##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 April 30, 2006
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 1-31642
 INTERNATIONAL ABSORBENTS INC.
  Province of British Columbia, Canada
(State or other jurisdiction of
incorporation or organization)
    
    None
(I.R.S. Employer
Identification No.)1569 Dempsey Road
North Vancouver, British Columbia, Canada
(Address of principal executive offices)
    
    V7K 1S8
(Zip Code)
 (604) 681-6181
 None
  þ o
  o o þ
  o þ
  Class
    
    Outstanding at June 3, 2006Common Shares, no par value per share
    
    6,410,328 shares




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##### 



PART I FINANCIAL INFORMATION  ITEM 1. FINANCIAL STATEMENTS
 INTERNATIONAL ABSORBENTS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 April 30,
    
    
    January 31,2006
    
    
    2006(unaudited)
    
    
    (audited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,314
    
    
    $
    2,198Short term investments
    
    
    610
    
    
    
    609Accounts receivable, net
    
    
    2,273
    
    
    
    2,160Inventories
    
    
    2,746
    
    
    
    2,646Prepaid expenses
    
    
    188
    
    
    
    113Deferred income tax asset
    
    
    96
    
    
    
    96Total current assets
    
    
    8,227
    
    
    
    7,822Property, plant and equipment, net
    
    
    16,847
    
    
    
    16,430Other assets, net
    
    
    242
    
    
    
    261Total assets
    
    $
    25,316
    
    
    $
    24,513Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    2,602
    
    
    $
    2,243Related party payable
    
    
    10
    
    
    
    6Current portion of long-term debt
    
    
    539
    
    
    
    537Income taxes payable
    
    
    59
    
    
    
    62Total current liabilities
    
    
    3,210
    
    
    
    2,848Deferred income tax liability
    
    
    830
    
    
    
    785Long-term debt
    
    
    6,691
    
    
    
    6,726Total liabilities
    
    
    10,731
    
    
    
    10,359Stockholders equity:Common stock, no par value;100,000,000
shares authorized,
6,410,328 and 6,320,768 issued and outstanding at
     
April 30, 2006 and January 31, 2006, respectively
    
    
    8,487
    
    
    
    8,299Additional paid in capital
    
    
    753
    
    
    
    652Retained earnings
    
    
    5,345
    
    
    
    5,203Total stockholders equity
    
    
    14,585
    
    
    
    14,154Total liabilities and stockholders equity
    
    $
    25,316
    
    
    $
    24,513
 2




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##### 



INTERNATIONAL ABSORBENTS INC.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedApril 30,
    
    
    April 30,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Sales, net
    
    $
    6,621
    
    
    $
    5,892Cost of goods sold
    
    
    4,566
    
    
    
    3,9332,055
    
    
    
    1,959Selling, general and administrative expenses
    
    
    1,714
    
    
    
    1,671Income from operations
    
    
    341
    
    
    
    288Interest expense
    
    
    (86
    )
    
    
    (78
    )Interest income
    
    
    18
    
    
    
    16Income before provision for income tax
    
    
    273
    
    
    
    226Income tax provision
    
    
    (131
    )
    
    
    (60
    )Net income
    
    $
    142
    
    
    $
    166Basic earnings per share
    
    $
    .02
    
    
    $
    .03Fully diluted earnings per share
    
    $
    .02
    
    
    $
    .03Weighted average number of shares outstanding
(in thousands)Basic
    
    
    6,384
    
    
    
    6,254Diluted
    
    
    6,393
    
    
    
    6,360
 3




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##### 



INTERNATIONAL ABSORBENTS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedApril 30,
    
    
    April 30,2006
    
    
    2005(unaudited)
    
    
    (unaudited)Cash flows from operating activitiesNet income
    
    $
    142
    
    
    $
    166Adjustments to reconcile net income to net cash
from operating activitiesDepreciation and amortization
    
    
    347
    
    
    
    312Stock-based compensation
    
    
    101
    
    
    
    4Deferred tax
    
    
    45
    
    
    
    12Changes in operating assets and liabilitiesAccounts receivable
    
    
    (113
    )
    
    
    (432
    )Inventory
    
    
    (100
    )
    
    
    (655
    )Prepaid expenses
    
    
    (75
    )
    
    
    (77
    )Accounts payable and accrued liabilities
    
    
    278
    
    
    
    72Income tax receivable/payable
    
    
    (3
    )
    
    
    48Due to related party
    
    
    4
    
    
    
    1Net cash flows from operating activities
    
    
    626
    
    
    
    (549
    )Cash flows from investing activitiesPurchase of short-term investments
    
    
    (1
    )
    
    
    (108
    )Proceeds from short-term investments
    
    
    
    
    
    
    107Purchase of property, plant and equipment
    
    
    (664
    )
    
    
    (364
    )Changes in restricted cash
    
    
    
    
    
    
    (2
    )Net cash flows from investing activities
    
    
    (665
    )
    
    
    (367
    )Cash flows from financing activitiesRepayment of long-term debt
    
    
    (33
    )
    
    
    (32
    )Proceeds from exercise of stock options
    
    
    188
    
    
    
    11Net cash flows from financing activities
    
    
    155
    
    
    
    (21
    )Net change in cash
    
    
    116
    
    
    
    (937
    )Cash and cash equivalents, beginning of period
    
    
    2,198
    
    
    
    3,520Cash and cash equivalents, end of period
    
    $
    2,314
    
    
    $
    2,583Supplemental Cash flow InformationCash paid for interest
    
    $
    73
    
    
    $
    63Cash paid for income taxes
    
    $
    79
    
    
    $
    Non-cash investing activitiesChange in property, plant and equipment and accounts
payable andaccrued liabilities for purchase of plant
and equipment
    
    $
    81
    
    
    $
    (33
    )
 4




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##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Significant Accounting Policies
 Basis of consolidation and presentation
   Use of estimates
  New Accounting Pronouncements
  Stock-based employee compensation
    5




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Three months endedApril 30,2005Net income
    
    $
    166Stock-based compensation recognized
under APB No. 25, net of related tax
effects
    
    
    Compensation expense calculated in accordance
with SFAS 123, net of related tax effects
    
    
    (84
    )Pro forma net income
    
    $
    82Basic earnings per shareAs reported
    
    $
    0.03Pro forma
    
    $
    0.01Diluted earnings per shareAs reported
    
    $
    0.03Pro forma
    
    $
    0.01
   6




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##### 



2007
    
    
    2006a)     risk free interest rate
    
    
    4.93
    %
    
    
    3.70
    %b)     expected volatility
    
    
    128.5
    %
    
    
    126.1
    %c)     expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %d)     estimated average life (in years)
    
    
    5.8
    
    
    
    7.00e)     weighted-average fair value per share
    
    $
    2.87
    
    
    $
    4.22
  Other stock-based compensation
  2. Share Capital
 Common Shares (U.S. dollars, in thousands)
 Shares
    
    
    CapitalCommon shares outstanding, January 31, 2006
    
    
    6,321
    
    
    $
    8,299Common shares outstanding, April 30, 2006
    
    
    6,410
    
    
    $
    8,487
 Options
  3. Segmented Information
    7




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Business Segment Data  Three Months Ended April 30, 2006
 Animal(U.S. dollars, in thousands)
    
    Care
    
    
    Industrial
    
    
    ConsolidatedRevenues
    
    $
    6,376
    
    
    $
    245
    
    
    $
    6,621Operating cost and expenses
    
    
    5,657
    
    
    
    276
    
    
    
    5,933Operating income (loss) before depreciation
and amortization
    
    
    719
    
    
    
    (31
    )
    
    
    688Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    (347
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (86
    )Interest income
    
    
    
    
    
    
    
    
    
    
    18Net income before taxes
    
    
    
    
    
    
    
    
    
    $
    273
 Business Segment Data  Three Months Ended April 30, 2005
 Animal(U.S. dollars, in thousands)
    
    Care
    
    
    Industrial
    
    
    ConsolidatedRevenues
    
    $
    5,548
    
    
    $
    344
    
    
    $
    5,892Operating cost and expenses
    
    
    4,880
    
    
    
    374
    
    
    
    5,254Operating income (loss) before depreciation
and amortization
    
    
    668
    
    
    
    (30
    )
    
    
    638Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    (350
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (78
    )Interest income
    
    
    
    
    
    
    
    
    
    
    16Net income before taxes
    
    
    
    
    
    
    
    
    
    $
    226
 4. Inventories components
 April 30,
    
    
    January 31,(U.S. dollars, in thousands)
    
    2006
    
    
    2006Raw materials and supplies
    
    $
    1,334
    
    
    $
    1,351Finished goods
    
    
    1,412
    
    
    
    1,295$
    2,746
    
    
    $
    2,646
 8




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##### 



5. Property, Plant and Equipment
 April 30,
    
    
    January 31,(U.S. dollars, in thousands)
    
    2006
    
    
    2006Property, plant and equipmentLand
    
    $
    1,547
    
    
    $
    1,547Buildings
    
    
    8,482
    
    
    
    8,474Leasehold improvements
    
    
    695
    
    
    
    630Equipment
    
    
    10,165
    
    
    
    10,127Construction in progress
    
    
    781
    
    
    
    147$
    21,670
    
    
    $
    20,925Less: Accumulated depreciation
    
    
    (4,823
    )
    
    
    (4,495
    )$
    16,847
    
    
    $
    16,430
 6. Credit arrangements
  7. Long-term debt
   8. Legal Matters
 et.al.
 9




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##### 



9. Earnings per share
 For the three months endedApril 30, 2006Net Income
    
    
    Shares
    
    
    Per share(numerator)
    
    
    (denominator)
    
    
    amountBasic earnings per shareNet income available to stockholders
    
    $
    142,000
    
    
    
    6,383,806
    
    
    $
    0.02Effect of dilutive securitiesStock options to purchase common stock
    
    
    
    
    
    
    9,633Diluted earnings per sharesNet income available to stockholders
    
    $
    142,000
    
    
    
    6,393,439
    
    
    $
    0.02
 For the three months endedApril 30, 2005Net Income
    
    
    Shares
    
    
    Per share(numerator)
    
    
    (denominator)
    
    
    amountBasic earnings per shareNet income available to stockholders
    
    $
    166,000
    
    
    
    6,253,598
    
    
    $
    0.03Effect of dilutive securitiesStock options to purchase common stock
    
    
    
    
    
    
    106,744Diluted earnings per sharesNet income available to stockholders
    
    $
    166,000
    
    
    
    6,360,342
    
    
    $
    0.03
  Three Months EndedMarch 31,2006
    
    
    2005Stock options
excluded from the
computation of
diluted net income
per share, other
than those used in
the determination
of common stock
equivalents
disclosed above
    
    
    512,400
    
    
    
    0
 ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   10




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Overview
  Care FRESH ® Care FRESH ® Care FRESH ®
  Care FRESH ® Care FRESH ® Ultra Care FRESH ® Colors Care FRESH ® Colors Care FRESH ® Colors Care FRESH ® Ultra Healthy Pet  Healthy Pet 
  RESULTS OF OPERATIONS
  April 30,
    
    
    Percent
    
    
    April 30,
    
    
    Percent
    
    
    Percentage2006
    
    
    of Sales
    
    
    2005
    
    
    of Sales
    
    
    ChangeSales, net
    
    $
    6,621
    
    
    
    100
    %
    
    $
    5,892
    
    
    
    100
    %
    
    
    12
    %Costs of goods sold
    
    
    4,566
    
    
    
    69
    %
    
    
    3,933
    
    
    
    67
    %
    
    
    16
    %Gross Profit
    
    
    2,055
    
    
    
    31
    %
    
    
    1,959
    
    
    
    33
    %
    
    
    5
    %Selling,
administrative and
general expenses
    
    
    1,714
    
    
    
    26
    %
    
    
    1,671
    
    
    
    28
    %
    
    
    3
    %Income from operations
    
    
    341
    
    
    
    5
    %
    
    
    288
    
    
    
    5
    %
    
    
    18
    %Interest income
    
    
    (18
    )
    
    
    0
    %
    
    
    (16
    )
    
    
    0
    %
    
    
    13
    %Interest expense
    
    
    86
    
    
    
    1
    %
    
    
    78
    
    
    
    1
    %
    
    
    10
    %Income before
provision for income
tax
    
    
    273
    
    
    
    4
    %
    
    
    226
    
    
    
    4
    %
    
    
    21
    %Income taxes
    
    
    (131
    )
    
    
    -2
    %
    
    
    (60
    )
    
    
    -1
    %
    
    
    118
    %Net income
    
    $
    142
    
    
    
    2
    %
    
    $
    166
    
    
    
    3
    %
    
    
    -14
    %
 11




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Net Sales
 Care FRESH ® Care FRESH ® Ultra Critter Care,
 Care FRESH ® Care FRESH Ultra Care FRESH ® Colors. Care FRESH ®
 Gross Profit
   12




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Selling, General and Administrative Expenses
    Interest Expense
  Income Tax
  Net Income
   13




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##### 



LIQUIDITY AND CAPITAL RESOURCES
   As of
    
    
    As ofApril 30, 2006
    
    
    January 31, 2006Financial ConditionTotal Assets
    
    $
    25,316
    
    
    $
    24,513Total Liabilities
    
    
    10,731
    
    
    
    10,359Total Equity
    
    $
    14,585
    
    
    $
    14,154Debt/equity ratio
    
    
    0.74
    
    
    
    0.73Assets/debt ratio
    
    
    2.36
    
    
    
    2.37Working CapitalCurrent assets
    
    $
    8,227
    
    
    $
    7,822Current liabilities
    
    $
    3,210
    
    
    $
    2,848Current ratio
    
    
    2.56
    
    
    
    2.75Cash PositionCash and short term investments
    
    $
    2,924
    
    
    $
    2,807Cash generated from operations
    
    $
    626
    
    
    $
    667
    ** for the entire year ended January 31, 2006
 Financial Condition
    14




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##### 



Working Capital
  Cash Position
    Cash Generated from Operations
  Financing and Investing Activities
    15




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##### 



Environmental Matters
  Off-Balance Sheet Arrangements
   CRITICAL ACCOUNTING POLICIES
   FORWARD-LOOKING STATEMENTS
  16




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ITEM
4. CONTROLS AND PROCEDURES
   PART II  OTHER INFORMATION
 ITEM
1. LEGAL PROCEEDINGS
   ITEM
1A. RISK FACTORS
  ITEM 6. EXHIBITS
 ExhibitNumber
    
    Exhibit Description3.1
    
    Altered Memorandum of Company (Amended) (incorporated by reference to Exhibit 3.1 to the Companys Form 10-KSB filed on April 3, 2003).3.2
    
    Articles of the Company (incorporated by reference to the exhibits to the Companys registration statement filed on February 24, 1992, as amended (No. 33-45020)).31.1
    
    Certification of Gordon Ellis, President and Chief Executive Officer of International Absorbents Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.31.2
    
    Certification of David Thompson, Chief Financial Officer of International Absorbents Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.32.1
    
    Certification of Gordon Ellis, President and Chief Executive Officer of International Absorbents Inc., pursuant to 18 U.S.C. Section 1350.32.2
    
    Certification of David Thompson, Chief Financial Officer of International Absorbents Inc., pursuant to 18 U.S.C. Section 1350.
 17




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##### 



SIGNATURES
  INTERNATIONAL ABSORBENTS INC.
(Registrant)Date:  June 9, 2006

/s/   GORDON L. ELLISGordon L. EllisPresident and Chief Executive Officer(Principal Executive Officer)Date: June 9,
2006
/s/   DAVID H. THOMPSONDavid H. ThompsonSecretary and Chief Financial Officer(Principal Financial Officer) 18