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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1999
OR
[ ] 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 0-15673
INTERNATIONAL ABSORBENTS INC.
(Exact name of registrant as specified in its charter)
Province of British Columbia, Canada None
(State of other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1569 Dempsey Road
North Vancouver, British Columbia
Canada V7K 1S8
(Address of principal executive offices)
(604) 681-6181
(Registrant's telephone number, including area code)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 15, 1999.
Title of Class No. of Shares
Common Shares, no par value 19,684,552
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INTERNATIONAL ABSORBENTS INC.
CONSOLIDATED BALANCE SHEETS
(US dollars, in thousands)
<TABLE>
<CAPTION>
OCTOBER 31, 1999 JANUARY 31, 1999
<S> <C> <C>
ASSETS
Current assets:
Cash $ 807 $ 195
Accounts receivable 719 630
Inventories 319 283
Prepaid expenses 71 67
---------------------------
$ 1,916 $ 1,175
Fixed assets 1,220 1,020
Other assets 63 68
---------------------------
$ 3,199 $ 2,263
===========================
LIABILITIES
Current liabilities:
Accounts payable $ 748 $ 606
Operating line of credit -- 223
Due to related parties 11 10
---------------------------
$ 759 $ 839
Long-term Liabilities -- --
---------------------------
$ 759 $ 839
SHAREHOLDERS' EQUITY
Share capital $ 6,595 $ 6,584
Deficit (4,155) (5,160)
---------------------------
$ 3,199 $ 2,263
===========================
</TABLE>
INTERNATIONAL ABSORBENTS INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(US dollars, in thousands)
<TABLE>
<CAPTION>
9 MONTHS 3 MONTHS
10/31/99 10/31/98 10/31/99 10/31/98
<S> <C> <C> <C> <C>
Sales revenues $ 5,582 $ 4,464 1,961 $ 1,624
Cost of goods sold 3126 2,829 1,108 984
-----------------------------------------------------
2,456 1,635 853 640
Gross margin 44% 37% 44% 39%
Corporate and administrative expenses:
Marketing and sales 696 645 205 234
General and administrative 777 701 249 205
-----------------------------------------------------
1,473 1,346 454 439
Profit before undernoted item 983 289 399 201
Other income 22 11 9 2
-----------------------------------------------------
Profit for the period 1,005 300 408 203
=====================================================
Deficit at beginning of period (5,160) (5,679) (4,563) (5,582)
-----------------------------------------------------
(4,155) (5,379) (4,155) (5,379)
Profit per common share (in dollars) 0.05 0.01 0.02 (0.00)
Weighted average number of common shares
(in thousands) 19,631 18,724 19,633 19,601
</TABLE>
UNAUDITED (ALL AMOUNTS IN US DOLLARS EXCEPT WHERE OTHERWISE NOTED 2
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INTERNATIONAL ABSORBENTS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(US dollars, in thousands)
<TABLE>
<CAPTION>
9 MONTHS ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998
<S> <C> <C>
Cash flows from operating activities 899 105
Cash flows used in investing activities 12 1
Cash flows used in financing activities (299) (88)
------------------------
Net change in cash 612 18
Cash and cash equivalents, beginning of period 195 46
Cash and cash equivalents, end of period 807 64
========================
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(US dollars except where otherwise noted)
1. BASIS OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of International
Absorbents Inc. ("IABS") and its wholly-owned subsidiaries Absorption Corp
("Absorption"), a Nevada company doing business in Washington State, and Total
Absorb Inc. ("TAI"), a British Columbia company.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada and with the
instructions to form 10-Q and Rule 10 of Regulation S-X promulgated by the
United States Securities and Exchange Commission. Differences with respect to
accounting principles generally accepted in the United States, which are not
significant, are disclosed in Note 12. Such financial statements do not include
all disclosures required by generally accepted accounting principles for annual
financial statement reporting purposes. However, there has been no material
change in the information disclosed in the company's annual consolidated
financial statements dated January 31, 1999, except as disclosed herein.
Accordingly, the information contained herein should be read in conjunction with
annual consolidated financial statements and related disclosures. Certain
amounts have been restated to conform with the presentation for Fiscal Year
1999.
The accompanying interim consolidated statements reflect, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the results of the interim periods
presented. Results of operations for the period ended October 31, 1999 are not
necessarily indicative of results expected for an entire year.
2. OPERATING LINE OF CREDIT
The Company paid off its operating line of credit, including all accrued
interest, on September 14, 1999. This was done at the end of the short-term line
of credit contract period. The pay-off amount was $183,303. Cash for the balance
paid off was generated internally from operations.
3. SHARE CAPITAL
AUTHORIZED
100,000,000 common shares without par value.
COMMON SHARES ISSUED
<TABLE>
<CAPTION>
SHARES AMOUNT
<S> <C> <C>
Balance as of January 31, 1998 16,695,938 6,332,493
</TABLE>
UNAUDITED (ALL AMOUNTS IN US DOLLARS EXCEPT WHERE OTHERWISE NOTED 3
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<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1999 SHARES AMOUNT
<S> <C> <C>
For cash
Private Placement 3,013,864 $ 206,179
Purchase of escrow shares (560,000)
Conversion of debentures 451,250 45,125
--------------------------
Issued during the year 2,905,114 251,304
Share issue and registrations expenses -- (47)
--------------------------
Balance as of January 31, 1999 19,601,052 $ 6,583,750
==========================
PERIOD ENDED OCTOBER 31, 1999
For cash
Conversion of options 62,000 12,400
--------------------------
Issued during the period 62,000 12,400
Shares issued and registration expenses -- (47)
--------------------------
Balance as of October 31, 1999 19,663,052 $ 6,596,103
==========================
</TABLE>
Share transactions (excluding exercise of options and warrants) during the
period ending October 31, 1999 and the year ending January 31, 1999
Pursuant to Regulation D, subscription agreements entered into in March of 1998,
3,013,864 common shares were issued through an employee stock purchase at a
price of $0.085 per share for total proceeds of $256,179. As part of the
subscription agreement, share purchasers were issued 1,506,930 warrants with an
exercise price of $0.25. No finder's fees were payable in respect of this
subscription.
STOCK OPTIONS
<TABLE>
<CAPTION>
NUMBER OF
UNDERLYING EXERCISE
SHARES PRICES
<S> <C> <C>
Stock options outstanding, January 31, 1998 1,196,500 $0.50 to C$3.90
------------------------------
Granted 703,336 $0.20
Surrendered or expired (472,000) $0.20 to $1.69
------------------------------
Stock options outstanding, January 31, 1999 1,427,836 $0.20 to $0.91
Granted 40,000 $0.34
Exercised (62,000) $0.20
Surrendered or expired (32,336) $0.20 to $0.91
------------------------------
Stock options outstanding, October 31, 1999 1,373,500 $0.20 to $0.34
==============================
</TABLE>
Stock options outstanding at January 31, 1999 are due to expire from December
21, 1999 to October 1, 2002. Pursuant to the vesting terms of the option
agreements, stock options to purchase 1,333,500 common shares were eligible for
exercise at October 31, 1999 (at January 31, 1999 - 1,177,086). Through a proxy
vote of common shareholders at the Annual General Meeting, 1,146,500 stock
options were repriced to $0.20 per share in August of 1998.
WARRANTS
<TABLE>
<CAPTION>
NUMBER OF
UNDERLYING EXERCISE
SHARES PRICES
<S> <C> <C>
Warrants outstanding, January 31, 1998 1,380,000 $0.50 to $1.75
---------------------------------
Issued 1,966,930 $0.10 to $0.25
Surrendered or expired (800,000) $0.50 to $1.25
---------------------------------
Warrants outstanding, January 31, 1999 2,546,930 $0.10 to $1.75
Surrendered or expired (90,000) $0.75 to $1.50
---------------------------------
Warrants outstanding, October 31, 1999 2,456,930 $0.10 to $1.75
=================================
</TABLE>
Warrants outstanding at October 31, 1999 are due to expire from December 21,
1999 to December 7, 2001.
UNAUDITED (ALL AMOUNTS IN US DOLLARS EXCEPT WHERE OTHERWISE NOTED 4
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MANAGEMENT'S DISCUSSION & ANALYSIS
OUTLOOK
International Absorbents, Inc. is currently experiencing record revenue and
sales quarters. Because of the resulting improvement in our financial position,
we are now positioned for rapid growth in many areas. All of the product lines
which can bring us growth, are based on proven technology and a sound,
established distribution network. We are using this proven technology to take
superior products into the fastest growing sectors of billion-dollar markets.
The fact that International Absorbents now has a no-debt balance sheet means
that we have a solid foundation to support future growth.
Currently, we are anticipating an increase in annual revenues. The majority of
the revenue growth will occur in the Animal Care division, due to growth in
existing product lines, increased distribution and the addition of new product
lines. For the first time in several quarters, expansion can be seen in the
Industrial division, driven by increased international sales.
SALES REVENUES for the three months ended October 31, 1999 net of allowances and
discounts, were $1,961,000, an increase of 21% over the three months ended
October 31, 1998 total of $1,624,000. Sales revenues for the nine months ended
October 31, 1999, net of allowances and discounts, were $5,582,000, an increase
of 25% over the nine months ended October 31, 1998 total of $4,464,000.
This increase in sales revenues was mainly due to an increase in animal care
products sales including regularly scheduled promotional activity with major
retailers and fall open house promotions with pet distributors.
For the balance of fiscal year 2000, sales revenue growth is expected to
continue at historical rates. Additionally, our new cat litter and our small
animal bedding for the mass merchandiser channel should begin to contribute to
revenue growth. Our industrial division sales should contribute to our sales
revenue increase because of strong international sales.
GROSS PROFIT on net sales revenues for the three months ended October 31, 1999
were $853,000 (or 44%) versus $640,000 (or 39%) for the three months ended
October 31, 1998. Gross profits on total sales for the nine months ended October
31, 1999 were $2,456,000 (or 44%) versus $1,635,000 (or 37%) for the nine months
ended October 31, 1998.
These increases were primarily due to improvements in our manufacturing
efficiencies.
For the balance of fiscal year 2000, gross profits will remain at current levels
because of the production efficiencies, which have already been achieved.
NET PROFIT improved for the three month period ended October 31, 1999, to
$408,000 versus $203,000 for the three month period ended October 31, 1998. Our
net profit improved for the nine month period ended October 31, 1999 to
$1,005,000 versus $300,000 in the nine month period ended October 31, 1998.
These increases are due to an increase in sales, an improvement in the gross
margin and tight controls on general and administrative costs.
Profits are expected to continue to remain at levels above the previous year for
the remainder of fiscal year 2000. Because most production efficiencies have
already been achieved, future growth will result primarily from increased sales.
GENERAL AND ADMINISTRATIVE EXPENSES increased for the three months ended October
31, 1999 to $249,000 from $205,000 for the three months ended October 31, 1998,
resulting in a 21% change. These expenses increased for the nine month period
ended October 31, 1999 to $777,000 from $701,000 for the nine month period ended
October 31, 1998, resulting in a 11% change. These increases were principally
due to additional operating costs resulting from the Company's increase in
sales.
UNAUDITED (ALL AMOUNTS IN US DOLLARS EXCEPT WHERE OTHERWISE NOTED 5
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Total general and administrative expenses for the fiscal year are expected to
remain at current levels, but decrease as a percentage of sales.
MARKETING EXPENSES were $205,000 for the three months ended October 31, 1999 a
decrease of 12% from the three month period ended October 31, 1998 total of
$234,000. Marketing expenses were $696,000 for the nine months ended October 31,
1999 an increase of 8% from the nine month period ended October 31, 1998 total
of $645,000. This increase reflects new marketing programs and additional sales
staff.
Marketing expenses are expected to continue near this level for the remainder of
the 1999 fiscal year, while decreasing significantly as a percentage of sales
revenue.
LIQUIDITY AND CAPITAL RESOURCES At October 31, 1999 International Absorbents,
Inc. has $1,157,000 in working capital. This is an improvement from $336,000 at
January 31, 1999. The current ratio (current assets to current liabilities) at
period end increased to 2.52 from 1.40 at January 31, 1999. These changes are
mainly due to the company's profitability and positive cash flows.
CASH FLOW from operations increased to $899,000 for the nine months ended
October 31, 1999 versus $105,000 for the nine months ended October 31, 1998. We
expect to continue to generate cash from operations sufficient to meet
operational and growth needs; however, we may use various credit facilities to
finance manufacturing improvements and for the introduction of new product lines
if the need arises.
YEAR 2000
Historically, certain computerized systems have used two digits rather than four
digits to define the applicable year, which could result in recognizing a date
using "00" as the year 1900 rather than the year 2000. This could result in
major failures or miscalculations and is generally referred to as the "year 2000
issue." International Absorbents, Inc. recognizes that the impact of the year
2000 issue extends beyond traditional computer hardware and software to
automated plant systems and instrumentation, as well as to third parties. The
year 2000 issue is being addressed within the company by its individual
departments and progress is reported periodically to management. We have
committed resources to conduct risk assessments and to take corrective action,
where required, within each of the following areas: information technology,
plant systems and external parties.
Assessment audits of the information technology systems were completed in the
fourth quarter of fiscal year 1999. A plan to update all systems, which may be
effected by the year 2000 issue, was adopted in the first quarter of fiscal year
2000. The plan was completed and the information systems were upgraded during
the third quarter of fiscal year 2000. The company has backup systems in place
in the unlikely event that the new information systems are effected by the year
2000 issue. In the plant systems area, 100 percent of the company's systems have
been audited and are not expected to be effected by the year 2000 issue. The
company has backup systems for all plant operations systems, which will allow
the company to maintain a full production schedule in the unlikely case of a
year 2000 failure. An assessment audit of external parties was completed in the
third quarter of fiscal year 2000. Not all companies have demonstrated a
willingness to respond to year 2000 readiness questions, even with the new
legislation on the issue. A significant number of our suppliers have responded
in the affirmative that they are prepared. No third parties have responded in
the negative. A large number have not responded at all mainly due to legal
concerns about liability. To remediate the unlikely event that some of our
vendors are unable to supply materials, we will increase inventories to maintain
full production over the short term. In the case of utilities, communications
and transportation, the company's level of risk is the same as that of the
general population and industry.
The total cost of our year 2000 activities was not material to operations,
liquidity or capital resources. International Absorbents, Inc.'s cost for year
2000 work did not exceed $40,000.
Failure to address a year 2000 issue could result in business disruptions that
may materially affect our operations, liquidity or capital resources. We have
prepared contingency plans to address year 2000 issues which may have a material
effect. Typically these contingency plans address the results of single events
while the scope of year 2000 issues may cause multiple events for longer
durations. It is not possible for us
UNAUDITED (ALL AMOUNTS IN US DOLLARS EXCEPT WHERE OTHERWISE NOTED 6
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to anticipate all multiples of events that may occur. We will plan for multiple
events to the best of its ability and resources.
There is still uncertainty about the scope of the year 2000 issue. At this time
we cannot quantify the potential impact of these failures. Our year 2000 program
and contingency plans have been developed to address issues within our control.
The program minimizes, but does not eliminate the issues of external parties.
Statements made in this document referring to the Company's outlook, expected
sales revenues, gross profits, net profits, future expense levels, the Company's
liquidity, and cash flows are forward looking statements. Also, statements about
the Company's future financial position are forward looking statements. It is
important to note that the Company's actual results could differ materially from
those projected, due to various risk factors. Those risks include, but are not
limited to, the Company's ability to service and penetrate new markets, changes
in market conditions, increased labor costs due to labor shortages, unexpected
changes in cost or availability of utilities and materials and exceptional
marketing or administrative costs needed to maintain current business levels.
Additional information concerning factors that could cause actual results to
differ materially from those in the forward-looking statements is contained from
time to time in the Company's SEC filings, including but not limited to, forms
10-KSB, 10-QSB and the proxy statement to shareholders. Copies of these filings
may be obtained by contacting the company or the SEC.
PART II - OTHER INFORMATION
5. OTHER INFORMATION
Directors as at October 31, 1999:
Gordon L. Ellis
Stephen H. Silbernagel
John J. Sutherland, Jr.
Douglas E. Ellis
Shawn M. Dooley
6. EXHIBITS AND REPORTS ON FORM 8-K
No exhibits
No reports on Form 8-K have been filed during the period ended
October 31, 1999.
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.
INTERNATIONAL ABSORBENTS INC.
(Registrant)
Date: 11/16/99 /s/ Gordon L. Ellis
------------------ -------------------------------------
Gordon L. Ellis
President & CEO
UNAUDITED (ALL AMOUNTS IN US DOLLARS EXCEPT WHERE OTHERWISE NOTED 7
