##### 



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
 For the quarterly period ended April 30, 2007
 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: 1-31642
 INTERNATIONAL ABSORBENTS INC.
  Province of British Columbia, Canada
    
    98-0487410(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)1569 Dempsey RoadNorth Vancouver, British Columbia, Canada
    
    V7K 1S8(Address of principal executive offices)
    
    (Zip Code)
 (604) 681-6181
 None
 þ o
  o o þ
 o þ
  Class
    
    Outstanding at June 3, 2007Common 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 31,2007
    
    
    2007(unaudited)
    
    
    (audited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,956
    
    
    $
    2,277Restricted cash
    
    
    451
    
    
    
    1,146Accounts receivable, net
    
    
    2,300
    
    
    
    2,373Inventories
    
    
    3,328
    
    
    
    3,221Prepaid expenses
    
    
    228
    
    
    
    126Deferred income tax asset
    
    
    101
    
    
    
    186Total current assets
    
    
    8,364
    
    
    
    9,329Property, plant and equipment, net
    
    
    19,519
    
    
    
    18,096Other assets, net
    
    
    258
    
    
    
    266Total assets
    
    $
    28,141
    
    
    $
    27,691Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    2,714
    
    
    $
    2,933Related party payable
    
    
    11
    
    
    
    5Current portion of long-term debt
    
    
    842
    
    
    
    805Income taxes payable
    
    
    224
    
    
    
    202Total current liabilities
    
    
    3,791
    
    
    
    3,945Deferred income tax liability
    
    
    892
    
    
    
    835Long-term debt
    
    
    7,434
    
    
    
    7,521Total liabilities
    
    
    12,117
    
    
    
    12,301Stockholders equity:Common stock, no par value;
100,000,000 shares authorized,
6,410,328 issued and outstanding at
April 30, 2007 and January 31, 2007
    
    
    8,487
    
    
    
    8,487Additional paid in capital
    
    
    1,093
    
    
    
    999Retained earnings
    
    
    6,444
    
    
    
    5,904Total stockholders equity
    
    
    16,024
    
    
    
    15,390Total liabilities and stockholders equity
    
    $
    28,141
    
    
    $
    27,691
 2




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##### 



INTERNATIONAL ABSORBENTS INC.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedApril 30,
    
    
    April 30,2007
    
    
    2006(unaudited)
    
    
    (unaudited)Sales, net
    
    $
    8,365
    
    
    $
    6,621Cost of goods sold
    
    
    5,598
    
    
    
    4,5662,767
    
    
    
    2,055Selling, general and administrative expenses
    
    
    1,670
    
    
    
    1,714Income from operations
    
    
    1,097
    
    
    
    341Interest expense
    
    
    (87
    )
    
    
    (86
    )Interest income
    
    
    24
    
    
    
    18Income before provision for income tax
    
    
    1,034
    
    
    
    273Income tax provision
    
    
    (411
    )
    
    
    (131
    )Net income
    
    $
    623
    
    
    $
    142Basic earnings per share
    
    $
    .10
    
    
    $
    .02Fully diluted earnings per share
    
    $
    .10
    
    
    $
    .02Weighted average number of shares outstanding
(in thousands)Basic
    
    
    6,410
    
    
    
    6,384Diluted
    
    
    6,428
    
    
    
    6,393
 3




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##### 



INTERNATIONAL ABSORBENTS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedApril 30,
    
    
    April 30,2007
    
    
    2006(unaudited)
    
    
    (unaudited)Cash flows from operating activitiesNet income
    
    $
    623
    
    
    $
    142Adjustments to reconcile net income to net cash
from operating activitiesDepreciation and amortization
    
    
    352
    
    
    
    347Stock-based compensation
    
    
    94
    
    
    
    101Deferred tax
    
    
    59
    
    
    
    45Changes in operating assets and liabilitiesAccounts receivable
    
    
    73
    
    
    
    (113
    )Inventory
    
    
    (107
    )
    
    
    (100
    )Prepaid expenses
    
    
    (102
    )
    
    
    (75
    )Accounts payable and accrued liabilities
    
    
    (576
    )
    
    
    278Income tax receivable/payable
    
    
    22
    
    
    
    (3
    )Due to related party
    
    
    6
    
    
    
    4Net cash flows from operating activities
    
    
    444
    
    
    
    626Cash flows from investing activitiesPurchase of short-term investments
    
    
    
    
    
    
    (1
    )Proceeds from short-term investments
    
    
    
    
    
    
    Purchase of property, plant and equipment
    
    
    (1,410
    )
    
    
    (664
    )Changes in restricted cash
    
    
    695
    
    
    
    Net cash flows from investing activities
    
    
    (715
    )
    
    
    (665
    )Cash flows from financing activitiesRepayment of long-term debt
    
    
    (50
    )
    
    
    (33
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    188Net cash flows from financing activities
    
    
    (50
    )
    
    
    155Net change in cash
    
    
    (321
    )
    
    
    116Cash and cash equivalents, beginning of period
    
    
    2,277
    
    
    
    2,198Cash and cash equivalents, end of period
    
    $
    1,956
    
    
    $
    2,314Supplemental Cash flow InformationCash paid for interest
    
    $
    96
    
    
    $
    73Cash paid for income taxes
    
    $
    330
    
    
    $
    79Non-cash investing activitiesChange in property, plant and equipment and accounts
payable and accrued liabilities for purchase of plant
and equipment
    
    $
    357
    
    
    $
    81
 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
 ,
   5




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##### 



Stock-based employee compensation
     2008
    
    2007a) risk free interest rate
    
    
    4.68
    %
    
    
    4.93
    %b) expected volatility
    
    
    106.0
    %
    
    
    128.5
    %c) expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %d) estimated average life (in years)
    
    
    5.80
    
    
    
    5.80e) weighted-average fair value per
share
    
    $
    2.97
    
    
    $
    2.87
  Other stock-based compensation
  6




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##### 



2. Share Capital
 Common Shares
 (U.S. dollars, in thousands)
    
    Shares
    
    CapitalCommon shares outstanding, January 31, 2007
    
    
    6,410
    
    
    $
    8,487Common shares outstanding, April 30, 2007
    
    
    6,410
    
    
    $
    8,487
 Options
  3. Segmented Information
    Business Segment Data  Three Months Ended April 30, 2007
 Animal(U.S. dollars, in thousands)
    
    Care
    
    
    Industrial
    
    
    ConsolidatedRevenues
    
    $
    8,164
    
    
    $
    201
    
    
    $
    8,365Operating cost and expenses
    
    
    6,697
    
    
    
    219
    
    
    
    6,916Operating income (loss) before depreciation
and amortization
    
    
    1,467
    
    
    
    (18
    )
    
    
    1,449Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    (352
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (87
    )Interest income
    
    
    
    
    
    
    
    
    
    
    24Net income before taxes
    
    
    
    
    
    
    
    
    
    $
    1,034
 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
 4. Inventories components
 April 30,
    
    
    January 31,(U.S. dollars, in thousands)
    
    2007
    
    
    2007Raw materials and supplies
    
    $
    1,534
    
    
    $
    1,569Finished goods
    
    
    1,794
    
    
    
    1,652$
    3,328
    
    
    $
    3,221
 5. Property, Plant and Equipment
 April 30,
    
    
    January 31,(U.S. dollars, in thousands)
    
    2007
    
    
    2007Property, plant and equipmentLand
    
    $
    1,547
    
    
    $
    1,547Buildings
    
    
    8,551
    
    
    
    8,534Leasehold improvements
    
    
    630
    
    
    
    630Equipment
    
    
    11,333
    
    
    
    10,996Construction in progress
    
    
    3,726
    
    
    
    2,313$
    25,787
    
    
    $
    24,020Less: Accumulated depreciation
    
    
    (6,268
    )
    
    
    (5,924
    )$
    19,519
    
    
    $
    18,096
 8




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##### 



6. Credit arrangements
  7. Long-term debt
    9




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##### 



8. Earnings per share
 For the three months endedApril 30, 2007Net Income
    
    
    Shares
    
    
    Per share(numerator)
    
    
    (denominator)
    
    
    amountBasic earnings per shareNet income available to stockholders
    
    $
    623,000
    
    
    
    6,410,328
    
    
    $
    0.10Effect of dilutive securitiesStock options to purchase common stock
    
    
    
    
    
    
    17,746Diluted earnings per sharesNet income available to stockholders
    
    $
    623,000
    
    
    
    6,428,074
    
    
    $
    0.10
 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
  Three Months EndedApril 30,2007
    
    2006Stock options
excluded from the
computation of
diluted net income
per share, other
than those used in
the determination
of common stock
equivalents
disclosed above
    
    
    384,150
    
    
    
    412,400
 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 Healthy Pet Healthy Pet
  Results of Operations
  April 30,
    
    Percent
    
    April 30,
    
    Percent
    
    Percentage2007
    
    of Sales
    
    2006
    
    of Sales
    
    ChangeSales
    
    
    8,365
    
    
    
    100
    %
    
    
    6,621
    
    
    
    100
    %
    
    
    26
    %COGS
    
    
    5,598
    
    
    
    67
    %
    
    
    4,566
    
    
    
    69
    %
    
    
    23
    %Gross Profit
    
    
    2,767
    
    
    
    33
    %
    
    
    2,055
    
    
    
    31
    %
    
    
    35
    %S G & A
    
    
    1,670
    
    
    
    20
    %
    
    
    1,714
    
    
    
    26
    %
    
    
    -3
    %Income from
operations
    
    
    1,670
    
    
    
    20
    %
    
    
    341
    
    
    
    5
    %
    
    
    390
    %Interest Income
    
    
    24
    
    
    
    0
    %
    
    
    18
    
    
    
    0
    %
    
    
    33
    %Interest Expense
    
    
    (87
    )
    
    
    -1
    %
    
    
    (86
    )
    
    
    -1
    %
    
    
    1
    %Profit before taxes
    
    
    1,034
    
    
    
    12
    %
    
    
    273
    
    
    
    4
    %
    
    
    279
    %Income Taxes
    
    
    (411
    )
    
    
    -5
    %
    
    
    (131
    )
    
    
    -2
    %
    
    
    214
    %Net Income
    
    
    623
    
    
    
    7
    %
    
    
    142
    
    
    
    2
    %
    
    
    339
    %
 11




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##### 



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




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##### 



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




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##### 



Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
   For the quarter ended(U.S. dollars in thousands)
    
    April 30, 2007
    
    April 30, 2006
    
    Percentage ChangeNet Income (Loss) (as
reported on Condensed
Consolidated Statement of
Operations)
    
    $
    623
    
    
    $
    142Interest expense
    
    
    87
    
    
    
    86Interest income
    
    
    (24
    )
    
    
    (18
    )Income tax provision
    
    
    411
    
    
    
    131Depreciation & amortization
    
    
    352
    
    
    
    347EBITDA
    
    $
    1,449
    
    
    $
    688
    
    
    
    111
    %
  Liquidity and Capital Resources
   As of April 30,
    
    As of January 31,2007
    
    2007Financial ConditionTotal Assets
    
    $
    28,141
    
    
    $
    27,691Total Liabilities
    
    
    12,117
    
    
    
    12,301Total Equity
    
    $
    16,024
    
    
    $
    15,390Debt/equity ratio
    
    
    0.76
    
    
    
    0.80Assets/debt ratio
    
    
    2.32
    
    
    
    2.25Working CapitalCurrent assets
    
    $
    8,364
    
    
    $
    9,329
 14




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##### 



As of April 30,
    
    As of January 31,2007
    
    2007Current liabilities
    
    $
    3,791
    
    
    $
    3,945Current ratio
    
    
    2.21
    
    
    
    2.36Cash PositionCash, restricted cash & short term
investments
    
    $
    2,407
    
    
    $
    3,423Cash generated from operations
    
    $
    444
    
    
    $
    2,416
    *
 
 *
    
    for the entire year ended January 31, 2007 Financial Condition
     Working Capital
   Cash Position
  15




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##### 



Cash Generated from Operations
  Financing and Investing Activities
      Environmental Matters
  Off-Balance Sheet Arrangements
  16




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##### 



Critical Accounting Policies
   FORWARD-LOOKING STATEMENTS
  ITEM 4. CONTROLS AND PROCEDURES
   PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  17




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##### 



ITEM 1A. RISK FACTORS
  ITEM 5. OTHER INFORMATION
  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.
 18




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##### 



SIGNATURES
  INTERNATIONAL ABSORBENTS INC.
(Registrant)Date: June 13, 2007
    /s/ GORDON L. ELLISGordon L. EllisPresident and Chief Executive Officer(Principal Executive Officer)Date: June 13, 2007
    /s/ DAVID H. THOMPSONDavid H. ThompsonSecretary and Chief Financial Officer(Principal Financial Officer) 19