UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
(Mark
One)
x
QUARTERLY
REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED FEBRUARY 29, 2008
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 of small business issuer as specified in its charter)
NEVADA 33-0215295
(State
or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
3303
LEE PARKWAY, SUITE 105, DALLAS, TEXAS
75219
(Address of principal executive
offices) (Zip
code)
(972)
432-0602
(Issuer's
telephone number)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Check
whether the issuer: (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): Yes
o
No
x
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: Common Stock, $.001 par value, 12,146,026
shares outstanding as of April 10, 2008.
Transitional
Small Business Disclosure Format (check one): Yes
o
No
x
ADVANCED
MATERIALS GROUP, INC.
FORM
10-QSB
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
|
|
ITEM
1. Financial Statements:
|
|
|
1
|
|
2
|
|
3
|
|
4
|
|
6
|
ITEM
3.
Controls
and Procedures
.......................................................................................................................................................................................
|
9
|
PART
II. OTHER INFORMATION
|
|
ITEM
1.
Legal
Proceedings
...................................................................................................................................................................................................
|
10
|
|
10
|
ITEM
3.
Defaults
Upon Senior
Securities
..........................................................................................................................................................................
|
10
|
|
10
|
ITEM
5.
Other
Information
...................................................................................................................................................................................................
|
10
|
ITEM
6.
Exhibits
......................................................................................................................................................................................................................
|
11
|
Signatures
..............................................................................................................................................................................................................................
|
12
|
|
|
PART
I - FINANCIAL INFORMATION
ITEM
1 - FINANCIAL STATEMENTS
CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
|
|
Three
Months Ended
|
|
|
|
February
29, 2008
|
|
|
February
28, 2007
|
|
Net
sales
|
|
$
|
3,037,193
|
|
$
|
2,563,854
|
|
Cost
of sales
|
|
|
2,313,217
|
|
|
2,072,293
|
|
Gross
profit
|
|
|
723,976
|
|
|
491,561
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
587,520
|
|
|
359,175
|
|
Depreciation
and amortization
|
|
|
11,216
|
|
|
15,195
|
|
Total
operating expenses
|
|
|
598,736
|
|
|
374,370
|
|
Income
from operations
|
|
|
125,240
|
|
|
117,191
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(28,530)
|
|
|
(22,217
|
)
|
Other,
net
|
|
|
(8,290)
|
|
|
8,788
|
|
Total
other income (expense), net
|
|
|
(36,820)
|
|
|
(13,429
|
)
|
Income
tax benefit
|
|
|
7,108
|
|
|
169,223
|
|
Net
income
|
|
$
|
95,528
|
|
$
|
272,985
|
|
Basic
and diluted net income per share
|
|
$
|
0.01
|
|
$
|
0.02
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
12,146,026
|
|
|
12,133,693
|
|
Diluted
|
|
|
12,361,481
|
|
|
12,296,000
|
|
See
accompanying notes to consolidated financial statements
CONSOLIDATED
BALANCE SHEETS
|
|
February
29, 2008 (unaudited)
|
|
November
30, 2007
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
775,487
|
|
$
|
462,701
|
|
Accounts
receivable, net
|
|
1,804,848
|
|
1,799,657
|
|
Inventories,
net
|
|
1,105,482
|
|
1,086,968
|
|
Deferred tax asset
|
|
865,172
|
|
858,064
|
|
Prepaid
expenses and other
|
|
496,633
|
|
398,133
|
|
Total
current assets
|
|
5,047,622
|
|
4,605,523
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
714,955
|
|
736,398
|
|
Other
assets
|
|
70,394
|
|
69,395
|
|
Total
assets
|
|
$
|
5,832,971
|
|
$
|
5,411,316
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
389,602
|
|
$
|
251,301
|
|
Accrued
liabilities
|
|
134,660
|
|
119,468
|
|
Line
of credit
|
|
1,522,917
|
|
1,354,167
|
|
Current
portion of capital lease obligations
|
|
44,532
|
|
59,782
|
|
Total
current liabilities
|
|
2,091,711
|
|
1,784,718
|
|
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
120,670
|
|
122,442
|
|
Total
liabilities
|
|
2,212,381
|
|
1,907,160
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
--
|
|
--
|
|
Stockholders'
equity:
|
|
|
|
|
|
Preferred
stock-$.001 par value; 5,000,000 shares authorized; no shares issued
and
outstanding
|
|
--
|
|
--
|
|
Common
stock-$.001 par value; 25,000,000 shares authorized; 12,146,026 and
12,146,026 shares issued and outstanding at February 29,
2008 and November 30, 2007, respectively
|
|
12,146
|
|
12,146
|
|
Additional
paid-in capital
|
|
8,515,878
|
|
8,494,971
|
|
Accumulated
deficit
|
|
(4,907,434)
|
|
(5,002,961)
|
|
Total
stockholders' equity
|
|
3,620,690
|
|
3,504,156
|
|
Total
liabilities and stockholders' equity
|
|
$
|
5,832,971
|
|
$
|
5,411,316
|
|
See
accompanying notes to consolidated financial statements
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three
Months Ended
|
|
|
|
February
29, 2008
|
|
February
28, 2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
95,527
|
|
$
|
272,985
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
Depreciation and amortization
|
|
32,695
|
|
51,005
|
|
Deferred
taxes and other
assets
|
|
(7,107)
|
|
(178,944)
|
|
Stock based compensation
|
|
20,907
|
|
1,700
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
(5,192)
|
|
14,871
|
|
Inventories
|
|
(18,513)
|
|
(327,774)
|
|
Prepaid
expenses and other
|
|
|
|
(47,798)
|
|
Accounts
payable and accrued liabilities
|
|
153,493
|
|
199,161
|
|
Net cash provided by (used in) operating activities
|
|
172,310
|
|
(14,794)
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
Purchases of property and equipment
|
|
(11,252)
|
|
(22,915)
|
|
Net cash used in
investing
|
|
(11,252)
|
|
(22,915)
|
|
Cash
flows from financing activities
|
|
|
|
|
|
Net borrowings (repayments) under line of credit
|
|
168,750
|
|
(99,129)
|
|
Repayments of long-term obligations
|
|
(17,022)
|
|
(19,385)
|
|
Exercise of stock
options
|
|
-
|
|
5,099
|
|
Net cash provided by (used in) financing activities
|
|
151,728
|
|
(113,415)
|
|
Net change in cash and cash equivalents
|
|
312,786
|
|
(151,124)
|
|
Cash
and cash equivalents, beginning of period
|
|
462,701
|
|
441,860
|
|
Cash
and cash equivalents, end of period
|
|
|
|
$ 290,736
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
28,530
|
|
$
|
22,217
|
|
Income taxes
|
|
$
|
(7,108)
|
|
$
|
9,722
|
|
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 29, 2008 and the results of operations and cash flows for the interim
periods ended February 29, 2008 and February 28, 2007. 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, 2007.
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.
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 29, 2008 and February 28, 2007, as their
effect would be antidilutive.
There
were 208,000 and 225,000 potentially dilutive options outstanding at February
29, 2008 and February 28, 2007, respectively, that were not included in the
computation of net income per share because the impact would be
anti-dilutive.
On
November 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 November 1, 2006 and any outstanding share-based awards that were issued
but not vested as of November 1, 2006.
For
the
quarters ended February 29, 2008 and February 28, 2007, the adoption of FAS
123(R) resulted in incremental stock-based compensation expense of $20,907
and
$1,700, respectively. This amount includes compensation expense related to
stock options granted prior to November 1, 2006, but not yet vested as of
November 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 29, 2008:
|
Shares
|
|
|
Weighted
Average Price
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at November, 2007
|
428,200
|
|
$
|
0.71
|
|
|
|
|
|
|
Granted
|
40,000
|
|
|
0.65
|
|
|
|
|
|
|
Cancelled
or expired
|
(10,000
|
)
|
$
|
3.69
|
|
|
|
|
|
|
Outstanding
at February 29, 2008
|
458,200
|
|
$
|
0.64
|
|
6.24
|
|
$
|
81,800
|
|
Options
exercisable at February 29, 2008
|
398,200
|
|
$
|
0.69
|
|
6.37
|
|
$
|
58,200
|
|
As
of
February 29, 2007 there was $9,067 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 1.5 years.
The
Company used the Black-Scholes Option Pricing Model (“BSOPM”) to determine the
fair value of option grants. 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% and a risk free rate of 2.71%. The calculated fair
value
of each option was approximately $0.48. No option grants were made during the
first quarter of fiscal 2007.
Inventories
are stated at the lower of cost (determined on the first-in, first-out method)
or market. Inventories consisted of the following:
|
|
|
February
29, 2008
|
|
|
November
30, 2007
|
|
|
|
|
|
|
|
(unaudited)
|
|
Raw
Materials
|
|
$
|
696,783
|
|
$
|
562,236
|
|
Work-in-process
|
|
|
159,801
|
|
|
148,104
|
|
Finished
Goods
|
|
|
257,898
|
|
|
376,628
|
|
Less
allowance for obsolete inventories
|
|
|
9,000
|
|
|
--
|
|
|
|
$
|
1,105,482
|
|
$
|
1,086,968
|
|
Consolidated
net sales and gross profit include income from the Singapore royalty agreement
of $0 and $97,225 for the three-month periods ended February 29, 2008 and 2007,
respectively. Based on the structure of the agreement, the Company has no cost
of sales related to this income. Net income attributable to this agreement
was
$0 and $87,503 for the three-month periods ended February 29, 2008 and 2007,
respectively.
On
or
about October 18, 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 Burma, formerly the Kingdom
of 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, as well as for breach of
fiduciary duty. The Company is seeking compensatory damages in excess of
$1,000,000, exemplary damages in an amount subject to proof, interest as
provided by law and costs associated with the suit.
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, 2007 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 29, 2008 COMPARED TO THE THREE
MONTHS
ENDED FEBRUARY 28, 2007
Net
sales
for the quarter ended February 29, 2008 were $3,037,193 versus $2,563,854
for
the same period of fiscal 2007, an increase of $473,339 or 18.5%. Revenues
from
the Singapore royalty agreement decreased to $0 in the three-month
period ended February 29, 2008 from $97,225 in the comparable period in 2007.
Revenues from U.S. operations increased to $3,037,193 in the first quarter
of
2008 from $2,466,629 in 2007. Revenues from U.S. Operations
increased 23% in the first quarter over the previous years first
quarter.
The
increase in sales for U.S. operations is due to increased
sales volumes from its top 5 customers and the signing of a license agreement
with Easy Industries dated and effective January 1, 2008, which contributed
to
the increase in sales overall. The license agreement resulted in $254,000
in
sales for the first fiscal quarter of 2008. The Company continues its strategic
focus on generating its own proprietary opportunities with both its existing
customer base as well as new prospects in order to build a more competitive
base
of business in the United States. During the first quarter of 2007, the Company
launched Nundies, a new women's undergarment product owned by the Company.
This
product is being sold through retailers and is available for direct purchase
at
www.nundies.com. The Easy Industries license agreement provides for Easy
Industries to market and sell the Nundies proprietary products. The product
line
is now being marketed under the brand name of Miss Oops. Miss Oops products,
along with the Nundies product, is currently available in over 2,000 retail
outlets worldwide and are available online at www.MissOops.com. The Management
of the company sees this strategic relationship as a high growth division
over
the next 3 years.
The
Singapore royalty agreement generated gross profit of $0 and $97,225
for the three month periods ended February 29, 2008 and 2007, respectively.
Net
income attributable to this agreement was $0 and $87,503 for the three-month
periods ended February 29, 2008 and 2007, respectively. The Company is currently
involved in litigation with Foamtec arising out of a dispute associated with
the
final payment to the Company under the royalty agreement. See Part II
- Other Information, Item 1: Legal Proceedings, for further
information.
Cost
of
goods sold for the quarters ended February 29, 2008 and February 28, 2007
were
$2,313,217 and $2,072,293, respectively. The Company's gross profit margin
was
24% in the first fiscal quarter of 2008, compared to 19% in the 2007 comparable
period. The increase in costs of goods sold results from the
increase in sales to customers due to greater raw material costs. The Company's
top five customers products are foam based products, which are petroleum-based
products, and we continue to see increases in raw material costs due to
increases in costs of petroleum.
Selling,
general and administrative expenses for the first quarter of fiscal 2008
and
2007 were $587,520 and $359,175, respectively, representing an increase of
$228,345 or 64%. These costs increased over the previous year due to additional
staff added in sales and quality control. The Company obtained ISO 13485
certification in 2007 and is currently pursuing the ISO AS9100 certification
in
order to allow the Company to bid for business within the Aerospace Industry.
The Company also has added customer service staff to further its commitment
to
service our customers with the upstart of the fulfillment services business
to
begin 2nd quarter of 2008. Additional costs were also incurred in the quarter
for the addition of the Miss Oops staff in connection with the license agreement
executed during the first quarter.
Interest
expense for the first quarter of fiscal 2008 and 2007 was $28,530 and $22,217,
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 $7,108 in the first quarter of 2008.
This benefit was mainly a result of the Company recording a deferred tax asset
related to stock based compensation. As of February 29, 2008, the
Company has a net operating tax loss carryforward of approximately $6,140,056
which is expected to be available to offset future Federal tax
liabilities.
Net
income for the first quarter of fiscal 2008 was
$95,527 compared to $272,985 for the first quarter of fiscal 2007. Basic
and diluted net income per share for the first quarter of fiscal 2008 was $0.01
per share, compared to $0.02 per share for the first quarter of fiscal
2007. Adjusted Net Income without the income tax benefit and Singapore
Royalty was $88,420 compared to $6,537 for the first quarter of fiscal 2008
and
2007. Adjusted Net Income increased 1252.61% quarter over
quarter.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
February 29, 2008, we had working capital of $2,955,911 compared to working
capital of $2,820,805 at November 30, 2007.
Cash
and
cash equivalents were $775,487 at February 29, 2008, compared with $462,701
at
November 30, 2007. Operating activities provided $72,310 of cash during the
first quarter of fiscal 2008, compared with cash used of $14,794 in the
corresponding period of fiscal 2007. The cash provided by operating activities
in the first quarter of 2008 resulted primarily from net income of $95,527
plus
non-cash charges of $60,709 and an increase in accounts payable and accrued
liabilities of $153,493 offset by an increase in prepaid and other assets of
$313,714.
Capital
expenditures were $11,252 for the three months ended February 29, 2008, compared
to $22,915 for the corresponding period in fiscal 2007. The Company believes
the
reduction is partially attributed to a Company-wide program to reduce
non-essential capital expenditures that are not specifically focused on revenue
growth.
The
Company uses short- and long-term borrowings to supplement internally generated
cash flow. Activity related to short- and long-term borrowings in the
three-months ended February 29, 2008 resulted in cash provided by financing
activities of $72,310 compared to cash used in financing activities of
$14,794 in the same period of 2007.
On
March
1, 2007, AMG, through its wholly-owned subsidiary AMI, obtained a $2,000,000
credit facility (the “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. 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
$2,000,000. 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 originally was April 1, 2008, but
now
has
been extended until April 1, 2009, effective as of March 28,
2008.
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 financials
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 29, 2008 were
$1,522,917.
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 60% or more 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.
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.
The
Company's Chief Executive Officer and President/Chief Financial Officer (the
Company's principal executive officer and principal financial officer), have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act
of 1934) as of the period ended February 29, 2008, the period covered by this
Quarterly Report on Form 10-QSB. Based upon that evaluation, the Company's
principal Chief Executive Officer and Chief Financial Officer have concluded
that as of February 29, 2008, the Company’s disclosure controls and procedures
provide reasonable assurance that material information relating to the Company
is made known to management, including our Chief Executive Officer and Chief
Financial Officer.
There
were no changes in the Company's internal control over financial reporting
that
occurred during the period ended February 29, 2008 that have materially
affected, or are reasonable likely to materially affect, the Company's internal
control over financial reporting.
PART
II - OTHER INFORMATION
On
or
about October 18, 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 Burma, formerly the Kingdom
of 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, as well as for breach of
fiduciary duty. The Company is seeking compensatory damages in excess of
$1,000,000, exemplary damages in an amount subject to proof, 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 effect the Company.
NONE
NONE
NONE
Strategic
License Agreement
On
February 25, 2008, the Company issued a press release announcing that the
Company has entered into a strategic licensing agreement with Easy Industries,
LLC for its Miss Oops
®
line of women’s problem-solving fashion and
accessory products. Through the licensing agreement, the Company has obtained
exclusive rights to the Miss Oops
®
name and product line and a 10%
equity ownership in Easy Industries, LLC. In addition, the Company hired
Easy
Industries, LLC’s president and staff to lead the Company’s Fashion Solutions
Product division in charge of sales, marketing and business
development.
The
Company manufactures and fulfills the Miss Oops
®
-branded products
within the Company’s current manufacturing and fulfillment facilities, and the
products are sold online and in boutiques, department stores, specialty stores
and sporting goods stores.
Branded
as Miss Oops
®
, the line will continue to provide
products that make life easier with plans to utilize existing materials and
designs to offer new problem-solving products for women’s sports and activities,
including running, biking, tennis and yoga. In addition to the Miss Oops
line of
products for women, the Company is researching a line of fashion
gear for men and children that will be branded Mr.
Oops
®
and Baby
Oops
®
.
AM's
Nundies product, a one-time use, pantyless panty that adheres to the inside
inseam of a woman’s pants is now being marketed with the Miss Oops products
through the licensing agreement with Easy Industries. AM intends to
leverage both the Nundies and Miss Oops retail presence in over 1,000
stores worldwide to achieve its “go-to-market” strategy for its products to
deliver innovative solutions-based products for women, men and
children.
AM
manufactures and fulfills the Miss Oops-branded products within its current
manufacturing and fulfillment facilities. Miss Oops is being sold online
and in
boutiques, department stores, specialty stores and sporting goods stores
worldwide. For more information on how and where to purchase Miss Oops products
online, please visit
http://www.missoops.com/purchase.html
.
For
retail store locations carrying Miss Oops products, please visit
http://www.missoops.com/storelisting.php
or call
1-877-686-3437.
The
Miss
Oops product line is now comprised of the following fashion and accessory
products:
·
|
Miss
Oops® JAKs™
-
An
amazing under the shirt, over the pant stretch lace band to cover
back
there
|
·
|
Miss
Oops® Nundies™
-
A
one-time use, pantyless panty that adhere to the inside inseam
of a
woman’s pants
|
·
|
Miss
Oops® Popper Stopper™
-
An
effective solution for stopping your bellybutton from showing
through your
garments
|
·
|
Miss
Oops® Dry Sponge™
-
A
life-saving sponge that removes difficult deodorant marks, powder
and the
other “oops”
|
·
|
Miss
Oops® Pedicure In A Bottle™
-
An
all-in-one treatment that exfoliates, smoothes and hydrates rough
tootsies
|
·
|
Miss
Oops® Pucker Protector™
-
An
innovative product that serves as lip balm and lip
gloss
|
·
|
Miss
Oops® Critical Care Kit for Mom’s-To-Be
™
-
A
three-in-one survival kit for
mom’s-to-be
|
·
|
Miss
Oops® Critical Care Kit for Women™
-
A
three-in-one survival kit for
women
|
(a)
Exhibits.
EXHIBIT
NO.
DESCRIPTION
31.1 Certifications
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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 15, 2008
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
EXHIBIT
31.1
I,
Ricardo G. Brutocao, certify that:
1.
I have
reviewed this quarterly report on Form 10-QSB of Advanced Materials Group,
Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the small business issuer
as
of, and for, the periods presented in this report;
4.
The
small business issuer's other certifying officer(s) and I are responsible
for
establishing and maintaining disclosure controls and procedures (as defined
in
Exchange Act Rules 13a-15(e) and 15d-15(e)) [language omitted pursuant to
SEC
Release 34-47986] for the small business issuer and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b)
[Omitted pursuant to SEC Release 34-47986];
(c)
Evaluated the effectiveness of the small business issuer’s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the
period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the small business issuer’s internal
control over financial reporting that occurred during the small business
issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is
reasonably likely to materially affect, the small business issuer’s internal
control over financial reporting; and
5.
The
small business issuer’s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to
the small business issuer’s auditors and the audit committee of the small
business issuer's board of directors (or persons performing the equivalent
functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the small business issuer’s ability to record, process,
summarize and report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the small business issuer’s internal control over
financial reporting.
Date:
April 15, 2008
/s/
RICARDO G. BRUTOCAO
Ricardo
G. Brutocao
Chief
Executive Officer
EXHIBIT
31.2
CERTIFICATIONS
I,
William G. Mortensen, certify that:
1.
I have
reviewed this quarterly report on Form 10-QSB of Advanced Materials Group,
Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the small business issuer
as
of, and for, the periods presented in this report;
4.
The
small business issuer's other certifying officer(s) and I are responsible
for
establishing and maintaining disclosure controls and procedures (as defined
in
Exchange Act Rules 13a-15(e) and 15d-15(e)) [language omitted pursuant to
SEC
Release 34-47986] for the small business issuer and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b)
[Omitted pursuant to SEC Release 34-47986];
(c)
Evaluated the effectiveness of the small business issuer’s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the
period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the small business issuer’s internal
control over financial reporting that occurred during the small business
issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is
reasonably likely to materially affect, the small business issuer’s internal
control over financial reporting; and
5.
The
small business issuer’s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to
the small business issuer’s auditors and the audit committee of the small
business issuer's board of directors (or persons performing the equivalent
functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the small business issuer’s ability to record, process,
summarize and report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the small business issuer’s internal control over
financial reporting.
Date:
April 15, 2008
/s/
WILLIAM G. MORTENSEN
William
G. Mortensen
President
and Chief Financial Officer
EXHIBIT
32.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
PURSUANT
TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the quarterly report on Form 10-QSB of Advanced Materials Group,
Inc. (the "Company") for the quarter ended February 29, 2008 (the "Report"),
the
undersigned hereby certifies, pursuant to 18 U.S.C. section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
1.
the
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
2.
the
information contained in the Report fairly presents, in all material respects,
as of, and for, the periods presented in the report, the consolidated financial
condition and results of operations of the Company.
Dated:
April 15, 2008
By:
/s/
RICARDO G. BRUTOCAO
Ricardo
G. Brutocao
Chief
Executive Officer
EXHIBIT
32.2
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
PURSUANT
TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the quarterly report on Form 10-QSB of Advanced Materials Group,
Inc. (the "Company") for the fiscal quarter ended February 29, 2008 (the
"Report"), the undersigned hereby certifies, pursuant to 18 U.S.C. section
1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
1.
the
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
2.
the
information contained in the Report fairly presents, in all material respects,
as of, and for, the periods presented in the report, the consolidated financial
condition and results of operations of the Company.
Dated:
April 15, 2008
By:
/s/
WILLIAM G. MORTENSEN
William
G. Mortensen
President
and Chief Financial Officer
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