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AMTY > SEC Filings for AMTY > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for AMERITYRE CORP

Form 10-Q for AMERITYRE CORP


14-Nov-2012

Quarterly Report


ITEM 2. 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. The historical results set forth in this discussion and analysis 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. A new dealer/distributor development program was rolled out in October 2012. This program is designed to build sales volume and add value to the Amerityre distribution network. In addition, key O.E.M customers are currently testing Amerityre products for eventual use on their equipment. The Company will experience a sales shift from the 1st quarter into the 3rd quarter of fiscal 2012 as draught and unseasonal warm weather patterns has effected product consumption from major accounts. In addition, we have received new orders from several customers in the lawn and garden sector, which we will begin to deliver the 3rd quarter of fiscal 2013. From these developments, sales are forecasted to double over the previous year during the 3rd and 4th of fiscal 2013.

Solid forklift tires - Manufacturing process improvements were implemented during the 4th quarter of fiscal 2012. As a result, all forklift tires are being consistently produced at a high quality level. No warranty claims have been received since implementation of the new process improvements. Forklift tire sales are up 10% over last year after adjustments for returns and allowances. In addition, capital investments have been made to eliminate production bottlenecks in the curing and rim blasting departments. The result is a lower cost to produce forklift tires through increase productivity and lower labor cost. Tooling investments were also made in this product line to expand sales to wholesale grocery customers, who have tested and approved our product. It is anticipated sales of forklift tires will grow well beyond fiscal 2012 levels as we have more than doubled the dealer network over previous year. Finished goods inventory now available through our newly established east coast distribution center will support these dealers and bolster sales revenues.

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. The newly designed tires are now entering the market and sales are expected to grow significantly during the 3rd and 4th quarters of fiscal 2013. Draught conditions severely impacted sales in this product segment. We are currently designing new dimensions for a significant customer which will be ready for shipment the 3rd quarter of fiscal 2013. Sales volumes during 3rd and 4th quarters of fiscal 2013 are projected to grow by 50% over prior year.

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.

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 new product development and product improvement using our technologies;

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


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

Stock based compensation expense related to stock and stock option awards issued to employees and consultants for services performed for the Company.

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.

Valuation of Intangible Assets and Goodwill

At September 30, 2012, we had capitalized patent and trademark costs, net of accumulated amortization, totaling $523,848. 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 a patent will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.


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Inventory

Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or market. The inventory consists primarily 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. The stock-based compensation expense recognized under ASC 718 for the three month periods ended September 30, 2012 and 2011 was $20,346 and $23,067, 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.

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 revenues of our products and the mix of product and equipment sales and license fees, if any;

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 three month periods ended September 30, 2012 and 2011 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below.

                                               For the Three Months Ended
                                                      September 30,
                                                 2012               2011         Change
Net revenues                                 $     913,210       $ 1,349,165       (32.3 %)
Cost of revenues                                   539,428           876,947       (38.5 %)
Gross profit                                       373,782           472,218       (20.8 %)
Selling, general & administrative expenses         581,837           584,187         0.0 %
Consulting expense                                  23,862            20,115        18.6 %
Research & development expenses                        300             2,756       (89.1 %)
Depreciation & amortization expenses                56,513            49,505        14.2 %
Bad debt expense                                   (18,235 )               -       100.0 %
Other income                                           496             5,294       (90.6 %)
Interest expense                                    (7,889 )         (15,049 )     (47.6 %)
Net loss                                     $    (277,888 )     $  (194,100 )     (43.2 %)


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Three Month Period Ended September 30, 2012 Compared to September 30, 2011

Net Revenues. Net revenues of $913,210 for the three month period ended September 30, 2012, represent a 32.3% decrease over net revenues of $1,349,165 for the three month period ended September 30, 2011. Revenues for the first quarter fiscal 2013 continue to lag forecasts due to replacement shipments relating to forklift tires returned under warranty; chemical and production shortages which led to delayed and cancelled orders; and delays in the redesign of the pivot wheel. In addition, we have experienced reduced orders from certain distributors and licensees currently under agreements with Amerityre. Revenues for the same period in fiscal 2012 were higher than normal due in part to the relaunch of the forklift product line; chemical and equipment sales under a new licensing agreement; and the launch of new products for agriculture.

Cost of revenues. Cost of Revenues for the three month period ended September 30, 2012 was $539,428 or 59.1% of revenues compared to $876,947 or 65.0% of revenues for the same period in 2011. Cost of revenues decreased primarily due to the decrease in net revenues.

Gross profit. Gross profit for three month period ended September 30, 2012 was $373,782 compared to $472,218 for the same period in 2011. Gross profit for the three month period ended September 30, 2012 decreased by $98,436 or 20.8% over the same period in 2011 due primarily to the decrease in net revenues.

Selling, general and administrative expenses. Selling, general and administrative (SG&A) expense for the three month period ended September 30, 2012 was $581,837 compared to $584,187 for the same period in 2011. Although the total SG&A between years remained relatively constant, there were notable changes in costs that comprise SG&A. The changes for the three months ended September 30, 2012 from the same period in the prior year included:

A decrease in director compensation, primarily stock based compensation, of approximately $46,000.

An increase of approximately $33,200 in warranty expense related to the tire failures and returns for the forklift product line.

A decrease of approximately $18,800 in the commissions paid on chemical sales.

The reduction of approximately $18,200 in the reserve for uncollectible accounts.

A decrease of $12,000 in the monthly building rent resulting from a lease renegotiation.

SG&A as a percentage of sales increased to 63.7% of total revenues from 43.3% in the same period last year primarily due to the decrease in net revenues.

Research and development expenses. Research and development expenses for the three month period ended September 30, 2012 were $300 compared to $2,756 for the same period in the prior year. The research and development expenses for the three month period ended September 30, 2012 decreased by $2,456, or 89.1% as compared with the same period in 2011 primarily due to a decrease in outside testing services and a reduction in tooling expenses.

Consulting expenses. Consulting expenses for the three month period ended September 30, 2012 were $23,862 as compared to $20,115 for the three month period ended September 30, 2011. In order to achieve the Company's goals in IT systems, accounting and finance and manufacturing, management has engaged consultants to assist the Company's full-time staff on various projects. Consulting expenses are expected to fluctuate depending upon future product development, manufacturing initiatives and other projects.

Depreciation and amortization expenses. Depreciation and amortization for the three month period ended September 30, 2012 was $56,513 compared to $49,505 for the same period last year. Depreciation and amortization increased by $7,008, or 14.2% compared to the same period in 2011 primarily due to the replacement of the outdated servers and computer workstations and capitalized retooling costs related to the forklift product line.

Net loss. Net loss for the three month period ended September 30, 2012 was $277,888 compared to a net loss of $194,100 for the same period in 2011. The $83,788 increase in the net loss is primarily due to the decrease in net revenues and the related impact on gross profit.


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Liquidity and Capital Resources

Our principal sources of liquidity consist of cash 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 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 cash flows for the three month periods ended
September 30, 2012 and 2011.

                                                       For the Three Months Ended
                                                              September 30,
                                                          2012               2011
  Net cash provided/(used) by operating activities   $     (242,546 )     $  231,573
  Net cash used by investing activities                    (145,817 )        (31,609 )
  Net cash provided/(used) by financing activities          711,374          (87,500 )
  Net increase in cash during period                 $      323,011       $  112,464

Net Cash Used By Operating Activities. Our primary sources of operating cash during the three month period ended September 30, 2012 came from a decrease in accounts receivables and decreases in prepaids and other assets. Our primary uses of operating cash were an increase in inventory and payments made to vendors and employees. Net cash used by operating activities was $242,546 for the three months ended September 30, 2012 compared to net cash provided by operating activities of $231,573 for the same period in 2011. The decrease in cash flow from operating activities compared to the prior year period is largely due an increase in inventories to meet customer demand and management's goal to improve vendor relationships while meeting company obligations.

Net Cash Used By Investing Activities. Net cash used by investing activities was $145,817 for the three month period ended September 30, 2012 and $31,609 for the same period in 2011. Our primary use of cash for the three month period ended September 30, 2012 was $145,817 for the purchase of property and equipment. Our primary uses of cash for the three month period ended September 30, 2011 were $15,803 for the purchase of property and equipment and $15,806 in cash paid for patents and trademarks.

Net Cash Provided by Financing Activities. Net cash used by financing activities was $711,374 for the three months ended September 30, 2012 compared to net cash used by financing activities of $87,500 for the same period last year. The primary source of cash for the three months ended September 30, 2012 were from proceeds related to the private placement of preferred stock of $814,114. The use of cash for the three months ended September 30, 2012 consisted of $100,000 for the redemption of secured convertible promissory notes. The use of cash for the three months September 30, 2011 also consisted of $87,500 for the redemption of secured convertible promissory notes.

Contractual Obligations and Commitments

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

                                                           Payments due by period
                                          Less than 1
                             Total           year          1 to 3 years       3 to 5 years        After 5 years
Facility lease (1)         $  231,000     $   132,000     $       99,000     $             -     $              -
Total contractual cash
obligations                $  231,000     $   132,000     $       99,000     $             -     $              -

(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.


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Cash Position, Outstanding Indebtedness and Future Capital Requirements

At September 30, 2012, our total cash was $428,849, none of which is restricted and our total indebtedness was $1,058,068. Our total indebtedness at September 30, 2012 includes $357,815 in accounts payable, $356,957 in principal and interest for secured convertible promissory notes, $261,837 in accrued expenses, $24,274 in current portion of long-term debt, $3,345 in deferred revenue and $53,840 in long-term debt. As of September 30, 2012, our current ratio, which measures a company's ability to pay its short term debt, was 1.56. Our debt ratio as of September 30, 2012 was 0.39.

The Company currently does not have a credit facility. Management, over the past year, has worked with our vendors to obtain extended credit terms and increase credit lines. We have improved the lines of communications with our vendors often integrating the vendor into the decision making process. We have succeeded in these endeavors and appreciate the continued support of our vendors. During the same period, management has also improved its customer credit policies and procedures and is aggressively pursuing receivable collections. As of this filing, our accounts receivable and accounts payable turnover rates, as calculated over the past six months, are approximately 40 days and 50 days respectively.

Management is intent, in spite of losing a significant number of revenue growth opportunities due to cash flow constraints, on focusing on the sale and distribution of profitable product lines. Management has adopted a more aggressive business plan that involves the acquisition of higher output production equipment and maintaining sufficient raw material and finished goods inventory levels to capitalize on revenue growth opportunities. Over the past nine months, management has invested approximately $116,000 in capital equipment to improve employee efficiency, thus reducing overall costs, and to promote sales growth. These investments include the replacement of an outdated server and computer workstations; the installation of a fully automated telephone system to support customer sales orders; and forklift tire production equipment to support sales orders. No additional capital expenditures are anticipated over the next six months, unless they support sales development and product improvement. Management is also working to reduce its overall costs. For example, we renegotiated the building lease in June 2012, resulting in an annual rent decrease of $48,000.

The Company has increased its efforts to obtain financing through means that previously were not considered such as preferred stock offerings and structured debt. As of this filing, we have completed a private offering of convertible preferred stock, which generated net proceeds of $1,074,114. We have also redeemed or converted $605,800 of the $755,800 in secured convertible promissory notes (the "Notes") placed in September 2010. Negotiations are currently underway to redeem, convert or obtain an 18 month extension on the remaining $150,000 in Notes. In addition, we are currently attempting to obtain approval for financing in the form of structured debt. We anticipate having this financing transaction completed during the third quarter of fiscal 2013.

In our Proxy Statement related to the Annual Stockholder Meeting scheduled for December 4, 2012, we have requested that the stockholders approve an increase in the authorized shares of common stock from 40 million to 55 million. The increase would allow us to convert the preferred stock mentioned above into common stock. In addition, the increase would provide the Company with approximately 11,133,000 shares authorized and available for issuance. However, these authorized but unissued and unreserved shares of our common stock could be utilized as necessary to fund the expansion of our manufacturing operations or to obtain additional working capital.

The success of the current business strategy is dependent upon obtaining additional working capital. If we are unable to obtain approval for the structured debt mentioned above, we would be required to raise additional working capital to continue operations.

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