secondquarter2008.htm
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 MAY 31, 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, 12,346,026
shares outstanding as of July 8, 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
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ITEM
1. Financial Statements:
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1
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2
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3
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4
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6
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ITEM 3. Controls
and
Procedures.....................................................................................................................................................................
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PART
II. OTHER INFORMATION
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ITEM 1. Legal
Proceedings................................................................................................................................................................................
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ITEM 3. Defaults Upon Senior
Securities........................................................................................................................................................
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ITEM 5. Other
Information.................................................................................................................................................................................
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ITEM 6. Exhibits....................................................................................................................................................................................................
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Signatures............................................................................................................................................................................................................
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PART
I - FINANCIAL INFORMATION
ITEM
1 - FINANCIAL STATEMENTS
CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
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Selling,
general and administrative
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Depreciation
and amortization
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Total
other income (expense), net
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Income
tax (expense) benefit
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Basic
and diluted net income per share
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Weighted
average common shares outstanding:
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See
accompanying notes to consolidated financial statements
CONSOLIDATED
BALANCE SHEETS
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Cash
and cash equivalents
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Current
portion of deferred tax asset
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Prepaid
expenses and other
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Property
and equipment, net
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Deferred tax assets, net of current portion |
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790,000
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Current
portion of capital lease obligations
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Total
current liabilities
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Capital
lease obligations, net of current portion
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Commitments
and contingencies
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Preferred
stock-$.001 par value; 5,000,000 shares authorized; no shares issued and
outstanding
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Common
stock-$.001 par value; 25,000,000 shares authorized; 12,346,026 and
12,146,026 shares issued and outstanding at May 31,
2008 and November 30, 2007, respectively
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Additional
paid-in capital
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Total
stockholders' equity
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Total
liabilities and stockholders' equity
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See
accompanying notes to consolidated financial statements
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Cash
flows from operating activities:
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Adjustments
to reconcile net income to net cash provided by operating
activities
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Depreciation and amortization
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Changes
in operating assets and liabilities:
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Prepaid
expenses and other
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Accounts
payable and accrued liabilities
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Net cash provided by (used in) operating activities
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Cash
flows from investing activities:
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Purchases of property and equipment
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Net cash used in
investing
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Cash
flows from financing activities
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Net borrowings (repayments) under line of credit
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Repayments of long-term obligations
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Exercise of stock
options
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Net cash provided by (used in) financing activities
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Net change in cash and cash equivalents
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Cash
and cash equivalents, beginning of period
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Cash
and cash equivalents, end of period
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Supplemental
disclosures of cash flow information
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Cash paid during the period for:
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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
May 31, 2008 and the results of operations and cash flows for the interim
periods ended May 31, 2008 and 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.
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 and six-month periods ended May 31, 2008 and 2007, as their effect would
be antidilutive.
There
were 268,200 and 35,000 potentially dilutive options outstanding at May 31, 2008
and 2007, 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
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
three-month periods ended May 31, 2008 and 2007, the adoption of FAS 123(R)
resulted in incremental stock-based compensation expense of $10,562 and $1,700,
respectively. For the six-month periods ended May 31, 2008 and 2007, the
adoption of FAS 123(R) resulted in incremental stock-based compensation expense
of $31,469 and $3,400, 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 six months ended
May 31, 2008:
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Weighted
Average Remaining Contractual Term (Years)
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Aggregate
Intrinsic Value
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Outstanding
at November, 2007
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Outstanding
at May 31, 2008
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Options
exercisable at May 31, 2008
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As of May
31, 2008 there was $7,367 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 1.25 years.
The
Company used the Black-Scholes Option Pricing Model (“BSOPM”) to determine the
fair value of option grants. During the second quarter of fiscal 2008, the
Company granted 20,000 fully vested options to directors at an exercise price of
$0.60. The options were valued using the BSOPM and the following assumptions:
stock price on date of grant - $0.60, exercise price - $0.60, expected life - 5
years, volatility - 97% and a risk free rate of 2.42%. The calculated fair value
of each option was approximately $0.44. No option grants were made during the
second quarter of fiscal 2007.
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:
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Less
allowance for obsolete inventories
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5)
SINGAPORE ROYALTY AGREEMENT
Consolidated
net sales and gross profit include income from the Singapore royalty agreement
of $0 and $95,263 for the three-month periods ended May 31, 2008 and 2007,
respectively, and $0 and $192,488 for the six-month periods ended May 31, 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 $85,736 for the three-month periods ended May 31, 2008 and
2007, respectively and $0 and $173,239 for the six-month periods ended May 31,
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.
6) ACCOUNTING CHANGES
In June,
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income
Taxes (FIN48), to create a single model to address accounting for
uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes
by prescribing a minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest, and penalties,
accounting in interim periods, disclosure and transition. The Company adopted
FIN 48 as of December 1, 2007 and the adoption did not have a material
impact to the Company’s consolidated financial statements or effective tax rate
and did not result in any unrecognized tax benefits.
Interest
costs and penalties related to income taxes are classified as interest expense
and general and administrative costs, respectively, in the Company’s
consolidated financial statements. For the three and six-months ended May
31, 2008 and 2007, the Company did not recognize any interest or penalty expense
related to income taxes. It is determined not to be reasonably possible for the
amounts of unrecognized tax benefits to significantly increase or decrease
within the next 12 months. The Company is currently subject to a three year
statute of limitations by major tax jurisdictions. The Company and its
subsidiaries file income tax returns in the U.S. federal
jurisdiction.
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 MAY 31, 2008 COMPARED TO THE THREE MONTHS ENDED
MAY 31, 2007
Net sales
for the quarter ended May 31, 2008 were $2,791,466 versus $2,587,504 for the
same period of fiscal 2007, an increase of $203,962 or 8%. Revenues from the
Singapore royalty agreement decreased to $0 in the three-month period
ended May 31, 2008 from $95,263 in the comparable period in 2007. Revenues from
U.S. operations increased to $2,791,466 in the second quarter of 2008 from
$2,492,241 in 2007. Revenues from U.S. Operations increased 12% in
the second quarter over the previous year’s second 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 $328,000 in sales for the second
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.
The
Singapore royalty agreement generated gross profit of $0 and $95,263
for the three month periods ended May 31, 2008 and 2007, respectively. Net
income attributable to this agreement was $0 and $85,736 for the three-month
periods ended May 31, 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 May 31, 2008 and 2007 were $2,115,363 and
$1,976,760, respectively. The Company's gross profit margin was 24% in the
second fiscal quarters of 2008 and 2007. The increase in costs of goods
sold results from the increase in raw material costs and incoming
freight 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 and freight costs due to increases in costs of
petroleum.
Selling,
general and administrative expenses for the second quarter of fiscal 2008 and
2007 were $605,362 and $420,821, respectively, representing an increase of
$184,541 or 44%. These costs increased over the previous year due to additional
staff added in sales, quality control and the addition of staff to fulfill the
Miss Oops product line. 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 that begin in the third quarter
of 2008.
Interest
expense for the second quarter of fiscal 2008 and 2007 was $25,250 and $19,194,
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 $3,591 in the second quarter of
2008. This benefit was mainly a result of the Company recording a deferred tax
asset related to
stock based compensation.
Net
income for the second quarter of fiscal 2008 was $30,502 compared to $160,061
for the second quarter of fiscal 2007. Basic and diluted net income per
share for the second quarter of fiscal 2008 was $0.00 per share, compared to
$0.01 per share for the second quarter of fiscal 2007.
RESULTS
OF OPERATIONS SIX MONTHS ENDED MAY 31, 2008 COMPARED TO THE SIX MONTHS ENDED MAY
31, 2007
Net sales
for the six months ended May 31, 2008 were $5,828,659 versus $5,151,059 for the
same period of fiscal 2007, an increase of $677,600 or 13%. Revenues from
the Singapore royalty agreement decreased to $0 in the six-month
period ended May 31, 2008 from $192,488 in the comparable period in
2007. Revenues from U.S. operations increased to $5,828,659 in the
first six months of 2008 from $4,958,571 in 2007. Revenues from U.S.
operations increased 18% in the six months ended May 31 over the same period in
prior year.
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 $582,000 in sales for the six months
ended May 31, 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.
The
Singapore royalty agreement generated gross profit of $0 and $192,488
for the six month periods ended May 31, 2008 and 2007, respectively. Net income
attributable to this agreement was $0 and $173,239 for the six-month periods
ended May 31, 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 six months ended May 31, 2008 and 2007 were $4,428,581 and
$4,049,053, respectively. The Company's gross profit margin was 24% in the six
months ended May 31, 2008, compared to 21% in the 2007 comparable
period. The increase in costs of goods sold results from the
increase in raw material and freight 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 and freight costs due to increases
in costs of petroleum.
Selling,
general and administrative expenses for the six months ended May 31, 2008 and
2007 were $1,192,881 and $779,996, respectively, representing an increase of
$412,885 or 53%. These costs increased over the previous year due to
additional staff added in sales, quality control and the addition of staff to
fulfill the Miss Oops product line. 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 that begin in
the third quarter of 2008.
Interest
expense for the six months ended May 31, 2008 and 2007 was $53,780 and $41,411,
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 $10,699 in the six months ended
May 31, of 2008. This benefit was mainly a result of the Company recording a
deferred tax asset related to stock based
compensation.
Net
income for the six months ended May 31, 2008 was $126,030 compared to
$433,046 for the same period in 2007. Basic and diluted net income per
share for the six months ended May 31, 2008 was $0.01 per share, compared to
$0.04 per share for the same period in 2007.
LIQUIDITY
AND CAPITAL RESOURCES
As of May
31, 2008, we had working capital of $2,279,485 compared
to working capital of $2,820,805 at
November 30, 2007.
Cash and
cash equivalents were $255,195 at May 31, 2008, compared with $462,701 at
November 30, 2007. Operating activities used $365,816 of cash during the six
months ended May 31, 2008, compared with cash used of $464,418 in the
corresponding period of fiscal 2007. The cash used by operating activities in
the six months ended May 31, 2008 resulted primarily from net income of $126,030
plus non-cash charges of $81,640, an increase in accounts receivable of
$614,588, an increase in inventory of $292,430, a decrease in prepaid expenses
of $154,539 and an increase in accrued liabilities of $179,992.
Capital
expenditures were $25,343 for the six months ended May 31, 2008, compared to
$27,633 for the corresponding period in fiscal 2007.
The
Company uses short- and long-term borrowings to supplement internally generated
cash flow. Activity related to short- and long-term borrowings in the six months
ended May 31, 2008 resulted in cash provided by financing activities of $183,653
compared to cash provided by financing activities of $235,764 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 has been extended until
April 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 May 31, 2008 were
$1,499,282.
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 May 31, 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 May 31, 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 May 31, 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 affect the Company.
NONE
NONE
NONE
NONE
(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:
July 14, 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
CERTIFICATIONS
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:
July 14, 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:
July 14, 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 May 31, 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:
July 14, 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 May 31, 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: July
14, 2008
By:
/s/ WILLIAM G.
MORTENSEN
William
G. Mortensen
President
and Chief Financial Officer