fiscalyear2008.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
(MARK
ONE)
x ANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL
YEAR ENDED NOVEMBER 30, 2008.
o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM __________ TO __________
COMMISSION
FILE NO. 000-16401
ADVANCED
MATERIALS GROUP, INC.
(Name
of small business issuer in its charter)
NEVADA 33-0215295
(State or
other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
2364
MERRITT DRIVE, SUITE A, GARLAND, TEXAS 75041
(Address
of principal executive offices)(Zip Code)
Issuer's
telephone number: (469)
246-4100
Securities
registered under Section 12(b) of the Exchange Act: NONE
Securities
registered under Section 12(g) of the Exchange Act: COMMON STOCK, $0.001 PAR
VALUE
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the issuer: (1) has 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 last 90 days.
Yesx No o
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
x
Indicate
by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yeso No x
State
issuer’s revenues for the year ended November 30, 2008: $12,303,528
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.)
The
aggregate market value on February 13, 2009 of the voting and non-voting common
equity held by non-affiliates of the registrant was $5,555,712.
There
were 12,346,026 shares of our common stock, par value $0.001 per share,
outstanding as of February 13, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE: Certain of the information required by Part III of
this report is incorporated by reference from portions of the registrant’s
Proxy Statement on Schedule 14A for the 2009 Annual Meeting of Stockholders to
the extent set forth herein.
Transitional
Small Business Format (check one): Yeso No x
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TABLE
OF CONTENTS
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PART
I
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ITEM
1. DESCRIPTION OF
BUSINESS......................................................................................................................................................
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1
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ITEM
2. DESCRIPTION OF
PROPERTY.....................................................................................................................................................
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6
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ITEM
3. LEGAL
PROCEEDINGS.................................................................................................................................................................
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6
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6
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PART
II
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7
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7
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ITEM
7. FINANCIAL
STATEMENTS........................................................................................................................................................
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11
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11
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ITEM
8A(T). CONTROLS AND
PROCEDURES.......................................................................................................................................
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11
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ITEM
8B. OTHER
INFORMATION............................................................................................................................................................
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12
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PART
III
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12
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ITEM
10. EXECUTIVE
COMPENSATION.................................................................................................................................................
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14
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15
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15
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ITEM
13. EXHIBITS.......................................................................................................................................................................................
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15
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15
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PART
IV
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F-1
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SIGNATURES.................................................................................................................................................................................................
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16
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INDEX TO
EXHIBITS....................................................................................................................................................................................
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17
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FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-KSB contains forward-looking statements. The words
“intend,” “anticipate,” “believe,” “estimate,” “plan,” “expect” and similar
expressions as they relate to us, identify these forward-looking statements.
Forward-looking statements include those that address activities, developments
or events that we expect or anticipate will or may occur in the future. All
statements other than statements of historical facts contained in this Annual
Report, including statements regarding our future financial position, business
strategy, budgets, projected costs and plans and objectives of management for
future operations, are forward-looking statements. The actual outcome of the
events described in these forward-looking statements could differ
materially.
These
factors expressly qualify all subsequent oral and written forward-looking
statements attributable to us or persons acting on our behalf.
A
forward-looking statement may include a statement of the assumptions or bases
underlying the forward-looking statement. We have chosen these assumptions or
bases in good faith and we believe that they are reasonable. However, we caution
you that assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material,
depending on the circumstances. When considering forward-looking statements, you
should keep in mind the risk factors and other cautionary statements in this
Annual Report. Except for our ongoing obligations to disclose material
information as required by the federal securities laws, we do not have any
intention or obligation to update forward-looking statements after we distribute
this Annual Report.
Readers
are referred to the caption “Risk Factors” appearing at the end of Item 1 of
this Annual Report for additional factors that may affect our forward-looking
statements. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Annual Report may not occur. We
undertake no obligation to update or revise our forward-looking statements,
whether as a result of new information, future events or otherwise.
PART
I
GENERAL
Advanced
Materials Group, Inc. (the "Company" or "AM") develops, manufactures and markets
a wide variety of products from a raw material base of flexible components. The
Company's principal subsidiary, Advanced Materials, Inc. (formerly known as
Wilshire Advanced Materials, Inc.) ("AMI"), is the successor to a 50-year old
business that converted specialty materials including foams, foils, films and
adhesive composites into components and finished products. In 2008, the Company
continued its transition from the foam fabricator / contract manufacturing
business to proprietary medical and consumer products. Advanced Materials Group,
Inc. and Advanced Materials, Inc. are consolidated and referenced as the
“Company” or "AM" in this Annual Report. Examples of the products AM
manufactures include non-skid surgical instrument pads and applicators for
medical use, soap impregnated surgical prep kit sponges, protective units for
arthroscopic and orthopedic instruments, printer cartridge inserts and inking
felts, automobile insulators and water and dust seals. These products are made
for a number of customers in various markets including medical, technology,
aerospace, automotive and consumer. AM's offerings to its customer base includes
contract manufacturing, engineering and fulfillment services.
Our
Advanced Materials Fashion Solutions Product Division sells and markets
proprietary consumer fashion products. Effective January 1, 2008, the
Company entered into a strategic licensing agreement with Easy Industries, LLC
for its line of women’s problem-solving fashion and accessory products, branded
as Miss Oops®. Through this agreement, AM has obtained exclusive
rights to the Miss Oops® name and product line and a 10% equity ownership of
Easy Industries, LLC. AM manufactures and fulfills the Miss Oops® in
its current manufacturing and fulfillment facilities.
The
Company, which was formerly known as Far West Ventures, Inc., was incorporated
in Nevada in October 1986. The Company was inactive from January 1990 until
April 1993, when it acquired AMI. AM had previously been formed as a California
corporation in August 1992 for the purpose of acquiring the assets of the
General Foam Products division of Wilshire Technologies, Inc. ("WTI"). The
assets acquired by AM constituted a portion of the business and assets
previously acquired by WTI from Wilshire Foam Products, Inc. in November
1990.
The
Company's principal executive offices are located at 2364 Merritt Drive, Suite
A, Garland, Texas 75041, and its telephone number is (469) 246-4100. The
Company's website is
www.advancedmaterials.net.
BUSINESS
STRATEGY
The
common ingredient among our products is that the raw materials from which all
products are produced is "flexible" in nature. The Company has focused
historically on the supply of specialty die-cut polymeric materials. This core
competency is still being utilized but expanded, and because polymers are
synthetic chemical structures and are used in a variety of configurations and
products, the applications are numerous. The equipment necessary to produce
these proprietary products is the same that has been historically employed by
the Company, but AM is finding ways to maximize equipment capabilities for
growth.
The
Company's strategic focus is to continue to acquire proprietary products
and technology, begin branding its own products, as well as to entrench its
competencies of product development competencies into customer-based solutions,
primarily in the growing medical and consumer industries.
Management
anticipates that manufacturers are increasingly recognizing the value in
conserving or reallocating their resources by outsourcing the manufacturing of
specialty components of their products, and the Company is positioning itself in
the marketplace to benefit from this trend. The Company's primary focus is
generating its own proprietary opportunities with both its existing customer
base as well as new prospects. The Company continuously looks for new materials
to work with as it has done historically, but with an emphasis on patentable or
otherwise proprietary applications related to its core
competencies.
The
Company's current short and long-term strategy also includes the identification
and acquisition of target companies whose resources or talents could aid AM in
its new strategy. Such acquisitions could add strategic and economic value to
the Company's product line and competitive positioning. Management continually
seeks to identify potential acquisition targets to further strengthen
the Company's business strategy.
PRODUCTS
The
Company manufactures a variety of products made from specialty flexible
materials including foams, foils, fabrics, non-woven paper products, needle
felts, films and adhesive composites. These products can be divided into three
primary categories: die cut foam products, heat/sonic sealed products, and
pressure sensitive adhesive products. These products consist primarily of
components and finished products for the medical, consumer, aerospace,
technology, and automotive markets. These products have historically included
inserts for computer printer cartridges, insulators used in automobile
applications, water and dust seals for automobiles, computers, printers and HVAC
systems, filters for trucks, computers and electrical humidifiers, sound
attenuation foam, and foam/fabric composites for cushions and padding in
helmets, soft luggage and other consumer products. In addition, we manufacture
private label products for medical accounts including electrosurgical grounding
pads, sponges, neck braces, knee pads and other specialty products. Most of
these products have been designed and produced to meet the specifications of
each customer.
The
Company’s products are sold in a number of foreign regions including Asia, South
America and the Middle East as well as in the United States, Canada and
Mexico.
Proprietary
products are built to the Company's or customer's specifications.
Given the Company's change in focus, it anticipates that an increasing
percentage of its products, designs, and production methods will be patent
protected, or be proprietary in some aspect. Different from the strategy adopted
prior to 2002, research and development is the objective of AM. The primary
target markets are medical and consumer, however it is expected that research
and development efforts could produce ideas that would be equally valuable to
the Company's existing industrial customers outside the medical and consumer
markets. In those cases the Company plans to share the benefits of those
non-medical or non-consumer products with our existing industrial customers and
to manufacture products for those industrial customers. The Company currently
has a product development backlog of approximately 10 products that is expected
to fuel future growth. In summary, the roots of the Company remain unchanged.
Die cutting of flexible materials continues unabated. However, the "root system"
is now being used to support new "branches." AM's future is in proprietary and
patented products and processes.
MANUFACTURING
AM's
corporate headquarters are located in Garland, Texas and its manufacturing
facility is located in Rancho Dominguez, California. This facility is
approximately 56,000 square feet and services a region consisting of the United
States and parts of the Pacific Rim area. A substantial amount of the
manufacturing equipment has been designed and constructed by AM.
The
Company continually improves its California manufacturing facility via equipment
upgrades and replacements and further upgrades will be required in the future as
the Company focuses more effort on the development of products for medical and
consumer applications.
AM has
developed and employs a wide variety of techniques in the manufacturing of its
products. These techniques include vacuum forming, pressure sensitive
lamination, coating, die cutting, splitting, slitting, heat sealing and
packaging. Vacuum forming is a process that involves heating foam until the
material is pliable and then pulling the material into a cooled mold using a
vacuum to get intimate contact to the mold surface with the material, which then
takes the form of the mold. Pressure sensitive lamination is a process that
involves the use of heat and pressure to apply an adhesive laminate to the
substrate and a paper liner to the adhesive, which can be pulled off by the user
to attach the substrate to the desired surface. In the coating operation,
materials are saturated in specific liquids and then dried with heat and
temperature in large ovens. Die cutting is a process that involves the use of a
match tool die in a hydraulic press to cut material. Splitting and slitting is a
process that uses saws or slitters with blades ranging from saw tooth to razor
edge, depending on the material to be processed, to horizontally and/or
vertically slice layers off blocks of raw material. Heat sealing involves using
heat and pressure to seal thermoplastics together.
A
significant part of the Company's past strategy had been to attempt to penetrate
foreign market places by establishing fabrication plants through subsidiaries in
such areas as Ireland and Singapore. This strategy has been abandoned at the
current time. Instead, Advanced Materials Foreign Sales Corp. ("AM
FSC"), was formed in 1997 in order to enter into a strategic manufacturing
agreement in Singapore. In 1998, AM FSC entered into a ten-year agreement with
Foamex Asia. The terms of the agreement call for AM FSC to provide certain
production equipment and technology to Foamex Asia. Foamex Asia in turn provides
its manufacturing facilities and work force to fabricate foam products at their
Singapore facility. The manufacturing agreement was amended in July 2003, and
although the Singapore joint venture is still producing product, the Company's
role in the management of that operations has been altered such that AM is
receiving a percentage of the profit with only limited involvement. The Company
is currently in litigation with Foamex Asia with respect to final payout under
the manufacturing agreement - see “ITEM 3. LEGAL PROCEEDINGS” for further
discussion.
QUALITY
CONTROL
In 2007,
the Company’s California manufacturing facility achieved ISO 13485
certification, which signifies the positive assessment of the Company's medical
device quality system. The ISO 13485 is an International Organization for
Standardization standard that represents the requirements for a comprehensive
management system for the design and manufacture of medical devices. The Company
also maintains systems and procedures that meet customer quality specifications
and has successfully completed qualification surveys conducted by Fortune 500
OEM manufacturers. AM maintains procedures for conducting quality compliance
surveys of its major suppliers and has specific procedures in place for
receiving inspection, source inspection, process inspection and control,
instrument calibration standards, records maintenance, training and internal
quality audits. The Company has implemented systems for statistical process
control, which utilize statistical techniques to identify, monitor and improve
critical manufacturing processes such as sawing, die cutting and
thermoforming.
SUPPLIERS
AM
purchases raw materials primarily consisting of polyurethane foam, cross-linked
polyolefin foams and pressure sensitive adhesives. AM's largest supplier of raw
materials is Foamex Engineered International Inc. ("Foamex"), which in fiscal
2008 and 2007 supplied approximately 41% and 43%, respectively, of AM's raw
materials' requirements. On Wednesday, February 18, 2009, Foamex
filed for Chapter 11 bankruptcy protection. The Company does not
currently know the effect that this will have on their raw materials supply and
is actively seeking other arrangements.
AM is an
authorized fabricating distributor for a number of raw material suppliers,
including Foamex, Voltek, Avery Dennison (pressure sensitive adhesives),
Zotefoam (cross linked polyethylenes) and Rogers (cast urethanes).
Management
believes that these supply arrangements, many of which have been active for 25
years or more, provide AM with a diverse mix of raw materials at the best
available prices. AM purchases raw materials pursuant to purchase orders placed
from time to time in the ordinary course of business. Failure or delay by such
suppliers in supplying necessary raw materials to AM could adversely affect AM's
ability to manufacture and deliver products on a timely and competitive basis.
AM purchases its raw materials on standard credit terms and considers its
relationships with its suppliers to be good.
Management
believes that a decrease in the demand for Foamex by our customers could
adversely affect the Company's business. If another supplier's products were to
be substituted by our customers in critical applications, there are no
assurances that AM would retain the favorable supply position that it has earned
through over 25 years as an authorized converter/fabricator for
Foamex.
MARKETING
AND SALES
AM's
products have traditionally been marketed and sold primarily to major divisions
of large industrial customers, many of which are industry leaders whose products
have significant market share. AM does not anticipate a major change in the
practice of selling and marketing its contract manufacturing, engineering and
fulfillment services. Most of AM's products have been components or finished
products manufactured to order for its industrial customers. As discussed
previously, AM will also sell and manufacture products developed internally, as
well as those licensed from outside sources. The customer's purchase decision
has often involved the engineering, manufacturing and purchasing groups within
the customer's management. It is anticipated that the customers' team of
management will continue to be involved in the process, but will also include
sales and executive level management.
AM
currently has 6 full-time sales and customer service representatives. Sales
representatives receive a salary plus incentive/commission pay for
performance.
AM's
domestic sales as a percentage of the Company's consolidated sales were
approximately 95% and 96% for fiscal years 2008 and 2007, respectively. AM sells
to a number of foreign regions including Asia, South America, the Middle East,
Canada and Mexico. Foreign sales accounted for approximately 5% and 4% of fiscal
2008 and 2007 sales.
CUSTOMERS
AM
generally sells its products pursuant to customer purchase orders. There can be
no assurance that any customers will continue to purchase products from AM. AM's
customers are in the medical disposables, technology, aerospace, automotive and
consumer markets. AM's plans are to continue to pursue customers in those
markets, but with an added emphasis in the medical and consumer segments and
concentrating on proprietary and or patentable products. Management believes
that diversity spreads the risk of dependence on one customer or one market
sector.
AM
believes its current prices are competitive with those of other domestic
suppliers of custom and flexible materials. AM sales are typically made on
terms, which require payment of the net amount due in 30 or 60 days. Product
development efforts will continue to pursue designs and materials that create
perceived value.
AM's
customers of products made from bulk materials such as foam are located
throughout the United States. For those bulky, low price products, high freight
costs on long distance shipments from AM's Rancho Dominguez manufacturing
facility make it difficult for AM to be competitive in other regions of the
United States or internationally. However, in the medical and consumer markets,
with products whose base materials do not use high volume foam, AM can
competitively supply products both domestically and
internationally.
AM relies
on a few large customers for a significant portion of our domestic sales. Sales
to our five largest customers together accounted for approximately 64% of our
domestic sales in 2008 and 60% of our domestic sales in 2007. The loss or a
substantial decrease in the amount, of purchases by any of our major customers
could adversely affect our financial position and results of
operations.
Our
customers’ adverse financial condition may have a corresponding material adverse
effect on our business, financial condition and results of
operations.
LICENSES
AND PROPRIETARY RIGHTS
AM’s
strategy is to develop products that it anticipates will be awarded a patent
because of unique design or function. AM has always relied on proprietary
know-how, exclusive license rights and distribution agreements, and employs
various methods to protect its processes. However, such methods may not afford
protection, and there can be no assurance that others will not independently
develop such processes.
We own
various registered and unregistered trademarks and service marks and have rights
under licenses to use various trademarks that are of material importance to our
business plan.
We have
license agreements with companies to manufacture certain products. Our rights
under these agreements are extendible but could be terminated at the end of the
original and/or extended agreements currently in place.
COMPETITION
The
custom materials fabrication industry in which AM competes is highly
competitive. The number of competitors is significant, and the Company's
competitive position is difficult to ascertain. Low barriers to entry and
fragmented competition characterize the industry. Most of the Company's
competitors have been small, privately held companies, which generally
specialize in only one product or process. AM has competed primarily on
the basis of its ability to meet customers' specifications promptly and cost
effectively, and on the quality of its products. AM also provides a much broader
ranges of services than most competitors in that services provided include
manufacturing, engineering and fulfillment services. AM also has received the
ISO 13485 certification, which is a step above most of its
competition.
GOVERNMENT
REGULATION
The
manufacture of certain products by AM requires the purchase and use of chemicals
and other materials, which are or may be classified as hazardous substances. The
Company does not maintain environmental impairment insurance. There can be no
assurance that the Company will not incur environmental liability or that
hazardous substances are not or will not be present at their
facilities.
The
Company is subject to regulations administered by the United States
Environmental Protection Agency, various state agencies, county and local
authorities acting in conjunction with federal and state agencies. Among other
things, these regulatory bodies impose restrictions to control air, soil and
water pollution. The extensive regulatory framework imposes significant
complications, burdens and risks on the Company. Governmental authorities have
the power to enforce compliance with these regulations and to obtain injunction
and/or impose civil and criminal fines or sanctions in the case of
violations.
The
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), imposes strict, joint and several liability on the
present and former owners and operators of facilities which release hazardous
substances into the environment. The Federal Resource Conservation and Recovery
Act of 1976, as amended ("RCRA"), regulates the generation, transportation,
treatment, storage and disposal of hazardous waste. In California, the handling
and disposal of hazardous substances is also governed by state
law, including the California counterparts of CERCLA and RCRA. The Company
and its subsidiaries believe that their manufacturing activities are in
substantial compliance with all material Federal and state laws and regulations
governing their operations. Amendments to existing statutes and regulations
could require the Company to modify or alter methods of operations at costs,
which could be substantial. There can be no assurance that the Company will be
able, for financial or other reasons, to comply with applicable environmental
laws and regulations.
Various
laws and regulations relating to safe working conditions, including the
Occupational Safety and Health Act ("OSHA"), are also applicable to the Company
and its subsidiaries. The Company believes it is in substantial compliance with
all material Federal, state and local laws and regulations regarding safe
working conditions.
As of
February 13, 2009, the Company had 66 full-time employees. The Company
also utilizes the services of independent contract workers as needed from time
to time in its manufacturing operations. As of February 13, 2009 the
Company utilized approximately 15 independent contract
workers.
None of
the employees of the Company are presently represented by a labor union and the
Company's management considers the relationships with its employees to be
good.
RISK
FACTORS
In
addition to the other information in the Annual Report on Form 10-KSB, investors
should carefully consider the following factors listed below.
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 and oil 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
AM
obtained a Credit Facility from JPMorgan Chase Bank, N.A. (“Lender”) in the
second quarter of fiscal 2007. The credit agreement evidencing the Credit
Facility requires AM 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 AM'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 AM 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 AM's and the Company's ability to conduct its
business.
CUSTOMER
CONCENTRATION
The
Company realizes approximately 61% of its revenues from five customers.
Any loss of business from these customers could have a significant impact on the
Company's financial position.
NEW
PRODUCT INTRODUCTIONS
The
process of developing new products and corresponding manufacturing processes is
complex and uncertain. The customer decision-making process can be lengthy and
some raw materials have extremely long lead times. These circumstances often
lead to long delays in new product introductions. After a product is developed,
the Company must be able to manufacture sufficient volumes quickly at low enough
costs. To do this it must accurately forecast volumes and mix of products.
Customer orders have also been subject to dramatic swings from customer provided
forecasts. Matching customers' demand and timing for particular products makes
the process of planning production and managing inventory levels increasingly
difficult. If the Company cannot continue to rapidly develop and
manufacture innovative products that meet customer requirements for performance,
price, quality and customer service, it may lose market share and future
revenue, and earnings may suffer.
RELIANCE
ON SUPPLIERS
The
Company's manufacturing operations depend on its suppliers' ability to deliver
quality raw materials and components in time for the Company to meet critical
manufacturing and distribution schedules. The Company sometimes experiences a
short supply of certain raw materials as a result of supplier out-of-stock
situations or long manufacturing lead times. If shortages or delays exist, the
Company's future operating results could suffer. Furthermore, it may not be able
to secure enough raw materials at reasonable prices to manufacture new products
in the quantities required to meet customer demand. Sudden or significant raw
materials price increases could also cause future operating results to suffer if
the Company is not able to increase its sales prices to account for the
materials price increases. Any of these factors, if realized, could reduce
the Company's profitability and operating results.
EARTHQUAKE
The AM
manufacturing division in California is located near major earthquake faults.
The ultimate impact on the Company and its general infrastructure is unknown,
but operating results could be materially affected in the event of a major
earthquake. The Company is predominantly uninsured for losses and interruptions
caused by earthquakes.
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 AM. 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 leases approximately 56,000 square feet of manufacturing and office
space in Rancho Dominguez, California. The Company’s Rancho Dominguez lease
expires November 2010.
The
Company leases office/production space in Garland for its corporate
headquarters. The Company’s lease expires in August 2014.
On or
about November 20, 2007, the Company filed suit in the Superior Court of the
State of California, County of Orange, Central Justice Center, against Foamtec
(Singapore) Pte. Ltd., a private limited company incorporated in Singapore, and
Foamex Asia Ltd., a private company incorporated in Thailand (collectively,
“Foamtec”). In December of 1998, the Company and Foamtec entered into a
Manufacturing Agreement, whereby the Company and Foamtec agreed to work
cooperatively to manufacture and sell certain foam components to Hewlett Packard
Company and certain other buyers. As part of the Manufacturing Agreement,
Foamtec agreed to act as fiduciary agent for the Company in distributing the
manufactured product to Hewlett Packard, its successors and assigns. The term of
the Manufacturing Agreement was for ten years, which could be extended by either
party for an additional five years. Foamtec had the option to purchase the
Company’s interest in the Manufacturing Agreement by paying a price to be
calculated on the profits expected under the entire remaining term which, by
definition, included its entire term, including the additional five years if the
Company exercised its extension right. In 2006, the Company gave notice to
Foamtec of its election to extend the term of the Manufacturing Agreement for an
additional five years in accordance with its rights under the Manufacturing
Agreement. Thereafter, Foamtec gave notice of its election to purchase the
Company’s interest in the Manufacturing Agreement, and tendered certain funds in
claimed discharge of its payment obligations thereunder. Foamtec asserted that
this payout right only applied to the initial term, and not the extended term,
and therefore remitted funds that represented the expected profits through the
end of the initial term. The Company therefore sued Foamtec for breach of
contract for Foamtec’s failure to pay the Company the amount of expected profits
for the extended term. The Company is seeking compensatory damages in excess of
$1,000,000, interest as provided by law and costs associated with the
suit. A trial date is set for March 31, 2009.
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.
The
Company did not submit any matter to a vote of security holders during the
fourth quarter of fiscal year 2008.
PART
II
MARKET
INFORMATION
The
Company’s common stock is traded on the OTC Pink Sheets under the symbol
"ADMG.PK". The high and low closing prices for the common stock for the past two
fiscal years as reported by The Pink Sheets, LLC are set forth in the following
table. Such quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not represent actual transactions.
HOLDERS
There
were 1,142 holders of record of our common stock as of February 13,
2009.
DIVIDEND
POLICY
The
present policy of the Company is to retain earnings to provide funds for the
operation and expansion of its business. The Company has paid no cash dividends
during the past two fiscal years and management does not anticipate that it will
do so in the foreseeable future. The Company's line of credit agreement with
JPMorgan Chase Bank, N.A. currently prohibits the payment of cash dividends
without prior approval.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The
following table provides information as of November 30, 2008 regarding
compensation plans (including individual compensation arrangements) under which
equity securities of the Company are authorized for issuance.
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NUMBER
OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS
AND RIGHTS
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WEIGHTED-AVERAGE EXERCISE PRICE OF OUTSTANDING
OPTIONS, WARRANTS AND RIGHTS
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NUMBER OF SECURITIES REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES
REFLECTED IN COLUMN (a))
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Equity
compensation plans approved by
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Equity
compensation plans not approved by security holders
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(1)
Includes the Advanced Materials Group, Inc. 2007 Stock Incentive Plan, the
Advanced Materials Group, Inc. 2003 Stock Plan and the Advanced Materials Group,
Inc. 1998 Stock Option Plan. Please see Note 7 of our Notes to Consolidated
Financial Statements.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
The
following discussion and analysis should be read in conjunction with the
Company's audited consolidated financial statements and notes to financial
statements included elsewhere in this document. This Annual Report on Form
10-KSB and the Company's audited consolidated financial statements and notes to
financial statements contain forward-looking statements, which generally include
the plans and objectives of management for future operations, including plans
and objectives relating to the Company's future economic performance and
management's current beliefs regarding revenues the Company might earn if it is
successful in implementing its business strategies. The forward-looking
statements and associated risks may include, relate to or be qualified by other
important factors, including, without limitation, those factors described in the
section entitled “Risk Factors” of this Annual Report.
We do not
undertake to update, revise or correct any forward-looking statements. Any
of the factors described above could cause our financial results, including our
net income or growth in net income to differ materially from prior results,
which in turn could, among other things, cause the price of our common stock to
fluctuate substantially.
CRITICAL
ACCOUNTING POLICIES
The
Company's significant accounting policies are described in Note 1 to the audited
consolidated financial statements included in Part II, Item 7 of this Annual
Report on Form 10-KSB. The Company's management believes the Company's most
critical accounting policies include revenue recognition, inventory valuation,
impairment of long-lived assets, income taxes, and stock based
compensation.
Revenue
Recognition
The
Company recognizes revenue from product sales when it is realized or realizable
and earned, which is generally at the time of shipment and passage of title.
Revenue is considered to be realized or realizable and earned when there is
persuasive evidence of a sales arrangement in the form of a contract or a
purchase order, the product has been shipped, the sales price is fixed or
determinable and collectibility is reasonably assured. The Company records
revenue for shipping costs charged to customers. The related shipping costs
incurred are recorded in cost of sales.
Inventory
Valuation
Inventories
are stated at the lower of cost (first-in, first-out method) or market. Cost
includes raw materials, labor, manufacturing overhead and purchased products.
Market is determined by comparison with recent purchases or net realizable
value. Net realizable value is based on forecasts for sales of the Company's
products in the ensuing years. Should demand for the Company's products prove to
be significantly less than anticipated, the ultimate realizable value of the
Company's inventories could be substantially less than the amount shown on the
accompanying consolidated balance sheets.
Impairment of Long-Lived
Assets
The
Company assesses the recoverability of its long-lived assets by determining
whether the related asset balance can be recovered through projected
undiscounted cash flows. The amount of impairment, if any, is measured based on
projected discounted future cash flows (fair value) and charged to operations in
the period in which impairment is determined by management.
Income
Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates expected to
apply when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts, which are
more likely than not to be realized. The provision for income taxes is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
RESULTS
OF OPERATIONS FOR FISCAL 2008 COMPARED TO FISCAL 2007
REVENUE
from operations for the fiscal year ended November 30, 2008 was $12,303,528, an
increase of 15.3% compared to the fiscal year ended November 30, 2007. Revenue
from the Singapore strategic manufacturing venture declined to $0 in fiscal 2008
compared to $476,985 in fiscal 2007.
The
increase in revenue 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 $988,285 in sales for the year ended November
30, 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
Company formed Advanced Materials Foreign Sales Corporation Ltd., a wholly-owned
subsidiary of the Company, in 1998 to enter into a strategic manufacturing
agreement in Singapore. The Company entered into a ten-year agreement with
Foamex Asia in January 1998. Terms of the agreement call for the Company to
lease production equipment and provide certain technology to Foamex Asia. Foamex
Asia in turn agreed to provide its manufacturing facilities and work force to
fabricate foam products at Foamex Asia's Singapore facility. The manufacturing
agreement has a profit sharing provision that changes annually. The profit
sharing split was as follows (in percentages):
Effective
July 17, 2003, there was an amendment to the Company's manufacturing agreement
in Singapore with Foamex Asia to change the vendor of record for the customer
supplied under the agreement from the Company to Foamex Asia. Although this
change did not affect the Company's share of the profitability under the
manufacturing agreement, it caused a significant reduction in its reported
revenues. Previously, the Company purchased the raw materials for the production
of product and billed the end customer and therefore recognized the gross sales
and cost of sales on its financials. Under the amended agreement, the Company no
longer purchased the raw materials or billed the end customer and only
recognized its portion of profit as revenue. This manufacturing
agreement expired in early 2008. The Company is currently in litigation with
Foamex Asia with respect to final payout under the manufacturing agreement - see
“ITEM 3. LEGAL PROCEEDINGS” for further discussion.
Revenues
as reported relating to the Singapore manufacturing agreement were $0 and
$476,985 for each of the fiscal years ended November 30, 2008 and 2007,
respectively. The royalty agreement was extended for 60 months
according to the terms of the agreement but the other party to the agreement has
not acknowledged the contract extension. As a result AM has proceeded with
litigation as described in this report to pursue legal remedies to secure the
contractual rights for AM under the agreement.
COST OF
SALES in fiscal 2008 increased to $9,421,606, an increase of 13.0% compared to
$8,335,899 in fiscal 2007. The increase in cost of sales was due to increased
raw materials and freight costs. The Company’s top five customers
products are foam based products, which are petroleum-based, and we continue to
see increases in raw material and freight costs due to the increases in costs of
petroleum. The Company's gross profit percentage was 23.4% in fiscal 2008,
compared to 21.9% in fiscal 2007. The Company continues to
assess ways to reduce its manufacturing and overhead cost to offset increases in
costs of raw materials and thus contribute to an overall lower cost of sales and
increase gross profit percentage. The Company believes that the introduction of
proprietary products into the market place will assist in greater gross profits
in the near future.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSE ("SG&A") was $2,417,431 in fiscal 2008,
an increase of 47.1% compared to $1,643,524 in fiscal 2007. SG&A as a
percentage of net sales was 19.6% in fiscal 2008 compared to 15.4% in fiscal
2007. 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 also has added customer service staff
to further its commitment to service our customers with the upstart of the
fulfillment services business that began in the third quarter of
2008.
INTEREST
EXPENSE in fiscal 2008 was $108,039, an increase of 16.6% compared to $92,630 in
fiscal 2007. Interest expense relates primarily to bank borrowings and will
increase or decrease based on interest rate fluctuations. In
addition, the Company obtained two term notes with interest rates of prime in
2008.
INCOME
TAX benefit of $11,855 realized in fiscal 2008 resulting from the recording of a deferred tax asset related
to stock based compensation.
NET
INCOME FROM OPERATIONS for fiscal 2008 was $317,507, a decrease of 60.9%
compared to $812,535 for fiscal 2007. Basic and diluted net income per share for
the year ended November 30, 2008 was $0.03 per share, compared to $0.07 per
share for the same period in 2007. The decrease in net income
is primarily attributable to the loss of Singapore royalties. See
“ITEM 3. LEGAL PROCEEDINGS” for further discussion.
LIQUIDITY
AND CAPITAL RESOURCES
As of
November 30, 2008, we had working capital of $2,446,189 compared to working
capital of $2,820,805 at November 30, 2007.
Cash and
cash equivalents were $353,189 at November 30, 2008, compared with $462,701 at
November 30, 2007. The Company's operating activities used $1,166,353
of cash in fiscal 2008 compared to cash used of $37,850 in fiscal 2007. The cash
flows used in fiscal 2008 were primarily a result of changes in operating assets
and liabilities, specifically an increase in accounts receivable of $1,364,094
and an increase in inventory of $678,642, which were offset by a decrease in
prepaid expenses of $267,229 and an increase in accounts payable and accrued
liabilities of $141,677. Non-cash adjustments included $117,492 in
depreciation and amortization and $34,869 in stock based compensation, offset by
an adjustment to deferred tax expenses of $11,855.
The
Company invested $117,876 and $360,584 in fiscal 2008 and 2007, respectively, in
capital equipment.
Cash
provided by financing activities was $1,174,717 and $419,275 in fiscal 2008
and 2007, respectively. The Company uses short- and long-term borrowings
to supplement internally generated cash flow.
On March
1, 2007, Advanced Materials Group, Inc. (AMG), through its wholly-owned
subsidiary Advanced Materials, Inc. (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. This Line of
Credit Note was amended on July 14, 2008 to extend the credit facility (the
“Credit Facility”) to $2,500,000. The proceeds under the Credit
Facility will be used primarily for working capital needs in the ordinary course
of business.
AMI can
borrow, pay and re-borrow principal under the Credit Facility from time to time
during its term, but the outstanding principal balance under the Credit Facility
may not exceed the lesser of the borrowing base or $2,500,000. For purposes of
the Credit Facility, “borrowing base” is calculated by adding 80% of AMI's
eligible accounts receivable to 50% of the lower of cost or wholesale market
value of all of AMI's eligible inventory.
The
outstanding principal balance under the Credit Facility bears interest at the
rate of interest per annum announced from time to time by the Lender as its
prime rate, and will be computed on the unpaid principal balance from the date
of each borrowing. Accrued interest payments on the unpaid principal balance
under the Credit Facility are payable quarterly commencing on May 1, 2007, and
all outstanding principal under the Credit Facility, together with all accrued
but unpaid interest, is due at maturity, or April 1, 2008. The agreement will
automatically renew as long as the financial covenants have been adhered to. The
Company was in compliance with all financial covenants at November 30,
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
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. The Company’s borrowings outstanding
under the Line of Credit at November 30, 2008 were $2,399,000. At November 30,
2008, $101,000 was available for borrowing under the Credit
Facility.
In order
to facilitate the Company's obtaining the Credit Facility, on April 2, 2007, the
Company terminated its existing $1,500,000 line of credit agreement with Textron
Financial Corporation, which was evidenced by a Loan and Security Agreement
dated October 9, 2003, as amended.
BUSINESS
OUTLOOK
This
Business Outlook section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ
materially.
The
Company currently has orders from original equipment manufacturers and
believes that its sales will be stable in fiscal 2009. The Company expects gross
profit and operating profit margins to be stable in fiscal 2009 if
its sales remain steady as anticipated by management, barring untoward events.
The Company’s business strategy is focused on providing contract manufacturing
services, engineering services, fulfillment services and product sales via
development of new products internally under the Miss Oops® brand. It
is possible that the economy could negatively impact management’s
expectations.
OFF-BALANCE
SHEET ARRANGEMENTS
We have
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, revenues, and expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to our stockholders.
RECENT
ACCOUNTING PRONOUNCEMENTS
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 (“FIN 48”), 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 on 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 years ended November 30, 2008 and
2007, the Company did not recognize any interest or penalty expense related to
income taxes. It is determined not to be reasonably likely 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.
In
September 2006, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines
fair value, establishes a market-based framework or hierarchy for measuring fair
value, and expands disclosures about fair value measurements. SFAS 157 is
applicable whenever another accounting pronouncement requires or permits assets
and liabilities to be measured at fair value. SFAS 157 does not expand or
require any new fair value measures; however the application of this statement
may change current practice. The requirements of SFAS 157 are first effective
for our fiscal year beginning December 1, 2008. However, in
February 2008 the FASB decided that an entity need not apply this standard
to nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis until the subsequent
year. Accordingly, our adoption of this standard on December 1, 2008 is
limited to financial assets and liabilities. We do not believe the initial
adoption of SFAS 157 will have a material effect on our financial condition or
results of operations. However, we are still in the process of evaluating this
standard with respect to its effect on nonfinancial assets and liabilities and
therefore have not yet determined the impact that it will have on our financial
statements upon full adoption.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”. SFAS 159 permits entities to choose to
measure certain financial assets and liabilities and other eligible items at
fair value, which are not otherwise currently required to be measured at fair
value. Under SFAS 159, the decision to measure items at fair value is made
at specified election dates on an irrevocable instrument-by-instrument basis.
Entities electing the fair value option would be required to recognize changes
in fair value in earnings and to expense upfront cost and fees associated with
the item for which the fair value option is elected. Entities electing the fair
value option are required to distinguish on the face of the statement of
financial position, the fair value of assets and liabilities for which the fair
value option has been elected and similar assets and liabilities measured using
another measurement attribute. We do not anticipate that the adoption of this
statement will have a material impact on our consolidated financial statements.
We did not elect to measure existing assets and liabilities at fair value on the
date of adoption.
The
Report of Independent Certified Public Accountants, the Consolidated Financial
Statements and the notes thereto are included in this Annual Report on Form
10-KSB beginning on Page F-1.
None.
DISCLOSURE
CONTROLS AND PROCEDURES
We
maintain “disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), that are designed to ensure that information
required to be disclosed by us in reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable assurance of achieving the desired control objectives, and we
necessarily are required to apply our judgment in evaluating the cost-benefit
relationship of possible disclosure controls and procedures.
Our
management, including our principal executive officer and principal financial
officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of November 30, 2008 and concluded that
the disclosure controls and procedures were not effective, because certain
deficiencies involving internal controls constituted material weaknesses as
discussed below. The material weaknesses identified did not result in the
restatement of any previously reported financial statements or any other related
financial disclosure, nor does management believe that it had any effect on the
accuracy of the Company’s financial statements for the current reporting
period.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control
system was designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes, in accordance with generally accepted accounting principles. Because
of inherent limitations, a system of internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate due to change in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Our
management, including our principal executive officer and principal accounting
officer, conducted an evaluation of the effectiveness of our internal control
over financial reporting using the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework. Based on its evaluation, our management concluded
that there is a material weakness in our internal control over financial
reporting. A material weakness is a deficiency, or a combination of control
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the Company’s annual or
interim financial statements will not be prevented or detected on a timely
basis. As of November 30, 2008, the following material weaknesses
existed:
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1.
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Entity-Level
Controls: We did not maintain effective entity-level controls as defined
by the framework issued by COSO. Specifically, we did not effectively
segregate certain accounting duties due to the small size of our
accounting staff, and maintain a sufficient number of adequately trained
personnel necessary to anticipate and identify risks critical to financial
reporting.
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2.
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Information
Technology: We did not maintain effective controls over the segregation of
duties and access to financial reporting systems. Specifically, key
financial reporting systems were not appropriately configured to ensure
that certain transactions were properly processed with segregate duties
amongst personnel and to ensure that unauthorized individuals did not have
access to add or change key financial
data.
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In order
to mitigate these material weaknesses to the fullest extent possible, all
financial reports are reviewed by the Chief Financial Officer, who has limited
system access. In addition, regular meetings are held with the Board
of Directors and the Audit Committee. If at any time we determine a
new control can be implemented to mitigate these risks at a reasonable cost, it
is implemented as soon as possible.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.
This
report shall not be deemed to be filed for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liabilities of that
section, and is not incorporated by reference into any filing of the Company,
whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended November 30, 2008 that have materially affected, or are
reasonable likely to materially affect, our internal control over financial
reporting.
None
PART
III
Directors
are elected annually and hold office until the next annual meeting of
shareholders or until their respective successors are duly elected and
qualified. Officers are appointed by, and serve at the discretion of, the
Company's Board of Directors, subject to the terms of any applicable employment
agreements. The following table sets forth information regarding the directors
and executive officers of the Company:
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Chairman
of the Board of Directors
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Chief
Executive Officer and Director
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President
and Chief Financial Officer
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TIMOTHY
R. BUSCH, 54, has been the Chairman and a director of the Company since February
1998 and September 1997, respectively. Mr. Busch formerly worked as tax estate
planning attorney and founded The Busch Firm in Irvine, CA in 1979. Mr. Busch is
a licensed attorney in California, Michigan, Texas and Washington, D.C. and has
a non-practicing/inactive status as a CPA in California and Michigan. Mr. Busch
is a director of several privately held companies and is an investor in a number
of public and private enterprises including real estate ventures focusing on
full service hotels. Mr. Busch also serves on many non-profit boards which
include private Christian Education.
N. PRICE
PASCHALL, 60, has been a director of the Company since January 1994. Mr.
Paschall also serves as the Chairman of the Company’s Compensation Committee.
Mr. Paschall has been Managing Director of Context Capital Group, an
investment-banking firm that serves clients in the medical and industrial
markets, since February 1992. Mr. Paschall was a partner of Shea, Paschall,
Powell-Hambros Bank, and its predecessor company, a firm specializing in mergers
and acquisitions, from January 1983 to January 1992. Mr. Paschall holds a B.A.
in Business Administration from California Polytechnic University at
Pomona. He currently serves on the Board of Directors of CPU Tech, a private
technology company located in Pleasanton, CA.
MAURICE
J. DEWALD, 68, has been a director and Chairman of the Audit Committee of the
Company since February 1998. From June 1992 to the present, Mr. DeWald has been
Chairman and Chief Executive Officer of Verity Financial Group, Inc., a private
investment and financial advisory firm. Mr. DeWald is a former member of the
KPMG LLC Board of Directors and also served as the Managing Partner of the Los
Angeles office of KPMG LLC from 1986 to 1991. He currently serves on the Boards
of Directors of Mizuho Corporate Bank of California, Aperture Healthcare, Inc.,
Integrated Healthcare Holdings, Inc. and Grubb & Ellis Healthcare REIT,
Inc.
RICARDO
G. BRUTOCAO, 64, was appointed the position of Chief Executive Officer to fill
the Company's previously announced vacancy at that position on January 2, 2006
and serves in this capacity on a part-time, at-will basis. Mr. Brutocao also has
served as a director of the Company since 2005. Mr. Brutocao also serves as a
director of Centergistic Solutions, Inc., a maker of performance management
software, a position Mr. Brutocao has held since 2001. Mr. Brutocao also serves
as President and COO of Dacor, Inc., a privately held appliance manufacturer,
and has held these positions since August 6, 2007. From 2000 to 2001, Mr.
Brutocao was the interim Chief Executive Officer of ZLand, Inc., a software
company.
JOHN
SAWYER, 64, was elected as a director on March 6, 2006. Mr. Sawyer is Chairman
and President of Penhall Company. He joined Penhall Company in 1978 as the
Estimating Manager of the Anaheim Division. In 1980, Mr. Sawyer was appointed
Manager of Penhall's National Contracting Division, and in 1984, he assumed the
position of Vice President and became responsible for managing all construction
services divisions. Mr. Sawyer was President of Penhall from 1989 through 2008
and Chairman from 1998 through 2008. Mr. Sawyer is also a director
and member of the audit committee for H&E Equipment Services.
WILLIAM
G. MORTENSEN, 43, was appointed President and retained as the Chief Financial
Officer position on August 22, 2005 and previously held the position of Chief
Financial Officer and Controller as of June 1, 2004. Mr. Mortensen was employed
by Cingular Wireless LLC as Associate Director in Finance, and before the
Cingular joint venture he was with SBC, Inc. as a manager of SBC Services
supporting the SBC Wireless division since 1999. Before joining SBC, Inc. Mr.
Mortensen worked for Frito-Lay, Inc. as a manager of finance and for over eight
years with EDS, Inc. holding various financial positions. Mr. Mortensen holds a
BBA degree in Business Administration from
Abilene Christian University and has experience in the
telecommunications, high-tech and manufacturing industries.
CODE
OF ETHICS
The
Company has adopted a Code of Ethics which applies to directors, officers,
senior management, and certain other employees of the Company, including its
principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions. The Code of
Ethics is available under the “Investor Relations" section on the Company's web
site located at www.advancedmaterials.net.
COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the officers
and directors of the Company, as well as persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater-than-10% shareholders are required by the
regulations of the Securities and Exchange Commission to furnish the Company
with copies of all Section 16(a) forms that they file.
To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company, all Section 16(a) requirements applicable to our
officers, directors and greater-than-10% shareholders were satisfied during the
fiscal year ended November 30, 2008.
AUDIT
COMMITTEE FINANCIAL EXPERT
During
fiscal year 2008 and 2007, Maurice DeWald and N. Price Paschall served as
members of the Company's Audit Committee. Maurice DeWald serves as the
Chairman of the Audit Committee and serves as the financial expert serving on
the committee.
SUMMARY
COMPENSATION TABLE
The
following table sets forth certain information regarding compensation paid by
the Company for services rendered to the Company by its principal executive
officer and to each of the other most highly compensated executive officers of
the Company who earned more than $100,000 in salary and bonus during the fiscal
year ended November 30, 2008 (the "Named Executive Officers").
Name
and Principal Position
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President
and Chief Financial Officer
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ADDITIONAL
COMPENSATION INFORMATION
Executive Compensation
Program
The
Compensation Committee of the Board of Directors, composed of Mr. Paschall, Mr.
Sawyer and Mr. DeWald, has the authority to recommend to the Board of Directors
changes to the Company’s executive compensation programs, including the
Company’s stock incentive plans. The Company’s executive compensation program is
designed to provide competitive levels of base compensation in order to attract,
retain and motivate high quality employees, tie individual total compensation to
individual performance and success of the Company, and align the interests of
the Company’s executive officers with those of its shareholders.
The
Company’s executive compensation program consists of three principal elements:
base salary, cash bonus and stock options. The Board of Directors sets the
annual base salary for executives after consideration of any employment
agreement provisions and the recommendations of the Compensation Committee.
Prior to making its recommendations, the Compensation Committee reviews
historical compensation levels of the executives, evaluates past performance and
assesses expected future contributions of the executives. In making the
determinations regarding base salaries, the Company considers generally
available information regarding the salaries prevailing in the
industry.
The
Company maintains incentive plans under which executive officers may be paid
cash bonuses at the end of each fiscal year. The bonuses under these incentive
plans depend upon individual performance and the achievement by the Company of
certain financial targets established by the Board of Directors prior to the
start of each fiscal year. The compensation plans are administered by the
Compensation committee of the Company.
Total
compensation for executive officers also includes long-term incentives offered
in the form of stock options, which are generally provided through initial stock
option grants at the date of hire and periodic additional stock options grants.
Stock options align the interests of the executive officers with the interests
of shareholders due to the fact that the executive can realize a gain only if
the Company’s stock appreciates in value. In determining the amount of such
grants, the Compensation Committee considers the contributions of each executive
to the overall success of the Company in the past fiscal year, the
responsibilities to be assumed in the upcoming fiscal year, appropriate
incentives for the promotion of the long-term growth of the Company, and grants
to other executives in the industry holding comparable positions as well as the
executive’s position within the Company.
Stock Option
Awards
The
Company uses the Black-Scholes Option Pricing Model (“BSOPM”) to determine the
fair value of option grants. During the year ended November 30 2008, the Company
granted 40,000 fully vested options to directors on February 12, 2008, at an
exercise price of $0.65 and 20,000 fully vested options to executive officers on
March 18, 2008, at an exercise price of $0.60. The options were valued using the
BSOPM and the following weighted average assumptions: stock price on date of
grant - $0.63, exercise price - $0.63, expected life - 5 years, volatility -
97%, dividend yield – 0% and a risk free rate of 2.61%. The weighted average
calculated fair value of each option was $0.47.
Employment
Agreements
On August
22, 2005, the Company entered into an Employment Agreement with William G.
Mortensen ("Mortensen") governing his service as President and Chief Executive
Officer of the Company. The terms of Mortensen’s employment are at will;
however, if he is terminated without cause (as defined in the Employment
Agreement), he will receive severance pay equal to three months' base salary.
Mortensen's base annual salary is set at $150,000 and he is entitled to bonuses
calculated by formulas based upon AM's income from continuing operations before
taxes. This agreement renews annually with compensation increases approved by
the Compensation Committee.
In
January 2006, the Company entered into an at-will employment arrangement with
Ricardo G. Brutocao to fill the Company's open Chief Executive Officer position.
Mr. Brutocao has an unwritten agreement to be compensated by the Company at the
rate of $140,000 per year based on recommendations by the Compensation
Committee.
The
following table shows certain information regarding outstanding equity awards as
of November 30, 2008 for the Company’s Named Executive Officers:
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Number
of Securities Underlying Unexercised Options
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Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
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(1)
Represents options granted with employment
DIRECTOR
COMPENSATION
Each of
the Company's directors receives $10,000 annually and reimbursement for
out-of-pocket expenses in connection with his attendance at each meeting of the
Board of Directors or committee of the Board of Directors. In addition, each
director receives non-qualified stock options, pursuant to the Company's 2007
Stock Incentive Plan, to purchase 20,000 shares of the Company's common stock at
fair market value when first elected to the Board of Directors, and 10,000
shares of common stock at fair market value in each first quarter subsequent to
their reelection to the Board of Directors. The options vest immediately at the
time of issuance. The chairman of the Company's Audit Committee receives an
additional $2,500 annually. All director fees are paid on a quarterly basis. Mr.
Brutocao does not receive director compensation as he is paid a salary of
$140,000 plus expenses for his role as part-time CEO.
Prior to
May, 2007, no director stock options had been granted since 2004, as the
Company’s policy at that time was for no options to be issued until the Company
was current with its periodic filings. In May 2007 the 2007 Stock Incentive Plan
was submitted to and approved by the Company’s shareholders. At that time, the
Company issued options to the Directors to make up for prior periods in which
options were not issued.
The
following table sets forth certain information with respect to the compensation
of all members of the Board of Directors for the year ended November 30, 2008.
Per Company policy, Mr. Brutocao does not receive separate compensation for his
service on the Board of Directors and his compensation is summarized above under
“Summary Compensation Table.”
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Fees
Earned or Paid in Cash
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Non-Equity
Incentive Plan Compensation
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Non-Qualified
Deferred Compensation Earnings
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(1)
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The
valuation of stock option awards in this column represents the
compensation cost of awards recognized for financial statement purposes
for 2008 under Statement of Financial Accounting Standards No. 123, as
revised. The amounts include portions of stock option grants that were
expensed in 2008 based on the amortization schedule. See discussion under
“Stock Option Awards” above for information concerning all assumptions
made in connection with determining the fair value of the
awards.
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(2)
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Includes
stock options granted under the 2007 Stock Incentive Plan on February 12,
2008, which are exercisable for 10,000 shares of the Company’s common
stock at an exercise price of $0.65 per share. These options vest
immediately and expire on February 12,
2018.
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The
information required by this Item 11 is incorporated by reference to the
information to be contained in the Company's Proxy Statement relating to the
2009 Annual Meeting of Shareholders. The Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days of November 30, 2008, our
fiscal year end.
The
information required by this Item 12 is incorporated by reference to the
information under the captions "Election of Directors" and "Other Matters" to be
contained in the Company's Proxy Statement relating to the 2009 Annual Meeting
of Shareholders to be held on June 30, 2009. The Proxy Statement will be filed
with the Securities and Exchange Commission within 120 days of November 30,
2008, our fiscal year end.
See Index
to Exhibits included herein.
The
information required by this Item 14 is incorporated by reference to the
information contained in the Company's Proxy Statement relating to the 2009
Annual Meeting of Shareholders. The Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days of November 30, 2008, our
fiscal year end.
FEI-FEI
CATHERINE FANG, CPA
6300
Stonewood Dr. Ste 308, Plano, TX 75024
TEL:
(972) 769-8588 FAX: (972) 769-0788
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of Advanced Materials Group,
Inc.
We have
audited the accompanying consolidated balance sheets of Advanced Materials
Group, Inc. and its subsidiaries (the Company) as of November 30, 2008 and 2007,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. An audit includes consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Materials Group,
Inc. and its subsidiaries, as of November 30, 2008 and 2007 and the results of
their operation and their cash flows the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
/s/ Fei-Fei Catherine Fang,
CPA
Dallas,
Texas
February
24, 2009
ADVANCED
MATERIALS GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
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Cost
of sales (including depreciation of $76,247 and $109,102 for the years
ended November 30, 2008 and 2007, respectively)
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Selling,
general and administrative
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Depreciation
and amortization
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Income
from operations before income tax benefit
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Net
income per share basic and diluted
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Weighted
average common shares outstanding:
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See
accompanying report of independent registered public accounting firm and notes
to consolidated financial statements.
ADVANCED
MATERIALS GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
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Cash
and cash equivalents
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Prepaid
expenses and other assets
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Current
portion of deferred tax asset
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Property
and equipment, net
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Current
portion of term notes
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Current
portion of capital lease obligations
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Total
current liabilities
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Term
notes, net of current portion
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Capital
lease obligations, net of current portion
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Commitments
and contingencies
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Preferred
stock-$.001 par value; 5,000,000 shares authorized; no
shares
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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 November 30, 2008 and
2007
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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 report of independent registered public accounting firm and notes
to consolidated financial statements.
ADVANCED
MATERIALS GROUP, INC.
CONSOLIDATED
STATEMENTS SHAREHOLDERS' EQUITY
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TOTAL
STOCKHOLDERS' EQUITY
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Exercise
of common stock options
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Exercise
of common stock warrants
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See
accompanying report of independent registered public accounting firm and notes
to consolidated financial statements.
ADVANCED
MATERIALS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
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Cash
flows from operating activities:
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Adjustments
to reconcile net income to net cash used in 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 assets
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Accounts payable and accrued liabilities
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Net
cash 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 activities
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Cash
flows from financing activities:
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Net borrowings under line of credit
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Repayments of long-term obligations
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Exercise of stock options and warrants
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Net
cash provided by financing activities
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Net
change in cash and cash equivalents
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Cash
and cash equivalents, beginning of year
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Cash
and cash equivalents, end of year
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Supplemental
disclosures of cash flow information:
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Cash paid during the year for:
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Fixed
assets acquired under capital leases
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Fixed
assets acquired with debt
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See
accompanying report of independent registered public accounting firm and notes
to consolidated financial statements.
ADVANCED
MATERIALS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of
Business
Advanced
Materials Group, Inc. (the "Company") develops, manufactures and markets a wide
variety of products from a base of flexible materials. The Company's principal
subsidiary, Advanced Materials, Inc. (formerly known as Wilshire Advanced
Materials, Inc.) ("AM"), is the successor to a 50 year old business that
converted specialty materials including foams, foils, films and adhesive
composites into components and finished products. The Company is making a
transition from the foam fabricator / contract manufacturing business to
proprietary medical and consumer products. Examples of the products AM is
currently manufacturing include non-skid surgical instrument pads and
applicators for medical use, soap impregnated surgical prep kit sponges,
protective units for arthoroscopic and orthopedic instruments, printer cartridge
inserts and inking felts, automobile insulators, water and dust seals. These
products are made for a number of customers in various markets including
medical, technology, aerospace, automotive and consumer.
Principles of
Consolidation
The
consolidated financial statements include the accounts of Advanced Materials
Group, Inc. and its wholly owned subsidiary, Advanced Materials, Inc. and
Advanced Materials, Ltd. All significant intercompany accounts and transactions
have been eliminated.
Use of
Estimates
The
preparation of consolidated 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 consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
materially from those estimates.
Cash and Cash
Equivalents
The
Company considers highly liquid investments with an original maturity of three
months or less when purchased to be cash equivalents.
Fair Value of Financial
Instruments
The
Company's cash and cash equivalents, accounts receivable, accounts payable and
line of credit approximated fair value at November 30, 2008 and 2007 because of
the relatively short maturity of these instruments. The carrying value of debt
approximated fair value at November 30, 2008 and 2007 as these instruments bear
market rates of interest.
Accounts
Receivable
The
Company performs periodic credit evaluations of its customers’ financial
condition and extends credit to virtually all of its customers on an
uncollateralized basis. Credit losses to date have been insignificant
and within management’s expectations.
Accounts
receivable are stated at amounts management expects to collect from outstanding
balances. Management provides for probable uncollectible amounts
through a charge to earnings and a credit to a valuation allowance based on its
assessment of the current status of individual accounts. Balances
still outstanding after management has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit to accounts
receivable. Management considers the accounts receivable balance at
November 30, 2008 and 2007 to be fully collectible and, as such, recorded no
allowance for doubtful accounts as of yearend.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out method) or market. Cost
includes raw materials, labor, manufacturing overhead and purchased products.
Market is determined by comparison with recent purchases or net realizable
value. Net realizable value is based on forecasts for sales of the Company's
products in the ensuing years. Should demand for the Company's products prove to
be significantly less than anticipated, the ultimate realizable value of the
Company's inventories could be substantially less than the amount shown on the
accompanying consolidated balance sheets.
Property and
Equipment
Property
and equipment are stated at cost. Expenditures for additions and major
improvements are capitalized. Repairs and maintenance costs are charged to
operations as incurred. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts, and gains or losses from retirements and dispositions are credited or
charged to operations.
Depreciation
and amortization are computed using the straight-line method over estimated
useful lives of five to seven years. Leasehold improvements are being amortized
on a straight-line basis over the lesser of the useful life of the related
improvements or term of the lease. Depreciation and amortization expense was
approximately $117,000 and $149,000, for the years ended November 30, 2008 and
2007, respectively, of which $76,000 and $109,000, respectively, is included in
cost of sales in the accompanying consolidated statements of
operations.
Impairment of Long-Lived
Assets
Management
reviews long-lived assets for impairment whenever changes in circumstances
indicate that the carrying amount of the assets may not be recoverable and would
record an impairment charge if necessary. Such evaluations compare the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset and are significantly impacted by estimates of future
prices for the Company’s products, capital needs, economic trends and other
factors. No impairment charges were recorded for the years ended November 30,
2008 and 2007.
Revenue
Recognition
The
Company recognizes revenue from product sales when it is realized or realizable
and earned, which is generally at the time of shipment and passage of title.
Revenue is considered to be realized or realizable and earned when there is
persuasive evidence of a sales arrangement in the form of a contract or a
purchase order, the product has been shipped, the sales price is fixed or
determinable and collectibility is reasonably assured. The Company records
revenue for shipping costs charged to customers. The related shipping
costs incurred are recorded in cost of sales.
Concentrations of Credit
Risk
CASH
AND CASH EQUIVALENTS
At
November 30, 2008, the Company had no cash balances at financial institutions in
excess of federally insured limits. The Company has experienced no
losses related to uninsured deposits.
CUSTOMERS
The
Company provides credit in the normal course of business to customers throughout
the United States and foreign markets. The Company performs ongoing credit
evaluations of its customers. The Company maintains reserves for potential
credit losses based upon the Company's historical experience related to credit
losses. Based on the Company's evaluation of its accounts receivable it has
determined a reserve is not necessary at November 30, 2008 and
2007.
The
Company formed Advanced Materials Foreign Sales Corporation Ltd., a wholly-owned
subsidiary of the Company, to enter into a strategic manufacturing agreement in
Singapore. The Company entered into a ten-year agreement with Foamex Asia in
January 1998. Terms of the agreement call for the Company to lease production
equipment and provide certain technology to Foamex Asia. Foamex Asia will in
turn provide its manufacturing facilities and work force to fabricate foam
products at Foamex Asia's Singapore facility. The manufacturing agreement had a
profit sharing provision that changed annually. The profit sharing split was as
follows (in percentages):
Revenues
and profits as reported relating to the Singapore manufacturing agreement were
$0 and $476,985 for each of the two years ended November 30, 2008 and 2007,
respectively. Under the amended agreement, only the Company's shares of the
profit are reported as revenue.
The lower
sales in Singapore are primarily attributable to an amendment to the Company's
manufacturing agreement in Singapore with Foamex Asia to change the vendor of
record for the customer supplied under the agreement from the Company to Foamex
Asia effective July 17, 2003. Although this change does not affect the Company's
share of the profitability under the agreement, it does cause a significant
reduction in its reported revenues. Previously, the Company purchased the raw
materials for the production of product and billed the end customer and
therefore recognized the gross sales and cost of sales on its financials. Under
the amended agreement, it no longer purchases the raw materials or bills the end
customer and only recognizes its portion of profit as revenue. Management
believes this change has been beneficial to the Company as it stills maintains a
share of the profits from the Singapore agreement, while it has significantly
reduced its capital requirements since it no longer needs to purchase raw
materials several months in advance of realizing sales. The Company
is currently in litigation with Foamex Asia with respect to final payout under
the manufacturing agreement - see “Note 6 – Commitments and Contingencies” for
further discussion.
Risks and
Uncertainties
ENVIRONMENTAL
REGULATION AND OPERATING CONSIDERATIONS
The
manufacture of certain products by the Company requires the purchase and use of
chemicals and other materials, which are or may be, classified as hazardous
substances. The Company and its subsidiaries do not maintain environmental
impairment insurance. There can be no assurance that the Company and its
subsidiaries will not incur environmental liability or that hazardous substances
are not or will not be present at their facilities.
The
Company is subject to regulations administered by the United States
Environmental Protection Agency, various state agencies, county and local
authorities acting in conjunction with federal and state agencies. Among other
things, these regulatory bodies impose restrictions to control air, soil and
water pollution. The extensive regulatory framework imposes significant
complications, burdens and risks on the Company. Governmental authorities have
the power to enforce compliance with these regulations and to obtain injunctions
and/or impose civil and criminal fines or sanctions in the case of
violations.
The
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), impose strict joint and several liability on the
present and former owners and operators of facilities which release hazardous
substances into the environment. The Federal Resource Conservation and Recovery
Act of 1976, as amended ("RCRA"), regulates the generation, governed by the law,
which contains the California counterparts of CERCLA and RCRA. The Company
believes that its manufacturing activities are in substantial compliance with
all material Federal and state laws and regulations governing its operations.
Amendments to existing statutes and regulations could require the Company to
modify or alter methods of operations at costs, which could be substantial.
There can be no assurance that the Company will be able, for financial or other
reasons, to comply with applicable laws and regulations.
The
Company believes that it currently conducts, and in the past has conducted, its
activities and operations in substantial compliance with applicable
environmental laws, and believes that costs arising from existing environmental
laws will not have a material adverse effect on the Company's consolidated
financial condition or results of operations. There can be no assurance,
however, that environmental laws will not become more stringent in the future or
that the Company will not incur costs in the future in order to comply with such
laws.
Various
laws and regulations relating to safe working conditions, including the
Occupational Safety and Health Act ("OSHA"), are also applicable to the Company
and its subsidiaries. The Company believes it and its subsidiaries are in
substantial compliance with all material Federal, state and local laws and
regulations regarding safe working conditions.
SUPPLIERS
Foamex
International, Inc. ("Foamex") accounted for 41% and 43% of consolidated
purchases for the years ended November 30, 2008 and 2007, respectively.
Management believes that the loss of Foamex as a major supplier of foam could
adversely affect the Company's business. If another supplier's products
were to be substituted by the Company's customers in critical applications,
there are no assurances that the Company would retain the favorable supply
position that it has earned through over 25 years as an authorized
converter/fabricator for Foamex. On Wednesday, February 18, 2009,
Foamex filed for Chapter 11 bankruptcy protection. The Company does
not currently know the affect that this will have on their raw materials supply
and is actively seeking other arrangements.
Income
Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates expected to
apply when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts, which are
more likely than not to be realized. The provision for income taxes is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Stock-based
Compensation
The
Company adopted SFAS No. 123R, Share-Based Payment, as of
December 1, 2006, using the modified prospective application method. This
statement requires the recognition of compensation expense when we obtain
employee services in stock-based payment transactions.
Prior to
December 1, 2006, the Company recognized compensation cost associated with
stock-based awards under the recognition and measurement principles of
Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Under APB 25, the difference
between the quoted market price as of the date of the grant and the contractual
purchase price of shares was charged to operations over the vesting period on a
straight-line basis. No compensation cost was recognized for fixed stock options
with exercise prices equal to the market price of the stock on the dates of
grant.
Upon the
adoption of SFAS 123R, the Company began recording compensation cost related to
all new stock based compensation grants after our adoption date. The
compensation cost to be recorded is based on the fair value at the grant
date.
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. The
difference between basic and diluted weighted average shares outstanding for the
years ended November 30, 2008 and 2007 relates to dilutive stock options and
warrants.
There
were approximately 243,000 and 218,000 potentially dilutive options and warrants
outstanding at November 30, 2008, and 2007, respectively, that were not included
in the computation of the net income per share because they would be
anti-dilutive.
Recent Accounting
Pronouncements
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 (“FIN 48”), 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 on 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 years ended November 30, 2008 and
2007, the Company did not recognize any interest or penalty expense related to
income taxes. It is determined not to be reasonably likely 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.
In
September 2006, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines
fair value, establishes a market-based framework or hierarchy for measuring fair
value, and expands disclosures about fair value measurements. SFAS 157 is
applicable whenever another accounting pronouncement requires or permits assets
and liabilities to be measured at fair value. SFAS 157 does not expand or
require any new fair value measures; however the application of this statement
may change current practice. The requirements of SFAS 157 are first effective
for our fiscal year beginning December 1, 2008. However, in
February 2008 the FASB decided that an entity need not apply this standard
to nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis until the subsequent
year. Accordingly, our adoption of this standard on December 1, 2008 is
limited to financial assets and liabilities. We do not believe the initial
adoption of SFAS 157 will have a material effect on our financial condition or
results of operations. However, we are still in the process of evaluating this
standard with respect to its effect on nonfinancial assets and liabilities and
therefore have not yet determined the impact that it will have on our financial
statements upon full adoption.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”. SFAS 159 permits entities to choose to
measure certain financial assets and liabilities and other eligible items at
fair value, which are not otherwise currently required to be measured at fair
value. Under SFAS 159, the decision to measure items at fair value is made
at specified election dates on an irrevocable instrument-by-instrument basis.
Entities electing the fair value option would be required to recognize changes
in fair value in earnings and to expense upfront cost and fees associated with
the item for which the fair value option is elected. Entities electing the fair
value option are required to distinguish on the face of the statement of
financial position, the fair value of assets and liabilities for which the fair
value option has been elected and similar assets and liabilities measured using
another measurement attribute. We do not anticipate that the adoption of this
statement will have a material impact on our consolidated financial statements.
We did not elect to measure existing assets and liabilities at fair value on the
date of adoption.
NOTE
2 - INVENTORIES
Inventories
consist of the following at November 30:
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Less
allowance for obsolete inventory
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NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment consists of the following at November 30:
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Less
accumulated depreciation
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The
assets held under capital leases have been included in property and equipment
and total $100,195 and $243,358 with accumulated depreciation of $71,672 and
$49,378 for the years ended November 30, 2008 and 2007, respectively.
Amortization costs related to assets under capital leases are charged to
depreciation expense.
NOTE
4 - LINE OF CREDIT
On March
1, 2007, Advanced Materials Group, Inc. (AMG), through its wholly-owned
subsidiary Advanced Materials, Inc. (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. This Line of Credit Note
was amended on July 14, 2008 to extend the credit facility (the “Credit
Facility”) to $2,500,000. The proceeds under the Credit Facility will
be used primarily for working capital needs in the ordinary course of
business.
AMI can
borrow, pay and reborrow principal under the Credit Facility from time to time
during its term, but the outstanding principal balance under the Credit Facility
may not exceed the lesser of the borrowing base or $2,500,000. For purposes of
the Credit Facility, “borrowing base” is calculated by adding 80% of AMI's
eligible accounts receivable to 50% of the lower of cost or wholesale market
value of all of AMI's eligible inventory.
The
outstanding principal balance under the Credit Facility bears interest at the
rate of interest per annum announced from time to time by the Lender as its
prime rate, and will be computed on the unpaid principal balance from the date
of each borrowing. Accrued interest payments on the unpaid principal balance
under the Credit Facility are payable quarterly commencing on May 1, 2007, and
all outstanding principal under the Credit Facility, together with all accrued
but unpaid interest, is due at maturity, or April 1, 2008. The
agreement will automatically renew as long as the financial covenants have been
adhered to. The company is in compliance with all financial
covenants.
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 November 30, 2008 were $2,399,000. At November 30, 2008, $101,000
was available for borrowing under the Credit Facility.
In order
to facilitate the Company's obtaining the Credit Facility, on April 2, 2007, the
Company terminated its existing $1,500,000 line of credit agreement with Textron
Financial Corporation, which was evidenced by a Loan and Security Agreement
dated October 9, 2003, as amended.
NOTE
5 – TERM NOTES
Term
notes as of November 30, 2008, consist of the following:
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Term
note with financial institution, interest at the Prime Rate (4% at
November 30, 2008), due in monthly installments not including interest of
$2,450 with the final payment due on June 18, 2013, secured by certain
equipment
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$ 134,230
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Term
note with financial institution, interest at the Prime Rate (4% at
November 30, 2008), due in monthly installments not including interest of
$1,045 with the final payment due on November 26, 2011, secured by certain
equipment
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37,625
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Total
term notes
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171,855
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Less
current portion
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41,816
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Non-current
portion of term notes
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$ 130,039
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Future
maturities of the term notes are approximately as follows:
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2009
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$ 41,900
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2010
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41,900
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2011
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41,900
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2012
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29,400
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2013
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16,755
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Thereafter
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--
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$ 171,855
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NOTE
6 - COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases manufacturing and office space in Rancho Dominguez, California
under a lease that expires in November 2010. The Company moved its
corporate headquarters to Garland, Texas and rents office space there with a
lease effective February 1, 2009 that expires in August 2014. The
lease is escalating and the Company will record the expense on a straight-line
basis. Rent expense totaled $473,245 and $386,627 for the years ended November
30, 2008 and 2007, respectively.
Approximate
future minimum operating and capital lease obligations at November 30, 2008, are
as follows:
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Total
minimum lease obligations
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amounts representing interest |
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(917)
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Present
value of capital lease payments
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Interest
expense incurred under capital lease obligations was insignificant for the years
ended November 30, 2008, and 2007.
Litigation
On or
about November 20, 2007, the Company filed suit in the Superior Court of the
State of California, County of Orange, Central Justice Center, against Foamtec
(Singapore) Pte. Ltd., a private limited company incorporated in Singapore, and
Foamex Asia Ltd., a private limited company incorporated in Thailand
(collectively, “Foamtec”). In December of 1998, the Company and Foamtec entered
into a Manufacturing Agreement, whereby the Company and Foamtec agreed to work
cooperatively to manufacture and sell certain foam components to Hewlett Packard
Company and certain other buyers. As part of the Manufacturing Agreement,
Foamtec agreed to act as fiduciary agent for the Company in distributing the
manufactured product to Hewlett Packard, its successors and assigns. The term of
the Manufacturing Agreement was for ten years, which could be extended by either
party for an additional five years. Foamtec had the option to purchase the
Company’s interest in the Manufacturing Agreement by paying a price to be
calculated on the profits expected under the entire remaining term which, by
definition, included its entire term, including the additional five years if the
Company exercised its extension right. In 2006, the Company gave notice to
Foamtec of its election to extend the term of the Manufacturing Agreement for an
additional five years in accordance with its rights under the Manufacturing
Agreement. Thereafter, Foamtec gave notice of its election to purchase the
Company’s interest in the Manufacturing Agreement, and tendered certain funds in
claimed discharge of its payment obligations thereunder. Foamtec asserted that
this payout right only applied to the initial term, and not the extended term,
and therefore remitted funds that represented the expected profits through the
end of the initial term. The Company therefore sued Foamtec for breach of
contract for Foamtec’s failure to pay the Company the amount of expected profits
for the extended term. The Company is seeking compensatory damages in excess of
$1,000,000, interest as provided by law and costs associated with the
suit. A trial date is set for March 31, 2009.
NOTE
7 - STOCKHOLDERS' EQUITY
2003
STOCK PLAN
In
December 2003, the stockholders of the Company approved the 2003 Stock Plan
("2003 Plan"). The Plan authorizes the granting of various options and rights to
purchase up to 3,000,000 shares of common stock of the Company. The 2003 Plan
provides for the grant by the Company of options to purchase shares of the
Company's common stock to its employees, directors and consultants. The 2003
Plan provides that it is to be administered by a committee consisting of two or
more members of the Board of Directors. The Committee has discretion, subject to
the terms of the 2003 Plan, to select the persons entitled to receive options
under the Plan, the terms and conditions on which options are granted, the
exercise price, the time period for vesting such shares and the number of shares
subject thereto.
Options
granted under the 2003 Plan may be either "incentive stock options", within the
meaning of Section 422 of the Internal Revenue Code, or "non-qualified stock
options". No incentive stock option may be granted to any person who is not an
employee of the Company at the date of grant. Options may be granted under the
2003 Plan for terms of up to 10 years, except for incentive stock options
granted to 10% Stockholders, which are limited to 5-year terms. The exercise
price in the case of incentive stock options granted under the 2003 Plan has to
be at least equal to the fair market value of the common stock as of the date of
grant.
This
stock option plan has been closed for future grants as of 2007.
2007
STOCK PLAN
As part
of the Company’s executive compensation program, executives are eligible to
receive incentive stock options, nonstatutory stock options, stock appreciation
rights and restricted shares (collectively, “Awards”) pursuant to the Advanced
Materials Group, Inc. 2007 Stock Incentive Plan (the “2007 Incentive Plan”). The
2007 Incentive Plan was approved by the Company’s stockholders in May 2007, and
is an unfunded plan that provides for the granting of Awards to employees,
directors and consultants of the Company or an affiliate. The Compensation
Committee believes that the 2007 Incentive Plan strengthens the Company’s
ability to attract, retain, and reward executives, as well as other employees,
directors and consultants, by enabling such persons to acquire or increase a
proprietary interest in the Company, strengthening the mutuality of interests
between such persons and the Company’s stockholders, and providing such persons
with performance incentives to expend their maximum efforts in the creation of
stockholder value.
Administration
The 2007
Incentive Plan is administered by the Compensation Committee. The Compensation
Committee, as the plan administrator, is vested with full and final authority to
administer and interpret the 2007 Incentive Plan and to make all determinations
necessary or advisable for the administration of the 2007 Incentive Plan.
Subject to the terms of the 2007 Incentive Plan, the Compensation Committee
determines who will receive Awards, the time or times at which Awards will be
granted, the type of Awards to be granted, the number of shares of common stock
covered by each Award, vesting schedules and other limitations on the vesting of
the Awards, and such other terms and conditions of each Award as are not
inconsistent with the provisions of the 2007 Incentive Plan.
Shares
Subject to the Plan
The
aggregate number of shares of common stock subject to the 2007 Incentive Plan is
3,000,000. Shares subject to Awards under the 2007 Incentive Plan include
authorized and unissued shares, as well as previously issued shares that have
been reacquired by the Company. The total number of shares authorized under the
2007 Incentive Plan will be subject to increase or decrease in order to reflect
any stock split, stock dividend, recapitalization, merger, consolidation,
reorganization, combination or exchange. If any Award granted under the 2007
Incentive Plan expires, terminates or is canceled for any reason without having
been exercised in full, or if any Shares issued in connection with an Award are
repurchased by the Company, the corresponding number of Shares will again be
available for Awards under the 2007 Incentive Plan.
Description
of Stock Options
Types of Options. The types
of stock options (“Options”) that may be granted under the 2007 Incentive Plan
include: (i) options which meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the “Code”)(“Incentive Stock Options”), and
(ii) stock options that do not qualify as Incentive Stock Options (“Nonstatutory
Stock Options”). Incentive Stock Options may only be granted to employees;
however, Nonstatutory Stock Options may be granted to employees, directors or
consultants of the Company. The exercise price per share for common stock
subject to an Option will be determined by the Compensation Committee, as the
plan administrator, at the date of grant; provided, that the exercise price for
any Option shall not be less than 100% of the fair market value of the common
stock at the date of grant, as determined by the Board, and if the participant
of an Incentive Stock Option owns more than 10% of the total combined voting
power of all classes of stock of the Company and its affiliates, as described in
Section 422(b)(6) of the Code, the exercise price of any Incentive Stock Option
granted to such participant shall not be less than 110% of the fair market value
of the common stock at the date of grant.
Payment on Exercise. Payment
for shares of common stock purchased upon the exercise of an Option may, subject
to the terms of the applicable award agreement, be made in cash or by wire
transfer or check, by execution of a promissory note, by withholding shares that
would otherwise be issued upon exercise of the Option (“cashless exercise”), or
by delivery of shares of common stock of the Company then owned by the
participant at the time of the exercise of the Option; provided, that the
participant shall have held such shares for a period of six months prior to such
exercise (or such shorter or longer period of time as is necessary for the
Company to avoid a charge to earnings).
Term of Options. The term of
each Option will be of such period as may be determined by the Compensation
Committee; provided, that in no event will the term of any Option exceed a
period of ten years (or, in the case of an Incentive Stock Option granted to an
employee who owns more than 10% of the total combined voting power of all
classes of stock of the Company and its affiliates, five years). The
Compensation Committee shall determine on the date of grant what conditions
shall apply to the exercise of an Option granted under the 2007 Incentive Plan
in the event the participant shall cease to be employed or retained as a
director or consultant by the Company or its affiliates for any
reason.
Description
of Restricted Share Award
Grant of Restricted Shares.
Restricted Shares may be granted alone or in addition to other Awards granted
pursuant to the 2007 Incentive Plan. Each Award of Restricted Shares will be
evidenced by an award agreement, which will describe the price to be paid for
the shares, if any, and the restrictions applicable to the shares received
thereunder.
Effect of Restrictions. The
Restricted Shares may be subject to such restrictions as may be provided under
the applicable award agreement. The Compensation Committee may accelerate the
lapse of all or a portion of the restrictions on an Award of Restricted Shares
at any time. Upon the lapse of the restrictions on Restricted Shares, the
Compensation Committee shall cause the stock certificate to be delivered to the
participant with respect to such shares, free of all restrictions under the 2007
Incentive Plan.
Description
of Stock Appreciation Rights
Grant of Stock Appreciation
Rights. Stock appreciation rights (“SARs”) may be granted alone or in
addition to other Awards. SARs are rights to be paid an amount equal to no more
than 100% of the difference between the value of a specified number of shares of
common stock of the Company on the date on which the SARs are granted and the
value of such common stock on the date on which the SARs are exercised. This
amount may be paid in cash or shares of common stock, as described in the
applicable award agreement.
Ownership Rights. SARs do not
generally provide voting, dividend or other rights associated with stock
ownership.
Term of SARs. The term of
each SAR will be of such period as may be determined by the Compensation
Committee. The Compensation Committee shall determine on the date of grant what
conditions shall apply to the exercise of an SAR granted under the 2007
Incentive Plan in the event the participant shall cease to be employed or
retained as a director or consultant by the Company or its affiliates for any
reason.
Amendment
or Termination
The
Company’s Board of Directors may amend, suspend or terminate the 2007 Incentive
Plan at any time, so long as such action does not impair any Award then
outstanding without the consent of the affected participant. Without the
approval of the stockholders, however, the Company’s Board of Directors may not
amend the 2007 Incentive Plan to expand the types of Awards available under the
2007 Incentive Plan or otherwise materially revise the 2007 Incentive Plan,
increase the number of shares reserved for issuance under the 2007 Incentive
Plan (other than pursuant to capitalization adjustments set forth in the 2007
Incentive Plan), modify the class of individuals eligible to receive Awards
under the 2007 Incentive Plan or change the identity of the granting company or
the shares to be issued upon the exercise of Incentive Stock
Options.
The
Compensation Committee may amend, modify or terminate any outstanding Award in
any manner not inconsistent with the terms of the 2007 Incentive Plan as long as
such action does not impair the rights of the participant without his or her
consent.
Absent
any earlier termination by the Board of Directors, no Award will be granted
under the 2007 Incentive Plan after the tenth anniversary of its effective date
or, if later, the tenth anniversary of any action by the Board of Directors or
approval of shareholders, if later, to (i) increase the number of shares
reserved for issuance under the 2007 Incentive Plan, (ii) modify the class of
persons eligible to receive Awards under the 2007 Incentive Plan, or (iii)
change the identity of the granting company or the shares issued upon exercise
of 2007 Incentive Stock Options.
Change
in Control
Unless
the Compensation Committee determines otherwise, upon or following a “Change in
Control” of the Company, as such term is defined in the 2007 Incentive Plan,
Awards shall accelerate and all restrictions shall immediately lapse. In
addition, Options that remain unexercised on the effective date of the Change in
Control may be immediately forfeited or, in the event the Company is not the
surviving company, all outstanding Options and SARs may be substituted or
assumed by the surviving company. Pursuant to the 2007 Incentive Plan, a Change
in Control is generally deemed to have occurred upon (i) the sale, transfer or
other conveyance of all or substantially all of the Company’s assets, (ii) the
acquisition of beneficial ownership, directly or indirectly, by a person of the
securities representing 50% or more of the total number of votes that may be
cast for the election of directors of the Company; or (iii) the failure at any
annual or special meeting of the Company's stockholders held during the
three-year period following a "solicitation in opposition" as defined in Rule
14a-6 promulgated under the Exchange Act, of a majority of the persons nominated
by the Company in the proxy material mailed to shareholders by the management of
the Company to win election to seats on the Board (such majority calculated
based upon the total number of persons nominated by the Company failing to win
election to seats on the Board divided by the total number of Board members of
the Board as of the beginning of such three-year period), excluding only those
who die, retire voluntarily, are disabled or are otherwise disqualified in the
interim between their nomination and the date of the meeting.
The
following table summarizes options granted and outstanding:
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WEIGHTED
AVERAGE EXERCISE PRICE
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Outstanding,
November 30, 2006 (466,000 exercisable at a weighted average price of
$1.04)
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Granted
(weighted average fair value of $0.70)
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Outstanding,
November 30, 2007 (368,200 exercisable at a weighted average price of
$0.78)
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Granted
(weighted average fair value of $0.47)
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Outstanding,
November 30, 2008 (423,200 exercisable at a weighted average price of
$0.59)
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The
following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options at November 30, 2008:
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WEIGHTED
AVERAGE CONTRACTUAL LIFE REMAINING
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As of
November 30, 2008 there was approximately $4,000 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 0.6 years.
The
aggregate intrinsic value of options outstanding and options exercisable at
November 30, 2008 was $19,500 and $16,500 respectively.
The
Company uses the Black-Scholes Option Pricing Model (“BSOPM”) to determine the
fair value of option grants. During the year ended November 30 2008, the Company
granted 40,000 fully vested options to directors on February 12, 2008, at an
exercise price of $0.65 and 20,000 fully vested options to executive officers on
March 18, 2008, at an exercise price of $0.60. The options were valued using the
BSOPM and the following weighted average assumptions: stock price on date of
grant - $0.63, exercise price - $0.63, expected life - 5 years, volatility -
97%, dividend yield – 0% and a risk free rate of 2.61%. The weighted average
calculated fair value of each option was $0.47.
On March
14, 2008, the Company’s 200,000 outstanding, fully-vested warrants were
exercised at a price of $0.363 per share.
NOTE
8 - INCOME TAXES
Income
tax expense (benefit) from continuing operations is as follows:
The
components of deferred tax assets and liabilities at November 30 are as
follows:
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Tax
over book depreciation
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Federal
net operating loss carryforwards
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State
net operating loss carryforwards
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Goodwill
and other intangible assets
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Total
deferred tax assets
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Less
valuation allowance for deferred tax assets
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At
November 30, 2008 and 2007, the Company had a valuation allowance of $1,502,000
and $1,609,000, respectively, to reduce its deferred tax assets to estimated
realizable value. Based on the level of historical taxable income and
projections for future taxable income over the periods in which temporary
differences are anticipated to reverse, management believes it is more likely
than not that the Company will realize the benefits of these deferred tax
assets, net of the valuation allowance. However, the amount of the deferred tax
asset considered realizable could be adjusted in the future if estimates of
taxable income are revised due to changes in circumstances.
As of
November 30, 2008, the Company has net tax operating loss carryforwards of
approximately $6,037,000 available to offset future Federal tax liabilities. The
carryforwards expire through 2027. As of November 30, 2008, the Company has net
operating tax loss carryforwards of approximately $1,476,000 available to offset
future state income tax liabilities, which expire through 2017.
The
reconciliation of the income tax provision (benefit) from continuing operations
to taxes computed at U.S. federal statutory rates is as
follows:
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Income
tax benefit at statutory rates
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Permanent
timing differences and other items
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Change
in federal valuation allowance and other permanent
items
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State
and local income taxes, net of federal income tax
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NOTE
9 – EMPLOYEE BENEFIT PLAN
The
Company has a 401(k) retirement plan that covers the majority of the Company's
domestic employees. An employee, at their discretion, can elect to make
voluntary contributions to the plan from 0% to 20% of their compensation, up to
the maximum amount set by the Internal Revenue Service. The Company may
contribute an amount determined in its sole judgment. Total expense from this
plan related to continuing operations was $0 for the years ended November 30,
2008 and 2007. All employees, including executive officers, may
participate in this plan according to the rules set forth by the
IRS.
NOTE
10 - FASB 131 SEGMENT REPORTING
The
Company's foreign operations consist of a sales joint venture located in
Singapore, which began operations in fiscal 1998. All of their sales are made to
unaffiliated customers. The following is a summary of operations by entities
within geographic areas for the year ending November 30, 2008, and
2007:
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SEGMENT
INCOME BEFORE CORPORATE ALLOCATION
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DEPRECIATION
AND AMORTIZATION
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INCOME
TAXES BENEFIT (EXPENSE)
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NOTE
11 – SUBSEQUENT EVENTS
Effective
February 1, 2009, the Company entered into a 66 month operating lease agreement
for office space in Garland, Texas and moved the corporate headquarters to this
location. Payments under the lease will be $0 for months one through
six, $5,250 for months seven through eighteen, $5,400 for months nineteen
through thirty, $5,550 for months thirty-one through forty-two, $5,700 for
months forty-three through fifty four and $5,850 for months fifty five through
sixty six.
On
Wednesday, February 18, 2009, Foamex filed for Chapter 11 bankruptcy
protection. The Company does not currently know the affect that this
will have on their raw materials supply and is actively seeking other
arrangements.
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED
MATERIALS GROUP, INC.
Dated:
February 27, 2009
By: /s/ RICARDO G.
BRUTOCAO
Ricardo
G. Brutocao
Chief
Executive Officer
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
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Signature
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Title
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Date
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/s/
Ricardo G. Brutocao
Ricardo
G. Brutocao
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Chief
Executive Officer and
Director
(Principal Executive
Officer)
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February
27, 2009
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/s/
William G. Mortensen
William
G. Mortensen
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President
and
Chief
Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
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February
27, 2009
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/s/
Timothy R. Busch
Timothy
R. Busch
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Chairman
and Director
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February
27, 2009
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/s/
Maurice J. DeWald
Maurice
J. DeWald
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Director
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February
27, 2009
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/s/
N. Price Paschall
N.
Price Paschall
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Director
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February
27, 2009
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/s/
John Sawyer
John
Sawyer
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Director
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February
27, 2009
|
Exhibit
No. Description
|
3.1
|
Articles
of Incorporation of Advanced Materials Group, Inc. (formerly known as Far
West Ventures, Inc.). (1)
|
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3.2
|
Certificate
of Amendment of Articles of Incorporation of Advanced Materials Group,
Inc. (1)
|
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3.3
|
Bylaws,
as amended, of Advanced Materials Group, Inc.
(1)
|
|
4.1
|
Advanced
Materials Group, Inc. 2007 Stock Incentive
Plan.(2)
|
|
4.2
|
Advanced
Materials Group, Inc. 2003 Stock
Plan.(3)
|
|
4.3
|
Amendment
No. One to the Advanced Materials Group, Inc. 2003 Stock
Plan.(4)
|
|
4.4
|
Advanced
Materials Group, Inc. 1998 Stock Option
Plan.(5)
|
|
4.5
|
Amendment
No. One to the Advanced Materials Group, Inc. 1998 Stock Option
Plan.(6)
|
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10.1
|
Manufacturing
Agreement dated January 30, 1998 by and between Advanced Materials FSC
Ltd. and Foamtec (Singapore) Pte. Ltd.
(7)
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10.2
|
Credit
Agreement dated as of March 1, 2007 between JP Morgan Chase Bank, N.A. and
Advanced Materials, Inc.(8)
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10.3
|
Continuing
Security Agreement dated as of March 1, 2007, executed by Advanced
Materials, Inc. in favor of JP Morgan Chase Bank,
N.A.(9)
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10.4
|
Line
of Credit Note dated March 1, 2007, in the principal amount of
$2,000,000.00, issued by Advanced Materials, Inc. to the order of JP
Morgan Chase Bank, N.A.(10)
|
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21.1
|
List
of Subsidiaries. (11)
|
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23.1
|
Consent
of Fei-Fei Catherine Fang, LLP, CPA
|
|
31.1
|
Certification
by Chief Executive Officer 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
|
Certification
by Chief Financial Officer 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 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 Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
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(1)
|
Filed
as a like-numbered exhibit to the Company's Registration Statement on Form
SB-2 dated December 6, 1993 (Registration No. 33-72500), incorporated
herein by reference.
|
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(2)
|
Filed
as Exhibit 4.1 to the Company’s Registration Statement on Form S-8 dated
October 9, 2007.
|
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(3)
|
Filed
as Exhibit 4.2 to the Company’s Registration Statement on Form S-8 dated
October 9, 2007.
|
|
(4)
|
Filed
as Exhibit 4.3 to the Company’s Registration Statement on Form S-8 dated
October 9, 2007.
|
|
(5)
|
Filed
as Exhibit 4.4 to the Company’s Registration Statement on Form S-8 dated
October 9, 2007.
|
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(6)
|
Filed
as Exhibit 4.5 to the Company’s Registration Statement on Form S-8 dated
October 9, 2007.
|
|
(7)
|
Filed
as Exhibit 10.23 to Form 10-KSB dated November 30, 1997, incorporated
herein by reference.
|
|
(8)
|
Filed
as Exhibit 10.1 to Form 10-QSB filed July 12, 2007, incorporated herein by
reference.
|
|
(9)
|
Filed
as Exhibit 10.2 to Form 10-QSB filed July 12, 2007, incorporated herein by
reference.
|
|
(10)
|
Filed
as Exhibit 10.3 to Form 10-QSB filed July 12, 2007, incorporated herein by
reference.
|
|
(11)
|
Filed
as Exhibit 21 to Form 10-K filed February 28, 2000, incorporated herein by
reference.
|
EXHIBIT
31.1
CERTIFICATIONS
I,
Ricardo G. Brutocao, certify that:
1. I have
reviewed this Form 10-KSB 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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(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:
February 27, 2009
/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 Form 10-KSB 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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(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:
February 27, 2009
/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 Annual Report on Form 10-KSB of Advanced Materials Group,
Inc. (the "Company") for the fiscal year ended November 30, 2008 (the "Report"),
the undersigned hereby certifies in his capacity as Chief Executive Officer of
the Company, 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; 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:
February 27, 2009
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 annual report on Form 10-KSB of Advanced Materials Group,
Inc. (the "Company") for the fiscal year ended November 30, 2008 (the "Report"),
the undersigned hereby certifies in his capacity as Chief Financial Officer of
the Company, 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; 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:
February 27, 2009
By: /s/ WILLIAM G.
MORTENSEN
William
G. Mortensen
President
and Chief Financial Officer