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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)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 for the quarterly period ended June 30, 2005
 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.
  Nevada
    
    94-3342064(State or other jurisdiction
of incorporation)
    
    (I.R.S. Employer
Identification No.)
 4126 Delp Street, Memphis, Tennessee 38118
 (901) 365-7650
 þ o
  
 Common Stock, $0.0001 Par value
    
    18,714,238 shares(Class of Stock)
    
    (Shares outstanding as of August 10, 2005)
 o þ




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INDEX TO FORM 10-QSB
  
 PagePart I. Financial InformationItem 1.
    
    Financial Statements.Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    3Condensed Consolidated Statements of Cash Flows
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    12Item 3.
    
    Controls and Procedures
    
    
    13Part II. Other InformationItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    14EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 302 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
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June 30
    
    
    December 312005
    
    
    2004(Unaudited)AssetsCurrent assets:Cash
    
    $
    63,504
    
    
    $
    Receivables:Trade, net of reserve for doubtful accounts of $48,167 in 2005
    
    
    1,318,125
    
    
    
    Related party
    
    
    
    
    
    
    27,116Total receivables
    
    
    1,318,125
    
    
    
    27,116Inventories, net
    
    
    3,052,386
    
    
    
    4,148Prepaid expenses
    
    
    70,185
    
    
    
    Total current assets
    
    
    4,504,200
    
    
    
    31,264Property, plant and equipment:Land
    
    
    97,817
    
    
    
    Buildings
    
    
    793,374
    
    
    
    Machinery and equipment
    
    
    554,189
    
    
    
    59,8431,445,380
    
    
    
    59,843Less accumulated depreciation
    
    
    64,683
    
    
    
    11,969Net property, plant and equipment
    
    
    1,380,697
    
    
    
    47,874Deferred acquisition costs
    
    
    
    
    
    
    100,568Total assets
    
    $
    5,884,897
    
    
    $
    179,706
 See accompanying Notes to Condensed Consolidated Financial Statements.
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June 30
    
    
    December 312005
    
    
    2004(Unaudited)Liabilities and shareholders deficitCurrent liabilities:Checks outstanding in excess of bank balance
    
    $
    
    
    
    $
    1,049Accounts payable and accrued expenses
    
    
    961,305
    
    
    
    283,947Due to seller
    
    
    282,524
    
    
    
    Current portion of long-term debt to
financial institution
    
    
    284,734
    
    
    
    Current portion of capital lease obligation
    
    
    24,600
    
    
    
    Total current liabilities
    
    
    1,553,163
    
    
    
    284,996Advances from shareholders
    
    
    49,899
    
    
    
    80,984Long-term debt, less current portion
    
    
    1,163,975
    
    
    
    Capital lease obligation, less current portion
    
    
    80,281
    
    
    
    Note payable to financial institution
    
    
    1,896,773
    
    
    
    Notes payable to related companies
    
    
    1,600,000
    
    
    
    589,514Total liabilities
    
    
    6,344,091
    
    
    
    955,494Shareholders deficit:Common stock, par value $0.0001:Authorized100,000,000 shares
Issued and outstanding18,664,238 in 2005
and 17,467,571 shares in 2004
    
    
    1,867
    
    
    
    1,747Additional paid-in capital
    
    
    11,207,135
    
    
    
    10,966,587Accumulated deficit
    
    
    (11,668,196
    )
    
    
    (11,744,122
    )Net shareholders deficit
    
    
    (459,194
    )
    
    
    (775,788
    )Total liabilities and shareholders deficit
    
    $
    5,884,897
    
    
    $
    179,706
 See accompanying Notes to Condensed Consolidated Financial Statements.
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Three months ended
    
    
    Six months endedJune 30
    
    
    June 302005
    
    
    2004
    
    
    2005
    
    
    


    2004Revenues:Unrelated companies
    
    $
    2,594,605
    
    
    $
    7,562
    
    
    $
    4,349,273
    
    
    $
    15,611Related companies
    
    
    12,898
    
    
    
    20,746
    
    
    
    39,817
    
    
    
    24,463Total revenues
    
    
    2,607,503
    
    
    
    28,308
    
    
    
    4,389,090
    
    
    
    40,074Costs of goods sold
    
    
    1,906,611
    
    
    
    23,340
    
    
    
    3,556,485
    
    
    
    35,183Gross profit
    
    
    700,892
    
    
    
    4,968
    
    
    
    832,605
    
    
    
    4,891Operating expenses:Professional and consulting
services
    
    
    43,107
    
    
    
    49,680
    
    
    
    89,089
    
    
    
    74,218Marketing and advertising
    
    
    92,281
    
    
    
    
    
    
    
    150,172
    
    
    
    Office and administrative
    
    
    235,986
    
    
    
    921
    
    
    
    383,817
    
    
    
    17,250Total operating expenses
    
    
    371,374
    
    
    
    50,601
    
    
    
    623,078
    
    
    
    91,468Operating income (loss)
    
    
    329,518
    
    
    
    (45,633
    )
    
    
    209,527
    
    
    
    (86,577
    )Other income (expenses):Miscellaneous income
    
    
    9,365
    
    
    
    
    
    
    
    15,264
    
    
    
    Write-off of deferred loan and
acquisition costs
    
    
    
    
    
    
    (415,246
    )
    
    
    
    
    
    
    (415,246
    )Interest expense
    
    
    (96,007
    )
    
    
    
    
    
    
    (148,865
    )
    
    
    Total other expenses
    
    
    (86,642
    )
    
    
    
    
    
    
    (133,601
    )
    
    
    Net income (loss)
    
    $
    242,876
    
    
    $
    (460,879
    )
    
    $
    75,926
    
    
    $
    (501,823
    )Basic net earnings (loss) per share
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    
    
    
    $
    (0.02
    )
 See accompanying Notes to Condensed Consolidated Financial Statements.
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Six months ended June 302005
    
    
    2004Operating activitiesNet income (loss)
    
    $
    75,926
    
    
    $
    (501,823
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in ) operating activities:Depreciation
    
    
    52,714
    
    
    
    Write-off of deferred loan and acquisition costs
    
    
    
    
    
    
    415,246Stock issued for services
    
    
    
    
    
    
    36,000Changes in operating assets and liabilities:Receivables
    
    
    (283,977
    )
    
    
    4,194Unbilled revenue to related company
    
    
    
    
    
    
    926Inventories
    
    
    361,347
    
    
    
    Prepaid expenses
    
    
    (70,185
    )
    
    
    Deferred loan & acquisition costs
    
    
    100,568
    
    
    
    38,256Checks outstanding in excess of cash
    
    
    (1,049
    )
    
    
    Accounts payable and accrued expenses
    
    
    60,455
    
    
    
    (245,609
    )Net cash provided by (used in) operating activities
    
    
    295,799
    
    
    
    (252,810
    )Investing activitiesPurchases of property, plant, and equipment
    
    
    (126,128
    )
    
    
    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
    
    
    (4,518,689
    )
    
    
    Financing activitiesNet borrowings on line of credit
    
    
    1,896,773
    
    
    
    Proceeds from borrowings of long-term debt
    
    
    1,500,000
    
    
    
    248,827Net borrowings from related parties
    
    
    1,010,486
    
    
    
    Net payments on advances from shareholders
    
    
    (1,085
    )
    
    
    Principal repayments on long-term debt
    
    
    (113,846
    )
    
    
    Principal repayments on capital lease obligation
    
    
    (5,934
    )
    
    
    Net cash provided by financing activities
    
    
    4,286,394
    
    
    
    248,827Net increase (decrease) in cash
    
    
    63,504
    
    
    
    (3,983
    )Cash at beginning of period
    
    
    
    
    
    
    4,168Cash at end of period
    
    $
    63,504
    
    
    $
    185
 See accompanying Notes to Condensed Consolidated Financial Statements.
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Supplemental disclosure of noncash activities
     Common stock issued for acquisition costs (see Note 3)
    
    
    210,668Due to seller
    
    
    282,524
 See accompanying Notes to Condensed Consolidated Financial Statements.
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1.
    
    Basis of Presentation
     2. Related Party Transactions
  Business Combinations
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2.
    
    Related Party Transactions (continued)
  3.
    
    Company Equity Matters
 2003 Diversified Thermal Solutions, Inc. Equity
Incentive Plan
  4.
    
    Business Acquisition and Related Financing
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4.
    
    Business Acquisition and Related Financing (continued)
  Statement of Financial Accounting Standards No. 141, Business Combinations.
 Accounts receivable
    
    $
    1,007,032Inventories
    
    
    3,409,585Property, plant, and equipment
    
    
    1,259,409Assets acquired
    
    
    5,676,026Accounts payable
    
    
    616,903Long-term debt
    
    
    62,555Capital lease obligations
    
    
    110,815Liabilities assumed
    
    
    790,273Net assets acquired
    
    $
    4,885,753
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4.
    
    Business Acquisition and Related Financing (continued)
  Three months ended
    
    
    Six months endedJune 30
    
    
    June 302005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues
    
    $
    2,607,503
    
    
    $
    2,163,051
    
    
    $
    5,022,102
    
    
    $
    4,760,008Net income (loss)
    
    
    242,876
    
    
    
    (428,776
    )
    
    
    (52,417
    )
    
    
    (512,995
    )Net income (loss) per share
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    
    
    
    $
    (0.03
    )Weighted average shares
used in computing net loss
per share
    
    
    18,664,238
    
    
    
    20,298,821
    
    
    
    18,464,794
    
    
    
    20,274,714
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4.
    
    Business Acquisition and Related Financing (continued)
  5.
    
    Commitments and Contingencies
   6.
    
    Earnings Per Share Data
   Three months ended
    
    
    Six months endedJune 30
    
    
    June 302005
    
    
    2004
    
    
    2005
    
    
    2004Average shares outstanding
    
    
    18,664,238
    
    
    
    20,298,821
    
    
    
    18,464,794
    
    
    
    20,274,714Net income (loss) per share
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    
    
    
    $
    (0.02
    )
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7.
    
    Income Tax Provision
  8.
    
    Going Concern
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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
  General
   Balance Sheets
  Results of Operations
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Liquiduty and Capital Resources
  Other Significant Events
  
 Item 3. Controls and Procedures
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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 200231.2
    
    Certification Pursuant to Section 302 of the Sarbanes  Oxley Act of 200232.1
    
    Certification Pursuant to Section 906 of the Sarbanes  Oxley Act of 200232.2
    
    Certification Pursuant to Section 906 of the Sarbanes  Oxley Act of 2002


(b). Reports on Form 8-K







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.
RegistrantDate: August 15, 2005
    
    /s/ B. Grant HunterB. Grant Hunter
President and Chief Executive OfficerDate: August 15, 2005
    
    /s/ J. Terry MedovitchJ. Terry Medovitch
Chief Financial Officer