Diversified Thermal Solutions (DVTS) 10QSB 2003 Q2 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

(MARK ONE)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	for the quarterly period ended June 30, 2003
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	for the transition period from                       to

Commission File Number: 000-28047

DIVERSIFIED THERMAL SOLUTIONS, INC.

(Exact name of issuer as specified in charter)

Nevada	94-3342064
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)

4126 Delp Street, Memphis, Tennessee 38118(Address of principal executive offices)

Registrant’s telephone number, including area code (901) 365-7650

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) has been subject to such filing requirements for the past 90 days. Yes  x    No  o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date.

Common Stock, $0.0001 Par value
(Class of Stock) 20,242,571 shares
(Shares outstanding as of August 14, 2002)

TABLE OF CONTENTS

		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Operations (Unaudited)
		Condensed Consolidated Statements of Cash Flows (Unaudited)
		Notes to Condensed Consolidated Financial Statements (Unaudited)
	ITEM 2. Management’s Discussion and Analysis or Plan of Operation.
	Item 3. Controls and Procedures
	Item 4. Items Voted on at Annual Meeting of Shareholders
PART II. OTHER INFORMATION
	Item 6.  Exhibits and Reports on Form 8-K
SIGNATURES
Ex-31.1 Section 302 Certifications of the CEO
Ex-31.2 Section 302 Certifications of the CFO
Ex-32.1 Section 906 Certifications of the CEO
Ex-32.2 Section 906 Certifications of the CFO

Diversified Thermal Solutions, Inc.
INDEX TO FORM 10-QSB

			Page
Part I. Financial Information
	Item 1. Financial Statements
		Condensed Consolidated Balance Sheets		3
		Condensed Consolidated Statements of Operations		4
		Condensed Consolidated Statements of Cash Flows		5
		Notes to Condensed Consolidated Financial Statements		6
	Item 2. Management’s Discussion and Analysis or Plan of Operation			10
	Item 3. Controls and Procedures			11
Part II. Other Information
	Item 4. Items Voted On at Annual Meeting of Shareholders			11
	Item 6. Exhibits and Reports on Form 8-K			12

2

Diversified Thermal Solutions, Inc.

Condensed Consolidated Balance Sheets

			June 30			December 31
			2003			2002
			(Unaudited)
Assets
Current assets:
	Cash		$	—		$	14,188
	Receivables:
		Trade, net		19,386			12,260
		Related party		12,459			59,009
	Total receivables			31,845			71,269
	Unbilled revenue to related company			4,993			11,827
	Refundable income taxes			—			8,068
	Inventories			4,000			—
Total current assets				40,838			105,352
Deferred loan and acquisition costs				274,513			192,395
Total assets			$	315,351		$	297,747
Liabilities and shareholders’ deficit
Current liabilities:
	Checks outstanding in excess of bank balance		$	157		$	—
	Accounts payable and accrued expenses			312,169			294,034
	Unearned revenue			59,400			—
	Advances from related parties:
		Shareholder		83,184			120,184
		Related company		186,388			124,063
	Total advances from related parties			269,572			244,247
Total current liabilities				641,298			538,281
Shareholders’ deficit:
	Common stock, par value $0.0001, authorized 100,000,000 shares, issued and outstanding 20,242,571 shares			2,024			2,024
	Additional paid-in capital			10,870,767			10,870,767
	Accumulated deficit			(11,198,738	)		(11,113,325	)
Net shareholders’ deficit				(325,947	)		(240,534	)
Total liabilities and shareholders’ deficit			$	315,351		$	297,747

See accompanying Notes to Condensed Consolidated Financial Statements.

3

Diversified Thermal Solutions, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

		Three months ended						Six months ended
		June 30						June 30
		2003			2002			2003			2002
					(Restated)						(Restated)
Revenues:
	Related companies	$	25,564		$	—		$	325,020		$	—
	Other		—			—			5,820			—
Total revenues			25,564			—			330,840			—
Costs of goods sold			15,649			—			320,614			—
Gross profit			9,915			—			10,226			—
Operating expenses:
	Professional and consulting services		25,203			18,324			60,017			292,133
	Salaries		—			98,047			—			180,729
	Marketing and advertising		8,306			—			24,256			13,443
	Office and administrative		4,373			7,499			10,976			8,110
Total operating expenses			37,882			123,870			95,249			494,415
Operating loss			(27,967	)		(123,870	)		(85,023	)		(494,415	)
Interest expense			—			—			390			—
Loss from continuing operations			(27,967	)		(123,870	)		(85,413	)		(494,415	)
Discontinued operations:
	Loss from operations of discontinued business segment		—			—			—			(172,595	)
	Gain on disposal of business segment		—			—			—			830,752
Income from discontinued operations			—			—			—			658,157
Net (loss) income		$	(27,967	)	$	(123,870	)	$	(85,413	)	$	163,742
Loss from continuing operations per share		$	—		$	(0.01	)	$	—		$	(0.02	)
Income from discontinued operations per share			—			—			—			0.03
Net (loss) income per share		$	—		$	(0.01	)	$	-		$	0.01

See accompanying Notes to Condensed Consolidated Financial Statements.

4

Diversified Thermal Solutions, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

			Six months ended June 30
			2003			2002
						(Restated)
Operating activities
Net (loss) income			$	(85,413	)	$	163,742
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
	Gain on sale of subsidiary			—			(830,752	)
	Depreciation			—			19,178
	Stock issued for services			—			494,021
	Changes in operating assets and liabilities, net of subsidiary sale:
		Receivables		39,424			71,984
		Unbilled revenue to related company		6,834			—
		Refundable income taxes		8,068			—
		Inventories		(4,000	)		—
		Deferred loan and acquisition costs		(18,193	)		—
		Checks outstanding in excess of bank balance		157			346,868
		Accounts payable and accrued expenses		(45,790	)		(20,978	)
		Unearned revenue		59,400			—
Net cash (used in) provided by operating activities				(39,513	)		244,063
Financing activities
Net repayments to related parties				25,325			(252,806	)
Net decrease in cash				(14,188	)		(8,743	)
Cash at beginning of period				14,188			8,790
Cash at end of period			$	—		$	47

Supplemental schedule of noncash activities

During March 2002, the Company sold its wholly-owned subsidiary, Access Communications, Inc. as further discussed in Note 2. This sale is summarized as follows:

Receivables	$	427,211
Equipment, furniture and fixtures		295,282
Other assets		55,354
Checks outstanding in excess of bank balance		(346,868	)
Accounts payable and accrued expenses		(932,711	)
Advances from related parties		(329,020	)
Net assets sold and liabilities assumed	$	(830,752	)

Additionally, during the six months ended June 30, 2003, the Company has $63,925 in deferred loan and acquisition costs related to the acquisition discussed in Note 6 that have not yet been paid.

See accompanying Notes to Condensed Consolidated Financial Statements.

5

Diversified Thermal Solutions, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Diversified Thermal Solutions, Inc. (the “Company”), formerly known as VoIP Telecom, Inc., have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003.

The condensed consolidated financial statements include the accounts of Diversified Thermal Solutions, Inc. and its wholly-owned subsidiaries, DT Solutions, Inc. (formerly Global Holdings, Inc.) and Refractory & Industrial Supply Group, Inc. All inter-company balances and transactions have been eliminated.

Additionally, the condensed consolidated financial statements have been retroactively restated for the three and six month periods ended June 30, 2002, to reflect the Company’s acquisition of Global Holdings, Inc. discussed in Note 3 and the discontinued operations discussed in Note 2.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form
10-KSB for the year ended December 31, 2002.

2. Discontinued Operations

Prior to March 29, 2002, the Company delivered international long distance service via flexible, server-based networks consisting of resale arrangements with other long distance providers, primarily through its wholly-owned subsidiary, Access Communications, Inc. On March 29, 2002, the Company sold 100% of the common stock of Access Communications, Inc. to an independent third party in exchange for a note receivable of $399,057. At the time of the sale, the subsidiary had net liabilities of $830,752 and, accordingly, the Company reported a gain on sale of subsidiary of $1,229,809. Subsequent to this sale, the Company determined the note receivable was not collectible and decreased the receivable and the previously reported gain by $399,057. The sale of Access Communications, Inc. represents the disposal of a business segment under Financial Accounting Standards Board (“FASB”) Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Accordingly, results of this operation have been classified as discontinued and the condensed consolidated statements of income and cash flows for the three and six months ended June 30, 2002 have been restated.

6

Diversified Thermal Solutions, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

2. Discontinued Operations (continued)

Operating results of this discontinued business segment for the six months ended June 30, 2002 are as follows:

Revenues	$	18,700
Loss from discontinued operations	$	(172,595	)
Gain on disposal of business segment		830,752
Income from discontinued operations	$	658,157

3. Ongoing Company Operations

Subsequent to the sale of Access Communications, Inc. previously discussed, the Company operated essentially as a shell company for the purpose of acquiring businesses related to the manufacturing and distribution of materials used in the refractory industry.

On July 1, 2002, the Company acquired all of the outstanding stock of Global Holdings, Inc., a related entity by common ownership and control, via the issuance of 15 million shares of common stock. In accordance with FASB Statement No. 141, “Business Combinations”, as a result of the companies being under common control, the net liabilities of Global Holdings, Inc. were recorded at their carrying amount of $166,665 as of the date of the acquisition. Subsequent to the acquisition, Global Holdings, Inc. changed its name to DT Solutions, Inc. This subsidiary currently has no operations; however, the Company intends for it to operate as a manufacturer of specialized brick in the refractory industry once the asset purchase discussed in Note 6 is completed.

During July 2002, Refractory & Industry Supply Group, Inc. was formed to operate as a distributor of refractory supplies. All of the current operations of the Company are presently conducted through this subsidiary.

4. Related Party Transactions

The Company’s revenues from continuing operations for the six months ended June 30, 2003 were derived from three customers. Two of these customers are related companies controlled by family members of a major stockholder and Company board member and represented 98.2% of these revenues. These related companies also represented 39.1% of the Company’s accounts receivable at June 30, 2003. Additionally, the Company has received advances from this related company and a shareholder in order to meet its current obligations. These advances are noninterest bearing and have no stated repayment terms.

7

Diversified Thermal Solutions, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

5. Company Equity Transactions

During February 2002, the Company’s Board of Directors declared a twenty-for-one reverse stock split of the Company’s common stock. All references to the number of shares and per share amounts in the accompanying condensed consolidated financial statements have been adjusted to reflect the split on a retroactive basis.

During the six months ended June 30, 2002, the Company issued 2,720,482 shares of common stock valued at $494,021 to certain shareholders and employees for their services. The values were determined based on reported market price of the stock.

6. Commitments

The Company has entered into a letter of intent to acquire substantially all of the assets, with the exception of cash and receivables, of a company that manufactures specialized brick used in the refractory business for approximately $9 million. The funding of the acquisition is expected to be provided through financial institution and seller financing. Additionally, the Company has a preliminary agreement with a financial institution to obtain a $300,000 line of credit once the acquisition is complete. The Company has capitalized $274,513 in acquisition and loan costs which will be allocated between direct costs of the acquisition and debt issue costs upon completion of the acquisition.

7. Earnings (Loss) Per Share Data

Basic earnings (loss) per share assumes no dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of common stock outstanding during each period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon the exercise of stock options or warrants, using the treasury stock method of computing such effects and contingent shares. As the Company has no outstanding stock options or warrants, there is no diluted earnings per share.

The following table sets forth the computation of basic earnings (loss) per share for the periods indicated:

	Three months ended					Six months ended
	June 30					June 30
	2003		2002			2003		2002
			(Restated)					(Restated)
Average shares outstanding		20,242,571		19,756,340			20,242,571		19,232,975
Loss from continuing operations per share	$	—	$	(0.01	)	$	—	$	(0.02	)
Income from discontinued operations per share		—		—			—		0.03
Net (loss) income per share	$	—	$	(0.01	)	$	—	$	0.01

8

Diversified Thermal Solutions, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

7. Earnings (Loss) Per Share Data (continued)

As a result of the restatement related to the revision in the gain on disposal of business segment(Note 2), the reverse stock split(Note 5)and the acquisition of Global Holdings, Inc.(Note 3), the Company’s net (loss) income per share has been restated for the three and six months ended June 30, 2002 from $(0.03) per share to $(0.01) per share and $0.13 per share to $0.01 per share, respectively.

8. Equity Incentive Plan

During the second quarter of 2003, the Company shareholders approved the 2003 Diversified Thermal Solutions, Inc. Equity Incentive Plan (the “Plan”) in an effort to promote the interests of the Company and its shareholders. Under the terms of the Plan, current and prospective officers and employees, and directors of and consultants to the Company or its subsidiaries or affiliates are eligible to be granted awards. Also under the terms of the Plan, the Company is authorized to grant stock options, including both incentive stock options and non-qualified stock options and is also authorized to grant stock appreciation rights, either with or without a related option. The Company has reserved 1,500,000 shares of authorized common stock for future issuance under the Plan. No stock options or stock appreciation rights have yet been issued under the Plan.

9. Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s continuing cash requirements, among other things, may indicate the Company will be unable to continue as a going concern for a reasonable period of time. Management recognizes the Company must maintain profitable operations and generate additional funds in order to continue as a going concern. The Company anticipates the recent changes made in its operations, along with the future operations and related financing of the asset acquisition discussed in Note 6, will provide the Company future positive cash flows necessary to continue as a going concern.

9

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

      Caution regarding Forward-Looking Statements

      The following information specifies certain forward-looking statements that are not historical facts. These statements represent our expectations or beliefs, including but not limited to, statements concerning future acquisitions, future operating results, statements concerning industry performance, capital expenditures, financings, as well as assumptions related to the foregoing. Forward-looking statements may be identified by the use of forward-looking terminology such as “may”, “shall”, “will”, “could”, “expect”, “estimate”, “anticipate”, “predict”, “should”, “continue” or similar terms, variations of those terms or the negative of those terms. Forward-looking statements are based on current expectations and involve various risks and uncertainties that could cause actual results and outcomes for future periods to differ materially from any forward-looking statement or view expressed herein. Our financial performance and the forward-looking statements contained in this report are further qualified by other risks including those set forth from time to time in documents filed by us with the SEC.

      Introduction

      Prior to March 29, 2002, we delivered international long distance service via flexible, server-based networks consisting of re-sale arrangements with other long distance providers primarily through our wholly-owned subsidiary, Access Communications, Inc. On March 29, 2002, we sold Access Communications. The sale represents the disposal of a business segment. The results of this business segment have been classified as discontinued, and the results of operations and cash flow for the three months ended March 31, 2002 have been restated to reflect such classification. On July 1, 2002, we acquired 100% of the outstanding stock of Global Holdings, Inc. and shifted our business focus towards acquiring businesses related to the manufacturing and distribution of materials used in the refractory business. Because of the change in our business focus from the long distance industry to the refractory industry and the disposal of our long distance business, a comparison of 2003 results of operations to 2002 results of operations would not be beneficial and is not presented.

      Balance Sheets

      As discussed in the footnotes to our financial statements, we have entered into a letter of intent to acquire substantially all the assets of a company that manufactures specialized brick used in the refractory business. As discussed below, we have significantly reduced our operations in the second quarter pending the completion of this acquisition. Accordingly, this has resulted in a decrease in our accounts receivable at June 30, 2003. Also, as a result of this intended acquisition, our deferred loan and acquisition costs have increased $82,118 from December 31, 2002 to June 30, 2003. We have funded these deferred loan and acquisition costs through advances from related parties and increases in accounts payable and accrued expenses. Additionally, we have recorded $59,400 as unearned revenue as a result of an advance payment received on an item that was shipped in July 2003. This amount has been recorded as unearned revenue at June 30, 2003. As a result of these matters, our current liabilities have increased by $105,953 over the six months ended June 30, 2003. There have been no other significant changes affecting our balance sheet since December 31, 2002.

      Results of Operations

      Revenue — Our revenue from continuing refractory operations for the six months ended June 30, 2003 was $330,840. However, only $25,564 was related to the second quarter of 2003 due to the significant reduction in our operations, as previously discussed. We expect our current operations to resume upon the completion of the acquisition. Substantially all of our revenue was derived from two customers, which are related companies controlled by family members of a major stockholder and director of our Company.

      Operating Expenses — Our operating expenses from continuing operations for the six months ended June 30, 2003 totaled $95,249. Of this amount, $60,017 represented payments of professional and consulting services. We incurred no salary expense. We incurred $24,256 of marketing and advertising expenses to develop the logos and brands for Diversified Thermal Solutions and RIS Group, and to announce and market our new products. The remaining expenses were routine office and administrative related.

10

      Liquidity and Capital Resources

      Currently, our losses from continuing operations have been funded by a major shareholder and a related company that is also a customer. These advances are non-interest bearing and have no stated repayment terms. We are currently seeking funding for our pending acquisition as well as for a working capital and acquisition line of credit. There is no assurance that additional funding will be available under favorable terms, if at all. Our inability to raise additional funding will harm our ability to implement our business plan which will, in turn, hurt our ability to generate revenue. Our independent auditors have expressed their concern that our continuing cash requirements, among other things, raise substantial doubt about our ability to continue as a going concern.

Item 3. Controls and Procedures

(a)     Evaluation of Disclosure Controls and Procedures.

      We have instituted disclosure controls and procedures designed to ensure the timely recording, processing, summarization and reporting to our management, including our Chief Executive Officer, of information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Within the 90 days prior to the filing date of this Quarterly Report on Form 10-QSB, we have performed an evaluation of the effectiveness of the design and operation of these controls under the supervision and with the participation of our management, including our Chief Executive Officer. Based upon that evaluation, the Chief Executive Officer has concluded that the disclosure controls and procedures effectively alert management to material information related to the Company in a manner which allows timely decisions regarding required disclosures of such information. In the design and evaluation of our disclosure controls and procedures, management has recognized that risks of misstatements due to error, failures in compliance, or changes in conditions are inherent in any cost-effective control system. Thus, management can provide only reasonable assurance that its controls and procedures will achieve their stated goals under all potential future conditions. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of management’s evaluation.

Item 4. Items Voted on at Annual Meeting of Shareholders

(a)  Election of Directors.

      At the 2003 annual meeting of shareholders, held on June 19, 2003, five directors were elected for terms that expire at the annual meeting of shareholders in 2004. The votes per director were as follows:

Director	Votes For		Votes Against		Votes Withheld
B. Grant Hunter		17,183,395		0		3,059,176
John F. Curry		17,183,395		0		3,059,176
Ed H. Gatlin		17,183,395		0		3,059,176
Jerry W. Hunter		17,183,395		0		3,059,176

(b)  Approval of 2003 Diversified Thermal Solutions, Inc. Equity Incentive Plan

      The 2003 Diversified Thermal Solutions, Inc. Equity Incentive Plan was approved by the shareholders at the annual meeting of shareholders by a vote of 17,183,395 FOR, 0 AGAINST, and 3,059,176 WITHHELD.

(c)  Ratification of Independent Auditors

      At the annual meeting of shareholders, the shareholders voted to ratify Coulter & Justus, P.C., as our independent auditors. The vote for ratification was as follows: 17,183,395 FOR, 0 AGAINST, and 3,059,176 WITHHELD.

11

PART II. OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

(a)     Exhibits

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)     Reports on Form 8-K

           None.

12

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DIVERSIFIED THERMAL SOLUTIONS, INC.
	Registrant
Date:August 19, 2003	/s/ B. Grant Hunter
	B. Grant Hunter President and Chief Executive Officer
Date:August 19, 2003	/s/ Julie Dean
	Julie Dean
	Acting Chief Financial Officer

13