Jurisdiction. If it were determined that FSI would be taxed as a U.S. corporation for U.S. federal income tax
purposes, the Company may be liable for both Canadian and U.S. taxes, which could have a material adverse effect on its financial
condition and results of operations.
On
the other hand, if the Company is to be treated as a non-U.S. corporation for U.S. federal tax purposes, certain adverse U.S.
federal income tax consequences could apply to a U.S. Holder if the Company were treated as a passive non-U.S. investment company
(“PFIC”)
for any taxable year during which the U.S. Holder holds FSI shares. The Company may be classified
as a PFIC and there can be no assurance that the Company or any of its non-U.S. corporate subsidiaries would not be treated as
a PFIC for any taxable year. If the Company were treated as a PFIC, U.S. Holders of the Company shares could be subject to certain
adverse U.S. federal income tax consequences with respect to a gain realized on a taxable disposition of such shares, and certain
distributions received on such shares. In addition, dividends received with respect to the Company shares or with respect to the
relevant non-U.S. corporate subsidiary, as applicable, would not constitute qualified dividend income eligible for preferential
tax rates if the Company or the relevant non-U.S. corporate subsidiary, as applicable, were treated as a PFIC for the taxable
year of the distribution or for its preceding taxable year. Certain elections may be available to U.S. Holders to mitigate some
of the adverse tax consequences resulting from PFIC treatment.
The
Company will be incorporated under the laws of Canada. Generally, corporations incorporated outside of the United States are not
treated as U.S. corporations for U.S. federal income tax purposes. However, as described below, Section 7874 of the Code treats
certain corporations incorporated outside the United States as U.S. corporations for U.S. federal income tax purposes. The Company
believes that it will be treated as a U.S. corporation for U.S. federal income tax purposes as a result of the Continuation.
Under
Section 7874 of the Code, a corporation created or organized outside the United States (i.e., a non-U.S. corporation) may nevertheless
be treated as a U.S. corporation for U.S. federal income tax purposes (and, therefore, a U.S. tax resident and subject to U.S.
federal income tax on its worldwide income) if each of the following three conditions are met: (i) the non-U.S. corporation acquires,
directly or indirectly, or is treated as acquiring under applicable Treasury Regulations, substantially all of the assets held,
directly or indirectly, by a U.S. corporation, (ii) after the acquisition, the former stockholders of the U.S. corporation hold
at least 80% (by vote or value) of the shares of the non-U.S. corporation by reason of holding shares of the U.S. corporation,
and (iii) after the acquisition, the non-U.S. corporation’s expanded affiliated group does not have substantial business
activities in the non-U.S. corporation’s country of organization or incorporation when compared to the expanded affiliated
group’s total business activities.
As
a result of the Continuation, (i) FSCA will likely be treated as indirectly acquiring all of the assets of FSI and (ii) after
the Continuation, the former stockholders of FSCA will likely own, in the aggregate, at least 80% (by vote and value) of FSI common
shares by reason of their ownership of FSI common stock. FSI believes that it does not have sufficient business activities in
Canada, its country of incorporation, to satisfy the “substantial business activity” exception under applicable Section
7874 Treasury Regulations. Therefore, under current law, the Company should be treated as a U.S. corporation for U.S. federal
income tax purposes.
The
remainder of this discussion assumes that FSI will be treated as a U.S. corporation for U.S. federal income tax purposes. The
U.S. federal income tax consequences of owning FSI shares would be materially different than those stated herein if, notwithstanding
FSI’s expectation, FSI were to be treated as a non-U.S. corporation for U.S. federal income tax purposes.
No
ruling from the IRS or legal opinion concerning the U.S. federal income tax consequences of the Continuation has been obtained
and none will be requested. Thus, there can be no assurance that the IRS will not challenge the qualification of the Continuation
as a tax-deferred F reorganization under Section 368(a)(1)(F) of the Code, or that, if challenged, a U.S. court would not agree
with the IRS.
If
the Continuation qualifies as an F reorganization and FSI is treated as a U.S. corporation for U.S. federal tax purposes under
Section 7874 of the Code, then the following U.S. federal income tax consequences generally would result for U.S. Holders:
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(a)
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no
gain or loss will be recognized by a U.S. Holder on the exchange of FSI Shares for FSCA
Shares pursuant to the Continuation;
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(b)
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the
tax basis of a U.S. Holder in the FSI Shares acquired in exchange for FSCA Shares pursuant
to the Continuation would be equal to such U.S. Holder’s tax basis in FSI Shares
exchanged;
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(c)
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the
holding period of a U.S. Holder with respect to the FSCA Shares acquired in exchange
for FSI Shares pursuant to the Continuation will include such U.S. Holder’s holding
period for FSI Shares; and
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(d)
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U.S.
Holders who exchange FSCA Shares for FSI Shares pursuant to the Continuation generally
would be required to report certain information to the IRS on their U.S. federal income
tax returns for the tax year in which the Continuation occurs, and to retain certain
records related to the Continuation.
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U.S.
Holders are urged to consult their tax advisors as to the particular consequences of the exchange of FSI stock for FSCA shares
pursuant to the Continuation.
Distributions
by FSCA
The
gross amount of cash distributions on FSCA shares would generally be taxable to U.S. Holders as dividend income to the extent
of the earnings and profits of FSCA as determined for U.S. federal income purposes.
To
the extent that the amount of any distribution exceeds FSCA’s earnings and profits, the distribution would generally first
be treated as a tax-free return of capital (with a corresponding reduction in the adjusted tax basis of a U.S. holder’s
FSCA common shares), and thereafter would be taxed as a capital gain recognized on a taxable disposition.
Dividends
paid in a currency other than U.S. dollars will be included in a U.S. Holder’s gross income in a U.S. dollar amount based
on the spot exchange rate in effect on the date of actual or constructive receipt, whether or not the payment is converted into
U.S. dollars at that time. The U.S. Holder will have a tax basis in such currency equal to such U.S. dollar amount, and any gain
or loss recognized upon a subsequent sale or conversion of the foreign currency for a different U.S. dollar amount will be U.S.
source ordinary income or loss. If the dividend were converted into U.S. dollars on the date of receipt, a U.S. Holder generally
should not be required to recognize foreign currency gain or loss in respect of the dividend income.
A
U.S. Holder would generally recognize a taxable gain or loss on any sale or other taxable disposition of FSI shares in an amount
equal to the difference between the amount realized from such sale or other taxable disposition and the U.S. Holder’s adjusted
tax basis in such shares. Such recognized gain or loss generally would be a capital gain or loss. Capital gains of non-corporate
U.S. Holders (including individuals) generally would be subject to U.S. federal income tax at preferential rates if the U.S. Holder
has held the FSI shares for more than one year as of the date of the sale or other taxable disposition. The deductibility of capital
losses is subject to limitations. Any gain or loss recognized by a U.S. Holder on the sale or other taxable disposition of FSCA
common shares generally would be treated as U.S. source gain or loss.
Material
U.S. Federal Income Tax Considerations for Non-U.S. Holders
A
non-U.S. Holder of FSCA shares generally would not be subject to U.S. federal income or withholding tax on any gain realized on
the disposition of FSCA shares unless:
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the
gain is effectively connected with a U.S. trade or business of such non-U.S. Holder (or,
if an income tax treaty applies, is attributable to a United States “permanent
establishment”); or
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such
non-U.S. Holder is an individual who is present in the United States for 183 days or
more in the taxable year of the disposition, and certain other conditions are met.
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Gain
recognized by a non-U.S. Holder of FSCA shares described in the first bullet point above would generally be subject to tax under
the rules described above as if it were a U.S. Holder of FSCA shares. An individual non-U.S. Holder of FSCA shares described in
the second bullet point above would generally be subject to a 30% tax on the gain, which may be offset by U.S. source capital
losses realized in the same year, even though the individual is not considered a resident of the United States.
Additionally,
non-U.S. Holders generally would be required to recognize gain and be liable for U.S. federal income and withholding tax with
respect to a taxable sale, exchange or other disposition of FSCA shares if FSCA were treated for U.S. federal income tax purposes
as a “U.S. real property interest”
(“USRPHI”)
. Subject to certain exceptions, FSCA would generally
be a USRPHI if at any point in the preceding 5 years the fair market value of its U.S. real property interests equaled or exceeded
50% of the sum of the fair market values of its worldwide real property interests and other assets used or held for use in a trade
or business, all as determined under applicable Treasury Regulations. While not free from doubt, the Company believes that it
has not been, and will not be at the time of the Change of Jurisdiction, a USRPHI for U.S. federal income tax purposes. Non-U.S.
Holders are urged to consult their tax advisor about the consequences that could result if FSCA were a USRPHI.
Assuming
that FSCA is to be treated as a U.S. corporation for U.S. federal tax purposes, a non-U.S. Holder generally would be subject to
U.S. federal withholding tax on dividends received from FSI, and could be subject to U.S. federal income tax if the dividends
were effectively connected with the non-U.S. Holder’s conduct of a trade or business in the United States (and, if an income
tax treaty applies, the dividends are attributable to a permanent establishment or fixed place of business maintained by the non-U.S.
Holder in the United States).
Certain
Canadian Federal Income Tax Consequences of the Change of Our Corporate Jurisdiction
The
following summarizes certain Canadian federal income tax consequences under the Canadian Act applicable to our company and our
stockholders resulting from the change of our corporate jurisdiction by means of the continuation, and thereafter of holding and
disposing of common shares in the capital of FSCA.
Comments
on tax consequences to shareholders is restricted to shareholders (each in this summary a
“Holder”
) of our
company each of whom is an individual (other than a trust) or corporation who or which, at all material times for the purposes
of the Canadian Act, holds all of its common shares in the capital of FSCA solely as capital property, acts at arm’s length
with FSCA, and is not a “financial institution” to which the “mark to market” rules apply, a “specified
financial institution” nor a shareholder in respect of whom our company is a “foreign affiliate” under the Canadian
Act. Comment is further restricted, in the case of any Holder who is not resident in Canada for Canadian federal income tax purposes
(in this commentary, a
“Non-resident Holder”
), to Non-resident Holders whose common shares in the capital of
FSCA are not used in or in the course of carrying on a business in Canada, and will not constitute “taxable Canadian property”
at any particular time after the change of our corporate jurisdiction. In general, a common share of FSCA held by a Non-resident
Holder will not constitute taxable Canadian property at any particular time after the change of our corporate jurisdiction provided
that at that time the common shares of FSCA are listed on a designated stock exchange for the purposes of the Canadian Act, which
includes Tiers 1 and 2 of the Canadian Securities Exchange, unless at any particular time during the five year period that ends
at that time either the Non-resident Holder, or any one or more persons with whom the Non-resident Holder does not deal at arm’s
length, alone or in any combination, held or had a right to acquire 25% or more of the issued shares of any class in the capital
stock of FSCA and more than 50% of the fair market value of the common shares of FSCA was derived directly or indirectly from
one or any combination of real or immovable property situated in Canada, Canadian resource properties, timber resource properties,
or options in respect of or interests in the foregoing.
This
summary assumes that we will not, at the time of the change of our corporate jurisdiction, own shares of a corporation that is
resident in Canada for the purposes of the Canadian Act.
Comment
is based on the current provisions of the Canadian Act and regulations, all amendments thereto publicly proposed by the Minister
of Finance of Canada to the date hereof, and our Canadian tax advisor’s understanding of the published administrative practices
of the Canada Revenue Agency (
“CRA”
). Unless otherwise expressly stated, it is assumed that all such amendments
will be enacted substantially as currently proposed, and that there will be no other material change to any relevant law or administrative
practice, although no assurances can be given in these respects. Except to the extent otherwise expressly provided, this summary
does not take into account any provincial, territorial or foreign tax law, nor any bilateral income tax treaty to which Canada
is a party. Canadian income tax laws, regulations and the interpretation thereof are subject to change, which could materially
alter the following summary. If there should be any change having retroactive effect in the Canadian Act, regulations or administrative
practices of the CRA then there may also be material changes to the following summary.
This
summary is of a general nature only and is not, and is not to be construed as, Canadian tax advice to any particular Holder. Each
Holder is urged to obtain independent advice as to the legal and Canadian tax implications of the continuation, and thereafter
of holding and disposing of common shares in the capital of FSCA, applicable to the Holder’s particular circumstances.
Canadian
Federal Income Tax Consequences
As
a result of the continuation, FSI will be deemed to have disposed of, and FSCA will be deemed to have immediately thereafter reacquired,
each property owned by FSI at its fair market value immediately before the time of the continuation. The Company will be subject
to Canadian federal income tax liabilities with respect to any gains realized as a result of the deemed disposition of all of
its assets that constitute “taxable Canadian property” for the purposes of the Canadian federal income tax. Following
the continuation, gains arising on the future disposition of property of the Company will be subject to tax in Canada. However,
the effect of the deemed disposition and reacquisition is that any gains or losses that accrued to FSI before the continuation
of FSI to Canada will generally not be taken into account in determining the Company’s liability for tax under the Canadian
Act when the Company actually disposes of, or is deemed to dispose of, the property. The deemed disposition and reacquisition
will be relevant not only for capital gains purposes but also in determining the cost of the FSI’s property for capital
cost allowance and inventory purposes.
As
a result of the continuation, the Company will be deemed to have been incorporated in Canada from that point onward, and not to
have been incorporated elsewhere. The Company will be deemed to have had a taxation year end immediately before the time of the
continuation, and will be deemed to have commenced a new tax year at the time of the continuation. The Company will be able to
choose a new fiscal year end falling within the 53 weeks following the date of the continuation.
Resident
Holders and Non-resident Holders
The
continuation will not cause a disposition or deemed disposition of the shares of common stock of FSI Nevada held by any Holder,
and therefore will not cause the realization of any capital gain or capital loss by the Holder in respect of such shares.
The
paid-up capital of shares of the Company’s common stock may be subject to adjustment upon the continuation. The Company
will be deemed to have disposed of all of its assets immediately before the continuation and to have reacquired them on the continuation
at a cost equal to their fair market value. If the resulting tax cost of the Company’s assets, net of the Company’s
outstanding liabilities at the time of the continuation (
“Net Tax Cost”
) is less than the aggregate paid-up
capital of its common shares, the paid-up capital of the Company’s common shares will be reduced to an amount equal the
Net Tax Cost. If the Company’s Net Tax Cost is greater than the aggregate paid-up capital of its common shares, the Company
may elect, within 90 days of the continuation, to increase the paid-up capital of its common shares. If the Company makes such
an election, it will be deemed to have paid prior to the continuation, and the holders of the Company’s common shares will
be deemed to have received pro rata, a dividend in respect of the Company’s common shares. It is not intended that the Company
will make this election if available.
Disposing
of Common Shares
Canadian
Resident Holders
The
normal rules for the taxation of capital gains and losses applicable before the change of our corporate jurisdiction to Holders
who are resident in Canada for the purposes of the Canadian Act (each a
“Resident Holder”
) will continue to
apply to Resident Holders in respect of a disposition of common shares in the capital of FSCA after the continuation.
In
summary, these rules will provide that a Resident Holder who disposes of such a common share after the continuation will realize
a capital gain (capital loss) equal to the amount by which the proceeds received by the Resident Holder on the disposition exceed
(are exceeded by) the adjusted cost base of the common share to the Resident Holder.
The
Resident Holder will be required to include one half of any such capital gain (taxable capital gain) in income to be taxed at
normal rates.
The
Resident Holder may deduct one half of any such capital loss (allowable capital loss) from taxable capital gains realized in the
taxation year of the Resident Holder in which the disposition occurs and, to the extent not so deductible, from taxable capital
gains realized in any of the three preceding taxation years or any subsequent taxation year.
The
Resident Holder, if a “Canadian-controlled private corporation” as defined for the purposes of the Canadian Act, will
be required to include any taxable capital gain so arising in its “aggregate investment income” and pay an additional
refundable tax equal to 10 2/3% of its aggregate investment income, and will be entitled to a refund of such additional tax at
the rate of 38 1/3% of refund for every CDN$1 of taxable dividends that it subsequently pays.
Non-resident
Holders
Generally,
a Non-resident Holder who is a US resident for the purposes of the Canada – U.S. Income Tax Convention who disposes of common
shares in the capital of the Company after the change of our corporate jurisdiction will not incur any tax liability provided
that at the time of disposition not more than 50% of the value of the common shares in the capital of the Company derives from
“real property” situated in Canada as defined for the purposes of the Canada – U.S. Income Tax Convention (which
includes among other things, any right to explore for or exploit mineral deposits and sources in Canada and other natural resources
in Canada, or any right to an amount computed by reference to the production, including profit, from, or to the value of production
from, mineral deposits and sources in Canada and other natural resources in Canada).
A
Non-resident Holder who disposes of common shares in the capital of the Company after the change of our corporate jurisdiction
will not incur any liability for Canadian federal income tax in respect of any taxable capital gain so arising, nor be permitted
to deduct any allowable capital loss so arising from taxable capital gains (if any) of the Non-resident Holder otherwise subject
to Canadian federal income tax if at the time of disposition such common shares are not taxable Canadian property to the Non-resident
Holder.
The
Non-resident Holder will not be required to obtain a tax clearance certificate from CRA in respect of the disposition provided
that at the time of disposition the common shares in the capital of the Company are listed on a Canadian or foreign “recognized
stock exchange” (as defined under the Canadian Act), which includes a designated stock exchange, such as the Canadian Securities
Exchange.
Any
Non-resident Holder who is contemplating disposing of common shares in the capital of the Company after the change of our corporate
jurisdiction should obtain Canadian tax advice as to whether the Non-resident Holder will be subject to Canadian tax, or be required
to obtain a tax clearance certificate from CRA, in respect of the disposition.
Dividends
on Common Shares
Canadian
Resident Holders
A
Resident Holder who is an individual will be required to include the amount of any dividend actually or deemed to have been received
after the change of our corporate jurisdiction on a common share in the capital of the Company in income, subject to the usual
dividend gross-up and dividend tax credit rules applicable to dividends paid by a taxable Canadian corporation.
A
Resident Holder that is a corporation will be required to include the amount of any dividend actually or deemed to have been received
by it after the change of our corporate jurisdiction on a common share in the capital of the Company in income, but generally
will be entitled to deduct an equivalent amount in computing its taxable income. The corporation, if it is a “private corporation”
as defined for the purposes of the CBCA, or a corporation controlled by or for the benefit of an individual or any related group
of individuals, may be liable for a 38 1/3% refundable tax (
“Part IV Tax”
) on any such dividend to the extent
that the dividend was deductible in computing its taxable income, and will be entitled to a refund of such Part IV Tax at the
rate of 38 1/3% of refund for every CDN$1 of taxable dividends that it subsequently pays.
Non-resident
Holders
Each
Non-resident Holder will be required to pay Canadian withholding tax on the amount of any dividend, including any stock dividend,
paid or credited or deemed to be paid or credited by the Company after the change of our corporate jurisdiction to the Non-resident
Holder on a common share. The rate of withholding tax is 25% of the gross amount of the dividend, or such lesser rate as may be
available under an applicable income tax treaty. The rate of withholding tax under the Canada – U.S. Income Tax Convention,
subject to the limitation of benefits article, applicable to a dividend paid to a Non-resident Holder who is a resident of the
United States for the purposes of the Canada – U.S. Income Tax Convention is 5% if the Non-resident Holder is a company
that owns at least 10% of the voting stock of FSI, and 15% in any other case, of the gross amount of the dividend. the Company
will be required to withhold any such tax from the dividend, and remit the tax directly to CRA for the account of the Non-resident
Holder.
Reporting
Obligations under Securities Laws
If
we change our corporate jurisdiction to Canada, we will still have to comply with reporting requirements under the United States
securities laws. However, these requirements should be reduced because we would no longer be a United States company.
We
currently prepare our financial statements in accordance with United States generally accepted accounting principles (
“US
GAAP”
). We file our audited annual financial statements with the Securities and Exchange Commission on annual reports
on Form 10-K and our unaudited interim financial statements with the Securities and Exchange Commission on quarterly reports on
Form 10-Q. Upon completion of the continuation, we anticipate that we will meet the definition of a “foreign private issuer”
under the Securities Exchange Act of 1934. As a foreign private issuer, we can file an annual report on Form 20-F each year with
the Securities and Exchange Commission and we can file our interim financial statements and management’s discussion and
analysis with the Securities and Exchange Commission on Form 6-K. We anticipate that we will continue to prepare our financial
statements in accordance with GAAP subsequent to the change of our corporate jurisdiction.
In
addition, as a foreign private issuer, our directors, officers and stockholders owning more than 10% of our outstanding common
stock will no longer be subject to the insider reporting requirements of Section 16(b) of the Securities Exchange Act of 1934
and we will no longer be subject to the proxy rules of Section 14 of the Securities Exchange Act of 1934. Furthermore, Regulation
FD does not apply to non-United States companies and will not apply to us upon completion of the continuation.
Quotation
on the NYSE American
Our
common stock is quoted on the NYSE American under the symbol “FSI”. We expect that immediately following the continuation,
our common shares will requalify to be quoted on the NYSE American.
FORWARD-LOOKING
STATEMENTS
This
proxy statement/prospectus contains forward-looking statements. Forward-looking statements are projections of events, revenues,
income, future economic performance or management’s plans and objectives for future operations. In some cases, you can identify
forward-looking statements by the use of terminology such as “may”, “should”, “expect”, “plan”,
“anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”
or the negative of these terms or other comparable terminology.
Forward-looking
statements are only predictions and involve known and unknown risks, uncertainties and other factors, including:
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General
economic and business conditions;
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Fluctuations
in prices and demand for our products; and
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Political
changes in Canada and the United States, which could affect our operations there,
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any
of which may cause our company’s or our industry’s actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these
forward-looking statements.
While
these forward-looking statements and any assumptions upon which they are based are made in good faith and reflect our current
judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates,
predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including
the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements
to actual results.
SCHEDULE
“A”
PLAN
OF CONVERSION
ARTICLES
OF CONVERSION
(PURSUANT
TO NRS 92A.205)
1.
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Name
and jurisdiction of organization of constituent entity and resulting entity:
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Flexible
Solutions International, Inc.
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Name
of Entity
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Nevada
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Corporate
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Jurisdiction
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Entity
Type
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and,
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Flexible
Solutions International, Inc.
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Name
of resulting entity
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Canada
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Corporation
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Jurisdiction
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Entity
Type
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2.
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A
plan of conversion has been adopted by the constituent entity in compliance with the
law of the jurisdiction governing the constituent entity.
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3.
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The
entire plan of conversion is attached to these articles.
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4.
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Forwarding
address where copies of process may be sent by the Secretary of State of Nevada (if a
foreign entity is the resulting entity in the conversion).
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Attn:
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Daniel
B. O’Brien
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c/o:
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Hart
& Hart, LLC
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1624
Washington Street
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Denver,
CO 80203
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5.
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Effective
date and time of filing: (optional) (must not be later than 90 days after the certificate
is filed).
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Flexible
Solutions International, Inc.
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Name
of constituent entity
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Chief
Executive Officer
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Signature
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Title
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Date
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PLAN
OF CONVERSION
OF
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
This
Plan of Conversion (the “
Plan
”) is hereby adopted by Flexible Solutions International, Inc., a Nevada corporation
as of May __, 2018.
1.
Parties to the Conversion
.
The
name of the converting organization is Flexible Solutions International, Inc., a Nevada corporation (the “
Corporation
”).
The name of the converted organization is Flexible Solutions International, Inc., a corporation organized under the Canada Business
Corporations Act (the “
Converted Corporation
”).
2.
Effective Time
.
The
conversion contemplated by this Plan shall be effective upon the filing and acceptance of the Articles of Continuance with the
regulatory authorities in Canada (the “
Effective Time
”).
3.
Terms and Conditions of Conversion
.
The
conversion of the Corporation into the Converted Corporation is being consummated pursuant to Section 92A of the Nevada Revised
and Section 187 of the Canada Business Corporations Act. The officers of the Corporation are hereby authorized to file Articles
of Conversion with the Nevada Secretary of State and Articles of Continuance with the regulatory authorities in Canada in substantially
the forms attached hereto as
Exhibit A
and
Exhibit B
respectively.
At
the Effective Time, each share of stock in the Corporation shall be converted into one share of stock of the Converted Corporation
with substantially similar economic rights.
At
the Effective Time, each stock option, warrant or other right to purchase shares of common stock in the Corporation (collectively,
the “Options”), if any, that are outstanding as of the Effective Time shall be converted into an option, warrant or
other right, respectively, to purchase an equal number of common shares of the Converted Corporation.
At
the Effective Time, (1) all property owned by the Corporation shall remain vested in the Converted Corporation, (2) all debts,
liabilities, and other obligations of the Corporation shall continue as obligations of the Converted Corporation, (3) an action
or proceeding pending by or against the Corporation may be continued as if the conversion had not occurred, and (4) all rights,
privileges, immunities, and powers of the Corporation shall remain vested in the Converted Corporation.
4.
Capitalization
.
Upon
completion of the conversion, all shareholders of the outstanding shares of the Corporation shall automatically become shareholders
owning the same number of shares of the Converted Corporation. All terms and conditions of all stock purchase agreements and any
other shareholder agreements between or among the Corporation and its shareholders shall remain in full force and effect and binding
upon the Converted Corporation and its stockholders according to their terms, including any and all restrictions on share transfers
by shareholders.
5.
Governing Documents
.
The
Articles of Incorporation and the Bylaws of the Corporation shall be terminated as of the Effective Time, and the affairs of the
Converted Corporation shall thereafter be governed by the Articles of Continuance (attached as Exhibit B hereto) and By-laws of
the Converted Corporation (attached as
Exhibit “C”
hereto), each of which shall be dated and effective as of
the Effective Time, subject to such amendments as the board or shareholders may make to the Articles of Continuance or Bylaws
at or after the Effective Time.
6.
Termination
.
The
Plan may be amended or terminated with the written consent of the Board of Directors of the Corporation any time prior to the
filings described in Section 3 of the Plan.
7.
Other Actions
.
The
officers of the Corporation, or any one of them, are hereby authorized to execute and deliver any and all documents and instruments
and to take any and all such actions on behalf of the Corporation and the members thereof as they may deem necessary or desirable
in order to carry out the intent and purposes of the Plan, the execution and delivery of such documents or instruments or the
taking of such actions to be conclusive evidence that such execution and delivery or the taking of such actions was authorized
by this Plan.
IN
WITNESS WHEREOF, the undersigned has executed this Plan of Conversion as of the day and year first above written.
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FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
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Name:
Daniel B. O’Brien
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Title:
Chief Executive Officer
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Canada
Business Corporation Act
(CBCA)
FORM
11
ARTICLES
OF CONTINUANCE
(Section
187)
1
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Corporate
Name
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Flexible
Solutions International, Inc.
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2
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The
province or territory in Canada where the registered office is situated
(do not indicate the full address)
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Alberta
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3
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The
classes and any maximum number of shares that the corporation is authorized to issue
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The
Corporation is authorized to issue an unlimited number of common and preferred shares.
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4
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Restrictions,
if any, on share transfers
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None
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5
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Minimum
and maximum number of directors
(for a fixed number of directors, indicate the same number in both boxes)
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Minimum
number – 1
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Maximum
number – 10
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6
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Restrictions,
if any, on the business the corporation may carry on
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None
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7
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a)
If change of name effected, previous name
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Not
applicable
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7
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b)
Details of incorporation
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The
Corporation was domesticated under the Nevada Revised Statutes on May 12, 1996.
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8
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Other
provisions, if any
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See
attached schedule/Voir l’annexe ci-jointe
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9
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Declaration
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I
hereby certify that I am a director or an authorized officer of the Corporation continuing
into the CBCA.
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Daniel
B. O’Brien
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Print
Name
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Signature
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SCHEDULE/ANNEXE
Oher
provisions/Autres dispositions
Without
in any way restricting the powers conferred upon the Corporation or its board of directors by the Canada Business Corporations
Act, as now enacted or as the same may from time to time be amended, re-enacted or replaced, the board of directors may from time
to time, without authorization of the shareholders, in such amounts and on such terms as it deems expedient:
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a)
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borrow
money upon the credit of the Corporation;
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b)
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issue,
re-issue, sell or pledge debt obligations of the Corporation;
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c)
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subject
to the provisions of the Canada Business Corporations Act, as now enacted or as the same
may from time to time be amended, re-enacted or replaced, give a guarantee on behalf
of the Corporation to secure performance of an obligation of any person;
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d)
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mortgage,
hypothecate, pledge or otherwise create a security interest in all or any property of
the Corporation owned or subsequently acquired, to secure any obligation of the Corporation;
and
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The
board of directors may from time to time delegate to a director, a committee of directors or an officer of the Corporation any
or all of the powers conferred on the board as set out above, to such extent and in such manner as the board shall determine as
the time of such delegation.
Between
annual and general meetings of the Corporation, the directors of the Corporation may appoint one or more additional directors
to serve until the next annual and general meeting but the number of additional directors shall not at any time exceed one-third
of the number of directors who held office at the expiration of the last annual and general meeting.
Common
Stock
No
share of common stock shall have any preference over or limitation in respect to any other share of common stock. All shares of
common stock shall have equal rights and privileges, including the following:
1.
All shares of common stock shall share equally in dividends. Subject to applicable laws, the board of directors may, from time
to time, declare and the Corporation may pay dividends in cash, property, or its own shares, except when the Corporation is insolvent.
2.
All shares of common stock shall share equally in distributions in any liquidation.
Each
outstanding share of common stock shall be entitled to one vote.
Preferred
Stock
The
preferred shares may be issued in one or more series and in such number as may be determined from time to time by the board of
directors. The designations, powers, rights, preferences, qualifications, restrictions and limitations of any series of preferred
stock shall be established from time to time by the Board of Directors.
Canada
Business Corporation Act
(CBCA)
FORM
2
INITIAL
REGISTERED OFFICE ADDRESS AND FIRST BOARD OF DIRECTORS
(Sections
19 and 106)
To
be filed with Articles of Incorporation, Amalgamation or Continuance)
1
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Corporate
Name
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Flexible
Solutions International, Inc.
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2
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Address
of registered office
(must be a street address; a P.O. Box is not acceptable)
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Number
and street name:
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6001
54 Ave.
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City:
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Taber
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Province
or territory:
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Alberta
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Postal
code:
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T1G
1X4
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3
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Additional
address
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Care
of:
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Number
and street name:
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City:
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Province
or territory:
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Postal
code:
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4
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Members
of the board of directors
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Name
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Address
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Resident
of Canada
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Daniel
O’Brien
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6001
54 Ave., Taber, Alberta, Canada, T1G 1X4
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Yes
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John
Bientjes
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6001
54 Ave., Taber, Alberta, Canada, T1G 1X4
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Yes
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Robert
Helena
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68
West Bay Road, Baytown Plaza
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George
Town, Grand Cayman KY1-1003
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No
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Thomas
Fyles
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6001
54 Ave., Taber, Alberta, Canada, T1G 1X4
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Yes
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Ben
Seaman
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6001
54 Ave., Taber, Alberta, Canada, T1G 1X4
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Yes
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David
Fynn
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6001
54 Ave., Taber, Alberta, Canada, T1G 1X4
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Yes
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5
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Declaration
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I
hereby certify that I am an incorporator of the new corporation, or that I am a director or an authorized officer of the corporation
continuing into or amalgamating under the CBCA.
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Signature:
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Print
Name:
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Daniel
B. O’Brien
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Telephone
Number:
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(250)477-9969
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SCHEDULE
“B”
NEVADA
REVISED STATUTES
CHAPTER
92A - MERGERS, CONVERSIONS, EXCHANGES AND DOMESTICATIONS
RIGHTS
OF DISSENTING OWNERS
NRS
92A.300 Definitions.
As used in
NRS 92A.300
to
92A.500
, inclusive, unless the context otherwise requires, the
words and terms defined in
NRS 92A.305
to
92A.335
, inclusive, have the meanings ascribed to them in those sections.
(Added to NRS by
1995, 2086
)
NRS
92A.305 “Beneficial stockholder” defined.
“Beneficial stockholder” means a person who is a beneficial
owner of shares held in a voting trust or by a nominee as the stockholder of record. (Added to NRS by
1995, 2087
)
NRS
92A.310 “Corporate action” defined.
“Corporate action” means the action of a domestic corporation.
(Added to NRS by
1995, 2087
)
NRS
92A.315 “Dissenter” defined.
“Dissenter” means a stockholder who is entitled to dissent from a domestic
corporation’s action under
NRS 92A.380
and who exercises that right when and in the manner required by
NRS 92A.400
to
92A.480
, inclusive. (Added to NRS by
1995, 2087
; A
1999, 1631
)
NRS
92A.320 “Fair value” defined.
“Fair value,” with respect to a dissenter’s shares, means the
value of the shares determined:
1.
Immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation
in anticipation of the corporate action unless exclusion would be inequitable;
2.
Using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the
transaction requiring appraisal; and
3.
Without discounting for lack of marketability or minority status. (Added to NRS by
1995, 2087
; A
2009, 1720
)
NRS
92A.325 “Stockholder” defined.
“Stockholder” means a stockholder of record or a beneficial stockholder
of a domestic corporation. (Added to NRS by
1995, 2087
)
NRS
92A.330 “Stockholder of record” defined.
“Stockholder of record” means the person in whose name shares
are registered in the records of a domestic corporation or the beneficial owner of shares to the extent of the rights granted
by a nominee’s certificate on file with the domestic corporation. (Added to NRS by
1995, 2087
)
NRS
92A.335 “Subject corporation” defined.
“Subject corporation” means the domestic corporation which
is the issuer of the shares held by a dissenter before the corporate action creating the dissenter’s rights becomes effective
or the surviving or acquiring entity of that issuer after the corporate action becomes effective. (Added to NRS by
1995, 2087
)
NRS
92A.340 Computation of interest.
Interest payable pursuant to
NRS 92A.300
to
92A.500
, inclusive, must be computed
from the effective date of the action until the date of payment, at the rate of interest most recently established pursuant to
NRS 99.040
. (Added to NRS by
1995, 2087
; A
2009, 1721
)
NRS
92A.350 Rights of dissenting partner of domestic limited partnership.
A partnership agreement of a domestic limited partnership
or, unless otherwise provided in the partnership agreement, an agreement of merger or exchange, may provide that contractual rights
with respect to the partnership interest of a dissenting general or limited partner of a domestic limited partnership are available
for any class or group of partnership interests in connection with any merger or exchange in which the domestic limited partnership
is a constituent entity. (Added to NRS by
1995, 2088
)
NRS
92A.360 Rights of dissenting member of domestic limited-liability company.
The articles of organization or operating agreement
of a domestic limited-liability company or, unless otherwise provided in the articles of organization or operating agreement,
an agreement of merger or exchange, may provide that contractual rights with respect to the interest of a dissenting member are
available in connection with any merger or exchange in which the domestic limited-liability company is a constituent entity. (Added
to NRS by
1995, 2088
)
NRS
92A.370 Rights of dissenting member of domestic nonprofit corporation.
1.
Except as otherwise provided in subsection 2, and unless otherwise provided in the articles or bylaws, any member of any constituent
domestic nonprofit corporation who voted against the merger may, without prior notice, but within 30 days after the effective
date of the merger, resign from membership and is thereby excused from all contractual obligations to the constituent or surviving
corporations which did not occur before the member’s resignation and is thereby entitled to those rights, if any, which
would have existed if there had been no merger and the membership had been terminated or the member had been expelled.
2.
Unless otherwise provided in its articles of incorporation or bylaws, no member of a domestic nonprofit corporation, including,
but not limited to, a cooperative corporation, which supplies services described in
chapter 704
of NRS to its members only,
and no person who is a member of a domestic nonprofit corporation as a condition of or by reason of the ownership of an interest
in real property, may resign and dissent pursuant to subsection 1. (Added to NRS by
1995, 2088
)
NRS
92A.380 Right of stockholder to dissent from certain corporate actions and to obtain payment for shares.
1.
Except as otherwise provided in
NRS 92A.370
and
92A.390
and subject to the limitation in paragraph (f), any stockholder
is entitled to dissent from, and obtain payment of the fair value of the stockholder’s shares in the event of any of the
following corporate actions:
(a)
Consummation of a plan of merger to which the domestic corporation is a constituent entity:
(1)
If approval by the stockholders is required for the merger by
NRS 92A.120
to
92A.160
, inclusive, or the articles
of incorporation, regardless of whether the stockholder is entitled to vote on the plan of merger; or
(2)
If the domestic corporation is a subsidiary and is merged with its parent pursuant to
NRS 92A.180
.
(b)
Consummation of a plan of conversion to which the domestic corporation is a constituent entity as the corporation whose subject
owner’s interests will be converted.
(c)
Consummation of a plan of exchange to which the domestic corporation is a constituent entity as the corporation whose subject
owner’s interests will be acquired, if the stockholder’s shares are to be acquired in the plan of exchange.
(d)
Any corporate action taken pursuant to a vote of the stockholders to the extent that the articles of incorporation, bylaws or
a resolution of the board of directors provides that voting or nonvoting stockholders are entitled to dissent and obtain payment
for their shares.
(e)
Accordance of full voting rights to control shares, as defined in NRS 78.3784, only to the extent provided for pursuant to
NRS
78.3793
.
(f)
Any corporate action not described in this subsection that will result in the stockholder receiving money or scrip instead of
a fraction of a share except where the stockholder would not be entitled to receive such payment pursuant to
NRS 78.205
,
78.2055
or
78.207
. A dissent pursuant to this paragraph applies only to the fraction of a share, and the stockholder
is entitled only to obtain payment of the fair value of the fraction of a share.
2.
A stockholder who is entitled to dissent and obtain payment pursuant to
NRS 92A.300
to
92A.500
, inclusive, may not
challenge the corporate action creating the entitlement unless the action is unlawful or fraudulent with respect to the stockholder
or the domestic corporation.
3.
Subject to the limitations in this subsection, from and after the effective date of any corporate action described in subsection
1, no stockholder who has exercised the right to dissent pursuant to
NRS 92A.300
to
92A.500
, inclusive, is entitled
to vote his or her shares for any purpose or to receive payment of dividends or any other distributions on shares. This subsection
does not apply to dividends or other distributions payable to stockholders on a date before the effective date of any corporate
action from which the stockholder has dissented. If a stockholder exercises the right to dissent with respect to a corporate action
described in paragraph (f) of subsection 1, the restrictions of this subsection apply only to the shares to be converted into
a fraction of a share and the dividends and distributions to those shares. (Added to NRS by
1995, 2087
; A
2001, 1414
,
3199
;
2003, 3189
;
2005, 2204
;
2007, 2438
;
2009, 1721
;
2011, 2814
)
NRS
92A.390 Limitations on right of dissent: Stockholders of certain classes or series; action of stockholders not required for plan
of merger.
1.
There is no right of dissent with respect to a plan of merger, conversion or exchange in favor of stockholders of any class or
series which is:
(a)
A covered security under section 18(b)(1)(A) or (B) of the Securities Act of 1933, 15 U.S.C. § 77r(b)(1)(A) or (B), as amended;
(b)
Traded in an organized market and has at least 2,000 stockholders and a market value of at least $20,000,000, exclusive of the
value of such shares held by the corporation’s subsidiaries, senior executives, directors and beneficial stockholders owning
more than 10 percent of such shares; or
(c)
Issued by an open end management investment company registered with the Securities and Exchange Commission under the Investment
Company Act of 1940, 15 U.S.C. §§ 80a-1 et seq., as amended, and which may be redeemed at the option of the holder at
net asset value,
➥
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unless the articles
of incorporation of the corporation issuing the class or series or the resolution of the board of directors approving the
plan of merger, conversion or exchange expressly provide otherwise.
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2.
The applicability of subsection 1 must be determined as of:
(a)
The record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to
act upon the corporate action requiring dissenter’s rights; or
(b)
The day before the effective date of such corporate action if there is no meeting of stockholders.
3.
Subsection 1 is not applicable and dissenter’s rights are available pursuant to
NRS 92A.380
for the holders of any
class or series of shares who are required by the terms of the corporate action requiring dissenter’s rights to accept for
such shares anything other than cash or shares of any class or any series of shares of any corporation, or any other proprietary
interest of any other entity, that satisfies the standards set forth in subsection 1 at the time the corporate action becomes
effective.
4.
There is no right of dissent for any holders of stock of the surviving domestic corporation if the plan of merger does not require
action of the stockholders of the surviving domestic corporation under
NRS 92A.130
.
5.
There is no right of dissent for any holders of stock of the parent domestic corporation if the plan of merger does not require
action of the stockholders of the parent domestic corporation under
NRS 92A.180
. (Added to NRS by
1995, 2088
; A
2009, 1722
;
2013, 1285
)
NRS
92A.400 Limitations on right of dissent: Assertion as to portions only to shares registered to stockholder; assertion by beneficial
stockholder.
1.
A stockholder of record may assert dissenter’s rights as to fewer than all of the shares registered in his or her name only
if the stockholder of record dissents with respect to all shares of the class or series beneficially owned by any one person and
notifies the subject corporation in writing of the name and address of each person on whose behalf the stockholder of record asserts
dissenter’s rights. The rights of a partial dissenter under this subsection are determined as if the shares as to which
the partial dissenter dissents and his or her other shares were registered in the names of different stockholders.
2.
A beneficial stockholder may assert dissenter’s rights as to shares held on his or her behalf only if the beneficial stockholder:
(a)
Submits to the subject corporation the written consent of the stockholder of record to the dissent not later than the time the
beneficial stockholder asserts dissenter’s rights; and
(b)
Does so with respect to all shares of which he or she is the beneficial stockholder or over which he or she has power to direct
the vote. (Added to NRS by
1995, 2089
; A
2009, 1723
)
NRS
92A.410 Notification of stockholders regarding right of dissent.
1.
If a proposed corporate action creating dissenter’s rights is submitted to a vote at a stockholders’ meeting, the
notice of the meeting must state that stockholders are, are not or may be entitled to assert dissenter’s rights under
NRS
92A.300
to
92A.500
, inclusive. If the domestic corporation concludes that dissenter’s rights are or may be available,
a copy of
NRS 92A.300
to
92A.500
, inclusive, must accompany the meeting notice sent to those record stockholders
entitled to exercise dissenter’s rights.
2.
If the corporate action creating dissenter’s rights is taken by written consent of the stockholders or without a vote of
the stockholders, the domestic corporation shall notify in writing all stockholders entitled to assert dissenter’s rights
that the action was taken and send them the dissenter’s notice described in
NRS 92A.430
. (Added to NRS by
1995,
2089
; A
1997, 730
;
2009, 1723
;
2013, 1286
)
NRS
92A.420 Prerequisites to demand for payment for shares.
1.
If a proposed corporate action creating dissenter’s rights is submitted to a vote at a stockholders’ meeting, a stockholder
who wishes to assert dissenter’s rights with respect to any class or series of shares:
(a)
Must deliver to the subject corporation, before the vote is taken, written notice of the stockholder’s intent to demand
payment for his or her shares if the proposed action is effectuated; and
(b)
Must not vote, or cause or permit to be voted, any of his or her shares of such class or series in favor of the proposed action.
2.
If a proposed corporate action creating dissenter’s rights is taken by written consent of the stockholders, a stockholder
who wishes to assert dissenter’s rights with respect to any class or series of shares must not consent to or approve the
proposed corporate action with respect to such class or series.
3.
A stockholder who does not satisfy the requirements of subsection 1 or 2 and
NRS 92A.400
is not entitled to payment for
his or her shares under this chapter. (Added to NRS by
1995, 2089
; A
1999, 1631
;
2005, 2204
;
2009, 1723
;
2013, 1286
)
NRS
92A.430 Dissenter’s notice: Delivery to stockholders entitled to assert rights; contents.
1.
The subject corporation shall deliver a written dissenter’s notice to all stockholders of record entitled to assert dissenter’s
rights in whole or in part, and any beneficial stockholder who has previously asserted dissenter’s rights pursuant to
NRS
92A.400
.
2.
The dissenter’s notice must be sent no later than 10 days after the effective date of the corporate action specified in
NRS 92A.380
, and must:
(a)
State where the demand for payment must be sent and where and when certificates, if any, for shares must be deposited;
(b)
Inform the holders of shares not represented by certificates to what extent the transfer of the shares will be restricted after
the demand for payment is received;
(c)
Supply a form for demanding payment that includes the date of the first announcement to the news media or to the stockholders
of the terms of the proposed action and requires that the person asserting dissenter’s rights certify whether or not the
person acquired beneficial ownership of the shares before that date;
(d)
Set a date by which the subject corporation must receive the demand for payment, which may not be less than 30 nor more than 60
days after the date the notice is delivered and state that the stockholder shall be deemed to have waived the right to demand
payment with respect to the shares unless the form is received by the subject corporation by such specified date; and
(e)
Be accompanied by a copy of
NRS 92A.300
to
92A.500
, inclusive. (Added to NRS by
1995, 2089
; A
2005, 2205
;
2009, 1724
;
2013, 1286
)
NRS
92A.440 Demand for payment and deposit of certificates; loss of rights of stockholder; withdrawal from appraisal process.
1.
A stockholder who receives a dissenter’s notice pursuant to
NRS 92A.430
and who wishes to exercise dissenter’s
rights must:
(a)
Demand payment;
(b)
ertify whether the stockholder or the beneficial owner on whose behalf he or she is dissenting, as the case may be, acquired beneficial
ownership of the shares before the date required to be set forth in the dissenter’s notice for this certification; and
(c)
Deposit the stockholder’s certificates, if any, in accordance with the terms of the notice.
2.
If a stockholder fails to make the certification required by paragraph (b) of subsection 1, the subject corporation may elect
to treat the stockholder’s shares as after-acquired shares under
NRS 92A.470
.
3.
Once a stockholder deposits that stockholder’s certificates or, in the case of uncertified shares makes demand for payment,
that stockholder loses all rights as a stockholder, unless the stockholder withdraws pursuant to subsection 4.
4.
A stockholder who has complied with subsection 1 may nevertheless decline to exercise dissenter’s rights and withdraw from
the appraisal process by so notifying the subject corporation in writing by the date set forth in the dissenter’s notice
pursuant to
NRS 92A.430
. A stockholder who fails to so withdraw from the appraisal process may not thereafter withdraw
without the subject corporation’s written consent.
5.
The stockholder who does not demand payment or deposit his or her certificates where required, each by the date set forth in the
dissenter’s notice, is not entitled to payment for his or her shares under this chapter. (Added to NRS by
1995, 2090
;
A
1997, 730
;
2003, 3189
;
2009, 1724
)
NRS
92A.450 Uncertificated shares: Authority to restrict transfer after demand for payment.
The subject corporation may restrict
the transfer of shares not represented by a certificate from the date the demand for their payment is received. (Added to NRS
by
1995, 2090
; A
2009, 1725
)
NRS
92A.460 Payment for shares: General requirements.
1.
Except as otherwise provided in
NRS 92A.470
, within 30 days after receipt of a demand for payment pursuant to
NRS 92A.440
,
the subject corporation shall pay in cash to each dissenter who complied with
NRS 92A.440
the amount the subject corporation
estimates to be the fair value of the dissenter’s shares, plus accrued interest. The obligation of the subject corporation
under this subsection may be enforced by the district court:
(a)
Of the county where the subject corporation’s principal office is located;
(b)
If the subject corporation’s principal office is not located in this State, in the county in which the corporation’s
registered office is located; or
(c)
At the election of any dissenter residing or having its principal or registered office in this State, of the county where the
dissenter resides or has its principal or registered office.
The
court shall dispose of the complaint promptly.
2.
The payment must be accompanied by:
(a)
The subject corporation’s balance sheet as of the end of a fiscal year ending not more than 16 months before the date of
payment, a statement of income for that year, a statement of changes in the stockholders’ equity for that year or, where
such financial statements are not reasonably available, then such reasonably equivalent financial information and the latest available
quarterly financial statements, if any;
(b)
A statement of the subject corporation’s estimate of the fair value of the shares; and
(c)
A statement of the dissenter’s rights to demand payment under
NRS 92A.480
and that if any such stockholder does not
do so within the period specified, such stockholder shall be deemed to have accepted such payment in full satisfaction of the
corporation’s obligations under this chapter. (Added to NRS by
1995, 2090
; A
2007, 2704
;
2009, 1725
;
2013, 1287
)
NRS
92A.470 Withholding payment for shares acquired on or after date of dissenter’s notice: General requirements.
1.
A subject corporation may elect to withhold payment from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenter’s notice as the first date of any announcement to the news media or to the stockholders
of the terms of the proposed action.
2.
To the extent the subject corporation elects to withhold payment, within 30 days after receipt of a demand for payment pursuant
to
NRS 92A.440
, the subject corporation shall notify the dissenters described in subsection 1:
(a)
Of the information required by paragraph (a) of subsection 2 of
NRS 92A.460
;
(b)
Of the subject corporation’s estimate of fair value pursuant to paragraph (b) of subsection 2 of
NRS 92A.460
;
(c)
That they may accept the subject corporation’s estimate of fair value, plus interest, in full satisfaction of their demands
or demand appraisal under
NRS 92A.480
;
(d)
That those stockholders who wish to accept such an offer must so notify the subject corporation of their acceptance of the offer
within 30 days after receipt of such offer; and
(e)
That those stockholders who do not satisfy the requirements for demanding appraisal under
NRS 92A.480
shall be deemed to
have accepted the subject corporation’s offer.
3.
Within 10 days after receiving the stockholder’s acceptance pursuant to subsection 2, the subject corporation shall pay
in cash the amount offered under paragraph (b) of subsection 2 to each stockholder who agreed to accept the subject corporation’s
offer in full satisfaction of the stockholder’s demand.
4.
Within 40 days after sending the notice described in subsection 2, the subject corporation shall pay in cash the amount offered
under paragraph (b) of subsection 2 to each stockholder described in paragraph (e) of subsection 2. (Added to NRS by
1995,
2091
; A
2009, 1725
;
2013, 1287
)
NRS
92A.480 Dissenter’s estimate of fair value: Notification of subject corporation; demand for payment of estimate.
1.
A dissenter paid pursuant to
NRS 92A.460
who is dissatisfied with the amount of the payment may notify the subject corporation
in writing of the dissenter’s own estimate of the fair value of his or her shares and the amount of interest due, and demand
payment of such estimate, less any payment pursuant to
NRS 92A.460
. A dissenter offered payment pursuant to
NRS 92A.470
who is dissatisfied with the offer may reject the offer pursuant to
NRS 92A.470
and demand payment of the fair value
of his or her shares and interest due.
2.
A dissenter waives the right to demand payment pursuant to this section unless the dissenter notifies the subject corporation
of his or her demand to be paid the dissenter’s stated estimate of fair value plus interest under subsection 1 in writing
within 30 days after receiving the subject corporation’s payment or offer of payment under
NRS 92A.460
or
92A.470
and is entitled only to the payment made or offered. (Added to NRS by
1995, 2091
; A
2009, 1726
)
NRS
92A.490 Legal proceeding to determine fair value: Duties of subject corporation; powers of court; rights of dissenter.
1.
If a demand for payment pursuant to
NRS 92A.480
remains unsettled, the subject corporation shall commence a proceeding
within 60 days after receiving the demand and petition the court to determine the fair value of the shares and accrued interest.
If the subject corporation does not commence the proceeding within the 60-day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded by each dissenter pursuant to
NRS 92A.480
plus interest.
2.
A subject corporation shall commence the proceeding in the district court of the county where its principal office is located
in this State. If the principal office of the subject corporation is not located in this State, the right to dissent arose from
a merger, conversion or exchange and the principal office of the surviving entity, resulting entity or the entity whose shares
were acquired, whichever is applicable, is located in this State, it shall commence the proceeding in the county where the principal
office of the surviving entity, resulting entity or the entity whose shares were acquired is located. In all other cases, if the
principal office of the subject corporation is not located in this State, the subject corporation shall commence the proceeding
in the district court in the county in which the corporation’s registered office is located.
3.
The subject corporation shall make all dissenters, whether or not residents of Nevada, whose demands remain unsettled, parties
to the proceeding as in an action against their shares. All parties must be served with a copy of the petition. Nonresidents may
be served by registered or certified mail or by publication as provided by law.
4.
The jurisdiction of the court in which the proceeding is commenced under subsection 2 is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers
have the powers described in the order appointing them, or any amendment thereto. The dissenters are entitled to the same discovery
rights as parties in other civil proceedings.
5.
Each dissenter who is made a party to the proceeding is entitled to a judgment:
(a)
For the amount, if any, by which the court finds the fair value of the dissenter’s shares, plus interest, exceeds the amount
paid by the subject corporation; or
(b)
For the fair value, plus accrued interest, of the dissenter’s after-acquired shares for which the subject corporation elected
to withhold payment pursuant to
NRS 92A.470
. (Added to NRS by
1995, 2091
; A
2007, 2705
;
2009, 1727
;
2011, 2815
;
2013, 1288
)
NRS
92A.500 Assessment of costs and fees in certain legal proceedings.
1.
The court in a proceeding to determine fair value shall determine all of the costs of the proceeding, including the reasonable
compensation and expenses of any appraisers appointed by the court. The court shall assess the costs against the subject corporation,
except that the court may assess costs against all or some of the dissenters, in amounts the court finds equitable, to the extent
the court finds the dissenters acted arbitrarily, vexatiously or not in good faith in demanding payment.
2.
The court may also assess the fees and expenses of the counsel and experts for the respective parties, in amounts the court finds
equitable:
(a)
Against the subject corporation and in favor of all dissenters if the court finds the subject corporation did not substantially
comply with the requirements of
NRS 92A.300
to
92A.500
, inclusive; or
(b)
Against either the subject corporation or a dissenter in favor of any other party, if the court finds that the party against whom
the fees and expenses are assessed acted arbitrarily, vexatiously or not in good faith with respect to the rights provided by
NRS 92A.300
to
92A.500
, inclusive.
3.
If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated,
and that the fees for those services should not be assessed against the subject corporation, the court may award to those counsel
reasonable fees to be paid out of the amounts awarded to the dissenters who were benefited.
4.
In a proceeding commenced pursuant to
NRS 92A.460
, the court may assess the costs against the subject corporation, except
that the court may assess costs against all or some of the dissenters who are parties to the proceeding, in amounts the court
finds equitable, to the extent the court finds that such parties did not act in good faith in instituting the proceeding.
5.
To the extent the subject corporation fails to make a required payment pursuant to
NRS 92A.460
,
92A.470
or
92A.480
,
the dissenter may bring a cause of action directly for the amount owed and, to the extent the dissenter prevails, is entitled
to recover all expenses of the suit.
6.
This section does not preclude any party in a proceeding commenced pursuant to
NRS 92A.460
or
92A.490
from applying
the provisions of
N.R.C.P. 68
. (Added to NRS by
1995, 2092
; A
2009, 1727
;
2015, 2566
)
SCHEDULE
“C”
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K/A
(Mark
One)
[X]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For
the Fiscal Year Ended December 31, 2017
OR
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Commission
File No. 001-31540
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
|
91-1922863
|
(State
or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
6001
54 Ave.
|
|
|
Taber,
Alberta, Canada
|
|
T1G
1X4
|
(Address
of Principal Executive Office)
|
|
Zip
Code
|
Registrant’s
telephone number, including Area Code: (403) 223-2995
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
|
Name
of each exchange on which registered
|
|
|
|
Common
Stock, $0.001 par value
|
|
NYSE
American
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
[ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
[ ] No [X]
Indicate by check mark whether the registrant
(1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ]
|
Accelerated
filer [ ]
|
|
|
Non-accelerated
filer [ ]
|
Smaller reporting
company [X]
|
(Do not check if
a smaller reporting company)
|
Emerging
growth company [ ]
|
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): [ ] Yes [X] No
As
of June 30, 2017 the aggregate market value of the Company’s common stock held by non-affiliates was $12,914,521 based on
the closing price for shares of the Company’s common stock on the NYSE American for that date.
As
of March 30, 2018, the Company had 11,630,991 issued and outstanding shares of common stock.
Documents
incorporated by reference: None
This amended 10-K report is being filed to correct the date
of the auditor’s opinion on the Company’s financial statements.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K for the year ended December 31, 2017 (“Annual Report”), including the Audited Consolidated
Financial Statements, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include, without limitation, those statements relating to development of new products, our financial
condition and our ability to increase distribution of our products. Forward-looking statements can be identified by the use of
forward-looking terminology, such as “may,” “will,” “should,” “expect,” “anticipate,”
“estimate,” “continue,” “plans,” “intends,” or other similar terminology. These
forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ materially from what is anticipated or forecasted in these
forward-looking statements due to numerous factors, including, but not limited to, our ability to generate or obtain sufficient
working capital to continue our operations, changes in demand for our products, the timing of customer orders and deliveries and
the impact of competitive products and pricing. In addition, such statements could be affected by general industry and market
conditions and growth rates, and general domestic and international economic conditions.
Although
we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, such statements
involve risks and uncertainties and no assurance can be given that our actual results will be consistent with these forward-looking
statements. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason,
after the date of this Annual Report is filed with the Securities and Exchange Commission.
PART
I
Item
1.
|
Description
of Business
|
We
were incorporated as Flexible Solutions Ltd., a British Columbia corporation on January 26, 1991. On May 12, 1998, we merged Flexible
Solutions Ltd. into Flexible Solutions International, Inc., a Nevada corporation. In connection with this merger, we issued 7,000,000
shares of common stock to the former shareholders of Flexible Solutions Ltd. in exchange for all of the outstanding shares of
Flexible Solutions Ltd.
In
June 2004 we purchased 52 U.S. and 139 International patents, as well as a 56,780 sq. ft. manufacturing plant near Chicago, Illinois
from the bankruptcy estate of Donlar Corporation (“Donlar”) for $6.15 million. The patents we acquired from Donlar
relate to water-soluble chemicals (“TPAs”) which prevent corrosion and scaling in water pipes used in the petroleum,
chemical, utility and mining industries. TPAs are also used to enhance fertilizers and improve crop yields and as additives for
household laundry detergents, consumer care products and pesticides.
We
operate through a number of wholly-owned subsidiaries which are mentioned in Note 1 to the consolidated financial statements included
as part of this report. Unless otherwise indicated, all references to our business include the operations of these subsidiaries.
Our
website is www.flexiblesolutions.com
Our
Products
HEATSAVR®
Our
studies indicate that approximately 70% of the energy lost from a swimming pool occurs through water evaporation. HEATSAVR®
is a chemical product for use in swimming pools and spas that forms a thin, transparent layer on the water’s surface. The
transparent layer slows the evaporation of water, allowing the water to retain a higher temperature for a longer period of time
and thereby reducing the energy required to maintain the desired temperature of the water. We have received reports from our commercial
customers documenting energy savings of between $2,400 and $6,000 per year when using HEATSAVR®.
In
outdoor pools, the HEATSAVR® also provides convenience compared to pool blankets. Pool blankets are plastic covers which are
cut to the size and shape of the surface of the pool or spa. Pool blankets float on the surface and, like the HEATSAVR®, reduce
energy costs by inhibiting water evaporation. However, it is often inconvenient to use conventional pool blankets because a pool
blanket must be removed and stored before the pool can be used. Pool blankets do not provide any energy savings when not on the
pool. Conversely, HEATSAVR® eliminates the need to install, remove and store the blanket and works 24 hours a day. In addition,
the use of HEATSAVR® in an indoor pool results in even greater energy savings since indoor pool locations use energy not only
to heat the pool water, but also to air condition the pool environment. By slowing the transfer of heat and water vapor from the
pool to the atmosphere of the pool enclosure, less energy is required to maintain a pool at the desired temperature and there
is a reduced load on the air-conditioning system.
HEATSAVR®
retails for between $250 and $300 per four gallon case in the United States. We market our HEATSAVR® product to homeowners
with swimming pools and spas as well as operators of swimming pools and spas in hotels, motels, schools, and municipal and private
recreational facilities.
We
also manufacture and sell products which automatically dispense HEATSAVR® into commercial size swimming pools or spas at the
rate of one ounce per 400 sq. ft. of water surface per day.
We
have non-exclusive distributorships in Canada and the United States for the sale of bulk HEATSAVR® and exclusive distributorships
in several countries outside North America.
WATERSAVR®
This
product utilizes a patented variation of our HEATSAVR technology to reduce water evaporation in reservoirs, potable water storage
tanks, livestock watering ponds, aqueducts, canals and irrigation ditches. WATERSAVR may also be used for lawn and turf care and
potted and bedding plants.
WATERSAVR®
is sold in granulated form and can be applied by hand, by fully automated scheduled metering, or by an automatic dispenser.
Tests
have indicated that WATERSAVR®:
|
●
|
Reduces
daily water evaporation as much as 54%
|
|
●
|
Reduces
monthly water evaporation as much as 37%
|
|
●
|
Has
no effect on invertebrates or vertebrates
|
|
●
|
Has
no anticipated effect on any current drinking water treatment processes and
|
We
have one full-time employee and one part-time employee involved in the sales and marketing of WATERSAVR®.
TPAs
(thermal polyaspartate biopolymers)
TPAs
for Oilfields
. TPAs are used to reduce scale and corrosion in various “topside” water systems. They are used in
place of traditional phosphonate and other products when biodegradability is required by environmental regulations. We have the
ability to custom manufacture TPAs depending on the specific water conditions associated with any oil well. TPAs are also used
in fracking fluids to reduce the toxicity while maintaining equal function.
TPAs
for the Agricultural Industry
. TPAs have the ability to reduce fertilizer crystallization before, during and after application
and can also prevent crystal formation between fertilizer and minerals present in the soil. Once crystallized, fertilizer and
soil minerals are not able to provide plant nourishment. As a result, in select conditions the use of TPAs either blended with
fertilizer or applied directly to crops can increase yields significantly. TPAs are designated for crop nutrient management programs
and should not be confused with crop protection and pesticides or other agricultural chemical applications. Depending on the application,
TPA products are marketed under a variety of brands including EX-10
TM
, Amisorb
TM
, LYNX
TM
, MAGNET
TM
,
AmGro
TM
and VOLT
TM
. Markets of significance include corn, wheat, soybeans, rice, potatoes, sugar beets,
cotton, tomatoes, almonds and other high value per acre crops.
TPAs
for Irrigation
. The crystallization prevention ability of TPAs can also be useful in select irrigation conditions. By reducing
calcium carbonate scale propagation, TPAs can prevent early plugging of drip irrigation ports, reduce maintenance costs and lengthen
the life of equipment. TPAs compete with acid type scale removers, but have the advantage of a positive yield effect on the plant,
as well as an easier deployment formulation with liquid fertilizers when used as part of a “fertigation” program.
Our TPAs for drip irrigation scale prevention are marketed and sold through the same channels as TPAs used by the agricultural
industry.
TPAs
for Detergent
. In detergents, TPAs are a biodegradable substitute for poly-acrylic acid. In select markets, the use of this
substitute outweighs the added cost of TPAs, which has allowed for the continued growth of this TPA product line. However, to
increase penetration of this market beyond specialty detergent manufacturers, we will need to decrease the cost of this product
or wait for legislative intervention regarding biodegradability of detergent components. In the meantime, we are researching various
methods to reduce production costs.
TPAs
for Personal Care Products
. TPAs can also be used in shampoo and cosmetic products for increased hydration that improves the
feel of the core product to consumers. TPA’s may also be used as an additive to toothpaste with the documented effect of
reducing decay bacteria adhesion to tooth enamel and presumed reduction in total decay. We do not currently sell TPAs for use
in personal care products.
Nitrogen
conservation products for Agriculture.
We manufacture and sell two conservation products for slowing nitrogen loss from
fields. One significant loss route for nitrogen fertilizer is enzymatic degradation by bacteria naturally present in soil. Our
product, SUN 27
TM
inhibits the bacterial action and keeps the nitrogen fertilizer available for plant growth. The second
significant nitrogen loss mechanism is de-nitrification. This is also caused by bacterial activity in soil resulting in oxygen
being stripped from the fertilizer leaving nitrogen gas. The gas can’t be used by the plants and escapes into the
atmosphere. Our N Savr 30
TM
product uses the most effective active ingredients available to combat this
cause of fertilizer loss. We sell SUN 27
TM
and N Savr 30
TM
through distributors in North and South
America under our trade names and under private labels.
Principal
Customers
The
table below presents our revenue resulting from purchases by our major customers for the periods presented.
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Company
A
|
|
$
|
4,630,784
|
|
|
$
|
5,180,333
|
|
Company
B
|
|
$
|
2,224,184
|
|
|
$
|
3,560,645
|
|
Company
C
|
|
$
|
1,598,195
|
|
|
$
|
1,407,064
|
|
Customers
with balances greater than 10% of our receivable balances as of each of the fiscal year ends presented are shown in the following
table:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Company
A
|
|
$
|
728,848
|
|
|
$
|
1,822,743
|
|
Company
B
|
|
|
518,526
|
|
|
|
-
|
|
Competition
HEATSAVR®
Although
we are aware of two other companies that manufacture products that compete with HEATSAVR® , we believe our products are more
effective and safer. We maintain fair pricing equal to or lower than our competitors and protect our intellectual property carefully.
Our products are expected to maintain or increase market share in the competitive pool market.
HEATSAVR®
also competes with plastic pool blanket products. However, we believe that HEATSAVR® is more effective and convenient than
pool blankets.
WATERSAVR®
Ultimate
Products (Aust) Pty Ltd. of Australia has a product called Aquatain that directly competes with WATERSAVR®. We believe our
WATERSAVR® product is superior for the following reasons: it is safer, much less expensive and has much better test data.
Aquatain has not expended the capital to test for environmental effects on insects and other aquatic life whereas WATERSAVR®
has recognized third party environmental safety documentation.
As
water conservation is an important priority throughout the world, numerous researchers are working to develop solutions that may
compete with, or be superior to, WATERSAVR.
TPAs
Our
TPA products have direct competition with Lanxess AG (spun out of Bayer AG), a German manufacturer of TPAs, which uses a patented
process different from ours. We have cross-licensed each other’s processes and either company can use either process for
the term of the patents involved. We believe that Lanxess has approximately the same production capacity and product costs as
we do. We believe that we can compete effectively with Lanxess by offering excellent customer service in oilfield sales, superior
distributor support in the agricultural marketplace and flexibility due to our relative size. In addition, we intend to continue
to seek market niches that are not the primary targets of Lanxess.
Our
TPA products face indirect competition from other chemicals in every market in which we are active. For purposes of oilfield scale
prevention, phosphonates, phosphates and molibdonates provide the same effect. For crop enhancement, increased fertilizer levels
or reduced concentrations can serve as a substitute for TPAs. In irrigation scale control, acid washes are our prime competitor.
In detergent, poly-acrylic acid is most often used due to price advantage. Notwithstanding the above, we believe our competitive
advantages include:
|
●
|
Biodegradability
compared to competing oil field chemicals;
|
|
●
|
Cost-effectiveness
for crop enhancement compared to increased fertilizer use;
|
|
●
|
Environmental
considerations, ease of formulation and increased crop yield opportunities in irrigation
scale markets; and
|
|
●
|
Biodegradability
compared to poly-acrylic acid for detergents.
|
Manufacturing
Our
HEATSAVR® products and dispensers are made from chemicals, plastic and other materials and parts that are readily available
from multiple suppliers. We have never experienced any shortage in the availability of raw materials and parts for these products
and we do not have any long term supply contracts for any of these items. We have these products made by outside parties without
long term contracts.
Our
WATERSAVR® products are manufactured by a third party. We are not required to purchase any minimum quantity of this product.
Our
56,780 sq. ft. facility in Peru, Illinois manufactures our TPA products. Raw materials for TPA production are sourced from various
manufacturers throughout the world and we believe they are available in sufficient quantities for any increase in sales. Raw materials
are, however, derived from crude oil and are subject to price fluctuations related to world oil prices.
In
November 2007, we purchased a building and 3.3 acres of land in Taber, Alberta, Canada. The price paid was CDN$1,325,000 and was
financed by cash of $660,000 and an interest free mortgage that was paid in June 2008. The building was operated as a fermentation
facility for the production of aspartic acid, a key ingredient in TPAs. Aspartic acid made in Taber was then shipped to our plant
in Illinois for finishing. In February 2014 we suspended production of aspartic acid at our Taber plant. The suspension was due
to the fact that since construction of the plant began in 2008, economic conditions in Alberta and worldwide have changed significantly.
In particular, plant operating costs increased and the price of aspartic acid derived from oil was less than forecast.
In February 2017, the Taber plant was destroyed in a fire. However, the loss was covered by insurance.
Government
Regulations
HEATSAVR®
Chemical
products for use in swimming pools are covered by a variety of governmental regulations in all countries where we sell these products.
These regulations cover packaging, labeling, and product safety. We believe our products are in compliance with these regulations.
WATERSAVR®
Our
WATERSAVR® product is subject to regulation in most countries, particularly for agricultural and drinking water uses. We do
not anticipate that governmental regulations will be an impediment to marketing WATERSAVR® because the components in WATERSAVR®
have historically been used in agriculture for many years for other purposes. Nevertheless, we may require county or state approval
on a case by case basis to sell WATERSAVR® in the United States for agricultural and drinking water uses. We have received
National Sanitation Foundation approval for the use of WATERSAVR® in drinking water in the United States.
TPAs
In
the oil field and agricultural markets we have received government approval for all TPAs currently sold. In the detergent market,
there are currently no regulatory requirements for use of TPAs in detergent formulations. For personal care products such as shampoo
and toothpaste, there are various regulatory bodies, including the National Sanitation Foundation and the United States Food and
Drug Administration, which regulate TPA use. If we begin to market our TPA products for personal care use, we will need to satisfy
applicable regulatory requirements.
Proprietary
Rights
Our
success is dependent, in part, upon our proprietary technology. We rely on a combination of patent, copyright, trademarks, trade
secrets and nondisclosure agreements to protect our proprietary technology. We currently hold many U.S. and International patents
which expire at various dates up to 2032. We also have applied to extend some of these patents to other countries where we operate.
There can be no assurance that our foreign patent applications will be granted or that any issued patent will be upheld as valid
or prevent the development of competitive products, which may be equivalent to or superior to our products. We have not received
any claims alleging infringement of the intellectual property rights of others, but there can be no assurance that we may not
be subject to such claims in the future.
Research
and Development
We
spent $98,833 during the year ended December 31, 2017 and $95,028 during year ended December 31, 2016 on research and development.
This work relates primarily to the development of our water and energy conservation products, as well as new research in connection
with our TPA products.
Employees
As
of December 31, 2017 we had 25 employees, including one officer, six sales and customer support personnel, and eighteen manufacturing
personnel. None of our employees is represented by a labor union and we have not experienced any work stoppages to date.
Item
1A. Risk Factors
This
Form 10-K contains forward-looking information based on our current expectations. Because our actual results may differ materially
from any forward-looking statements made by us, this section includes a discussion of important factors that could affect our
future operations and result in a decline in the market price of our common stock.
We
have incurred significant operating losses since inception and may not sustain profitability in the future.
We
have in the past experienced operating losses and negative cash flow from operations and we currently have an accumulated deficit.
If our revenues decline, our results of operations and liquidity may be materially and adversely affected. If we experience slower
than anticipated revenue growth or if our operating expenses exceed our expectations, we may not be profitable. We may not remain
profitable in future periods.
Fluctuations
in our operating results may cause our stock price to decline.
Given
the nature of the markets in which we operate, we cannot reliably predict future revenues and profitability. Changes in competitive,
market and economic conditions may cause us to adjust our operations. A high proportion of our costs are fixed, due in part to
our sales, research and development and manufacturing costs. Thus, small declines in revenue could disproportionately affect our
operating results. Factors that may affect our operating results and the market price of our common stock include:
|
●
|
demand
for and market acceptance of our products;
|
|
●
|
competitive
pressures resulting in lower selling prices;
|
|
●
|
adverse
changes in the level of economic activity in regions in which we do business;
|
|
●
|
adverse
changes in the oil and gas industry on which we are particularly dependent;
|
|
●
|
changes
in the portions of our revenue represented by various products and customers;
|
|
●
|
delays
or problems in the introduction of new products;
|
|
●
|
the
announcement or introduction of new products, services or technological innovations by
our competitors;
|
|
●
|
variations
in our product mix;
|
|
●
|
the
timing and amount of our expenditures in anticipation of future sales;
|
|
●
|
increased
costs of raw materials or supplies; and
|
|
●
|
changes
in the volume or timing of product orders.
|
Our
operations are subject to seasonal fluctuation.
The
use of our swimming pool products increases in summer months in most markets and results in our sales from January to June being
greater than in July through December. Markets for our WATERSAVR® product are also seasonal, depending on the wet versus dry
seasons in particular countries. We attempt to sell into a variety of countries with different seasons on both sides of the equator
in order to minimize seasonality. Our TPA business is the least seasonal, however there is a small increase in the spring related
to inventory building for the crop season in the United States and a small slowdown in December as oilfield customers run down
stock in advance of year end, but otherwise, little seasonal variation. We believe we are able to adequately respond to these
seasonal fluctuations by reducing or increasing production as needed.
Interruptions
in our ability to purchase raw materials and components may adversely affect our profitability.
We
purchase certain raw materials and components from third parties pursuant to purchase orders placed from time to time. Because
we do not have guaranteed long-term supply arrangements with our suppliers, any material interruption in our ability to purchase
necessary raw materials or components could have a material adverse effect on our business, financial condition and results of
operations.
Our
WATERSAVR® product has not proven to be a revenue producing product and we may never recoup the cost associated with its development.
The
marketing efforts of our WATERSAVR® product may result in continued losses. We introduced our WATERSAVR® product in June
2002 and, to date, we have delivered quantities for testing by potential customers, but only a few customers have ordered the
product for commercial use. This product can achieve success only if it is ordered in substantial quantities by commercial customers
who have determined that the water saving benefits of the product exceed the costs of purchase and deployment of the product.
We can offer no assurance that we will receive sufficient orders of this product to achieve profits or cover the expenses incurred
to manufacture and market this product. We have received National Sanitation Foundation approval for the use WATERSAVR® in
drinking water in the United States. Neverless, we may require county or state approval on a case by case basis. We expect
to spend $200,000 on the marketing and production of our WATERSAVR® product in fiscal 2018.
If
we do not introduce new products in a timely manner, our products could become obsolete and our operating results would suffer.
Without
the timely introduction of new products and enhancements, our products could become obsolete over time, in which case our revenue
and operating results would suffer. The success of our new product offerings will depend upon several factors, including our ability
to:
|
●
|
accurately
anticipate customer needs;
|
|
●
|
innovate
and develop new products and applications;
|
|
●
|
successfully
commercialize new products in a timely manner;
|
|
●
|
price
our products competitively and manufacture and deliver our products in sufficient volumes
and on time; and
|
|
●
|
differentiate
our products from our competitors’ products.
|
In
developing any new product, we may be required to make a substantial investment before we can determine the commercial viability
of the new product. If we fail to accurately foresee our customers’ needs and future activities, we may invest heavily in
research and development of products that do not lead to significant revenues.
We
are dependent upon certain customers.
Among
our current customers, we have identified three that are sizable enough that the loss of any one would be significant. Any loss
of one or more of these customers could result in a substantial reduction in our revenues.
Economic,
political and other risks associated with international sales and operations could adversely affect our sales.
Revenues
from shipments made outside of the United States accounted for approximately 72% of our revenues in the year ended December 31,
2017, 71% in the year ended December 31, 2016 and 75% in the year ended December 31, 2015. Since we sell our products worldwide,
our business is subject to risks associated with doing business internationally. We anticipate that revenues from international
operations will continue to represent a sizable portion of our total revenue. Accordingly, our future results could be harmed
by a variety of factors, including:
|
●
|
changes
in foreign currency exchange rates;
|
|
●
|
changes
in a country’s or region’s political or economic conditions, particularly
in developing or emerging markets;
|
|
●
|
longer
payment cycles of foreign customers and difficulty of collecting receivables in foreign
jurisdictions;
|
|
●
|
trade
protection measures and import or export licensing requirements;
|
|
●
|
differing
tax laws and changes in those laws;
|
|
●
|
difficulty
in staffing and managing widespread operations;
|
|
●
|
differing
laws regarding protection of intellectual property; and
|
|
●
|
differing
regulatory requirements and changes in those requirements.
|
We
are subject to credit risk and may be subject to substantial write-offs if one or more of our significant customers default on
their payment obligations to us.
We
currently allow our major customers between 30 and 90 days to pay for each sale. This practice, while customary, presents an accounts
receivable write-off risk in that if one or more of our significant customers defaulted on their payment obligations to us, such
write-off, if substantial, would have a material adverse effect on our business and results of operations.
Our
products can be hazardous if not handled, stored and used properly; litigation related to the handling, storage and safety of
our products would have a material adverse effect on our business and results of operations.
Some
of our products are flammable and must be stored properly to avoid fire risk. Additionally, some of our products may cause irritation
to a person’s eyes if they are exposed to the concentrated product. Although we label our products to warn of such risks,
our sales could be reduced if our products were considered dangerous to use or if they are implicated in causing personal injury
or property damage. We are not currently aware of any circumstances in which our products have caused harm or property damage
to consumers. Nevertheless, litigation regarding the handling, storage and safety of our products would have a material adverse
effect on our business and results of operations.
Our
failure to comply with environmental regulations may create significant environmental liabilities and force us to modify our manufacturing
processes.
We
are subject to various federal, state and local environmental laws, ordinances and regulations relating to the use, storage, handling
and disposal of chemicals. Under such laws, we may become liable for the costs of removal or remediation of these substances that
have been used by our consumers or in our operations. Such laws may impose liability without regard to whether we knew of, or
caused, the release of such substances. Any failure by us to comply with present or future regulations could subject us to substantial
fines, suspension of production, alteration of manufacturing processes or cessation of operations, any of which could have a material
adverse effect on our business, financial condition and results of operations.
Our
failure to protect our intellectual property could impair our competitive position.
While
we own certain patents and trademarks, some aspects of our business cannot be protected by patents or trademarks. Accordingly,
in these areas there are few legal barriers that prevent potential competitors from copying certain of our products, processes
and technologies or from otherwise entering into operations in direct competition with us. In particular, we have been informed
that our former exclusive agent for the sale of our products in North America is now competing with us in the swimming pool and
personal spa markets. As a former distributor, they were given access to many of our sales, marketing and manufacturing techniques.
Our
products may infringe on the intellectual property rights of others, and resulting claims against us could be costly and prevent
us from making or selling certain products.
Third
parties may seek to claim that our products and operations infringe on their patent
s
or other intellectual property rights.
We may incur significant expense in any legal proceedings to protect our proprietary rights or to defend infringement claims by
third parties. In addition, claims of third parties against us could result in awards of substantial damages or court orders that
could effectively prevent us from making, using or selling our products in the United States or abroad.
A
claim for damages could materially and adversely affect our financial condition and results of operations.
Our
business exposes us to potential product liability risks. 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 since we currently
do not have any other employee with an equivalent level of expertise in and knowledge of our industry. If Mr. O’Brien no
longer served as our President and Chief Executive Officer, we would have to recruit one or more new executives, with no real
assurance that we would be able to engage a replacement executive with the required skills on satisfactory terms. The market for
skilled employees is highly competitive, especially for employees in the fields in which we operate. While our compensation programs
are intended to attract and retain qualified employees, there can be no assurance that we will be able to retain the services
of all our key employees or a sufficient number to execute our plans, nor can there be any assurances that we will be able to
continue to attract new employees as required.
Item
1B.
|
Unresolved
Staff Comments.
|
Not
applicable.
We
lease a 6,400 sq. ft. facility in Naperville, Illinois which we use for offices and laboratories at a cost of $5,440 per month
with a lease effective to December 2020 and 30,600 sq. ft. of warehouse space in Peru, IL used for storage and extra capacity
at a cost of $10,270 per month with a lease effective to October 2021. We own a 56,780 sq. ft. facility in Peru, Illinois which
is used to manufacture our TPA line of products. In 2017, we purchased a 3,000 sq ft building on 1 acre of land in Taber, AB Canada.
We also own 3.3 acres of cleared and undeveloped land in Taber, AB.
Item
3.
|
Legal
Proceedings.
|
None.
Item
4.
|
Mine
Safety Disclosures
|
Not
applicable.
PART
II
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities.
|
Our
common stock is traded on the NYSE American under the symbol “FSI”. The following is the range of high and
low closing prices for our common stock for the periods indicated:
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2017
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.63
|
|
|
$
|
1.29
|
|
Second Quarter
|
|
|
2.48
|
|
|
|
1.46
|
|
Third Quarter
|
|
|
1.93
|
|
|
|
1.64
|
|
Fourth Quarter
|
|
|
1.97
|
|
|
|
1.68
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2016
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.10
|
|
|
$
|
0.75
|
|
Second
Quarter
|
|
|
1.81
|
|
|
|
0.84
|
|
Third
Quarter
|
|
|
2.41
|
|
|
|
1.33
|
|
Fourth
Quarter
|
|
|
2.26
|
|
|
|
1.20
|
|
As
of March 30, 2017 we had approximately 2,200 shareholders.
Our
common stock also trades on the Frankfurt stock exchange under the symbol “FXT.”
We
have not paid any dividends on our common stock and it is not anticipated that any dividends will be paid in the foreseeable future.
Our board of directors intends to follow a policy of retaining earnings, if any, to finance our growth. The declaration and payment
of dividends in the future will be determined by our directors in light of conditions then existing, including our earnings, financial
condition, capital requirements and other factors.
None
of our officers or directors, nor any of our principal shareholders purchased, on our behalf, any shares of our common stock from
third parties either in a private transaction or as a result of purchases in the open market during the years ended December 31,
2016 and 2017.
As
of March 30, 2018 we had 11,630,991 outstanding shares of common stock. The following table lists additional shares of our common
stock, including shares issuable upon the exercise of options which have not yet vested, which may be issued as of March 30, 2018:
|
|
Number
|
|
|
Note
|
|
|
Of
Shares
|
|
|
Reference
|
Shares
issuable upon exercise of options granted to our officers, directors, employees, consultants, and third parties
|
|
|
680,000
|
|
|
A
|
A. Options
are exercisable at prices ranging from $0.75 to $1.70 per share. See Item 11 of this report for more information concerning these
options.
Item
6.
|
Selected
Financial Data.
|
Not
applicable.
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operation.
|
Results
of Operations
We
have two product lines.
The
first is a chemical (“EWCP”) used in swimming pools and spas. The product forms a thin, transparent layer on the water’s
surface. The transparent layer slows the evaporation of water, allowing the water to retain a higher temperature for a longer
period of time thereby reducing the energy required to maintain the desired temperature of the water. A modified version of EWCP
can also be used in reservoirs, potable water storage tanks, livestock watering pods, canals, and irrigation ditches for the purpose
of reducing evaporation.
The
second product, biodegradable polymers (“TPAs”), is used by the petroleum, chemical, utility and mining industries
to prevent corrosion and scaling in water piping. TPAs can also be used to increase biodegradability in detergents and in the
agriculture industry to increase crop yields by enhancing fertilizer uptake.
Material
changes in the line items in our Statement of Operations for the year ended December 31, 2017 as compared to the same period last
year, are discussed below:
Item
|
|
Increase
(I) or
Decrease
(D)
|
|
Reason
|
|
|
|
|
|
Sales
EWCP
products
TPA
products
|
|
D
D
|
|
Loss
of Taber, AB manufacturing facility to fire.
Lower
uptake by customers.
|
Gross
Profit, as a %
of
sales
|
|
D
|
|
Temporary
increase in costs after loss of the EWCP manufacturing plant to fire along with increased aspartic acid costs.
|
Wages
|
|
I
|
|
Increased wages
to retain employees.
|
Administrative
salaries
and
benefits
|
|
I
|
|
Increased wages
to retain employees.
|
Rent
|
|
I
|
|
Additional
storage and capacity space for BCPS products.
|
Professional fess
|
|
I
|
|
Increased legal
fees related to IP and general legal representation along with increased accounting costs.
|
|
|
|
|
|
Gain
on involuntary disposition
|
|
I
|
|
Result
of fire at Taber, AB manufacturing facility.
|
The
factors that will most significantly affect future operating results will be:
|
●
|
the
sale price of crude oil which is used in the manufacture of aspartic acid we import from
China. Aspartic acid is a key ingredient in our TPA product;
|
|
●
|
activity
in the oil and gas industry, as we sell our TPA product to oil and gas companies; and
|
|
●
|
drought
conditions, since we also sell our TPA product to farmers.
|
Other
than the foregoing we do not know of any trends, events or uncertainties that have had, or are reasonably expected to have, a
material impact on our revenues or expenses.
Capital
Resources and Liquidity
Our
sources and (uses) of cash for the years ended December 31,
2017 and 2016 are shown below:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash
provided by (used by) operations
|
|
|
1,042,425
|
|
|
|
1,775,226
|
|
Long term deposits
|
|
|
7,980
|
|
|
|
(15,925
|
)
|
Return
on i
nvestment
|
|
|
25,000
|
|
|
|
(87,500
|
)
|
Insurance proceeds
from fire loss
|
|
|
3,366,889
|
|
|
|
-
|
|
Sales (purchases)
of equipment
|
|
|
(426,480
|
)
|
|
|
(114,270
|
)
|
Advances from (repayments
of) short term line of credit
|
|
|
-
|
|
|
|
50,000
|
|
Repayment of loans
|
|
|
(201,193
|
)
|
|
|
(201,193
|
)
|
Repurchase of common
stock
|
|
|
-
|
|
|
|
(1,575,000
|
)
|
Proceeds from issuance
of common stock
|
|
|
156,020
|
|
|
|
32,600
|
|
Changes in exchange
rates
|
|
|
471,431
|
|
|
|
107,390
|
|
We have sufficient cash
resources to meets our future commitments and cash flow requirements for the coming year. As of December 31, 2017, our working
capital was $11,259,028 and we have no substantial commitments that require significant outlays of cash over the coming
fiscal year.
We are committed to minimum
rental payments for property and premises aggregating approximately $735,670 over the term of three leases, the last expiring
on October 31, 2021.
Commitments
for rent in the next four years are as follows:
2018
|
|
$
|
201,840
|
|
2019
|
|
$
|
205,580
|
|
2020
|
|
$
|
209,400
|
|
2021
|
|
$
|
118,850
|
|
Other
than as disclosed above, we do not anticipate any material capital requirements for the twelve months ending December 31, 2018.
Other
than as disclosed in Item 7 of this report, we do not know of any trends, demands, commitments, events or uncertainties that will
result in, or that are reasonable likely to result in, our liquidity increasing or decreasing in any material way.
Other
than as disclosed in Item 7 of this report, we do not know of any significant changes in our expected sources and uses of cash.
We
do not have any commitments or arrangements from any person to provide us with any equity capital.
See
Note 2 to the consolidated financial statements included as part of this report for a description of our significant accounting
policies.
Critical
Accounting Policies And Estimates
Allowances
for Product Returns
. We grant certain of our customers the right to return product which they are unable to sell. Upon sale,
we evaluate the need to record a provision for product returns based on our historical experience, economic trends and changes
in customer demand.
Allowances
for Doubtful Accounts Receivable
. We evaluate our accounts receivable to determine if they will ultimately be collected. This
evaluation includes significant judgments and estimates, including an analysis of receivables aging and a review of large accounts.
If, for example, the financial condition of a customer deteriorates resulting in an impairment of its ability to pay or a pattern
of late payment develops, an allowance may be required.
Provisions
for Inventory Obsolescence
. We may need to record a provision for estimated obsolescence and shrinkage of inventory. Our estimates
would consider the cost of inventory, the estimated market value, the shelf life of the inventory and our historical experience.
If there are changes to these estimates, provisions for inventory obsolescence may be necessary.
Recent
Accounting Pronouncements
We
have evaluated recent accounting pronouncements issued since January 1, 2017 and determined that the adoption of these
recent accounting pronouncements will not have a material effect on our financial statements.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable.
Item
8.
|
Financial
Statements and Supplementary Data.
|
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of
Flexible Solutions International,
Inc.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Flexible Solutions International Inc. (the Company) as of December 30, 2017 and
2016, and the related statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in
the two-year period ended December 31, 2017, and the related notes (collectively referred to as the financial statements). In
our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December
31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
|
|
We
have served as the Company’s auditor since 2009.
|
|
Vancouver,
BC
|
|
March
31, 2018
|
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Balance Sheets
As
at December 31
(U.S.
Dollars)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,912,138
|
|
|
$
|
2,470,066
|
|
Accounts receivable (see Note 3)
|
|
|
2,105,471
|
|
|
|
3,008,153
|
|
Inventories (see Note 4)
|
|
|
4,686,852
|
|
|
|
3,786,093
|
|
Prepaid expenses
|
|
|
255,080
|
|
|
|
228,699
|
|
Total current assets
|
|
|
13,959,541
|
|
|
|
9,493,011
|
|
|
|
|
|
|
|
|
|
|
Property, equipment and leaseholds, net (see Note 5)
|
|
|
1,938,509
|
|
|
|
3,393,944
|
|
Patents (see Note 6)
|
|
|
79,452
|
|
|
|
95,890
|
|
Long term deposits (see Note 7)
|
|
|
18,531
|
|
|
|
26,163
|
|
Investment (Note 8)
|
|
|
13,414
|
|
|
|
122,480
|
|
Deferred tax asset (Note 11)
|
|
|
1,763,923
|
|
|
|
2,026,999
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
17,773,370
|
|
|
$
|
15,158,487
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
939,116
|
|
|
$
|
902,037
|
|
Deferred revenue
|
|
|
208,608
|
|
|
|
95,308
|
|
Income taxes payable
|
|
|
1,101,596
|
|
|
|
893,867
|
|
Short term line of credit (Note 9)
|
|
|
250,000
|
|
|
|
250,000
|
|
Current portion of long term debt (Note 10)
|
|
|
201,193
|
|
|
|
201,193
|
|
Total current liabilities
|
|
|
2,700,513
|
|
|
|
2,342,405
|
|
Long term debt (Note 10)
|
|
|
150,896
|
|
|
|
352,089
|
|
Total liabilities
|
|
|
2,851,409
|
|
|
|
2,694,494
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock (see Note 14)
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
|
|
|
|
|
|
50,000,000 common shares with a par value of $0.001 each
1,000,000 preferred shares with a par value of $0.01 each
Issued and outstanding:
|
|
|
|
|
|
|
|
|
11,597,991 (2016: 11,457,991) common shares
|
|
|
11,598
|
|
|
|
11,458
|
|
Capital in excess of par value
|
|
|
15,114,835
|
|
|
|
14,842,863
|
|
Other comprehensive loss
|
|
|
(656,093
|
)
|
|
|
(1,087,208
|
)
|
Accumulated earnings (deficit)
|
|
|
451,621
|
|
|
|
(1,303,120
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
14,921,961
|
|
|
|
12,463,993
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
17,773,370
|
|
|
$
|
15,158,487
|
|
Commitments
and Subsequent events (See
Notes 16 and 17)
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Income and Comprehensive Income
For
the Years Ended December 31
(U.S.
Dollars)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
15,494,325
|
|
|
$
|
16,246,014
|
|
Cost of sales
|
|
|
9,508,827
|
|
|
|
9,256,526
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,985,498
|
|
|
|
6,989,488
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Wages
|
|
|
1,647,780
|
|
|
|
1,528,031
|
|
Administrative salaries and benefits
|
|
|
1,007,850
|
|
|
|
838,837
|
|
Advertising and promotion
|
|
|
18,257
|
|
|
|
21,199
|
|
Investor relations and transfer agent fee
|
|
|
152,362
|
|
|
|
131,037
|
|
Office and miscellaneous
|
|
|
238,195
|
|
|
|
269,800
|
|
Insurance
|
|
|
285,418
|
|
|
|
301,856
|
|
Interest expense
|
|
|
44,125
|
|
|
|
41,699
|
|
Rent
|
|
|
241,286
|
|
|
|
117,715
|
|
Consulting
|
|
|
133,949
|
|
|
|
119,198
|
|
Professional fees
|
|
|
222,743
|
|
|
|
184,931
|
|
Travel
|
|
|
137,392
|
|
|
|
140,340
|
|
Telecommunications
|
|
|
26,071
|
|
|
|
24,363
|
|
Shipping
|
|
|
19,624
|
|
|
|
16,338
|
|
Research
|
|
|
98,928
|
|
|
|
95,098
|
|
Commissions
|
|
|
112,678
|
|
|
|
66,839
|
|
Bad debt expense
|
|
|
1,191
|
|
|
|
-
|
|
Currency exchange
|
|
|
64,870
|
|
|
|
(10,602
|
)
|
Utilities
|
|
|
21,339
|
|
|
|
17,495
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,474,058
|
|
|
|
3,904,174
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,511,440
|
|
|
|
3,085,314
|
|
Gain on sale of equipment
|
|
|
-
|
|
|
|
6,848
|
|
Gain on involuntary disposition (net of tax)
|
|
|
2,043,614
|
|
|
|
-
|
|
Write down of inventory
|
|
|
(51,346
|
)
|
|
|
-
|
|
Loss on investment
|
|
|
(84,066
|
)
|
|
|
(15,086
|
)
|
Interest income
|
|
|
913
|
|
|
|
2,184
|
|
Income before income tax
|
|
|
3,420,555
|
|
|
|
3,079,260
|
|
|
|
|
|
|
|
|
|
|
Income taxes (Note 11)
|
|
|
|
|
|
|
|
|
Deferred income (expense) tax recovery
|
|
|
(985,495
|
)
|
|
|
(303,793
|
)
|
Income tax recovery (expense)
|
|
|
(680,319
|
)
|
|
|
(982,133
|
)
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
$
|
1,754,741
|
|
|
$
|
1,793,334
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
431,115
|
|
|
|
118,590
|
|
Comprehensive income
|
|
|
2,185,856
|
|
|
|
1,911,924
|
|
Income per share (basic) (Note 12)
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
Income per share (diluted) (Note 12)
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Weighted average number of common shares (basic)
|
|
|
11,485,580
|
|
|
|
11,464,270
|
|
Weighted average number of common shares (diluted)
|
|
|
11,725,482
|
|
|
|
11,635,136
|
|
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Cash Flows
For
Years Ended December 31
(U.S.
Dollars)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,754,741
|
|
|
$
|
1,793,334
|
|
Adjustments to reconcile net income to net cash:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
116,092
|
|
|
|
66,318
|
|
Depreciation and amortization
|
|
|
286,616
|
|
|
|
540,079
|
|
Loss on investment
|
|
|
84,066
|
|
|
|
15,086
|
|
Decrease in deferred tax asset
|
|
|
985,495
|
|
|
|
303,793
|
|
Write down of inventory
|
|
|
(51,346
|
)
|
|
|
-
|
|
Gain on involuntary disposition
|
|
|
(2,043,614
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes in non-cash working capital items:
|
|
|
|
|
|
|
|
|
(Increase) Decrease in accounts receivable
|
|
|
912,056
|
|
|
|
(1,199,267
|
)
|
(Increase) Decrease in inventories
|
|
|
(887,339
|
)
|
|
|
(506,278
|
)
|
(Increase) Decrease in prepaid expenses
|
|
|
(23,758
|
)
|
|
|
15,793
|
|
Increase (Decrease) in accounts payable and accrued liabilities
|
|
|
(407,555
|
)
|
|
|
90,111
|
|
Increase (Decrease) in taxes payable
|
|
|
207,729
|
|
|
|
600,629
|
|
Increase (Decrease) deferred revenue
|
|
|
109,242
|
|
|
|
55,628
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
1,042,425
|
|
|
|
1,775,226
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Long term deposits
|
|
|
7,980
|
|
|
|
(15,925
|
)
|
Investment
|
|
|
25,000
|
|
|
|
(87,500
|
)
|
Proceed from insurance
|
|
|
3,366,889
|
|
|
|
-
|
|
Net purchase of property, equipment and leaseholds
|
|
|
(426,480
|
)
|
|
|
(114,270
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
2,973,389
|
|
|
|
(217,695
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Draw from short term line of credit
|
|
|
-
|
|
|
|
50,000
|
|
Loan repayment
|
|
|
(201,193
|
)
|
|
|
(201,193
|
)
|
Repurchase of common stock
|
|
|
-
|
|
|
|
(1,575,000
|
)
|
Proceeds of issuance of common stock
|
|
|
156,020
|
|
|
|
32,600
|
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(45,173
|
)
|
|
|
(1,693,593
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
471,431
|
|
|
|
107,390
|
|
|
|
|
|
|
|
|
|
|
Inflow (outflow) of cash
|
|
|
4,442,072
|
|
|
|
(28,672
|
)
|
Cash and cash equivalents, beginning
|
|
|
2,470,066
|
|
|
|
2,498,738
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending
|
|
$
|
6,912,138
|
|
|
$
|
2,470,066
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
|
833,766
|
|
|
|
452,654
|
|
Interest paid
|
|
|
43,003
|
|
|
|
41,699
|
|
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Stockholders’ Equity
For
the Years Ended December 31, 2017 and 2016
(U.S.
Dollars)
|
|
|
|
|
|
|
|
Capital in
|
|
|
Accumulated
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Excess of
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Par Value
|
|
|
(Deficiency)
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2015
|
|
|
13,177,991
|
|
|
$
|
13,178
|
|
|
$
|
16,317,225
|
|
|
$
|
(3,096,454
|
)
|
|
$
|
(1,205,798
|
)
|
|
$
|
12,028,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
118,590
|
|
|
|
118,590
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,793,334
|
|
|
|
—
|
|
|
|
1,793,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,911,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock cancelled
|
|
|
(1,750,000
|
)
|
|
|
(1,750
|
)
|
|
|
(1,573,250
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,575,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
30,000
|
|
|
|
30
|
|
|
|
32,570
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
66,318
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2016
|
|
|
11,457,991
|
|
|
$
|
11,458
|
|
|
$
|
14,842,863
|
|
|
$
|
(1,303,120
|
)
|
|
$
|
(1,087,208
|
)
|
|
$
|
12,463,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
431,115
|
|
|
|
431,115
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,754,741
|
|
|
|
—
|
|
|
|
1,754,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,185,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
140,000
|
|
|
|
140
|
|
|
|
155,880
|
|
|
|
—
|
|
|
|
—
|
|
|
|
156,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
116,092
|
|
|
|
—
|
|
|
|
—
|
|
|
|
116,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2017
|
|
|
11,597,991
|
|
|
$
|
11,598
|
|
|
$
|
15,114,835
|
|
|
$
|
451,621
|
|
|
$
|
(656,093
|
)
|
|
$
|
14,921,961
|
|
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(U.S.
Dollars)
1. Basis
of Presentation
.
These
consolidated financial statements include the accounts of Flexible Solutions International, Inc. (the “Company”),
and its wholly-owned subsidiaries Flexible Fermentation Ltd. (“Flexible Ltd.”), NanoChem Solutions Inc. (“NanoChem”),
Flexible Solutions Ltd., Flexible Biomass LP, FS Biomass Inc., NCS Deferred Corp., Conserve H2O Ltd. and Natural Chem SEZC Ltd.
All inter-company balances and transactions have been eliminated. The Company was incorporated May 12, 1998 in the State of Nevada
and had no operations until June 30, 1998.
Flexible
Solutions International, Inc. and its subsidiaries develop, manufacture and market specialty chemicals which slow the evaporation
of water. One product, HEATSAVR®, is marketed for use in swimming pools and spas where its use, by slowing the evaporation
of water, allows the water to retain a higher temperature for a longer period of time and thereby reduces the energy required
to maintain the desired temperature of the water in the pool. Another product, WATERSAVR®, is marketed for water conservation
in irrigation canals, aquaculture, and reservoirs where its use slows water loss due to evaporation. In addition to the water
conservation products, the Company also manufactures and markets water-soluble chemicals utilizing thermal polyaspartate biopolymers
(hereinafter referred to as “TPAs”), which are beta-proteins manufactured from the common biological amino acid, L-aspartic.
TPAs can be formulated to prevent corrosion and scaling in water piping within the petroleum, chemical, utility and mining industries.
TPAs are also used as proteins to enhance fertilizers in improving crop yields and can be used as additives for household laundry
detergents, consumer care products and pesticides.
2. Significant
Accounting Policies.
These
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States applicable to a going concern and reflect the policies outlined below.
(a)
Cash
and Cash Equivalents
.
The
Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at
the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with several financial institutions.
(b)
Inventories
and Cost of Sales
The
Company has three major classes of inventory: completed goods, work in progress and raw materials and supplies. In all classes,
inventories are stated at the lower of cost and net realizable value for 2017 and at the lower of cost or market for 2016. Cost
is determined on a first-in, first-out basis. Cost of sales includes all expenditures incurred in bringing the goods to the point
of sale. Inventory costs and costs of sales include direct costs of the raw material, inbound freight charges, warehousing costs,
handling costs (receiving and purchasing) and utilities and overhead expenses related to the Company’s manufacturing and
processing facilities.
(c)
Allowance
for Doubtful Accounts
The
Company provides an allowance for doubtful accounts when management estimates collectability to be uncertain. Accounts receivable
are continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate
allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer,
overall customer credit-worthiness and historical experience.
(d)
Property,
Equipment, Leaseholds and Intangible Assets.
The
following assets are recorded at cost and depreciated using the methods and annual rates shown below:
Computer
hardware
|
|
30%
Declining balance
|
Furniture
and fixtures
|
|
20%
Declining balance
|
Manufacturing
equipment
|
|
20%
Declining balance
|
Office
equipment
|
|
20%
Declining balance
|
Boat
|
|
20%
Declining balance
|
Building
and improvements
|
|
10%
Declining balance
|
Trailer
|
|
30%
Declining balance
|
Patents
|
|
Straight-line
over 17 years
|
Technology
|
|
Straight-line
over 10 years
|
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 their carrying amounts may not be recoverable. No write-downs have been necessary to date.
(e)
Impairment
of Long-Lived Assets
.
In
accordance with FASB Codification Topic 360, “Property, Plant and Equipment (ASC 360), the Company reviews long-lived assets,
including, but not limited to, property, equipment and leaseholds, patents and other assets, for impairment annually or whenever
events or changes in circumstances indicate the carrying amounts of assets may not be recoverable. The carrying value of long-lived
assets is assessed for impairment by evaluating operating performance and future undiscounted cash flows of the underlying assets.
If the expected future cash flows of an asset is less than its carrying value, an impairment measurement is indicated. Impairment
charges are recorded to the extent that an asset’s carrying value exceeds its fair value. Accordingly, actual results could
vary significantly from such estimates. There were no impairment charges during the periods presented.
(f)
Foreign
Currency
.
The
functional currency of three of the Company’s subsidiaries is the Canadian Dollar. The translation of the Canadian Dollar
to the reporting currency of the Company, the U.S. Dollar is performed for assets and liabilities using exchange rates in effect
at the balance sheet date. Revenue and expense transactions are translated using average exchange rates prevailing during the
year. Translation adjustments arising on conversion of the Company’s financial statements from the subsidiary’s functional
currency, Canadian Dollars, into the reporting currency, U.S. Dollars, are excluded from the determination of income (loss) and
are disclosed as other comprehensive income in the consolidated statements of income and comprehensive income.
Foreign
exchange gains and losses relating to transactions not denominated in the applicable local currency are included in operating
income (loss) if realized during the year and in comprehensive income (loss) if they remain unrealized at the end of the year.
(g)
Revenue
Recognition
.
Revenue
from product sales is recognized at the time the product is shipped since title and risk of loss is transferred to the purchaser
upon delivery to the carrier. Shipments are made F.O.B. shipping point. The Company recognizes revenue when there is persuasive
evidence of an arrangement, delivery to the carrier has occurred, the fee is fixed or determinable, collectability is reasonably
assured and there are no significant remaining performance obligations. When significant post-delivery obligations exist, revenue
is deferred until such obligations are fulfilled. To date, there have been no such significant post-delivery obligations.
Since
the Company’s inception, product returns have been insignificant; therefore, no provision has been established for estimated
product returns.
Deferred
revenues consist of products sold to distributors with payment terms greater than the Company’s customary business terms
due to lack of credit history or operating in a new market in which the Company has no prior experience. The Company defers the
recognition of revenue until the criteria for revenue recognition has been met, and payments become due or cash is received from
these distributors.
(h)
Stock
Issued in Exchange for Services
.
The
Company’s common stock issued in exchange for services is valued at estimated fair market value based upon trading prices
of the Company’s common stock on the dates of the stock transactions. The corresponding expense of the services rendered
is recognized over the period that the services are performed.
(i)
Stock-based
Compensation
.
The
Company recognizes compensation expense for all share-based payments in accordance with FASB Codification Topic 718,
Compensation
— Stock Compensation
, (ASC 718). Under the fair value recognition provisions of ASC 718, the Company recognizes share-based
compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award.
The
fair value at grant date of stock options is estimated using the Black-Scholes option-pricing model. Compensation expense is recognized
on a straight-line basis over the stock option vesting period based on the estimated number of stock options that are expected
to vest. Shares are issued from treasury upon exercise of stock options.
(j)
Comprehensive
Income
.
Other
comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included
in comprehensive income, but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders’
equity. The Company’s other comprehensive income is primarily comprised of unrealized foreign exchange gains and losses.
(k)
Income
Per Share
.
Basic
earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares
outstanding in the period. Diluted earnings per share are calculated giving effect to the potential dilution of the exercise of
options and warrants. Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options
and warrants are included in diluted net income per share to the extent that these shares are dilutive. Common equivalent shares
that have an anti-dilutive effect on net income per share have been excluded from the calculation of diluted weighted average
shares outstanding for the years ended December 31, 2017 and 2016.
(l)
Use
of Estimates
.
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates and would impact the results of operations and cash flows.
Estimates
and underlying assumptions are reviewed at each period end. Revisions to accounting estimates are recognized in the period in
which the estimates are revised and in any future periods affected.
Significant
areas requiring the use of management estimates include assumptions and estimates relating to the asset impairment analysis, share-based
payments and warrants, valuation allowances for deferred income tax assets, determination of useful lives of property, equipment
and leaseholds, and the valuation of inventory.
(m)
Financial
Instruments
.
The
fair market value of the Company’s financial instruments comprising cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, and short term line of credit were estimated to approximate their carrying values due to immediate
or short-term maturity of these financial instruments.
(n)
Fair
Value of Financial Instruments
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize
the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs described below,
of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
|
●
|
Level
1 – Quoted prices in active markets for identical assets or liabilities
|
|
|
|
|
●
|
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
●
|
Level
3 — Unobservable inputs that are supported by little or no market activity which is significant to the fair value of
the assets or liabilities.
|
The
fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and the short term line
of credit for all periods presented approximate their respective carrying amounts due to the short term nature of these financial
instruments
(o)
Contingencies
Certain
conditions may exist as of the date the financial statements are issued which may result in a loss to the Company but which will
only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess
such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies
related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the
Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates
that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material,
would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed. Legal fees associated with loss contingencies are expensed as incurred.
(p)
Income Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance so that the
assets are recognized only to the extent that when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will be realized.
Per
FASB ASC 740 “Income taxes” under the liability method, it is the Company’s policy to provide for uncertain
tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more
likely than not to be sustained upon examination by tax authorities. At December 31, 2017, the Company believes it has appropriately
accounted for any unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized
benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given
financial statement period may be affected. Interest and penalties associated with the Company’s tax positions are recorded
as interest expense in the consolidated statements of income and comprehensive income.
(q)
Risk Management.
The
Company’s credit risk is primarily attributable to its accounts receivable. The amounts presented in the accompanying consolidated
balance sheets are net of allowances for doubtful accounts, estimated by the Company’s management based on prior experience
and the current economic environment. The Company is exposed to credit-related losses in the event of non-payment by customers.
Credit exposure is minimized by dealing with only credit worthy counterparties. Accounts receivable for the Company’s two
primary customers totaled $1,247,374 (65%) at December 31, 2017 (December 31, 2016 - $2,032,646 or 67%).
The
credit risk on cash and cash equivalents is limited because the Company limits its exposure to credit loss by placing its cash
and cash equivalents with major financial institutions. The Company maintains cash balances at financial institutions which at
times exceed federally insured amounts. The Company has not experienced any material losses in such accounts.
The
Company is exposed to foreign exchange and interest rate risk to the extent that market value rate fluctuations materially differ
from financial assets and liabilities, subject to fixed long-term rates.
In
order to manage its exposure to foreign exchange risks, the Company is closely monitoring the fluctuations in the foreign currency
exchange rates and the impact on the value of cash and cash equivalents, accounts receivable, and accounts payable and accrued
liabilities. The Company has not hedged its exposure to currency fluctuations.
(r)
Equity
Method Investment
The
Company accounts for investments using the equity method of accounting if the investment provides the Company the ability to exercise
significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company’s
ownership interest in the voting stock of the investee ranges between 20% and 50%, although other factors, such as representation
on the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate.
Under the equity method of accounting, the investment is recorded at cost in the consolidated balance sheets under other assets
and adjusted for dividends received and the Company’s share of the investee’s earnings or losses together with other-than-temporary
impairments which are recorded through interest and other loss, net in the consolidated statements of income and comprehensive
income.
(s)
Adoption
of new accounting principles
In
July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The standard will require inventory to be measured
at the lower of cost or net realizable value. The guidance will not apply to inventories for which cost is determined using the
last-in, first-out method or the retail inventory method. The standard is effective for annual and interim reporting periods beginning
after December 15, 2016. Adoption of this standard had no material effect on our consolidated financial statements.
In
March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU
2016-09”). This standard was issued as part of the FASB’s Simplification Initiative that involve several aspects of
the accounting for share based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic
entities. For public business entities, ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim
periods within those annual periods. The method of adoption is dependent on the specific aspect of accounting addressed in this
new guidance. Early adoption is permitted in any interim or annual period. Adoption of this standard had no material effect on
our consolidated financial statements.
(t)
Accounting
Pronouncements Not Yet Adopted
In
February 2016, the FASB issued ASU 2016-02, Leases. The standard will require lessees to recognize most leases on their balance
sheet and makes selected changes to lessor accounting. The standard is effective for annual and interim reporting periods beginning
after December 15, 2018. A modified retrospective transition approach is required, with certain practical expedients available.
We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which has been updated through several revisions
and clarifications since its original issuance. The standard will require revenue recognized to represent the transfer of promised
goods or services to customers at an amount that reflects the consideration which a company expects to receive in exchange for
those goods or services. The standard also requires new, expanded disclosures regarding revenue recognition. The standard will
be effective January 1, 2018 with early adoption permissible beginning January 1, 2017. We do not expect this to have a material
impact on our consolidated financial statements.
3.
Accounts
Receivable
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
2,145,803
|
|
|
$
|
3,044,652
|
|
Allowances
for doubtful accounts
|
|
|
(40,332
|
)
|
|
|
(36,499
|
)
|
|
|
$
|
2,105,471
|
|
|
$
|
3,008,153
|
|
4. Inventories
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Completed
goods
|
|
$
|
2,530,914
|
|
|
$
|
1,646,465
|
|
Work
in progress
|
|
|
183,944
|
|
|
|
2,572
|
|
Raw
materials and supplies
|
|
|
1,971,994
|
|
|
|
2,137,056
|
|
|
|
$
|
4,686,852
|
|
|
$
|
3,786,093
|
|
In
February 2017, the Company lost $367,331CAD ($277,482USD) in inventory in a fire at the Taber, AB location. Insurance was in place.
See Note 5.
5.
Property,
Equipment and Leaseholds
|
|
2017
|
|
|
Accumulated
|
|
|
2017
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
Buildings
and improvements
|
|
$
|
3,400,792
|
|
|
$
|
2,409,179
|
|
|
$
|
991,613
|
|
Computer
hardware
|
|
|
40,904
|
|
|
|
39,398
|
|
|
|
1,506
|
|
Furniture
and fixtures
|
|
|
17,673
|
|
|
|
11,156
|
|
|
|
6,517
|
|
Office
equipment
|
|
|
1,480
|
|
|
|
148
|
|
|
|
1,332
|
|
Manufacturing
equipment
|
|
|
2,590,158
|
|
|
|
2,104,137
|
|
|
|
486,021
|
|
Trailer
|
|
|
9,562
|
|
|
|
1,434
|
|
|
|
8,128
|
|
Boat
|
|
|
34,400
|
|
|
|
14,586
|
|
|
|
19,814
|
|
Leasehold
improvements
|
|
|
85,432
|
|
|
|
32,506
|
|
|
|
52,926
|
|
Technology
|
|
|
101,748
|
|
|
|
101,748
|
|
|
|
—
|
|
Land
|
|
|
370,652
|
|
|
|
—
|
|
|
|
370,652
|
|
|
|
$
|
6,652,801
|
|
|
$
|
4,714,292
|
|
|
$
|
1,938,509
|
|
|
|
2016
|
|
|
Accumulated
|
|
|
2016
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
Buildings
and improvements
|
|
$
|
4,762,094
|
|
|
$
|
2,967,370
|
|
|
$
|
1,794,724
|
|
Computer
hardware
|
|
|
89,480
|
|
|
|
85,784
|
|
|
|
3,696
|
|
Furniture
and fixtures
|
|
|
32,439
|
|
|
|
23,142
|
|
|
|
9,297
|
|
Office
equipment
|
|
|
17,745
|
|
|
|
16,788
|
|
|
|
957
|
|
Manufacturing
equipment
|
|
|
5,236,404
|
|
|
|
4,102,635
|
|
|
|
1,133,769
|
|
Trailer
|
|
|
12,859
|
|
|
|
12,250
|
|
|
|
609
|
|
Boat
|
|
|
34,400
|
|
|
|
9,632
|
|
|
|
24,768
|
|
Leasehold
improvements
|
|
|
85,432
|
|
|
|
15,419
|
|
|
|
70,013
|
|
Technology
|
|
|
101,748
|
|
|
|
101,748
|
|
|
|
—
|
|
Land
|
|
|
356,111
|
|
|
|
—
|
|
|
|
356,111
|
|
|
|
$
|
10,728,712
|
|
|
$
|
7,334,768
|
|
|
$
|
3,393,944
|
|
Amount
of depreciation expense for 2017: $270,178 (2016: $524,463) and is included in cost of sales in the consolidated statements of
income and comprehensive income.
In
February 2017, the Company lost a net carrying value total of $2,196,722CAD ($1,659,404USD) in building and manufacturing equipment
in a fire at the Taber, AB location. Insurance was in place. During the year ended December 31, 2017, the Company was approved
for interim insurance proceeds of $5,570,000CAD ($4,207,578USD).
6. Patents
|
|
2017
Cost
|
|
|
Accumulated
Amortization
|
|
|
2017
Net
|
|
Patents
|
|
$
|
212,426
|
|
|
$
|
132,974
|
|
|
$
|
79,452
|
|
|
|
2016
Cost
|
|
|
Accumulated
Amortization
|
|
|
2016
Net
|
|
Patents
|
|
$
|
197,448
|
|
|
$
|
101,558
|
|
|
$
|
95,890
|
|
Increase
in 2017 cost was due to currency conversion. 2017 cost in Canadian dollars - $265,102 (2016 - $265,102 in Canadian dollars).
Amount
of amortization for 2017: $16,438 (2016: $15,616) and is included in cost of sales in the consolidated statements of income
and comprehensive income (loss).
Estimated
amortization expense over the next five years is as follows:
2018
|
|
$
|
16,438
|
|
2019
|
|
|
16,438
|
|
2020
|
|
|
16,438
|
|
2021
|
|
|
16,438
|
|
2022
|
|
|
16,438
|
|
7.
Long
Term Deposits
The
Company has security deposits that are long term in nature which consist of damage deposits held by landlords and security deposits
held by various vendors.
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Long
term deposits
|
|
$
|
18,531
|
|
|
$
|
26,163
|
|
8. Equity
Method Investment
The Company has a 42%
ownership interest in ENP Peru Investments LLC (“ENP Peru”), which the Company acquired in fiscal 2016.
ENP Peru is located in Illinois and leases warehouse space. The Company accounts for this investment using the equity method
of accounting. A summary of the Company’s investment is as follows:
|
|
|
|
January 1,
2016 Balance
|
|
|
-
|
|
Capital
contributions
|
|
$
|
150,066
|
|
Return of
equity
|
|
|
(12,500
|
)
|
Loss
in equity method investment
|
|
|
(15,086
|
)
|
December 31,
2016 Balance
|
|
$
|
122,480
|
|
Return of
equity
|
|
|
(25,000
|
)
|
Loss
on equity method investment
|
|
|
(84,066
|
)
|
December
31, 2017 Balance
|
|
|
13,414
|
|
9. Short-Term
Line of Credit
In
May 2017, the Company signed a new agreement with Harris Bank (“the Bank”) to renew the expiring credit line. The
revolving line of credit is for an aggregate amount of up to the lesser of (i) $3,000,000, or (ii) 75% of eligible domestic accounts
receivable and certain foreign accounts receivable plus 40% of inventory. The loan has an annual interest rate of 5%. (2016
– 4%) and is up for renewal on June 30, 2018.
The
Revolving Line of Credit contains customary affirmative and negative covenants, including the following: compliance with laws,
provision of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance
of operating accounts at the Bank, the Bank’s access to collateral, formation or acquisition of subsidiaries, incurrence
of indebtedness, dispositions of assets, granting liens, changes in business, ownership or business locations, engaging in mergers
and acquisitions, making investments or distributions and affiliate transactions. The covenants also require that the Company
maintain a minimum ratio of qualifying financial assets to the sum of qualifying financial obligations. As of December 31, 2017,
Company was in compliance with all loan covenants.
To
secure the repayment of any amounts borrowed under the Revolving Line of Credit, the Company granted the Bank a security interest
in substantially all of the assets of NanoChem Solutions Inc., exclusive of intellectual property assets.
Short-term
borrowings outstanding under the Revolving Line as of December 31, 2017 were $250,000 (December 31, 2016 - $250,000).
10. Long
Term Debt
In
September 2014, NanoChem Solutions Inc. signed a $1,005,967 promissory note with Harris Bank with a rate of prime plus 0.5% (2017
– 5%) to be repaid over 5 years with equal monthly installments plus interest. This money was used to retire the previously
issued and outstanding debt obligations. The balance owing at December 31, 2017 was $352,089 (December 31, 2016 - $553,282). The
final payment will be made in September 2019.
The
Company has committed to the following repayments:
2018
|
|
$
|
201,193
|
|
2019
|
|
$
|
150,896
|
|
As
of December 31, 2017, Company was in compliance with all loan covenants.
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Continuity
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
553,282
|
|
|
$
|
754,475
|
|
Less:
Payments on loan
|
|
|
201,193
|
|
|
|
201,193
|
|
Balance,
end of year
|
|
$
|
352,089
|
|
|
$
|
553,282
|
|
Less:
current portion
|
|
|
(201,193
|
)
|
|
|
(201,193
|
)
|
Long
term balance
|
|
$
|
150,896
|
|
|
$
|
352,089
|
|
11. Income
Tax
The
provision for income tax expense (benefit) is comprised of the following:
|
|
2017
|
|
|
2016
|
|
Current tax, federal
|
|
$
|
547,486
|
|
|
$
|
787,539
|
|
Current tax, state
|
|
|
132,833
|
|
|
|
194,594
|
|
Current tax, foreign
|
|
|
-
|
|
|
|
-
|
|
Current tax, total
|
|
|
680,319
|
|
|
|
982,133
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax, federal
|
|
|
(11,069
|
)
|
|
|
41,343
|
|
Deferred income tax, state
|
|
|
(2,686
|
)
|
|
|
10,215
|
|
Deferred income tax, foreign
|
|
|
385,639
|
|
|
|
252,235
|
|
Deferred income tax, total
|
|
|
371,884
|
|
|
|
303,793
|
|
Total
|
|
$
|
1,052,203
|
|
|
$
|
3,191,056
|
|
The
following table reconciles the income tax benefit at the U.S. Federal statutory rate to income tax benefit at the Company’s
effective tax rates.
|
|
2017
|
|
|
2016
|
|
Income (loss) before tax, net of tax from gain on involuntary disposition
|
|
|
3,420,556
|
|
|
|
3,079,260
|
|
Tax from gain on involuntary disposition
|
|
|
(613,611
|
)
|
|
|
-
|
|
Income (loss) before taxes
|
|
|
2,806,945
|
|
|
|
3,079,260
|
|
US statutory tax rates
|
|
|
39.69
|
%
|
|
|
39.12
|
%
|
Expected income tax (recovery)
|
|
|
1,114,147
|
|
|
|
1,207,840
|
|
Non-deductible items
|
|
|
520,665
|
|
|
|
(139,975
|
)
|
Change in estimates
|
|
|
(91,632
|
)
|
|
|
228,495
|
|
Change in enacted tax rate
|
|
|
189,626
|
|
|
|
4,437
|
|
Option expired during the year
|
|
|
21,640
|
|
|
|
8,418
|
|
Foreign tax rate difference
|
|
|
(662,381
|
)
|
|
|
(46,498
|
)
|
Change in valuation allowance
|
|
|
(39,863
|
)
|
|
|
22,878
|
|
Total income taxes (recovery)
|
|
|
1,052,203
|
|
|
|
1,285,595
|
|
|
|
|
|
|
|
|
|
|
Current income tax expenses (recovery)
|
|
|
680,318
|
|
|
|
982,133
|
|
Deferred tax expenses (recovery)
|
|
|
371,884
|
|
|
|
303,792
|
|
Total income taxes (recovery)
|
|
|
1,052,203
|
|
|
|
1,285,925
|
|
Deferred
taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes. Deferred tax assets (liabilities) at December 31, 2017 and 2016 are comprised of the following:
Canada
|
|
2017
|
|
|
2016
|
|
Non capital loss carryforwards
|
|
|
1,378,242
|
|
|
|
830,476
|
|
Patents
|
|
|
69,597
|
|
|
|
45,351
|
|
Fixed assets
|
|
|
-
|
|
|
|
848,843
|
|
Financial instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,447,839
|
|
|
|
1,724,670
|
|
Valuation Allowance
|
|
|
-
|
|
|
|
-
|
|
Net Deferred tax asset (liability)
|
|
|
1,447,839
|
|
|
|
1,724,670
|
|
USA
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Fixed Assets
|
|
|
351,746
|
|
|
|
322,634
|
|
Stock-Based Compensation
|
|
|
154,023
|
|
|
|
209,242
|
|
|
|
|
505,768
|
|
|
|
531,876
|
|
Deferred tax asset not recognized
|
|
|
189,684
|
|
|
|
229,547
|
|
Net Deferred tax asset
|
|
|
316,084
|
|
|
|
302,329
|
|
The
Company has non-operating loss carryforwards of approximately $5,097,682 (2016 - $3,075,838) which may be carried forward to apply
against future year income tax for Canadian income tax purposes, subject to the final determination by taxation authorities, expiring
in the following years:
Expiry
|
|
Loss
|
|
2029
|
|
|
710,778
|
|
2030
|
|
|
862,371
|
|
2031
|
|
|
992,967
|
|
2032
|
|
|
649,299
|
|
2033
|
|
|
77,587
|
|
2037
|
|
|
1,804,680
|
|
Total
|
|
|
5,097,682
|
|
As
at December 31, 2017, the Company has no net operating losses carryforward available for US tax purposes.
Accounting
for Uncertainty for Income Tax
Effective
January 1, 2009, the Company adopted the interpretation for accounting for uncertainty in income taxes which was an interpretation
of the accounting standard accounting for income taxes. This interpretation created a single model to address accounting for uncertainty
in tax positions. This interpretation clarifies the accounting for income taxes, by prescribing a minimum recognition threshold
a tax position is required to meet before being recognized in the financial statements.
As
at December 31, 2017 and 2016, the Company’s consolidated balance sheets did not reflect a liability for uncertain tax positions,
nor any accrued penalties or interest associated with income tax uncertainties. The Company has no income tax examinations in
progress.
12. Income
Per Share
We
present both basic and diluted income per share on the face of our consolidated statements of income. Basic and diluted income
per share are calculated as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,754,741
|
|
|
$
|
1,793,334
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,485,580
|
|
|
|
11,464,270
|
|
Diluted
|
|
|
11,725,482
|
|
|
|
11,635,136
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
Diluted
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Certain
stock options whose terms and conditions are described in Note 13, “Stock Options” could potentially dilute basic
EPS in the future, but were not included in the computation of diluted EPS because to do so would have been anti-dilutive. Those
anti-dilutive options are as follows.
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
options
|
|
|
nil
|
|
|
|
72,000
|
|
There
were no preferred shares issued and outstanding during the years ended December 31, 2017 or 2016.
13. Stock
Options
.
The
Company adopted a stock option plan (“Plan”). The purpose of this Plan is to provide additional incentives to key
employees, officers, directors and consultants of the Company and its subsidiaries in order to help attract and retain the best
available personnel for positions of responsibility and otherwise promote the success of the Company’s business. It is intended
that options issued under this Plan constitute non-qualified stock options. The general terms of awards under the option plan
are that 100% of the options granted will vest the year following the grant. The maximum term of options granted is 5 years.
The
Company may issue stock options and stock bonuses for shares of its common stock to provide incentives to directors, key employees
and other persons who contribute to the success of the Company. The exercise price of all incentive options are issued for not
less than fair market value at the date of grant.
The
following table summarizes the Company’s stock option activity for the years ended December 31, 2017 and 2016:
|
|
Number
of shares
|
|
|
Exercise
price
per share
|
|
|
Weighted
average exercise price
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2015
|
|
|
1,190,000
|
|
|
|
$0.75
- $2.45
|
|
|
$
|
1.34
|
|
Granted
|
|
|
168,000
|
|
|
|
$1.42
|
|
|
$
|
1.42
|
|
Cancelled
or expired
|
|
|
(515,000
|
)
|
|
|
$0.75
– 2.45
|
|
|
$
|
1.61
|
|
Exercised
|
|
|
(30,000
|
)
|
|
|
$1.00
– 1.21
|
|
|
$
|
1.09
|
|
Balance,
December 31, 2016
|
|
|
813,000
|
|
|
|
$0.75
– 2.22
|
|
|
$
|
1.19
|
|
Granted
|
|
|
154,000
|
|
|
|
$1.70
|
|
|
$
|
1.70
|
|
Cancelled
or expired
|
|
|
(114,000
|
)
|
|
|
$1.00
- 2.22
|
|
|
$
|
1.75
|
|
Exercised
|
|
|
(140,000
|
)
|
|
|
$0.75
– 1.21
|
|
|
$
|
1.11
|
|
Balance,
December 31, 2017
|
|
|
713,000
|
|
|
|
$0.75
– 1.70
|
|
|
$
|
1.21
|
|
Exercisable,
December 31, 2017
|
|
|
559,000
|
|
|
|
$0.75
– 1.41
|
|
|
$
|
1.08
|
|
The
weighted-average remaining contractual life of outstanding options is 2.8 years.
The
fair value of each option grant is calculated using the following weighted average assumptions:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Expected
life – years
|
|
|
3.0
|
|
|
|
3.0
|
|
Interest
rate
|
|
|
2.23
|
%
|
|
|
1.37
|
%
|
Volatility
|
|
|
73.09
|
%
|
|
|
75.64
|
%
|
Dividend
yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Weighted average
fair value of options granted
|
|
$
|
0.8344
|
|
|
$
|
0.7073
|
|
During
the year ended December 31, 2017, the Company granted 40,000 (2016 – 40,000) stock options to consultants and has applied
ASC 718 using the Black-Scholes option-pricing model, which resulted in additional expenses of $6,675 (2016 - $5,658). Options
granted in other years resulted in additional expenses of $22,634 (2016 – $11,879). During the year ended December 31, 2017,
employees were granted 114,000 (2016 – 128,000) stock options, which resulted in additional expenses of $19,024 (2016 –
$17,824). Options granted in other years resulted in additional expenses in the amount of $67,759 for employees during the year
ended December 31, 2017 (2016 - $30,957). There were 110,000 employee and 30,000 consultant stock options exercised during the
year ended December 31, 2017 (2016 – 30,000 employee; nil consultant).
As
of December 31, 2017, there was approximately $102,798 of compensation expense related to non-vested awards. This expense is expected
to be recognized over a weighted average period of 1 year.
The
aggregate intrinsic value of vested options outstanding at December 31, 2017 is $413,410 (2016 – nil).
14.
Capital Stock
.
During
the year ended December 31, 2017, the Company issued 110,000 shares upon the exercise of employee stock options and 30,000 shares
upon the exercise of consultant stock options
On
January 6, 2016, the Company repurchased 1,750,000 shares of its common stock at $0.90 per share for a total purchase price of
$1,575,000. The shares were returned to treasury.
The
Company issued 30,000 shares upon the exercise of employee stock options during the year ended December 31, 2016.
15. Segmented,
Significant Customer Information and Economic Dependency
.
The
Company operates in two segments:
(a)
Energy and water conservation products (as shown under the column heading “EWCP” below), which consists of a (i) liquid
swimming pool blanket which saves energy and water by inhibiting evaporation from the pool surface, and (ii) food-safe powdered
form of the active ingredient within the liquid blanket and which is designed to be used in still or slow moving drinking water
sources.
(b)
Biodegradable polymers (“BCPA’s”), also known as TPA’s, used by the petroleum, chemical, utility and mining
industries to prevent corrosion and scaling in water piping. This product can also be used in detergents to increase biodegradability
and in agriculture to increase crop yields by enhancing fertilizer uptake.
The
accounting policies of the segments are the same as those described in Note 2,
Significant Accounting Policies
. The Company
evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains and losses
and foreign exchange gains and losses.
The
Company’s reportable segments are strategic business units that offer different, but synergistic products and services.
They are managed separately because each business requires different technology and marketing strategies.
Year
ended December 31, 2017:
|
|
EWCP
|
|
|
BCPA
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
641,675
|
|
|
$
|
14,852,650
|
|
|
$
|
15,494,325
|
|
Interest expense
|
|
|
54
|
|
|
|
44,071
|
|
|
|
44,125
|
|
Depreciation
|
|
|
62,376
|
|
|
|
219,108
|
|
|
|
281,484
|
|
Income tax expense
|
|
|
-
|
|
|
|
680,319
|
|
|
|
680,319
|
|
Segment profit
|
|
|
2,021,289
|
|
|
|
(266,548)
|
|
|
|
1,754,741
|
|
Segment assets
|
|
|
580,304
|
|
|
|
1,437,657
|
|
|
|
2,017,961
|
|
Expenditures for segment assets
|
|
|
287,853
|
|
|
|
138,628
|
|
|
|
426,480
|
|
Year
ended December 31, 2016:
|
|
EWCP
|
|
|
BCPA
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
785,660
|
|
|
$
|
15,460,354
|
|
|
$
|
16,246,014
|
|
Interest expense
|
|
|
59
|
|
|
|
41,640
|
|
|
|
41,699
|
|
Depreciation
|
|
|
325,696
|
|
|
|
214,383
|
|
|
|
540,079
|
|
Income tax expense
|
|
|
-
|
|
|
|
982,133
|
|
|
|
982,133
|
|
Segment profit (loss)
|
|
|
(417,770
|
)
|
|
|
2,211,104
|
|
|
|
1,793,334
|
|
Segment assets
|
|
|
1,966,564
|
|
|
|
1,523,270
|
|
|
|
3,489,834
|
|
Expenditures
for
segment assets
|
|
|
6,352
|
|
|
|
107,918
|
|
|
|
114,270
|
|
Sales
by territory are shown below:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
362,362
|
|
|
$
|
453,480
|
|
United States
and abroad
|
|
|
15,131,963
|
|
|
|
15,792,534
|
|
Total
|
|
$
|
15,494,325
|
|
|
$
|
16,246,014
|
|
The
Company’s long-lived assets (property, equipment, leaseholds and patents) are located in Canada and the United States as
follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
580,304
|
|
|
$
|
1,966,564
|
|
United States
|
|
|
1,437,657
|
|
|
|
1,523,270
|
|
Total
|
|
$
|
2,017,961
|
|
|
$
|
3,489,834
|
|
Three
customers accounted for $8,453,163 (55%) of sales made in 2017 (2016 - $10,148,042 or 62%).
16.
Commitments
.
The Company is committed
to minimum rental payments for property and premises aggregating approximately $735,670 over the term of two leases, the
last expiring on October 31, 2021.
Commitments for rent
in the next four years are as follows:
2018
|
|
$
|
201,840
|
|
2019
|
|
$
|
205,580
|
|
2020
|
|
$
|
209,400
|
|
2021
|
|
$
|
118,850
|
|
17.
Subsequent Events.
In
January 2018, the Company issued 23,000 shares on the exercise of employee stock options and 10,000 shares on the exercise of
consultant stock options.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item
9A. 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 on Form 10-K for the year ended December 31, 2017, we carried out an evaluation,
under the supervision and with the participation of management, including our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our principal executive officer
and principal financial officer concluded that our disclosure controls and procedures are effective.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment
of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal
control over financial reporting is a process designed by, or under the supervision of our principal executive officer and principal
financial officer and implemented by our Board of Directors, management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of our financial statements in accordance with U.S. generally accepted
accounting principles.
Our
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with U.S.
generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In
connection with the preparation of our annual financial statements, management has undertaken an assessment of the effectiveness
of our internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the 2013 COSO Framework.
Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing
of the operational effectiveness of those controls.
Based
on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31,
2017.
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.
Item
9B. Other Information.
None.
Item
10. Directors, Executive Officers and Corporate Governance.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Daniel
B. O’Brien
|
|
61
|
|
President,
Chief Executive Officer, Principal Financial and Accounting Officer and a Director
|
John
H. Bientjes
|
|
65
|
|
Director
|
Robert
Helina
|
|
52
|
|
Director
|
Tom
Fyles
Ben
Seaman
|
|
66
37
|
|
Director
Director
|
David
Fynn
|
|
60
|
|
Director
|
Daniel
B. O’Brien has served as our President, Chief Executive Officer and Principal Financial and Accounting Officer, as well
as a director since June 1998. He has been involved in the swimming pool industry since 1990, when he founded our subsidiary,
Flexible Solutions Ltd. From 1990 to 1998 Mr. O’Brien was also a teacher at Brentwood College where he was in charge of
outdoor education.
John
H. Bientjes has been a director since February 2000. Since 1984, Mr. Bientjes has served as the manager of the Commercial Aquatic
Supplies Division of D.B. Perks & Associates, Ltd., located in Vancouver, British Columbia, a company that markets supplies
and equipment to commercial swimming pools which are primarily owned by municipalities. Mr. Bientjes graduated in 1976 from Simon
Fraser University in Vancouver, British Columbia with a Bachelor of Arts Degree in Economics and Commerce.
Robert
T. Helina has been a director since October 2011. Mr. Helina has been involved in the financial services industry for over 25
years which has given him extensive knowledge in business, economics and finance. His specially is in Corporate Finance and Capital
Markets. Mr. Helina holds a Bachelor of Arts degree from Trinity Western University.
Thomas
M. Fyles has been a director since August 2012. Since 1979 Dr. Fyles has been a chemistry professor at the University of Victoria
(Assistant Professor 1979-1984/Associate Professor 1984-1992/and Professor with Tenure since 1992) Dr. Fyles received his Bachelor
of Science degree (with honors) from the University of Victoria in 1974 and his Ph.D. in chemistry from York University in 1977.
Dr. Fyles was a postdoctoral fellow with Prof. J.M. Lehn, Institut Le Bel, Universite Louis Pasteur, Strasbourg, France, between
September 1977 and July 1979.
Ben
Seaman was elected as a director in 2016. Mr.
Seaman has been the CEO of Eartheasy.com Sustainable
Living Ltd since 2007, growing the company from $50K to over $25M in annual revenue. His company has contributed over $1M towards
clean water projects in Kenya since 2013, and has been recognized internationally by the Stockholm Challenge Award and the Outdoor
Industry Inspiration Award in 2016. Prior to that, he worked in sales and investor relations at Flexible Solutions. Mr. Seaman
graduated from the University of Victoria with a Bachelor of Science degree in 2004. He has significant experience in launching
new products, marketing, distribution and e-commerce in both the US and Canada. He’s a strong believer in the triple bottom
line approach to business, giving consideration to social and environmental issues in addition to financial performance.
David
Fynn was elected as a director in 2016.
Mr. David Fynn is a Canadian Chartered Professional Accountant
and services individuals/companies in many sectors including mining and commodities in his private practice. David worked as a
senior manager with KPMG in Canada and Ernst & Young in the United Kingdom and Saudi Arabia. Since 1996 he has been the principal
of D.A. Fynn & Associates Inc., an accounting firm.
Directors
are elected annually and hold office until the next annual meeting of our stockholders and until their successors are elected
and qualified. All executive offices are chosen by the board of directors and serve at the board’s discretion.
John
Bientjes, Thomas Fyles, Ben Seaman and David Fynn are independent directors as that term is defined in section 803 of the listing
standards of the NYSE American.
Our
Audit Committee, consisting of John Bientjes, Ben Seaman and David Fynn all of whom have strong financial backgrounds, facilitates
and maintains open communications with our board of directors, senior management and our independent auditors. Our Audit Committee
also serves as an independent and objective party which monitors our financial reporting process and internal control system.
In addition, our Audit Committee reviews and appraises the efforts of our independent auditors. Our Audit Committee meets periodically
with management and our independent auditors. John Bientjes and David Fynn meet the SEC’s definition of an audit committee
financial expert. Each member of the Audit Committee is “independent” as that term is defined in Section 803 of the
listing standards of the NYSE American.
Our
Compensation Committee, consisting of John Bientjes, Ben Seaman and David Fynn, establishes salary, incentive and other forms
of compensation for our Chief Executive Officer and administers our Stock Option Program. None of our officers participated in
deliberations of the compensation committee concerning executive officer compensation. During the year ended December 31, 2017,
none of our executive officers served as a member of the compensation committee or as a director of another entity, one of
whose executive officers served on our compensation committee or as one of our directors.
We
have adopted a Code of Ethics that applies to our Chief Executive Officer, our Chief Financial Officer and our Principal Accounting
Officer, as well as our other senior management and financial staff. Interested persons may obtain a copy of our Code of Ethics
from our website at www.flexiblesolutions.com.
We
believe our directors benefit us for the following reasons:
|
Name
|
|
Reason
|
|
|
|
|
|
Daniel
B. O’Brien
|
|
Long
standing relationship with us.
|
|
John
J. Bientjes
|
|
Long
standing relationship with us.
|
|
Robert
Helina
|
|
Corporate
finance experience.
|
|
Dr.
Thomas Fyles
|
|
Scientific
expertise.
|
|
Ben
Seaman
|
|
Younger
generation businessman increases our awareness of internet sales and adds value to our audit and compensation
committees
|
|
David
Fynn
|
|
Experienced
accountant adds value our audit and compensation committees
|
Item
11. Executive Compensation.
Summary
Compensation Table
The
following table shows in summary form the compensation earned by (i) our Chief Executive Officer and (ii) by each other executive
officer who earned in excess of $100,000 during the two fiscal years ended December 31, 2017.
Name and Princi-
|
|
Fiscal
|
|
|
Salary
|
|
|
Bonus
|
|
|
Restric-ted Stock Awards
|
|
|
Options
Awards
|
|
|
All
Other
Annual
Compen-
sation
|
|
|
|
|
pal Position
|
|
Year
|
|
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
(4)
|
|
|
(5)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel B. O’Brien
|
|
|
2017
|
|
|
$
|
901,605
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
901,605
|
|
President, Chief
|
|
|
2016
|
|
|
$
|
743,042
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
743,042
|
|
Executive Officer and Principal Financial
and Accounting Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
dollar value of base salary (cash and non-cash) earned.
|
|
|
(2)
|
The
dollar value of bonus (cash and non-cash) earned.
|
|
|
(3)
|
During
the periods covered by the table, the value of the shares of restricted stock issued as compensation for services to the persons
listed in the table.
|
|
|
(4)
|
The
value of all stock options granted during the periods covered by the table.
|
|
|
(5)
|
All
other compensation received that we could not properly report in any other column of the table.
|
During
the year ended December 31, 2012, the Company determined that Daniel B. O’Brien, the Company’s President and Chief
Executive Officer, was underpaid. Accordingly, the Company increased Mr. O’Brien’s annual salary to twice that which
was paid to the highest paid employee of the Company. The Company expects that Mr. O’Brien’s salary for the year ending
December 31, 2018 will again be twice the annual salary paid to the Company’s highest paid employee, excluding Mr. O’Brien.
Non-Qualified
Stock Option Plan
In
August 2014 we adopted a Non-Qualified Stock Option Plan which authorizes the issuance of up to 1,500,000 shares of our common
stock to persons that exercise options granted pursuant to the Plan. Our employees, directors and officers, and consultants or
advisors are eligible to be granted options pursuant to the Non-Qualified Plan.
The
Plan is administered by our Compensation Committee. The Committee is vested with the authority to determine the number of shares
issuable upon the exercise of the options, the exercise price and expiration date of the options, and when, and upon what conditions
options granted under the Plan will vest or otherwise be subject to forfeiture and cancellation.
During
the fiscal year ended December 31, 2017 we issued 154,000 options pursuant to the Non-Qualified Plan (2016 – 168,000).
Stock
Option Program
Prior
to August 2014 we had a Stock Option Program which involved the issuance of options, from time to time, to our employees, directors,
officers, consultants and advisors. Options were granted by means of individual option agreements. Each option agreement specified
the shares issuable upon the exercise of the option, the exercise price, the expiration date and other terms and conditions of
the option.
Options
granted had terms of between one and five years after the date of grant and had exercise prices equal to the fair market value
of a share of our common stock on the date of grant.
As
a result of the adoption of our Non-Qualified Stock Option Plan in August 2014, all future options have been granted pursuant
to the Non-Qualified Stock Option Plan.
Summary
The
following table shows the weighted average exercise price of the outstanding options granted pursuant to our Non-Qualified Stock
Option Plan and our Stock Option Program as of December 31, 2017, our most recently completed fiscal year.
Plan
Category
|
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
|
|
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
|
|
|
Number
of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected
in
Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Non-Qualified Stock Option Plan
|
|
|
561,000
|
|
|
$
|
1.26
|
|
|
|
861,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option
Program
|
|
|
152,000
|
|
|
$
|
1.03
|
|
|
|
Not
Applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
713,000
|
|
|
$
|
1.21
|
|
|
|
861,000
|
|
Our
Non-Qualified Stock Option Plan and all grants made pursuant to our Stock Option Program have been approved by our shareholders.
As
of December 31, 2017 options to purchase 561,000 shares of our common stock were outstanding under our Non-Qualified Stock Option
Plan. The exercise price of these options varies between $0.75 and $1.70 per share and the options expire at various dates
between on December 31, 2019 and December 31, 2022.
As
of December 31, 2017 options to purchase 152,000 shares of our common stock were outstanding under our Stock Option Program. The
exercise price of these options varies between $1.00 and $1.21 per share. The options expire on December 31, 2018.
No
options were exercised by our executive officers during the fiscal year ended December 31, 2017.
Director
Compensation
We
reimburse directors for any expenses incurred in attending board meetings. We also compensate directors $5,000 annually for each
year that they serve.
Our
directors received the following compensation in 2017:
Name
|
|
Paid
in Cash
|
|
|
Stock
Awards (1)
|
|
|
Option
Awards (2)
|
|
|
|
|
|
|
|
|
|
|
|
John H. Bientjes
|
|
$
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
Dale Friend
|
|
$
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
Robert Helina
|
|
$
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
Tom Fyles
|
|
$
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
The
fair value of stock issued for services computed in accordance with ASC 718 on the date of grant.
|
|
|
(2)
|
The
fair value of options granted computed in accordance with ASC 718 on the date of grant.
|
The
terms of outstanding options granted to our directors are shown below:
Name
|
|
Option
Price
|
|
|
No.
of Options
|
|
|
Expiration
Date
|
John H. Bientjes
|
|
$
|
1.00
|
|
|
|
5,000
|
|
|
December 31, 2018
|
John H. Bientjes
|
|
$
|
1.05
|
|
|
|
5,000
|
|
|
December 31, 2019
|
Robert Helina
|
|
$
|
1.00
|
|
|
|
5,000
|
|
|
December 31, 2018
|
Robert Helina
|
|
$
|
1.05
|
|
|
|
5,000
|
|
|
December 31, 2019
|
Daniel
B. O’Brien was not compensated for serving as directors during 2017.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The
following table shows the beneficial ownership of our common stock as of March 30, 2018 by (i) each stockholder who is known by
us to own beneficially more than five percent of our outstanding common stock, (ii) each of our officers and directors, and (iii)
by all of our executive officers and directors as a group.
|
|
Shares
(1)
|
|
|
Percentage
Ownership
|
|
|
|
|
|
|
|
|
Daniel B. O’Brien
|
|
|
4,521,900
|
|
|
|
39.5
|
%
|
6001 54 Ave.
|
|
|
|
|
|
|
|
|
Taber, AB
|
|
|
|
|
|
|
|
|
Canada T1G 1X4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Bientjes
|
|
|
10,000
|
|
|
|
0.1
|
%
|
#1-230 West 13th Street North
|
|
|
|
|
|
|
|
|
Vancouver, B.C.
|
|
|
|
|
|
|
|
|
Canada V7M 1N7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Helina
|
|
|
15,000
|
|
|
|
0.1
|
%
|
6001 54 Ave.
|
|
|
|
|
|
|
|
|
Taber, AB
|
|
|
|
|
|
|
|
|
Canada T1G 1X4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Thomas Fyles
|
|
|
15,000
|
|
|
|
0.1
|
%
|
Box 3065
|
|
|
|
|
|
|
|
|
Victoria, BC
|
|
|
|
|
|
|
|
|
Canada V8W 3V6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ben Seaman
|
|
|
800
|
|
|
|
0
|
%
|
Unit 605 5 E. Cordova St.
|
|
|
|
|
|
|
|
|
Vancouver BC
|
|
|
|
|
|
|
|
|
Canada V6A 0A5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Fynn
|
|
|
0
|
|
|
|
0
|
%
|
202-2526 Yale Court,
|
|
|
|
|
|
|
|
|
Abbotsford, BC
|
|
|
|
|
|
|
|
|
Canada V2S 8G9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All officers
and directors as a group (6 persons)
|
|
|
4,562,700
|
|
|
|
39.3
|
%
|
(1)
|
Includes
shares which may be acquired on the exercise of the stock options, all of which were exercisable as of March 30, 2018, listed
below.
|
Name
|
|
No.
of Options
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
John Bientjes
|
|
|
5,000
|
|
|
$
|
1.00
|
|
|
December 31, 2018
|
|
|
|
5,000
|
|
|
$
|
1.05
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Robert Helina
|
|
|
5,000
|
|
|
$
|
1.00
|
|
|
December 31, 2018
|
|
|
|
5,000
|
|
|
$
|
1.05
|
|
|
December 31, 2019
|
Item
13. Certain Relationships and Related Transactions, Director Independence.
Not
applicable.
Item
14. Principal Accountant Fees and Services.
MNP,
LLP, Chartered Accountants, examined our financial statements for the years ended December 31, 2016 and 2015.
Audit
Fees
MNP
was paid $72,375 and $64,553 for the fiscal years ended December 31, 2017 and 2016, respectively, for professional services rendered
in the audit of our annual financial statements and for the reviews of the financial statements included in our quarterly reports
on Form 10-Q during these fiscal years.
Tax
Fees
MNP
was paid nil and $5,663 for the fiscal years ended December 31, 2017 and 2016, respectively, for professional services rendered
for the preparation and filing of our income tax returns for the fiscal years ended December 31, 2016 and 2015.
All
Other Fees
MNP
was not paid any other fees for professional services during the fiscal years ended December 31, 2017 and 2016.
Audit
Committee Pre-Approval Policies
Rules
adopted by the SEC in order to implement requirements of the Sarbanes-Oxley Act of 2002 require public company audit committees
to pre-approve audit and non-audit services. Our Audit Committee has adopted a policy for the pre-approval of all audit, audit-related
and tax services, and permissible non-audit services provided by our independent auditors. The policy provides for an annual review
of an audit plan and budget for the upcoming annual financial statement audit, and entering into an engagement letter with the
independent auditors covering the scope of the audit and the fees to be paid. Our Audit Committee may also from time-to-time review
and approve in advance other specific audit, audit-related, tax or permissible non-audit services. In addition, our Audit Committee
may from time-to-time give pre-approval for audit services, audit-related services, tax services or other non-audit services by
setting forth such pre-approved services on a schedule containing a description of, budget for, and time period for such pre-approved
services. The policies require our Audit Committee to be informed of each service and the policies do not include any delegation
of our Audit Committee’s responsibilities to management. Our Audit Committee may delegate pre-approval authority to one
or more of its members. The member to whom such authority is delegated will report any pre-approval decisions to our Audit Committee
at its next scheduled meeting.
During
the year ended December 31, 2017 our Audit Committee approved all of the fees paid to MNP. Our Audit Committee has determined
that the rendering of all non-audit services by MNP is compatible with maintaining MNP’s independence. During the year ended
December 31, 2017, none of the total hours expended on our financial audit by MNP were provided by persons other than MNP’s
full-time permanent employees.
SCHEDULE “D”
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For
the quarterly period ended June 30, 2018
OR
[ ]
|
TRANSITION
REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For
the transition period from ________ to ________
Commission
File Number: 001-31540
FLEXIBLE
SOLUTIONS INTERNATIONAL INC.
(Exact
Name of Issuer as Specified in Its Charter)
Nevada
|
|
91-1922863
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or
organization)
|
|
Identification No.)
|
6001
54 Ave.
|
|
|
Taber,
Alberta, Canada
|
|
T1G
1X4
|
(Address
of Issuer’s Principal Executive Offices)
|
|
(Zip
Code)
|
Issuer’s
telephone number: (403) 223-2995
N/A
(Former
name, former address and former fiscal year, if changed since last report)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes
[X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ]
|
Accelerated
filer [ ]
|
|
|
Non-accelerated
filer [ ]
|
Smaller
reporting company [X]
|
(Do
not check if a smaller reporting company)
|
Emerging
growth company [ ]
|
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
[ ] Yes [X] No
Class
of Stock
|
|
No.
Shares Outstanding
|
|
Date
|
|
|
|
|
|
Common
|
|
11,630,991
|
|
August
14, 2018
|
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This document contains
“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical fact are “forward-looking statements” for the purposes of the federal and state
securities laws, including, but not limited to: any projections of earnings, revenue or other financials items; any statements
of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or
developments; any statements regarding future economic conditions or performance; any statements regarding future economic conditions
or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.
Forward-looking statements
may include the words “may,” “could,” “will,” “estimate,” “intend,”
“continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking
statements present our estimates and assumptions only as of the date of this report. Except for our ongoing obligation to disclose
material information as required by the federal securities laws, we do not intend, and undertake no obligation, to update any forward-looking
statement.
Although we believe that
the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from
those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations,
as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these
risks and uncertainties include but are not limited to:
|
●
|
Increased competitive pressures from existing competitors and new entrants;
|
|
|
|
|
●
|
Increases in interest rates or our cost of borrowing or a default under any material debt agreement;
|
|
|
|
|
●
|
Deterioration in general or regional economic conditions;
|
|
|
|
|
●
|
Adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
|
|
|
|
|
●
|
Loss of customers or sales weakness;
|
|
|
|
|
●
|
Inability to achieve future sales levels or other operating results;
|
|
|
|
|
●
|
The unavailability of funds for capital expenditures; and
|
|
|
|
|
●
|
Operational inefficiencies in distribution or other systems.
|
For a detailed description
of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement,
please see “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2017.
PART
I
|
FINANCIAL INFORMATION
|
Item
1.
|
Financial
Statements.
|
FLEXIBLE
SOLUTIONS INTERNATIONAL INC.
CONDENSED
INTERIM CONSOLIDATED BALANCE SHEETS
(U.S.
Dollars - Unaudited)
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,305,465
|
|
|
$
|
6,912,138
|
|
Accounts receivable (see Note 3)
|
|
|
2,433,335
|
|
|
|
2,105,471
|
|
Inventory (see Note 4)
|
|
|
4,361,138
|
|
|
|
4,686,852
|
|
Prepaid expenses
|
|
|
90,338
|
|
|
|
255,080
|
|
Total current assets
|
|
|
17,190,276
|
|
|
|
13,959,541
|
|
Property, plant and equipment (see Note 5)
|
|
|
1,827,297
|
|
|
|
1,938,509
|
|
Patents (see Note 6)
|
|
|
71,233
|
|
|
|
79,452
|
|
Long term deposits (see Note 7)
|
|
|
18,474
|
|
|
|
18,531
|
|
Investment (see Note 8)
|
|
|
914
|
|
|
|
13,414
|
|
Deferred tax asset
|
|
|
1,016,070
|
|
|
|
1,763,923
|
|
Total Assets
|
|
$
|
20,124,264
|
|
|
$
|
17,773,370
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
545,728
|
|
|
$
|
939,116
|
|
Deferred revenue
|
|
|
51,881
|
|
|
|
208,608
|
|
Taxes payable
|
|
|
1,481,947
|
|
|
|
1,101,596
|
|
Line of credit (see Note 9)
|
|
|
250,000
|
|
|
|
250,000
|
|
Current portion of long term debt (see Note 10)
|
|
|
201,193
|
|
|
|
201,193
|
|
Total current liabilities
|
|
|
2,530,749
|
|
|
|
2,700,513
|
|
Long term debt (see Note 10)
|
|
|
50,299
|
|
|
|
150,896
|
|
Total Liabilities
|
|
|
2,581,048
|
|
|
|
2,851,409
|
|
|
|
|
|
|
|
|
|
|
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 11,630,991 (December 31, 2017: 11,597,991) common shares
|
|
|
11,631
|
|
|
|
11,598
|
|
Capital in excess of par value
|
|
|
15,202,169
|
|
|
|
15,114,835
|
|
Accumulated other comprehensive loss
|
|
|
(961,775
|
)
|
|
|
(656,093
|
)
|
Retained earnings (Deficit)
|
|
|
3,291,191
|
|
|
|
451,621
|
|
Total Stockholders’ Equity
|
|
|
17,543,216
|
|
|
|
14,921,961
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
20,124,264
|
|
|
$
|
17,773,370
|
|
Commitments (Note 14)
|
|
|
|
|
|
|
|
|
—
See
Notes to Unaudited Condensed Interim Consolidated Financial Statements
—
FLEXIBLE
SOLUTIONS INTERNATIONAL INC.
CONDENSED
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(U.S.
Dollars
—
Unaudited)
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
4,137,545
|
|
|
$
|
4,722,366
|
|
Cost of sales
|
|
|
2,600,934
|
|
|
|
2,841,003
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,536,611
|
|
|
|
1,881,363
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Wages
|
|
|
379,016
|
|
|
|
438,285
|
|
Administrative salaries and benefits
|
|
|
277,318
|
|
|
|
247,121
|
|
Advertising and promotion
|
|
|
2,570
|
|
|
|
3,718
|
|
Investor relations and transfer agent fee
|
|
|
37,802
|
|
|
|
36,736
|
|
Office and miscellaneous
|
|
|
78,147
|
|
|
|
70,547
|
|
Insurance
|
|
|
68,074
|
|
|
|
55,928
|
|
Interest expense
|
|
|
7,087
|
|
|
|
12,729
|
|
Rent
|
|
|
63,053
|
|
|
|
65,494
|
|
Consulting
|
|
|
29,522
|
|
|
|
33,650
|
|
Professional fees
|
|
|
51,495
|
|
|
|
58,373
|
|
Travel
|
|
|
58,880
|
|
|
|
39,263
|
|
Telecommunications
|
|
|
6,752
|
|
|
|
7,090
|
|
Shipping
|
|
|
3,620
|
|
|
|
4,911
|
|
Research
|
|
|
17,347
|
|
|
|
20,394
|
|
Commissions
|
|
|
-
|
|
|
|
13,512
|
|
Bad debt expense
|
|
|
-
|
|
|
|
811
|
|
Currency exchange
|
|
|
(114,505
|
)
|
|
|
32,740
|
|
Utilities
|
|
|
4,445
|
|
|
|
4,545
|
|
Total operating expenses
|
|
|
970,623
|
|
|
|
1,145,847
|
|
|
|
|
|
|
|
|
|
|
Income before other items and income tax
|
|
|
565,988
|
|
|
|
735,516
|
|
Gain (loss) on involuntary disposition (net of tax)
|
|
|
1,721,977
|
|
|
|
(326,570
|
)
|
Interest income
|
|
|
5,196
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
2,293,161
|
|
|
|
408,995
|
|
Provision for income taxes
|
|
|
157,255
|
|
|
|
135,372
|
|
Net income
|
|
|
2,135,906
|
|
|
|
273,623
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(186,653
|
)
|
|
|
186,762
|
|
Comprehensive income
|
|
|
1,949,253
|
|
|
|
460,385
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic and diluted)
|
|
$
|
0.18
|
|
|
$
|
0.02
|
|
Weighted average number of common shares (basic)
|
|
|
11,630,991
|
|
|
|
11,465,606
|
|
Weighted average number of common shares (diluted)
|
|
|
11,791,017
|
|
|
|
11,752,945
|
|
—
See Notes to Unaudited Condensed Interim Consolidated Financial Statements —
FLEXIBLE
SOLUTIONS INTERNATIONAL INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE
INCOME (LOSS)
(U.S.
Dollars — Unaudited)
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
8,338,725
|
|
|
$
|
9,386,074
|
|
Cost of sales
|
|
|
4,834,851
|
|
|
|
5,410,678
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,503,874
|
|
|
|
3,975,396
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Wages
|
|
|
800,326
|
|
|
|
796,702
|
|
Administrative salaries and benefits
|
|
|
537,911
|
|
|
|
496,203
|
|
Advertising and promotion
|
|
|
6,913
|
|
|
|
13,295
|
|
Investor relations and transfer agent fee
|
|
|
73,457
|
|
|
|
74,077
|
|
Office and miscellaneous
|
|
|
107,820
|
|
|
|
105,449
|
|
Insurance
|
|
|
130,852
|
|
|
|
137,537
|
|
Interest expense
|
|
|
14,487
|
|
|
|
24,296
|
|
Rent
|
|
|
124,795
|
|
|
|
121,008
|
|
Consulting
|
|
|
62,376
|
|
|
|
67,946
|
|
Professional fees
|
|
|
94,809
|
|
|
|
115,925
|
|
Travel
|
|
|
89,030
|
|
|
|
73,162
|
|
Telecommunications
|
|
|
12,908
|
|
|
|
13,386
|
|
Shipping
|
|
|
7,729
|
|
|
|
8,773
|
|
Research
|
|
|
54,553
|
|
|
|
31,538
|
|
Commissions
|
|
|
-
|
|
|
|
54,167
|
|
Bad debt expense
|
|
|
-
|
|
|
|
1,191
|
|
Currency exchange
|
|
|
(200,639
|
)
|
|
|
41,744
|
|
Utilities
|
|
|
8,980
|
|
|
|
11,510
|
|
Total operating expenses
|
|
|
1,926,307
|
|
|
|
2,187,909
|
|
Income before other items and income tax
|
|
|
1,577,567
|
|
|
|
1,787,487
|
|
Gain on involuntary disposition (net of tax)
|
|
|
1,714,261
|
|
|
|
2,245,718
|
|
Write down of inventory
|
|
|
-
|
|
|
|
(51,346
|
)
|
Interest income
|
|
|
6,893
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
3,298,721
|
|
|
|
3,981,941
|
|
Deferred tax expense
|
|
|
-
|
|
|
|
23,404
|
|
Provision for income taxes
|
|
|
459,151
|
|
|
|
432,247
|
|
Net income
|
|
|
2,839,570
|
|
|
|
3,526,290
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(305,682
|
)
|
|
|
226,429
|
|
Comprehensive income
|
|
|
2,533,888
|
|
|
|
3,752,719
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic)
|
|
$
|
0.24
|
|
|
$
|
0.31
|
|
Net income per share (diluted)
|
|
$
|
0.24
|
|
|
$
|
0.30
|
|
Weighted average number of common shares (basic)
|
|
|
11,625,671
|
|
|
|
11,462,167
|
|
Weighted average number of common shares (diluted)
|
|
|
11,804,842
|
|
|
|
11,700,631
|
|
—
See Notes to Unaudited Condensed Interim Consolidated Financial Statements —
FLEXIBLE
SOLUTIONS INTERNATIONAL INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars — Unaudited)
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,839,570
|
|
|
$
|
3,526,290
|
|
Stock compensation expense
|
|
|
51,006
|
|
|
|
45,692
|
|
Depreciation and amortization
|
|
|
120,490
|
|
|
|
135,537
|
|
Decrease in deferred tax asset
|
|
|
-
|
|
|
|
23,404
|
|
Gain on involuntary disposition (net of tax)
|
|
|
(1,714,261
|
)
|
|
|
(2,245,718
|
)
|
Changes in non-cash working capital items:
|
|
|
|
|
|
|
|
|
(Increase) in accounts receivable
|
|
|
(335,880
|
)
|
|
|
(663,895
|
)
|
Decrease (increase) in inventory
|
|
|
295,116
|
|
|
|
(194,020
|
)
|
Decrease (increase) in prepaid expenses
|
|
|
164,053
|
|
|
|
74,283
|
|
(Decrease) in accounts payable
|
|
|
(370,728
|
)
|
|
|
(522,328
|
)
|
Increase (decrease) in taxes payable
|
|
|
380,351
|
|
|
|
(401,519
|
)
|
(Decrease) in deferred revenue
|
|
|
(156,600
|
)
|
|
|
(185,253
|
)
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by operating activities
|
|
|
1,273,117
|
|
|
|
(407,527
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Investment
|
|
|
12,500
|
|
|
|
12,500
|
|
Proceeds from insurance
|
|
|
2,426,876
|
|
|
|
3,727,042
|
|
Acquisition of property and equipment
|
|
|
(24,680
|
)
|
|
|
(56,306
|
)
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by investing activities
|
|
|
2,414,696
|
|
|
|
3,683,236
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Short term line of credit
|
|
|
-
|
|
|
|
350,000
|
|
Loan Repayment
|
|
|
(100,597
|
)
|
|
|
(100,597
|
)
|
Proceeds from sale of common stock
|
|
|
36,360
|
|
|
|
32,500
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing activities
|
|
|
(64,237
|
)
|
|
|
281,903
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(230,249
|
)
|
|
|
228,789
|
|
|
|
|
|
|
|
|
|
|
(Outflow) Inflow of cash
|
|
|
3,393,327
|
|
|
|
3,786,401
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning
|
|
|
6,912,138
|
|
|
|
2,470,066
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending
|
|
$
|
10,305,465
|
|
|
$
|
6,256,467
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
78,800
|
|
|
$
|
833,766
|
|
Interest paid
|
|
$
|
14,411
|
|
|
$
|
24,296
|
|
—
See Notes to Unaudited Condensed Interim Consolidated Financial Statements —
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the Period Ended June 30, 2018
(U.S.
Dollars)
1.
|
Basis of Presentation
.
|
These
unaudited condensed interim consolidated financial statements include the accounts of Flexible Solutions International Inc. (the
“Company”), and its wholly-owned subsidiaries Flexible Fermentation Ltd. (“Flexible Ltd.”), NanoChem Solutions
Inc. (“NanoChem”), Flexible Solutions Ltd., Flexible Biomass LP, FS Biomass Inc., NCS Deferred Corp., Conserve H2O
Ltd. and Natural Chem SEZC Ltd. All inter-company balances and transactions have been eliminated. The Company was incorporated
May 12, 1998 in the State of Nevada and had no operations until June 30, 1998.
Flexible
Solutions International Inc. and its subsidiaries develop, manufacture and market specialty chemicals which slow the evaporation
of water. One product, HEATSAVR®, is marketed for use in swimming pools and spas where its use, by slowing the evaporation
of water, allows the water to retain a higher temperature for a longer period of time and thereby reduces the energy required
to maintain the desired temperature of the water in the pool. Another product, WATERSAVR®, is marketed for water conservation
in irrigation canals, aquaculture, and reservoirs where its use slows water loss due to evaporation. In addition to the water
conservation products, the Company also manufactures and markets water-soluble chemicals utilizing thermal polyaspartate biopolymers
(hereinafter referred to as “TPAs”), which are beta-proteins manufactured from the common biological amino acid, L-aspartic.
TPAs can be formulated to prevent corrosion and scaling in water piping within the petroleum, chemical, utility and mining industries.
TPAs are also used as proteins to enhance fertilizers in improving crop yields and can be used as additives for household laundry
detergents, consumer care products and pesticides.
These
unaudited condensed interim consolidated financial statements of the Company have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial statements. These unaudited interim financial statements
are condensed and do not include all disclosures required for annual financial statements. The organization and business of the
Company, accounting policies followed by the Company and other information are contained in the notes to the Company’s audited
consolidated financial statements filed as part of the Company’s December 31, 2017 Annual Report on Form 10-K/A. This quarterly
report should be read in conjunction with such annual report.
In
the opinion of the Company’s management, these consolidated financial statements reflect all adjustments necessary to present
fairly the Company’s consolidated financial position at June 30, 2018, the consolidated results of operations for the three
and six months ended June 30, 2018 and 2017, and the consolidated statements of cash flows for the six months ended June 30, 2018
and 2017. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results
to be expected for the entire fiscal year.
2.
|
Significant Accounting
Policies.
|
These
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States applicable to a going concern and reflect the policies outlined below.
(a)
Cash and Cash Equivalents
.
The
Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at
the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with several financial institutions.
(b)
Inventories and Cost of Sales
The
Company has three major classes of inventory: completed goods, work in progress and raw materials and supplies. In all classes,
inventories are stated 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. Inventory costs and costs of sales include
direct costs of the raw material, inbound freight charges, warehousing costs, handling costs (receiving and purchasing) and utilities
and overhead expenses related to the Company’s manufacturing and processing facilities.
(c)
Allowance for Doubtful Accounts
The
Company provides an allowance for doubtful accounts when management estimates collectability to be uncertain. Accounts receivable
are continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate
allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer,
overall customer credit-worthiness and historical experience.
(d)
Property, Equipment, Leaseholds and Intangible Assets.
The
following assets are recorded at cost and depreciated using the methods and annual rates shown below:
Computer
hardware
|
|
30%
Declining balance
|
Furniture
and fixtures
|
|
20%
Declining balance
|
Manufacturing
equipment
|
|
20%
Declining balance
|
Office
equipment
|
|
20%
Declining balance
|
Boat
|
|
20%
Declining balance
|
Building
and improvements
|
|
10%
Declining balance
|
Patents
|
|
Straight-line
over 17 years
|
Technology
|
|
Straight-line
over 10 years
|
Leasehold
improvements
|
|
Straight-line
over lease term
|
Property
and equipment are written down to net realizable value when management determines there has been a change in circumstances which
indicates its carrying amount may not be recoverable. No write-downs have been necessary to date.
(e)
Impairment of Long-Lived Assets
.
In
accordance with FASB Codification Topic 360, “Property, Plant and Equipment (ASC 360), the Company reviews long-lived assets,
including, but not limited to, property, equipment and leaseholds, patents and other assets, for impairment annually or whenever
events or changes in circumstances indicate the carrying amounts of assets may not be recoverable. The carrying value of long-lived
assets is assessed for impairment by evaluating operating performance and future undiscounted cash flows of the underlying assets.
If the expected future cash flows of an asset is less than its carrying value, an impairment measurement is indicated. Impairment
charges are recorded to the extent that an asset’s carrying value exceeds its fair value. Accordingly, actual results could
vary significantly from such estimates. There were no impairment charges during the periods presented.
(f)
Foreign Currency
.
The
functional currency of three of the Company’s subsidiaries is the Canadian Dollar. The translation of the Canadian Dollar
to the reporting currency of the Company, the U.S. Dollar is performed for assets and liabilities using exchange rates in effect
at the balance sheet date. Revenue and expense transactions are translated using average exchange rates prevailing during the
year. Translation adjustments arising on conversion of the Company’s financial statements from the subsidiary’s functional
currency, Canadian Dollars, into the reporting currency, U.S. Dollars, are excluded from the determination of income (loss) and
are disclosed as other comprehensive income in the consolidated statements of income and comprehensive income.
Foreign
exchange gains and losses relating to transactions not denominated in the applicable local currency are included in operating
income (loss) if realized during the year and in comprehensive income (loss) if they remain unrealized at the end of the year.
(g)
Revenue Recognition
.
Revenue
from product sales is recognized at the time the product is shipped since title and risk of loss is transferred to the purchaser
upon delivery to the carrier. Shipments are made F.O.B. shipping point. The Company recognizes revenue when there is persuasive
evidence of an arrangement, delivery to the carrier has occurred, the fee is fixed or determinable, collectability is reasonably
assured and there are no significant remaining performance obligations. When significant post-delivery obligations exist, revenue
is deferred until such obligations are fulfilled. To date, there have been no such significant post-delivery obligations.
Since
the Company’s inception, product returns have been insignificant; therefore, no provision has been established for estimated
product returns.
Deferred
revenues consist of products sold to distributors with payment terms greater than the Company’s customary business terms
due to lack of credit history or operating in a new market in which the Company has no prior experience. The Company defers the
recognition of revenue until the criteria for revenue recognition has been met, and payment is received from these distributors.
(h)
Stock Issued in Exchange for Services
.
The
Company’s common stock issued in exchange for services is valued at estimated fair market value based upon trading prices
of the Company’s common stock on the dates of the stock transactions. The corresponding expense of the services rendered
is recognized over the period that the services are performed.
(i)
Stock-based Compensation
.
The
Company recognizes compensation expense for all share-based payments in accordance with FASB Codification Topic 718,
Compensation
— Stock Compensation
, (ASC 718). Under the fair value recognition provisions of ASC 718, the Company recognizes share-based
compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award.
The
fair value at grant date of stock options is estimated using the Black-Scholes option-pricing model. Compensation expense is recognized
on a straight-line basis over the stock option vesting period based on the estimated number of stock options that are expected
to vest. Shares are issued from treasury upon exercise of stock options.
(j)
Comprehensive Income
.
Other
comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included
in comprehensive income but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders’
equity. The Company’s other comprehensive income is primarily comprised of unrealized foreign exchange gains and losses.
(k)
Income Per Share
.
Basic
earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares
outstanding in the period. Diluted earnings per share are calculated giving effect to the potential dilution of the exercise of
options and warrants. Common equivalent shares, comprised of incremental common shares issuable upon the exercise of stock options
and warrants are included in diluted net income per share to the extent that these shares are dilutive. Common equivalent shares
that have an anti-dilutive effect on net income per share have been excluded from the calculation of diluted weighted average
shares outstanding for the three and six months ended June 30, 2018 and 2017.
(l)
Use of Estimates
.
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates and would impact the results of operations and cash flows.
Estimates
and underlying assumptions are reviewed at each period end. Revisions to accounting estimates are recognized in the period in
which the estimates are revised and in any future periods affected.
Significant
areas requiring the use of management estimates include assumptions and estimates relating to the asset impairment analysis, share-based
payments and warrants, valuation allowances for deferred income tax assets, determination of useful lives of property, equipment
and leaseholds, and the valuation of inventory.
(m)
Financial Instruments
.
The
fair market value of the Company’s financial instruments comprising cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, and short term line of credit were estimated to approximate their carrying values due to immediate
or short-term maturity of these financial instruments.
(n)
Fair Value of Financial Instruments
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize
the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs described below,
of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
|
●
|
Level
1 – Quoted prices in active markets for identical assets or liabilities
|
|
|
|
|
●
|
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
●
|
Level
3 — Unobservable inputs that are supported by little or no market activity which is significant to the fair value of
the assets or liabilities.
|
The
fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and the short term line
of credit for all periods presented approximate their respective carrying amounts due to the short term nature of these financial
instruments
(o)
Contingencies
Certain
conditions may exist as of the date the financial statements are issued which may result in a loss to the Company but which will
only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess
such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies
related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the
Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates
that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material,
would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed. Legal fees associated with loss contingencies are expensed as incurred.
(p)
Income Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance so that the
assets are recognized only to the extent that when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will be realized.
Per
FASB ASC 740 “Income taxes” under the liability method, it is the Company’s policy to provide for uncertain
tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more
likely than not to be sustained upon examination by tax authorities. At June 30, 2018, the Company believes it has appropriately
accounted for any unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized
benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given
financial statement period may be affected. Interest and penalties associated with the Company’s tax positions are recorded
as interest expense in the consolidated statements of income and comprehensive income.
(q)
Risk Management.
The
Company’s credit risk is primarily attributable to its accounts receivable. The amounts presented in the accompanying consolidated
balance sheets are net of allowances for doubtful accounts, estimated by the Company’s management based on prior experience
and the current economic environment. The Company is exposed to credit-related losses in the event of non-payment by customers.
Credit exposure is minimized by dealing with only credit worthy counterparties. Accounts receivable for the Company’s three
primary customers totaled $1,125,148 (47%) at June 30, 2018 (December 31, 2017 - $1,247,374 or 65%).
The
credit risk on cash and cash equivalents is limited because the Company limits its exposure to credit loss by placing its cash
and cash equivalents with major financial institutions. The Company maintains cash balances at financial institutions which at
times exceed federally insured amounts. The Company has not experienced any losses in such accounts.
The
Company is exposed to foreign exchange and interest rate risk to the extent that market value rate fluctuations materially differ
from financial assets and liabilities, subject to fixed long-term rates.
In
order to manage its exposure to foreign exchange risks, the Company is closely monitoring the fluctuations in the foreign currency
exchange rates and the impact on the value of cash and cash equivalents, accounts receivable, and accounts payable and accrued
liabilities. The Company has not hedged its exposure to currency fluctuations.
(r)
Equity Method Investment
The
Company accounts for investments using the equity method of accounting if the investment provides the Company the ability to exercise
significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company’s
ownership interest in the voting stock of the investee ranges between 20% and 50%, although other factors, such as representation
on the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate.
Under the equity method of accounting, the investment is recorded at cost in the consolidated balance sheets under other assets
and adjusted for dividends received and the Company’s share of the investee’s earnings or losses together with other-than-temporary
impairments which are recorded through interest and other loss, net in the consolidated statements of income and comprehensive
income.
(s)
Adoption of new accounting principles
In
February 2016, the FASB issued ASU 2016-02, Leases. The standard will require lessees to recognize most leases on their balance
sheet and makes selected changes to lessor accounting. The standard is effective for annual and interim reporting periods beginning
after December 15, 2018. A modified retrospective transition approach is required, with certain practical expedients available.
The company is currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which has been updated through several revisions
and clarifications since its original issuance. The standard will require revenue recognized to represent the transfer of promised
goods or services to customers at an amount that reflects the consideration which a company expects to receive in exchange for
those goods or services. The standard also requires new, expanded disclosures regarding revenue recognition. The standard is effective
January 1, 2018. Adoption of this standard had no material impact on the Company’s consolidated financial statements.
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Accounts receivable
|
|
$
|
2,471,759
|
|
|
$
|
2,145,803
|
|
Allowances for doubtful accounts
|
|
|
(38,424
|
)
|
|
|
(40,332
|
)
|
|
|
$
|
2,433,335
|
|
|
$
|
2,105,471
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Completed goods
|
|
$
|
2,563,930
|
|
|
$
|
2,530,914
|
|
Work in progress
|
|
|
-
|
|
|
|
183,944
|
|
Raw materials and supplies
|
|
|
1,797,208
|
|
|
|
1,971,994
|
|
|
|
$
|
4,361,138
|
|
|
$
|
4,686,852
|
|
In
February 2017, the Company lost $367,331CAD ($277,482USD) in inventory in a fire at the Taber, AB location. Insurance was in place.
See Note 5.
5.
|
Property, Plant & equipment
|
|
|
June 30, 2018
|
|
|
Accumulated
|
|
|
June 30, 2018
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
Buildings and Improvements
|
|
$
|
3,396,306
|
|
|
$
|
2,457,839
|
|
|
$
|
939,467
|
|
Computer hardware
|
|
|
43,505
|
|
|
|
39,819
|
|
|
|
3,686
|
|
Furniture and fixtures
|
|
|
21,356
|
|
|
|
11,992
|
|
|
|
9,364
|
|
Manufacturing equipment
|
|
|
2,595,201
|
|
|
|
2,152,656
|
|
|
|
442,545
|
|
Boat
|
|
|
34,400
|
|
|
|
16,567
|
|
|
|
17,833
|
|
Office equipment
|
|
|
1,802
|
|
|
|
287
|
|
|
|
1,515
|
|
Trailer
|
|
|
9,110
|
|
|
|
2,528
|
|
|
|
6,582
|
|
Leasehold Improvements
|
|
|
88,872
|
|
|
|
41,737
|
|
|
|
47,135
|
|
Land
|
|
|
360,170
|
|
|
|
-
|
|
|
|
360,170
|
|
Technology
|
|
|
103,742
|
|
|
|
103,742
|
|
|
|
-
|
|
|
|
$
|
6,654,464
|
|
|
$
|
4,827,167
|
|
|
$
|
1,827,297
|
|
|
|
December 31, 2017
|
|
|
Accumulated
|
|
|
December 31, 2017
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
Buildings and Improvements
|
|
$
|
3,400,792
|
|
|
$
|
2,409,179
|
|
|
$
|
991,613
|
|
Computer hardware
|
|
|
40,904
|
|
|
|
39,398
|
|
|
|
1,506
|
|
Furniture and fixtures
|
|
|
17,673
|
|
|
|
11,156
|
|
|
|
6,517
|
|
Office equipment
|
|
|
1,480
|
|
|
|
148
|
|
|
|
1,332
|
|
Manufacturing equipment
|
|
|
2,590,158
|
|
|
|
2,104,137
|
|
|
|
486,021
|
|
Trailer
|
|
|
9,562
|
|
|
|
1,434
|
|
|
|
8,128
|
|
Boat
|
|
|
34,400
|
|
|
|
14,586
|
|
|
|
19,814
|
|
Leasehold improvements
|
|
|
85,432
|
|
|
|
32,506
|
|
|
|
52,926
|
|
Technology
|
|
|
101,748
|
|
|
|
101,748
|
|
|
|
-
|
|
Land
|
|
|
370,652
|
|
|
|
-
|
|
|
|
370,652
|
|
|
|
$
|
6,652,801
|
|
|
$
|
4,714,292
|
|
|
$
|
1,938,509
|
|
Amount
of depreciation expense for the six months ended June 30, 2018: $112,271 (2017: $127,318) and is included in cost of sales in
the Unaudited Condensed Interim Consolidated Statements of Comprehensive Income (Loss).
In
February 2017, the Company lost a net carrying value total of $2,196,722CAD ($1,659,404USD) in building and manufacturing equipment
in a fire at the Taber, AB location. Insurance was in place. During the six months ended June 30, 2017, the Company was approved
for interim insurance proceeds of $5,570,000CAD ($4,207,578USD). During the six months ended June 30, 2018, the Company was approved
for and received a final insurance payment of $3,132,666CAD ($2,426,876USD). An after-tax gain of $1,714,261USD (2017 –
$2,245,718USD) is included as other income in the Unaudited Condensed Interim Consolidated Statement of Operations and
Comprehensive Income (Loss).
|
|
June 30
, 2018
Cost
|
|
|
Accumulated
Amortization
|
|
|
June 30,
2018
Net
|
|
Patents
|
|
$
|
201,318
|
|
|
$
|
130,085
|
|
|
$
|
71,233
|
|
|
|
December 31,
2017
Cost
|
|
|
Accumulated
Amortization
|
|
|
December 31, 2
017
Net
|
|
Patents
|
|
$
|
212,426
|
|
|
$
|
132,974
|
|
|
$
|
79,452
|
|
Decrease
in 2018 cost was due to currency conversion. June 30, 2018 cost in Canadian dollars - $265,102 (December 31, 2017 - $265,102 in
Canadian dollars).
Amount
of amortization for the six months ended June 30, 2018 - $8,219 (2017 - $8,219) and is included in cost of sales in the consolidated
statements of operations and comprehensive income (loss).
Estimated
amortization expense over the next five years is as follows:
2018
|
|
$
|
16,438
|
|
2019
|
|
|
16,438
|
|
2020
|
|
|
16,438
|
|
2021
|
|
|
16,438
|
|
2022
|
|
|
16,438
|
|
The
Company has reclassified certain security deposits to better reflect their long term nature. Long term deposits consist of damage
deposits held by landlords and security deposits held by various vendors.
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Long term deposits
|
|
$
|
18,474
|
|
|
$
|
18,531
|
|
8.
|
Equity Method Investment
|
The
Company has a 42% ownership interest in ENP Peru Investments LLC (“ENP Peru”), which was acquired in fiscal 2016.
ENP Peru is located in Illinois and leases warehouse space. The Company accounts for this investment using the equity method of
accounting. A summary of the Company’s investment follows:
|
|
|
|
Balance, January 1, 2017
|
|
$
|
122,480
|
|
Return of equity
|
|
|
(25,000
|
)
|
Loss in equity method investment
|
|
|
(84,066
|
)
|
Balance, December 31, 2017
|
|
$
|
13,414
|
|
Return of equity
|
|
|
(12,500
|
)
|
Balance, June 30, 2018
|
|
$
|
914
|
|
9.
|
Short-Term Line of Credit
|
In
June 2018, the Company signed a new agreement with Harris Bank (“the Bank”) to renew the expiring credit line. The
revolving line of credit is for an aggregate amount of up to the lesser of (i) $3,000,000, or (ii) 75% of eligible domestic accounts
receivable and certain foreign accounts receivable plus 40% of inventory. The loan has an annual interest rate of 5.5%.
The
Revolving Line of Credit contains customary affirmative and negative covenants, including the following: compliance with laws,
provision of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance
of operating accounts at the Bank, the Bank’s access to collateral, formation or acquisition of subsidiaries, incurrence
of indebtedness, dispositions of assets, granting liens, changes in business, ownership or business locations, engaging in mergers
and acquisitions, making investments or distributions and affiliate transactions. The covenants also require that the Company
maintain a minimum ratio of qualifying financial assets to the sum of qualifying financial obligations. As of June 30, 2018 the
Company was in compliance with all loan covenants.
To
secure the repayment of any amounts borrowed under the Revolving Line of Credit, the Company granted the Bank a security interest
in substantially all of the assets of NanoChem Solutions Inc., exclusive of intellectual property assets.
Short-term
borrowings outstanding under the Revolving Line as of June 30, 2018 were $250,000 (December 31, 2017 - $250,000).
In
September 2014, NanoChem Solutions Inc. signed a $1,005,967 promissory note with Harris Bank with a rate of prime plus 0.5% (June
30, 2018 – 5.5%; December 31, 2017 – 5%) to be repaid over 5 years with equal monthly installments plus interest.
This money was used to retire the previously issued and outstanding debt obligations. The balance owing at June 30, 2018 was $251,492
(December 31, 2017 - $352,089). The final payment will be made in September 2019.
The
Company has committed to the following repayments:
2018
|
|
$
|
100,596
|
|
2019
|
|
$
|
150,896
|
|
As
of June 30, 2018, the Company was in compliance with all loan covenants.
Continuity
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Balance, beginning of year
|
|
$
|
352,089
|
|
|
$
|
553,282
|
|
Less: Payments on loan
|
|
|
100,597
|
|
|
|
201,193
|
|
Balance, end of year
|
|
$
|
251,492
|
|
|
$
|
352,089
|
|
Less: current portion
|
|
|
(201,193
|
)
|
|
|
(201,193
|
)
|
Long term balance
|
|
$
|
50,299
|
|
|
$
|
150,896
|
|
The
Company adopted a stock option plan (“Plan”). The purpose of this Plan is to provide additional incentives to key
employees, officers, directors and consultants of the Company and its subsidiaries in order to help attract and retain the best
available personnel for positions of responsibility and otherwise promote the success of its business. It is intended that options
issued under this Plan constitute non-qualified stock options. The general terms of awards under the option plan are that 100%
of the options granted will vest the year following the grant. The maximum term of options granted is 5 years.
The
Company may issue stock options to provide incentives to directors, key employees and other persons who contribute to the success
of the Company. The exercise price of all incentive options are issued for not less than fair market value at the date of grant.
The
following table summarizes the Company’s stock option activity for the year ended December 31, 2017 and the six-month period
ended June 30, 2018:
|
|
Number of shares
|
|
|
Exercise price
per share
|
|
|
Weighted average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
813,000
|
|
|
$
|
0.75
- $2.22
|
|
|
$
|
1.19
|
|
Granted
|
|
|
154,000
|
|
|
$
|
1.70
|
|
|
$
|
1.70
|
|
Cancelled or expired
|
|
|
(114,000
|
)
|
|
$
|
1.00
– 2.22
|
|
|
$
|
1.75
|
|
Exercised
|
|
|
(140,000
|
)
|
|
$
|
0.75
– 1.21
|
|
|
$
|
1.11
|
|
Balance, December 31, 2017
|
|
|
713,000
|
|
|
$
|
0.75
– 1.70
|
|
|
$
|
1.21
|
|
Granted
|
|
|
5,000
|
|
|
$
|
1.48
|
|
|
$
|
1.48
|
|
Cancelled or expired
|
|
|
3,000
|
|
|
$
|
1.70
|
|
|
$
|
1.70
|
|
Exercised
|
|
|
(33,000
|
)
|
|
$
|
1.00
- 1.42
|
|
|
$
|
1.10
|
|
Balance, June 30, 2018
|
|
|
682,000
|
|
|
$
|
0.75
– 1.70
|
|
|
$
|
1.22
|
|
Exercisable, June 30, 2018
|
|
|
526,000
|
|
|
$
|
0.75
– 1.41
|
|
|
$
|
1.08
|
|
The
fair value of each option grant is calculated using the following weighted average assumptions:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Expected life – years
|
|
|
3.0
|
|
|
|
3.0
|
|
Interest rate
|
|
|
2.69
|
%
|
|
|
2.23
|
%
|
Volatility
|
|
|
54.00
|
%
|
|
|
73.09
|
%
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Weighted average fair value of options granted
|
|
$
|
0.6656
|
|
|
$
|
0.8344
|
|
The
Company granted 5,000 stock options to employees during the six months ended June 30, 2018 (2017 – nil). This resulted in
$1,109 in expenses. Vesting of options granted in previous years resulted in expenses in the amount of $36,547 for employees (2017
- $34,375) during the six months ended June 30, 2018 and $13,350 for consultants (2017 - $11,317). There were 23,000 employee
and 10,000 consultant stock options exercised during the during the six months ended June 30, 2018 (2017 – 28,000 employee
stock options).
As
of June 30, 2018, there was approximately $52,516 of compensation expense related to non-vested awards. This expense is expected
to be recognized over a weighted average period of 0.5 years.
The
aggregate intrinsic value of vested options outstanding at June 30, 2018 is $321,330.
During
the six months ended June 30, 2018, 23,000 shares were issued upon the exercise of employee stock options (2017 – 28,000)
and 10,000 shares were issued upon the exercise of consultant stock options (2017 – nil).
13.
|
Segmented, Significant
Customer Information and Economic Dependency
.
|
The
Company operates in two segments:
(a)
Energy and water conservation products (as shown under the column heading “EWCP” below), which consists of a (i) liquid
swimming pool blanket which saves energy and water by inhibiting evaporation from the pool surface, and (ii) food-safe powdered
form of the active ingredient within the liquid blanket and which is designed to be used in still or slow moving drinking water
sources.
(b)
Biodegradable polymers and chemical additives used within the petroleum, chemical, utility and mining industries to prevent corrosion
and scaling in water piping (as shown under the column heading “TPA” below). These chemical additives can also be
used in laundry and dish detergents, as well as in products to reduce levels of insecticides, herbicides and fungicides.
The
accounting policies of the segments are the same as those described in Note 2,
Significant Accounting Policies
. The Company
evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains and losses
and foreign exchange gains and losses.
The
Company’s reportable segments are strategic business units that offer different, but synergistic products and services.
They are managed separately because each business requires different technology and marketing strategies.
Six
months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
EWCP
|
|
|
BPCA
|
|
|
Total
|
|
Revenue
|
|
$
|
198,392
|
|
|
$
|
8,140,333
|
|
|
$
|
8,338,725
|
|
Interest expense
|
|
|
-
|
|
|
|
14,487
|
|
|
|
14,487
|
|
Depreciation and amortization
|
|
|
25,682
|
|
|
|
94,808
|
|
|
|
120,490
|
|
Segment profit
|
|
|
1,570,996
|
|
|
|
1,268,574
|
|
|
|
2,839,570
|
|
Segment property, equipment, leaseholds,
and patents
|
|
|
546,161
|
|
|
|
1,352,369
|
|
|
|
1,898,530
|
|
Expenditures
for segment assets
|
|
|
(15,162
|
)
|
|
|
(9,518
|
)
|
|
|
(24,680
|
)
|
Six
months ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
EWCP
|
|
|
BPCA
|
|
|
Total
|
|
Revenue
|
|
$
|
475,018
|
|
|
$
|
8,911,056
|
|
|
$
|
9,386,074
|
|
Interest expense
|
|
|
53
|
|
|
|
24,243
|
|
|
|
24,296
|
|
Depreciation and amortization
|
|
|
38,730
|
|
|
|
96,807
|
|
|
|
135,537
|
|
Segment profit
|
|
|
2,335,153
|
|
|
|
1,191,137
|
|
|
|
3,526,290
|
|
Segment property, equipment, leaseholds,
and patents
|
|
|
349,454
|
|
|
|
1,433,869
|
|
|
|
1,783,323
|
|
Expenditures
for segment assets
|
|
|
(48,900
|
)
|
|
|
(7,406
|
)
|
|
|
(56,306
|
)
|
The
sales generated in the United States and Canada are as follows:
|
|
Six Months Ended
June 30, 2018
|
|
|
Six Months Ended
June 30, 2017
|
|
Canada
|
|
$
|
147,810
|
|
|
$
|
218,915
|
|
United States and abroad
|
|
|
8,190,915
|
|
|
|
9,167,159
|
|
Total
|
|
$
|
8,338,725
|
|
|
$
|
9,386,074
|
|
The
Company’s property, equipment, leasehold and patents are located in Canada and the United States as follows:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Canada
|
|
$
|
546,161
|
|
|
$
|
580,304
|
|
United States
|
|
|
1,352,369
|
|
|
|
1,437,657
|
|
Total
|
|
$
|
1,898,530
|
|
|
$
|
2,017,961
|
|
Three
customers accounted for $3,703,287 (44%) of sales during the six months ended June 30, 2018 (2017 - $5,527,772 or 59%). Three
customers accounted for $1,125,148 of accounts receivable (47%) at June 30, 2018 (December 31, 2017 – $1,247,374 or 65%).
The
Company is committed to minimum rental payments for property and premises aggregating approximately $634,960 over the term of
three leases, the last expiring on October 31, 2021.
Commitments
in the next four years are as follows:
2018
|
|
$
|
101,130
|
|
2019
|
|
$
|
205,580
|
|
2020
|
|
$
|
209,400
|
|
2021
|
|
$
|
118,850
|
|
15.
|
Comparative Figures
.
|
Certain
of the comparative figures have been reclassified to conform with the current year’s presentation.
Item
2.
|
Management’s
Discussion and Analysis of Results of Operation and Financial Condition.
|
Overview
The
Company manufactures and markets biodegradable polymers which are used in the oil, gas and agriculture industries. The Company
also develops, manufactures and markets specialty chemicals that slow the evaporation of water.
Results
of Operations
The
Company has two product lines:
Energy
and Water Conservation products - The Company’s HEAT$AVR® product is used in swimming pools and spas. The product forms
a thin, transparent layer on the water’s surface. The transparent layer slows the evaporation of water, allowing the water
to retain a higher temperature for a longer period of time and thereby reducing the energy required to maintain the desired temperature
of the water. WATER$AVR®, a modified version of HEAT$AVR®, can be used in reservoirs, potable water storage tanks, livestock
watering ponds, canals, and irrigation ditches.
TPA
products - The second product, TPA’s (i.e. thermal polyaspartate biopolymers), are biodegradable polymers used by the petroleum,
chemical, utility and mining industries to prevent corrosion and scaling in water piping. This product can also be used in detergents
to increase biodegradability and in agriculture to increase crop yields by enhancing fertilizer uptake.
Material
changes in the Company’s Statement of Operations for the six and three months ended June 30, 2018 are discussed below:
Six
Months ended June 30, 2018
|
|
Increase
(I) or
|
|
|
Item
|
|
Decrease
(D)
|
|
Reason
|
|
|
|
|
|
Sales
|
|
|
|
|
EWCP
products
|
|
D
|
|
Customer
orders were lower that prior period.
|
|
|
|
|
|
BCPA
products
|
|
D
|
|
Customer
orders were lower that prior period.
|
|
|
|
|
|
Administrative
salaries and benefits
|
|
I
|
|
Increased
wages to retain employees.
|
|
|
|
|
|
Professional
fess
|
|
D
|
|
Decreased
legal fees related to intellectual property and general legal representation
|
|
|
|
|
|
Research
|
|
I
|
|
New
research projects started.
|
|
|
|
|
|
Commissions
|
|
D
|
|
All
sales during the period were uncommissioned.
|
Three
months ended June 30, 2018
|
|
Increase
(I) or
|
|
|
Item
|
|
Decrease
(D)
|
|
Reason
|
|
|
|
|
|
Sales
|
|
|
|
|
EWCP
products
|
|
D
|
|
Customer
orders were lower that prior period.
|
|
|
|
|
|
BPCA
products
|
|
D
|
|
Customer
orders were lower that prior period.
|
|
|
|
|
|
Administrative
salaries and benefits
|
|
I
|
|
Increased
wages to retain employees.
|
|
|
|
|
|
Professional
fess
|
|
D
|
|
Decreased
legal fees related to intellectual property and general legal representation
|
|
|
|
|
|
Commissions
|
|
D
|
|
All
sales during the period were uncommissioned.
|
|
|
|
|
|
Gain
on involuntary disposition
|
|
I
|
|
Final
insurance payment was received in 2018.
|
Three
customers accounted for 41% of our sales during the three months ended June 30, 2018 (2017 – 61%) and 44% of our sales during
the six months ended June 30, 2018 (2017 – 59%). The amount of revenue (all from the sale of BPCA products) attributable
to each customer is shown below.
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
Customer
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
$
|
879,635
|
|
|
$
|
741,395
|
|
|
$
|
1,632,327
|
|
|
$
|
1,445,770
|
|
B
|
|
|
-
|
|
|
$
|
551,762
|
|
|
$
|
1,180,099
|
|
|
$
|
1,032,009
|
|
C
|
|
$
|
479,680
|
|
|
|
-
|
|
|
$
|
890,860
|
|
|
|
-
|
|
D
|
|
$
|
348,658
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
E
|
|
|
-
|
|
|
$
|
1,591,641
|
|
|
|
-
|
|
|
$
|
3,049,993
|
|
Customers
with balances greater than 10% of our receivables as of June 30, 2018 and 2017 are shown below:
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Company A
|
|
|
643,676
|
|
|
|
616,411
|
|
Company B
|
|
|
48,960
|
*
|
|
|
280,590
|
|
Company E
|
|
|
284,192
|
|
|
|
1,647,726
|
|
|
|
|
|
|
|
|
|
|
*less than 10%
|
|
|
|
|
|
|
|
|
In
2007, we began construction of a plant in Taber, AB, Canada. The plant came on line during 2012 and we began depreciating the
plant and related equipment effective January 2012.
In
February 2014, we suspended production of aspartic acid at our Taber plant. The suspension was due to the fact that since construction
of the plant began in 2008, economic conditions in Alberta and worldwide have changed significantly. In particular, plant operating
costs increased and the price of aspartic acid derived from oil was less than forecast. On February 11, 2017, the Taber plant
was destroyed in a fire. The building and contents with a carrying value of $1,936,886 were a total loss. Insurance was in place.
Other
factors that will most significantly affect future operating results will be:
|
●
|
the
sale price of crude oil which is used in the manufacture of aspartic acid we import from China. Aspartic acid is a key ingredient
in our TPA products. If tariffs are maintained or expanded and if relief is not available, some customer may experience price
increases;
|
|
|
|
|
●
|
activity
in the oil and gas industry, as we sell our TPA products to oil and gas companies; and
|
|
|
|
|
●
|
drought
conditions, since we also sell our TPA products to farmers.
|
Other
than the foregoing we do not know of any trends, events or uncertainties that have had, or are reasonably expected to have, a
material impact on our revenues or expenses.
Capital
Resources and Liquidity
The
Company’s sources and (uses) of cash for the six months ended June 30, 2018 and 2017 are shown below:
|
|
2018
|
|
|
2017
|
|
Cash provided by (used in) operations
|
|
|
1,273,117
|
|
|
|
(407,527
|
)
|
Investment
|
|
|
12,500
|
|
|
|
12,500
|
|
Insurance proceeds from fire loss
|
|
|
2,426,876
|
|
|
|
3,727,042
|
|
Sale (purchase) of equipment
|
|
|
(24,680
|
)
|
|
|
(56,306
|
)
|
Advances from (repayments of) short term line of credit
|
|
|
-
|
|
|
|
350,000
|
|
Repayment of loans
|
|
|
(100,597
|
)
|
|
|
(100,597
|
)
|
Proceeds from sale of common stock
|
|
|
36,360
|
|
|
|
32,500
|
|
Changes in exchange rates
|
|
|
(230,249
|
)
|
|
|
228,789
|
|
The
Company has sufficient cash resources to meets its future commitments and cash flow requirements for the coming year. As of June
30, 2018, working capital was $14,659,527 (December 31, 2017 - $11,259,028) and the Company has no substantial commitments that
require significant outlays of cash over the coming fiscal year.
The
Company is committed to minimum rental payments for property and premises aggregating approximately $634,960 over the term of
three leases, the last expiring on October 31, 2021.
Commitments
in the next four years are as follows:
2018
|
|
$
|
101,130
|
|
2019
|
|
$
|
205,580
|
|
2020
|
|
$
|
209,400
|
|
2021
|
|
$
|
118,850
|
|
Other
than as disclosed above, the Company does not anticipate any capital requirements for the twelve months ending December 31, 2018.
Other
than as disclosed in Item 2 of this report, the Company does not know of any trends, demands, commitments, events or uncertainties
that will result in, or that are reasonable likely to result in, its liquidity increasing or decreasing in any material way.
Other
than as disclosed in Item 2 of this report, the Company does not know of any significant changes in its expected sources and uses
of cash.
The
Company does not have any commitments or arrangements from any person to provide it with any equity capital.
See
Note 2 to the financial statements included as part of this report for a description of the Company’s significant accounting
policies.
Item
4.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Under
the direction and with the participation of our management, including our Principal Executive and Financial Officer, we conducted
an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2018.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic
reports with the Securities and Exchange Commission 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 and 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 desired disclosure control objectives.
Based on the evaluation, our Principal Executive and Financial Officer concluded that these disclosure controls and procedures
are effective as of June 30, 2018.
Changes
in Internal Control over Financial Reporting
Our
management, with the participation of our Principal Executive and Financial Officer, evaluated whether any change in our internal
control over financial reporting occurred during the three and six months ended June 30, 2018. Based on that evaluation, it was
concluded that there has been no change in our internal control over financial reporting during the three and six months ended
June 30, 2018 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PROXY
CARD
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
This
Proxy is solicited by the Company’s Board of Directors
The
undersigned stockholder of Flexible Solutions International, Inc. acknowledges receipt of the Notice of the Annual Meeting of
Stockholders to be held ___________, 2018, at _________. local time, at Unit 15, 6782 Veyaness Rd., Saanichton, British Columbia
V8M 2C2 and hereby appoints Daniel B. O’Brien with the power of substitution, as Attorney and Proxy to vote all the shares
of the undersigned at said annual meeting of stockholders and at all adjournments thereof, hereby ratifying and confirming all
that said Attorney and Proxy may do or cause to be done by virtue hereof. The above named Attorney and Proxy is instructed to
vote all of the undersigned’s shares as follows:
(1)
|
To
elect the persons who shall constitute the Company’s Board of Directors for the ensuing year.
|
|
|
|
|
|
|
[ ]
|
FOR
all nominees listed below
|
[ ]
|
WITHHOLD
AUTHORITY to vote for all nominees listed below
|
|
|
(except
as marked to the contrary below)
|
|
|
(INSTRUCTION:
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE’S NAME IN THE LIST BELOW)
Nominees:
|
Daniel
B. O’Brien
|
John
H. Bientjes
|
Robert
Helina
|
Thomas
Fyles
|
Ben
Seamen
|
David
Fynn
|
(2)
|
To
approve on an advisory basis, the compensation of the Company’s executive officers.
|
[ ]
FOR
|
[ ]
AGAINST
|
[ ]
ABSTAIN
|
|
|
|
|
|
(3)
|
To
ratify the appointment of Meyers, Norris, Penny, LLP as the Company’s independent registered public accounting firm
for the fiscal year ending December 31, 2018.
|
[ ]
FOR
|
[ ]
AGAINST
|
[ ]
ABSTAIN
|
|
|
|
|
|
(4)
|
To
change the domicile of the Company to Canada.
|
[ ]
FOR
|
[ ]
AGAINST
|
[ ]
ABSTAIN
|
To
transact such other business as may properly come before the meeting.
THIS
PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DISCRETION IS INDICATED,
THIS PROXY WILL BE VOTED IN FAVOR OF ALL DIRECTORS AND ITEMS 2 THROUGH 4.
|
Dated
this __ day of
____________
2018.
|
|
|
|
|
|
(Signature)
|
|
|
|
|
|
(Signature)
|
Please
sign your name exactly as it appears on your stock certificate. If shares are held jointly, each holder should sign. Executors,
trustees, and other fiduciaries should so indicate when signing.
Please
Sign, Date and Return this Proxy so that your shares may be voted at the meeting.
Send
the proxy statement by regular mail, email, or fax to:
Flexible
Solutions International, Inc.
Attn:
Daniel B. O’Brien
6001
54 Ave.
Taber,
Alberta, Canada T1G 1X4
Phone:
(403) 223-2995
Fax:
________________
Email:
damera@flexiblesolutions.com
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
NOTICE
OF INTERNET AVAILABILITY OF PROXY MATERIALS
Important
Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to Be Held on __________________, 2018.
|
1.
|
This
notice is not a form for voting.
|
|
|
|
|
2.
|
This
communication presents only an overview of the more complete proxy materials that are available to you on the Internet. We
encourage you to access and review all of the important information contained in the proxy materials before voting.
|
|
|
|
|
3.
|
The
Proxy Statement, Information Statement, Annual Report to Shareholders is available at www.flexiblesolutions.com/investor/proxy.shtml
|
|
|
|
|
4.
|
If
you want to receive a paper or email copy of these documents, you must request one. There is no charge to you for requesting
a copy. Please make your request for a copy as instructed below on or before __________, 2018 to facilitate timely delivery.
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The
2018 annual meeting of the Company’s shareholders will be held at Unit 15, 6782 Veyaness Rd., Saanichton, British Columbia
V8M 2C2 on ______________, 2018, at _________, for the following purposes:
(1)
to elect the directors who shall constitute the Company’s Board of Directors for the ensuing year;
(2)
to approve on an advisory basis, compensation of the Company’s executive officers;
(3)
to ratify appointment of Meyers, Norris, Penny, LLP as the Company’s independent registered public accounting firm for the
fiscal year ending December 31, 2018;
(4)
to change the domicile of the Company to Canada.
to
transact such other business as may properly come before the meeting.
The
Board of Directors recommends that shareholders vote FOR all directors and proposals 2-4.
_____________,
2018 is the record date for the determination of shareholders entitled to notice of and to vote at such meeting. Shareholders
may cast one vote for each share held.
Shareholders
may access the following documents at
www.flexiblesolutions.com/ investor/proxy.hstml
:
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Notice
of the 2018 Annual Meeting of Shareholders
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Company’s
2018 Proxy Statement/Prospectus;
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Company’s
Annual Report on form 10-K for the year ended December 31, 2017
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Proxy
Card
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Shareholders
may request a paper copy of the Proxy Materials and Proxy Card by calling 1-800-661-3560, by emailing the Company at www.flexiblesolutions.com/investor/proxy.shtml,
or by visiting www.flexiblesolutions.com/investor/proxy.shtml and indicating if you want a paper copy of the proxy materials and
proxy card:
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●
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for
this meeting only, or
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for
this meeting and all other meetings.
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If
you have a stock certificate registered in your name, or if you have a proxy from a shareholder of record on _____________, 2018,
you can, if desired, attend the Annual Meeting and vote in person. Shareholders can obtain directions to the 2018 annual shareholders’
meeting at www.flexiblesolutions.com/investor/proxy.shtml.
Please
visit www.flexiblesolutions.com to print and fill out the Proxy Card. Complete and sign the proxy card and mail the Proxy Card
to:
Flexible
Solutions International, Inc.
6001
54 Ave.,
Taber,
Alberta
Canada
T1G 1X4
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
ITEM
20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our
directors and officers are indemnified as provided by the Nevada Statutes and our Bylaws. We have agreed to indemnify each of
our directors and certain officers against certain liabilities, including liabilities under the Securities Act of 1933. Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling
persons pursuant to the provisions described above, or otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities (other than our payment of expenses incurred
or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
We
have been advised that in the opinion of the Securities and Exchange Commission indemnification for liabilities arising under
the Securities Act is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities is asserted by one of our directors, officers, or controlling persons
in connection with the securities being registered, we will, unless in the opinion of our legal counsel the matter has been settled
by controlling precedent, submit the question of whether such indemnification is against public policy to a court of appropriate
jurisdiction. We will then be governed by the court’s decision.
ITEM
21. EXHIBITS
(1)
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Previously
filed as an exhibit to our Registration Statement on Form 10-SB filed with the Commission on February 22, 2000, and incorporated
herein by reference.
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(2)
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Previously
filed as an exhibit to our Registration Statement on Form SB-2 filed with the Commission on January 22, 2003, and incorporated
herein by reference.
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ITEM
22. UNDERTAKINGS
The
undersigned registrant hereby undertakes:
1.
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
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i.
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To
include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
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ii.
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To
reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information
in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20%
change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the
effective registration statement; and
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iii.
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To
include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
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2.
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof;
3.
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold
at the termination of the offering;
4.
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant
to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on 430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement
as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into
the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract
of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that
was part of the registration statement or made in any such document immediately prior to such date of first use;
5.
That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect
to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the
applicable form;
6.
That every prospectus (i) that is filed pursuant to paragraph (5) immediately preceding, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Securities Act of 1933 and is used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof;
7.
To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or
13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail
or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this
registration statement through the date of responding to the request; and
8.
To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in this registration statement when it became effective.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy
as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the Province of British Columbia, Canada, on August 16 , 2018.
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Flexible
Solutions International, Inc.
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By:
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/s/
Daniel B. O’Brien
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Name:
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Daniel
B. O’Brien
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Title:
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President
and Chief Executive Officer
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In
accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
Signature
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Title
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Date
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/s/
Daniel B. O’Brien
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President,
Principal Executive Officer,
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August
16 , 2018
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Daniel
B. O’Brien
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Principal
Financial
and
Accounting Officer
and
a Director
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/s/
John
H. Bientjes
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Director
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August
16 , 2018
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John
H. Bientjes
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/s/
Robert
T. Helina
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Director
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August
16 , 2018
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Robert
T. Helina
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Director
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Thomas
Fyles
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/s/
Ben
Seaman
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Director
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August
16 , 2018
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Ben
Seaman
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Director
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David
Fynn
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FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
REGISTRATION
STATEMENT
ON
FORM
S-4
EXHIBITS
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