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AMTY > SEC Filings for AMTY > Form 10-K on 27-Sep-2013All Recent SEC Filings

Show all filings for AMERITYRE CORP

Form 10-K for AMERITYRE CORP


27-Sep-2013

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 energy efficiency, than conventional rubber tires. We also believe that our manufacturing processes are more energy efficient than traditional rubber 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: closed-cell polyurethane foam tires, polyurethane elastomer forklift tires and agricultural tires. Our most recent activities in these areas are set forth below:

Closed-Cell Polyurethane 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 customer relationships with original equipment manufacturers and further develop distribution to expand business and product sales.

Polyurethane Elastomer Forklift tires - During 2013, the forklift product line was reintroduced into the marketplace. This process has been slow given the poor product performance experienced in 2011 and 2012. Results have been below expectation, however the product is now reviving marketplace acceptance. 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.

Agricultural tires - The Company made progress with this new product line resulting in additional sales to new customers seeking solutions to existing rubber tire problems. Test sites are up and running in twenty-four locations across the country. Product performance to date has met or exceeded customer expectations. This is evidenced by receipt of additional orders from these new customers. We will continue to seek product improvements as we penetrate this important market segment.

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 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.


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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 June 30, 2013, the Company had capitalized patent and trademark costs, net of accumulated amortization, totaling $505,006. 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, 2013 and 2012 was $103,971 and $480,160 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. With expanding original equipment manufacturer relationships the second quarter will show positive effects as the pipeline begins to fill.


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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, 2013 and 2012 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
                                             (in 000's)
                                      2013                2012           2013 vs. 2012
     Net revenues                 $       3,635       $       4,365            (16.7) %
     Cost of revenues                     2,403               2,833            (15.2) %
     Gross profit                         1,232               1,531            (19.5) %
     Selling, general, and
     administrative expenses
     (1)                                  2,015               2,371            (15.0) %
     Research and development
     expenses                                 1                  10            (90.0) %
     Consulting expenses                     70                  90            (22.2) %
     Depreciation and
     amortization expenses                  207                 212             (2.4) %
     Gain on sales of assets                 44                   9             388.9 %
     Other Income/(Expense)                 (73 )               (23 )            87.0 %
     Net loss                     $      (1,135 )     $      (1,175 )           (3.4) %

(1) Includes stock-based compensation expense of $103,971 and $480,160 for the fiscal years ended June 30, 2013 and 2012, respectively.

Year Ended June 30, 2013 Compared to the Year Ended June 30, 2012

Net revenues. Net revenues of $3,634,676 for the year ended June 30, 2013, represents a $730,080 or 16.7% decrease over net revenues of $4,364,756 the year ended June 30, 2012. The overall decrease in revenues was largely due to the loss of business from our largest customer previously serviced through the distribution network. This business has been fully restored on a direct line basis. In addition, licensed chemical sales decreased due to competitive market conditions. The net effect impacted hand truck tire and wheel assembly sales which decreased approximately $330,000 or approximately 27%. Forklift tire sales decreased approximately $150,000 or approximately 40% primarily due to performance issues related to prior tire failures. Revenues from the sale of licensed chemicals and equipment decreased approximately $134,000 or approximately 99% primarily due to chemical pricing.

Cost of revenues. Cost of revenues for the year ended June 30, 2013 was $2,402,880 or 66.1% of revenues compared to $2,833,385 or 64.9% of revenues for fiscal 2012. The increase as a percent of revenue was largely due to under-utilization of the factory, increased inventory reserves for forklift tires and the decrease in revenues. The Company maintains sufficient production capacity to meet anticipated customer demand without incurring a proportionate increase in overall production costs.

Gross profit. Gross profit for the year ended June 30, 2013 of $1,231,796 represents a 19.5% decrease over gross profit of $1,531,371 for the same period in 2012. The fiscal 2013 gross profit reflects a 33.9% gross margin for product sales compared to a gross margin on product sales of 35.1% for fiscal 2012.

Selling, general and administrative expenses. Selling, general and administrative expenses (SG&A) of $2,015,108 for the year ended June 30, 2013 represents a 15.0% decrease over SG&A expenses of $2,370,858 for the same period in 2012. The decrease in SG&A expenses over the prior year is largely due to a decrease in stock-based compensation for services; an increase in bad debt recoveries; a decrease in commissions related licensed chemical sales; and a decrease in facility rental costs resulting from the building lease renegotiation.


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Research and development expenses. Research and development expenses for the year ended June 30, 2013 were $1,395, an 86.1% decrease in the research and development expenses for fiscal 2012 of $10,032. Research and development expenses are largely limited to product improvement and specific customer requests.

Consulting expenses. Consulting expenses for the year ended June 30, 2013 were $70,196 compared to consulting expenses of $90,257 for fiscal 2012. The Board of Directors has engaged a number of management, financial and manufacturing consultants assisting to improve operations where internal resources are unavailable. 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, 2013 were $206,705 compared to $212,056 for fiscal 2012. The 2.4% decrease between years was primarily a result of fully depreciated assets that offset the asset additions.

Net loss. The net loss for the year ended June 30, 2013 of $1,134,625 represents a 3.4% decrease from the net loss for the year ended June 30, 2012 of $1,175,019. The decrease in the net loss is primarily due to the decreases in SG&A. The net loss also includes a $43,702 loss on the disposal of assets relating to the disposition of fixed assets from fiscal 2007.

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 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, 2013 and 2012.

                                                    Years ended June 30,
                                                         (in 000's)
                                                   2013              2012
        Net cash used by operating activities   $      (641 )     $      (213 )
        Net cash used in investing activities          (224 )             (99 )
        Net cash provided by financing
        activities                                      866               289
        Net increase (decrease) in cash and
        cash equivalents during period          $         3       $       (23 )

Net Cash Used By Operating Activities. Our primary sources of operating cash during fiscal 2013 came from collected accounts receivable and extended credit terms on vendor accounts. Net cash used by operating activities was $640,988 for the year ended June 30, 2013 compared to $212,509 for the same period in 2012.

Non-cash items include depreciation and amortization, stock based compensation and a loss on disposal of assets. Our net loss was $1,134,625 for the year ended June 30, 2013 compared to a net loss of $1,175,019 for the same period in 2012. The net loss for fiscal 2013 included non-cash expenses for stock-based compensation of $30,250, for the loss on disposal of assets of $43,702 and for accrued stock-based compensation for services of $73,721. In fiscal 2012, stock-based compensation and accrued stock-based compensation for services were $330,160 and $150,000, respectively.

Net Cash Used In Investing Activities. Net cash used by investing activities was $224,147 for the year ended June 30, 2013 and $98,603 for the same period in 2012. The primary use of cash from investing activities for the year ended June 30, 2013 relate to the acquisition of property and equipment of $225,742.

Net Cash Provided by Financing Activities. During the fiscal year ended June 30, 2013, the primary sources of cash from financing activities were the proceeds from sale of notes in a private offering of $285,000 and preferred stock subscriptions of $814,689. The primary use of cash from financing activities was for the redemption of convertible secured notes of $350,000.


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Contractual Obligations and Commitments

The following table summarizes our contractual cash obligations and other
commercial commitments at June 30, 2013.

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

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

Total contractual cash
obligations                $  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, 2013 was $1,269,879 and our total cash was $108,747, none of which is restricted. Our total indebtedness at June 30, 2013 includes $493,723 in accounts payable, $167,937 in accrued expenses, $100,000 in convertible notes, $409,200 in unsecured notes and short-term borrowings, $18,888 in current portion of long term debt, $19,004 in convertible note accrued interest and $7,293 in deferred revenues. We also have $53,840 in long-term liabilities.

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 $59,196,728 at June 30, 2013, which raises a doubt about our ability to continue as a going concern 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.

Over the past year, management has been working on various proposals to secure short-term loans as well as long-term bank financing and equity based investments. During the third quarter of fiscal 2013, we were reasonably assured that at least $800,000 could be raised in a private offering of unsecured notes. However we only received $285,000 in cash proceeds from that offering. At the same time, we were informed that the support we anticipated for the bank financing would not be forthcoming. The reduced funding under the private offering along with the lack of support for the bank financing resulted in the reinstatement of the going concern opinion. In September 2013, we entered into a non-binding agreement in principle with a group of investors which would again allow us to pursue long-term bank financing. We are currently working with that group to prepare financial information for a bank loan application. It is estimated that the loan application process may take 2-3 months to complete. In the meantime, we will continue to pursue other financing opportunities.

The Company currently does not have an existing credit facility. Over the past year, management has worked with our vendors to obtain extended credit terms and increase credit lines. We also continue to maintain strong customer credit policies and procedures and aggressively pursue receivable collections.

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. Therefore Management is aggressively pursuing an expand and grow business plan that will require securing a financial facility required to maintain sufficient raw material and finished goods inventory levels to capitalize on revenue growth opportunities. No additional capital expenditures are anticipated over the next twelve months unless they support sales development and product improvement. Management is also working to reduce its overall costs as well.

The Company has increased its efforts to obtain financing through means that previously were not considered such as preferred stock offerings, structured debt, private equity funding and asset based lending. On September 30, 2012, we completed a private offering of convertible preferred stock, which generated net proceeds of $1,074,864. In January 2013, the Company received $285,000 in cash receipts from the sale of unsecured notes. To date, we have also redeemed or converted a total of $655,800 of the $755,800 in secured convertible promissory notes (the "Notes") placed in September 2010. We will continue to pursue approval for financing in the form of structured debt.


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At the Annual Stockholder's Meeting, held on December 4, 2012, the stockholders voted to amend the Company's Article of Incorporation to increase the number of authorized shares of common stock from 40,000,000 shares to 55,000,000 shares. The increase allowed us to convert the preferred stock mentioned above into common stock. In addition, the increase provided the Company with approximately 11,133,000 shares authorized and available for issuance. These authorized but unissued and unreserved shares of our common stock can be utilized as necessary to fund the expansion of our manufacturing operations or to obtain additional working capital.

In connection with the preparation of our financial statements for the year ended June 30, 2013, we have analyzed our cash needs for the next twelve months. We have concluded that our available cash and accounts receivables are not sufficient to meet our current minimum working capital, capital expenditure and other cash requirements for this period. Moreover, we cannot assure that we will be able to obtain financing on favorable terms or at all. If we cannot obtain equity or bank financing, generate adequate sales of our products or increase our revenues through other means, then we may be forced to cease operations.

The accompanying financial statements do not include any adjustments that might be necessary in the event we are unable to continue as a going concern.

Off-Balance Sheet Arrangements

We do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Recent Accounting Pronouncements

In the first quarter of 2010, the FASB issued ASU 2010-09, Subsequent Events:
Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09). ASU 2010-09 amends ASC 855, Subsequent Events, so that SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in financial statements. We adopted the provisions of ASU 2010-09 in the first quarter of 2010. This adoption did not affect our financial statements.

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