Edgar Filing: FLEXIBLE SOLUTIONS INTERNATIONAL INC

fsi_10q-80331.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, 2008

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

For the transition period from ________ to ________

Commission File Number: 000-2969

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	14,057,567	May 12, 2008

FORM 10-QSB

Index

PART I.	FINANCIAL INFORMATION		Page

Item 1.	Financial Statements.		1

	(a)	Unaudited Consolidated Balance Sheets at March 31, 2008 and December 31, 2007.	1

	(b)	Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007.	2
			3
	(c)	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007.

	(d)	Notes to Unaudited Consolidated Financial Statements for the Period Ended March 31, 2008.	4

Item 2.	Management’s Discussion and Analysis or Plan of Operation.		15

Item 4T.	Controls and Procedures.		16

PART II.	OTHER INFORMATION		18

Item 1.	Legal Proceedings.		18

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		18

Item 3.	Defaults Upon Senior Securities.		18

Item 4.	Submission of Matters to a Vote of Security Holders.		18

Item 5.	Other Information.		18

Item 6.	Exhibits.		19

SIGNATURES			19

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are “forward-looking statements” for the purposes of the federal and state securities laws, including, but not limited to any projections of earnings, revenue or other financials items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.

Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing obligation to disclose material information as required by the federal securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include but are not limited to:

●	Increased competitive pressures from existing competitors and new entrants;

●	Increases in interest rate or our cost of borrowing or a default under any material debt agreement;

●	Deterioration in general or regional economic conditions;

●	Adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;

●	Loss of customers or sales weakness;

●	Inability to achieve future sales levels or other operating results;

●	The unavailability of funds for capital expenditures; and

●	Operational inefficiencies in distribution or other systems.

For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see “Risk Factors” in our Annual Report on Form 10-KSB for the year ended December 31, 2007.

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements.

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

At March 31, 2008

(U.S. Dollars)

	March 31, 2008 (Unaudited)			December 31, 2007
Assets
Current
Cash and cash equivalents	$	2,897,678		$	3,355,854
Accounts receivable		2,670,544			1,051,056
Inventory		1,841,470			2,361,270
Prepaid expenses		116,550			115,353
		7,526,241			6,883,533

Property, equipment and leaseholds		4,709,082			4,612,571
Patents		223,674			230,438
Long term deposits		47,547			48,034
	$	12,506,545		$	11,774,576
Liabilities
Current
Accounts payable and accrued liabilities	$	797,916		$	385,792
Deferred revenue		9,532			9,870
		807,449			395,662
Mortgage		448,989			452,018
		1,256,438			847,680
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 (2007: 14,057,567) common shares		14,058			14,058
Capital in excess of par value		15,997,004			15,914,303
Other comprehensive income		324,626			394,289
Deficit		(5,085,581	)		(5,395,754	)

Total Stockholders’ Equity		11,250,107			10,926,895

Total Liabilities and Stockholders’ Equity	$	12,506,545		$	11,774,576

Commitments, Contingencies and Subsequent events (Notes 11, 12 & 13)

-- See Notes to Unaudited Consolidated Financial Statements --

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2008 and 2007

(U.S. Dollars -- Unaudited)

	Three Months Ended March 31,
	2008			2007

Sales	$	3,498,473		$	2,289,901
Cost of sales		2,285,732			1,466,351

Gross profit		1,212,742			823,550

Operating expenses
Wages		283,727			257,186
Administrative salaries and benefits		91,225			131,797
Advertising and promotion		39,800			31,878
Investor relations and transfer agent fee		45,840			58,191
Office and miscellaneous		72,698			37,928
Insurance		49,486			54,829
Interest expense		14,141			1,025
Rent		67,842			54,293
Consulting		50,191			64,997
Professional fees		21,738			38,796
Travel		27,614			33,743
Telecommunications		9,201			9,616
Shipping		12,301			8,093
Research		19,961			32,694
Commissions		29,126			36,703
Bad debt expense (recovery)		120			1,076
Currency exchange		(6,760	)		(10,093	)
Utilities		4,342			5,607
		832,563			848,359

Income (loss) before other items and income tax		380,149			(24,809	)
Loss on sale of equipment		(29,026	)		-
Write down of inventory		(41,440	)		-
Interest income		490			594

Income (loss) before income tax		310,173			(24,215	)
Income tax (recovery)		-			-

Net income (loss)		310,173			(24,215	)

Net income (loss) per share (basic and diluted)	$	0.02		$	0.00

Weighted average number of common shares		14,057,567			13,240,377

-- See Notes to Unaudited Consolidated Financial Statements --

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2008 and 2007

(U.S. Dollars -- Unaudited)

	Three Months Ended March 31,
	2008			2007

Operating activities
Net income (loss)	$	310,173		$	(24,215	)
Stock compensation expense		82,699			123,712
Depreciation		111,626			127,733
Assigned interest expense		12,846			-
		517,344			227,230
Changes in non-cash working capital items:
(Increase) Decrease in accounts receivable		(1,619,488	)		(330,165	)
(Increase) Decrease in inventory		519,800			153,316
(Increase) Decrease in prepaid expenses		(1,197	)		3,832
Increase (Decrease) in accounts payable		412,124			104,108
Increase (Decrease) in deferred revenue		(338	)		(20,559	)

Cash provided by (used in) operating activities		(171,754	)		137,762

Investing activities
Long term deposits		487			(311	)
Development of patents		6,764			(18,820	)
Acquisition of property and equipment		(224,012	)		(3,824	)

Cash provided by (used in) investing activities		(216,761	)		(22,955	)

Financing activities
Proceeds from issuance of common stock		-			197,850

Cash provided by financing activities		-			197,850

Effect of exchange rate changes on cash		(69,661	)		17,231

Inflow (outflow) of cash		(458,176	)		329,888	)
Cash and cash equivalents, beginning		3,355,854			450,759

Cash and cash equivalents, ending	$	2,897,678		$	780,647

Supplemental disclosure of cash flow information:
Interest paid	$	14,141		$	1,025

-- See Notes to Unaudited Consolidated Financial Statements --

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Period Ended March 31, 2008

(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, 2007 Annual Report on Form 10-KSB. 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, 2008, and the consolidated results of operations and the consolidated statements of cash flows for the three months ended March 31, 2008 and 2007. The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the entire fiscal year.

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 develop, manufacture and market 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 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 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 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):

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. 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 2007 or 2008.

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
Truck		30% Declining balance
Trailers		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 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.

(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 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.

(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 years ended December 31, 2007, 2006 and 2005, 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 $1,386,524 (52%) as at March 31, 2008 (2007 - $582,001 or 35%).

(o) Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company's management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company's legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company's financial statements. If the assessment indicates that a 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

	2008		2007
Completed goods	$	592,716	$	1 ,664,777
Works in progress		481,589		198,172
Raw materials		767,165		498,321
	$	1,841,470	$	2,361,270

4.	Property, Plant & equipment

	2008		Accumulated		2008
	Cost		Depreciation		Net
Buildings	$	3,982,119	$	1,024,623	$	2,957,496
Building Improvements		65,971		—		65,971
Computer hardware		74,206		49,152		25,054
Furniture and fixtures		21,509		12,310		9,199
Office equipment		32,132		22,050		10,082
Manufacturing equipment		2,430,360		1,293,213		1,137,147
Trailer		15,021		2,804		12,217
Leasehold improvements		27,932		18,970		8,962
Trade show booth		8,465		6,184		2,281
Truck		11,583		869		10,714
Land		469,959		—		469,959
	$	7,139,257	$	2,430,175	$	4,709,082

	2007		Accumulated		2007
	Cost		Depreciation		Net
Buildings	$	4,011,826	$	970,854	$	3,040,972
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		477,133		—		477,133
	$	6,991,397	$	2,378,829	$	4,612,571

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.

		2008 Cost				Accumulated Amortization				2008 Net
Patents		$	237,485			$	13,811			$	223,674

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

6.	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.

		2008				2007
Long term deposits		$	47,547			$	48,034

7.	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.

The following table summarizes the Company’s stock option activity for the years ended December 31, 2007 and 2006 and the quarter ended March 31, 2008:

	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
Granted		83,000		$3.60	$	3.60
Balance, March 31, 2008		1,995,440		$3.00 - 4.55	$	3.39

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.

Prior to 2006, the Company applied APB Opinion No. 25 and related interpretations in accounting for stock options granted to its employees and, accordingly, stock compensation expense of nil was recognized as wages expense in 2005 and 2004.

The fair value of each option grant is calculated using the following weighted average assumptions:

	2007			2007
Expected life – years		5.0			1.0 - 5.0
Interest rate		2.27	%		4.18 – 5.18	%
Volatility		99	%		86.0 – 115.0	%
Dividend yield		—	%		—	%
Weighted average fair value of options granted	$	1.15		$	1.37 – 2.67

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, 2007, the Company granted 150,000 stock options to Mr. Grant as a part of the litigation settlement made January 3, 2007. As the options were previously granted and expensed in 2001, no expense was recorded in this quarter related to this transaction.

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 immediately 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 of up to 174,800 shares of its common stock. 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.

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 for total of 468,070 warrants. The Company also issued 16,154 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 years ended December 31, 2006 and 2007 (no subsequent activity):

	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		484,244	$	4.50	$	4.50
Exercised		—		—		—
Cancelled		—		—		—
Balance, December 31, 2007		1,471,644	$	4.50	$	4.50

9.	Capital Stock.

During the quarter ended March 31, 2007, the Company issued 120,800 shares of common stock upon the exercise of stock options. The strike price varied from $1.50 – 3.25 per share.

No stock was issued in the quarter ending March 31, 2008.

10.	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	$	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		1,505,591			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:

	2008		2007
Canada	$	74,723	$	31,278
United States and abroad		3,423,750		2,258,623
Total	$	3,498,473	$	2,289,901

The Company’s long-lived assets are located in Canada and the United States as follows:

	2008		2007
Canada	$	1,501,963	$	1,331,166
United States		3,207,119		3,511,843
Total	$	4,709,082	$	4,843,009

Three customers account for $1,748,545 (50%) of sales made in the period (2007 - $840,310 or 37%).

11.	Commitments.

The Company is committed to minimum rental payments for property and premises aggregating approximately $295,682 over the term of four leases, the last expiring on December 31, 2011.

Commitments in each of the next five years are approximately as follows:

2008		135,667
2009		127,253
2010		16,381
2011		16,381

12.	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 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.

13.	Subsequent Events.

There have been no subsequent events.

14.	Comparative Figures.

Certain of the comparative figures have been reclassified to conform with the current year’s presentation.

Item 2.

Management’s Discussion and Analysis or Plan of Operation.

Overview

Flexible Solutions International, Inc. (“we,” “us,” and “our”) develops, manufactures and markets specialty chemicals that slow the evaporation of water. Our initial product, HEAT$AVR®, is marketed for use in swimming pools and spas where its use, by slowing the evaporation of water, allows the water to retain a higher temperature for a longer period of time and thereby reduces the energy required to maintain the desired temperature of the water in the pool. Using the same technology, WATER$AVR®, is marketed for water conservation in irrigation canals, aquaculture, and reservoirs where its use slows water loss due to evaporation. We also manufacture and market TPA’s for use in the oilfields to reduce scale and corrosion in many ‘topside’ water systems and in the agriculture industry to reduce fertilizer crystallization before, during and after application.

Results of Operations

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

Quarter Ended March 31, 2008

Item	Increase (I) or Decrease (D)	Reason

Sales	I	Maintenance shutdowns in the oil extraction industry during 2007 had a comparative year-over-year effect.

Wages	I	Increased sales required increased support on all levels.

Administrative salaries and benefits	D	Five year stock option plans granted to several long term employees in 2006 resulted in higher expenses in 2007 than 2008. Granting of stock options plans resulted in an expense of $51,150 in first quarter 2007 as compared to $34,140 in the same period 2008.

Office and miscellaneous	I	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.

Interest expense	I	Accounting regulations dictate that we must recognize interest expense comparable to what we would have incurred with a conventional mortgage despite having an interest free mortgage in place with the seller of the building for the new facility.

Consulting	D	The granting of stock options to long term consultants in 2006 resulted in a stock option expense of $14,590 in first quarter 2008 as compared to $32,805 in the same period 2007.

Professional fees	D	The Company experienced reduced professional fees after the conclusion of two lawsuits in December 2006 and January 2007.

Quarter Ended March 31, 2007

Item	Increase (I) or Decrease (D)	Reason

Sales	D	Recent back logs in ports around the world prevented shipping of several orders towards the end of the quarter.

Wages	D	Five year stock options plans granted to several key employees in 2006 resulted in higher expenses in 2006. Granting of stock options plans resulted in an expense of $15,519 in first quarter 2007 as compared to $39,359 in the same period 2006.

Administrative salaries and benefits	D	Five year stock option plans granted to several long term employees in 2006 resulted in higher expenses in 2006. Granting of stock options plans resulted in an expense of $51,150 in first quarter 2007 as compared to $92,498 in the same period 2006.

Advertising and promotion	I	After reducing advertising expense in 2006, the Company decided to increase spending up to previous levels.

Investor relations and transfer agent fee	I	Increase in external investor relations and transfer agent fees.

Insurance	I	Increase is comparable to what others are experiencing in the industry.

Consulting	D	The granting of stock options to long term consultants in 2006 resulted in a stock option expense of $61,152 in first quarter 2006 as compared to $32,805 in the same period 2007.

Professional fees	D	The Company experienced reduced professional fees after the conclusion of two lawsuits in December 2006 and January 2007.

Capital Resources and Liquidity

The sources and uses of funds are directly obtainable from our Consolidated Statement of Cash Flows found on Page 3 of this document.

The Company has sufficient cash resources to meets its future commitments and cash flow requirements for the coming year. As of March 31, 2008 working capital was $6,296,803 (2007 - $6,035,853) and the Company has no substantial commitments that requires significant outlays of cash over the coming fiscal year.

The Company is committed to minimum rental payments for property and premises aggregating approximately $295,682 over the term of four leases, the last expiring on December 31, 2011.

Commitments in each of the next five years are approximately as follows:

2008		135,667
2009		127,253
2010		16,381
2011		16,381

The Company doesn’t anticipate any capital requirements for the twelve months ending December 31, 2008.

The Company does not have any commitments or arrangements from any person to provide 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.

Subsequent Events

None.

Item 4T.

Controls and Procedures.

Daniel O’Brien, Flexible Solution International Inc.’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report; and in his opinion the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2008 that have affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Flexible Solution International Inc.’s management is responsible for establishing and maintaining adequate internal control over financial reporting as required by Sarbanes-Oxley (SOX) Section 404.A. The Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive and Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of their financial statements for external purposes in accordance with Generally Accepted Accounting Principles.

As of the end of the period covered by this report, Flexible Solution International Inc.’s management assessed the effectiveness of its internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Based on that evaluation, Flexible Solutions International Inc.’s management concluded that during the period covered by this report its internal controls and procedures were effective.

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

Item 5.

Other Information.

None.

Item 6.

Exhibits.

Number	Description
3.1	Amended and Restated Certificate of Incorporation of the registrant. (1)
3.2	Bylaws of the registrant. (1)
31.1	Certification of Principal Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of Principal Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. §1350 and §906 of the Sarbanes-Oxley Act of 2002.*
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. §1350 and §906 of the Sarbanes-Oxley Act of 2002.*

______________

* 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.

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: May 15, 2008	By:	/s/ Daniel B. O’Brien
		Daniel B. O’Brien
		President and Chief Executive Officer

	By:	/s/Daniel B. O’Brien
		Daniel B. O’Brien
		Chief Financial and Accounting Officer