Form 10-QSB

10QSB 1 d10qsb.htm FORM 10-QSB Form 10-QSB

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 June 30, 2006

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from to

Commission File Number: 001-32862

AMERICAN MOLD GUARD, INC.

(Exact name of small business issuer as specified in its charter)


California		74-3077656
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

30200 Rancho Viejo Road, Suite G, San Juan Capistrano, California 92675

(Address of principal executive offices)

(949) 240-5144

(Issuer’s telephone number)

Not Applicable

(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: as of August 4, 2006, 4,576,690 common stock, no par value, were outstanding.

Transitional Small Business Disclosure Format (check one): Yes ¨ No x

AMERICAN MOLD GUARD, INC.

FORM 10-QSB

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

TABLE OF CONTENTS


		Page No.
PART I - FINANCIAL INFORMATION

Item 1.	Unaudited Condensed Consolidated Financial Statements:

	Condensed Consolidated Balance Sheets as of December 31, 2005 and June 30, 2006 (unaudited)	3

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2006 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2006 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis or Plan of Operation	15

Item 3.	Controls and Procedures	27

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Submission of Matters to a Vote of Security Holders	28

Item 5.	Other Information	29

Item 6.	Exhibits	30

Signatures		31

PART I

FINANCIAL INFORMATION

Item 1.

Unaudited Condensed Consolidated Financial Statements

American Mold Guard, Inc.

Condensed Consolidated Balance Sheets


	December 31, 2005			June 30, 2006 (unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	67,782		$	9,241,229
Accounts receivable, less allowance for doubtful accounts of $15,708 and $52,694 as of December 31, 2005 and June 30, 2006, respectively.		1,257,356			1,616,260
Inventories		38,039			61,320
Deferred offering costs (Note 2)		620,882			—
Deposits		115,935			349,573
Other current assets		80,122			58,658

Total Current Assets		2,180,116			11,327,040
Property and equipment, net (Note 4)		309,465			635,670
Intangible assets, net		2,536			1,522

Total Assets	$	2,492,117		$	11,964,232

LIABILITIES AND SHAREHOLDERS’ EQUITY(DEFICIENCY)
Current Liabilities:
Accounts payable and accrued liabilities	$	1,908,414		$	1,776,920
Lease line of credit, current portion		—			73,635
Accrued payroll related expenses		1,687,834			1,293,938
Short term notes payable (Note 5)		3,129,986			176,581
Accrued interest payable		372,326			126,229

Total Current Liabilities		7,098,560			3,447,303
Long-Term Liabilities:
Long-term notes payable, net of discount (Note 5)		835,089			220,904
Lease line of credit, net of current portion

Total Liabilities		7,933,649			3,668,207

Commitments and contingencies (Notes 5, 8)
Shareholders’ Equity (Deficiency) (Notes 3, 5, 6, 7 and 9)
Preferred stock no par value; 10,000,000 shares authorized:
Series A Convertible Preferred Stock, no par value, 170,062 shares authorized, 170,062 shares issued and outstanding having a liquidation preference of $772,740 on December 31, 2005, and 0 shares authorized, issued and outstanding on June 30, 2006		625,000			—
Series B Redeemable, Convertible Preferred Stock, no par value, 411,550 shares authorized, 154,586 shares issued and outstanding having a liquidation preference of $1,180,791 on December 31, 2005, and 256,964 shares authorized and 0 shares issued and outstanding on June 30, 2006		859,000			—
Series C Convertible Preferred Stock, no par value, 5,000,000 authorized, none issued and outstanding on December 31, 2005 and June 30, 2006
Common Stock, no par value, 50,000,000 shares authorized, 942,301 and 4,536,690 shares issued and outstanding on December 31, 2005 and June 30, 2006, respectively		1,475,262			16,578,041
Additional paid-in capital		2,005,289			6,804,807
Accumulated deficiency		(10,406,083	)		(15,086,823	)

Total Shareholders’ Equity (Deficiency)		(5,441,532	)		8,296,025

Total Liabilities and Shareholders’ Equity (Deficiency)	$	2,492,117		$	11,964,232

The accompanying notes are an integral part of these condensed consolidated financial statements.

American Mold Guard, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)


	Three months ended June 30, 2005			Three months ended June 30, 2006			Six months ended June 30, 2005			Six months ended June 30, 2006
Revenue, net	$	1,264,174		$	2,591,968		$	2,259,873		$	5,353,622
Cost of revenue:
Direct costs		1,129,028			1,449,341			1,836,123			3,013,296
Depreciation expense		24,769			38,056			45,041			71,614

Total cost of revenue		1,153,797			1,487,397			1,881,164			3,084,910

Gross margin		110,377			1,104,571			378,709			2,268,712
Selling, general and administrative expenses		1,267,119			2,738,263			2,331,949			4,302,568

Loss from operations		(1,156,742	)		(1,633,692	)		(1,953,240	)		(2,033,856	)
Interest expense		(230,875	)		(1,913,352	)		(394,714	)		(2,642,050	)

Loss before provision income for taxes		(1,387,617	)		(3,547,044	)		(2,347,954	)		(4,675,906	)
Provision for income taxes		150			965			950			4,833

Net loss		(1,387,767	)		(3,548,009	)		(2,348,904	)		(4,680,739	)
Dividends on cumulative preferred stock		33,066			11,720			185,463			304,163

Net loss applicable to common shareholders		(1,420,833	)		(3,559,729	)		(2,534,367	)		(4,984,902	)

Basic and diluted net loss per share	$	(1.50	)	$	(1.57	)	$	(2.56	)	$	(2.92	)

Dividends accumulated for the period on cumulative preferred stock	$	(0.04	)	$	(0.01	)	$	(0.20	)	$	(0.19	)

Net loss per share attributable to common shareholders	$	(1.54	)	$	(1.57	)	$	(2.76	)	$	(3.11	)

Weighted average number of common shares outstanding – basic and diluted		923,798			2,260,871			917,676			1,601,586

The accompanying notes are an integral part of these condensed consolidated financial statements.

American Mold Guard, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six months ended June 30, 2005			Six months ended June 30, 2006
Cash flows from operating activities:
Net loss	$	(2,348,904	)	$	(4,680,739	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization expense		56,878			88,204
Compensation expense from stock options		—			60,514
Common stock issued for payment of interest		15,000			—
Common stock issued in payment of directors fees		37,500			—
Fair value of warrant issued for services		128,000			56,766
Fair value of Common Stock issued for Trust One		12,500			—
Amortization of beneficial conversion debt discount		203,730			2,415,837
Increase (decrease) in cash from changes in assets and liabilities:
Accounts receivable		(206,835	)		(358,904	)
Inventories		29,419			(23,281	)
Deposits and other current assets		(10,214	)		(211,160	)
Accounts payable and accrued liabilities		717,388			(131,495	)
Accrued payroll related expenses		264,121			(393,895	)
Accrued interest payable		134,905			(246,097	)

Net cash used in operating activities		(966,512	)		(3,424,250	)

Cash flows from investing activities:
Purchase of property and equipment		(148,246	)		(119,870	)

Net cash used in investing activities		(148,246	)		(119,870	)

Cash flows from financing activities:
Proceeds on issuance of Common Stock, net of $1.4 million of offering costs and underwriter discounts of $1.5 million		—			16,631,685
Borrowings from notes payable		951,581			750,000
Payments on short term notes payable		(26,161	)		(5,285,000	)
Deferred offering costs, net of an increase of $787,583		(40,776	)		620,882

Net cash flows provided by financing activities		884,644			12,717,567

(Decrease) increase in cash and cash equivalents		(230,114	)		9,173,447
Cash and cash equivalents, beginning of period		243,788			67,782

Cash and cash equivalents, end of period	$	13,674		$	9,241,229

Supplemental disclosures for cash flow information:
Non-cash financing activities
Conversion of Series A and B preferred stock	$	—		$	1,484,000
Securities issued in repayment of bridge financing		—			1,500,000
Property and equipment acquired under lease line of credit		—			294,539
Non-cash investing activities – Trust One Termite
Vehicles and equipment		5,730			—
Other current assets		2,233			—
Intangible assets		4,397			—
Accounts payable		(7,362	)		—
Long term notes payable		(1,581	)		—
Cash paid for interest		40,264			474,076
Cash paid for income taxes		—			2,555

The accompanying notes are an integral part of these condensed consolidated financial statements.

Note 1. Organization and Nature of Operations

Organization

American Mold Guard, Inc. (the “Company”) commenced operations in September 2002 and was incorporated under the laws of the State of California on January 13, 2003.

Nature of Operations

The Company’s principal business is providing mold prevention services to the residential home building industry. The Company focuses its efforts on single and multi-family residential new construction. Currently, the Company operates 16 service centers in five states – California, Florida, Texas, Mississippi and Louisiana. Through its wholly-owned subsidiary, Trust One Termite, Inc. (“Trust One”), the Company also provides termite control services.

Unaudited Interim Financial Statements

The Company has prepared these financial statements in accordance with United States generally accepted accounting principles for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended December 31, 2005 included in the Company’s Registration Statement on Form SB2 filed with the Securities and Exchange Commission on January 6, 2006 ( the ‘Registration Statement”) and effective on May 2, 2006. The interim unaudited condensed consolidated financial statements should be read in conjunction with the financial statements included in the Registration Statement. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair statement of the financial position of the Company as of June 30, 2006 and the results of its operations and its cash flows for the three and six months ended June 30, 2006 and 2005. Such adjustments are of a normal recurring nature. The results of operations for the six months ended June 30, 2006 are not necessarily indicative of results of operations to be expected for the full year.

Acquisition of Trust One Termite, Inc.

The Company acquired Trust One on February 1, 2005. Under the terms of the acquisition, the Company issued 3,401 shares of its Common Stock for all of the issued and outstanding shares of common stock of Trust One. The acquisition was accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” The shares were valued at $12,500, based on the estimated fair value of the Company’s Common Stock at the day of the acquisition of $3.68 per share. The results of Trust One’s operations have been included in the consolidated financial statements since the date of the acquisition.

The pro forma financial results set forth below reflect certain operational data of the Company as if the acquisition of Trust One took place on January 1, 2005.


	Six Months Ended June 30, 2005
Net revenue	$	2,269,740
Net loss	$	(2,357,717	)
Loss per common share	$	(2.57	)
Weighted average common shares outstanding		917,676

Note 2. Summary of Critical Accounting Policies

Principles of Consolidation

These condensed consolidated financial statements are presented in accordance with generally accepted accounting principles in the United States. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Trust One since the date of its acquisition, February 1, 2005. All significant inter-company accounts and transactions are eliminated upon consolidation.

Management 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, the 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 from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less, when acquired, to be cash equivalents.

Inventories

Inventories are stated at the lower of cost (as determined by the first-in, first-out method) or market and consist primarily of raw materials.

Deferred Offering Costs

Direct costs were incurred in connection with the sale of the Company’s $1.5 million aggregate principal amount 10% unsecured promissory notes due August 31, 2006 (the “Unsecured Notes”). The costs related to the Unsecured Notes were fully amortized over the life of the Unsecured Notes, and, for the three and six months ended June 30, 2006, $40,670 and $47,450 has been recognized as interest expense. Direct costs were also incurred in connection with the Company’s initial public offering (the “IPO”), which became effective on May 2, 2006 (Note 7), principally related to underwriting commissions and legal expenses which were capitalized. The Company offset the costs associated with the IPO in the amount of $1,408,465 against the IPO proceeds in the quarter ended June 30, 2006.

Property and Equipment

Property and equipment are recorded at cost. The Company provides for depreciation over estimated useful lives ranging from three to five years, using the straight-line method. Leasehold improvements and capitalized leased equipment are amortized over the life of the related non-cancelable lease. Repair and maintenance expenditures that significantly add to the value of the property, or prolong its life, are capitalized. Repair and maintenance expenditures that do not significantly add to the value of the property, or prolong its life, are charged to expense as incurred. Gains and losses on dispositions of property and equipment are included in the related period’s statement of operations.

Impairment of Long-Lived Assets

The Company has adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses significant issues relating to the implementation of SFAS No. 121 and develops a single accounting model, based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale, whether or not such assets are deemed to be a business. SFAS No. 144 also modifies the accounting and disclosure rules for discontinued operations. Management did not note any indicators of impairment during the six months ended June 30, 2005 and 2006.

Income Taxes

The Company accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amount at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Comprehensive Income

The Company has adopted SFAS No. 130, “Reporting Comprehensive Income” which establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on available-for-sale securities. The Company did not have any items of other comprehensive income as of June 30, 2006 or during the six months ended June 30, 2005 and 2006.

Revenue Recognition

Revenue is based on contracts for agreed upon fees entered into with customers for the services to be completed and is recognized when the service is completed, the amount of the service and contract value is determinable and collection is reasonably assured. The resulting accounts receivable are reported at their principal amounts and adjusted for an estimated allowance for uncollectible amounts, if appropriate. The Company does not require collateral on its accounts receivable.

Service Warranties

The Company provides a general warranty on its services that extends for the entire “statute of repose,” the period during which, under the various state laws, builders have continuing liability for construction defects. In general, the period of continuing liability is between 10 and 15 years depending upon the state in which the service has been provided. The warranty covers both property damage and personal injury arising from mold contamination on any surface treated by the Company. The personal injury portion of the warranty is supported by a $2.0 million pollution liability mold giveback provision under the Company’s general liability policy. The Company estimates its exposure to warranty claims based upon historical warranty claim costs and expectations of future trends. Management reviews these estimates on a regular basis and adjusts the warranty provisions as actual experience differs from historical estimates or other information becomes available. However, the Company does not have, at this time, sufficient experience to determine if a reserve is required and/or if the coverage under the general liability policy is sufficient should claims be filed against the Company. To date, the Company has not been required to perform under the terms of its warranty provisions, and management is not aware of any pending or threatened claims. As a result, the accompanying condensed consolidated financial statements do not include any accruals or provisions associated with future warranty expenditures.

Stock-based Compensation under FAS123R

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,”, or SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, or APB 25, for periods beginning in fiscal 2006. In March 2006, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective application transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s 2006 fiscal year. The Company’s Consolidated Financial Statements as of and for the three and six months ended June 30, 2006 reflect the impact of SFAS 123(R). In accordance with this transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).

Upon adoption of SFAS No. 123R, the Company has continued to use the Black-Scholes model which was previously used for the Company’s pro forma information required under SFAS No. 123. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.

The weighted-average estimated fair value of employee stock options granted during the three and six month periods ended June 30, 2005 and 2006 was $0.45 and $0.44 and, $2.59 and $2.59, respectively per share using the Black-Scholes model with the following assumptions (annualized percentages):


	June 30, 2005		June 30, 2006
Expected volatility	31	%	55	%
Expected dividend yield	0		0
Expected term (in years)	5.0		3.4
Risk-free rate	3.8	%	4.9	%

Expected volatility is based on the Company’s historical volatility and the historical volatilities of the common stock of comparable publicly traded companies. The risk-free rate for the expected term of the option is based on the average U.S. Treasury yield curve at balance sheet date for the expected term. The expected term of options granted is derived from the average midpoint between vesting and the contractual term, as described in SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment.

Share-based compensation expense, included in selling, general and administrative expenses, recognized under SFAS 123(R) for the three and six months ended June 30, 2006 was $27,107 and $60,514, respectively. SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the grant-date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Operations.

Share-based compensation expense recognized during the current period is based on the value of the portion of share-based payment awards that is ultimately expected to vest. SFAS 123(R) requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is based on historical rates. Share-based compensation expense recognized in the Company’s Consolidated Statement of Operations for the six months ended June 30, 2006 includes (i) compensation expense for share-based payment awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the pro forma provisions of SFAS 123 and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). As share-based compensation expense recognized in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Pre-vesting forfeitures were estimated to be approximately 9.0% in the second quarter of 2006 based on historical experience. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

Pro Forma Information under FAS123 for Periods Prior to Fiscal 2006

Prior to the adoption of SFAS 123(R), the Company accounted for share-based awards to employees and directors using the intrinsic value method in accordance with APB 25, as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, or SFAS 123. Under the intrinsic value method, no share-based compensation expense related to stock options had been recognized in the Company’s Consolidated Statements of Operations because the exercise price of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant-date.

If the Company had adopted the fair value provisions of SFAS No. 123 for employee stock options, in connection with options issued during the three and six months ended June 30, 2005, the Company would have recorded deferred compensation of $682 (using the Black-Scholes method of valuation with a volatility ranging from 44.6% to 48.9%, a discount rate ranging from 2.184% and 3.109%, a term of five years and no dividends). Most grants vest over a period of three years with one-third vesting after one year and the remaining two-thirds vesting ratably over the eight remaining quarters.

The pro forma loss assuming implementation of SFAS No. 123R for the three and six months ended June 30, 2005 is as follows:


	Three months ended June 30, 2005			Six months ended June 30, 2005
Net loss, as reported	$	(1,387,767	)	$	(2,348,904	)
Add: Stock-based compensation expense recorded in accordance with APB No. 25		—			—
Deduct: Additional stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects		(8,096	)		(36,317	)

Pro forma net loss	$	(1,395,863	)	$	(2,385,221	)

Weighted average number of shares outstanding:
Basic and diluted -		923,798			917,676
Net loss per share:
Basic – as reported	$	(1.50	)	$	(2.56	)
Basic – pro forma	$	(1.51	)	$	(2.60	)

Risk Management

The Company is not exposed to significant credit concentration risk, interest rate or hedging risks. The Company’s functional currency is the US dollar. The Company is not exposed to foreign exchange risk and the Company is not a party to any derivative transactions.

Fair Value of Financial Instruments

The carrying values of cash, accounts receivable, other current assets, accounts payable and accrued liabilities, accrued salary and wages, accrued interest payable and short term debt approximate their fair values because of the short maturity of these instruments.

Per Share Information

The Company presents basic earnings (loss) per share (“EPS”) and diluted EPS on the face of the statements of operations. Basic EPS is computed as net income (loss) divided by the weighted average number of shares of the Company’s common stock, no par value (the “Common Stock”), outstanding for the period. Diluted EPS reflects the potential dilution that could occur from shares of Common Stock issuable through stock options, warrants, and other convertible securities which are exercisable during or after the reporting period. In the event of a net loss, such incremental shares are not included in EPS since their effects are anti-dilutive. Securities that could potentially dilute basic EPS in the future, that were not included in the calculation of diluted EPS because to do so would have been anti-dilutive, aggregate 999,634 and 6,436,654 as of June 30, 2005 and 2006, respectively.

Note 3. Capitalization

The accompanying financial statements give retroactive effect to a reverse stock split pursuant to which each share of Common Stock outstanding before the reverse stock split was converted and exchanged for 0.340124209 new shares of Common Stock. The reverse stock split was effective as of April 7, 2006.

Note 4. Property and Equipment

Property and equipment consisted of the following as of:


	December 31, 2005			June 30, 2006 (Unaudited)
Vehicles	$	421,678		$	767,628
Office furniture and fixtures		96,589			165,049
Accumulated depreciation		(208,802	)		(297,007	)

Property and equipment, net	$	309,465		$	635,670

Note 5. Notes Payable and Lease Line of Credit

As of June 30, 2006 Notes Payable consisted of the following:

One note for $100,000 from one investor had a stated interest rate of 8% per annum and a maturity date of October 9, 2004. The Company did not repay any portion of the principal or interest until March 31, 2005. As of June 30, 2006, total arrearage on the note, including accrued interest expense and penalties totaled $211,221. The Company entered into a settlement in August 2006 (Note 9).

A $75,000 unsecured loan dated March 17, 2004 with an interest rate of 8% per annum and an unspecified maturity date. As of June 30, 2006, the loan plus accrued interest of $90,008 remained outstanding. The Company entered into a settlement in August 2006 (Note 9).

In the second quarter of 2006, the Company opened a secured lease line of credit with Bank of America for the amount of $500,000. On June 26, 2006, the Company borrowed $294,539 against this line of credit to purchase equipment. The terms of this agreement is 48 months with an annual interest rate of 7.75% and with a $1.00 buy out at the end of the lease term.

Debt transactions in the six months ended June 30, 2006:

In January and February 2006, the Company borrowed an aggregate of $150,000 on a demand basis from an institutional accredited investor. The notes bear interest at the rate of 8% per annum until a written demand is made after which interest will be 18% per annum. No demand has been made to date. In order to induce the investor to make these loans, the Company’s chief executive officer and one of its directors agreed to transfer 1,701 and 8,503 shares of Common Stock, respectively, to the investor from their own personal holdings. The benefit of the personal transfer to the Company has been valued at $49,081 which was charged to debt discount and credited to additional paid in capital during 2006. The loan, including accrued interest, was paid in full in May 2006.

In February and March, 2006, the Company’s chief executive officer loaned the Company an aggregate of $100,000. The loan bears interest at the rate of 10% per annum and is payable from the proceeds of the IPO. The loan, including accrued interest, was paid in full in May 2006.

On March 1, 2006, the Company issued a 10% unsecured promissory note up to a principal amount of $200,000 to the representative of the underwriters of the IPO (the “Representative”). In April 2006, the Company borrowed an additional $50,000. The note, including accrued interest, was payable in full at the closing of the IPO and was paid in full in May 2006.

On March 15, 2006, the Company borrowed $250,000 from an accredited investor. The note bears interest at 10% per annum and is payable on May 31, 2007. In order to induce the investor to make the loan, the Company’s chief executive officer agreed to transfer 25,000 shares to the investor from his own personal holdings. The benefit of the personal transfer to the Company has been valued at $120,250, which will be charged to debt discount and credited to additional paid in capital during 2006. During the six months ended June 30, 2006, $120,250 was charged to interest expense since the note was paid in full in May 2006.

In the quarter ending June 30, 2006, the Company paid off an aggregate amount of short term and long term notes payable of $5,285,000 with the IPO proceeds.

For the six months ended June 30, 2006, the Company realized a total of $2,415,837 of deferred interest costs (debt discount) which was amortized and charged to interest expense since the notes were paid in full in May 2006.

Prepaid financing fees of $81,350 paid in connection with certain notes payable were amortized over the life of the respective notes. Amortization of $13,560 and $47,450 for the six months ended June 30, 2005 and 2006, respectively, is included in interest expense in the accompanying condensed consolidated statements of operations. Since the Company paid off the notes related to these financing fees in May 2006, the remaining balance has been expensed to interest expense.

Note 6. Purchase Warrants

Common Stock Purchase Warrants

Listed below are the warrant balances of the Company as of June 30, 2006:


	Underlying Shares	Weighted Average Exercise Price		Weighted Average Contractual Life Remaining
January 2005 Warrants	85,031	$	3.68	0.50 years
April 2005 Warrants	170,062		5.88	0.75 years
May 2006 Warrants	10,000		5.00	2.00 years
June 2006 Warrants	15,000		5.00	3.00 years

Balance, June 30, 2006	280,093	$	5.13	0.76 years

The January 2005 Warrants are fully vested and entitle the holder thereof to purchase up to 85,031 shares of Common Stock at any time up to January 3, 2007 at a purchase price of $3.68 per share. In connection with the issuance of the January 2005 Warrants, the Company estimated the fair value of such warrants to be $128,000 using the Black-Sholes valuation model.

The April 2005 Warrants are fully vested and entitle the holder thereof to purchase up to 170,062 shares of Common Stock at any time until April 15, 2008 at a purchase price of $5.88 per share. In connection with the issuance of the April 2005 Warrants, the Company recorded $147,368 of debt discount, which it charged against the face value of the $600,000 Convertible Notes issued in April 2005 and has been amortized over the life of Convertible Note which was paid May 2006.

In May 2006, the Company was obligated to issue 5,000 units (as discussed below), in conjunction with a consulting services agreement. The Warrants entitle the holder thereof to purchase up to 10,000 shares of Common Stock at any time until June 14, 2008 at a purchase price of $5.00 per share. In connection with the authorization of the May 2006 Warrants, the Company recorded the estimated fair value of the warrants using the Black-Scholes valuation model to be $51,200 as prepaid consulting expense, that is being amortized over the term of the services. For the three and six months ended June 30, 2006, $25,600 has been amortized and charged to expense.

June 2006 Warrants were issued in conjunction with payment for services to be received by the Company over a six month period. The Warrants entitle the holder thereof to purchase up to 15,000 shares of Common Stock at any time until June 14, 2009 at a purchase price of $5.00 per share. In connection with the issuance of the June 2006 Warrants, the Company recorded a prepaid asset which will be amortized to expense as the related services are received. The Company estimated the fair value of such warrants to be $23,029 using the Black-Scholes valuation model. For the three and six months ended June 30, 2006, $960 has been amortized and charged to expense.

Class A and Class B Purchase Warrants

Listed below are the A and B warrant balances of the Company as of June 30, 2006:


	Underlying Shares	Weighted Average Exercise Price		Weighted Average Contractual Life Remaining
May 2006 IPO Class A Warrants	2,930,770	$	9.75	4.84 years
May 2006 IPO Class B Warrants	2,930,770		13.00	4.84 years

Balance, June 30, 2006	5,861,540	$	11.37	4.84 years

In May 2006 in conjunction with the IPO there were 2,930,770 Class A warrants issued and outstanding of which 2,700,000 were included in the units sold and 230,770 were included in the units that were issued to the holders of the Unsecured Notes on April 26, 2006. The Class A warrants issued are exercisable beginning May 26, 2006 and ending on April 26, 2011. Each Class A warrant entitles the holder to purchase one share of Common Stock at an exercise price of $9.75 per share. The exercise price will be adjusted if specific events occur, as defined in the underwriting agreement.

In May 2006 in conjunction with the IPO there were 2,930,770 Class B warrants issued and outstanding of which 2,700,000 were included in the units sold and 230,770 were included in the units that were issued to the holders of the Unsecured Notes on April 26, 2006. The Class B warrants are identical to the Class A warrants except that the Class B warrants have an exercise price of $13.00 per share and the Class B warrants may only be redeemable after gross revenues for any previous 12 month period, as confirmed by independent audit, equals or exceeds $20 million.

In addition to the above outstanding Class A and Class B warrants, the Company granted a warrant to purchase Class A and Class B warrants in conjunction with payment for consulting services in May 2006 and in connection with the May 2006 common stock warrants. These warrants entitle the holder thereof to purchase up to 10,000 Class A and Class B warrants at any time until June 14, 2008 at a purchase price of $1.00 and $0.50, respectively. In connection with the issuance of the May 2006 common stock warrants, the Company recorded prepaid consulting expense which is being amortized over the service period. The Company estimated the fair value of the Class A and Class B warrants to be $3,717 and $1,859, respectively, using the Black-Scholes valuation model.

Note 7. Stockholders Equity (Deficiency)

Equity Incentive Plan

The shareholders of the Company approved the Equity Incentive Plan (the “Plan”) on April 28, 2003, which initially provided for the issuance of up to an aggregate of 340,124 shares of Common Stock or options covering shares of Common Stock. The plan was amended in December 2005 to permit the issuance of up to a total of 425,155 shares of Common Stock or options covering shares of Common Stock. Options granted under the Plan generally vest one-third after 12 months while the remainder vests ratably in quarterly installments over the next two years. All unexercised options expire after five years from the date of grant.

A summary of option activity under the Plan as of June 30, 2006


Options	Shares		Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding on December 31, 2005	267,499		$	4.52		4.23	$	1,210,000
Granted	40,000			5.93		4.80		—
Exercised	—			—		—		—
Forfeited or expired	(32,477	)		(6.51	)	—		—

Outstanding on June 30, 2006 (unaudited)	275,022		$	4.52		3.81	$	115,938

Exercisable on June 30, 2006 (unaudited)	105,519		$	4.37		3.43	$	49,893

As of June 30, 2006, there was $265,897 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.2 years.

Initial Public Offering

On May 2, 2006, the Company completed an initial public offering of 1,350,000 units, at a price per unit of $13.00 . Each unit consisted of two shares of Common Stock, two Class A Warrants and two Class B Warrants. On May 23, 2006, the representative of the several underwriters exercised an overallotment option granted to the several underwriters in connection with the initial public offering and purchased an additional 100,000 units. On June 7, 2006, the representative of the several underwriters exercised the overallotment option again and purchased 100,000 shares of Common Stock, 100,000 Class A Warrants and 100,000 Class B Warrants. The total gross proceeds from the Company’s IPO were approximately $19.5 million, and the Company realized aggregate net proceeds of approximately $16.6 million.

Convertible Preferred Stock

In connection with our initial public offering, each share of Series A and Series B convertible preferred stock outstanding as of May 2, 2006 was automatically converted into Common Stock at a ratio of one share of Common Stock for each share of preferred stock. As of May 2, 2006, 170,062 Series A preferred and 154,586 Series B preferred shares were converted to 324,648 common shares.

Note 8. Commitments and Contingencies

Lease Commitments

The Company’s executive offices are located in San Juan Capistrano, California under a lease that expires in August 2006. The Company operates out of regional service centers under leases with terms ranging from 12 to 36 months and leases vehicles for terms ranging from 36 to 48 months.

Future minimum lease payments under these noncancelable operating leases are as follow:


Years ending December 31,
2006	$	454,440
2007		459,901
2008		356,838
2009		137,156
2010		2,027

	$	1,410,362

Rent expense was $45,349 and $93,646 during the three months ended June 30, 2005 and 2006. Rent expense was $92,952 and $165,567 during the six months ended June 30, 2005 and 2006, respectively.

Litigation

The Company is, at times, subject to legal proceedings, claims, and litigation arising in the ordinary course of business. Management currently is not aware of any such claims that would have a material adverse affect on the Company’s consolidated financial position, results of operations or cash flows.

Note 9. Subsequent events

On March 17, 2004, the Company received a $75,000 unsecured loan from an individual investor with an interest rate of 8% per annum and an unspecified maturity date. On July 8, 2004, the Company borrowed $100,000 at a stated interest rate of 8% per annum from the same investor pursuant to a Loan Agreement entered into on the date of the loan. Although the Loan Agreement required the Company to repay all outstanding loan balances to the investor on or prior to October 9, 2004, the Company did not pay any interest or repay any portion of the principal or interest until March 31, 2005. The Company and the parties are negotiating a settlement agreement for which the Company believes it is adequately reserved.

In July 2006, one of the Company’s board members resigned. As a result of this resignation, the Company no longer meets the Nasdaq listing requirements relating to the number of independent board members and the number of audit committee members that a Nasdaq listed company must maintain. On August 8, 2006, the Company announced the reassignment of an existing board member to the audit committee and on August 9, 2006, the Company announced the addition of a new independent board member to fill the vacancy created by the July 26, 2006 board member resignation. On August 10, 2006 the Company received notification from Nasdaq that the Company is once again in compliance with the Nasdaq listing requirements.

On August 2, 2006, the Board of Directors of the Company granted a warrant to purchase 13,000 shares of Common Stock to a provider of consulting services to the Company. The warrant has an exercise price of $5.00 per share, and expires two years after the date of issuance. In connection with this grant, the Company and the recipient of the warrant have agreed to cancel a warrant previously granted to the recipient in May 2006 (See Note 6).

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FORWARD-LOOKING STATEMENTS AND SAFE HARBOR

The following is a discussion of the financial condition and results of operations for our quarter ended June 30, 2006. As used herein, the “Company,” “we,” “us,” or “our” means American Mold Guard, Inc. and its wholly-owned subsidiary.

This Form 10-QSB includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding, among other things, statements relating to goals, plans and projections regarding the Company’s financial position, results of operations, market position, product and service development and market strategy. These statements may be identified by the fact that they use words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “targets,” “will likely result,” “will continue,” “may,” “could” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes and results to differ materially from current expectations. These factors include, among other things, competitive product and service development, future broad market acceptance of mold prevention services, difficulties in raising additional capital in the future, difficulties and delays in establishing the “Mold Guard” brand, the impact of the absence of significant proprietary technology underlying our services, a continued and long-term dependence on a limited number of customers, changes to the inventory levels of the Company’s raw materials suppliers, the impact of a continued absence of exclusive or long-term commitments from the Company’s customers, changes in the anticipated size or trends of the markets in which the company competes, judicial decisions and governmental laws and regulations, and changes in general economic conditions in the markets in which the Company may compete. In addition, these statements constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. Forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which the forward-looking statement is based. The forward-looking statements in this Form 10-QSB should be evaluated together with the many uncertainties that affect our business, particularly those mentioned under the section entitled “Factors That May Affect Future Results” below and our periodic reporting on Form 8-K (if any), which we incorporate by reference.

GENERAL OVERVIEW

We provide mold prevention services to builders of single and multi-family homes. To date, we have proved our service to over 350 national and regional single- and multi-family home builders through 16 service centers located in California, Florida, Texas, Mississippi and Louisiana. Our clients include national home builders such as Lennar Corporation, DR Horton, Inc. and Centex Corporation, regional home builders such as Issa Homes, Inc., The McCaffrey Group and Lenox Homes and multi-family home builders such as Global Construction Company, L.L.C., Hanover R.S. Limited Partnership, Bosa Development and Opus West Construction, Inc.

Although our business continues to grow, we continue to lose money on an operating and cash flow basis. We believe that the primary reason that we have yet to be cash flow positive and profitable is because we continue to invest in our business by opening new service centers.

Our strategy is to continue to establish new service centers throughout the country. Where we open new service centers and how many we will open will depend on a number of factors, including existing customer demand, the strength of the new housing market in a particular region, the extent to which mold may or may not be a problem in a particular region, the availability of capital and other opportunities. In our experience, a new service center usually does not become cash flow positive until it has been operating for at least eight months and it does not become profitable until it has been operating for approximately one year. As a result, an aggressive expansion program would adversely affect our financial performance. On the other hand, we believe that an aggressive expansion policy would enable us to achieve our goal of capturing a larger market share relatively quickly in advance of our existing and potential competitors. One of the challenges we face is balancing our goals of achieving profitability as soon as possible and capturing market share.

Our future financial condition and operating performance may be affected by several industry trends. The major trends that we believe will have a positive impact on our business are the demand for mold prevention and the backlog of homes to be built by our customer and prospective customer base. In addition, we believe public awareness of health risk associated with mold contamination, particularly in the aftermath of Hurricanes Katrina, Rita and Wilma, the growth in mold-related insurance claims and litigation and the high cost of mold remediation also will contribute to our growth. On the other hand, higher interest rates, higher building costs, increasing levels of inventories in the housing construction industry and the general decline in the rate of growth of the new home construction industry could retard our growth. While we may be negatively impacted by these trends, we believe we will be able to manage these challenges through favorable pricing conditions in strategic markets and through continued efforts to control costs.

Lack of sufficient capital has prevented us from aggressively marketing our services. Marketing is an important part of our business plan because builders need to be persuaded to make our mold prevention services standard line items in their budgets. The lack of capital has had negative margin impact on our service operations in the areas of raw material cost, labor cost and labor productivity. The additional capital will allow us to implement operation improvement programs that we expect will lead to higher gross margins.

On May 2, 2006, the Company completed an initial public offering of 1,350,000 units, at a per unit price of $13.00. Each unit consisted of two shares of Common Stock, two Class A Warrants and two Class B Warrants. On May 23, 2006, the representative of the several underwriters exercised an overallotment option granted to the several underwriters in connection with the initial public offering and purchased an additional 100,000 units. On June 7, 2006, the representative of the several underwriters exercised the overallotment option again and purchased 100,000 shares of Common Stock, 100,000 Class A Warrants and 100,000 Class B Warrants. The total gross proceeds from the Company’s IPO were approximately $19.5 million, and the Company realized aggregate net proceeds of approximately $16.6 million. We believe that capital raised in our initial public offering will allow us to increase sales and marketing resources in our existing regions, as well as expand into new regions.

We measure our business using both financial and other operating metrics. The financial metrics include revenue, gross margin, operating expenses and income from continuing operations. The operating metrics include new sales order activity, service schedule, material usage and crew productivity.

New Sales Activity. With this metric we measure the level of new customer commitments in terms of new clients and dollar value of sales. We use this metric to gauge the effectiveness of our sales efforts. The data is gathered by sales representatives, by region and by month. We monitor new sales activity between project type: single-family versus multi-family. We also analyze new sales based on regional builders’ and national builders’ activity.

Service Schedule. We utilize this data to evaluate the demand for services in each service center or region. This measurement allows us to identify unused service capacity and to shift capacity, when necessary, to service centers with greater demand.

Material Usage. As material cost represents a key component of our total cost of service, we use this metric to gauge the relative usage of material in each service center and region. The material usage rate for soda can vary depending on the amount of mold contamination on the wood surfaces required to be removed, the relative humidity of the region and the proficiency of the crews. We monitor the material usage rate in order to help identify service centers that may need operational improvements or training to decrease their relative cost of service.

Crew Productivity. This measure focuses on our cost of service. We have planning standards for each region that we use to plan crew labor requirements. Measuring productivity, how many square feet of construction are treated in a day, allows us to analyze the effectiveness of our labor force and crew leaders. Anticipated productivity by project also is a determining factor in project pricing. Again, the productivity levels vary depending on the type of project (single-family versus multi-family), the climate conditions, the training level and the experience of the crew and the amount of mold contamination to be removed from the project.

CRITICAL ACCOUNTING POLICIES

Revenue Recognition

Impairment of Long-Lived Assets

The Company has adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses significant issues relating to the implementation of SFAS No. 121 and develops a single accounting model, based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale, whether or not such assets are deemed to be a business.

Income Taxes

Stock-based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, or SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, or APB 25, for periods beginning in fiscal 2006. In March 2006, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective application transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s 2006 fiscal year. The Company’s Consolidated Financial Statements as of and for the three months ended March 31, 2006 reflect the impact of SFAS 123(R). In accordance with this transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation expense recognized under SFAS 123(R) for the six months ended June 30, 2006 was $60,514.

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the grant-date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Operations. Prior to the adoption of SFAS 123(R), the Company accounted for share-based awards to employees and directors using the intrinsic value method in accordance with APB 25, as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, or SFAS 123. Under the intrinsic value method, no share-based compensation expense related to stock options had been recognized in the Company’s Consolidated Statements of Operations because the exercise price of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant-date.

Share-based compensation expense recognized during the current period is based on the value of the portion of share-based payment awards that is ultimately expected to vest. SFAS 123(R) requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is based on historical rates. Share-based compensation expense recognized in the Company’s Consolidated Statement of Operations includes (i) compensation expense for share-based payment awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the pro forma provisions of SFAS 123 and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). As share-based compensation expense recognized in the Condensed Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated

forfeitures. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

RESULTS OF OPERATIONS (Unaudited)

The following table set forth the percentage relationship to total revenues of items included in the Company’s Condensed Consolidated Statements of Operations for the periods indicated:


	Three Months Ended June 30,
	2005			2006			Increase (Decrease)		% Change
Revenue	$	1,264,174		$	2,591,968		$	1,327,794	105.0	%
Cost of Revenue		1,153,797			1,487,397			333,600	28.9	%

Gross Margin		110,377			1,104,571			994,194	900.7	%
Selling, general and administrative expenses		1,267,119			2,738,263			1,471,444	116.1	%

Loss from Operations		(1,156,742	)		(1,633,692	)		476,950	41.20	%
Interest Expense		(230,875	)		(1,913,352	)		1,682,477	728.7	%

Loss before provision for income taxes		(1,387,617	)		(3,547,044	)		2,159,427	155.6	%
Provision for income taxes		150			965			815	543.3	%

Net Loss	($	1,387,767	)	($	3,548,009	)	$	2,160,242	155.7	%


	Six Months Ended June 30,
	2005			2006			Increase (Decrease)		% Change
Revenue	$	2,259,873		$	5,353,622		$	3,093,749	136.9	%
Cost of Revenue		1,881,164			3,084,910			1,203,746	64.0	%

Gross Margin		378,709			2,268,712			1,890,003	499.1	%
Selling, general and administrative expenses		2,331,949			4,302,568			1,970,619	84.5	%

Loss from Operations		(1,953,240	)		(2,033,856	)		80,616	4.1	%
Interest Expense		(394,714	)		(2,642,050	)		2,247,336	569.4	%

Loss before provision for income taxes		(2,347,954	)		(4,675,906	)		2,327,952	99.1	%
Provision for income taxes		950			4,833			3,883	408.7	%

Net Loss	($	2,348,904	)	($	4,680,739	)	$	2,331,835	99.3	%

Revenues

Revenues for the three months ended June 30, 2006 increased 105% to $2,591,968, compared to $1,264,174 during the same period last year. Year to date revenue increased $3,093,749 or 137% compared to the same period last year. The increase in revenue is attributable to increased market penetration through the expansion of regions and service centers as well as a price increase enacted in the beginning of 2006.

Revenue growth in the three months ended June 30, 2006 versus the three months ended June 30, 2005 by region is summarized below:


	Three Months Ended June 30, 2005		Percentage of Revenue		Three Months Ended June 30, 2006		Percentage of Revenue		Increase (Decrease)		Percentage Increase (Decrease)
Region
California	$	815,084	64.4	%	$	1,433,650	55.3	%	618,566		75.90	%
Florida		281,609	22.2	%		354,264	13.7	%	72,655		25.80	%
Gulf		124,770	10.0	%		804,054	31.0	%	679,284		544.40	%
Other		42,711	3.4	%		0	0.0	%	(42,711	)	100.00	%
Total		1,264,174	100.0	%		2,591,968	100.0	%	1,327,794		105.00	%


	Six Months Ended June 30, 2005		Percentage of Revenue		Six Months Ended June 30, 2006		Percentage of Revenue		Increase (Decrease)		Percentage Increase (decrease)
Region
California	$	1,366,533	60.5	%	$	2,817,888	52.6	%	$	1,451,355	106.2	%
Florida		653,141	28.9	%		758,429	14.2	%		105,288	16.1	%
Gulf		219,549	9.7	%		1,602,978	29.8	%		1,383,429	630.1	%
Other		20,650	.9	%		174,327	3.4	%		153,677	744.2	%
Total		2,259,873	100.0	%		5,353,622	100.0	%		3,093,749	136.9	%

Revenue in California increased $618,566, or 75.9% in the second quarter of 2006 versus the same period for 2005. Year to date revenue increased $1,451,355 or 106.2% compared to the same period last year. The year to date increase was the result of increases in pricing enacted in the beginning of the year ($274,490), increases in multi-family projects ($285,562) and increases in single family production ($891,303). The Company, also, opened up three new service centers in California in the quarter ended June 30, 2006.

Commencing in the quarter ended March 31, 2006, we realigned our business to combine our Texas and Louisiana regions into the Gulf Coast region. Revenue in that region increased $679,284 or 544.4%, in the second quarter of 2006 versus the same period in 2005. Year to date revenue increased $1,383,429 or 630.1%. The increase was primarily attributable to the expansion into New Orleans in October 2005 following Hurricane Katrina. The company opened two additional service centers in The Gulf in the quarter ended June 30, 2006 which contributed an additional 6% of revenue in the second quarter

Revenue in the Florida region increased $72,655, 25.8%, in the second quarter of 2006 versus the same period of 2005. Year to date revenue increased $105,288 or 16.1%. The increase was primarily attributable to increased service volumes with existing customers and the addition of new customers in the region.

Other region revenue comprises projects serviced outside of our existing primary regions. Other revenue decreased $(42,711), 100.0%, in the second quarter of 2006. Year to date revenue increased $153,677 or 744.2%, as a result of the completion of three multi-family projects in New Jersey and Maryland in the first quarter of 2006.

The Company also analyzes revenue based on type of construction treated. National builder projects increased from $501,532 to $872,893 during the second quarter of 2006, an increase of 74% compared to the same period in 2005. National Builder year to date revenue increased from $830,551 to $1,697,494 an increase of 104% from a year ago. Single family construction increased from $460,210 to $1,390,648 during the second quarter of 2006, an increase of 202% from the same quarter in 2005. Year to date single family revenue increased from $876,009 to $2,830,879 an increase of 223%. Service to multi-family construction increased from $302,432 to $328,426, an increase of 8% compared to the same period in 2005. Year to date multi-family revenue increased from $553,313 to $825,249 or an increase of 49% compared to same period last year.

Cost of Revenue


Three Months Ended June 30, 2005	Percent of revenues		Three Months Ended June 30, 2006		Percent of Revenues		Increase (Decrease)
$1,153,797	91.3	%	$	1,487,397	57.4	%	$	333,600


Six Months Ended June 30, 2005	Percent of revenues		Six Months Ended June 30, 2006		Percent of revenues		Increase (Decrease)
$1,881,164	83.2	%	$	3,084,910	57.6	%	$	1,203,746

Cost of revenue includes the material, labor and other costs directly related to providing our services, including the depreciation expense relating to equipment used to provide our services. Cost of revenue for the quarter ended June 30, 2006 totaled $1,487,397 an increase of 28.9% compared to the cost of revenue for the period ended June 30, 2005. Year to date Cost of Revenue is $3,084,910 an increase of 63.9% compared to the same period last year. The increase was a result of increased cost of materials and labor associated with the increase in new sales and the associated service center expansion.

The first six months of 2005, the Company could not afford our own worker’s compensation insurance policy and were forced to hire workers from employee leasing firms or labor agencies, both of which are considerably more expensive than if we hired our workers directly. Starting in June 2005, we qualified for and initiated our own national worker’s compensation insurance policy. As a result our gross margins have improved.

Raw material costs have decreased as a percentage of revenue from 20.9% in the second quarter of 2005 to 10.9% for the same time period in 2006. Year to date decreased from 19.8% in 2005 to 12.5% in 2006. This decrease is attributable to increased pricing on new construction services and an increase in Gulf Coast business, which has a lower material cost as a percentage of revenue.

Direct labor cost as a percentage of revenue decreased from 15.9% in second quarter of 2005 to 28.5% in the same period in 2006. The year to date decreased from 47.3% in 2005 to 30.1% in 2006. The decrease is primarily a result of improved labor utilization on higher sales volume and from acquiring our own national workman’s compensation insurance policy as well as productivity improvements.

Other costs of revenue include costs associated with fuel, service vehicle rental, equipment rental, equipment depreciation, direct supplies and other costs directly associated with the services we provide. Other direct costs have increased as a percentage of revenue from 15.8% in the second quarter of 2005 to 17.9% for the same time period in 2006. For the six months ended 2006, other cost of revenue was 14.8% verses 16.0% for the six months ended 2005. The percentage of increase was attributable to service center expansion and the rental of vehicles in 2006. In June, we converted the majority of our rental vehicles into leases, which should improve our gross margin in the quarter ending September 30, 2006.

Selling, General and Administrative Costs


Three Months Ended June 30, 2005	Percent of Revenues		Three Months Ended June 30, 2006		Percent of Revenues		Increase (Decrease)
$1,267,119	100.2	%	$	2,738,263	105.6	%	$	1,471,144


Six Months Ended June 30, 2005	Percent of Revenues		Six Months Ended June 30, 2006		Percent of Revenues		Increase (Decrease)
$2,331,949	103.2	%	$	4,302,568	80.4	%	$	1,970,619

Selling, general and administrative costs include corporate and regional overhead such as compensation and benefits for our sales, administrative and executive personnel, rent, insurance, professional fees, travel and office related expenses. The increase from the second quarter of 2005 to the second quarter of 2006 of $1,471,144 and the year to date increase of $1,970,619 in 2006 is primarily attributed to the investments in service center expansion, regional and brand marketing and corporate infrastructure additions and the added cost of being a public company. As a percentage of revenue, selling, general

and administrative costs increased from 100.2% in the second quarter of 2005 to 105.6% for the same period in 2006. Year to date selling, general administrative costs decreased to 80.4% in 2006 from 103.2% for first half of 2005.

Interest Expense


Three Months Ended June 30, 2005	Percent of Revenues		Three Months Ended June 30, 2006		Percent of Revenues		Increase (Decrease)
$230,875	18.7	%	$	1,913,352	73.8	%	$	1,682,477


Six Months Ended June 30, 2005	Percent of Revenues		Six Months Ended June 30, 2006		Percent of Revenues		Increase (Decrease)
$394,714	17.5	%	$	2,642,050	49.4	%	$	2,247,336

Interest expense for the three months ended June 30, 2006 totaled $1,913,352, an increase of $1,682,477 over the same period in 2005. The 2006 year to date interest expense totals $2,642,050, an increase of $2,247,336. The increase is directly attributable to the increase in debt financings in the last three quarters of 2005 and the first quarter of 2006. Of the amount incurred during the second quarter of 2006, $61,902 represented interest paid in cash or stock or accrued during the period, $130,435 represented amortization of debt discount on the Convertible Notes and $44,956 represented one month amortization of the beneficial conversion feature since the Convertible Notes had an effective conversion price below the deemed fair market value of our stock on the date of issuance. These notes were paid in full in May. Accordingly the unamortized portion of the beneficial conversion feature of $1,693,298 was charged to interest expense. The Company, also, earned interest income of $17,239 from cash investments in the second quarter of 2006.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have funded our operations from internally generated funds, the proceeds from the sale of debt and equity securities and payment of obligations with our Common Stock. As of June 30, 2006, our working capital was $7.9 million. The primary reason for this increase is the IPO proceeds and the payment of debt.

Our net loss increased from $1,387,767 for the three months ended June 30, 2005 to $3,548,009 for the three months ended June 30, 2006. For the six months ended June 30, 2006 the net loss of $4,680,739 increased $2,331,835 as compared to the six months ended June 30, 2005. The net loss for both periods was primarily attributable to the write-off of the unamortized interest expense related to the pre-IPO debt and the increase in operating expenses in support of service center expansion, marketing of the company’s brand and product, infrastructure additions to regions and corporate and the added cost of being a public Company. Gross margin improved from $1,104,571 or 42.6% of net sales for the three months ended June 30, 2006 as compared to $110,377 or 8.7% of net sales for the three months ended June 30, 2005. The year to date gross margin in 2006 is $2,268,712 or 42.4% compared to $378,709 or 16.8% for the same period of the prior year. The gross margin increase was the result of lower material usage and improved crew productivity on higher sales volume, as well as from a price increase that the Company implemented in the beginning of the year.

On May 2, 2006, the Company completed an initial public offering of 1,350,000 units, at a price per unit of $13.00. On May 23, 2006, the representative of the several underwriters exercised an overallotment option granted to the several underwriters in connection with the initial public offering and purchased an additional 100,000 units. On June 7, 2006, the representative of the several underwriters exercised the overallotment option again and purchased 100,000 shares of Common Stock, 100,000 Class A Warrants and 100,000 Class B Warrants. The total gross proceeds from the Company’s IPO were approximately $19.5 million, and the Company realized aggregate net proceeds of approximately $16.6 million. As noted in the Company’s offering prospectus, significant amounts of the net proceeds of the offering were used to repay outstanding debt of the Company and for working capital purposes. As of close of market on June 30, 2006 there were 4,536,690 shares of Common Stock outstanding.

Changes in Working Capital between December 31, 2005 and June 30, 2006

During the six months ending June 30, 2006, our working capital increased from a deficit of $4,918,444 as of December 31, 2005 to $7,879,738, or an increase of $12,798,182. The principal reasons for the increase in working capital was as follows:

•

Cash increased by $9,173,000 primarily as a result of proceeds received from the IPO and the following additional items.

•

Long and short term notes payable decreased by $5,285,000 as result of paying off debt with the IPO proceeds.

•

Deferred offering costs decreased by $620,882 as the result of netting these costs against the IPO proceeds

•

Accrued payroll related expenses decreased $393,000 as IPO funds were used to pay payroll related expenses.

•

Accounts receivable increased by $358,000 due primarily to the 137% increase in revenues over the comparable period in 2005

•

Property and Equipment increased $326,000 as a result of purchasing compressors and Soda Pots for our service center expansion.

•

Accrued interest decreased by $246,000 as IPO funds were used to pay off debt and the associated accrued interest.

•

Accounts payable decreased by $131,000, as IPO proceeds received in May 2006 were used to pay aged payables.

Off-Balance Sheet Arrangements

None

FACTORS THAT MAY AFFECT FUTURE RESULTS

Our prospects are subject to certain uncertainties and risks. Our future results may differ materially from our current results, and our actual results could differ materially from those projected. Such differences may be the result of certain risks, including but not limited to those risk factors set forth below, other one-time events and other important factors previously disclosed or to be disclosed from time to time in our other filings with the Securities and Exchange Commission. The following risk factors should be considered carefully in evaluating the Company and its business because these risks currently have a significant impact or may have a significant impact in the future on our business, operating results and financial condition.

Risks Related To Our Business.

We have a history of losses and cash flow deficits, and we expect to continue to operate at a loss and to have negative cash flow for the foreseeable future. This could cause the price of our stock to decline.

Since our inception, we have incurred net losses in every quarter through June 30, 2006. At June 30, 2006, we had cumulative net losses of $15.1 million and working capital of $7.9 million. We also had negative cash flow from operating activities. Historically, we have funded our operations from internally generated funds, the proceeds from the sale of debt and equity securities and payment of obligations with Common Stock. Our growth strategy is to increase our market share by opening more service centers. This is likely to result in additional losses and negative cash flow for the foreseeable future. We cannot give assurances that we will ever become profitable.

Our future success depends on broad market acceptance of mold prevention services, which may not happen. In that case, we may never achieve profitability.

The market for mold prevention services is relatively new and small. As is typical of a new and rapidly evolving industry, the demand for, and market acceptance of, mold prevention services is highly uncertain. Currently, mold prevention services are not required by local building codes or the insurance industry, making it even more difficult for us to market our services. In order to be successful, we must educate property owners, builders and the public about the importance of mold prevention. We believe that one of the major obstacles we face is the lack of knowledge of the importance of maintaining indoor environments mold-free. We spend a considerable amount of time educating property owners, builders, contractors and the general public on the health risks associated with mold exposure and the value of our services. We can provide no assurances that these efforts will be successful or result in increased revenue. Our success also depends on builders allocating a portion of their construction budget for problem avoidance. In the event that builders do not have funds available for such purpose, the sales of our services will be adversely affected. We cannot give assurances that the demand for mold prevention service will become widespread. If the market for mold prevention services fails to develop or develops more slowly than we anticipate, our business could be adversely affected.

Our limited operating history makes it difficult for us to accurately forecast our revenues and appropriately plan our expenses

We commenced operation in September 2002 and incorporated in January 2003. As a result of our limited operating history, it is difficult to accurately forecast our revenue and plan our operating expenses. Revenues and operating results are difficult to forecast because they generally depend on the volume and timing of the job orders we receive, which are uncertain. Some of our expenses are fixed and, as a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in revenues. This inability could cause our net income in a given quarter to be lower than expected or our net loss to be higher than expected. In addition, our limited operating history makes it difficult to evaluate our business and prospects. An investor should consider our business and prospects in light of the risks, uncertainties and difficulties frequently encountered by early stage companies, including limited capital, marketing and sales obstacles and delays, inability to gain customer acceptance our services, inability to attract and retain high-quality and talented executives and other personnel and significant competition. If we are unable to successfully address these risks, our business may not grow, our stock price may suffer and/or we may be unable to stay in business.

Our cash balance may not be sufficient to fully execute on our growth strategy. As a result, we may need to raise additional capital in the future.

After the IPO and the payment of our outstanding debt, we have approximately $9.2 million for use in expansion, sales and marketing, capital expenditures and working capital. This amount may not be sufficient to execute our growth strategy in full. Since our growth strategy contemplates a national roll-out of service centers in targeted markets, we anticipate that we will need to raise additional capital in the future. We could also face unforeseen costs, such an increase in the cost of raw materials and operating expenses, which would further strain our limited financial resources. Also, our revenues could fall short of our projection because builders could discontinue ordering our services or for reasons unrelated to our services, such as severe weather or natural disasters in a region of the country where we have projected significant sales or a decline in the new construction segment of the residential housing construction industry, which would further increase our operating losses and negative cash flow.

We have not been able to generate a sufficient amount of cash flow to fund operations and, as a result, if we need to raise additional capital in the future, we may not be able to do so on terms that are reasonable, if at all. This could cause our operating and financial performance to decline from previous levels or to be lower than expected.

We have no arrangements or commitments for additional financings. We do not have any currently identified sources of additional capital on which we could rely. New sources of capital may not be available to us when we need it or may be available only on terms we would find acceptable. If capital is not available on satisfactory terms or is not available at all, we may be unable to continue to fully develop our business or take advantage of new business opportunities. In addition, our results of operations may decline from previous levels or may fail to meet expectations because of the higher cost of capital. As a result, the price of our publicly traded securities may decline, causing holders of our securities to lose all or part of their investment. Finally, equity financing, if obtained, could result in additional dilution to our existing shareholders.

We may not succeed in establishing the “Mold Guard” brand, which could prevent us from acquiring customers and increasing our revenues.

A significant element of our business strategy is to build market share by continuing to promote and establish the “Mold Guard” brand. If we cannot establish our brand identity, we may fail to build the critical mass of customers required to substantially increase our revenues. Promoting and positioning our brand will depend largely on the success of our sales and marketing efforts and our ability to provide a consistent, high quality customer experience. To promote our brand, we expect that we will incur substantial expenses related to advertising and other marketing efforts. If our brand promotion activities fail, our ability to attract new customers and maintain customer relationships will be adversely affected, and, as a result, our financial condition and results of operations will suffer.

There is very little, if anything, about our service that is proprietary. As such, we are likely to face increasing competition, making it more difficult for us to capture market share.

We do not own any intellectual property or other proprietary rights. The raw materials that we use are not owned or produced by us and are available commercially. Although we believe that the methodology we use in delivering our services is proprietary, there is very little we can do to protect it. Except for our senior executive officers, none of our employees or contractors sign confidentiality, non-compete or non-disclosure agreements. With virtually no barriers to entry, any number of potential competitors could enter the market and provide the same services that we provide. Competitors may misappropriate our methodology or our methodology may otherwise become known or independently developed by competitors. This could materially and adversely affect our business and the value of an investment in our securities.

We rely on our suppliers to provide us with the raw materials we need to provide mold prevention services, and these third parties may fail to deliver us the material we need in a timely fashion, which could adversely affect our reputation and our ability to generate revenues.

We use two products for our mold prevention services: baking soda and an antimicrobial agent. Our ability to service our customers depends on us having a regular and reliable source for these materials. We rely on our suppliers to provide us with adequate quantities of these products in a timely manner. A failure by our suppliers to provide us with these key products in a timely manner or in sufficient quantities will have an adverse effect on our ability to satisfy customer demand and could damage our reputation and brand and substantially harm our financial condition and results of operations. Timely delivery of these products could be affected by a number of factors including labor issues at the supplier and shipper, inclement weather and product availability. We only have a supply agreement covering the antimicrobial agent. Recently, our principal supplier of baking soda was unable to satisfy our demand because it underestimated our needs. As a result, we had to delay fulfilling some of our contracts. If these shortages occur on a regular basis, we will lose revenue opportunities, which would have an adverse impact on our financial condition and could negatively impact our reputation, which could have longer term adverse consequences on our ability to grow our business.

We have a limited amount of general liability insurance coverage. A large damage award for personal injury or property damage could render us financially insolvent.

There is increasing litigation in the United States over personal injuries caused by mold contamination and jury awards relating to such litigation are significant. If our services fail to prevent mold growth on a surface we treated, a person suffering property damage or personal injury is likely to sue us. In such event, our insurance coverage – $2 million – may not be sufficient. We intend to seek additional liability insurance coverage in the future. However, we cannot give assurances that additional insurance will be available to us at a reasonable cost, if at all. Litigation that is launched against us and that results in a large jury aware could render us financially insolvent.

Our future success depends on retaining our existing senior executives and hiring and retaining additional management personnel as well as skilled managers and sales personnel for our service centers. Losing any of our key employees or failing to hire new management level personnel could limit our ability to execute our growth strategy, resulting in lost sales and a slower rate of growth.

Our future success depends, in part, on the continued active participation of our chief executive officer, our chief operating officer and our chief financial officer. We do not carry, nor do we anticipate obtaining, “key man” insurance on any of them. If, for any reason, either one of them decides to discontinue his active participation in our business, our financial condition or results of operations could be adversely affected. Our current management team is not sufficient for our projected needs. As our business grows, we will need to hire a vice president of operations, a marketing director and a director of human resources. Competition for such highly skilled executives in Orange County, California, where our executive offices are located, is intense, and we may find it difficult to hire the people we need.

In addition, we must hire and retain at least one experienced and knowledgeable general manager and sales executive for each region in which we establish a service center. The competition for high-quality, skilled managers and sales personnel in the new home construction industry is intense, causing the search process to be time-consuming and expensive. Moreover, in certain parts of the country, it may also be difficult to find workers to staff the crews needed to perform our services at the construction sites. We may not be able to hire enough qualified personnel to meet our needs as our business grows or to retain the employees we currently have. Our inability to hire and retain the individuals we need could hinder our ability to sell our existing services. If we are not able to attract and retain qualified employees, we will not be able to successfully implement our business plan and our business will be harmed.

We may not be able to manage our growth effectively, create operating efficiencies or achieve or sustain profitability.

The ability to manage and operate our business as we execute our growth strategy will require effective planning. Significant rapid growth could strain our internal resources, leading to a lower quality of customer service, reporting problems and delays in meeting important deadlines, resulting in loss of market share and other problems that could adversely affect our reputation and financial performance. Our efforts to grow have placed, and we expect will continue to place, a significant strain on our personnel, management systems, infrastructure and other resources. Our ability to manage future growth effectively will also require us to continue to update and improve our operational, financial and management controls and procedures. If we do not manage our growth effectively, we could be faced with slower growth and a failure to achieve or sustain profitability.

Risks Related to Our Industry

As public awareness of the health risks and economic costs of mold contamination grows, we expect competition to increase, which could make it more difficult for us to grow and achieve profitability.

We expect competition to increase as awareness of mold-related problems increases and as we demonstrate the success of mold prevention. A rapid increase in competition could negatively affect our ability to develop new and retain our existing clients and the prices that we can charge. Many of our competitors and potential competitors have substantially greater financial resources, customer support, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships than we do. We cannot be sure that we will have the resources or expertise to compete successfully. Compared to us, our competitors may be able to:

•

develop and expand their products and services more quickly;

•

adapt faster to new or emerging technologies and changing customer needs and preferences;

•

take advantage of acquisitions and other opportunities more readily;

•

negotiate more favorable agreements with vendors and customers;

•

devote greater resources to marketing and selling their products or services; and

•

address customer service issues more effectively.

Some of our competitors also may be able to increase their market share by providing customers with additional benefits or by reducing their prices. We cannot be sure that we will be able to match price reductions by our competitors. In addition, our competitors may form strategic relationships to better compete with us. These relationships may take the form of strategic investments, joint-marketing agreements, licenses or other contractual arrangements that could increase our competitors’ ability to serve customers. If our competitors are successful in entering our market, our ability to grow or even sustain our current business could be adversely impacted.

If we fail to keep up with changes in our industry, we will become less competitive, limiting our ability to generate new business and increase our revenues.

In order to remain competitive, serve our customers effectively and increase our revenue, we must respond on a timely and cost-effective basis to changes in technology, industry standards and procedures and customer preferences. We need to continuously develop new procedures and technologies that address new developments in the construction industry in general, the market segments we serve and the regions in which we operate, as well as laws, regulations, rules, standards, guidelines, releases and other pronouncements that are periodically issued by legislatures, government agencies, courts, professional associations and others. In some cases these changes may be significant and the cost to comply with these changes may be substantial. We cannot give assurances that we will be able to adapt to any changes in the future, that we will have the financial resources to keep up with changes in the marketplace or that we will be able to offset those costs with increases in the amounts we change for our services. This could cause our net income to decline, which likely will lead to a decline in the price of our publicly traded securities, resulting in a loss of all or a part of an investment in our securities.

We do not have “exclusive” or long-term commitments from builders for our services, negating any competitive advantage we get from these relationships.

Although we have ongoing relationships with a number of national and regional home builders, none of these relationships are “exclusive.” In addition, we do not have any long-term firm commitments from builders to use our services. Even “preferred provider” status, which we enjoy with three national home builders, does not guarantee that we will be hired for a particular job or any job with that customer. As a result, our revenues are unpredictable, and we are highly susceptible to competition. There is nothing preventing any of our customers from entering into identical or similar relationships with our competitors or from discontinuing their relationship with us at any time. If a number of builders were to terminate their relationship with us at the same time or direct business to our competitors, our business, operating and financial condition would suffer.

Risk Related to Our Stock

Our stock price is volatile and there is a limited market for our shares.

The stock markets generally have experienced, and will probably continue to experience, extreme price and volume fluctuations that have affected the market price of the shares of many small capital companies. These fluctuations have often

been unrelated to the operating results of such companies. Factors that may affect the volatility of our stock price include the following:

•

our success, or lack of success, in developing and marketing our products and services;

•

the announcement of new products, services, or technological innovations by us or our competitors;

•

quarterly fluctuations of our operating results;

•

changes in revenue or earning estimates by the investment community; and

•

competition.

In addition, broad market fluctuations, as well as general economic and political conditions, may decrease the market price of our Common Stock or warrants in any market that develops. Based on the factors described above, recent trends should not be considered reliable indicators of our future stock prices or financial results. Additionally, there is a limited market for our Common Stock and warrants and we cannot give assurances that such a market will continue to develop or be maintained.

Investors should not expect the payment of dividends by us.

We do not expect to pay dividends on our Common Stock or warrants in the foreseeable future. Investors who require cash dividends from their investments should not purchase our Common Stock or warrants.

Holders of our securities may experience significant dilution.

We anticipate that we will need to raise additional capital to fund our business. In addition, we anticipate that we may issue a significant number of shares or the rights to acquire shares as a part of our strategy. In either event, current shareholders may experience significant dilution and our earnings per share may decrease.

Fluctuations in our quarterly operating results may cause our stock price to decline and limit our shareholders’ ability to sell our Common Stock or warrants in the public markets.

Our operating results and the operating results of businesses that we may acquire in the future may fluctuate significantly due to a variety of factors, many of which are outside of our control. Our operating results may in some future quarter fall below the expectations of securities analysts and investors. In this event, the trading price of our Common Stock or warrants could decline significantly. In addition to the risks disclosed elsewhere in this report, factors outside of our control, which may cause our quarterly operating results to fluctuate may include:

•

fluctuations in the general economic condition;

•

demand for our products;

•

fluctuation in the capital budgets of our customers; and

•

development of superior products and services by our competitors.

In addition, factors within our control, such as our ability to deliver equipment in a timely fashion, may cause our operating results to fluctuate in the future.

The factors listed above may affect both our quarter-to-quarter operating results as well as our long-term success. Given the potential fluctuation in our operating results, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance or to determine any trend in our performance. Fluctuations in our quarterly operating results could cause the market price and demand for our Common Stock or warrants to fluctuate substantially, which may limit the ability of our shareholders to sell our securities in the public markets.

If persons engage in short sales of our Common Stock, including sales of shares to be issued upon exercise of warrants, the price of our Common Stock may decline.

Selling short is a technique used by a shareholder to take advantage of an anticipated decline in the price of a security. A significant number of short sales or a large volume of other sales within a relatively short period of time can create downward pressure on the market price of a security. Further sales of Common Stock issued upon exercise of our warrants

could cause even greater declines in the price of our Common Stock due to the number of additional shares available in the market, which could encourage short sales that could further undermine the value of our Common Stock. Holders of our securities could, therefore, experience a decline in the value of their investment as a result of short sales of our Common Stock.

ITEM 3 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our “disclosure controls and procedures” (as defined in Rules 13(a)-15(e) under the Securities Exchange Act of 1934, as amended) are effective to ensure that all information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and Forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, and allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

In connection with the above-referenced evaluation, no change in our internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to affect, our 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

During the six-month period ended June 30, 2006, the Company sold the following unregistered securities:

•

In March 2006, the Company issued a $250,000 principal amount unsecured promissory note, bearing interest at 10% per annum, to an institutional accredited investor. The original principal amount and all accrued but unpaid interest was due May 31, 2007. In order to induce the investor to purchase this note, the Company’s Chief Executive Officer agreed to transfer 25,000 shares of Common Stock that he personally owned to the investor. The Company paid $20,000 in commissions to a registered broker-dealer in connection with this sale, resulting in net proceeds to the Company of $230,000.

•

In March 2006, the Company issued a $250,000 principal amount unsecured promissory note, bearing interest at 10%, to Paulson Investment Company, the representative of the several underwriters of the Company’s initial public offering concluded on May 2, 2006. Under the terms of this note, the Company was entitled to up to five weekly draws not to exceed $50,000 each. The aggregate amount drawn plus the accrued interest thereon in payable out of the net proceeds of the initial public offering. No commission or placement agent fee was payable in connection with the issuance of this note.

•

In May 2006, the Company issued a warrant to purchase 5,000 units to Investor Awareness, Inc. in exchange for certain consulting services rendered by Investor Awareness, Inc. to the Company. The units covered by the warrant are the same as those units issued by the Company in its initial public offering. The warrant entitles Investor Awareness, Inc. to purchase the units at a price of $13.00 per unit, and expires two years after the date of issuance.

•

In June 2006, the Company issued a warrant to purchase 15,000 shares of its Common Stock to Brookstreet Securities Corporation in exchange for certain consulting services rendered by Brookstreet Securities Corporation to the Company. The warrant issued to Brookstreet Securities Corporation has an exercise price of $5.00 per share of Common Stock and expires two years after the date of issuance.

•

In June 2006, the Company issued 40,000 shares of its Common Stock to Morse, Zelnick, Rose & Lander in exchange for certain legal services rendered to the Company in connection with the Company’s initial public offering.

Item 3 – Defaults upon Senior Securities

On September 30, 2004, the Company entered into a Note Purchase Agreement with an accredited investor under which the investor agreed to purchase up to $4,250,000 aggregate principal amount of the Company’s 10% secured convertible notes (the “Convertible Notes”). Pursuant to this agreement, from October 2004 through April 2005, the Company issued four Convertible Notes having an aggregate principal amount of $1,950,000. The Company was in default under the Note Purchase Agreement as a result of breaching certain covenants set forth therein. The notes and accrued interest were paid in full in May 2006.

Item 4 – Submission of Matters to a Vote of Security Holders

None

Item 5 – Other Information

None

Item 6 – Exhibits


Exhibit No.		Description

3.1		Articles of Incorporation, as amended, previously filed as Exhibit 3.1 to the Registration Statement of American Mold Guard, Inc. on Form SB-2/A (Amendment No. 1), filed with the Commission on February 13, 2006 (File No. 333-130899), which is incorporated herein by reference.

3.2		Amended and Restated Bylaws, previously filed as Exhibit 3.1 to the Registration Statement of American Mold Guard, Inc. on Form SB-2/A (Amendment No. 1), filed with the Commission on February 13, 2006 (File No. 333-130899), which is incorporated herein by reference.

4.1		Form of Stock Certificate for Common Stock, previously filed as Exhibit 4.1 to the Registration Statement of American Mold Guard, Inc. on Form SB-2/A (Amendment No. 2), filed with the Commission on March 28, 2006 (File No. 333-130899), which is incorporated herein by reference.

4.2		Form of Warrant Agreement between American Mold Guard, Inc. and U.S. Stock Transfer Corporation, including form of Class A and Class B warrants, previously filed as Exhibit 4.2 to the Registration Statement of American Mold Guard, Inc. on Form SB-2/A (Amendment No. 3), filed with the Commission on April 10, 2006 (File No. 333-130899), which is incorporated herein by reference.

4.3		Form of Unit Certificate for Units, previously filed as Exhibit 4.3 to the Registration Statement of American Mold Guard, Inc. on Form SB-2/A (Amendment No. 2), filed with the Commission on March 28, 2006 (File No. 333-130899), which is incorporated herein by reference.

4.4		Revised Form of Purchase Warrant Issued to Paulson Investment Company, Inc., previously filed as Exhibit 4.2 to the Registration Statement of American Mold Guard, Inc. on Form SB-2/A (Amendment No. 4), filed with the Commission on April 10, 2006 (File No. 333-130899), which is incorporated herein by reference.

10.1		American Mold Guard, Inc. Amended and Restated Equity Incentive Plan, previously filed as Exhibit 10.1 to the Registration Statement of American Mold Guard, Inc. on Form SB-2/A (Amendment No. 2), filed with the Commission on March 28, 2006 (File No. 333-130899), which is incorporated herein by reference.

10.2		American Mold Guard, Inc. Annual Reward Plan, previously filed as Exhibit 10.2 to the Registration Statement of American Mold Guard, Inc. on Form SB-2/A (Amendment No. 1), filed with the Commission on February 13, 2006 (File No. 333-130899), which is incorporated herein by reference.

10.3		Form of American Mold Guard, Inc. Indemnification Agreement for Directors and Officers. Previously filed as exhibit 10.8 to the registration statements of American Mold Guard, Inc. on Form SB-2/A (Amendment No. 3), filed with the Commissions on April 7, 2006 (File No. 333-130899), which is incorporated herein by reference.

31.1		Certification of Chief Executive Officer of American Mold Guard, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act.

31.2		Certification of Chief Financial Officer of American Mold Guard, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act.

32.1		Certification of Chief Executive Officer of American Mold Guard, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer of American Mold Guard, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

In accordance with the requirements of the Exchange Act, American Mold Guard, Inc. caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 11, 2006

AMERICAN MOLD GUARD, INC.

/s/ THOMAS BLAKELEY

Thomas Blakeley

Chief Executive Officer

/s/ PAUL BOWMAN

Paul Bowman

Chief Financial Officer

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