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 FEBRUARY 28, 2006
|_| 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)
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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,
12,116,026 shares outstanding as of June 12, 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
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ITEM 1. Financial Statements:
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Consolidated Statements of Operations (unaudited) for the three
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months ended February 28, 2006 and 2005 3
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Consolidated Balance Sheets at February 28, 2006 (unaudited) and
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November 30, 2005 4
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Consolidated Statements of Cash Flows (unaudited) for the three
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months ended February 28, 2006 and 2005 5
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Notes to Consolidated Financial Statements (unaudited) 6
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ITEM 2. Management's Discussion and Analysis or Plan of Operation 7
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ITEM 3. Controls and Procedures 9
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PART II. OTHER INFORMATION
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ITEM 1. Legal Proceedings 10
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 10
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ITEM 3. Defaults Upon Senior Securities 10
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ITEM 4. Submission of Matters to a Vote of Security Holders 10
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ITEM 5. Other Information 10
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ITEM 6. Exhibits 10
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Signatures 11
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Certifications
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
----------------------------------------
FEBRUARY 28, 2006 FEBRUARY 28, 2005
----------------- -----------------
Net sales $ 2,375,337 $ 1,967,066
Cost of sales 1,700,786 1,620,452
----------------- -----------------
Gross profit 674,551 346,614
----------------- -----------------
Operating expenses:
Selling, general and administrative 464,727 476,297
Depreciation and amortization 26,769 50,144
----------------- -----------------
Total operating expenses 491,496 526,441
----------------- -----------------
Income (loss) from operations 183,055 (179,827)
Other income (expense):
Interest expense (41,884) (34,021)
Other, net 11,522 4,373
----------------- -----------------
Total other income (expense), net (30,362) (29,648)
----------------- -----------------
Net income (loss) $ 152,693 $ (209,475)
================= =================
Basic and diluted net income (loss) per share $ 0.01 $ (0.02)
================= =================
Weighted average common shares outstanding:
Basic 12,116,026 10,516,026
Diluted 12,140,783 10,516,026
See accompanying notes to consolidated financial statements
3
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, NOVEMBER 30,
2006 (UNAUDITED) 2005
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 449,125 $ 407,039
Accounts receivable 1,233,904 1,470,805
Inventories, net 995,396 1,085,057
Prepaid expenses and other 153,345 218,242
---------------- ----------------
Total current assets 2,831,770 3,181,143
Property and equipment, net 477,768 519,888
Other assets 78,862 80,964
---------------- ----------------
Total assets $ 3,388,400 $ 3,781,995
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 382,204 $ 849,715
Accrued liabilities 124,827 233,287
Notes payable - related parties 86,519 99,418
Line of credit 1,253,869 1,168,879
Current portion of term loan 90,000 90,000
Current portion of capital lease obligations 18,386 31,886
---------------- ----------------
Total current liabilities 1,955,805 2,473,185
Capital lease obligations, net of current portion 51,758 54,781
Term loan, net of current portion 10,000 35,885
---------------- ----------------
Total liabilities 2,017,563 2,563,851
---------------- ----------------
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; 12,116,026 shares
issued and outstanding at February 28, 2006 and November 30, 2005 12,116 12,116
Additional paid-in capital 8,355,497 8,355,497
Accumulated deficit (6,996,776) (7,149,469)
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Total stockholders' equity 1,370,837 1,218,144
---------------- ----------------
Total liabilities and stockholders' equity $ 3,388,400 $ 3,781,995
================ ================
See accompanying notes to consolidated financial statements
4
ADVANCED MATERIALS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
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FEBRUARY 28, 2006 FEBRUARY 28, 2005
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 152,693 $ (209,475)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities
Depreciation and amortization 62,814 111,365
Changes in operating assets and liabilities:
Accounts receivable 236,901 164,852
Inventories 89,661 (95,729)
Prepaid expenses and other 66,999 (23,675)
Accounts payable and accrued liabilities (575,971) 191,168
Restructuring reserve -- (6,328)
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Net cash provided by (used in) operating activities 33,097 132,178
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Cash flows from investing activities:
Purchases of property and equipment (20,694) (4,129)
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Net cash used in investing activities (20,694) (4,129)
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Cash flows from financing activities:
Net borrowings under line of credit 84,990 1,742
Repayments under term loan (25,885) (22,500)
Repayments of other long-term obligations (29,422) (8,591)
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Net cash provided by (used in) financing activities 29,683 (29,349)
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Net change in cash and cash equivalents 42,086 98,700
Cash and cash equivalents, beginning of period 407,039 55,289
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Cash and cash equivalents, end of period 449,125 $ 153,989
================= =================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 41,884 $ 34,020
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Income taxes $ -- $ --
================= =================
See accompanying notes to consolidated financial statements
5
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 February 28, 2006 and the results of
operations and cash flows for the interim periods ended February 28,
2006 and February 28, 2005. 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-KSB for the fiscal year ended November 30,
2005.
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) EARNINGS (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 February 28, 2006
and February 28, 2005, as their effect would be antidilutive.
There were 686,000 and 2,556,000 potentially dilutive options and
warrants outstanding at February 28, 2006 and February 28, 2005,
respectively, that were not included in the computation of the net
income (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:
6
THREE MONTHS ENDED
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FEBRUARY 28, 2006 FEBRUARY 28, 2005
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Net income (loss) available to common shareholders $ 152,693 $ (209,475)
Plus: Stock-based employee compensation expense included in
reported net income (loss) -- --
Less: Total stock-based employee compensation determined using
fair value based method (4,750) (9,378)
----------------- -----------------
Pro forma net income (loss) available to common stockholders $ 147,943 $ (218,853)
================= =================
Net income (loss) per common share - basic and diluted - as
reported $ 0.01 $ (0.02)
================= =================
Net income (loss) per common share - basic and diluted - pro forma $ 0.01 $ (0.02)
================= =================
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:
FEBRUARY 28, 2006 NOVEMBER 30, 2005
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(UNAUDITED)
Raw Materials $ 441,202 $ 479,206
Work-in-process 75,272 150,763
Finished Goods 513,822 489,988
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Less allowance for obsolete inventories (34,900) (34,900)
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$ 995,396 $ 1,085,057
================= =================
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-KSB for
the year ended November 30, 2005 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. Advanced Materials Group, Inc. undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
GENERAL
As of February 28, 2006, we had working capital of $875,965 compared to working
capital of $707,958 at November 30, 2005. The change is primarily related our
reduction of outstanding accounts payable and accrued liabilities by $467,511
and $108,460, respectively, over the three month period. The decrease in
accounts payable and accrued liabilities is offset by additional borrowings
under our line of credit of $84,990. Current assets have decreased $349,373
during the three month period ended February 28, 2006 primarily as a result of
decreases in accounts receivable and inventories, offset by an increase in cash.
7
RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 2006 COMPARED TO THE THREE
MONTHS ENDED FEBRUARY 28, 2005
Net sales for the quarter ended February 28, 2006 were $2,375,337 versus
$1,967,066 for the same period of fiscal 2005, an increase of $408,271 or 21%.
Revenues from the Singapore strategic manufacturing venture increased to
$160,968 in the three-month period ended February 28, 2006 from $109,814 in the
comparable period in 2005. Revenues from U.S. operations increased to $2,214,369
in the first quarter of 2006 from $1,857,252 in 2005.
The increase in sales for U.S. operations is due to both increased sales prices
and higher sales volumes. The Company is shifting 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.
Cost of sales for the quarters ended February 28, 2006 and February 28, 2005
were $1,700,786 and $1,620,452, respectively. The Company's gross profit
percentage was 28% in the 2006 period, compared to 18% in the 2005 period. The
Company continues to negotiate supply contracts with our suppliers to guard
against changing market conditions which would increase costs. The Company also
continues to buy in bulk quantities to achieve lower costs.
Selling, general and administrative expenses for the first quarter of fiscal
2006 and 2005 were $464,727 and $476,297, respectively, a decrease of $11,570 or
2%.
Interest expense for the first quarter of fiscal 2006 and 2005 was $41,884 and
$34,021, respectively. Interest expense relates primarily to bank borrowings and
is not expected to fluctuate significantly in the near future.
Net income for the first quarter of fiscal 2006 was $152,693, compared to a net
loss of $209,475 for the first quarter of fiscal 2005. Basic and diluted net
income per share for the first quarter of fiscal 2006 was $0.01 per share,
compared to a net loss of $.02 per share for the first quarter of fiscal 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $449,125 at February 28, 2006, compared with
$407,039 at November 30, 2005. Operating activities provided $33,097 of cash
during the first quarter of fiscal 2006, compared with $132,178 in the
corresponding period of fiscal 2005. The cash provided by operating activities
in the first quarter of 2006 resulted primarily from a decrease in accounts
receivable, inventories and prepaid expenses and other, offset by a decrease in
accounts payable and accrued liabilities of $236,901, $89,661, $66,999 and
$575,971, respectively.
Capital expenditures were $20,694 for the three months ended February 28, 2006,
compared to $4,129 for the corresponding period in fiscal 2005. 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
three-months ended February 28, 2006 resulted in cash provided in financing
activities of $9,683 compared to cash used of $29,349 in the same period of
2005.
FACTORS THAT COULD AFFECT FUTURE RESULTS
BANKING - The Company continues to improve the balance sheet through the
realization of positive earnings quarter over quarter. This has allowed the
Company to seek out conventional bank financing other than the current asset
based credit facility in place. The Company is working towards moving to
conventional bank line of credit by the fourth quarter of 2006.
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.
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 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 AM manufacturing division in California is 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.
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 and President/Chief Financial Officer (the
Company's principal executive officer and principal financial officer), have
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 February 28, 2006, the period covered by this
Quarterly Report on Form 10-QSB. Based upon that evaluation, the Company's
principal Chief Executive Officer and Chief Financial Officer have concluded
that the disclosure controls and procedures were effective as of February 28,
2006 to provide reasonable assurance that material information relating to the
Company is made known to the CEO and CFO.
There were no changes in the Company's internal control over financial reporting
that occurred during the period ended February 28, 2006 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
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE
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
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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
31.2 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
32.2 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
10
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: August 22, 2006 ADVANCED MATERIALS GROUP, INC.
By: /s/ William G. Mortensen
-------------------------------------
William G. Mortensen
President and Chief Financial Officer
11