fsi_10ksb-71231.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
 
FORM 10-KSB
 
(Mark one)
 
ý
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For The Fiscal Year Ended December 31, 2007.
 
o
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ____________ to ____________.
 
Commission File Number 000-29649


FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)

Nevada
  
91-1922863
(State of Incorporation)
  
(IRS Employer Identification No.)
     
615 Discovery Street
Victoria, British Columbia, CANADA
  
V8T 5G4
(Address of Principal Executive Offices)
  
(Zip Code)
     
(250) 477-9969
(Issuer’s Telephone Number)
 
None
(Securities registered under Section 12(b) of the Exchange Act)

Common Stock, $0.001 par value
(Securities registered under Section 12(g) of the Exchange Act)
 
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   o
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Yes ý    No o
 
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.   ý
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes o    No ý
 
State issuer’s revenues for its most recent fiscal year:  $7,431,791.
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days:  As of March 4, 2007, the aggregate market value of the Company’s common stock held by non-affiliates was approximately $22,390,584 based on the closing price for shares of the registrant’s common stock on the American Stock Exchange for that date.
 
State the number of shares outstanding of each of the issuer’s class of common equity, as of the latest practicable date:  As of March 4, 2007, there were 14,057,567 shares of the Company’s common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
No documents are incorporated by reference.
 
Transitional Small Business Disclosure Format (check one):    
Yes o    No ý
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

 
INDEX TO ANNUAL REPORT ON FORM 10-KSB
For the Fiscal Year Ended December 31, 2007
 
   
Page
  
 
PART I
    
Item 1.
1
  
Item 2.
11
  
Item 3.
11
  
Item 4.
12
  
 
PART II
    
Item 5.
13
  
Item 6.
14
  
Item 7.
17
  
Item 8.
18
  
Item 8A.
18
  
Item 8B.
18
  
 
PART III
    
Item 9.
19
  
Item 10.
21
  
Item 11.
24
  
Item 12.
25
  
Item 13.
26
  
Item 14.
26
  
       
27
  

 
 
 
 
 
 
 
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB for the year ended December 31, 2007 (“Annual Report”), including the Notes to 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, our ability to increase distribution of our products, integration of businesses we acquire and disposition of any of our current business.  Forward-looking statements can be identified by the use of forward-looking terminology, such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “continue,” “plans,” “intends,” or other similar terminology.  These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict.  Therefore, actual outcomes and results may differ materially from what is anticipated or forecasted in these forward-looking statements due to numerous factors, including, but not limited to, our ability to generate or obtain sufficient working capital to continue our operations, changes in demand for our products, the timing of customer orders and deliveries and the impact of competitive products and pricing.  In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic and international economic conditions.

Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, such statements involve risks and uncertainties and no assurance can be given that 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ii
PART I
 
Item 1. 
 
We were incorporated as Flexible Solutions, Ltd., a British Columbia corporation inter-provincially registered in Alberta, 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 that 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 five wholly-owned subsidiaries: Flexible Solutions Ltd., WaterSavr Global Solutions Inc., NanoChem Solutions Inc., Nano Detect Technologies Inc., and Seahorse Systems Inc.  Unless otherwise indicated, all references to our business include the operations of these subsidiaries.

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 which is due on Nov 30, 2012.  The building will be renovated and operated as a fermentation facility for the production of aspartic acid, a key ingredient in TPAs  Aspartic acid made in Taber will be shipped to IL for finishing.

Our website is www.flexiblesolutions.com

Our Products

HEAT$AVR®/ECO$AVR

Our studies indicate that approximately 70% of the energy lost from a swimming pool occurs through water evaporation.  HEAT$AVR® is a chemical product for use in swimming pools and spas that forms a thin, transparent layer on the water’s surface.  The transparent layer slows the evaporation of water, allowing the water to retain a higher temperature for a longer period of time and thereby reducing the energy required to maintain the desired temperature of the water.   We have received reports from our commercial customers documenting energy savings of between $2,400 to $6,000 per year when using HEAT$AVR®.

ECO$AVR® is a patented, disposable dispenser designed for the residential pool and spa market.  ECO$AVR® is made of molded plastic in the form of a ten-inch long colorful fish that is filled with enough HEAT$AVR® to cover the surface of a 400 sq. ft. swimming pool for about one month.  The HEAT$AVR® solution inside the ECO$AVR® escapes into the water and rises to the surface to form a transparent layer on the water’s surface.  Once the ECO$AVR® is empty the dispenser is removed and replaced.

In outdoor pools, the HEAT$AVR® also provides convenience compared to pool blankets.  Pool blankets are plastic cover, which are cut to the size and shape of the surface of the pool or spa.  Pool blankets float on the surface and, like the HEAT$AVR®, reduce energy cost by inhibiting water evaporation.  
 
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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, HEAT$AVR® eliminates the need to install, remove and store the blanket and works 24 hours a day.  In addition, the use of HEAT$AVR® 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.

HEAT$AVR® retails for between $200 and $300 per four gallon case in the United States.  ECO$AVR® has a suggested retail price of between $11.95 and $14.95 in the United States.  We market our HEAT$AVR® and ECO$AVR® products to homeowners with swimming pools and spas as well as operators of swimming pools and spas in hotels, motels, schools, and municipal and private recreational facilities.

We also make and sell products which automatically dispense HEAT$AVR® into commercial size swimming pools or spas at the rate of one ounce per 400 sq. ft. of water surface per day.

We have 7 non-exclusive distributorships in Canada and the United States for the sale of bulk HEAT$AVR® (without the ECO$AVR® dispenser) and exclusive distributorships in Australia, Chile, Japan, Korea, Spain, South Africa, Switzerland and Great Britain.  We support our distributors and seek additional market opportunities by annually attending the major pool industry trade shows in the United States.  We also advertise in trade magazines, maintain a semi-annual newsletter that is sent to buyer associations, customers and potential customers, and maintain a website which is information about our products.

WATER$AVR®

This product utilizes our HEAT$AVR technology to reduce water evaporation in reservoirs, potable water storage tanks, livestock watering ponds, aqueducts, canals and irrigation ditches.  WATER@AVR may also be used for lawn and turf care and potted and bedding plants.

WATER$AVR® 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 WATER$AVR®:

●     
Reduces daily water evaporation as much as 54%
●     
Reduces monthly water evaporation as much as 37%
●     
Is odorless
●     
Has no effect on invertebrates or vertebrates
●     
Has no anticipated effect on any current drinking water treatment processes and
●     
Is biodegradable

We have two full-time employees and one part-time employee who are involved in the sales and marketing of WATER$AVR®.
 
WATER$AVR—BTI™

WATER$AVR—BTI™ combines evaporation control with an environmentally friendly method of killing mosquito larvae during the first, second and third stages of development.  
 
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Combined with our original WATER$AVR® product, WATER$AVR—BTI™ can be quickly and evenly spread across large and small water surfaces where larvae must go to obtain air.  Tests conducted by the Entomology Department at the Louisiana State University Agricultural Center showed that the use of WATER$AVR—BTI™ resulted in a 100% kill rate of mosquito larvae in contact with the product.

TPAs

TPAs for Oilfields.  TPAs are used to reduce scale and corrosion in various “topside” water systems.  They are used in place of traditional phosphate and other products when biodegradability is required by environmental regulations.  We have the ability to custom manufacture TPAs depending on the specific water conditions associated with any oil well.

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 bio-available to provide plant nourishment.  As a result, in select conditions the use of TPAs either blended with fertilizer or applied directly to crops can increase yields significantly.  TPAs are designated for crop nutrient management programs and should not be confused with crop protection and pesticides or other agricultural chemical applications.  Depending on the application, TPA products are marketed under a variety of brands including Amisorb, LYNX, MAGNET, AmGro and VOLT.  Markets of significance include potatoes, sugar beets, cotton, tomatoes, almonds and other high value per acre crops.

TPAs for Irrigation.  The crystallization prevention ability of TPAs can also be useful in select irrigation conditions.  By reducing calcium carbonate scale propagation, TPAs can prevent early plugging of drip irrigation ports, reduce maintenance costs and lengthen the life of equipment.  TPAs compete with acid type scale removers, but have the advantage of a positive yield effect on the plant, as well as an easier deployment formulation with liquid fertilizers when used as part of a “fertigation” program.  Our TPAs for drip irrigation scale prevention are at an early stage of commercialization and will be marketed and sold through the same channels as TPAs used by the agricultural industry.

TPAs for Detergent.  In detergents, TPAs are a biodegradable substitute for poly-acrylic acid.  In select markets, the use of this substitute outweighs the added cost of TPAs, which has allowed for the continued growth of this TPA product line.  However, to increase penetration of this market beyond specialty detergent manufacturers, we will need to decrease the cost of this product or wait for legislative intervention regarding biodegradability of detergent components.  In the meantime, we are researching various methods to reduce production costs.

TPAs for Personal Care Products.  TPAs can also be used in shampoo and cosmetic products for increased hydration that improves the feel of the core product to consumers.  It 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.

 
Competition

HEAT$AVR® and ECO$AVR™

We are aware of only one other company that manufactures a product that competes with HEAT$AVR®.  This other product has had limited sales to date and does not have the important convenience factor of our ECO$AVR® product.  In addition to this existing competitor, our previous distributor, Sun Solar Energy Technologies Inc. ( “Sun Solar”), has recently begun selling a product that directly competes with our ECO$AVR® product.  
 
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This product, while having a higher price point and limited sales history to date, must be taken seriously because of the expertise Sun Solar derived from working with us between 1998 and 2004 as our North American distributor.

HEAT$AVR® also competes with plastic pool blanket products.  However, we believe that HEAT$AVR® is more effective and convenient than pool blankets.

WATER$AVR®

Aegis Chemical Industries Ltd. of India directly competes with WATER$AVR®.  We believe our WATER$AVR® product is superior for the following reasons:

●     
Easier Application.  WATER$AVR® may be applied directly to the water surface by hand or machine.  Our competition requires premixing to dilute the product to usable strength, followed by extensive pumping.

●     
Cost.  In order to achieve comparable water savings levels, other products cost more than WATER$AVR®.

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, WATER$AVR.

WATER$AVR—BTI™

Although we are not aware of any direct competition with WATER$AVR—BTI™, the pest control industry is very large and well funded and there are a multitude of alternative methods and materials that can be used for mosquito control.  We believe that we will be able to compete by providing an environmentally sensitive product which is less expensive than traditional products.

TPAs

Our TPA products have direct competition with Lanxess AG (recently 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;
 
4
 
●     
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 HEAT$AVR® and ECO$AVR® 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 manufacture these products in our plant in Calgary, Alberta, Canada.

Our WATER$AVR® products are manufactured under contract with Ondeo Nalco Company (“Ondeo”) under an agreement which expires April 2007, with a five-year extension available.  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 which is due on Nov 30, 2012.  The building will be renovated and operated as a fermentation facility for the production of aspartic acid, a key ingredient in TPAs Aspartic acid made in Taber will be shipped to IL for finishing.

Government Regulations

HEAT$AVR® and ECO$AVR®

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.

WATER$AVR®

Our WATER$AVR® product is subject to regulation in most countries, particularly for agricultural and drinking water uses.  We do not anticipate that governmental regulations will be an impediment to marketing WATER$AVR® because the components in WATER$AVR® have historically been used in agriculture for many years for other purposes.  Nevertheless, we will need to obtain approval to sell WATER$AVR® in the United States for agricultural and drinking water uses.  We have received National Sanitation Foundation approval for the use of WATER$AVR in drinking water in the United States.

WATER$AVR—BTI™

As a pesticide, WATER$AVR—BTI™ was approved by the EPA for commercial sale in the United States on November 30, 2005.  We began marketing this product commercially in 2006.  While EPA approval applies only to registration of the product in the United States, we believe EPA approval may expedite product registration and approval processes in other parts of the world.  We will apply for certification in any country where significant markets are identified.

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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, that regulate TPA use.  If we begin to market our TPA products to these industries, 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 and trade secret laws and nondisclosure agreements to protect our proprietary technology.  We currently hold 56 U.S. patents and 139 International patents which expire at various dates between 2011 and 2020. We also have three U.S. patent applications pending and have applied to extend these pending patents to certain other countries where we operate.  There can be no assurance that our pending patent applications will be granted or that any issued patent will be upheld as valid or prevent the development of competitive products, which may be equivalent to or superior to our products.  We have not received any claims alleging infringement of the intellectual property rights of others, but there can be no assurance that we may not be subject to such claims in the future.

Research and Development

We spent $120,817 for the year ended December 31, 2007 and $127,254 for the year ended December 31, 2006 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, 2007 we had 24 employees, including one officer, thirteen sales and customer support personnel, and ten manufacturing personnel.  None of our employees is represented by a labor union and we have experienced no work stoppages to date.

Risk Factors

This Form 10-KSB 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 experienced operating losses and negative cash flow from operations since our inception and we currently have an accumulated deficit.  If our revenues do not increase, our results of operations and liquidity will be materially adversely affected.  If we experience slower than anticipated revenue growth or if our operating expenses exceed our expectations, we may not be profitable.  Even if we become profitable in the future, we may not remain profitable.

6
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 industries, such as swimming pool construction, 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 WATER$AVR® product are also seasonal, dependent on the wet versus dry seasons in particular countries.  We attempt to sell into a variety of countries with different seasons on both sides of the equator in order to minimize seasonality.  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.

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Our WATER$AVR® 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 WATER$AVR® product may result in continued losses.  We introduced our WATER$AVR® product in June 2002 and, to date, we have delivered quantities for testing by potential customers, but only a few customers have ordered the product for commercial use.  This product can achieve success only if it is ordered in substantial quantities by commercial customers who have determined that the water saving benefits of the product exceed the costs of purchase and deployment of the product.  We can offer no assurance that we will receive sufficient orders of this product to achieve profits or cover the additional expenses incurred to manufacture and market this product.  We expect to spend $400,000 on the marketing and production of our WATER$AVR® product in fiscal 2008.

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 six 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.

8
In the year ended December 31, 2007, revenues from shipments made outside of the United States accounted for approximately 79% of our revenues, 79% in the year ended December 31, 2006 and 80% in the year ended December 31, 2005.  Since we sell our products worldwide, our business is subject to risks associated with doing business internationally.  We anticipate that revenues from international operations will continue to represent a sizable portion of our total revenue.  Accordingly, our future results could be harmed by a variety of factors, including:

●     
changes in foreign currency exchange rates;

●     
changes in a country or region’s political or economic conditions, particularly in developing or emerging markets;

●     
longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions;

●     
trade protection measures and import or export licensing requirements;

●     
differing tax laws and changes in those laws;

●     
difficulty in staffing and managing widespread operations;

●     
differing protection of intellectual property and changes in that protection; 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 45 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.  
 
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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 their patent or other intellectual property rights.  We may incur significant expense in any legal proceedings to protect our proprietary rights or to defend infringement claims by third parties.  In addition, claims of third parties against us could result in awards of substantial damages or court orders that could effectively prevent us from making, using or selling our products in the United States or abroad.

A claim for damages could materially and adversely affect our financial condition and results of operations.

Our business exposes us to potential product liability risks, particularly with respect to our consumer swimming pool and consumer TPA products.  There are many factors beyond our control that could lead to liability claims, including the failure of our products to work properly and the chance that consumers will use our products incorrectly or for purposes for which they were not intended.  There can be no assurance that the amount of product liability insurance that we carry will be sufficient to protect us from product liability claims.  A product liability claim in excess of the amount of insurance we carry could have a material adverse effect on our business, financial condition and results of operations.

Our ongoing success is dependent upon the continued availability of certain key employees.

Our business would be adversely affected if the services of Daniel B. O’Brien ceased to be available to us because we currently do not have any other employee with an equivalent level of expertise in and knowledge of our industry.  If Mr. O’Brien no longer served as our President and Chief Executive Officer, we would have to recruit one or more new executives, with no real assurance that we would be able to engage a replacement executive with the required skills on satisfactory terms.  The market for skilled employees is highly competitive, especially for employees in the fields in which we operate.  While our compensation programs are intended to attract and retain qualified employees, there can be no assurance that we will be able to retain the services of all our key employees or a sufficient number to execute on our plans, nor can there be any assurances that we will be able to continue to attract new employees as required.

10
 
Item 2. 

We lease 4,300 sq. ft. in Victoria, British Columbia for administration and sales and research at $5,135 per month.  This lease is effective through June 2009.  We lease an 11,000 sq. ft. building in Calgary, Alberta for $8,925per month which we use to manufacture our swimming pool products.  This lease is effective through September 2009.  We lease 1,488 sq. ft. in Richmond, British Columbia for sales and customer support at a cost of $1,414 per month.  This lease is effective through December 2011.  We lease 7,000 sq. ft. in Bedford Park, Illinois for offices and laboratories at a cost of $6,548 per month and the lease is currently month to month.  We also own a 56,780 sq. ft. facility in Peru, Illinois which is used to manufacture our TPA line of products.

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 which is due on Nov 30, 2012.  The building will be renovated and operated as a fermentation facility for the production of aspartic acid, a key ingredient in TPAs Aspartic acid made in Taber will be shipped to IL for finishing.

Item 3. 

On July 23, 2004, we filed a lawsuit in the Circuit Court of Cook County, Illinois against Tatko Biotech Inc. (“Tatko”).  The action arose from our Joint Product Development Agreement with Tatko in which we agreed to invest $10,000 toward the product development venture and granted to Tatko 100,000 shares of our restricted common stock.  In return, Tatko granted us a five-year option to purchase 20% of Tatko’s outstanding capital stock.  Tatko refused to collaborate on the agreement and, therefore, we filed the lawsuit to have the court declare that Tatko is not entitled to the 100,000 shares of our restricted common stock. On January 4, 2008, the lawsuit was dismissed pursuant to an agreement by Tatko to treat the Joint Product Development Agreement as void. As a result of the dismissal of the lawsuit and the agreement of the parties, the 100,000 shares of restricted stock will be returned or cancelled.

Item 4. 

Not applicable.
 
 
 
 
 
 
 
 
 
 
 
 
 

 
11
PART II

Item 5.

Market for Securities

Our common stock is traded on the American Stock Exchange under the symbol “FSI”.  The following is the range of high and low closing sales or bid prices for our common stock for the periods indicated:
 
     
High
    
Low
  
               
Year Ended December 31, 2006 First Quarter    $ 3.55     $ 2.25  
  Second Quarter      4.30       2.45  
  Third Quarter     3.25       2.50  
  Fourth Quarter      4.12       2.80  
 
     
High
    
Low
  
               
Year Ended December 31, 2007 First Quarter      3.55       2.25  
  Second Quarter      4.30       2.45  
  Third Quarter     3.25       2.50  
  Fourth Quarter      4.12       2.80  
 
Prices represent high and low prices on the American Stock Exchange.  As of December 31, 2007 we had approximately 1,700 shareholders.

Our common stock also trades on the Frankfurt stock exchange under the symbol “FXT.”

Shares Which May Be Issued

As of March 15, 2008 we had 14,157,567 outstanding shares of common stock.  The following table lists additional shares of our common stock which may be issued as of March 15, 2008:
 
   
Number
Of Shares
    
Note
Reference
  
             
Shares issuable upon the exercise of warrants
 held by private investors
     1,455,470      
A
  
                 
Shares issuable upon exercise of options granted
 to our officers, directors, employees, consultants,
 and third parties
     1,912,440      
B
  
 
A.           Between April 14th and June 8th, 2005 and again in May 2007, we sold shares of our common stock in private transactions.  In some cases warrants were issued as part of the financings.  Information concerning the outstanding warrants are shown below.
 
Shares Issuable
Upon Exercise
Of Warrants
  
Issue
Date
  
Exercise
Price
  
Expiration
Date
             
900,000
  
4/14/05
  
$  4.50
  
4/14/09
87,400
  
6/08/05
  
$  4.50
  
6/08/09
468,070
  
5/03/07
   $  4.50  
5/03/10
 
12
B.           Options are exercisable at prices ranging from $3.00 to $4.60 per share.  See Item 10 of this report for more information concerning these options.

Dividend Policy

We have not paid any dividends on our common stock, and it is not anticipated that any dividends will be paid in the foreseeable future.  Our board of directors intends to follow a policy of retaining earnings, if any, to finance our growth.  The declaration and payment of dividends in the future will be determined by the board of directors in light of conditions then existing, including our earnings, financial condition, capital requirements and other factors.

Item 6. 

Results of Operations

Material changes in our Statement of Operations for the periods presented are discussed below:

Year Ended December 31, 2007
 
Item  
Increase (I) or
Decrease (D)
   Reason
         
Sales
  
D
  
Maintenance shutdowns in the oil extraction industry during 2007 reduced sales of TPAs.  It is understood that shutdowns did not occur in 2006 because high oil prices encouraged the oil companies to continue production.
         
Administrative salaries and benefits
  
D
  
In 2006, we granted 5 year stock options to a few key employees.  The expense for financial reporting purposes added $369,992 to administrative salaries in 2006 but only $204,602 in 2007.
         
Professional fees
  
D
  
Resolution of several legal proceedings in the year 2007 reduced our costs.
         
Consulting
  
D
  
The expense, for financial reporting purposes, of stock options granted in 2006 to consultants that did not reoccur in 2007.
         
Commissions
  
D
  
Decreased sales led to a decrease in commission costs.

Year Ended December 31, 2006
 
Item  
Increase (I) or
Decrease (D)
   Reason
         
Sales
  
I
  
Sales growth in all divisions.
         
Wages
  
I
  
In 2005 we were not required to record the expense of stock options.  The expense, for financial reporting purposes for employee stock options, added $131,517 to wages in 2006.
 
13
 
         
Administrative salaries and benefits
  
I
  
In 2005 we were not required to record the expense of stock options.  The expense, for financial reporting purposes for employee stock options, added $369,992 to administrative salaries in 2006.
         
Investor relations and transfer agent fee
  
D
  
Upon the closing of our private placements in 2005, some stock options granted in 2004 vested and incurred expenses in this category by $422,500.
         
Insurance
  
I
  
Increase is comparable to what others are experiencing in the industry.
         
Consulting
  
I
  
The expense, for financial reporting purposes, of stock option grants in 2006 to consultants.
         
Research
  
I
  
Increased spending on development.

Capital Resources and Liquidity

Our material sources and <uses> of cash during the year ended December 31, 2007 were:
 
Cash provided by operations
   $ 242,451  
Patent development
     (60,680 )
Equipment purchases
     (586,127 )
Sale of common stock
     3,164,481  
Exchange rate changes
     142,990  
Other
     (1,981 )
 
Our material sources and <uses> of cash during the year ended December 31, 2006 were:
 
Cash provided by operations
   $ 17,539  
Collection of loan
     35,228  
Patent development
     (29,116 )
Equipment purchases
     (37,160 )
Sale of common stock
     15,285  
Exchange rate changes
     (22,152 )
Other
     (2,147 )
Cash on hand at January 1, 2006
     22,523  
 
We are committed to minimum rental payments for property and premises aggregating approximately $355,022 over the term of three leases, the last expiring on December 31, 2011.
 
Commitments in each of the next five years are approximately as follows:
 
2008
     186,906  
2009
     134,192  
2010
     16,962  
2011
     16,962  

We don’t anticipate any capital requirements for the twelve months ending December 31, 2008.

14
We do not have any commitments or arrangements from any person to provide us with any additional capital.

See Note 2 to the financial statements included as part of this report for a description of our significant accounting policies and recent accounting pronouncements.

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 our customers deteriorates resulting in an impairment of their ability to pay or a pattern of late payment develops, allowances may be required.

Provisions for Inventory Obsolescence.  We may need to record a provision for estimated obsolescence and shrinkage of inventory.  Our estimates would consider the cost of inventory, the estimated market value, the shelf life of the inventory and our historical experience.  If there are changes to these estimates, provisions for inventory obsolescence may be necessary.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
15
 
Item 7. 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page
   
F-1
F-2
F-3
F-4
F-5
F-6
F-7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16
Cinnamon Jang Willoughby & Company
Chartered Accountants
A Partnership of Incorporated Professionals


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors and Stockholders of
 
 
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.:
 
We have audited the consolidated balance sheets of Flexible Solutions International, Inc. (the “Company”) as of December 31, 2007 and 2006 and the consolidated statements of operations, stockholders’ equity and cash flows for the years then ended.  The consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion the consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and 2006 and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles in the United States of America.
 



Chartered Accountants
 
Burnaby, Canada
 
F-1
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
Consolidated Balance Sheet
December 31, 2007 and 2006
(U.S. Dollars)
   
December 31, 2007
    
December 31, 2006
  
             
Assets
            
             
Current
            
  Cash and cash equivalents
   $ 3,355,854     $ 450,759  
  Accounts receivable
     1,051,056       1,319,575  
  Inventories (see Note 4)
     2,361,270       1,904,315  
  Prepaid expenses
     115,353       124,360  
                 
      6,883,533       3,799,009  
                 
Property, equipment and leaseholds, net (see Note 5)
     4,743,362       4,100,553  
Patents (see Note 6)
     230,438       169,758  
Investment (see Note 7)
     -       369,000  
Long term deposits (see Note 8)
     48,034       47,220  
                 
 Total Assets
   $ 11,905,367     $ 8,485,540  
                 
Liabilities
                
                 
Current
                
  Accounts payable and accrued liabilities
   $ 339,266     $ 423,030  
  Deferred revenue
     9,870       20,559  
      349,136       443,589  
  Mortgage
     645, 617       -  
      994,753       443, 589  
                 
Stockholders’ Equity
                
                 
Capital stock
                
Authorized
                
  50,000,000 common shares with a par value of $0.001 each
                
    1,000,000  preferred shares with a par value of $0.01 each
                
Issued and outstanding:
                
  14,057,567 (2006: 13,058,427) common shares
     14,058       13,058  
Capital in excess of par value
     15,824,284       12,370,418  
Other comprehensive income (see Note 9)
     394,289       131,002  
Accumulated Deficit
     (5,322,017 )     (4,472,527 )
                 
Total Stockholders’ Equity
     10,910,614       8,041,951  
                 
Total Liabilities and Stockholders’ Equity
   $ 11,905,367     $ 8,485,540  
                 
Commitments, Contingencies and Subsequent events
  
(See Notes 15, 16 & 17)
  

 
See Notes to Consolidated Financial Statements.
F-2
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2007 and 2006
(U.S. Dollars)

   
Years Ended December 31,
  
   
2007
    
2006
  
             
Sales
   $ 7,431,791     $ 8,373,597  
Cost of sales
     4,799,750       5,401,350  
                 
Gross profit
     2,632,041       2,972,247  
                 
Operating Expenses
                
  Wages
     1,094,799       1,069,736  
  Administrative salaries and benefits
     447,516       666,542  
  Advertising and promotion
     63,126       45,215  
  Investor relations and transfer agent fee
     302,401       258,072  
  Office and miscellaneous
     193,165       157,755  
  Insurance
     230,656       209,864  
  Interest expense
     10,605       3,136  
  Rent
     227,431       232,820  
  Consulting
     248,707       383,965  
  Professional fees
     233,701       324,359  
  Travel
     131,539       136,049  
  Telecommunications
     38,163       34,041  
  Shipping
     39,486       41,517  
  Research
     120,817       123,254  
  Commissions
     119,790       171,380  
  Bad debt expense
     2,310       90,747  
  Currency exchange
     42,094       (23,417 )
  Utilities
     21,612       18,064  
                 
      3,567,918       3,940,099  
                 
Loss before other items and income tax
     (935,877 )     (967,852 )
Registration rights penalty
     -       (326,710 )
Write down of investment
     (98,000 )        
Other expenses
     (15,051 )        
Other income
     195,442          
Interest income
     3,996       3,114  
                 
Loss before income tax
     (849,490 )     (1,291,448 )
Income tax (recovery)
     -       (127,049 )
                 
Loss for the year
   $ (849,490 )   $ (1,164,369 )
                 
Net loss per share (basic and diluted)
   $ (0.06 )   $ (0.09 )
                 
Weighted average number of common shares (basic and diluted)
     13,772,180       12,994,430  
 
 
See Notes to Consolidated Financial Statements.
F-3
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
Consolidated Statements of Operations
For Three Months Ended December 31, 2007 and 2006
(U.S. Dollars)

   
Three Months Ended December 31,
  
   
2007
    
2006
  
   
(unaudited)
    
(unaudited)
  
             
Sales
   $ 1,701,359     $ 1,700,806  
Cost of sales
     1,162,160       1,155,807  
                 
Gross profit
   $ 539,199     $ 544,999  
                 
Operating Expenses
                
  Wages
     294,363       217,991  
  Administrative salaries and benefits
     71,436       190,561  
  Advertising and promotion
     21,355       9,381  
  Investor relations and transfer agent fee
     50,319       112,064  
  Office and miscellaneous
     57,790       30,050  
  Insurance
     62,677       48,814  
  Interest expense
     7,731       1,161  
  Rent
     57,213       55,841  
  Consulting
     60,217       93,106  
  Professional fees
     102,192       111,922  
  Travel
     33,475       54,832  
  Telecommunications
     10,883       9,598  
  Shipping
     8,815       7,682  
  Research
     42,032       21,195  
  Commissions
     31,258       41,184  
  Bad debt expense
     249       90,557  
  Currency exchange
     (27,456 )     (28,695 )
  Utilities
     6,715       4,806  
                 
      890,634       1,072,050  
                 
Loss before other items and income tax
   $ (351,435 )   $ (527,051 )
Write down of investment
     (98,000 )     -  
Interest income
     600       430  
                 
Loss before income tax
   $ (448,835 )   $ (526,621 )
Income tax (recovery)
     -       -  
                 
Loss for the 3 months
   $ (448,835 )   $ (526,621 )
                 
                 
Net loss per share (basic and diluted)
   $ (0.03 )   $ (0.04 )
                 
Weighted average number of shares (basic and diluted)
     14,156,480       13,010,514  

 
See Notes to Consolidated Financial Statements.
F-4
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
For Years Ended December 31, 2007 and 2006
(U.S. Dollars)
 
 
Years Ended December 31,
  
   
2007
    
2006
  
             
Operating activities
            
  Net loss
   $ (849,490 )   $ (1,164,369 )
  Adjustments to reconcile net loss to net cash
                
  Stock compensation expense
     561,384       858,585  
  Shares issued for services
     -       74,306  
  Depreciation
     588,932       597,170  
      300,826       365,692  
Changes in non-cash working capital items:
                
  (Increase) Decrease in accounts receivable
     268,518       (553,174 )
  (Increase) Decrease in inventories
     (456,955 )     410,664  
  (Increase) Decrease in prepaid expenses
     9,007       12,955  
  Increase (Decrease) in accounts payable
     (83,763 )     (268,075 )
  Increase (Decrease) deferred revenue
     10,689       20,559  
  Increase (Decrease) in income taxes
     -       28,918  
                 
Cash provided by (used in) operating activities
     26,944       17,539  
                 
Investing activities
                
  (Increase) Decrease in short-term investments
     -       -  
  (Increase) Decrease in investments
     369,000       -  
  (Increase) Decrease in long term deposits
     (814 )     (2,147 )
  (Increase) Decrease in loan receivable
     -       35,228  
  (Increase) Decrease in development of patents
     (60,680 )     (29,116 )
  (Increase) Decrease in acquisition of equipment
     (1,231,741 )     (37,160 )
                 
Cash provided by (used in) investing activities
     (924,235 )     (33,195 )
                 
Financing activities
                
 Mortgage
     645,617       -  
 Proceeds from issuance of common stock
     2,893,481       15,285  
                 
Cash provided by financing activities
     3,539,098       15,285  
                 
Effect of exchange rate changes on cash
     263,289       (22,152 )
                 
Inflow (outflow) of cash
     2,905,096     (22,152 )
Cash and cash equivalents, beginning
     450,759       473,282  
                 
Cash and cash equivalents, ending
   $ 3,355,855     $ 450,759  
                 
Supplemental disclosure of cash flow information:
                
Registration rights penalty
   $ -     $ (326,710 )
Interest paid
     10,605       3,136  

 
See Notes to Consolidated Financial Statements.
F-5
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2007 and 2006
(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, 2005
     12,981,316     $ 12,981     $ 11,422,218     $ (3,308,158 )   $ 153,254     $ 8,280,295  
                                                 
Translation adjustment
     —       —       —       —       (22,495 )     (22,495 )
Net loss
     —       —       —       (1,164,369 )     —       (1,164,369 )
                                                 
Comprehensive income
     —       —       —       —       —       (1,210,081 )
                                                 
Shares issued:
                                                
  Exercise of stock options
     46,000       46       64,354       —       —       64,400  
  Issue of stock for services
     31,111       31       74,306       —       —       74,337  
  Private placement
     —       —       (49,046 )     —       —       (49,046 )
Stock option compensation
     —       —       858,585       —       —       882,015  
                                                 
Balance December 31, 2006
     13,058,427     $ 13,058     $ 12,370,417     $ (4,472,527 )   $ 131,002     $ 8,041,950  
                                                 
Translation adjustment
     —       —       —       —       263,288       263,288  
Net loss
     —       —       —       (849,490 )     —       (849,490 )
                                                 
Comprehensive income
     —       —       —       —       —       (586,202 )
                                                 
Shares issued:
                                                
  Exercise of stock options
     163,000       163       288,837       —       —       289,000  
  Cancellation of stock
     (100,000 )     (100 )     (270,000 )     —       —       (271,000 )
  Private placement
     936,140       936       2,874,546       —       —       2,875,482  
Stock option compensation
     —       —       561,384       —       —       561,384  
                                                 
Balance December 31, 2007
     14,057,567     $ 14,057     $ 15,824,284     $ (5,322,017 )   $ 394,289     $ 10,910,614  


 
See Notes to Consolidated Financial Statements.
F-6
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
(U.S. Dollars)
 
1.           Basis of Presentation.
 
These consolidated financial statements include the accounts of Flexible Solutions International, Inc. (the “Company”), and its wholly-owned subsidiaries Flexible Solutions, Ltd. (“Flexible Ltd.”), NanoChem Solutions Inc., WaterSavr Global Solutions Inc., NanoDetect Technologies Inc. and Seahorse Systems Inc.  All inter-company balances and transactions have been eliminated.  The parent company was incorporated May 12, 1998 in the State of Nevada and had no operations until June 30, 1998 as described further below.
 
Flexible Solutions International, Inc. and its subsidiaries develops, manufactures and markets specialty chemicals which slow down the evaporation of water.  The companies primary product, HEAT$AVR®, is marketed for use in swimming pools and spas where its use, by slowing the evaporation of water, allows the water to retain a higher temperature for a longer period of time and thereby reduces the energy required to maintain the desired temperature of the water in the pool.  Another product, WATER$AVR®, is marketed for water conservation in irrigation canals, aquaculture, and reservoirs where its use slows down water loss due to evaporation.  In addition to the water conservation products, the Company also manufacturers and markets water-soluble chemicals utilizing thermal polyaspartate biopolymers (hereinafter referred to as “TPAs”), which are beta-proteins manufactured from the common biological amino acid, L-aspartic.  TPAs can be formulated to prevent corrosion and scaling in water piping within the petroleum, chemical, utility and mining industries.  TPAs are also used as proteins to enhance fertilizers in improving crop yields and as additives for household laundry detergents, consumer care products and pesticides.
 
On June 30, 1998, the Company completed the acquisition of all of the shares of Flexible Ltd.  The acquisition was effected through the issuance of 7,000,000 shares of common stock by the Company with former shareholders of the subsidiary receiving all of the total shares then issued and outstanding.  The transaction has been accounted for as a reverse-takeover.  Flexible Ltd. is accounted for as the acquiring party and the surviving entity.  As Flexible Ltd. is the accounting survivor, the consolidated financial statements presented for all periods are those of Flexible Ltd.  The shares issued by the Company pursuant to the 1998 acquisition have been accounted for as if those shares had been issued upon the organization of Flexible Ltd.
 
On May 2, 2002, the Company established WaterSavr Global Solutions Inc. through the issuance of 100 shares of common stock from WaterSavr Global Solutions Inc. to the Company.
 
On February 7, 2005, the Company established Nano Detect Technologies Inc. through the issuance of 1,000 shares of common stock from Nano Detect Technologies Inc. to the Company.
 
On June 21, 2005, the Company established Seahorse Systems Inc. through the issuance of 1,000 shares of common stock from Seahorse Systems Inc. to the Company.
 
Pursuant to a purchase agreement dated May 26, 2004, the Company acquired the assets of Donlar Corporation (“Donlar”) on June 9, 2004 and created a new company, NanoChem Solutions Inc. as the operating entity for such assets.  The purchase price of the transaction was $6,150,000 with consideration being a combination of cash and debt.  Under the purchase agreement and as part of the consideration, the Company issued a promissory note bearing interest at 4% to Donlar’s largest creditor to satisfy $3,150,000 of the purchase price.  This note was due June 2, 2005 and upon payment, all former Donlar assets that were pledged as security were released from their mortgage.  The remainder of the consideration given was cash.
 
F-7
The following table summarizes the estimated fair value of the assets acquired at the date of acquisition (at June 9, 2004):
 
Current assets
   $ 1,126,805  
Property and equipment
     5,023,195  
    $ 6,150,000  
Acquisition costs assigned to property and equipment
     314,724  
Total assets acquired
   $ 6,464,724  
 
There was no goodwill or other intangible assets accept certain patents recorded at nil fair value, acquired as a result of the acquisition.  The acquisition costs assigned to property and equipment include all direct costs incurred by the Company to purchase the Donlar assets.  These costs include due diligence fees paid to outside parties investigating and identifying the assets, legal costs directly attributable to the purchase of the assets, plus applicable transfer taxes.  These costs have been assigned to the individual assets based on their proportional fair values and will be amortized based on the rates associated with the related assets.
 
 
2.           Significant Accounting Policies.
 
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern and reflect the policies outlined below.
 
(a)           Cash and Cash Equivalents.
 
The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents.  Cash and cash equivalents are maintained with several financial institutions.
 
(b)           Inventories and Cost of Sales
 
The Company has four major classes of inventory:  finished goods, works in progress, raw materials and supplies.  In all classes, inventory is valued at the lower of cost and market.  Cost is determined on a first-in, first-out basis.  Cost of sales includes all expenditures incurred in bringing the goods to the point of sale.  Inventorial costs and costs of sales include direct costs of the raw material, inbound freight charges, warehousing costs, handling costs (receiving and purchasing) and utilities and overhead expenses related to the Company’s manufacturing and processing facilities.
 
In 2004, the FASB issued SFAS No. 151, “Inventory Costs”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material.  This standard requires that such items be recognized as current-period charges.  The standard also establishes the concept of “normal capacity” and requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities.  Any unallocated overhead must be recognized as an expense in the period incurred.  This standard is effective for inventory costs incurred starting January 1, 2006.  The adoption of this standard did not have a material impact on its financial position, results of operations or cash flows for 2006 or 2007.
 

 
F-8
(c)           Allowance for Doubtful Accounts
 
The Company provides an allowance for doubtful accounts when management estimates collectibility to uncertain.  Accounts receivable are continually reviewed to determine which, if any, accounts are doubtful of collection.  In making the determination of the appropriate allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer, overall customer credit-worthiness and historical experience.
 
 (d)           Property, Equipment and Leaseholds.
 
The following assets are recorded at cost and depreciated using the following methods using the following annual rates:
 
Computer hardware
  
30% Declining balance
Furniture and fixtures
  
20% Declining balance
Manufacturing equipment
  
20% Declining balance
Office equipment
  
20% Declining balance
Building
  
10% Declining balance
Leasehold improvements
  
Straight-line over lease term

Depreciation is recorded at half for the year the assets are first purchase.  Property and equipment are written down to net realizable value when management determines there has been a change in circumstances which indicates its carrying amount may not be recoverable.  No write-downs have been necessary to date.
 
(e)           Impairment of Long-Lived Assets.
 
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews long-lived assets, including, but not limited to, property and equipment, patents and other assets, for impairment annually or whenever events or changes in circumstances indicate the carrying amounts of assets may not be recoverable.  The carrying value of long-lived assets is assessed for impairment by evaluating operating performance and future undiscounted cash flows of the underlying assets.  If the sum of the expected future cash flows of an asset, is less than its carrying value, an impairment measurement is indicated.  Impairment charges are recorded to the extent that an asset’s carrying value exceeds its fair value.  Accordingly, actual results could vary significantly from such estimates.  There were no impairment charges during the periods presented.
 
(f)           Investments.
 
Investment in corporations subject to significant influence and investments in partnerships are recorded using the equity method of accounting.  On this basis, the Company’s share of income and losses of the corporations and partnerships is included in earnings and the Company’s investment therein adjusted by a like amount.  Dividends received from these entities reduce the investment accounts.  Portfolio investments not subject to significant influence are recorded using the cost method.
 
The fair value of a cost method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment.

The Company currently does not have any investments that require use of the equity method of accounting.

 

 
F-9
(g)           Foreign Currency.
 
The functional currency of one of the subsidiaries is the Canadian Dollar.  The translation of the Canadian Dollar to the reporting currency of the U.S. Dollar is performed for assets and liabilities using exchange rates in effect at the balance sheet date.  Revenue and expense transactions are translated using average exchange rates prevailing during the year.  Translation adjustments arising on conversion of the financial statements from the Company’s functional currency, Canadian Dollars, into the reporting currency, U.S. Dollars, are excluded from the determination of loss and are disclosed as other comprehensive income (loss) in stockholders’ equity.
 
Foreign exchange gains and losses relating to transactions not denominated in the applicable local currency are included in the operating loss if realized during the year and in comprehensive income if they remain unrealized at the end of the year.
 
(h)           Revenue Recognition.
 
Revenue from product sales is recognized at the time the product is shipped since title and risk of loss is transferred to the purchaser upon delivery to the carrier.  Shipments are made F.O.B. shipping point.  The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable, collectibility is reasonably assured and there are no significant remaining performance obligations.  When significant post-delivery obligations exist, revenue is deferred until such obligations are fulfilled.  To date there have been no such significant post-delivery obligations.
 
Provisions are made at the time the related revenue is recognized for estimated product returns.  Since the Company’s inception, product returns have been insignificant; therefore no provision has been established for estimated product returns.
 
(i)           Stock Issued in Exchange for Services.
 
The valuation of the Company’s common stock issued in exchange for services is valued at an estimated fair market value as determined by officers and directors of the Company based upon trading prices of the Company’s common stock on the dates of the stock transactions.  The corresponding expense of the services rendered are recognized over the period that the services are performed.
 
(j)           Stock-based Compensation.
 
In December 2004, the Financial Accounting Standards Board (“FASB”) issued revised SFAS No. 123(R), Share-Based Payment, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, which superseded APB Opinion No. 25, “Accounting for Stock Issued to Employees”.  FAS No. 123(R) requires the cost of all share-based payment transactions to be recognized in an entity’s financial statements, establishes fair value as the measurement objective and requires entities to apply a fair-value-based measurement method in accounting for share-based payment transactions.  SFAS No. 123(R) applies to all awards granted, modified, repurchased or cancelled after July 1, 2005, and unvested portions of previously issued and outstanding awards.  The Company adopted this statement for its first quarter starting January 1, 2006 and will continue to evaluate the impact of adopting this statement.
 
Prior to 2006, the Company adopted the disclosure provisions of SFAS No. 123 for stock options granted to employees and directors.  The Company disclosed on a supplemental basis, the pro-forma effect of accounting for stock options awarded to employees and directors, as if the fair value based method had been applied, using the Black-Scholes option-pricing model.  The Company has always recognized the fair value of options granted to consultants.
 

 
F-10
(k)           Comprehensive Income.
 
Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income, but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders’ equity.  The Company’s other comprehensive income is primarily comprised of unrealized foreign exchange gains and losses.
 
(l)           Loss Per Share.
 
Basic loss per share data is computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding during the year. Diluted earnings per share, which includes the dilutive effect of the exercise of options and warrants has not been presented because, due to the net losses recorded by the Company for all periods presented, their inclusion would be anti-dilutive.
 
(m)           Use of Estimates.
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and would impact the results of operations and cash flows.
 
(n)           Financial Instruments.
 
The fair market value of the Company’s financial instruments comprising cash, short-term investment, accounts receivable, income tax recoverable, loan receivable, accounts payable and accrued liabilities and amounts due to shareholders were estimated to approximate their carrying values due to immediate or short-term maturity of these financial instruments.  The Company maintains cash balances at financial institutions which at times, exceed federally insured amounts. The Company has not experienced any material losses in such accounts.

The Company is exposed to foreign exchange and interest rate risk to the extent that market value rate fluctuations materially differ from financial assets and liabilities, subject to fixed long-term rates.

The Company is exposed to credit-related losses in the event of non-performance by counterparties to the financial instruments. Credit exposure is minimized by dealing with only credit worthy counterparties. Accounts receivable for the three primary customers totals $630,296 (60%) as at December 31, 2007 (2006 - $483,682 or 37%).

(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.

F-11
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company's financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.

 
3.           Inventories
 
   
2007
    
2006
  
Completed goods
   $ 1,597,294     $ 970,780  
Works in progress
     241,625       397,995  
Raw materials
     522,351       535,540  
    $ 2,361,270     $ 1,904,315  
 
 
4.           Property, Plant and Equipment
 
   
2007
    
Accumulated
    
2007
  
   
Cost
    
Depreciation
    
Net
  
Buildings
   $ 4,483,465     $ 1,033,663     $ 3,449,802  
Computer hardware
     75,458       48,284       27,174  
Furniture and fixtures
     21,788       12,154       9,634  
Office equipment
     32,905       22,035       10,870  
Manufacturing equipment
     2,313,363       1,280,943       1,032,420  
Trailer
     3,854       1,863       1,990  
Leasehold improvements
     46,304       36,480       9,825  
Trade show booth
     8,766       6,212       2,554  
Land
     199,093       —       199,093  
    $ 7,184,996     $ 2,441,634     $ 4,743,362  


   
2006
    
Accumulated
    
2006
  
   
Cost
    
Depreciation
    
Net
  
Buildings
   $ 3,144,259     $ 724,752     $ 2,419,507  
Computer hardware
     60,576       34,200       26,376  
Furniture and fixtures
     18,576       8,608       9,968  
Office equipment
     29,533       17,488       12,045  
Manufacturing equipment
     2,207,781       990,959       1,216,822  
Trailer
     1,991       1,411       580  
Leasehold improvements
     39,517       25,551       13,966  
Trade show booth
     7,456       4,353       3,103  
Land
     398,186       —       398,186  
    $ 5,907,875     $ 1,807,322     $ 4,100,553  

 
F-12
5.           Patents

In fiscal 2005, the Company started the patent process for additional WATER$AVR® products.  Patents associated with these costs were granted in 2006 and they have been amortized over their legal life of 17 years.

   
2007
Cost
    
Accumulated
Amortization
    
2007
Net
  
Patents
   $ 243,853     $ 13,415        230,438  



   
2006
Cost
    
Accumulated
Amortization
    
2006
Net
  
Patents
   $ 172,938     $ 3,180        169,758  


6.   Investments.

   
2007
    
2006
  
Tatko Inc.
   $ -     $ 271,000  
Air-Water Interface Delivery and Detection Inc.
     -       98,000  
    $ -     $ 369,000  

On May 31, 2003, the Company acquired an option to purchase a 20% interest in the outstanding shares of Tatko Inc. (“Tatko”) for consideration of the issuance of 100,000 shares of the Company’s common stock.  The option to purchase the shares of Tatko expires on May 31, 2008.  The cost of the investment has been accounted for based on the fair market value of the Company’s common stock on May 31, 2003.  For further information on this option, see Contingencies (Note 16) below.
 
In 2005, NanoDetect purchased 32.7 shares of equity in Air Water Interface Delivery and Detection Inc. (“AWD”) for a total cost of $98,000.  This investment represents only 3.3% of the issued and outstanding shares of AWD and, accordingly, will be accounted for under the cost method.  While the technology to be developed by AWD still has enormous potential and may be commerialized in the future, management consideres that those events are sufficiently far in the future and not certain enough to maintain the investment in the venture at the invested cost. Therefore, the investment in AWD will be written down to zero.

 
7.           Long Term Deposits
 
The Company has reclassified certain security deposits to better reflect there long term nature.  Long term deposits consist of damage deposits held by landlords and security deposits held by various vendors.
 
   
2007
    
2006
  
Long term deposits
   $ 48,034     $ 47,220  
 
 
F-13
8.           Comprehensive Income
 
   
2007
    
2006
  
Net loss
   $ (779,885 )   $ (1,164,369 )
Other comprehensive income
     263,287       (22,495 )
Comprehensive income
   $ (516,599 )   $ (1,186,864 )
 
 
9.           Income Tax
 
The income tax expense (recovery) is compromised of the following:
 
   
2007
    
2006
  
Current tax, domestic
     -       -  
Current tax, foreign
     -     $ (127,079 )
Current tax, total
     -     $ (127.079 )
 
Income taxes vary from the amount that would be computed by applying the estimated combined statutory income tax rate (35%) for the following reasons:
 
   
2006
    
2006
  
Income before taxes, domestic
   $ (427,661 )   $ (427,661 )
Income before taxes, foreign
     (863,787 )     (863,787 )
Income before taxes, total
   $ (1,291,448 )   $ (1,291,448 )
Expense (recovery) for income taxes at statutory rate (35%)
   $ (452,007 )   $ (452,007 )
Permanent difference – stock based compensation
     326,523       326,523  
Depreciation
     104,543       104,543  
Miscellaneous
     -       -  
Tax refund from application of losses to prior periods
     (127,079 )     (127,079 )
Application of losses from prior periods
     (139,308 )     (139,308 )
Losses carried forward
     160,249       160,249  
Income tax expense (recovery)
   $ (127,079 )   $ (127,079 )
 
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  The Company’s deferred tax liability calculated at a 35% tax rate consists of the following:
 
F-14
 
   
2006
    
2006
  
Non-capital loss carry forwards
     950,037     $ 950,037  
Book over tax value of property and equipment
     (83,416 )     (83,416 )
Change in valuation allowance
     (866,621 )     (866,621 )
Net deferred tax asset (liability)
     -       -  

The Company's carried losses for income tax purposes are $2,714,390 (2005 - $3,726,632), which may be carried forward to apply against future income tax, expiring between 2013 and 2025.  The future tax benefit of these loss carry-forwards has been offset with a full valuation allowance.  These losses expire as follows:

2013
   $ 93,218  
2014
     390,847  
2016
     392,888  
2023
     300,352  
2024
     1,336,009  
2025
     201,076  

 
10.           Loss Per Share.
 
                   
   
Net loss
    
Shares
(denominator)
    
Per share
amount
  
2007 Basic net loss
   $ (849,490 )     13,772,180     $ (0.06 )
                         
2006 Basic net loss
   $ (1,164,369 )     12,994,430     $ (0.09 )
 
Options to purchase 1,912,440 shares of the Company’s common stock at prices ranging from $3.00 to $4.60 per share were outstanding during the year ended December 31, 2007 (2006:  options to purchase 2,126,410 shares of the Company’s common stock at prices ranging from $1.40 to $4.60 per share), but were excluded from the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the Company’s common stock and were anti-dilutive.  There were no preferred shares issued and outstanding for the years ended December 31, 2007 or 2006.
 
11.           Stock Options.
 
The Company adopted a stock option plan ("Plan").  The purpose of this Plan is to  provide  additional  incentives  to  key  employees, officers, directors and consultants  of  the  Company  and its subsidiaries in order to help attract and retain  the  best  available  personnel  for  positions  of  responsibility  and otherwise promoting the success of the business activities.  It is intended that options issued under this Plan constitute non-qualified stock options. The general terms of awards under the option plan are that 100% of the options granted will vest the year following the grant.  The maximum term of options granted is 5 years.
 
The Company may issue stock options and stock bonuses for shares of its common stock to provide incentives to directors, key employees and other persons who contribute to the success of the Company.  The exercise price of all incentive options are issued for not less than fair market value at the date of grant.
 
F-15
The following table summarizes the Company’s stock option activity for the years ended December 31, 2007 and 2006:
 
   
Number of shares
    
Exercise price
per share
    
Weighted average exercise price
  
Balance, December 31, 2005
     1,060,740    
$1.40 - $4.60
     $ 3.44  
Granted
     1,191,000    
$3.25 - $3.60
     $ 3.25  
Exercised
     (46,000 )  
$1.40
     $ 1.40  
Cancelled or expired
     (79,000 )  
$1.40 - $4.25
     $ 2.46  
Balance, December 31, 2006
     2,126,740    
$1.40 - $4.60
     $ 3.44  
Granted
     235,700    
$1.50 - $3.60
     $ 2.35  
Exercised
     (163,000 )  
$1.50 - $3.25
     $ 1.77  
Cancelled or expired
     (287,000 )  
$3.00 - $4.40
     $ 3.93  
Balance, December 31, 2007
     1,912,440    
$3.00 – 4.60
     $ 3.38  


In December 2004, the Financial Accounting Standards Board (“FASB”) issued revised FAS No. 123(R), Share-Based Payment, which replaces FAS No. 123, Accounting for Stock-Based Compensation, which superseded APB Opinion No. 25, Accounting for Stock Issued to Employees.  FAS No. 123(R) requires the cost of all share-based payment transactions to be recognized in an entity’s financial statements, establishes fair value as the measurement objective and requires entities to apply a fair-value-based measurement method in accounting for share-based payment transactions.  FAS No. 123(R) applies to all awards granted, modified, repurchased or cancelled after July 1, 2005, and unvested portions of previously issued and outstanding awards.  The Company adopted this statement for its first quarter starting January 1, 2006 and will continue to evaluate the impact of adopting this statement.

The fair value of each option grant is calculated using the following weighted average assumptions:
 
   
2007
    
2006
  
Expected life – years
    
5.0
      
5.0
  
Interest rate
    
4.69%
      
4.50%
  
Volatility
    
52%
      
52.0%
  
Dividend yield
    
-- %
      
-- %
  
Weighted average fair value of options granted
   $
1.35
     $
1.49
  
 
During the year ended December 31, 2007, the Company granted 200,700 (2006 – 410,000) stock options to consultants and has applied FAS No. 123 using the Black-Scholes option-pricing model, which resulted in additional expenses of $87,389 (2006 - $362,005).  During the year ended December 31, 2007, employees were granted 35,000 (2006 – 781,000) stock options, which resulted in additional expenses of $10,009 (2006 – 496,580).
 
12.           Warrants
 
On April 14, 2005, the Company raised $3,375,000 pursuant to the private sale of 900,000 shares of the Company’s common stock at a per share purchase price of $3.75, together with warrants to purchase up to 900,000 additional shares of the Company’s common stock.  The warrants have a four-year term and are immediately exercisable at a price of $4.50 per share.
 
F-16
On June 8, 2005, the Company raised $327,750 pursuant to the private sale of 87,400 shares of the Company’s common stock at a per share price of $3.75, together with a warrant to purchase up to 87,400 additional shares of the Company’s common stock.  The warrant has a four-year term and is immediately exercisable at a price of $4.50 per share.
 
In May 2007 the Company raised $3,042,455 from the private sale of 936,140 units, at a price of $3.25 per unit.  Each unit consists of one share of common stock and one half warrant with a three year term and a strike price of $4.50 per share.  The Company also issued 21,970 warrants with the same terms for investment banking services related to this transaction.
 
The following table summarizes the Company’s warrant activity for the two years ended December 31, 2007.
 
   
Number of shares
    
Exercise price
per share
    
Weighted average exercise price
  
Balance, December 31, 2005
     987,400     $ 4.50     $ 4.50  
Granted
     —       —       —  
Exercised
     —       —       —  
Cancelled
     —       —       —  
Balance, December 31, 2006
     987,400     $ 4.50     $ 4.50  
Granted
     490,040     $ 4.50     $ 4.50  
Exercised
     —       —       —  
Cancelled
     —       —       —  
Balance, December 31, 2007
     1,455,470     $ 4.50     $ 4.50  

 
13.           Capital Stock.
 
The $326,710 registration rights penalty recorded in the quarter ended September 30, 2006 is a one time occurrence that management believes should have been recorded directly against the corresponding capital, which was raised in 2005.  However, at the date of issuance of the capital, it was deemed to be very unlikely that any obligation would arise and as such, we were not able to make a reasonable estimate of a potential liability.  Given these circumstances, GAAP requires we record the payment as another item on our income statement.  All contractual obligations related to the equity raised in 2005 are now complete and no more amounts will become due.
 
During the year ended December 31, 2006 the Company issued 46,000 shares of common stock at $1.40 per share upon exercise of stock options.
 
During the year ended December 31, 2006 the Company issued 31,111 shares of common stock for services, recognizing an expense of $74,337.
 
During the year ended December 31, 2007 the Company issued 163,000 shares of common stock upon the exercise of stock options.  The strike price varied from $1.50 – 3.25 per share.
 
In May 2007 the Company closed a $3,042,455 private placement with select institutional investors.  The terms are 936,140 units with each unit consisting of one share at $3.25 and one half warrant with a three year term and a strike price of $4.50 per share.  The proceeds will be used to build a biomass conversion facility that will use renewable agriculture crops to produce aspartic acid.
 
F-17
14.           Segmented, Significant Customer Information and Economic Dependency.
 
The Company operates in two segments:
 
(a)   Development and marketing of two lines of energy and water conservation products (as shown under the column heading “EWCP” below), which consists of a (i) liquid swimming pool blanket which saves energy and water by inhibiting evaporation from the pool surface, and (ii) food-safe powdered form of the active ingredient within the liquid blanket and which is designed to be used in still or slow moving drinking water sources.
 
(b)    Manufacture of biodegradable polymers and chemical additives used within the petroleum, chemical, utility and mining industries to prevent corrosion and scaling in water piping (as shown under the column heading “BPCA” below).  These chemical additives are also manufactured for use in laundry and dish detergents, as well as in products to reduce levels of insecticides, herbicides and fungicides.
 
The Company’s traditional operating activities related to the production and sale of its energy conversation product line.  Upon acquiring the Donlar assets, the Company formed NanoChem, which was formed as its wholly-owned subsidiary in exchange for the capital contribution necessary to purchase the Donlar assets.  The assets the Company acquired from Donlar include domestic and international patents and business processes relating to the production of TPAs and other environmental products and technologies, as well as a manufacturing plant.  These assets are currently used by NanoChem for its revenue-producing activities.
 
The accounting policies of the segments are the same as those described in Note 2 to the Company’s consolidated financial statements, Significant Accounting Policies.  The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses.
 
The Company’s reportable segments are strategic business units that offer different, but synergistic products and services.  They are managed separately because each business requires different technology and marketing strategies.
 
   
EWCP
    
BPCA
    
Total
  
Revenue
   $ 1,217,366     $ 6,214,425     $ 7,431,791  
Interest revenue
     3,996       -       3,996  
Interest expense
     7,412       3,193       10,605  
Depreciation and Amortization
     125,637       463,295       588,932  
Segment profit (loss)
     (1,832,681 )     983,191       (849,490 )
Segment assets
     1,471,603       3,271,759       4,743,362  
Expenditures for
    segment assets
     1,198,537       33,204       1,231,741  
 
Sales by territory are shown below:
 
   
2007
    
2006
  
Canada
   $ 85,145     $ 202,763  
United States and abroad
     7,346,646       8,171,399  
Total
   $ 7,431,791     $ 8,374,162  
 
 
F-18
The Company’s long-lived assets are located in Canada and the United States as follows:
 
   
2007
    
2006
  
Canada
   $ 1,068,786     $ 364,487  
United States and abroad
     3,905,014       3,905,824  
Total
   $ 4,973,800     $ 4,270,311  
 
Three customers accounted for $4,120,386 (55%) of sales made in the year (2006 - $4,727,042).

 
15.           Commitments.
 
We are committed to minimum rental payments for property and premises aggregating approximately $355,022 over the term of three leases, the last expiring on December 31, 2011.
 
Commitments in each of the next five years are approximately as follows:
 
2008
186,906
2009
134,192
2010
16,962
2011
16,962
 
 
16.           Contingencies.
 
On May 1, 2003, the Company filed a lawsuit in the Supreme Court of British Columbia, Canada, against John Wells and Equity Trust, S.A. seeking the return of 100,000 shares of the Company’s common stock and the repayment of a $25,000 loan, which were provided to defendants for investment banking services consisting of securing a $5 million loan and a $25 million stock offering.  Such services were not performed and in the proceeding the Company seeks return of such shares after defendant’s failure to both return the shares voluntarily and repay the note.  On May 7, 2003, the Company obtained an injunction freezing the transfer of the shares.  On May 24, 2004, there was a hearing on defendant’s motion to set aside the injunction, which motion was denied by the trial court on May 29, 2004.  On the date of issuance, the share transaction was recorded as shares issued for services at fair market value, a value of $0.80 per share.  No amounts have been recorded as receivable in the Company’s consolidated financial statements as the outcome of this claim is not determinable.
 
As of January 3, 2007 all litigation between FSI and Patrick Grant has been settled. As part of the settlement FSI permited Mr. Grant to exercise an option to purchase 100,000 shares of FSI’s common stock at a price of $1.50 per share and to exercise a second option to purchase 50,000 shares of FSI’s common stock at a price of $2.00 per share.  FSI also forgave a loan to Mr. Grant and related parties in the amount of approximately $46,177. This amount has been recorded as a bad debt expense in 2006.  FSI, its subsidiaries and officers face no further liability in regard to the Grant lawsuit.
 
On May 28, 2004, Sun Solar Energy Technologies, Inc. (“Sun Solar”), filed a lawsuit in the Federal Court of Canada, against the Company, Flexible Ltd., and Mr. O’Brien.  Sun Solar is seeking:  (a) a declaration that the trademark “Tropical Fish” is available for use by Sun Solar; (b) injunctive relief against further use of the “Tropical Fish” trademark by the Company; and (c) monetary damages exceeding $7,000,000 for the alleged infringement by the Company, Flexible Ltd. and Mr. O’Brien of the “Tropical Fish” trademark, as well as any other “confusingly similar trademarks” or proprietary trade dresses.  On August 9, 2004, the Company, Flexible Ltd. and Mr. O’Brien filed their defense and filed a counterclaim against Sun Solar.  The counterclaim seeks:  (x) injunctive relief against further use of the “Tropical Fish” trademark by Sun Solar; (y) a declaration that the “Tropical Fish” trademark is owned by the Company, or, in the alternative, is not distinctive and should be struck from the trademark registry; and (z) monetary damages exceeding $50,000.  On December 28, 2006, all litigation with Sunsolar Energy Technologies was settled on a confidential basis. This settlement will have no effect on our financial statements nor on our ability to sell swimming pool products under our current trademarks and trade-dress.
 
F-19
On July 23, 2004, we filed a lawsuit in the Circuit Court of Cook County, Illinois against Tatko Biotech Inc. (“Tatko”).  The action arose from our Joint Product Development Agreement with Tatko in which we agreed to invest $10,000 toward the product development venture and granted to Tatko 100,000 shares of our restricted common stock.  In return, Tatko granted us a five-year option to purchase 20% of Tatko’s outstanding capital stock.  Tatko refused to collaborate on the agreement and, therefore, we filed the lawsuit to have the court declare that Tatko is not entitled to the 100,000 shares of our restricted common stock. On January 4, 2008, the lawsuit was dismissed pursuant to an agreement by Tatko to treat the Joint Product Development Agreement as void. As a result of the dismissal of the lawsuit and the agreement of the parties, the 100,000 shares of restricted stock will be returned and cancelled.
 
17.           Subsequent Events.
 
No subsequent events.

18.           Comparative Figures.
 
Certain of the comparative figures have been reclassified to conform with the current year’s presentation.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
F-20
 
Item 8.

None.

Item8A(T). 

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-KSB for the year ended December 31, 2007, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).  Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) that is required to be included in our periodic reports.

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.

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.
 
18
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, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the 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, 2007. 
 
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report on internal control in this annual report.
 
 
Item 8B. 

None.

 
Item 9.
 
Name
Age
Position
     
Daniel B. O’Brien
51
President, Director
John H. Bientjes
54
Director
Dr. Robert N. O’Brien
86
Director
Dale Friend
51
Director
Eric Hodges
59
Director
 
Daniel B. O’Brien has served as the President and Chief Executive Officer, as well as a director, of our company since June 1998.  He has been involved in the swimming pool industry since 1990, when he founded our subsidiary, Flexible Ltd., which was purchased by us in 1998.  From 1990 to 1998, Mr. O’Brien was also a teacher at Brentwood College where he was in charge of outdoor education.
 
John H. Bientjes has been a member of our board of directors since February 2000.  Since 1984, Mr. Bientjes has served as the manager of the Commercial Aquatic Supplies Division of D.B. Perks & Associates, Ltd., located in Vancouver, British Columbia, a company that markets supplies and equipment to commercial swimming pools which are primarily owned by municipalities.  Mr. Bientjes graduated in 1976 from Simon Fraser University in Vancouver, British Columbia with a Bachelor of Arts Degree in Economics and Commerce.
 
Dr. Robert N. O’Brien has been a member of our board of directors since June 1998.  Dr. O’Brien was a Professor of Chemistry at the University of Victoria from 1968 until 1986 at which time he was given the designation of Professor Emeritus.  He held various academic positions since 1957 at the University of Alberta, the University of California at Berkley, and the University of Victoria.  While teaching, Dr. O’Brien acted as a consultant and served on the British Columbia Research Council from 1968 to 1990.  In 1987, Dr. O’Brien founded the Vancouver Island Advanced Technology and Research Association.  Dr. O’Brien received his Bachelor of Applied Science in Chemical Engineering from the University of British Columbia in 1951; his Masters of Applied Science in Metallurgical Engineering from the University of British Columbia in 1952; his Ph.D. in Metallurgy from the University of Manchester in 1955; and was a Post Doctoral Fellow in Pure Chemistry at the University of Ottawa from 1955 through 1957.  Dr. Robert N. O’Brien and Daniel B. O’Brien are father and son.
 
19
Dale Friend was elected a director in December 2002.  Ms. Friend is currently an Accounting Manager of DB Perks & Associates.  She served as the company comptroller for a Lock and Security firm in Vancouver from 2004 to 2006 and was a Senior Trust Analyst for Alderwoods Group, a company engaged in funeral and mortuary services, from August 2002 to February 2003.  She also served as an Advanced Accountant for such firm from 1999 to August 2002.  From 1979 to 1998, Ms. Friend was with Telus in various accounting, auditing and financial planning positions.
 
Eric Hodges was elected a director in September 2004.  Mr. Hodges is an accountant from Victoria who has over three decades of experience.  He received his financial education from the University of Washington in Seattle where he played for the Huskies football program.  Mr. Hodges continued playing football after college, with a successful, multiyear professional career with the British Columbia Lions of the Canadian Football League.  In the past five years, Mr. Hodges has owned and operated Eric G. Hodges & Associates, a Victoria-based accounting firm with both Canadian and U.S. clientele.  Eric is extremely familiar with both Canadian and United States generally accepted accounting principles (“GAAP”), since he has clients in both countries.  Furthermore, his wide range of experience with small and quickly growing companies is an asset to the board of directors.

Directors are elected annually and hold office until the next annual meeting of our stockholders and until their successors are elected and qualified.  There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.  All executive offices are chosen by the board of directors and serve at the board’s discretion.

John Bientjes, Dale Friend, and Eric Hodges are independent directors as that term is defined in section 121(a) of the listing standards of the American Stock Exchange.

Our Audit Committee, consisting of John Bientjes, Dale Friend and Eric Hodges, all of whom are independent directors and have strong financial backgrounds, facilitates and maintains open communications among our board of directors, our Audit Committee, senior management and our independent auditors.  Our Audit Committee also serves as an independent and objective party to monitor our financial reporting process and internal control system.  In addition, our Audit Committee reviews and appraises the efforts of our independent auditors.  Our Audit Committee meets periodically with management and our independent auditors.  Mr. Bientjes meets the SEC’s definition of audit committee financial expert.  Each member of the Audit Committee is “independent” as that term is defined in Section 121(a) of the listing standards of the American Stock Exchange.

Our Compensation Committee, consisting of Dr. Robert O’Brien and John Bientjes, establishes salary, incentive and other forms of compensation for our Chief Executive Officer and administers our Stock Option Program.  None of our officers participated in deliberations of the compensation committee concerning executive officer compensation.  Dr. O’Brien is not an independent member of the compensation committee as that term is defined in Section 121(a) of the listing standards of the American Stock Exchange.  During the year ended December 31, 2007, no director was also an executive officer of another entity, which had one of our executive officers serving as a director of such entity or as a member of the compensation committee of such entity.

We have adopted a Code of Ethics that applies to our Chief Executive Officer, our Chief Financial Officer and our Principal Accounting Officer, as well as our other senior management and financial staff.  Interested persons may also obtain a copy of our Code of Ethics from our website at www.flexiblesolutions.com.

20
 
Item 10. 
 
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 earmed in excess of $100,000 during the two fiscal years ended December 31, 2007.
 
Name and Principal Position
Fiscal
Year
    
Salary
(1)
      
Bonus
(2)
      
Restricted
Stock
Awards
(3)
      
Options
Awards
(4)
      
All
Other
Annual
Compensation
(5)
      
Total
  
Daniel B. O’Brien
2007
   $ 140,154       --       --       --       --     $ 140,154  
President and Chief
2006
   $ 150,109       --       --       340,217       --       490,326  
Executive 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.

Stock Option Program

Our Stock Option Program involves the issuance of options, from time to time, to our employees, directors, officers, consultants and advisors.  Options are granted by means of individual option agreements.  Each option agreement specifies the shares issuable upon the exercise of the option, the exercise price and expiration date and other terms and conditions of the option.

If the option holder is an employee, and if he or she ceases to be employed by us, the option holder may, during the 30-day period following termination of employment, exercise the option to the extent the option was exercisable on the date of termination.  In the case of death or disability, the option holder (or his or her administrator) has twelve months from the date of death or disability to exercise the option to the extent the option was exercisable on the date of death or disability.

The options are subject to adjustment by reason of a recapitalization, reclassification, stock split, combination of shares, dividend or other distribution payable in capital stock.  Upon a merger, liquidation, dissolution or other consolidation, we will provide each option holder with one-months’ prior written notice informing the option holder that he or she may exercise the option in full (to the extent it has not been previously exercised) within the one-month period.  Following the expiration of the one month period, the options will terminate.

21
The options may not be transferred, assigned, pledged or hypothecated in any way (except by will or the laws of descent) and are not subject to execution, attachment or similar process.

All of the options granted have terms of between one and five years after the date of grant and reflect exercise prices equal to the fair market value of a share of our common stock as determined by our board of directors on the date of grant.  All of the options contain vesting provisions pursuant to which the options are 100% exercisable within a fixed number of months after the date of grant.

All option grants made during a fiscal year are submitted for shareholder approval at the next annual shareholder meeting.  To date, our shareholders have approved all of the grants.

The following table shows the weighted average exercise price of the outstanding options granted pursuant to our Stock Option Program as of December 31, 2007, 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)
               
Stock Option Program
     1,912,440     $ 3.38  
Not Applicable
Total
     1,912,440     $ 3.38    
 
 
As of February 15, 2008 options to purchase 1,912,440 shares of our common stock were outstanding under our Stock Option Program.  The exercise price of these options varies between $3.00 and $4.60 per share.  The options expire at various dates between April 23, 2008 and December 18, 2012.

The following tables show, during the fiscal year ended December 31, 2007, the options granted to, and the options exercised and held by, the persons named below.  All options were granted pursuant to our Stock Option Program.
 
 
 Options Granted
 Name
Grant
Date
Options
Granted (#) 
Exercise
Price Per 
Share
 
Expiration
Date
         
 Daniel O’Brien
--
--
--
--
 
 
 
Options Exercised 
 Name
Shares
Acquired On
Exercise (1)
Value
Realized (2)
 
    
 Daniel O’Brien
--
--


(1)
The number of shares received upon exercise of options during the fiscal year ended December 31, 2007.
 
22
 
(2)
With respect to options exercised during the fiscal year ended December 31, 2007, the dollar value of the difference between the option exercise price and the market value of the option shares purchased on the date of the exercise of the options.

 
 
Shares underlying
unexercised options
which are:
 
 
Exercise
 
 
Expiration
Name
Exercisable
Unexercisable
Price
Date
Daniel O’Brien
50,000
 
$4.25
07/01/07
 
20,000
  
  3.60
12/31/08
 
50,000
  
  3.00
11/26/09
 
200,000
  
  3.25
01/05/11
   
300,000
  3.25
01/05/11
 
Director Compensation

We reimburse directors for any expenses incurred in attending board meetings.  We also compensate directors $1,000 annually and grant our directors options to purchase shares of our common stock each year that they serve.

Our directors received the following compensation in 2007:
 
Name
Paid in Cash
Stock Awards (1)
Option Awards (2)
       
Robert N. O’Brien
--
--
--
John H. Bientjes
$1,000
--
--
Dale Friend
$1,000
--
--
Eric Hodges
$1,000
--
--
 
(1)
The fair value of stock issued for services computed in accordance with FAS 123R on the date of grant.

(2)
The fair value of options granted computed in accordance with FAS 123R on the date of grant.

The terms of the options granted to our directors in 2006 are shown below.
 
 Name
  Option Price 
 No. of Options 
 Expiration Date
Robert N. O’Brien
$3.25
250,000
January 5, 2011
John H. Bientjes
$3.25
5,000
January 5, 2011
John H. Bientjes
$3.60
5,000
December 18, 2012
Dale Friend
$3.25
5,000
January 5, 2011
Dale Friend
$3.60
5,000
December 18, 2012
Eric Hodges
$3.25
5,000
January 5, 2011
Eric Hodges
$3.60
5,000
December 18, 2012

Daniel B. O’Brien is not compensated for serving as a director.
 
23
 
Item 11.
 
The following table shows the beneficial ownership of our common stock as of February 15, 2008 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
2614 Queenswood Dr.
Victoria, BC V8N 1X5
 
4,891,900
 
34.6%
     
Dr. Robert N. O’Brien
2614 Queenswood Dr.
Victoria, BC V8N 1X5
 
1,970,000
 
13.9%
     
John Bientjes
#1-230 West 13th Street,
North Vancouver, B.C. V7M 1N7
35,000
0.2%
     
Dale Friend
3009 E. Kent Ave,
Vancouver, BC V5S 4P6
-
-
     
Eric Hodges
#110 - 4252 Commerce Circle
Victoria, BC  V8Z 4M2
-
-
     
All officers and directors
as a group (5 persons)
6,896,900
48.7%
 

(1)
Includes shares which may be acquired on the exercise of the stock options, all of which were exercisable as of __________, listed below.
 
 
Name
No. of Options
Exercise
     Price   
Expiration Date
Daniel O’Brien
 
 
 
 
20,000
$3.60
December 31, 2008
 
50,000
$3.00
November 26, 2009
 
100,000
$3.25
January 5, 2011
 
100,000
$3.25
January 5, 2011
Dr. Robert O’Brien
      
 
20,000
$3.60
December 31, 2008
 
25,000
$3.00
November 26, 2009
 
50,000
$3.25
January 5, 2011
 
50,000
$3.25
January 5, 2011
 
24
 
John Bientjes
      
 
5,000
$3.60
December 31, 2008
 
5,000
$3.00
November 26, 2009
 
5,000
$3.25
January 5, 2011
Dale Friend
      
 
5,000
$3.60
December 31, 2008
 
5,000
$3.00
November 26, 2009
 
5,000
$3.25
January 5, 2011
Eric Hodges
      
 
5,000
$3.60
December 31, 2008
 
5,000
$3.00
November 26, 2009
 
5,000
$3.25
January 5, 2011

Item 12. 
 
Our director, Dr. Robert N. O’Brien, developed substantially all of our products and has assigned the patent rights to these products to us.  We have no agreement with Dr. O’Brien requiring him to conduct any research and development activities for us, but we anticipate that any future inventions which may be of interest to us will continue to be assigned to us by Dr. O’Brien, although he has no legal obligation to do so.  Dr. O’Brien does not receive any salary or royalties from us for any research and development activities, although our board of directors does consider such activities undertaken by Dr. O’Brien when it grants stock options to Dr. O’Brien.  Dr. O’Brien is a member of our board of directors, but abstains from all proceedings of the board concerning his stock option grants.  Please refer to Item 10 of this report for further information.  Dr. O’Brien is the father of our Chief Executive Officer, Daniel B. O’Brien.
 
Item 13.
 
Number
Description
 
3.1
 
Articles of Incorporation of the Registrant. (1)
3.2
Bylaws of the Registrant. (1)
21.1
Subsidiaries. (2)
23.1
31.1
31.2
32

(1)
Previously filed as an exhibit to our Registration Statement on Form 10-SB filed with the Commission on February 22, 2000, and incorporated herein by reference.
(2)
Previously filed as an exhibit to our Registration Statement on Form SB-2 filed with the Commission on January 22, 2003, and incorporated herein by reference.

Item 14.

Cinnamon Jang Willoughby & Company, Certified Public Accountants (“CJW”), are our independent auditors and have examined our financial statements for the fiscal years ended December 31, 2007 and 2006.
 
25
Audit Fees
 
CJW was paid $55,484 and $62,731 for the for the fiscal years ended December 31, 2007 and 2006, 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-QSB during these fiscal years.
 
Audit-Related Fees
 
CJW was paid $12,106 and $10,712 for the fiscal years ended December 31, 2007 and 2006, respectively, for assurance and related services related to the performance of the audit or review of our financial statements.
 
Tax Fees
 
CJW was paid $2,176 and $2,150 for the fiscal years ended December 31, 2007 and 2006, respectively, for professional services rendered for the preparation and filing of our income tax returns for the fiscal years ended December 31, 2006 and 2005.
 
All Other Fees
 
CJW was paid no other fees for professional services during the fiscal years ended December 31, 2007 and 2006.
 
Audit Committee Pre-Approval Policies
 
Rules adopted by the SEC in order to implement requirements of the Sarbanes-Oxley Act of 2002 require public company audit committees to pre-approve audit and non-audit services.  Effective as of December 2002, our Audit Committee has adopted a policy for the pre-approval of all audit, audit-related and tax services, and permissible non-audit services provided by our independent auditors.  The policy provides for an annual review of an audit plan and budget for the upcoming annual financial statement audit, and entering into an engagement letter with the independent auditors covering the scope of the audit and the fees to be paid.  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, 2007 our Audit Committee approved all of the fees paid to CJW.  Our Audit Committee has determined that the rendering of all other non-audit services by CJW is compatible with maintaining CJW’s independence.  During the year ended December 31, 2007, none of the total hours expended on our financial audit by CJW were provided by persons other than CJW’s full-time permanent employees.
 
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SIGNATURES
 
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
Flexible Solutions International, Inc.
  
       
Dated:  March 29, 2007.
By:
/s/ DANIEL B. O'BRIEN  
 
Name:
Daniel B. O’Brien
  
 
Title:
President and Chief Executive Officer
  
       
 
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
Signature
Title
Date
     
/s/ DANIEL B. O'BRIEN
Daniel B. O’Brien
President, Chief Executive Officer, Principal Financial and Accounting Officer and a Director
March 29, 2007
     
/s/ JOHN H. BIENTJES
John H. Bientjes
Director
March 29, 2007
     
/s/ ROBERT N. O'BRIEN
Robert N. O’Brien
Director
March 29, 2007
     
/s/ DALE FRIEND
Dale Friend
Director
March 29, 2007
     
/s/ ERIC G. HODGES
Eric G. Hodges
Director
March 29, 2007

 
 
 
 
 
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