form10-q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x QUARTERLY REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED FEBRUARY 28, 2009
o TRANSITION REPORT UNDER
SECTION 13 OR 15(D) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD
FROM_________________ TO__________________
COMMISSION
FILE NO. 0-16401
ADVANCED
MATERIALS GROUP, INC.
(Exact
name registrant as specified in its charter)
NEVADA
|
|
33-0215295
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
2364
MERRITT DRIVE, SUITE A, GARLAND, TEXAS 75041
(Address
of principal executive offices) (Zip code)
(469) 246-4100
(Registrant's
telephone number, including area code)
3303 Lee
Parkway, Suite 105, Dallas, TX 75219
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 þ No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
|
Accelerated
filer o
|
|
Non-accelerated
filer o
|
|
Smaller
reporting company þ
|
|
|
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date: Common Stock, $.001 par value, 12,346,026 shares
outstanding as of April 6, 2009.
FORM
10-Q
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
|
|
|
8
|
|
|
|
|
|
11
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
12
|
|
|
|
|
|
12
|
|
|
|
|
|
12
|
|
|
|
|
|
12
|
|
|
|
|
|
12
|
|
|
|
|
|
13
|
|
|
|
Certifications
|
|
|
PART
I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,689,190 |
|
|
$ |
3,037,193 |
|
|
|
|
1,891,174 |
|
|
|
2,313,217 |
|
|
|
|
798,016 |
|
|
|
723,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
742,090 |
|
|
|
587,520 |
|
Depreciation
and amortization
|
|
|
9,078 |
|
|
|
11,216 |
|
|
|
|
751,168 |
|
|
|
598,736 |
|
|
|
|
46,848 |
|
|
|
125,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,278 |
) |
|
|
(28,530 |
) |
|
|
|
-- |
|
|
|
(8,290 |
) |
|
|
|
(24,278 |
) |
|
|
(36,820 |
) |
|
|
|
5,168 |
|
|
|
7,108 |
|
|
|
$ |
27,738 |
|
|
$ |
95,528 |
|
Basic
and diluted net income per share
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
12,346,026 |
|
|
|
12,146,026 |
|
|
|
|
12,420,788 |
|
|
|
12,361,481 |
|
See
accompanying notes to consolidated financial statements
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
885,475 |
|
|
$ |
353,189 |
|
|
|
|
2,426,017 |
|
|
|
3,163,751 |
|
|
|
|
1,877,006 |
|
|
|
1,765,610 |
|
Current
portion of deferred tax asset
|
|
|
46,997 |
|
|
|
46,997 |
|
Prepaid
expenses and other
|
|
|
273,268 |
|
|
|
130,904 |
|
|
|
|
5,508,763 |
|
|
|
5,460,451 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
774,964 |
|
|
|
774,407 |
|
|
|
|
828,090 |
|
|
|
822,922 |
|
|
|
|
59,931 |
|
|
|
59,931 |
|
|
|
$ |
7,171,748 |
|
|
$ |
7,117,711 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
420,517 |
|
|
$ |
351,133 |
|
|
|
|
70,852 |
|
|
|
161,313 |
|
|
|
|
2,459,000 |
|
|
|
2,399,000 |
|
Current
portion of term notes
|
|
|
41,816 |
|
|
|
41,816 |
|
Current
portion of capital lease obligations
|
|
|
61,000 |
|
|
|
61,000 |
|
Total
current liabilities
|
|
|
3,053,198 |
|
|
|
3,014,262 |
|
|
|
|
|
|
|
|
|
|
Term
notes, net of current portion
|
|
|
117,464 |
|
|
|
130,039 |
|
Capital
lease obligations, net of current portion
|
|
|
29,028 |
|
|
|
44,278 |
|
|
|
|
3,199,677 |
|
|
|
3,188,579 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock-$.001 par value; 5,000,000 shares authorized; no shares issued and
outstanding
|
|
|
-- |
|
|
|
-- |
|
Common
stock-$.001 par value; 25,000,000 shares authorized;
12,346,026 shares issued and outstanding at February 28,
2009 and November 30, 2008
|
|
|
12,346 |
|
|
|
12,346 |
|
Additional
paid-in capital
|
|
|
8,617,441 |
|
|
|
8,602,240 |
|
|
|
|
(4,657,716 |
) |
|
|
(4,685,454 |
) |
Total
stockholders' equity
|
|
|
3,972,071 |
|
|
|
3,929,132 |
|
Total
liabilities and stockholders' equity
|
|
$ |
7,171,748 |
|
|
$ |
7,117,711 |
|
See
accompanying notes to consolidated financial statements
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
$ |
27,738 |
|
|
$ |
95,527 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
30,690 |
|
|
|
32,695 |
|
|
|
|
(5,168 |
) |
|
|
(7,107 |
) |
|
|
|
15,201 |
|
|
|
20,907 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
737,734 |
|
|
|
(5,192 |
) |
|
|
|
(111,396 |
) |
|
|
(18,513 |
) |
Prepaid
expenses and other
|
|
|
(142,364 |
) |
|
|
(99,500 |
) |
Accounts
payable and accrued liabilities
|
|
|
(21,077 |
) |
|
|
153,493 |
|
Net
cash provided by operating activities
|
|
|
531,358 |
|
|
|
172,310 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(31,247 |
) |
|
|
(11,252 |
) |
Net
cash used in investing activities
|
|
|
(31,247 |
) |
|
|
(11,252 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Net
borrowings under line of credit
|
|
|
60,000 |
|
|
|
168,750 |
|
Repayments
of long-term obligations
|
|
|
(27,825 |
) |
|
|
(17,022 |
) |
Net
cash provided by financing activities
|
|
|
32,175 |
|
|
|
151,728 |
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
532,286 |
|
|
|
312,786 |
|
Cash
and cash equivalents, beginning of period
|
|
|
353,189 |
|
|
|
462,701 |
|
Cash
and cash equivalents, end of period
|
|
$ |
885,475 |
|
|
$ |
775,487 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
$ |
24,278 |
|
|
$ |
28,530 |
|
|
|
$ |
-- |
|
|
$ |
(7,108 |
) |
See
accompanying notes to consolidated financial statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1)
BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and therefore do not include all information and footnotes
necessary for a complete presentation of financial position, results of
operations and cash flows in conformity with accounting principles generally
accepted in the United States of America.
The
unaudited consolidated financial statements do, however, reflect all
adjustments, consisting of only normal recurring adjustments, which are, in the
opinion of management, necessary to state fairly the financial position as of
February 28, 2009 and the results of operations and cash flows for the interim
periods ended February 28, 2009 and February 29, 2008. However, these
results are not necessarily indicative of results for any other interim period
or for the year. The accompanying consolidated financial statements should
be read in conjunction with the Company's audited consolidated financial
statements and accompanying notes thereto included in the Company's Annual
Report on Form 10-KSB for the fiscal year ended November 30, 2008.
Principles of
Consolidation
The
consolidated financial statements include the accounts of Advanced Materials
Group, Inc. ("AM" or the "Company") and its wholly owned subsidiary, Advanced
Materials, Inc. ("AM"). All significant intercompany accounts and
transactions have been eliminated.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from those
estimates.
2)
EARNINGS PER SHARE
The
Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the
presentation of basic and diluted net income per share. Basic earnings per share
exclude dilution and are computed by dividing net income by the weighted average
of common shares outstanding during the period. Diluted earnings per share
reflect the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Potential common share equivalents including stock options have been excluded
for the three month periods ended February 28, 2009 and February 29, 2008, as
their effect would be antidilutive.
There
were approximately 283,000 and 208,000 potentially dilutive options outstanding
at February 28, 2009 and February 29, 2008, respectively, that were not included
in the computation of net income per share because the impact would be
anti-dilutive.
3)
STOCK BASED COMPENSATION
On
December 1, 2006, the Company adopted Statement of Financial Accounting Standard
No. 123(R), Share-Based
Payment (“SFAS 123(R)”), and has elected to use the modified prospective
method, which requires the application of the accounting standard to all
share-based awards issued on or after December 1, 2006 and any outstanding
share-based awards that were issued but not vested as of December 1,
2006.
For the
three-month periods ended February 28, 2009 and February 29, 2008, FAS 123(R)
resulted in stock-based compensation expense of $15,201 and $20,907,
respectively. This amount includes compensation expense related to
stock options granted prior to, but not yet vested as of December 1, 2006,
based on the grant date fair value estimated in accordance with the pro-forma
provisions of SFAS 123. Stock compensation expense has been recorded as selling,
general and administrative expense in the accompanying consolidated statements
of income.
The
following is a summary of all stock option transactions for the three months
ended February 28, 2009:
|
|
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at November 30, 2008
|
|
|
453,200 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
40,000 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
Outstanding
at February 28, 2009
|
|
|
493,200 |
|
|
$ |
0.56 |
|
|
|
6.87 |
|
|
$ |
37,700 |
|
Options
exercisable at February 28, 2009
|
|
|
423,200 |
|
|
$ |
0.58 |
|
|
|
7.03 |
|
|
$ |
32,200 |
|
As of
February 28, 2009 there was $2,267 of total unrecognized stock based
compensation related to nonvested share-based compensation awards granted under
the stock option plans. This cost is expected to be recognized over a weighted
average period of approximately six months.
The
Company used the Black-Scholes Option Pricing Model (“BSOPM”) to determine the
fair value of option grants. During the first quarter of fiscal 2009, the
Company granted 40,000 fully vested options to directors at an exercise price of
$0.46. The options were valued using the BSOPM and the following
assumptions: stock price on date of grant - $0.46, exercise price - $0.46,
expected life – 5 years, volatility – 97%, dividend rate – 0% and a
risk free rate of 1.44%. The calculated fair value of each option was
approximately $0.34. During the
first quarter of fiscal 2008, the Company granted 40,000 fully vested options to
directors at an exercise price of $0.65. The options were valued using the BSOPM
and the following assumptions: stock price on date of grant - $0.65, exercise
price - $0.65, expected life - 5 years, volatility - 97%, dividend rate – 0% and
a risk free rate of 2.71%. The calculated fair value of each option was
approximately $0.48.
4)
INVENTORIES
Inventories
are stated at the lower of cost (determined on the first-in, first-out method)
or market. Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
818,402 |
|
|
$ |
876,757 |
|
|
|
|
72,280 |
|
|
|
136,646 |
|
|
|
|
1,020,477 |
|
|
|
788,207 |
|
|
|
|
1,911,159 |
|
|
|
1,801,610 |
|
Less
allowance for obsolete inventories
|
|
|
34,153 |
|
|
|
36,000 |
|
|
|
$ |
1,877,006 |
|
|
$ |
1,765,610 |
|
5)
SINGAPORE ROYALTY AGREEMENT
On or
about November 20, 2007, the Company filed suit in the Superior Court of the
State of California, County of Orange, Central Justice Center, against Foamtec
(Singapore) Pte. Ltd., a private limited company incorporated in Singapore, and
Foamex Asia Ltd., a private company incorporated in Thailand (collectively,
“Foamtec”). In December of 1998, the Company and Foamtec entered into a
Manufacturing Agreement, whereby the Company and Foamtec agreed to work
cooperatively to manufacture and sell certain foam components to Hewlett Packard
Company and certain other buyers. As part of the Manufacturing Agreement,
Foamtec agreed to act as fiduciary agent for the Company in distributing the
manufactured product to Hewlett Packard, its successors and assigns. The term of
the Manufacturing Agreement was for ten years, which could be extended by either
party for an additional five years. Foamtec had the option to purchase the
Company’s interest in the Manufacturing Agreement by paying a price to be
calculated on the profits expected under the entire remaining term which, by
definition, included its entire term, including the additional five years if the
Company exercised its extension right. In 2006, the Company gave notice to
Foamtec of its election to extend the term of the Manufacturing Agreement for an
additional five years in accordance with its rights under the Manufacturing
Agreement. Thereafter, Foamtec gave notice of its election to purchase the
Company’s interest in the Manufacturing Agreement, and tendered certain funds in
claimed discharge of its payment obligations thereunder. Foamtec asserted that
this payout right only applied to the initial term, and not the extended term,
and therefore remitted funds that represented the expected profits through the
end of the initial term. The Company therefore sued Foamtec for breach of
contract for Foamtec’s failure to pay the Company the amount of expected profits
for the extended term. The Company is seeking compensatory damages in excess of
$1,000,000, interest as provided by law and costs associated with the
suit.
6)
ACCOUNTING CHANGES
In
September 2006, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
value, establishes a market-based framework or hierarchy for measuring fair
value, and expands disclosures about fair value measurements. SFAS 157 is
applicable whenever another accounting pronouncement requires or permits assets
and liabilities to be measured at fair value. SFAS 157 does not expand or
require any new fair value measures; however the application of this statement
may change current practice. The requirements of SFAS 157 are first effective
for our fiscal year beginning December 1, 2008. However, in February 2008 the
FASB decided that an entity need not apply this standard to nonfinancial assets
and liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis until the subsequent year. Accordingly, our
adoption of this standard on December 1, 2008 is limited to financial assets and
liabilities. The initial adoption of SFAS 157 did not have a material effect on
our financial condition or results of operations. However, we are still in the
process of evaluating this standard with respect to its effect on nonfinancial
assets and liabilities and therefore have not yet determined the impact that it
will have on our financial statements upon full adoption.
ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
The
following discussion should be read in conjunction with the unaudited
consolidated financial statements and the related notes that appear elsewhere in
this report.
This
document contains forward-looking statements that involve risks and
uncertainties that could cause the results of the Company and its consolidated
subsidiaries to differ materially from those expressed or implied by such
forward-looking statements. These risks include, but are not limited
to, the timely development, production and delivery of new products; the
challenge of managing asset levels, including inventory and trade receivables;
the difficulty of keeping expense growth at modest levels while increasing
revenues and other risks described from time to time in the Company's filings
with the Securities and Exchange Commission, including but not limited to the
Annual Report on Form 10-KSB for the year ended November 30, 2008 and in
"Factors That Could Affect Future Results" below.
Forward-looking
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. Advanced
Materials Group, Inc. undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
RESULTS
OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 2009 COMPARED TO THE THREE MONTHS
ENDED FEBRUARY 29, 2008
Net sales
for the quarter ended February 28, 2009 were $2,689,190 versus $3,037,193 for
the same period of fiscal 2008, a decrease of $348,003 or 11%.
The
decrease in sales is due to lower demand of products produced from its customer
base. The Miss Oops licensed products have also realized a sharp decline in
sales due to decreased sales traffic in the retail outlets where the product is
sold.
Cost of
goods sold for the quarters ended February 28, 2009 and February 29, 2008 were
$1,891,174 and $2,313,217, respectively. The Company's gross profit margin was
30% in the first quarter of 2009 and 24% in the first quarter of 2008. The
decrease in costs of goods sold is a direct relation to the decrease in
revenue for the quarter. The Company’s primary products are foam
products which represent a high cost of goods sold due to the raw material
costs.
Selling,
general and administrative expenses for the first quarter of fiscal 2009 and
2008 were $742,090 and $587,520, respectively, representing an increase of
$154,570 or 26%. The increase in costs was due to the addition of the Miss Oops
license agreement in 2008 and the staff needed to promote and grow the Miss Oops
brand.
Interest
expense for the first quarter of fiscal 2009 and 2008 was $24,278 and $28,530,
respectively. Interest expense relates primarily to bank borrowings and will
increase or decrease based on interest rate fluctuations.
The Company recorded an
income tax benefit of $5,168 in the first quarter of 2009 and $7,108 in the first quarter
of 2008. These benefits were mainly a result of the
Company recording a deferred tax asset related to stock based
compensation.
Net
income for the first quarter of fiscal 2009 was $27,738 compared to
$95,528 for the first quarter of fiscal 2008. Basic and diluted net
income per share for the first quarter of fiscal 2009 was $0.00 per share,
compared to $0.01 per share for the first quarter of fiscal 2008.
LIQUIDITY
AND CAPITAL RESOURCES
As of
February 28, 2009, we had working capital of $2,455,565 compared to working
capital of $2,446,189 at November 30, 2008.
Cash and
cash equivalents were $885,475 at February 28, 2009, compared with $353,189 at
November 30, 2008. Operating activities provided $531,358 of cash during
the three months ended February 28, 2009, compared with cash provided of
$172,310 in the corresponding period of fiscal 2008. The cash provided by
operating activities in the three months ended February 28, 2009 resulted
primarily from net income of $27,738 plus non-cash charges of $40,723, a
decrease in accounts receivable of $737,734, an increase in inventory of
$111,396, an increase in prepaid expenses of $142,364 and a decrease in accounts
payable and accrued liabilities of $21,077.
Capital
expenditures were $31,247 for the three months ended February 28, 2009,
compared to $11,252 for the
corresponding period in fiscal 2008.
The
Company uses short- and long-term borrowings to supplement internally generated
cash flow. Activity related to short- and long-term borrowings in the three
months ended February 28, 2009 resulted in cash provided by financing activities
of $32,175 compared to cash provided by financing activities of $151,728 in
the same period of 2008.
On March
1, 2007, AMG, through its wholly-owned subsidiary AMI, obtained a $2,000,000
credit facility from JPMorgan Chase Bank, N.A. (“Lender”). The Credit Facility
was established pursuant to a Credit Agreement between AMI and Lender and
evidenced by a Line of Credit Note executed by AMI. This Line of Credit Note was
amended on July 14, 2008 to extend the credit facility (the “Credit Facility”)
to $2,500,000. The proceeds under the Credit Facility will be used
primarily for working capital needs in the ordinary course of
business.
AMI can
borrow, pay and reborrow principal under the Credit Facility from time to time
during its term, but the outstanding principal balance under the Credit Facility
may not exceed the lesser of the borrowing base or $2,500,000. For purposes of
the Credit Facility, “borrowing base” is calculated by adding 80% of AMI's
eligible accounts receivable to 50% of the lower of cost or wholesale market
value of all of AMI's eligible inventory.
The
outstanding principal balance under the Credit Facility bears interest at the
rate of interest per annum announced from time to time by the Lender as its
prime rate, and will be computed on the unpaid principal balance from the date
of each borrowing. Accrued interest payments on the unpaid principal balance
under the Credit Facility are payable quarterly commencing on May 1, 2007, and
all outstanding principal under the Credit Facility, together with all accrued
but unpaid interest, is due at maturity, which has been extended until June
1, 2009.
The
Credit Facility is secured by a first priority lien on all of AMI's currently
owned and subsequently acquired accounts receivable, chattel paper, deposit
accounts, documents, equipment, general intangibles, instruments, inventory,
investment property and letter of credit rights pursuant to a Continuing
Security Agreement between AMI and Lender.
The
Credit Agreement contains certain covenants with which AMI must comply. Subject
to Lender's consent, AMI is prohibited under the Credit Agreement from, among
other things, declaring or paying dividends on its capital stock, issuing,
selling or otherwise disposing of any shares of its capital stock and incurring,
assuming or permitting to remain outstanding any indebtedness for borrowed
money, subject to certain exceptions. Additionally, AMI is prohibited from
engaging in any business activities substantially different from those in which
it is currently engaged and from merging or consolidating with any other entity
or selling any of its assets outside of the ordinary course of
business.
The line
of credit agreement requires the Company to maintain certain financial covenants
including maintaining tangible net worth no less than $1,500,000 as of each
fiscal quarter end.
If a
default occurs under the Credit Agreement, the Line of Credit Note or any other
related documents, Lender may declare all amounts outstanding under the Credit
Facility immediately due and payable. In such event, Lender may exercise any
rights and remedies it may be provided by law or agreement, including the
ability to cause all or any part of the collateral under the Continuing Security
Agreement to be transferred to Lender or registered in Lender's or any other
designated entity's name. Any such event may materially impair AMI's and the
Company's ability to conduct its business.
Borrowings
outstanding under the Line of Credit at February 28, 2009 were
$2,459,000.
FACTORS
THAT COULD AFFECT FUTURE RESULTS
COSTS
OF PETROLEUM-BASED RAW MATERIALS
The costs
of raw materials, which primarily includes petroleum-based products such as
foam, account for an average of 54% or more of our manufacturing costs. We have
experienced increases in raw material costs since the middle of 2002. Our
ability to pass on cost increases may be hindered by competition or selling
price. Prices of raw materials are influenced by demand, manufacturing capacity
and oil and natural gas prices. Historically, the prices of raw materials
have been cyclical and volatile and our suppliers of raw materials have
increased the price of raw materials several times over the past years. We have
been successful in implementing fixed price contracts for raw materials for our
largest customers and retaining our customer base; however, we may not be able
to pass along all costs to our customers in the future, which could impact our
profitability.
BANKING
AMI
obtained a Credit Facility in the second quarter of fiscal 2007. This credit
agreement has been extended until April 1, 2009. The credit agreement
evidencing the Credit Facility requires AMI to maintain certain financial
covenants as outlined in the Credit Agreement. Failure to meet these financial
covenants could result in increased borrowing costs. The Credit Facility is
secured by a first priority lien on all of AMI's currently owned and
subsequently acquired accounts receivable, chattel paper, deposit accounts,
documents, equipment, general intangibles, instruments,
inventory, investment property and letter of credit rights pursuant to a
Continuing Security Agreement between AMI and Lender. If a default occurs under
the documents evidencing the Credit Facility, Lender may declare all amounts
outstanding under the Credit Facility immediately due and payable. In such
event, Lender may exercise any rights and remedies it may be provided by law or
agreement, including the ability to cause all or any part of the collateral
under the continuing Security Agreement to be transferred to Lender or
registered in Lender's or any other designated entity's name. Any such event may
materially impair AMI's and the Company's ability to conduct its
business.
CUSTOMER
CONCENTRATION
The
Company realizes approximately 61% of its revenues from five customers. Any loss
of business from these customers could have a significant impact on the
Company's financial position.
NEW
PRODUCT INTRODUCTIONS
The
process of developing new products and corresponding manufacturing processes is
complex and uncertain. The customer decision-making process can be lengthy and
some raw materials have extremely long lead times. These circumstances often
lead to long delays in new product introductions. After a product is developed,
the Company must be able to manufacture sufficient volumes quickly at low enough
costs. To do this it must accurately forecast volumes and mix of products.
Customer orders have also been subject to dramatic swings from customer provided
forecasts. Matching customers' demand and timing for particular products makes
the process of planning production and managing inventory levels increasingly
difficult. If the Company cannot continue to rapidly develop and manufacture
innovative products that meet customer requirements for performance, price,
quality and customer service, it may lose market share and future revenue, and
earnings may suffer.
RELIANCE
ON SUPPLIERS
The
Company's manufacturing operations depend on its suppliers' ability to deliver
quality raw materials and components in time for the Company to meet critical
manufacturing and distribution schedules. The Company sometimes experiences a
short supply of certain raw materials as a result of supplier out-of-stock
situations or long manufacturing lead times. If shortages or delays exist, the
Company's future operating results could suffer. Furthermore, it may not be able
to secure enough raw materials at reasonable prices to manufacture new products
in the quantities required to meet customer demand. Sudden or significant raw
materials price increases could also cause future operating results to suffer if
the Company is not able to increase its sales prices to account for the
materials price increases. Any of these factors, if realized, could reduce the
Company's profitability and operating results. On Wednesday, February 18,
2009, one of the Company’s major suppliers, Foamex, filed for Chapter 11
bankruptcy protection. The Company does not currently know the effect that
this will have on their raw materials supply and is actively seeking other
arrangements.
EARTHQUAKE
The AMI
manufacturing division in California is located near major earthquake faults.
The ultimate impact on the Company and its general infrastructure is unknown,
but operating results could be materially affected in the event of a major
earthquake. The Company is predominantly uninsured for losses and interruptions
caused by earthquakes.
INTELLECTUAL
PROPERTY
The
Company's success will depend, in part, on its ability to obtain and enforce
intellectual property protection for our technology in both the United States
and other countries. Although the Company has been issued certain patents, it
has also filed patent applications in the United States Patent and Trademark
Office with respect to certain patents that have not yet been issued. The
Company cannot provide any assurance that patents will issue from these
applications or that, with respect to any patents, issued or pending, the claims
allowed are, or will be, sufficiently broad to protect the key aspects of our
technology, or that the patent laws will provide effective legal or injunctive
remedies to stop any infringement of its patents. In addition, the Company
cannot assure investors that any owned patent rights will not be challenged,
invalidated or circumvented, that the rights granted under patents will provide
competitive advantages, or that competitors will not independently develop or
patent technologies that are substantially equivalent or superior to our
technology. The Company's business plan assumes that it will obtain and maintain
comprehensive patent protection of its technologies. The Company cannot assure
investors that such protection will be obtained, or that, if obtained, it will
withstand challenge. Furthermore, if an action is brought, a court may find that
the Company has infringed on the patents owned by others. The Company may have
to go to court to defend its patents, to prosecute infringements, or to defend
infringement claims made by others. Patent litigation is expensive and
time-consuming, and well-funded adversaries can use such actions as part of a
strategy for depleting the resources of a small company such as AMI. The Company
cannot assure investors that we will have sufficient resources to successfully
prosecute our interests in any litigation that may be brought.
LIQUIDITY
Our
common stock trades in the United States only on the Pink Sheets, which is a
reporting service and not a securities exchange. We cannot assure investors that
in the future our common stock will ever qualify for inclusion on any of the
NASDAQ markets, the American Stock Exchange or any other national exchange or
that more than a limited market will ever develop for our common stock. The lack
of an orderly market for our common stock may negatively impact the volume of
trading and market price for our common stock.
Historically,
the volume of trades for our stock has been limited. Moreover, thus far the
prices at which our common stock has traded have fluctuated fairly widely on a
percentage basis. The trading activity in our common stock should be considered
sporadic, illiquid and highly volatile.
General
market conditions and domestic or international macroeconomic factors unrelated
to the Company's performance may also affect the stock price. For these reasons,
investors should not rely on recent trends to predict future stock prices or
financial results. In addition, following periods of volatility in a company's
securities, securities class action litigation against a company is sometimes
instituted. This type of litigation could result in substantial costs and the
diversion of management time and resources.
ITEM 3 - CONTROLS AND PROCEDURES
We
maintain “disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), that are designed to ensure that information
required to be disclosed by us in reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable assurance of achieving the desired control objectives, and we
necessarily are required to apply our judgment in evaluating the cost-benefit
relationship of possible disclosure controls and procedures.
Our
management, including our principal executive officer and principal financial
officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of February 28, 2009 and concluded that
the disclosure controls and procedures were not effective, because certain
deficiencies involving internal controls constituted a material weakness as
discussed in our Annual Report on Form 10-KSB for the year ended November 30,
2008, as filed with the Securities and Exchange Commission on February 27, 2009.
The material weaknesses identified did not result in the restatement of any
previously reported financial statements or any other related financial
disclosure, nor does management believe that it had any effect on the accuracy
of the Company’s financial statements for the current reporting
period.
The
material weaknesses in our internal control over financial reporting that we
identified in our Annual Report on Form 10-KSB for the year ended November 30,
2008 relate to a lack of segregation of certain accounting duties due to the
small size of our accounting staff and information technology controls over
segregation of duties and access to financial reporting systems.
In order
to mitigate these material weaknesses to the fullest extent possible, all
financial reports are reviewed by the Chief Financial Officer, who has limited
system access. In addition, regular meetings are held with the Board
of Directors and the Audit Committee. If at any time we determine a
new control can be implemented to mitigate these risks at a reasonable cost, it
will be implemented as soon as possible.
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended February 28, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On or
about November 20, 2007, the Company filed suit in the Superior Court of the
State of California, County of Orange, Central Justice Center, against Foamtec
(Singapore) Pte. Ltd., a private limited company incorporated in Singapore, and
Foamex Asia Ltd., a private company incorporated in Thailand (collectively,
“Foamtec”). In December of 1998, the Company and Foamtec entered into a
Manufacturing Agreement, whereby the Company and Foamtec agreed to work
cooperatively to manufacture and sell certain foam components to Hewlett Packard
Company and certain other buyers. As part of the Manufacturing Agreement,
Foamtec agreed to act as fiduciary agent for the Company in distributing the
manufactured product to Hewlett Packard, its successors and assigns. The term of
the Manufacturing Agreement was for ten years, which could be extended by either
party for an additional five years. Foamtec had the option to purchase the
Company’s interest in the Manufacturing Agreement by paying a price to be
calculated on the profits expected under the entire remaining term which, by
definition, included its entire term, including the additional five years if the
Company exercised its extension right. In 2006, the Company gave notice to
Foamtec of its election to extend the term of the Manufacturing Agreement for an
additional five years in accordance with its rights under the Manufacturing
Agreement. Thereafter, Foamtec gave notice of its election to purchase the
Company’s interest in the Manufacturing Agreement, and tendered certain funds in
claimed discharge of its payment obligations thereunder. Foamtec asserted that
this payout right only applied to the initial term, and not the extended term,
and therefore remitted funds that represented the expected profits through the
end of the initial term. The Company therefore sued Foamtec for breach of
contract for Foamtec’s failure to pay the Company the amount of expected profits
for the extended term. The Company is seeking compensatory damages in excess of
$1,000,000, interest as provided by law and costs associated with the
suit.
The
Company may from time to time be involved in other legal proceedings in the
normal course of operations and are incidental to its business. Although the
outcome of the proceedings cannot be determined, in the opinion of management,
based on discussions with and advice of legal counsel, any resulting future
liability from such proceedings, either individually or in the aggregate, will
not adversely affect the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
NONE
ITEM 5. OTHER INFORMATION.
NONE
EXHIBIT NO.
DESCRIPTION
31.1 Certifications Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certifications Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated:
April 20, 2009
ADVANCED
MATERIALS GROUP, INC.
/s/ Ricardo G.
Brutocao
Ricardo
G. Brutocao
Chief
Executive Officer
/s/ William G.
Mortensen
William
G. Mortensen
President
and Chief Financial Officer
13