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 AUGUST 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
(Registrant'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|
- --------------------------------------------------------------------------------
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 nine months ended August 31, 2005 and 2004 1
Consolidated Balance Sheets at August 31, 2005 (unaudited)
and November 30, 2004 2
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended August 31, 2005 and 2004 3
Notes to Consolidated Financial Statements (unaudited) 4
ITEM 2. Management's Discussion and Analysis or Plan of Operations 6
- ------- ----------------------------------------------------------
ITEM 3. Controls and Procedures 9
- ------- -----------------------
PART II. OTHER INFORMATION
- --------------------------
ITEM 1. Legal Proceedings
- ------- -----------------
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
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ITEM 6. Exhibits 9
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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 NINE MONTHS ENDED
----------------------------- -----------------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales $ 1,943,450 $ 2,016,298 $ 5,967,379 $ 5,856,963
Cost of sales 1,550,911 1,510,925 4,786,436 4,661,987
------------ ------------ ------------ ------------
Gross profit 392,539 505,373 1,180,943 1,194,976
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 344,344 401,192 1,259,710 1,085,667
Depreciation and amortization 39,214 50,180 139,656 136,508
------------ ------------ ------------ ------------
Total operating expenses 383,558 451,372 1,399,366 1,222,175
------------ ------------ ------------ ------------
Income (loss) from operations 8,981 54,001 (218,423) (27,199)
Other income (expense):
Interest expense (39,982) (34,451) (113,471) (82,038)
Impairment of fixed assets -- -- -- (108,232)
Gain on settlement -- -- -- 974,000
Other, net 51,358 16,011 90,034 (73,926)
------------ ------------ ------------ ------------
Total other income (expenses), net 11,376 (18,440) (23,437) 709,804
------------ ------------ ------------ ------------
Net income (loss) $ 20,357 $ 35,561 $ (241,860) $ 682,605
============ ============ ============ ============
Basic and diluted earnings (loss) per common share $ 0.00 $ 0.00 $ (0.02) $ 0.07
============ ============ ============ ============
Weighted Average Common Shares Outstanding:
Basic 10,932,693 10,469,730 10,654,915 9,872,449
============ ============ ============ ============
Diluted 10,941,264 10,955,303 10,654,915 10,444,106
============ ============ ============ ============
See accompanying notes to consolidated financial statements
1
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AUGUST 31, NOVEMBER 30,
2005 (UNAUDITED) 2004
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 140,501 $ 55,289
Accounts receivable 1,071,104 1,193,203
Inventories, net 1,094,734 690,951
Prepaid expenses and other 174,699 162,776
----------- -----------
Total current assets 2,481,038 2,102,219
Property and equipment, net 424,205 697,901
Other assets 80,965 668
----------- -----------
Total assets $ 2,986,208 $ 2,800,788
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 874,285 $ 582,871
Accrued liabilities 149,198 245,896
Restructuring reserve, current 12,656 25,312
Notes payable - related parties 100,000 200,000
Line of credit 875,591 685,970
Current portion of term loan 90,000 90,000
Current portion of capital lease obligations 41,484 45,275
----------- -----------
Total current liabilities 2,143,214 1,875,324
Capital lease obligations, net of current portion 5,860 18,803
Term loan, net of current portion 88,000 165,500
----------- -----------
Total liabilities 2,237,074 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;
11,766,026 and 10,516,026 shares issued and outstanding at
August 31, 2005 and November 30, 2004, respectively 11,766 10,516
Additional paid-in capital 8,285,846 8,037,097
Accumulated deficit (7,548,478) (7,306,452)
----------- -----------
Total stockholders' equity 749,134 741,161
----------- -----------
Total liabilities and stockholders' equity $ 2,986,208 $ 2,800,788
=========== ===========
See accompanying notes to consolidated financial statements
2
ADVANCED MATERIALS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
-----------------------
AUGUST 31, AUGUST 31,
2005 2004
--------- ---------
Cash flows from operating activities:
Net income (loss) $(241,860) $ 682,605
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 295,957 299,268
Provision for obsolete inventory -- 22,000
Restructuring reserve adjustment -- (84,032)
Non-cash compensation -- 80,000
Impairment of fixed assets -- 108,232
Gain on settlement -- (974,000)
Changes in operating assets and liabilities:
Accounts receivable 122,099 91,477
Inventories (403,783) 213,282
Prepaid expenses and other assets (92,220) 70,086
Accounts payable and accrued liabilities 194,716 (388,738)
Deferred compensation -- (250,000)
Restructuring reserve (12,656) (16,328)
--------- ---------
Net cash used in operating activities (137,747) (146,148)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (22,261) (113,931)
--------- ---------
Net cash used in investing activities (22,261) (113,931)
--------- ---------
Cash flows from financing activities:
Sale of common stock 249,833 749,001
Exercise of common stock options -- 6,609
Net borrowings under line of credit 189,621 160,675
Proceeds from issuance of debt -- 248,000
Payments on debt (194,234) (763,562)
--------- ---------
Net cash provided by financing activities 245,220 400,723
--------- ---------
Net change in cash and cash equivalents 85,212 140,644
Cash and cash equivalents, beginning of period 55,289 80,831
--------- ---------
Cash and cash equivalents, end of period $ 140,501 $ 221,475
========= =========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 113,470 $ 61,839
========= =========
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 August 31, 2005 and November 30, 2004 and the results of operations
and cash flows for the related interim periods ended August 31, 2005 and
August 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. At August 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 August
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.
4
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 August 31, 2005 and August 31, 2004, as their effect would be
antidilutive.
There were 2,436,000 and 1,176,000 potentially dilutive options and
warrants outstanding at August 31, 2005 and August 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 NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------------- ---------------------------
2005 2004 2005 2004
---------- ---------- ----------- -----------
Net income (loss) available to common
stockholders $ 20,357 $ 35,561 $ (241,860) $ 682,605
---------- ---------- ----------- -----------
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) (30,040) (18,755) (112,145)
Pro forma net income (loss) available to
common stockholders 10,979 5,521 (260,615) 570,460
Net income (loss) per common share - as reported:
Basic 0.00 0.00 (0.02) 0.07
Diluted 0.00 0.00 (0.02) 0.07
Net income (loss) per common share - pro forma:
Basic 0.00 0.00 (0.02) 0.06
Diluted 0.00 0.00 (0.02) 0.05
========== ========== =========== ===========
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:
AUGUST 31, NOVEMBER 30,
2004 2004
----------- -----------
(UNAUDITED)
Raw Materials $ 440,237 $ 348,738
Work-in-process 140,747 45,276
Finished Goods 513,750 317,154
----------- -----------
Less allowance for obsolete inventory (20,217)
----------- -----------
$ 1,094,734 $ 690,951
=========== ===========
5
5) STOCKHOLDERS EQUITY
In August, 2005, ADMG issued to each of the Lenawee Trust and Plus Four Private
Equities, L.P. 625,000 shares of ADMG's common stock for $0.20 per share
($125,000 each). The Lenawee Trust is an affiliate of Timothy R. Busch, the
Chairman of ADMG's Board of Directors.
6) DEBT
At August 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) 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.
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 August 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 generated net income of $20,357 and $35,561 in the three-month periods
ended August 31, 2005 and 2004, respectively and a net loss $241,860 and net
income of $682,605 in the nine-month periods ended August 31, 2005 and 2004,
respectively. At August 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 August 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.
6
RESULTS OF OPERATIONS
FY 05 CURRENT THREE MONTHS VERSUS FY 04
Net sales for the quarter ended August 31, 2005 were $1,943,450 versus
$2,016,298 for the same period of fiscal 2004, a decrease of $72,848 or 4%.
Revenues from the Singapore strategic manufacturing venture declined to $153,660
in the three-month period ended August 31, 2005 from $193,528 in the comparable
period in 2004. Revenues from U.S. operations decreased to $1,789,790 in the
third quarter of 2005 from $1,822,770 in 2004.
The decrease in sales for the U.S. operations are due to lower sales volumes in
the 3rd quarter. AM continues to focus on a strategy of becoming a product based
business and as these efforts continue AM will see increased sales revenues.
Cost of sales for the quarters ended August 31, 2005 and August 31, 2004 were
$1,550,991 and $1,510,925, respectively. Cost of sales as a percentage of net
sales was 80% for the third quarter of fiscal 2005, compared to 75% for the
third quarter of fiscal 2004. The Company's gross profit percentage was 20 % in
2005 period, compared to 25% in the 2004 period. Raw material price increases
lead to the cost of sales increased, then the gross profit percentage is getting
lower accordingly.
Selling, general and administrative expenses for the third quarter of fiscal
2005 and 2004 were $344,344 and $401,192, respectively, a decrease of $56,848 or
14%. There were abnormal legal and accounting expenses from 3rd quarter 2004 to
the 2nd quarter of 2005. There were no unusual general and administrative
expenses occurring in the 3rd quarter of fiscal 2005.
Interest expense for the third quarter of fiscal 2005 and 2004 was $39,982 and
$34,451, respectively. Interest expense relates primarily to bank borrowings and
is not expected to fluctuate significantly in the near future.
Net income for the third quarter of fiscal 2005 was $20,357, compared to net
income of $35,561 for the third quarter of fiscal 2004. Basic and diluted income
per share for the second quarter of fiscal 2005 was $0.00 per share, compared to
net income of $0.00 per share for the third quarter of fiscal 2004.
FY 05 CURRENT NINE MONTHS VERSUS FY 04
Net sales for the nine-month period ended August 31, 2005 were $5,967,379 versus
$5,856,963 for the same period of fiscal 2004, an increase of $110,416 or 2%.
Revenues from the Singapore strategic manufacturing venture declined to $407,581
in the nine-month period ended August 31, 2005 from $565,729 in the comparable
period in 2004. Revenues from U.S. operations increased to $5,559,798 in the
nine-month period ended August 31, 2005 from $5,291,234 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 nine-month periods ended August 31, 2005 and August 31,
2004 were $4,786,436 and $4,661,987, respectively. The Company's gross profit
percentage was 20% in the 2005 period, compared to 20% in the 2004 period.
Selling, general and administrative expenses for the nine-month periods ended
August 31, 2005 and 2004 were $1,259,710 and $1,085,667, respectively, a
decrease of $174,043 or 16%. This decrease was due to operating efficiencies.
Interest expense for the nine-month periods ended August 31, 2005 and 2004 was
$113,471 and $82,038, respectively. Interest expense relates primarily to bank
borrowings and is not expected to fluctuate significantly in the near future.
Net loss for the nine-month period ended August 31, 2005 was $241,860, compared
to a net income of $682,605 for the same period of fiscal 2004. Basic and
diluted income (loss) per share for the nine-month period ended August 31, 2005
was $(0.02) per share, compared to a net income of $0.07 per share for the same
period of fiscal 2004.
Net income for nine- month period of 2004 includes gain on settlement of
litigation of $974,000 and the reversal of a restructuring reserve of $84,032.
7
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $140,501 at August 31, 2005, compared with
$55,289 at November 30, 2004. Operating activities used $137,747 during the
nine-month period ended August 31, 2005, compared with $146,148 in the
corresponding period of fiscal 2004. The cash used by operating activities in
the 2005 period resulted primarily from an increase in inventory, prepaid
expenses and other, offset by an increase in accounts payable and accrued
liabilities, and a decrease in accounts receivable of $403,783 and $92,220 and
$194,716, and $122,099 respectively.
Capital expenditures were $22,261 for the nine months ended August 31, 2005,
compared to $113,931 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 and sales of common stock to
supplement internally generated cash flow. Activity related to short- and
long-term borrowings and sales of common stock in the nine-months ended August
31, 2005 resulted in cash provided by financing activities of $245,220.
In August, 2005, ADMG issued to each of the Lenawee Trust and Plus Four Private
Equities, L.P. 625,000 shares of ADMG's common stock for $0.20 per share
($125,000 each). The Lenawee Trust is an affiliate of Timothy R. Busch, the
Chairman of ADMG's Board of Directors.
At August 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.
FACTORS THAT COULD AFFECT FUTURE RESULTS
BANKING - The Company has incurred losses from operations The Company has
incurred continued net losses. At August 31, 2005, the Company had limited cash
reserves.
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
August 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 August lose market share
and future revenue and earnings August 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.
8
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 August 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 August 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.
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 August 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
August 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
August 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 August 31, 2005 that have materially
affected, or are reasonable likely to materially affect, the Company's internal
control over financial reporting.
9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
NONE
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In August, 2005, ADMG issued to each of the Lenawee Trust and Plus Four Private
Equities, L.P. 625,000 shares of ADMG's common stock for $0.20 per share
($125,000 each). The Lenawee Trust is an affiliate of Timothy R. Busch, the
Chairman of ADMG's Board of Directors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
At August 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.
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------
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
11