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AMTY > SEC Filings for AMTY > Form 10-K/A on 19-Oct-2012All Recent SEC Filings

Show all filings for AMERITYRE CORP

Form 10-K/A for AMERITYRE CORP


19-Oct-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance or financial condition. Such statements are only predictions and the actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Part I. Item 1A. Risk Factors" as well as those discussed elsewhere in this report. The historical results set forth in this discussion and analyses are not necessarily indicative of trends with respect to any actual or projected future financial performance. This discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report.

Overview

Amerityre engages in the research and development, manufacturing and sale of polyurethane tires. We believe that we have developed unique polyurethane formulations that allow us to make products with superior performance characteristics, including abrasion resistance and load-bearing capabilities, than conventional rubber tires. We also believe that our manufacturing processes are more efficient than traditional tire manufacturing processes, in part because our polyurethane compounds do not require the multiple processing steps, extreme heat, and high pressure that are necessary to cure rubber. Using our polyurethane technologies, we believe tires can be produced which last longer, are less susceptible to failure and offer improved fuel economy.

We are concentrating on three segments of the tire market: low duty cycle foam tires, solid forklift tires and agricultural tires. Our most recent activities in these areas are set forth below:

Low duty cycle foam tires - The sale of polyurethane foam tires to original equipment manufacturers, distributors and dealers accounts for most of our revenue at this time. We have the ability to produce a broad range of products for the low duty cycle tire market. Marketing efforts are focused on building a distribution network to expand our business and product sales.

Solid forklift tires - Manufacturing was suspended in the second quarter of fiscal 2012 due to quality and process issues. We engaged a polyurethane specialist to lead the corrective action efforts and complete the development of a marketable forklift tire. The Company recommenced commercial sales of forklift tires in the third quarter of fiscal 2012.

Agricultural tires - The Company completed a product redesign in the fourth quarter of fiscal 2012 and is currently pursuing two segments of the agricultural tire market. We believe both segments present a significant opportunity and is a significant part of the Company's growth strategy.

Due to the Company's limited resources, tire projects which are contingent on additional development, such as composite and automotive tires, have been put on hold and will be revisited at a later date.


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Factors Affecting Results of Operations

Our operating expenses consisted primarily of the following:

Cost of sales, which consists primarily of raw materials, components and production of our products, including applied labor costs and benefits expenses, maintenance, facilities and other operating costs associated with the production of our products;

Selling, general and administrative expenses, which consist primarily of salaries, commissions and related benefits paid to our employees and related selling and administrative costs including professional fees;

Research and development expenses, which consist primarily of equipment and materials used in the development of our technologies;

Consulting expenses, which consist primarily of amounts paid to third-parties for outside services;

Depreciation and amortization expenses which result from the depreciation of our property and equipment, including amortization of our intangible assets; and

Amortization of deferred compensation that results from the expense related to certain stock options to our employees.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, deferred compensation and contingencies. We base our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances. These estimates allow us to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We believe the following accounting policies are our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that may be uncertain. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.

Revenue Recognition

Revenue for products is recognized when the sales amount is determined, shipment of goods to the customer has occurred and collection is reasonably assured. Generally, we ship all of our products FOB origination.


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Valuation of Intangible Assets and Goodwill

At June 30, 2012, the Company had capitalized patent and trademark costs, net of accumulated amortization, totaling $531,222. The patents which have been granted are being amortized over a period of 20 years. Patents which are pending or are being developed are not amortized until a patent has been issued. We evaluate the recoverability of intangibles and review the amortization period on a continual basis utilizing the guidance of Accounting Standards Codification 350, Intangibles - Goodwill and Other (ASC 350). We test our patents and trademarks for impairment at least annually and whenever events or changes in circumstances indicated that the carrying value may not be recoverable. We consider the following indicators, among others, when determining whether or not our patents are impaired:

any changes in the market relating to the patents that would decrease the life of the asset;

any adverse change in the extent or manner in which the patents are being used;

any significant adverse change in legal factors relating to the use of the patents;

current-period operating or cash flow loss combined with our history of operating or cash flow losses;

future cash flow values based on the expectation of commercialization through licensing; and

current expectations that, more likely than not, the patents will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

Inventory

Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or market. The inventory consists of chemicals, finished goods produced in our plant and products purchased for resale.

Stock-Based Compensation

Equity securities issued for services rendered have been accounted for at the fair market value of the securities on the date of authorization. Per the provisions of Accounting Standards Codification 718, Compensation - Stock Compensation (ASC 718), stock-based compensation expense recognized for the fiscal years ended June 30, 2012 and 2011 was $480,160 and $142,863 respectively.

Seasonality

A substantial majority of our sales are to customers within the United States. We experience some seasonality in the sale of our closed-cell polyurethane foam tires for bicycles and lawn and garden products because sales of these products generally decline during the winter months in the United States. Sales of our closed-cell polyurethane form tire products generally peak during the spring and summer months; typically resulting in greater sales volumes during the third and fourth quarters of the fiscal year.


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Results of Operations

Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality and potential variability of our revenues and cash flows. These key performance indicators include:

Net revenues, which consists of product sales revenues and equipment sales revenues, if any;

Sales revenue, net of returns and trade discounts, which is an indicator of our overall business growth and the success of our sales and marketing efforts;

Gross profit, which is an indicator of both competitive pricing pressures and the cost of sales of our products;

Growth in our customer base, which is an indicator of the success of our sales efforts; and

Distribution of revenue across our products offered.

The following summary table presents a comparison of our results of operations for the fiscal years ended June 30, 2012 and 2011 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in

greater detail below

                                                                            Percent
                                   Fiscal Year Ended June 30,               Change
                                     2012                2011            2012 vs. 2011
   Net revenues                 $        4,365       $      3,679             18.6 %
   Cost of revenues                      2,833              2,329             21.6 %
   Gross profit                          1,531              1,350             13.4 %
   Selling, general, and
   administrative expenses
   (1)                                   2,371              1,869             28.9 %
   Research and development
   expenses                                 10                 23            (56.5 )%
   Consulting expenses                      90                127            (29.1 )%
   Depreciation and
   amortization expenses                   212                208            (10.9 )%
   Gain on sales of assets                   9                  6             50.0 %
   Gain on settlement                        -                110           (100.0 )%
   Other Income/(Expense)                  (32 )              (43 )          (25.6 )%
   Net loss                     $       (1,175 )     $       (841 )           39.7 %

(1) Includes stock-based compensation expense of $480,160 and $142,863 for the fiscal years ended June 30, 2012 and 2011, respectively.


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Year Ended June 30, 2012 Compared to the Year Ended June 30, 2011

Net revenues. Net revenues of $4,364,756 for the year ended June 30, 2012, represents a $685,716 or 18.6% increase over net revenues of $3,679,040 the year ended June 30, 2011. The overall increase in revenues was largely due to the revenue growth in several product lines. Hand truck tire and wheel assemblies revenues increased approximately 12% over the prior year and remain our number one selling product representing approximately 30% of revenue. Revenues for wheel barrow tire and wheel assemblies grew approximately 44% over the prior year and became our second best selling product. Lawn and garden products accounted for approximately 12% of total revenues and are our third largest selling product line. Although forklift tire sales increased approximately 137% over the prior year, tire failures during the second quarter caused a production shutdown for several months. As a result, forklift tire sales did not meet management's expectations for the fiscal year. The forklift tire failures were caused by product design and chemical mixing problems that have since been resolved and production recommenced in March 2012. The improved performance of the forklift tire has led to the resurgence of product sales. The forklift dealer network experienced growth during the fourth quarter of fiscal 2012. Sales of blended chemicals to customers licensed to manufacture non-competing products also increased significantly over the prior year and represents approximately 8% of total revenues. Engineering and product redesign of the agricultural product lines was completed in the fourth quarter of fiscal 2012 and are ready for a major product launch in the spring of 2013. An initial startup of orders has already been booked.

Cost of revenues. Cost of revenues for the year ended June 30, 2012 was $2,833,385 or 64.9% of revenues compared to $2,329,139 or 63.3% of revenues for fiscal 2011. The increase as a percent of revenue was largely due to our inability to purchase chemicals at bulk load pricing due to cash flow constraints. In some cases, wheel components have been sourced domestically at higher per unit prices rather than from international suppliers due to our inability to meet minimum purchasing requirements. Both of these issues lead to a negative purchase price variance in the second half of the year. In addition, redesign and retooling of the forklift tire product lines resulted in higher than expected costs. These issues have led to higher costs of revenues and lower gross profit margins. The Company still maintains sufficient production capacity to meet anticipated customer demand without incurring a proportionate increase in overall production costs. In addition, recent capital funding has allowed us to return to bulk chemical purchases at lower costs per unit.

Gross profit. Gross profit for the year ended June 30, 2012 of $1,531,371 represents a 13.4% increase over gross profit of $1,349,901 for the same period in 2011. The fiscal 2012 gross profit reflects a 35.1% gross margin for product sales compared to a gross margin on product sales of 36.7% for fiscal 2011.

Selling, general and administrative expenses. Selling, general and administrative expenses (SG&A) of $2,370,858 for the year ended June 30, 2012 represents a 26.8% increase over SG&A expenses of $1,869,299 for the same period in 2011. The increase in SG&A expenses over the prior year is largely due to an increase in the use of stock-based compensation for services, an increase in sales related expenses and warranty expense related to forklift tire failures experienced in the second quarter.

Recognizing a significant need to reorganize key management positions, over the past year we have strived to place qualified individuals in key positions. Often, we have had to turn to outside consultants, recently graduated students, interns and directors to fill key positions, assist the current staff or complete important projects. In a number of cases, we have missed opportunities to retain qualified individuals due to cash flow constraints. Therefore, in order to attract and retain the qualified personnel needed to achieve our goals, management has resorted to the issuance of stock or stock options whenever possible. However in many cases, the issuance of stock and stock options is only a viable option to those who have independent sources of personal income and deeply believe in the potential of the Company, such as retired consultants and directors. While this policy has enhanced our ability to achieve our goals without impacting cash flow, the related non-cash expense has been significant. During the fiscal year 2012, we incurred approximately $480,000 in non-cash, stock-based compensation expense compared to $142,863 for the same period in 2011. We expect this trend to continue in the foreseeable future or until we can obtain additional capital financing. The use of non-resident personnel, which primarily includes consultants and directors, has also increased the travel related costs.

Sales related expenses, such as travel expenses, sales commissions and advertising, also contributed to the increase in SG&A. During the fiscal year 2012, sales related travel expenses increased approximately $44,000 over the prior year. In addition, sales commissions on chemical sales to licensees increased approximately $38,000 and sales commissions to the sales group increased approximately $56,000 over the prior fiscal year. Advertising and other marketing costs increased approximately $14,000 during fiscal 2012 over the prior year.

Warranty expense, primarily related to the forklift tire failures that occurred in the second quarter, was also a contributing factor to the increase in SG&A. As a result of the forklift tire failures in the second quarter, a number of customers and distributors returned their entire forklift tire inventory along with the tires that failed. In order to retain its customers and dealers, the Company was forced to accept the return of the forklift tires. All of the returned forklift tires are being held at the east coast distribution warehouse located in Ravenna, Ohio. Management hopes to sell those tires to international customers on an "as is" basis at a reduced priced. During fiscal 2012, we recorded a loss of approximately $47,000 primarily related to the forklift tire failures. As of June 30, 2012, we held approximately $55,000 of the returned forklift inventory at our Ravenna distribution center. We may incur additional losses if our plan to dispose of the returned forklift tires is unsuccessful.


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Research and development expenses. Research and development expenses for the year ended June 30, 2012 were $10,032, and 56.0% decrease in the research and development expenses for fiscal 2011 of $22,795. Research and development expenses are largely limited to product improvement and specific customer requests.

Consulting expenses. Consulting expenses for the year ended June 30, 2012 were $90,257 compared to consulting expenses of 127,188 for fiscal 2011. The Board of Directors has engaged a number of management, financial and manufacturing consultants to assist in the management of the Company. Consulting expenses are expected to fluctuate from time to time due to the need for qualified personnel to assist us with production and system needs.

Depreciation and amortization expenses. Depreciation and amortization for the year ended June 30, 2012 were $212,056 compared to $208,411 for fiscal 2011. The 1.7% increase between years is primarily due to the acquisition of computer equipment and retooling for the forklift product line.

Net loss. The net loss for the year ended June 30, 2012 of $1,175,019 represents a 39.7% increase from the net loss for the year ended June 30, 2011 of $841,133. The increase in the net loss is primarily due to higher cost of revenues resulting from negative purchase price variances on raw materials and higher SG&A expenses relating to stock based compensation and selling costs associated with increased sales activity.

Liquidity and Capital Resources

Our principal sources of liquidity consist of cash and cash equivalents and payments received from our customers. We do not have any significant credit arrangements. Historically, our expenses have exceeded our revenues, resulting in operating losses. From time to time we have obtained additional liquidity to fund our operations through the sale of shares of our common and preferred stock, and the placement of short-term debt instruments. In assessing our liquidity, management reviews and analyzes our current cash, short-term investments, accounts receivable, accounts payable, capital expenditure commitments and other obligations.

Cash Flows

The following table sets forth our consolidated cash flows for the fiscal years
ended June 30, 2012 and 2011.

                                                    Years ended June 30,
                                                   2012              2011
                                                         (In 000's)
        Net cash used by operating activities   $      (213 )     $      (600 )
        Net cash used in investing activities           (99 )            (107 )
        Net cash provided by financing
        activities                                      289               771
        Net increase (decrease) in cash and
        cash equivalents during period          $       (23 )     $        64

Net Cash Used By Operating Activities. Our primary sources of operating cash during fiscal 2012 came from collected accounts receivable and the reduction of raw material and finished goods inventory levels. Our primary uses of operating cash are payments made to our vendors and employees. Net cash used by operating activities was $212,509 for the year ended June 30, 2012 compared to $600,559 for the same period in 2011. The decrease in cash used in operating activities is primarily due to improved collections utilizing favorable payment terms and efforts to increase inventory turnover and reducing standing inventory levels.

Non-cash items include depreciation and amortization, and stock based compensation. Our net loss was $1,175,019 for the year ended June 30, 2012 compared to a net loss of $841,133 for the same period in 2011. The net loss for fiscal 2012 included non-cash expenses of $330,160 and $150,000 for stock-based compensation and accrued stock-based compensation for services, respectively. In fiscal 2011, stock-based compensation and accrued stock-based compensation for services were $93,549 and 49,314, respectively.


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Net Cash Used In Investing Activities. Net cash used by investing activities was $98,603 for the year ended June 30, 2012 and $106,573 for the same period in 2011. The primary sources and uses of cash flow from investing activities for the year ended June 30, 2012 were related to the sale and acquisition of property and equipment of $79,749, and investments in patents of $18,854.

Net Cash Provided by Financing Activities. During the fiscal year ended June 30, 2012, the primary sources and uses of cash from financing activities were proceeds from preferred stock subscriptions of $260,000; proceeds from the settlement of a note receivable of $100,000; cash receipts from the exercise of stock options of $51,000; and cash paid to retire notes payable of $110,000.

Contractual Obligations and Commitments

The following table summarizes our contractual cash obligations and other
commercial commitments at June 30, 2012.

                                                         Payments due by period
                                           Less than                                                 After
                             Total          1 year         1 to 3 years       3 to 5 years          5 years

Facility lease (1)         $  264,000     $   132,000     $      132,000     $             -     $           -

Total contractual cash
obligations                $  264,000     $   132,000     $      132,000     $             -     $           -

(1) In June 2012, we negotiated an extension to the lease for our executive and manufacturing facilities located at 1501 Industrial Road, Boulder City, Nevada. The property consists of a 49,200 square-foot building, which includes approximately 5,500 square-feet of office space, situated on approximately 4.15 acres. The two year lease extension commenced on July 1, 2012 and the base rent was reduced $4,000 per month to $11,000 per month. All other terms and conditions of the building lease remain in effect.

Cash Position, Outstanding Indebtedness, and Future Capital Requirements

Our total indebtedness at June 30, 2012 was $1,276,924 and our total cash was $105,838, none of which is restricted. Our total indebtedness at June 30, 2012 includes $376,721 in accounts payable, $356,986 in accrued expenses, $450,000 in convertible notes, $27,014 in current portion of long term debt, $9,018 in convertible note accrued interest and $3,345 in deferred revenues. We also have $53,840 in long-term liabilities.

Over the past several months, the Company has revised its overall business and financing strategy. While management is still intent on focusing on the profitable product lines, there are a significant number of revenue growth opportunities that are being lost due to existing cash flow constraints. Therefore, management hopes to adopt an aggressive business plan that involves the acquisition of production equipment to achieve higher production output, and to maintain sufficient raw material inventory levels to capitalize on revenue growth opportunities. This aggressive business strategy can only be implemented with additional financing. Therefore, the Company has increased its efforts to obtain financing through means that heretofore may not have been previously considered such as preferred stock offerings and government backed loans. If we are unable to obtain the necessary financing to execute an aggressive strategy, then the Company will have to revert to a slow-growth, cash sustainable plan.

Although we believe that we can successfully implement either of these business plans, management cannot give any assurances that it will be able to do so. Our business plans assume that, among other items, our revenues will increase from the sale of the new product lines, our raw materials expenses may increase, and our expenses from operations will decrease as a percentage of sales due to the cost reduction measures already implemented.

Our financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have historically incurred significant losses which have resulted in a total retained deficit of $58,062,103 at June 30, 2012, which raises substantial doubt about our ability to continue as a going concern (See Note 5 to the attached financial statements). The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.


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To supplement our cash needs at the end of fiscal year 2012 and into fiscal 2013, we conducted a private placement of convertible preferred stock (the "Series A Shares). As of the filing date, the Company has received and accepted subscriptions for the purchase of 885,000 shares of its Series A Shares.

In connection with the preparation of our financial statements for the year ended June 30, 2012, we have analyzed our cash needs for fiscal 2013. Based on this analysis, we have concluded that our available cash, including the cash raised in the private placement of convertible preferred stock, should be sufficient to meet our minimum cash requirements for fiscal 2013 for a slow-growth, cash sustainable plan. However we may need additional capital if our sales revenues do not meet our expectations. Furthermore, we will need a significant capital investment if we are to implement our aggressive business strategy.

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