Diversified Thermal Solutions (DVTS) 10QSB/A 2006 Q1 Quarterly report (small business) (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB/A

(MARK ONE)

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

for the quarterly period ended March 31, 2006

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	(I.R.S. Employer
of incorporation)	Identification No.)

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

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

Check whether the issuer (1) 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.
Yesx       Noo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso       Nox

APPLICABLE ONLY TO CORPORATE ISSUERS:

State 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	18,834,238 shares
(Class of Stock)	(Shares outstanding as of May 8, 2006)

Transitional Small Business Disclosure Format (check one): Yeso       Nox

AMENDMENT NO.1 TO THE QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 2006

EXPLANATORY NOTE

Diversified Thermal Solutions, Inc. (the “Company”) is filing this amendment to Form 10-QSB (the “Amendment”) for the fiscal quarter ended March 31, 2006, as filed with the Securities and Exchange Commission on May 11, 2006 (the “Original Filing”). The purpose of filing this Amendment is to amend Part I, Item 1 “Financial Information” to include a revised Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Cash Flows and Notes to the Financial Information and to include corresponding revisions to Part I, Item 2 Management’s Discussion and Analysis or Plan of Operation. This Amendment does not update any disclosures in the Original Filing.

Pursuant to Rule 12b-15 of the Exchange Act, as a result of this Amendment, the certifications filed pursuant to the Sarbanes-Oxley Act of 2002, included exhibits to the Original Filing, have been amended, restated, re-executed and re-filed as of the date of this Amendment and are included as listed below.

Except as set forth above, no other changes have been made to the Original Filing and this Form 10-QSB/A does not amend, update or change any other items or disclosures in the Original Filing.

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

	Page
Part I. Financial Information
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets		F-2
Condensed Consolidated Statements of Operations		F-4
Condensed Consolidated Statements of Cash Flows		F-5
Notes to Condensed Consolidated Financial Statements		F-7
Item 2. Management’s Discussion and Analysis or Plan of Operation		1
Part II. Other Information
Item 6. Exhibits
Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002
Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002
Certification Pursuant to Section 906 of the Sarbanes — Oxley Act of 2002
Certification Pursuant to Section 906 of the Sarbanes — Oxley Act of 2002
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO
Ex-32.2 Section 906 Certification of the CFO

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Index to Financial Statements

Condensed Consolidated Balance Sheets	F-2
Condensed Consolidated Statements of Operations	F-4
Condensed Consolidated Statements of Cash Flows	F-5
Notes to Condensed Consolidated Financial Statements	F-7

F-1

Diversified Thermal Solutions, Inc.

Condensed Consolidated Balance Sheets

	March 31		December 31
	2006		2005
	(Restated)
	(Unaudited)
Assets
Current assets:
Cash	$	12,890	$	--
Receivables:
Trade, net of reserve for doubtful accounts of $5,000 in 2005 and 2006		1,660,581		1,010,669
Related party		—		55,110
Total receivables		1,660,581		1,065,779
Inventories		3,044,116		3,396,590
Prepaid expenses		102,349		92,252
Total current assets		4,819,936		4,554,621
Property, plant and equipment:
Land		208,987		104,498
Buildings		832,136		832,136
Machinery and equipment		804,319		731,935
		1,845,442		1,668,569
Less accumulated depreciation		209,109		151,880
Net property, plant and equipment		1,636,333		1,516,689
Total assets	$	6,456,269	$	6,071,310

F-2

Diversified Thermal Solutions, Inc.

Condensed Consolidated Balance Sheets (continued)

	March 31			December 31
	2006			2005
	(Restated)
	(Unaudited)
Liabilities and shareholders’ deficit
Current liabilities:
Checks outstanding in excess of bank balance	$	—		$	3,450
Line of credit		2,334,773			2,235,773
Accounts payable and accrued expenses		1,692,011			1,300,808
Due to seller of business acquired		122,727			150,000
Current portion of long-term debt		1,212,292			1,278,259
Current portion of capital lease obligation		30,305			29,880
Total current liabilities		5,392,108			4,998,170
Advances from shareholders		39,899			39,899
Long-term debt, less current portion		27,095			31,852
Capital lease obligation, less current portion		78,888			87,001
Notes payable to related companies and affiliates		1,600,000			1,600,000
Total liabilities		7,137,990			6,756,922
Shareholders’ deficit:
Common stock, par value $0.0001:
Authorized—100,000,000 shares
Issued and outstanding—18,834,238 and 18,824,238 shares in 2006 and 2005		1,884			1,883
Additional paid-in capital		11,234,318			11,232,719
Accumulated deficit		(11,917,923	)		(11,920,214	)
Net shareholders’ deficit		(681,721	)		(685,612	)
Total liabilities and shareholders’ deficit	$	6,456,269		$	6,071,310

See accompanying Notes to Condensed Consolidated Financial Statements.

F-3

Diversified Thermal Solutions, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

	Three months ended March 31
	2006			2005
	(Restated)
Revenues:
Trade	$	3,287,671		$	1,754,668
Related companies		—			26,919
Total revenues		3,287,671			1,781,587
Costs of goods sold		2,785,776			1,586,971
Gross profit		501,895			194,616
Operating expenses:
Professional and consulting services		51,054			45,982
Marketing and advertising		104,404			57,891
Office and administrative		239,100			147,831
Total operating expenses		394,558			251,704
Operating income (loss)		107,337			(57,088	)
Other income (expenses):
Miscellaneous income		2,420			5,899
Interest expense		(107,466	)		(52,858	)
Net other expenses		(105,046	)		(46,959	)
Net income (loss)	$	2,291		$	(104,047	)
Net income (loss) per share	$	0.00		$	(0.01	)

See accompanying Notes to Condensed Consolidated Financial Statements.

F-4

Diversified Thermal Solutions, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Three months ended March 31
	2006			2005
	(Restated)
Operating activities
Net income (loss)	$	2,291		$	(104,047	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		57,229			16,612
Stock issued for service		1,600			—
Changes in operating assets and liabilities:
Receivables		(594,802	)		(217,223	)
Inventories		352,474			401,738
Prepaid expenses		(10,097	)		(97,161	)
Deferred loan and acquisition costs		—			100,568
Checks outstanding in excess of bank balance		(3,450	)		(1,049	)
Accounts payable and accrued expenses		391,203			153,283
Net cash provided by operating activities		196,448			252,721
Investing activities
Purchases of property, plant, and equipment		(176,873	)		(43,896	)
Acquisition of business, net of noncash transactions related to amount owed to seller and stock issued for acquisition		—			(4,392,561	)
Net cash used in investing activities		(176,873	)		(4,436,457	)
Financing activities
Net borrowings on line of credit		99,000			1,896,773
Proceeds from borrowings of long-term debt		—			1,500,000
Net borrowings from related parties		—			1,010,486
Advances from shareholders		—			3,914
Principal repayments on long-term debt		(70,724	)		(46,143	)
Principal repayments on capital lease obligations		(7,688	)		—
Payments on amount due to seller		(27,273	)		—
Net cash provided by financing activities		(6,685	)		4,365,030
Net increase in cash		12,890			181,294
Cash at beginning of period		—			—
Cash at end of period	$	12,890		$	181,294

F-5

Diversified Thermal Solutions, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)

Supplemental disclosure of noncash activities

During January 2005, the Company issued 120,000 shares of stock valued at $30,000 to an outside consultant. This transaction was executed via a reduction in advances from shareholders.

Also, during January 2005, the Company completed a business acquisition. The acquisition resulted in the following noncash activities:

Common stock issued for acquisition costs	$	210,668
Due to seller	$	282,524

See accompanying Notes to Condensed Consolidated Financial Statements.

F-6

Diversified Thermal Solutions, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2006

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Diversified Thermal Solutions, Inc. (the “Company”) 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 month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.

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

The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United Sates of America for complete financial statements.

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, 2005.

2. Related Party Transaction

During the three months ended March 31, 2006, the Company purchased approximately $53,000 in inventory from a related company controlled by a family member of a major shareholder and Company board member.

3. Contingencies

During February 2006, a fire damaged a building and certain equipment of the Company. Additionally, the fire disrupted the Company’s operations for a period of time. As a result of the fire, the Company has incurred additional direct costs of approximately $212,000 through March 31, 2006. These amounts have been recorded as accounts receivable at March 31, 2006 as the Company expects to be reimbursed by its insurance provider for these costs. Additionally, the Company has incurred property and equipment loss and other indirect business interruption costs and loss of revenue related to the fire. The Company is currently negotiating a claim with their insurance provider; however, the ultimate settlement amount of this claim is not presently determinable.

F-7

Diversified Thermal Solutions, Inc.

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

March 31, 2006

3. Contingencies (continued)

The Company has agreed to guarantee certain indebtedness of two related companies. Upon default by the related companies, the Company would be obligated to pay any outstanding principal and accrued interest on their behalf. In addition, if the related companies default on these loans, the Company’s outstanding loans with the same financial institution in the amount of $3,528,607 will also be considered in default. At March 31, 2006, the debt guaranteed for the related companies was $2,641,462 under term loans and up to $5,500,000 under revolving lines of credit. These term loans and revolving lines of credit expire between October of 2008 and February of 2010. These loans are also cross-collateralized by substantially all of the assets of the related companies and the Company.

4. Debt Covenants

As of December 31, 2005 and March 31, 2006, the Company was not in compliance with certain financial covenants of the line of credit and long-term debt with a financial institution and accordingly, these balances have been classified as current in the accompanying condensed consolidated balance sheets.

5. Income (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 income (loss) per share.

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

	Three months ended March 31
	2006		2005
Average shares outstanding		18,832,571		17,667,016
Net income (loss) per share	$	0.00	$	(0.01	)

F-8

Diversified Thermal Solutions, Inc.

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

March 31, 2006

6. Restatement

Subsequent to the filing of the Company’s 10-QSB for the three months ended March 31, 2006, the Company determined prepaid expenses were overstated due to an error in application of accounting principles generally accepted in the United States of America. Accordingly, these financial statements have been restated as follows as of and for the three months ended March 31, 2006 to correct this error:

Prepaid expenses were decreased $70,190 of which $28,095 was reclassified to machinery and equipment. The difference, plus additional depreciation of $1,672, decreased net income and increased accumulated deficit by $43,767. Specific increases in expenses were as follows:

Professional and consulting expense	$	25,048
Cost of goods sold		18,719
	$	43,767

Net cash provided by operating activities and net cash used in investing activities increased by $28,095.

There was no significant effect on earnings per share for the three months ended March 31, 2006.

7. 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 recent losses and 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 achieve profitably in order to continue as a going concern. The Company anticipates the future efficiencies in operations will continue to improve operating cash flows necessary to continue as a going concern.

F-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

     Our primary business purpose is to acquire businesses related to the manufacturing and distribution of refractory materials used in industry. DT Solutions, Inc., one of our subsidiaries, currently has no operations.

     All of our current operations are presently conducted through our other subsidiary, Fuzion Technologies, Inc., formerly known as Refractory & Industrial Supply Group, Inc., which originally was formed to operate as a distributor of refractory products and supplies. However, on January 31, 2005, this subsidiary changed its primary activity to manufacturing refractory products by acquiring substantially all the refractory assets and assuming certain liabilities of Freeport Brick Company, Kittanning Brick Company, Free-MaDie Company, Freeport Refractories, Inc., and Freeport Area Enterprises, Inc., (the “Freeport Entities”). This acquisition consisted principally of machinery, equipment, inventories, accounts receivable, certain contracts and leases, three manufacturing facilities, and intellectual property. The Freeport Entities are located in Pennsylvania and are engaged not only in the business of manufacturing refractory products, but also in manufacturing dies used in the refractory industry and precision machining. These entities now operate as the Freeport Brick Division, Kittanning Brick Division, and Armstrong Precision Manufacturing Division. An additional operation, the Memphis Division, operates in Tennessee, but on a much smaller scale.

     The Company earns revenue and generates cash principally through the sale of products manufactured by its Fuzion Technologies Inc. subsidiary. Products are sold to customers worldwide in the cement & lime, aluminum, steel, chemical, petroleum, paper & pulp, foundry, and other non-ferrous industries.

     This discussion has been revised to reflect appropriate amounts based on this amended filing of our 10Q-SB as of and for the three months ended March 31, 2006.

Balance Sheets

     Our assets have changed slightly since December 31, 2005. The most significant change is an increase in Accounts Receivable of approximately $600,000, for which there are two primary reasons. For the three months ended March 31, 2006, monthly sales averaged approximately $1,100,000, compared to approximately $800,000 for the eleven months in 2005 after the acquisition of the Freeport entities. There was a corresponding decrease in inventory for the quarter. Secondly, included in the Accounts Receivable balance at March 31, 2006 is $212,000 designated as Accounts Receivable—Fire Recovery Loss relating to an accumulation of Extra Expense relating to the fire at the Freeport plant (to be discussed later).

     Also, in January 2006, the Company finalized the financial terms of its acquisition of the Freeport entities. In conjunction with this, the Company purchased additional parcels of land for $100,000 during the quarter ended March 31, 2006 and agreed to pay a total of $150,000 in periodic payments throughout the year 2006 to complete this acquisition. This obligation is identified on the Balance Sheet as “Due to Seller of business acquired.”

     Our shareholders’ deficit has decreased from year-end as a result of stock issuance and the net income for the quarter.

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Results of Operations

     Revenue — Our revenues for the quarter ended March 31, 2006 are $3,287,671, which is a significant increase from the prior year. There are two main factors contributing to this increase. Since the Freeport Acquisition occurred on January 31, 2005, there were only two months of significant activity in the three months ended March 31, 2005. Additionally, average monthly sales for the three months ended March 31, 2006 were $1,100,000 compared to $900,000 for the quarter ending March 31, 2005. The most significant increases in volume were in sales to the cement & lime, aluminum, and petroleum industries. Sales to the cement and lime industries for the quarter ended March 31, 2006 have already exceeded the sales to those industries for the entire year of 2005. Sales to the aluminum industry have increased approximately 90% over the same period last year. Also, sales to the petroleum industry were generated through a new customer and amounted to approximately 6% of our sales for the period ended March 31, 2006. It should be noted here that we are projecting sales for the remainder of the year to decrease compared to the first quarter, since several significant orders were filled in the first quarter and will probably not be replaced by similar orders later in the year.

     Expenses — Our cost of goods sold for the quarter ended March 31, 2006 are $2,785,776, which is a significant increase from the prior year, attributable to the factors noted above. Our operating expenses increased significantly also for the same reason. Our Gross Profit percentage for the quarter is 15%, which fell short of our projections for several reasons. Because of increases in the cost of natural gas over the past several years, it has become our single largest cost of operations. While we have been increasing prices to customers to help offset these costs, we need to become more efficient with the gas that we are consuming. The company is planning on improving the efficiency of its production processes by consolidating its refractory product manufacturing facilities to one site. This will involve moving production operations from the Kittanning Brick facility to the Freeport Brick facility. Unfortunately, the fire that occurred at the Freeport plant on February 2, 2006, has caused a delay in this plant consolidation process, while we negotiate the settlement of our claim with our insurance carrier. In addition, in late May 2005, we began manufacturing products at our Freeport Brick plant, which had not manufactured any product for nine months. In doing so, there have been numerous start-up costs that have been absorbed, including the training of a significant number of new employees and losses in recovery that have been higher than anticipated.

     For the quarter ended March 31, 2006, net other expenses have increased by $58,087 compared to the same quarter last year, because of comparing only two months in 2005 as noted above, increases in the revolving line of credit balance, and increase in interest rates.

Liquidity and Capital Resources

     A major shareholder and a related company funded our losses in prior years. The Company obtained financing through a financial institution and related companies for the Freeport acquisition. As of December 31, 2005 and March 31, 2006, the Company was not in compliance with certain financial covenants of the line of credit and long-term debt and accordingly, these balances have been classified as current in the accompanying condensed consolidated balance sheets. We recognize that the Company must achieve profitable operations to continue as a going concern. The Company anticipates the future efficiencies in operations will continue to improve operating cash flows necessary to continue as a going concern.

Other Significant Events

     On February 2, 2006, a fire significantly damaged the Grinding Department building and equipment at the Freeport Brick plant. This Grinding Department equipment was used to grind 100% of the clay used in production at the Freeport plant as well as 100% of the bauxite used in production at both the Freeport and Kittanning plants. This fire disrupted our operations for several weeks until a temporary alternate re-configuration of our raw materials processing was in place. We are currently negotiating a claim with our insurance provider; however, the ultimate settlement amount of the claim is not presently determinable.

     The Company is planning on improving the efficiency of its production processes by consolidating its refractory product manufacturing facilities to one site. This will involve moving production operations from the Kittanning Brick facility to the Freeport Brick facility. The Company has contracted with a commercial realtor to sell the Kittanning Brick facility. According to current plans, this project will be completed by the end of the year 2006. However, progress on this

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major project is still continuing but has slowed dramatically until the ultimate settlement of our fire insurance claim has been determined.

     On March 27, 2006, our subsidiary, Refractory & Industrial Supply Group Inc. changed its name to Fuzion Technologies, Inc. This name more appropriately describes the vision of the company and what we are becoming, namely a supplier of a full line of quality refractory and industrial products and complementary industrial services.

PART II. OTHER INFORMATION

Item 6. Exhibits

(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

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SIGNATURES

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 14, 2006	/s/ B. Grant Hunter
	B. Grant Hunter
	President and Chief Executive Officer

Date: August 14, 2006	/s/ J. Terry Medovitch
	J. Terry Medovitch
	Chief Financial Officer

4