UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-16401
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ADVANCED MATERIALS GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA 33-0215295
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3303 LEE PARKWAY SUITE 105 DALLAS, TEXAS 75219
(Address of principal executive offices)(Zip code)
(972) 432-0602
(Registant's telephone number, including area code)
--------------------------------------------------------------------------------
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 |_| No |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock, $.001 par value,
12,116,000 shares outstanding as of July 1, 2006.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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ADVANCED MATERIALS GROUP, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. Financial Statements: 1
Consolidated Statements of Operations (unaudited) for the
three and six months ended May 31, 2005 and May 31, 2004 1
Consolidated Balance Sheets at May 31, 2005 (unaudited) and
November 30, 2004 2
Consolidated Statements of Cash Flows (unaudited) for the six
months ended May 31, 2005 and, 2004 3
Notes to Consolidated Financial Statements (unaudited) 4
ITEM 2. Management's Discussion and Analysis or Plan of Operations 5
ITEM 3. Controls and Procedures 9
PART II. OTHER INFORMATION
--------------------------
ITEM 1. Legal Proceedings 9
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 9
ITEM 3. Defaults Upon Senior Securities 9
ITEM 4. Submission of Matters to a Vote of Security Holders 9
ITEM 5. Other Information 9
ITEM 6. Exhibits 9
Signatures 11
Certifications 12
ii
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
MAY 31, 2005 MAY 31, 2004 MAY 31, 2005 MAY 31, 2004
------------ ------------ ------------ ------------
Net sales $ 2,056,863 $ 1,826,054 $ 4,023,929 $ 3,840,665
Cost of sales 1,615,073 1,565,272 3,235,525 3,151,062
------------ ------------ ------------ ------------
Gross profit 441,790 260,782 788,404 689,603
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 439,069 321,327 915,366 760,152
Depreciation and amortization 50,298 36,764 100,442 86,328
------------ ------------ ------------ ------------
Total operating expenses 489,367 358,091 1,015,808 846,480
------------ ------------ ------------ ------------
Income (loss) from operations (47,577) (97,309) (227,404) (156,877)
Other income (expense):
Interest expense (39,468) (24,627) (73,489) (47,587)
Impairment of fixed assets -- (108,232) -- (108,232)
Gain on settlement -- 974,000 -- 974,000
Other, net 34,303 (27,574) 38,676 (14,261)
------------ ------------ ------------ ------------
Total other expenses, net (5,165) 813,567 (34,813) 803,920
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss) $ (52,742) $ 716,258 $ (262,217) $ 647,043
============ ============ ============ ============
Basic and diluted earnings (loss) per common share $ (0.01) $ 0.07 $ (0.02) $ 0.07
============ ============ ============ ============
Weighted Average Common Shares Outstanding:
Basic 10,516,026 9,920,787 10,516,026 9,573,808
============ ============ ============ ============
Diluted 10,516,026 10,179,830 10,516,026 9,841,529
============ ============ ============ ============
See accompanying notes to consolidated financial statements
-1-
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, NOVEMBER 30,
2005 (UNAUDITED) 2004
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 186,588 $ 55,289
Accounts receivable, net 1,099,946 1,193,203
Inventories, net 801,451 690,951
Prepaid expenses and other 123,153 162,776
----------- -----------
Total current assets 2,211,138 2,102,219
Property and equipment, net 488,876 697,901
Other assets -- 668
----------- -----------
Total assets $ 2,700,014 $ 2,800,788
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 724,301 $ 582,871
Accrued liabilities 198,471 245,896
Restructuring reserve, current 12,656 25,312
Notes payable - related parties 200,000 200,000
Line of credit 840,234 685,970
Current portion of term loan 90,000 90,000
Current portion of capital lease obligations 36,740 45,275
----------- -----------
Total current liabilities 2,102,402 1,875,324
Capital lease obligations, net of current portion 8,168 18,803
Term loan, net of current portion 110,500 165,500
----------- -----------
Total liabilities 2,221,070 2,059,627
----------- -----------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock-$.001 par value; 5,000,000 shares authorized; no shares
issued and outstanding -- --
Common stock-$.001 par value; 25,000,000 shares authorized; 10,516,026
shares issued and outstanding at May 31, 2005 and November 30, 2004 10,516 10,516
Additional paid-in capital 8,037,097 8,037,097
Accumulated deficit (7,568,669) (7,306,452)
----------- -----------
Total stockholders' equity 478,944 741,161
----------- -----------
Total liabilities and stockholders' equity $ 2,700,014 $ 2,800,788
=========== ===========
-2-
ADVANCED MATERIALS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
--------------------------------
MAY 31, 2005 MAY 31, 2004
------------ ------------
Cash flows from operating activities:
Net loss $(262,217) $ 647,043
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 216,433 193,012
Provision for obsolete inventory -- 22,000
Restructuring reserve adjustment (84,032)
Non-cash compensation -- 60,000
Impairment of fixed assets 108,232
Gain on settlement (974,000)
Changes in operating assets and liabilities:
Accounts receivable 93,257 198,880
Inventories (110,500) 277,020
Prepaid expenses and other 40,291 93,994
Accounts payable and accrued liabilities 94,005 (512,673)
Restructuring reserve (12,656) (10,000)
--------- ---------
Net cash provided by operating activities 58,613 19,476
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (7,408) (1,000)
--------- ---------
Net cash used in investing activities (7,408) (1,000)
--------- ---------
Cash flows from financing activities:
Sale of common stock -- 500,004
Exercise of common stock options -- 6,609
Net borrowings under line of credit 154,264 71,978
Proceeds from issuance of debt -- 248,000
Payments on debt (74,170) (724,757)
--------- ---------
Net cash provided by financing activities 80,094 101,834)
--------- ---------
Net change in cash and cash equivalents 131,299 120,310
Cash and cash equivalents, beginning of period 55,289 80,831
--------- ---------
Cash and cash equivalents, end of period $ 186,588 $ 201,141
========= =========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 73,489 $ 47,587
========= =========
Income taxes $ -- $ --
========= =========
See accompanying notes to consolidated financial statements
-3-
ADVANCED MATERIALS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and therefore do not include all information and
footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America.
The unaudited consolidated financial statements do, however, reflect all
adjustments, consisting of only normal recurring adjustments, which are, in
the opinion of management, necessary to state fairly the financial position
as of May 31, 2005 and November 30, 2004 and the results of operations and
cash flows for the related interim periods ended May 31, 2005 and May 31,
2004. However, these results are not necessarily indicative of results for
any other interim period or for the year. It is suggested that the
accompanying consolidated financial statements be read in conjunction with
the Company's audited consolidated financial statements and accompanying
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 2004.
The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred continued net losses. At May 31, 2005,
the Company had limited cash reserves and was not in compliance with
certain financial covenant ratios pertaining to its line of credit, and
therefore is in technical default under the compliance provisions of the
line of credit and term loan. This violation was cured in October 2005.
Management has implemented a plan to reduce expenses and improve sales. The
Company has altered its focus and will now be concentrating on securing
proprietary products primarily for the medical and consumer industry. The
objective is to create advanced designs, using current materials. These
products will be pursued through aggressive product development and the
licensing of existing patented products or technology. These new products
are expected to have higher profit margins and be less subject to
competition. There can be no assurances that the Company will be successful
in completing these critical tasks. If the Company is unable to
successfully complete these critical tasks, it may be forced to
significantly reduce, restructure or cease its operations and/or liquidate
inventory at amounts below current carrying value to generate the necessary
working capital to fund its operations, and if necessary, seek other
remedies available to the Company including protection under the bankruptcy
laws. As a result of these and other factors, the Company's independent
certified registered public accounting firm, Katherine Fang, LLP, indicated
in their report on the 2004 consolidated financial statements, that there
is substantial doubt about the Company's ability to continue as a going
concern.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Advanced
Materials Group, Inc. and its wholly owned subsidiary, Advanced Materials,
Inc. and Advanced Materials, Ltd. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ materially from those estimates.
2) LOSS PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the
presentation of basic and diluted net income per share. Basic earnings per
share exclude dilution and are computed by dividing net income by the
weighted average of common shares outstanding during the period. Diluted
earnings per share reflect the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. Potential common share equivalents including
stock options and warrants have been excluded for the three-month periods
ended May 31, 2005 and May 31, 2004, as their effect would be antidilutive.
-4-
There were 2,556,000 and 1,747,250 potentially dilutive options and
warrants outstanding at May 31, 2005 and May 31, 2004, respectively, that
were not included in the computation of the net loss per share because they
would be anti-dilutive.
3) STOCK BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure", which amended FAS No. 123, "Accounting for Stock-Based
Compensation." The new standard provides alternative methods of transition
for a voluntary change to the fair market value based method for accounting
for stock-based employee compensation. Additionally, the statement amends
the disclosure requirements of FAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. In compliance with FAS No. 148, the
Company has elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation plan as defined by APB
No. 25.
The following table represents the effect on net income and earnings per
share if the Company had applied the fair value based method and
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The Company's pro forma
information follows:
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
--------------------------- ----------------------------
2005 2004 2005 2004
----------- ---------- ----------- -----------
Net income (loss) available to common
stockholders $ (52,742) $ 716,258 $ (262,217) $ 647,043
----------- ---------- ----------- -----------
Plus: Stock-based employee compensation
included in reported net income (loss) -- -- -- --
Less: Total stock-based employee compensation
determined using fair value based method (9,378) (41,105) (18,755) (82,105)
Pro forma net income (loss) available to
common stockholders (62,120) 675,153 (280,972) 564,938
Net income (loss) per common share - as reported:
Basic (0.01) 0.07 (0.02) 0.07
Diluted (0.01) 0.07 (0.02) 0.07
Net income (loss) per common share - pro forma:
Basic (0.01) 0.07 (0.03) 0.06
Diluted (0.01) 0.07 (0.03) 0.06
=========== ========== =========== ===========
4) INVENTORIES
Inventories are stated at the lower of cost (determined on the first-in,
first-out method) or market. Inventories consisted of the following:
MAY 31, 2004 NOVEMBER 30, 2004
---------------------- -----------------------
(UNAUDITED)
Raw Materials $ 352,359 $ 348,738
Work-in-process 149,270 45,276
Finished Goods 320,038 317,154
---------------------- -----------------------
Less allowance for obsolete inventory (20,216) (20,217)
---------------------- -----------------------
$ 801,451 $ 690,951
====================== =======================
5) CONTINGENT LIABILITIES
Material legal proceedings to which the Company is a party are discussed in
Part 1, Item 3, in the Company's latest Annual Report on Form 10-K and in
Part II, Item 1 of this Form 10-QSB.
ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and the related notes that appear elsewhere in
this report.
-5-
This document contains forward-looking statements that involve risks and
uncertainties that could cause the results of the Company and its consolidated
subsidiaries to differ materially from those expressed or implied by such
forward-looking statements. These risks include the timely development,
production and delivery of new products; the challenge of managing asset levels,
including inventory and trade receivables; the difficulty of keeping expense
growth at modest levels while increasing revenues and other risks described from
time to time in the Company's filings with the Securities and Exchange
Commission, including but not limited to the Annual Report on Form 10-K for the
year ended November 30, 2004 and in "Factors That Could Affect Future Results"
below.
Forward-looking statements reflect the current views of the Company with respect
to future events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated or
expected.
The Company's condensed consolidated financial statements have been presented on
the basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company incurred a net loss of $52,742 in the three-month period ended May 31,
2005 and a net loss of $262,217 in the six-month period ended May 31 , 2005, the
Company had limited cash reserves and was not in compliance with certain
financial covenant ratios pertaining to its line of credit, and therefore is in
technical default under the compliance provisions of the line of credit and term
loan. This violation was cured in October 2005. Management has implemented a
plan to reduce expenses and improve sales. The Company has altered its focus and
will now be concentrating on securing proprietary products primarily for the
medical and consumer industry. The objective is to create advanced designs,
using current materials. These products will be pursued through aggressive
product development and the licensing of existing patented products or
technology. These new products are expected to have higher profit margins and be
less subject to competition. There can be no assurances that the Company will be
successful in completing these critical tasks. If the Company is unable to
successfully complete these critical tasks, it may be forced to significantly
reduce, restructure or cease its operations and/or liquidate inventory at
amounts below current carrying value to generate the necessary working capital
to fund its operations, and if necessary, seek other remedies available to the
Company including protection under the bankruptcy laws. As a result of these and
other factors, the Company's independent certified registered public accounting
firm, Katherine Fang, LLP, indicated in their report on the 2004 consolidated
financial statements, that there is substantial doubt about the Company's
ability to continue as a going concern.
RESULTS OF OPERATIONS
FY 05 CURRENT THREE MONTHS VERSUS FY 04
Net sales for the quarter ended May 31, 2005 were $2,056,863 versus $1,826,054
for the same period of fiscal 2004, an increase of $230,809 or 13%. Revenues
from the Singapore strategic manufacturing venture declined to $144,107 in the
three-month period ended May 31, 2005 from $179,708 in the comparable period in
2004. Revenues from U.S. operations increased to $1,912,756 in the second
quarter of 2005 from $1,646,346 in 2004.
The increase in sales for the U.S. operations are due to both increased sales
prices and higher sales volumes. The Company has begun to shift its primary
focus to generating its own proprietary opportunities with both its existing
customer base as well as new prospects in order to build a more competitive base
of business in the United States. In is anticipated that sales will continue to
increase as customer contracts are signed and new business is added.
Cost of sales for the quarters ended May 31, 2005 and May 31, 2004 were
$1,615,073 and $1,565,272, respectively. Cost of sales as a percentage of net
sales was 79% for the second quarter of fiscal 2005, compared to 86% for the
second quarter of fiscal 2004. The Company's gross profit percentage was 21% in
2005 period, compared to 14% in the 2004 period. After the 2nd fiscal quarter
2004 the company significantly reduced manufacturing costs. During the 2nd
quarter of 2004, manufacturing costs were about 23%; the 2nd fiscal quarter of
2005 costs were about 16%, which is contributed to the gross profit percentage
increase from 14% to 23% in the second quarter of fiscal 2005.
Selling, general and administrative expenses for the second quarter of fiscal
2005 and 2004 were $439,069 and $321,327, respectively, an increase of $117,742
or 37%. The reason for this increase was primarily due to the legal expenses
associated with the tax notice received from the IRAS to research fully the
issue.
Interest expense for the second quarter of fiscal 2005 and 2004 was $39,468 and
$24,627, respectively. Interest expense relates primarily to bank borrowings and
is not expected to fluctuate significantly in the near future.
Net loss for the second quarter of fiscal 2005 was $52,742, compared to net
income of $716,258 for the second quarter of fiscal 2004. Basic and diluted loss
per share for the second quarter of fiscal 2005 was $0.01 per share, compared to
net income of $0.07 per share for the second quarter of fiscal 2004.
-6-
FY 05 CURRENT SIX MONTHS VERSUS FY 04
Net sales for the six-month period ended May 31, 2005 were $4,023,929 versus
$3,840,665 for the same period of fiscal 2004, an increase of $183,264 or 5%.
Revenues from the Singapore strategic manufacturing venture declined to $253,921
in the six-month period ended May 31, 2005 from $371,319 in the comparable
period in 2004. Revenues from U.S. operations increased to $3,770,008 in the
six-month period ended May 31, 2005 from $3,469,346 in 2004.
The increase in sales for the U.S. operations are due to both increased sales
prices and higher sales volumes.
The lower sales in Singapore are primarily attributable to an amendment to the
Company's manufacturing agreement in Singapore with Foamex Asia ("Foamex") to
change the vendor of record for the customer supplied under the agreement from
the Company to Foamex effective July 17, 2003. Although this change does not
affect the Company's share of the profitability under the agreement, it does
cause a significant reduction in its reported revenues. Previously, the Company
purchased the raw materials for the production of product and billed the end
customer and therefore recognized the gross sales and cost of sales on its
financials. Under the amended agreement, it no longer purchases the raw
materials or bills the end customer and only recognizes its portion of profit as
revenue. Management believes this change has been beneficial to the Company as
it stills maintains a share of the profits from the Singapore agreement, while
it has significantly reduced its capital requirements since it no longer needs
to purchase raw materials several months in advance of realizing sales.
Cost of sales for the six-month periods ended May 31, 2005 and May 31, 2004 were
$3,235,525 and $3,151,062, respectively. The Company's gross profit percentage
was 20% in 2005 period, compared to 18% in the 2004 period. The increase in
gross profit percentage for the second quarter of 2005 was primarily due to the
change in the Singapore agreement noted above. The remaining improvement in the
gross profit percentage is due to the Company's discontinuing certain low margin
sales, and lower labor and overhead costs due to the optimizing of manufacturing
processes.
Selling, general and administrative expenses for the six-month periods ended May
31, 2005 and 2004 were $915,366 and $760,152, respectively, an increase of
$155,214 or 20%. This increase was due primarily to abnormal legal expenses
which described below and corporate-office relocation expenses.
Interest expense for the six-month periods ended May 31, 2005 and 2004 was
$73,489 and $47,587, respectively. Interest expense relates primarily to bank
borrowings and is not expected to fluctuate significantly in the near future.
Net loss for the six-month period ended May 31, 2005 was $262,217, compared to
net income of $647,043 for the same period of fiscal 2004. Basic and diluted
income (loss) per share for the six-month period ended May 31, 2005 was $(0.02)
per share, compared to $0.07 per share for the same period of fiscal 2004.
Net income for six- month period of 2004 includes gain on settlement of
litigation of $974,000 and the reversal of a restructuring reserve of $84,032.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $186,588 at May 31, 2005, compared with $55,289
at November 30, 2004. Operating activities provided $58,613 of cash during the
six-month period of fiscal 2005, compared with $19,476 in the corresponding
period of fiscal 2004. The cash provided by operating activities in 2005
resulted primarily from a decrease in accounts receivable, and an increase in
accounts payable and accrued liabilities, offset by an increase in inventory of
$93,257 and $94,005 and $110,500, respectively.
Capital expenditures were $7,408 for the six months ended May 31, 2005, compared
to $1,000 for the corresponding period in fiscal 2004. The Company has
instituted a Company-wide program to reduce non-essential capital expenditures
that are not specifically focused on revenue growth.
The Company uses short- and long-term borrowings to supplement internally
generated cash flow. Activity related to short- and long-term borrowings in the
six-months ended May 31, 2005 resulted in cash provided by financing activities
of $80,094.
At May 31, 2005, the Company was not in compliance with certain financial
covenant ratios pertaining to its line of credit, and therefore is in technical
default under the compliance provisions of the line of credit and term loan. In
September of 2005, the Company renegotiated the terms of these debt instruments,
reducing the line of credit from $3.75 million to $1.5 million and extending the
term of the term loan through October 1, 2006 with monthly principal payments of
$7,500 and the remainder due on October 1, 2006. Under the new agreement, the
line of credit and term loan bear interest at Prime plus 1.5% and Prime plus
2.0%, respectively. As a result of the new agreement, the Company was able to
cure its debt covenant violations.
-7-
FACTORS THAT COULD AFFECT FUTURE RESULTS
BANKING - The Company has incurred losses from operations The Company has
incurred continued net losses. At May 31, 2005, the Company had limited cash
reserves and was not in compliance with certain financial covenant ratios
pertaining to its line of credit, and therefore is in technical default under
the compliance provisions of the line of credit and term loan. This violation
was cured in October 2005. The curing of this default along with the revised
terms of the lending agreement result in reduced administrative and borrowing
fees.
COMPETITION - The Company encounters aggressive competition in all areas of its
business. It has numerous competitors, ranging from several comparable-size
companies to many relatively small companies. The majority of the competitors
are private, closely held companies. There is also the risk that a supplier to
the Company could become a competitor. The Company competes primarily on the
basis of performance, price, quality and customer service. Product life cycles
are short, with numerous small one-time customer orders. To remain competitive,
the Company must be able to quickly develop new products and enhance existing
products in response to customer demands. In some of its markets, the Company
may not be able to successfully compete against current and future competitors,
and the competitive pressures faced could harm the Company's business and
prospects.
NEW PRODUCT INTRODUCTIONS - If the Company cannot continue to rapidly develop
and manufacture innovative products that meet customer requirements for
performance, price, quality and customer service, it may lose market share and
future revenue and earnings may suffer. The process of developing new products
and corresponding manufacturing processes is complex and uncertain. The customer
decision-making process can be lengthy and some raw materials have extremely
long lead times. These circumstances often lead to long delays in new product
introductions. After a product is developed, the Company must be able to
manufacture sufficient volumes quickly at low enough costs. To do this it must
accurately forecast volumes and mix of products. Customer orders have also been
subject to dramatic swings from customer provided forecasts. Thus, matching
customers' demand and timing for particular products makes the process of
planning production and managing inventory levels increasingly difficult.
SHORT PRODUCT LIFE CYCLES - The short life cycles of many of the Company's
products pose a challenge to the Company's ability to effectively manage the
transition from existing products to new products. If the Company does not
manage the transition effectively, future revenue and earnings could suffer.
Among the factors that make a smooth transition from current products to new
products difficult are delays in the customer decision-making process,
development of manufacturing processes, long lead times for the delivery of raw
materials and variations in product costs. The Company's future revenues and
earnings could also suffer due to the timing and introduction of new product
offerings that compete directly or indirectly with its customers' products and
new product offerings by its competitors.
RELIANCE ON SUPPLIERS - The Company's manufacturing operations depend on its
suppliers' ability to deliver quality raw materials and components in time for
the Company to meet critical manufacturing and distribution schedules. The
Company sometimes experiences a short supply of certain raw materials as a
result of supplier out-of-stock situations or long manufacturing lead times. If
shortages or delays exist, the Company's future operating results could suffer.
Furthermore, it may not be able to secure enough raw materials at reasonable
prices to manufacture new products in the quantities required to meet customer
demand. Sudden or large raw materials price increases could also cause future
operating results to suffer if the Company is not able to increase its sales
prices to account for the materials price increases.
EARTHQUAKE - The corporate offices and manufacturing division in California are
located near major earthquake faults. The ultimate impact on the Company and its
general infrastructure is unknown, but operating results could be materially
affected in the event of a major earthquake. The Company is predominantly
uninsured for losses and interruptions caused by earthquakes.
ENVIRONMENTAL - Some of the Company's operations use substances regulated under
various federal, state and international laws governing the environment. It is
the Company's policy to apply strict standards for environmental protection to
sites inside and outside the U.S., even when not subject to local government
regulations. The Company has not been notified of any environmental infractions.
PROFIT MARGIN - The Company's profit margins vary somewhat among its products.
Consequently, the overall profitability in any given period is partially
dependent on the product and customer mix reflected in that period's net sales.
STOCK PRICE - The Company's stock price, like that of any other small-cap
company, can be volatile. Some of the factors that can affect the stock price
are:
o The Company's, its customer's or its competitor's announcement of new or
discontinued products,
o Quarterly increases or decreases in earnings,
o Changes in revenue or earnings estimates by the investment community, and
o Speculation in the press or investment community.
General market conditions and domestic or international macroeconomic factors
unrelated to the Company's performance may also affect the stock price. For
these reasons, investors should not rely on recent trends to predict future
stock prices or financial results. In addition, following periods of volatility
in a company's securities, securities class action litigation against a company
is sometimes instituted. This type of litigation could result in substantial
costs and the diversion of management time and resources.
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EARNINGS FLUCTUATIONS - Although management believes the Company has products
and resources needed for successful results, it cannot reliably predict future
revenue and margin trends. Actual trends may cause it to adjust its operations,
which could cause period-to-period fluctuations in earnings.
ITEM 3 - CONTROLS AND PROCEDURES
The Company's Chief Executive Officer (the Company's principal executive officer
and principal financial officer), has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of the period ended May
31, 2005, the period covered by this Quarterly Report on Form 10-QSB. Based upon
that evaluation, the Company's principal Chief Executive Officer has concluded
that the disclosure controls and procedures were effective as of May 31, 2005 to
provide reasonable assurance that material information relating to the Company
is made known to the CEO.
There were no changes in the Company's internal control over financial reporting
that occurred during the period ended May 31, 2005 that have materially
affected, or are reasonable likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
NONE
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
At May 31, 2005, the Company was not in compliance with certain financial
covenant ratios pertaining to its line of credit, and therefore is in technical
default under the compliance provisions of the line of credit and term loan. In
September of 2005, the Company renegotiated the terms of these debt instruments,
reducing the line of credit from $3.75 million to $1.5 million and extending the
term of the term loan through October 1, 2006 with monthly principal payments of
$7,500 and the remainder due on October 1, 2006. Under the new agreement, the
line of credit and term loan bear interest at Prime plus 1.5% and Prime plus
2.0%, respectively. As a result of the new agreement, the Company was able to
cure its debt covenant violations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
ITEM 5. OTHER INFORMATION.
NONE
ITEM 6. EXHIBITS
(a) Exhibits.
EXHIBITS DESCRIPTION
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31.1 Certifications Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: July 18, 2006 ADVANCED MATERIALS GROUP, INC.
By: /s/ William G. Mortensen
------------------------------
William G. Mortensen
President and Chief Financial Officer
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