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, 2011
OR
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from ________ to ________
Commission File Number: 001-31540
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
--------------------------------------
(Exact Name of Issuer as Specified in Its Charter)
Nevada 91-1922863
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 13,169,991 April 30, 2011
FORM 10-Q
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
(a)Unaudited Consolidated Balance Sheets at March 31, 2011 and
December 31, 2010.
(b)Unaudited Consolidated Statements of Operations for the
Three Months Ended
March 31, 2011 and 2010.
(c)Unaudited Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2011 and 2010.
(d)Notes to Unaudited Consolidated Financial Statements for
the Period Ended
March 31, 2011.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Item 4 and 4T.Controls and Procedures.
PART II. OTHER INFORMATION
Item 6. Exhibits.
SIGNATURES
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:
o Increased competitive pressures from existing competitors and new
entrants;
o Increases in interest rates or our cost of borrowing or a default
under any material debt agreement;
o Deterioration in general or regional economic conditions;
o Adverse state or federal legislation or regulation that increases the
costs of compliance, or adverse findings by a regulator with respect
to existing operations;
o Loss of customers or sales weakness;
o Inability to achieve future sales levels or other operating results;
o The unavailability of funds for capital expenditures; and
o Operational inefficiencies in distribution or other systems.
For a detailed description of these and other factors that could cause
actual results to differ materially from those expressed in any forward-looking
statement, please see "Risk Factors" in our Annual Report on Form 10-K for the
year ended December 31, 2010.
ii
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
At March 31, 2011
(U.S. Dollars)
March 31,
2011 December
31,
(Unaudited) 2010
------------ ------------
Assets
Current
Cash and cash equivalents $ 525,709 $ 2,763,420
Accounts receivable 3,124,584 1,198,939
Inventory 2,529,348 2,539,190
Prepaid expenses 158,984 192,269
------------ ------------
6,338,625 6,693,819
Property, equipment and leaseholds 8,222,659 7,867,672
Patents 227,832 225,180
Long term deposits 8,087 7,895
Deferred tax asset 199,000 199,000
------------ ------------
$14,996,203 $14,993,565
============ ============
Liabilities
Current
Accounts payable and accrued liabilities $ 619,806 512,380
Deferred revenue 304,975 250,000
Taxes payable 940,000 620,000
Current portion of long term debt 127,273 122,726
------------ ------------
1,992,054 1,505,106
Long Term
Loans 2,230,479 2,206,075
------------ ------------
4,222,533 3,711,181
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
13,169,991 (2010: 13,962,567) common
shares 13,170 13,963
Capital in excess of par value 15,645,509 16,638,227
Other comprehensive income 681,555 554,865
Deficit (5,566,564) (5,924,671)
------------ ------------
Total Stockholders' Equity 10,773,670 11,282,384
------------ ------------
Total Liabilities and Stockholders' Equity $14,996,203 $14,993,565
============ ============
Commitments (Note 13)
-- See Notes to Unaudited Consolidated Financial Statements --
1
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2011 and 2010
(U.S. Dollars -- Unaudited)
Three Months Ended March
31,
---------------------------
2011 2010
-------------- -----------
Sales $ 4,357,467 $3,384,846
Cost of sales 2,573,948 1,852,532
-------------- -----------
Gross profit 1,783,519 1,532,314
-------------- -----------
Operating expenses
Wages 470,838 377,153
Administrative salaries and benefits 93,614 84,355
Advertising and promotion 37,610 28,774
Investor relations and transfer agent fee 25,824 23,496
Office and miscellaneous 97,335 100,206
Insurance 56,098 50,616
Interest expense 19,281 18,742
Rent 44,665 41,183
Consulting 30,691 33,227
Professional fees 44,931 41,611
Travel 32,650 25,503
Telecommunications 8,908 9,772
Shipping 8,119 5,868
Research 14,115 18,855
Commissions 66,658 42,384
Bad debt expense (recovery) -
5,253
Currency exchange 12,923 10,284
Utilities 41,152 30,359
-------------- -----------
Total operating expenses 1,105,412 947,641
-------------- -----------
Operating income (loss) 678,107 584,673
Interest income - -
-------------- -----------
Income (loss) before income tax 678,107 584,673
-------------- -----------
Provision for income taxes (320,000) (69,000)
-------------- -----------
Net income (loss) 358,107 515,673
Net income (loss) per share (basic and
diluted) $ 0.03 $ 0.04
-------------- -----------
Weighted average number of common shares 13,592,698 13,962,567
-------------- -----------
-- See Notes to Unaudited Consolidated Financial Statements --
2
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2011 and 2010
(U.S. Dollars -- Unaudited)
Three Months Ended March
31,
---------------------------
2011 2010
------------ -----------
Operating activities
Net income (loss) $ 358,107 $ 515,673
Stock compensation expense 36,839 28,186
Depreciation 81,153 86,738
Changes in non-cash working capital items:
(Increase) Decrease in accounts receivable (1,916,725) (565,878)
(Increase) Decrease in inventory 24,899 (180,130)
(Increase) Decrease in prepaid expenses 34,666 3,630
Increase (Decrease) in accounts payable 110,908 (40,167)
Increase (Decrease) in taxes payable 320,000 69,000
Increase (Decrease) in deferred revenue 54,975 -
------------ -----------
Cash provided by (used in) operating
activities (895,178) (429,588)
------------ -----------
Investing activities
Acquisition of property and equipment (287,698) (76,320)
------------ -----------
Cash provided by (used in) investing
activities (287,698) (76,320)
------------ -----------
Financing activities
Loan (30,758) -
Purchase of common stock (1,030,349) -
------------ -----------
Cash provided (used) by financing activities (1,061,107) -
------------ -----------
Effect of exchange rate changes on cash 6,272 15,688
------------ -----------
Inflow (outflow) of cash (2,237,711) (490,220)
Cash and cash equivalents, beginning 2,763,420 2,126,150
------------ -----------
Cash and cash equivalents, ending $ 525,709 $1,635,930
------------ -----------
Supplemental disclosure of cash flow
information:
Income taxes paid $ - $ 69,000
Interest paid $ 19,281 $ 18,742
------------ -----------
-- See Notes to Unaudited Consolidated Financial Statements --
3
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period Ended March 31, 2011
(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, 2010 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, 2011, and the consolidated results
of operations and the consolidated statements of cash flows for the three months
ended March 31, 2011 and 2010. The results of operations for the three months
ended March 31, 2011 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.") and NanoChem Solutions Inc. All
inter-company balances and transactions have been eliminated. The Company was
incorporated May 12, 1998 in the State of Nevada and had no operations until
June 30, 1998.
The Company and its subsidiaries develop, manufacture and market specialty
chemicals which slow the evaporation of water. The Company's primary product,
HEAT$AVR(R), is marketed for use in swimming pools and spas where its use, by
slowing the evaporation of water, allows the water to retain a higher
temperature for a longer period of time and thereby reduces the energy required
to maintain the desired temperature of the water in the pool. Another product,
WATER$AVR(R), is marketed for water conservation in irrigation canals,
aquaculture, and reservoirs where its use slows water loss due to evaporation.
In addition to the water conservation products, the Company also 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.
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.
4
(b) Inventories and Cost of Sales
The Company has four major classes of inventory: finished goods, work in
progress, raw materials and supplies. In all classes, inventory is valued at the
lower of cost or 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.
(c) Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts when management
estimates collectibility to be uncertain. Accounts receivable are continually
reviewed to determine which, if any, accounts are doubtful of collection. In
making the determination of the appropriate allowance amount, the Company
considers current economic and industry conditions, relationships with each
significant customer, overall customer credit-worthiness and historical
experience.
(d) Property, Equipment and Leaseholds.
The following assets are recorded at cost and depreciated using the methods
and annual rates shown below:
-----------------------------------------------------
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.
Costs capitalized on self-constructed assets classified as plant under
construction, include contracted costs and supplies, but do not capitalize
interest costs. The Company does not commence depreciating its plant under
construction until it becomes operational.
(e) Impairment of Long-Lived Assets.
In accordance with FASB Codification Topic 360, "Property, Plant and
Equipment (ASC 360), the Company reviews long-lived assets, including, but not
limited to, property 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.
5
(f) 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
year. Translation adjustments arising on conversion of the financial statements
from the subsidiary's functional currency, Canadian Dollars, into the reporting
currency, U.S. Dollars, are excluded from the determination of income (loss) and
are disclosed as other comprehensive income (loss) in stockholders' equity.
Foreign exchange gains and losses relating to transactions not denominated
in the applicable local currency are included in operating income (loss) if
realized during the year and in comprehensive income (loss) if they remain
unrealized at the end of the year.
(g) Revenue Recognition.
Revenue from product sales is recognized at the time the product is shipped
since title and risk of loss is transferred to the purchaser upon delivery to
the carrier. Shipments are made F.O.B. shipping point. The Company recognizes
revenue when there is persuasive evidence of an arrangement, delivery to the
carrier has occurred, the fee is fixed or determinable, collectability is
reasonably assured and there are no significant remaining performance
obligations. When significant post-delivery obligations exist, revenue is
deferred until such obligations are fulfilled. To date there have been no such
significant post-delivery obligations.
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.
(h) Stock Issued in Exchange for Services.
The Company's common stock issued in exchange for services is valued at an
estimated fair market value based upon trading prices of the Company's common
stock on the dates of the stock transactions. The corresponding expense of the
services rendered is recognized over the period that the services are performed.
(i) Stock-based Compensation.
The Company recognizes compensation expense for all share-based payments,
in accordance with FASB Codification Topic 718, Compensation -- Stock
Compensation, (ASC 718). Under the fair value recognition provisions of ASC 718,
the Company recognizes share-based compensation expense, net of an estimated
forfeiture rate, over the requisite service period of the award.
The fair value at grant date of stock options is estimated using the
Black-Scholes-Merton option-pricing model. Compensation expense is recognized on
a straight-line basis over the stock option vesting period based on the
estimated number of stock options that are expected to vest.
(j) Comprehensive Income.
Other comprehensive income refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income, but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders' equity. The Company's other
comprehensive income is primarily comprised of unrealized foreign exchange gains
and losses.
6
(k) Income (loss) Per Share.
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding in the period. Diluted earnings (loss) per share are calculated
giving effect to the potential dilution of the exercise of options and warrants.
Common equivalent shares, composed of incremental common shares issuable upon
the exercise of stock options and warrants are included in diluted net income
per share to the extent that these shares are dilutive. Common equivalent shares
that have an anti-dilutive effect on net income per share have been excluded
from the calculation of diluted weighted average shares outstanding for the
three months ended March 31, 2011 and 2010.
(l) Use of Estimates.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and would impact the results of
operations and cash flows.
(m) Financial Instruments.
The fair market value of the Company's financial instruments comprising
cash and cash equivalents, accounts receivable, and accounts payable 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.
(n) Fair Value of Financial Instruments
In August 2009, an update was made to Fair Value Measurements and
Disclosures -- "Measuring Liabilities at Fair Value." This update permits
entities to measure the fair value of liabilities, in circumstances in which a
quoted price in an active market for an identical liability is not available,
using a valuation technique that uses a quoted price of an identical liability
when traded as an asset, quoted prices for similar liabilities or similar
liabilities when traded as assets or the income or market approach that is
consistent with the principles of Fair Value Measurements and Disclosures.
Effective upon issuance, the Company has adopted this guidance with no material
impact to the Company's consolidated financial statements.
Fair value is defined as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to
measure fair value must maximize the use of observable inputs and minimize the
use of unobservable inputs. The standard describes a fair value hierarchy based
on three levels of inputs described below, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value.
o Level 1 - Quoted prices in active markets for identical assets or
liabilities
o Level 2 - Inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
7
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
o Level 3 -- Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.
The fair values of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities for all periods presented approximate their
respective carrying amounts due to the short term nature of these financial
instruments. Long term debt relates to borrowings from governmental entities and
as such no interest has been imputed on the non-interest bearing loan.
(o) Contingencies
Certain conditions may exist as of the date the financial statements are
issued, which may result in a loss to the Company but which will only be
resolved when one or more future events occur or fail to occur. The Company's
management and its legal counsel assess such contingent liabilities, and such
assessment inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company's legal
counsel evaluates the perceived merits of any legal proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought or
expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a
material loss has been incurred and the amount of the liability can be
estimated, the estimated liability would be accrued in the Company's financial
statements. If the assessment indicates that a potential material loss
contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss if determinable and material, would be
disclosed.
Loss contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the guarantees would be disclosed.
(p) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are reduced by a valuation
allowance so that the assets are recognized only to the extent that when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will be realized.
Per FASB ASC 740 "Income taxes" under the liability method, it is the
Company's policy to provide for uncertain tax positions and the related interest
and penalties based upon management's assessment of whether a tax benefit is
more likely than not to be sustained upon examination by tax authorities. At
March 31, 2011, the Company believes it has appropriately accounted for any
unrecognized tax benefits. To the extent the Company prevails in matters for
which a liability for an unrecognized benefit is established or is required to
pay amounts in excess of the liability, the Company's effective tax rate in a
given financial statement period may be affected. Interest and penalties
associated with the Company's tax positions are recorded as Interest Expense.
8
(q) Risk Management
The Company's credit risk is primarily attributable to its account
receivables. The amounts presented in the accompanying consolidated balance
sheets are net of allowances for doubtful accounts, estimated by the Company's
management based on prior experience and the current economic environment. The
Company is exposed to credit-related losses in the event of non-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 $1,615,743 (52%) as at March 31, 2011 (2010 -
$702,486 or 59%).
The credit risk on cash and cash equivalents is limited because the Company
limits its exposure to credit loss by placing its cash and cash equivalents with
major financial institutions.
The Company is not exposed to significant interest rate risk to the extent
that the long term debt maintained from the foreign government agencies is
subject to a fixed rate of interest.
In order to manage its exposure to foreign exchange risks, the Company is
closely monitoring the fluctuations in the foreign currency exchange rates and
the impact on the value of cash and cash equivalents, accounts receivable, and
accounts payable.
(r) Recent Accounting Pronouncements
In December 2010, the FASB issued ASU No. 2010-29, -Business Combinations
(Topic 805): Disclosure of Supplementary Pro Forma Information for Business
Combinations (-ASU 2010-29). The amendments in this ASU specifies that if a
public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. The amendments
also expand the supplementary pro forma disclosures to include a description of
the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma
revenue and earnings. The amendments are effective prospectively for 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, 2010. The
adoption of ASU 2010-29 on January 1, 2011 did not have a material impact on the
Company's Consolidated Financial Statements.
In December 2010, the FASB issued ASU No. 2010-28, -Intangibles - Goodwill
and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test
for Reporting Units with Zero or Negative Carrying Amounts (-ASU 2010-28). For
reporting units with zero or negative carrying amounts, this ASU requires that
an entity perform Step 2 of the goodwill impairment test if it is more likely
than not that a goodwill impairment exists. In determining whether it is more
likely than not that a goodwill impairment exists, an entity should consider
whether there are any adverse qualitative factors indicating that an impairment
may exist. The qualitative factors are consistent with the existing guidance and
examples, which require that goodwill of a reporting unit be tested for
impairment between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
carrying amount. The amendments in this ASU are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2010. The
adoption of ASU 2010-28 on January 1, 2011 did not have an impact on the
Company's Consolidated Financial Statements.
9
3. ACCOUNTS RECEIVABLE
-----------------------------------------------------------
2011 2010
----------------------------
Accounts receivable $3,138,422 $1,212,428
Allowances for doubtful
accounts (13,838) (13,489)
-------------- -------------
$3,124,584 $1,198,939
-----------------------------------------------------------
The Company has pledged $350,748 of the above listed accounts receivable as
collateral for the Flexible Solutions Ltd. loan from AFSC (see Note 8b).
4. INVENTORIES
----------------------------------------------------
2011 2010
----------------------------
Completed goods $1,204,443 $1,354,578
Works in progress 75,511 142,824
Raw materials 1,249,394 1,041,788
------------- -------------
$ 2,529,348 $2,539,190
----------------------------------------------------
5. PROPERTY, PLANT & EQUIPMENT
----------------------------------------------------------------------
2011 Accumulated 2011
Cost Depreciation Net
------------ ----------- -----------
Buildings $3,216,859 $1,607,905 $1,608,954
Plant under construction and
equipment 5,346,283 -- 5,346,283
Computer hardware 102,391 75,967 26,424
Furniture and fixtures 28,907 19,511 9,396
Office equipment 24,573 19,772 4,801
Manufacturing equipment 2,397,907 1,813,384 584,523
Trailer 28,790 18,828 9,962
Technology 140,901 - 140,901
Trade show booth 8,962 8,134 828
Truck 12,263 7,539 4,724
Land 485,863 - 485,863
------------ ----------- -----------
$11,936,699 $3,571,040 $8,222,659
----------------------------------------------------------------------
--------------------------------------------------------------------------
2010 Accumulated 2010
Cost Depreciation Net
--------------------------------------
Buildings $3,216,859 $1,566,462 $1,650,397
Plant under construction and
equipment 4,922,148 -- 4,922,148
Computer hardware 100,733 72,557 28,176
Furniture and fixtures 28,391 18,654 9,737
Office equipment 23,954 19,028 4,926
Manufacturing equipment 2,392,162 1,772,207 619,955
Trailer 28,0654 17,566 10,498
Technology 137,349 -- 137,349
Trade show booth 8,736 7,863 873
Truck 11,954 6,975 4,979
Land 478,634 -- 478,634
--------------------------------------
$11,348,985 $3,481,313 $7,867,672
--------------------------------------------------------------------------
10
Amount of depreciation expense for 2011: $81,153 (2010: $83,806)
As of March 31, 2011, the following capitalized costs pertaining to our new
plant in Taber, Alberta are classified as Plant Under Construction and Equipment
and include contracted costs and supplies, but do not include capitalized
interest costs. The Company will not begin depreciating the Plant and Equipment
until it becomes operational.
--------------------------------------------------------------------
2011 2010
---- ----
Building 1,090,972 1,063,471
Building improvements 1,116,492 1,085,613
Manufacturing equipment 3,117,387 2,773,064
Technology 140,901 137,349
----------- -----------
5,487,184 5,059,497
--------------------------------------------------------------------
The following carrying amount of capital assets held by Flexible Solutions
Ltd. serves as collateral for the AFSC loan. (See Note 8b):
----------------------------------------
Land $ 286,770
Building 1,090,972
Building improvements 1,116,492
Manufacturing equipment 3,185,982
Trailer 9,962
Truck 4,725
Trade show booth 828
Technology 140,901
----------------------------------------
6. PATENTS
In fiscal 2005, the Company started the patent process for additional
WATER$AVR(R) 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, $81,042 (2010 - $79,582) are not subject
to amortization as of March 31, 2011, as the patents are still in the process of
being approved.
2011 Accumulated 2011
Cost Amortization Net
-------------------------------------------------------
Patents $273,408 $ 45,575 $227,832
-------------------------------------------------------
2010 Accumulated 2010
Cost Amortization Net
---------------------------------------------------------
Patents $266,530 $ 41,350 $225,180
---------------------------------------------------------
Increase in 2011 cost was due to currency conversion. 2011 cost in Canadian
dollars - $265,102 (2010 - $265,102 in Canadian dollars).
Amount of depreciation for 2011 - $2,932 (2010 - $2,932)
11
Estimated depreciation expense over the next five years is as follows:
-----------------------
2011 $ 11,865
2012 11,865
2013 11,865
2014 11,865
2015 11,865
-----------------------
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.
----------------------------------------------------
2011 2010
--------------------
Long term deposits $ 8,087 $ 7,895
----------------------------------------------------
8. LONG TERM DEBT
(a) 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 had an outstanding balance of $910,801 in
Canadian funds ($939,400 US) as of March 31, 2011, on an unsecured basis. If the
full amount is borrowed, 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
(b) 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 had an outstanding balance of $1,375,172 in Canadian
funds ($1,418,352 US) as of March 31, 2011. The Company was required to make
interest payments until May 1, 2010 and then effective May 1, 2010 equal monthly
payments of principal and interest of $15,829 in Canadian funds ($16,325 US)
until May 1, 2014. The Company has pledged its building in Taber, Alberta, as
well as equipment, inventory and accounts receivable (see Notes 3 and 5) as
collateral, as well as signed a promissory note guaranteeing the amount of the
loan.
Continuity:
Balance at December 31, 2009 $ 2,285,314
Less: loan repayment (75,642)
Effect of exchange rate 119,129
-------------------
Balance at December 31, 2010 $ 2,328,801
Less: loan repayment (30,757)
Effect of exchange rate 59,708
-------------------
Balance at March 31, 2011 $ 2,357,752
===================
12
Outstanding balance at: 2011 2010
a) Long term debt - AAFC $ 939,400 $ 915,719
b) Long term debt - AFSC 1,418,352 1,413,082
------------- -----------
Long term debt $ 2,357,752 $2,328,801
Less current portion (127,273) (122,726)
------------- -----------
$ 2,230,479 $2,206,075
============= ===========
9. 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 its business. It is intended that options
issued under this Plan constitute non-qualified stock options. The general terms
of awards under the option plan are that 100% of the options granted will vest
the year following the grant. The maximum term of options granted is 5 years.
The Company may issue stock options 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, 2009, 2010 and the period ended March 31, 2011:
-----------------------------------------------------------------------------
Exercise Weighted
Number of price average
shares per share exercise price
---------------- ----------- --------------
Balance, December 31, 2008 1,910,700 $3.00-$4.55 $3.38
Granted 122,000 $2.25 $2.25
Cancelled or expired (204,740) $3.00-$4.60 $3.74
---------------- ----------- --------------
Balance, December 31, 2009 1,546,700 $2.25-$3.85 $3.25
Granted 315,000 $1.50-$2.25 $1.87
Cancelled or expired (25,000) $1.50-$3.85 $1.97
---------------- ----------- --------------
Balance, December 31, 2010 1,836,700 $1.50-$3.60 $3.03
---------------- ----------- --------------
Granted 358,000 $1.50-$2.00 $1.61
Cancelled or expired 1,134,000 $1.90-$3.60 $3.20
---------------- ----------- --------------
Balance, March 31, 2011 1,060,700 $1.50-$3.60 $2.38
---------------- ----------- --------------
Exercisable, March 31, 2011 611,700 $1.50-$3.60 $2.85
-----------------------------------------------------------------------------
The fair value of each option grant is calculated using the following
weighted average assumptions:
-------------------------------------------------------------------
2011 2010
----------- ------------
Expected life - years 5.0 5.0
Interest rate 1.8% 1.4 - 2.49%
Volatility 62% 60%
Dividend yield --% --%
Weighted average fair value of
options granted $0.39-0.50 $0.29-0.70
-------------------------------------------------------------------
13
During the three months ended March 31, 2011 the Company granted 196,000
options to consultants that resulted in $13,550 in expenses this quarter. During
the same period, 162,000 options were granted to employees, resulting in $17,317
in expenses this quarter. Options granted in previous quarters resulted in
additional expenses in the amount of $5,971 for employees during the quarter
ended March 31, 2011. No stock options were exercised during the period.
During the three months ended March 31, 2010 the Company granted 61,000
options to consultants that resulted in $5,008 in expenses this quarter. During
the same period, 94,000 options were granted to employees, resulting in $7,021
in expenses this quarter. Options granted in previous quarters resulted in
additional expenses in the amount of $5,285 for consultants and $10,871 for
employees during the quarter ended March 31, 2010. No stock options were
exercised during the period.
10. WARRANTS
On April 14, 2005, the Company announced that it had raised $3,375,000
pursuant to a private placement. The investors in this offering purchased
900,000 shares of the Company's common stock at a per-share price of $3.75,
together with warrants to purchase up to 900,000 additional shares of the
Company's common stock. The warrants originally had a 4 year term and were
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 warrants originally had a 4 year term and were exercisable at a price
of $4.50 per share.
In February 2009, the Company amended the warrants granted in 2005 to a per
share exercise price of $4.00 and extended the exercise term until July 31,
2009.
In May 2007 the Company closed a $3,042,455 private placement with
institutional investors. The Company sold 936,140 units at a price of $3.25 per
unit. Each unit consisted of one share of common stock and one-half warrant with
a three year term and an exercise 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.
In February 2010, the Company amended the warrants granted in 2007 to a per
share exercise price of $3.00 and extended the exercise term until December 31,
2010.
The following table summarizes the Company's warrant activity for the three
years ended December 30, 2010 (no subsequent activity):
Number of Exercise Weighted
Shares price per average
share exercise price
------------ ------------- ---------------
Balance December 31, 2007 and 1,477,440 $ 4.50 $ 4.50
2008
Granted - - -
Exercised - - -
Cancelled/Expired 987,400 $ 4.50 $ 4.50
------------ ------------- ---------------
Balance December 31, 2009 490,040 $ 3.00 $ 3.00
Granted
Exercised
Cancelled/Expired 490,040 $ 3.00 $ 3.00
------------ ------------------------------
Balance December 31, 2010 and - - -
March 31, 2011
14
11. CAPITAL STOCK.
On February 16, 2011 the Company repurchased and cancelled 792,576 shares
of common stock for $1.30 per share, for a total of $1,030,349.
12. 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 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, 2011:
-------------------------------------------------------------------
EWCP BPCA Total
---------- ---------- ------------
Revenue $411,317 $3,946,150 $ 4,357,467
Interest revenue - - -
Interest expense 19,281 - 19,281
Depreciation and
amortization 10,807 70,346 81,153
Segment profit (loss) (470,252) 828,359 358,107
Segment assets 5,857,849 2,364,810 8,222,659
Expenditures for
segment assets 270,329 17,369 287,698
-------------------------------------------------------------------
15
Three months ended March 31, 2010:
-------------------------------------------------------------------
EWCP BPCA Total
---------- ---------- ------------
Revenue $280,800 $3,104,046 $ 3,384,846
Interest revenue - - -
Interest expense 17,794 948 18,742
Depreciation and
amortization 11,278 75,460 86,738
Segment profit (loss) (413,520) 929,193 515,673
Segment assets 5,180,735 2,520,733 7,701,468
Expenditures for
segment assets 75,876 444 76,320
-------------------------------------------------------------------
The sales generated in the United States and Canada are as follows:
---------------------------------------------------------------------
2011 2010
----------- ----------
Canada $ 205,766 $ 165,914
United States and abroad 4,151,701 3,218,932
----------- ----------
Total $4,357,467 $3,384,846
---------------------------------------------------------------------
The Company's long-lived assets are located in Canada and the United
States as follows:
---------------------------------------------------------------------
2011 2010
----------- ----------
Canada $6,226,649 $5,675,065
United States 2,223,842 2,417,787
----------- ----------
Total $8,450,491 $8,092,852
---------------------------------------------------------------------
Three customers accounted for $2,506,107 (64%) of sales made in the
period (2010 - $2,025,581 or 59%).
13. COMMITMENTS.
The Company is committed to minimum rental payments for property and
premises aggregating approximately $333,119 over the term of three leases, the
last expiring on July 31, 2014.
Commitments in each of the next four years are approximately as follows:
---------------------
2011 123,587
2012 78,563
2013 81,750
2014 49,219
---------------------
14. COMPARATIVE FIGURES.
Certain of the comparative figures have been reclassified to conform with
the current year's presentation.
16
Item 2. Management's Discussion and Analysis of Results of Operation and
Financial Condition.
Overview
The Company develops, manufactures and markets specialty chemicals that
slow the evaporation of water. The Company also manufactures and markets
biodegradable polymers which are used in the oil, gas and agriculture
industries.
Results of Operations
The Company has two product lines:
Energy and Water Conservation products - The Company's HEAT$AVR(R) 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$AVR(R), a modified version of HEAT$AVR(R), can be used in
reservoirs, potable water storage tanks, livestock watering ponds, canals, and
irrigation ditches.
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 three
months ended March 31, 2011 are discussed below:
Three Months Ended March 31, 2011
---------------------------------
Increase (I) or
Item Decrease (D) Reason
---- ------------ ------
Sales
EWCP products I Increase in customer inventory to more normal
level has resulted in greater sales.
BPCA products I Increased sales across all market verticals due
to increased success in sales activity.
Gross Profit I Increased sales.
Wages I Increased sales.
Administrative I Increased sales.
salaries and
benefits
Commissions I Increased sales for the quarter resulted
in higher commissions.
17
Utilities I Increased work at the Taber plant has required
increased used of energy. Once the facility is
operational, these costs will be allocated to
overhead.
Capital Resources and Liquidity
The Company's sources and (uses) of cash for the three months ended March 31,
2011 and 2010 are shown below:
2011 2010
---- ----
Cash used by operations (895,178) (429,588)
Construction of plant in (270,329) (75,876)
Taber, AB
Purchases of equipment (17,369) (444)
Repayment of loans (30,758) -
Purchase of common stock (1,030,349)
Changes in exchange rates 6,272 15,688
In February 2011, the Company purchased 792,576 shares of its common stock
from unrelated third parties. The shares were acquired in privately negotiated
transactions for a total purchase price of $1,030,349. None of the share were
acquired in open market transactions.
In 2007, the Company began construction of a plant in Taber Alberta. The
plant will be used to manufacture aspartic acid which is the major component of
TPAs. Presently the Company buys its aspartic acid from China where the base raw
material is oil. The Company's plant in Taber will use sugar as the base raw
material. Although the Company expects that it will still import some aspartic
acid from China, using aspartic acid manufactured by its plant from sugar will
reduce its raw material costs, reduce price fluctuations generated by oil prices
and reduce shipping costs.
The Company expects that the Taber plant will begin commercial production
in 2011 and expects to spend approximately another $200,000 before commercial
production begins.
The Company has sufficient cash resources to meets its future commitments
and cash flow requirements for the coming year. As of March 31, 2011 working
capital was $3,376,569 (2010 - $5,188,713) 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 $333,119 over the term of three leases, the
last expiring on July 31, 2014.
Commitments in each of the next four years are approximately as follows:
---------------------
2011 123,587
2012 78,563
2013 81,750
2014 49,219
---------------------
18
Other than as disclosed in this report, the Company does not know of any
trends, demands, commitments, events or uncertainties that will result in, or
that are reasonably likely to result in, the Company's liquidity increasing or
decreasing in any material way.
Other than as disclosed in this report, the Company does not know of any
significant changes in its expected sources and uses of cash.
The Company does not have any lines of credit or similar financing
arrangements.
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 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the direction and with the participation of our management, including our
Principal Executive and Financial Officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures as of March 31, 2011. 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,
2011.
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, 2011. 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, 2011
that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
20
PART II
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 ss.302 of the
Sarbanes-Oxley Act of 2002.*
31.2 Certification of Principal Financial Officer Pursuant to ss.302 of the
Sarbanes-Oxley Act of 2002.*
32.1 Certification of Principal Executive and Financial Officer Pursuant to 18
U.S.C. ss.1350 and ss.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.
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.
May 16, 2011
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
By: /s/ Daniel B. O'Brien
--------------------------------
Name: Daniel B. O'Brien
Title: President and Principal
Executive Officer
By: /s/ Daniel B. O'Brien
--------------------------------
Name: Daniel B. O'Brien
Title: Principal Financial and
Accounting Officer
22