fsi_10q-90331.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

OR

[     ] 
TRANSITION REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number:  001-31540

 
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
 (Exact Name of Issuer as Specified in Its Charter)
 
 
 
Nevada
  
91-1922863
  
 
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
  
         
 
615 Discovery St.
Victoria, British Columbia, Canada
   V8T 5G4  
 
(Address of Issuer's Principal Executive Offices)
  
(Zip Code)
  
 
 
Issuer’s telephone number: (250) 477-9969


N/A
 (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) had been subject to such filing requirements for the past 90 days.

Yes      X          No             

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
 
 
Large accelerated filer   [     ]
   Accelerated filer   [     ]  
         
  Non-accelerated filer   [     ]   Smaller reporting company   [ X ]  
  (Do not check if a smaller reporting company)      
 
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).
Yes                   No      X     
 
Class of Stock
No. Shares Outstanding
Date
     
Common
14,062,567
April 30, 2009
 
 
FORM 10-Q
 
Index
 
 
 
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements other than statements of historical fact are “forward-looking statements” for the purposes of the federal and state securities laws, including, but not limited to any projections of earnings, revenue or other financials items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.
 
Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words.  These forward-looking statements present our estimates and assumptions only as of the date of this report.  Except for our ongoing obligation to disclose material information as required by the federal securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.
 
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements.  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties.  The factors impacting these risks and uncertainties include but are not limited to:
For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.
 

 
ii
 
PART I 
 
Item 1. 
 
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
At March 31, 2009
(U.S. Dollars)
 
   
March 31,
2009
 (Unaudited)
    
December 31,
2008
  
Assets
            
Current
            
Cash and cash equivalents
   $ 1,508,257     $ 1,894,045  
Accounts receivable
     2,110,670       1,642,001  
Inventory
     3,291,627       3,591,112  
Prepaid expenses
     62,837       109,494  
      6,973,391       7 ,236,617  
                 
Property, equipment and leaseholds
     5,987,901       5,882,223  
Patents
     194,420       204,203  
Long term deposits
     27,107       32,713  
    $ 13,182,819     $ 13,355,756  
Liabilities
                
Current
                
Accounts payable and accrued liabilities
   $ 731,011     $ 771,180  
Long Term
                
Loans
     1,485,744       1,546,836  
    $ 2,216,755     $ 2,318,016  
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
                
14,062,567 (2008: 14,062,567) common shares
     14,063       14,063  
Capital in excess of par value
     16,325,899       16,259,614  
Other comprehensive income
     (249,520 )     (244,788 )
Deficit
     (5,124,378 )     (4,991,149 )
                 
Total Stockholders’ Equity
     10,966,064       11,037,740  
                 
Total Liabilities and Stockholders’ Equity
   $ 13,182,819     $ 13,355,756  
 
Commitments, Contingencies and Subsequent Events (Notes 14, 15 & 16)
 
-- See Notes to Unaudited Consolidated Financial Statements --
1
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2009 and 2008
(U.S. Dollars -- Unaudited)
 
   
Three Months Ended March 31,
  
   
2009
    
2008
  
             
Sales
   $ 2,659,548     $ 3,498,473  
Cost of sales
     2,012,546       2,327,172  
                 
Gross profit
     647,002       1,171,301  
                 
Operating expenses
                
Wages
     306,590       283,727  
Administrative salaries and benefits
     88,431       91,225  
Advertising and promotion
     22,072       39,800  
Investor relations and transfer agent fee
     38,256       45,840  
Office and miscellaneous
     56,698       72,698  
Insurance
     52,903       49,486  
Interest expense
     11,385       14,141  
Rent
     59,619       67,842  
Consulting
     27,475       50,191  
Professional fees
     42,488       21,738  
Travel
     31,212       27,614  
Telecommunications
     6,783       9,201  
Shipping
     10,385       12,301  
Research
     2,894       19,961  
Commissions
     23,705       29,126  
Bad debt expense (recovery)
     (590 )     120  
Loss of sale on equipment
     -       29,026  
Currency exchange
     (13,518 )     (6,760 )
Utilities
     13,443       4,342  
                 
Total operating expenses
     780,231       861,619  
                 
Operating Income (loss)
     (133,229 )     309,682  
                 
Interest income
     -       490  
                 
Income (loss) before income tax
     (133,229 )     310,172  
                 
Net income (loss)
     (133,229 )     310,172  
                 
Net income (loss) per share (basic and diluted)
   $ (0.01 )   $ 0.02  
                 
Weighted average number of  common shares
     14,062,567       14,057,567  

 
-- See Notes to Unaudited Consolidated Financial Statements --
2
 FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2009 and 2008
(U.S. Dollars -- Unaudited)
 
   
Three Months Ended March 31,
  
   
2009
    
2008
  
             
Operating activities
            
Net income (loss)
   $ (133,229 )   $ 310,173  
Stock compensation expense
     66,292       82,699  
Depreciation
     100,083       111,626  
Assigned interest expense
     -       12,846  
Changes in non-cash working capital items:
                
(Increase) Decrease in accounts receivable
     (468,668 )     (1,619,488 )
(Increase) Decrease in inventory
     299,484       519,800  
(Increase) Decrease in prepaid expenses
     46,621       (1,197 )
Increase (Decrease) in accounts payable
     (40,167 )     412,124  
Increase (Decrease) in deferred revenue
     -       (338 )
                 
Cash provided by (used in) operating activities
     (129,584 )     (171,755 )
                 
Investing activities
                
Long term deposits
     5,606       487  
Development of patents
     9,783       6,764  
Acquisition of property and equipment
     (205,760 )     (224,012 )
                 
Cash provided by (used in) investing activities
     (190,371 )     (216,761 )
                 
Financing activities
                
Loan
     (61,092 )     -  
Proceeds from issuance of common stock
     -       -  
                 
Cash provided by financing activities
     (61,092 )     -  
                 
Effect of exchange rate changes on cash
     (4,741 )     (69,659 )
                 
Inflow (outflow) of cash
     (385,788 )     (458,175 )
Cash and cash equivalents, beginning
     1,894,045       3,355,854  
                 
Cash and cash equivalents, ending
   $ 1,508,257     $ 2,897,678  
                 
Supplemental disclosure of cash flow information:
                
Interest paid
   $ 11,385     $ 14,141  
 
-- See Notes to Unaudited Consolidated Financial Statements --
3
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period Ended March 31, 2009
(U.S. Dollars)
 
1. 
Basis of Presentation.
 
These unaudited consolidated financial statements of Flexible Solutions International, Inc (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information.  These financial statements are condensed and do not include all disclosures required for annual financial statements.  The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the Company’s audited consolidated financial statements filed as part of the Company’s December 31, 2008 Annual Report on Form 10-K.  This quarterly report should be read in conjunction with such annual report.
 
In the opinion of the Company’s management, these consolidated financial statements reflect all adjustments necessary to present fairly the Company’s consolidated financial position at March 31, 2009, and the consolidated results of operations and the consolidated statements of cash flows for the three months ended March 31, 2009 and 2008.  The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year.
 
These consolidated financial statements include the accounts of 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 Company was incorporated May 12, 1998 in Nevada and had no operations until June 30, 1998.
 
The Company and its subsidiaries develop, manufactures and markets specialty chemicals which slow down the evaporation of water.  The Company’s 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 thermal polyaspartate biopolymers (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.
 
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 paid 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.
 
The following table summarizes the estimated fair value of the assets acquired at the date of acquisition (at June 9, 2004):
 
4
 
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 three 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.  Inventory costs and costs of sales include direct costs of the raw material, inbound freight charges, warehousing costs, handling costs (receiving and purchasing) and utilities and overhead expenses related to the Company’s manufacturing and processing facilities.
 
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 the Company’s financial position, results of operations or cash flows for 2008 or 2009.
 
5
(c)           Allowance for Doubtful Accounts
 
The Company provides an allowance for doubtful accounts when management estimates collectibility is 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 and annual rates:
 
Computer hardware
  
30% Declining balance
Automobile
  
30% Declining balance
Trade show booth
  
30% Declining balance
Furniture and fixtures
  
20% Declining balance
Manufacturing equipment
  
20% Declining balance
Office equipment
  
20% Declining balance
Building and improvements
  
10% Declining balance
Leasehold improvements
  
Straight-line over lease term

Depreciation is recorded at half for the year the assets are first purchased.  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.
 
6
(g)           Foreign Currency.
 
The functional currency of one of the Company’s 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 period.  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 period and in comprehensive income if they remain unrealized at the end of the period.
 
(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 is 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.
 
7
(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)           Income (Loss) Per Share.
 
Income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding.  Diluted loss per share is computed by giving effect to all potential dilutive options that were outstanding during the year.  For the periods ended March 31, 2009 and 2008, all outstanding options were 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 $1,171,499 (55%) as at March 31, 2009 (2008 - $961,931 or 60%).

(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.

8
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.

(p)    Recent Accounting Pronouncements

Business Combinations

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 141 (Revised 2007), “Business Combinations” (“FAS 141(R)”). FAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes from current practice resulting from FAS 141(R) include the expansion of the definitions of a “business” and a “business combination.” For all business combinations (whether partial, full or step acquisitions), the acquirer will record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration will be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settlement; and acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition. FAS 141(R) also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is not permitted. The Company is currently evaluating the potential impact of this statement.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An amendment of ARB No. 51” (“FAS 160”). FAS 160 amends Accounting Research Bulletin 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is a third-party ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, FAS 160 requires the consolidated statement of income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. FAS 160 also requires disclosure on the face of the consolidated statement of income of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. FAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is not permitted. The Company is currently evaluating the potential impact of this statement.

Fair Value Measurements

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), to partially defer FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FSP 157-2 defers the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. The Company is currently evaluating the impact of adopting the provisions of FAS 157 as it relates to non-financial assets and liabilities.

9
Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”). FAS 161 amends and expands the disclosure requirements of FAS 133, “Accounting for Derivative Instruments and Hedging Activities” and requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This statement is effective for financial statements issued for fiscal periods beginning after November 15, 2008. Earlier adoption is not permitted. The Company does not believe the adoption of FAS 161 will have a material impact on its consolidated financial statements.

Determination of Useful Life of Intangible Assets

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. The Company is currently evaluating the potential impact the adoption of FAS FSP 142-3 will have on its consolidated financial statements.

3. 
Accounts Receivable
 
   
2009
    
2008
  
Accounts receivable
   $ 2,119,457     $ 1,672,772  
Allowances for doubtful accounts
     (8,787 )     (30,771 )
    $ 2,110,670     $ 1,642,001  

 
4. 
Inventories
 
   
2009
    
2008
  
Completed goods
   $ 2,100,671     $ 2,394,723  
Works in progress
     54,272       56,036  
Raw materials
     1,136,684       1,140,353  
    $ 3,291,627     $ 3,591,112  
 
10
 
5. 
Property, Plant & equipment

   
2009
    
Accumulated
    
2009
  
   
Cost
    
Depreciation
    
Net
  
Buildings
   $ 3,987,998     $ 1,236,415     $ 2,751,583  
Building Improvements
     645,606       —       645,606  
Computer hardware
     74,391       49,846       24,545  
Furniture and fixtures
     21,947       12,045       9,902  
Office equipment
     18,308       13,318       4,990  
Manufacturing equipment
     3,431,305       1,434,660       1,996,645  
Trailer
     22,130       6,099       16,031  
Leasehold improvements
     22,730       20,671       2,059  
Technology
     108,305       —       108,305  
Trade show booth
     6,889       5,589       1,300  
Truck
     9,426       2,014       7,412  
Land
     419,523       —       419,523  
    $ 8,768,558     $ 2,780,658     $ 5,987,901  


   
2008
    
Accumulated
    
2008
  
   
Cost
    
Depreciation
    
Net
  
Buildings
   $ 4,017,334     $ 1,187,408     $ 2,829,926  
Building improvements
     502,847       —       502,847  
Computer hardware
     78,121       50,962       27,159  
Furniture and fixtures
     19,884       11,875       8,009  
Office equipment
     29,396       21,262       8,134  
Manufacturing equipment
     3,335,089       1,402,423       1,932,666  
Trailer
     23,040       4,996       18,044  
Leasehold improvements
     23,665       19,378       4,287  
Technology
     112,759       —       112,759  
Trade show booth
     7,172       5,709       1,463  
Truck
     9,814       1,472       8,342  
Land
     428,587       —       428,587  
    $ 8,587,708     $ 2,705,485     $ 5,882,223  

Amount of depreciation expense for 2009: $100,083 (2008: $111,626)

The following carrying amount of capital assets held by Flexible Solutions Ltd. serves as collateral for the AFSC loan:

Land
   $ 220,430  
Building
     835,758  
Building improvements
     645,606  
Manufacturing equipment
     1,295,487  
Trailer
     16,032  
Truck
     7,412  
Trade show booth
     1,300  
Technology
     108,305  
 
11
 
6. 
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.

Of the patents costs listed below, $62,877 are not subject to amortization as of yet, as the patents are still in the process of being approved.

   
2009
Cost
    
Accumulated
Amortization
    
2009
Net
  
Patents
   $ 210,293     $ 15,873     $ 194,420  

   
2008
Cost
    
Accumulated
Amortization
    
2008
Net
  
Patents
   $ 218,209     $ 14,009     $ 204,203  

Decrease in 2009 cost was solely due to currency conversion.  2009 cost in Canadian dollars - $264,519 (2008 - $264, 244 in Canadian dollars).

Amount of depreciation for 2009 - $1,864 (2008 - $396)

Estimated depreciation expense over the next five years is as follows:

2009
   $ 9,950  
2010
     9,950  
2011
     9,950  
2012
     9,950  
2013
     9,950  

 
7. 
Long Term Deposits
 
The Company has reclassified certain security deposits to better reflect their long term nature.  Long term deposits consist of damage deposits held by landlords and security deposits held by various vendors.
 
   
2009
    
2008
  
Long term deposits
   $ 27,107     $ 32,713  

 
8. 
Long Term Debt
 
Flexible Solutions Ltd. has received a non-interest bearing loan from the Department of Agriculture and Agri-Food Canada (AAFC).  Eligible for up to $1,000,000 Canadian funds, the Company has drawn $383,047 CDN ($303,679US) as of March 31, 2009 and has pledged no securities.
 
12
If the full amount is drawn, the repayment schedule is as follows:
 
Amount Due (in CDN funds)
Payment Due Date
$200,000
January 1, 2012
$200,000
January 1, 2013
$200,000
January 1, 2014
$200,000
January 1, 2015
$200,000
January 1, 2016
 
Flexible Solutions Ltd. has also received a 5% simple interest loan from Agriculture Financial Services Corp. (AFSC).  Eligible for up to $2,000,000 Canadian funds, the Company has drawn $1,491,000 CDN ($1,182,065 US) as of March 31, 2009 and has until April 1, 2009 to draw the remainder.  The Company only has to make interest payments until May 1, 2010 and then must pay down the principal in equal payments until May 1, 2014.  The Company has pledged the assets of the Taber, AB building, including equipment, inventory and accounts receivable, as collateral as well as signed a promissory note guaranteeing the amount of the loan by Flexible Solutions International Inc.
 
9.
Mortgage
 
Pursuant to the acquisition of the plant and property in Taber, Alberta, the Company agreed to assume a mortgage of $651,298 ($645,167 CAD) to the vendor to satisfy the balance of the purchase price.  The mortgage was paid in June 2008.
 
10. 
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.
 
13
The following table summarizes the Company’s stock option activity for the years ended December 31, 2007, 2008 and the period ended March 31, 2009:
 
   
Number of shares
    
Exercise price
per share
    
Weighted average exercise price
  
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
  
Granted
     203,000      
$3.60
      
$3.60
  
Cancelled or expired
     (204,740 )    
$3.00 - $4.60
      
$3.74
  
Balance, December 31, 2008
     1,910,700      
$3.00 – 4.55
      
$3.38
  
Granted
     122,000      
$2.25
      
$2.25
  
Cancelled or expired
     (8,000 )    
$3.92
      
$3.92
  
Balance, March 31, 2009
     2,024,700      
$2.25 - $4.55
      
$3.31
  
 
The fair value of each option grant is calculated using the following weighted average assumptions:
 
   
2009
    
2008
  
Expected life – years
     5.0       5.0  
Interest rate
     1.14 %     2.27 %
Volatility
     65 %     99 %
Dividend yield
     — %     — %
Weighted average fair value of options granted
   $ 1.00     $ 1.15  

During the three months ended March 31, 2008 the Company granted 46,000 options to consultants that resulted in $13,239 in expenses this quarter.  During the same period, 37,000 options were granted to employees, resulting in $10,649 in expenses this quarter.  No stock options were exercised during the period.
 
During the three months ended March 31, 2009 the Company granted 61,000 options to consultants that resulted in $15,346 in expenses this quarter.  During the same period, 61,000 options were granted to employees, resulting in $15,347 in expenses this quarter.  No stock options were exercised during this period.
 
11. 
Warrants
 
On April 14, 2005, the Company announced that it had raised $3,375,000 pursuant to a private placement of up to 1,800,000 shares of its common stock.  The investors collectively purchased 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 exercisable at a price of $4.50 per share.
 
On June 8, 2005, the Company announced that it had raised an additional $327,750 pursuant to a private placement.  An investor purchased 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.
 
14
In May 2007 the Company closed a $3,042,455 private placement with 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 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 option activity for the three years ended December 30, 2007 (no subsequent activity):
 
   
Number of shares
    
Exercise price
per share
    
Weighted average exercise price
  
Balance, December 31, 2004
     —       —       —  
Granted
     987,400     $ 4.50     $ 4.50  
Exercised
     —       —       —  
Cancelled
     —       —       —  
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 30, 2007
     1,477,440     $ 4.50     $ 4.50  
 
12. 
Capital Stock.
 
The Company did not issue any shares of its common stock during the three months ended March 31, 2009.
 
13. 
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 (“BCPA’s”) used by the petroleum, chemical, utility and mining industries to prevent corrosion and scaling in water piping. This product can also be used in detergents to increase biodegradability and in agriculture to increase crop yields by enhancing fertilizer uptake.

The 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.
 
15
The accounting policies of the segments are the same as those described in Note 2, Significant Accounting Policies.  The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses.
 
The Company’s reportable segments are strategic business units that offer different, but synergistic products and services.  They are managed separately because each business requires different technology and marketing strategies.
 
Three months ended March 31, 2009:
 
   
EWCP
    
BPCA
    
Total
  
Revenue
   $ 211,267     $ 2,448,281     $ 2,659,548  
Interest revenue
     -       -       -  
Interest expense
     10,173       1,212       11,385  
Depreciation and amortization
     13,065       87,018       100,083  
Segment profit (loss)
     (307,893 )     174,663       (133,230 )
Segment assets
     3,351,638       2,830,683       6,182,321  
Expenditures for segment assets
     202,857       2,903       205,760  
 
Three months ended March 31, 2008:
 
   
EWCP
    
BPCA
    
Total
  
Revenue
   $ 410,828     $ 3,087,645     $ 3,498,473  
Interest revenue
     490       -       490  
Interest expense
     13,039       1,102       14,141  
Depreciation and amortization
     11,378       100,248       111,626  
Segment profit (loss)
     (347,068 )     657,241       310,173  
Segment assets
     1,5050,591       3,203,491       4,709,082  
Expenditures for segment assets
     192,032       (31,980 )     224,012  
 
The sales generated in the United States and Canada are as follows:
 
   
2009
    
2008
  
Canada
   $ 87,572     $ 74,723  
United States and abroad
     2,601,976       3,423,750  
Total
   $ 2,659,548     $ 3,498,473  
 
The Company’s long-lived assets are located in Canada and the United States as follows:
 
   
2009
    
2008
  
Canada
   $ 3,361,638     $ 3,176,775  
United States
     2,830,683       2,909,651  
Total
   $ 6,182,321     $ 6,086,426  
 
Three customers accounted for $1,581,211 (59%) of sales made in the period (2008 - $1,748,545 or 50%).
 
16
14. 
Commitments.
 
The Company is committed to minimum rental payments for property and premises aggregating approximately $85,806 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:
 
2009
   $ 65,881  
2010
     9,962  
2011
     9,962  
2011
     -  
2012
     -  

15. 
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.
 
16. 
Subsequent Events.
 
On April 8, 2009 the Company received an additional $99,375US ($125,792CDN) loan from the Department of Agriculture and Agri-Food Canada (AAFC).  Please see Note 8.
 
17. 
Comparative Figures.
 
Certain of the comparative figures have been reclassified to conform with the current year’s presentation.
 
Item 2.
 
Overview
 
The Company develops, manufactures and markets specialty chemicals that slow the evaporation of water.  The Company also manufactures and markets biodegradable polymers which are used in the oil, gas and agriculture industries.
 
Results of Operations
 
The Company has two product lines:
 
Energy and Water Conservation products - The Company’s HEAT$AVR® product is used in swimming pools and spas.  The product forms a thin, transparent layer on the water’s surface.  The transparent layer slows the evaporation of water, allowing the water to retain a higher temperature for a longer period of time and thereby reducing the energy required to maintain the desired temperature of the water.  WATER$AVR®, a modified version of HEAT$AVR®, can be used in reservoirs, potable water storage tanks, livestock watering ponds, canals, and irrigation ditches.
 
17
BCPA products - The second product, TPA’s (i.e. thermal polyaspartate biopolymers), are biodegradable polymers used by the petroleum, chemical, utility and mining industries to prevent corrosion and scaling in water piping. This product can also be used in detergents to increase biodegradability and in agriculture to increase crop yields by enhancing fertilizer uptake.
 
Material changes in the Company’s Statement of Operations for the periods presented are discussed below:

Three Months Ended March 31, 2009

Item
Increase (I) or
Decrease (D)
   Reason
       
Sales      
    EWCP products
D
  
The Company believes that the lower volume is the result of large customers keeping inventory levels down.
       
    BPCA products
D
  
Reduced selling prices, reduced demand in the detergent sector and lower oil extraction levels all contributed to lower revenue.
       
Gross Profit
D
  
Reduced due to lower volume and lower pricing per unit sales that were not accompanied by lower cost raw materials until later in the quarter.
       
Wages
I
  
Decreased use of consultants increased wages.
       
Advertising and Promotion
D
  
The Company selected the highest impact trade shows and trade publications, reducing the total cost of reaching customers.
       
Office and miscellaneous
D
  
Various administrative costs associated with the start up of the new facility have been allocated to this account.  Once the facility is operational, these costs will be allocated to overhead.
       
Consulting
D
  
 Increased wages decreased the need for consultants.
       
Professional Fees
I
  
The Company has chosen to allocate the year end audit fee throughout the year instead of just recording it in fourth quarter.
       
Research
D
  
Decreased as one line of inquiry was completed and new projects were identified.
       
Commissions
D
  
Decreased sales for the quarter resulted in lower commissions.

18
Capital Resources and Liquidity

The sources and uses of funds are directly obtainable from the Consolidated Statement of Cash Flows included as part of the financial statements filed with this report.

The Company has sufficient cash resources to meets its future commitments and cash flow requirements for the coming year.  As of March 31, 2009 working capital was $6,242,378 (2008 - $6,465,437) and the Company has no substantial commitments that require significant outlays of cash over the coming fiscal year.

The Company is committed to minimum rental payments for property and premises aggregating approximately $85,806 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:
 
2009
   $ 65,881  
2010
     9,962  
2011
     9,962  
2011
     -  
2012
     -  


See Note 2 to the financial statements included as part of this report for a description of the Company’s significant accounting policies and recent accounting pronouncements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19
 
Item 4T. 

Evaluation of Disclosure Controls and Procedures

Under the direction and with the participation of our management, including our Principal Executive and Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2009.  We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and that such information is accumulated and communicated to our management, including our principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosure.  Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching desired disclosure control objectives. Based on the evaluation, our Principal Executive and Financial Officer concluded that these disclosure controls and procedures are effective as of March 31, 2009.

Changes in Internal Control over Financial Reporting

Our management, with the participation of our Principal Executive and Financial Officer, evaluated whether any change in our internal control over financial reporting occurred during the three months ended March 31, 2009.  Based on that evaluation, it was  concluded that there has been no change in our internal control over financial reporting during the three months ended March 31, 2009 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
20
PART II
 
Item 6. 
 
Number
Description
3.1
Amended and Restated Certificate of Incorporation of the registrant. (1)
3.2
Bylaws of the registrant. (1)
31.1
31.2
32.1
______________
* 
Filed with this report.
 
(1) 
Incorporated by reference to the registrant’s Registration Statement on Form 10-SB (SEC File. No. 000-29649) filed February 22, 2000.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21
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.
  
       
May 14, 2009
By:
/s/ Daniel B. O’Brien  
 
Name:
Daniel B. O’Brien
  
 
Title:
President and Chief Executive Officer
  
       
       
       
       
 
By:
/s/ Daniel B. O’Brien  
 
Name:
Daniel B. O’Brien
  
 
Title:
Chief Financial and Accounting Officer
  
 
 
 
 
 
 
 
 
 
 
 
22