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AMTY > SEC Filings for AMTY > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for AMERITYRE CORP


12-Nov-2013

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 incorporated as a Nevada corporation on January 30, 1995 under the name American Tire Corporation and changed its name to Amerityre Corporation in December 1999.

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, energy efficiency and load-bearing capabilities, 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.

Our polyurethane material technology is based on two proprietary formulations; closed-cell polyurethane foam, which is a lightweight material with high load-bearing capabilities for low duty cycle applications; and Elastothane®, a high performance polyurethane elastomer with high load-bearing capabilities for high duty applications. We are concentrating on three segments of the tire market: closed-cell polyurethane foam tires, polyurethane elastomer forklift tires and agricultural tires.

Closed-Cell Polyurethane Foam Tires

We currently manufacture several lines of closed-cell polyurethane foam tires for bicycles, hand trucks, lawn and garden, wheelbarrow, and medical mobility products. Our closed-cell polyurethane foam products are often referred to as flat-free because they have no inner tube, do not require inflation and will not go flat even if punctured. Our closed-cell polyurethane foam tires are mounted on the wheel rim in much the same way as a pneumatic tire. Our closed-cell polyurethane foam products are virtually maintenance free, eliminating the need to make tedious puncture repairs; provide extended tire life; and offer superior energy efficiency compared to rubber based tires. Foam tires and components accounted for 90.7% of fiscal 2013 sales.

Polyurethane Elastomer Forklift Tires

We have developed solid polyurethane forklift tires made of Elastothane®. We currently produce and sell over 20 sizes for Class 1, 4 and 5 forklifts. We believe our tires are superior to rubber tires as they are non-marking, more energy efficient, carry greater load weight, operate in lower temperature environments and have longer service lives. Forklift tires accounted for 6.3% of fiscal 2013 sales.

Agricultural Tires

Amerityre has developed two products for the agricultural tire market, one used in irrigation and one used in planting. Both products have successfully field tested and we are developing sales and marketing strategies and manufacturing plans for these products. Agricultural tires accounted for 3.0% of fiscal 2013 sales.

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;

· 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.


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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, sales 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, 2013, we had capitalized patent and trademark costs, net of accumulated amortization, totaling $497,813. 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.

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 quarter ended September 30, 2013 and 2012 was $14,982 and $20,346, 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 an expansion of our original equipment manufacturer relationships, the second quarter of fiscal 2014 is expected to show an increase in sales.


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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 sales and cash flows. These key performance indicators include:

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

· Sales, 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 goods sold 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 sales across our products offered.

The following summary table presents a comparison of our results of operations for the quarter ended September 30, 2013 and 2012 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below.

                                             For the Quarter Ended
                                                 September 30,
                                              2013            2012        Change
       Net Sales                           $ 1,037,325     $  913,210        13.6 %
       Cost of Goods Sold                      815,519        730,096        11.7 %
       Gross Profit                            221,806        183,114        21.1 %
       Research & Development Expenses          35,913         21,849        64.4 %
       Sales & Marketing Expenses              119,689        114,512         4.5 %
       General & Administrative Expenses       226,894        317,248       (28.5 %)
       Other Income                                 11            496       (97.8 %)
       Interest Expense                        (13,887 )       (7,889 )      29.3 %
       Net Loss                            $  (174,566 )   $ (277,888 )     (37.2 %)

Quarter Ended September 30, 2013 Compared to September 30, 2012

Net Sales. Net sales of $1,037,325 for the quarter ended September 30, 2013, represent a 13.6% increase over net sales of $913,210 for the quarter ended September 30, 2012. Sales for the first quarter of fiscal 2014 increased largely due to increases in the hand truck, lawn and garden and agriculture product lines. Sales for the forklift product line remain depressed, however based on an increase in recent orders, a resurgence in customer demand appears to have surfaced in October 2013.

Cost of Goods Sold. Cost of goods sold for the quarter ended September 30, 2013 was $815,519 or 78.6% of sales compared to $730,096 or 80.0% of sales for the same period in 2012. As a percent of sales, the cost of goods sold decreased largely due to favorable purchase price variances obtained from competitive pricing measures and improvements in inventory controls leading to other favorable inventory variances.

Gross Profit. Gross profit for quarter ended September 30, 2013 was $221,806 compared to $183,114 for the same period in 2012. Gross profit for the quarter ended September 30, 2013 increased by $38,692 or 21.1% over the same period in 2012 due to the reductions in cost of goods sold as a percent of sales and an improvement in product profit margins achieved from price increases.

Research & Development Expenses. Research and development expenses for the quarter ended September 30, 2013 were $35,913 compared to $21,849 for the same period in the prior year. The research and development expenses for the quarter ended September 30, 2013 increased by $14,064, or 64.4% as compared with the same period in 2012 primarily due to a staff addition to fill the vacant engineer position and the departmental allocation of certain overhead costs, previously charged entirely to general and administrative expenses.

Sales & Marketing Expenses. Sales and marketing expenses for the quarter ended September 30, 2013 were $119,689 as compared to $114,512 for the same period in the prior year. The sales and marketing expenses for the quarter ended September 30, 2013 increased $5,177 compared to the same period in 2012 primarily due to the departmental allocation of certain overhead costs, previously charged entirely to general and administrative expenses.


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General & Administrative Expenses. General and administrative expenses for the quarter ended September 30, 2013 were $226,894 compared to $317,248 for the same period in 2012. General and administrative expenses for the quarter ended September 30, 2013 decreased $90,354 or 28.5 % compared to the same period in 2012 primarily due to:

††† A $47,011 decrease from the departmental allocation of certain overhead costs, such as rent, utilities and general liability insurance, previously charged entirely to general and administrative expense.

††† A $33,210 decrease in warranty expense related to the tire failures and returns for the forklift product line.

††† A $14,454 reduction in audit fees incurred between the periods.

Net Loss. Net loss for the quarter ended September 30, 2013 was $174,566 compared to a net loss of $277,888 for the same period in 2012. The $103,322 decrease in the net loss is largely due to the increase in net sales, improved product gross margins and the reduction in general and administrative expenses.

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 sales, 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, accounts receivable, accounts payable, capital expenditure commitments and other obligations.

Cash Flows

The following table sets forth our cash flows for the quarter ended September
30, 2013 and 2012.

                                                       For the Quarter Ended
                                                           September 30,
                                                        2013            2012
     Net Cash Used by Operating Activities           $  (63,127 )    $ (242,546 )
     Net Cash Used by Investing Activities              (20,501 )      (145,817 )
     Net Cash Provided by Financing Activities            3,177         711,374
     Net Increase/(Decrease) in Cash During Period   $  (80,451 )    $  323,011

Net Cash Used by Operating Activities. Our primary sources of operating cash during the quarter ended September 30, 2013 came from a decrease in inventory; a decrease in prepaid and other current assets; and an increase in accounts payable and accrued expenses. Our primary use of operating cash was an increase in accounts receivable. Net cash used by operating activities was $63,127 for the quarter ended September 30, 2013 compared to net cash provided by operating activities of $242,546 for the same period in 2012. The decrease in net cash used by operating activities compared to the prior year period is largely due to the decrease in the net loss of $103,322 and the decrease in inventory of $127,739.

Net Cash Used by Investing Activities. Net cash used by investing activities was $20,501 for the quarter ended September 30, 2013 and $145,817 for the same period in 2012. Our use of cash for the quarter ended September 30, 2013 was for the purchase of models and molds used in the manufacturing process. Our primary uses of cash for the quarter ended September 30, 2012 were the purchase of property and equipment, including an automated sandblaster to improve efficiency; a larger curing oven to improve production throughput; and an upgraded telephone system to improve customer service.

Net Cash Provided by Financing Activities. Net cash provided by financing activities was $3,177 for the quarter ended September 30, 2013 compared to net cash used by financing activities of $711,374 for the same period last year. The primary source of cash for the quarter ended September 30, 2013 were proceeds of $235,769 from short-term loans secured by customer purchase orders. The primary use of cash for the quarter ended September 30, 2013 consisted of $231,923 for the repayment of short-term loans. The primary source of cash for the quarter ended September 30, 2012 were proceeds related to the private placement of preferred stock of $814,114. The primary use of cash for the quarter September 30, 2012 consisted of $100,000 for the redemption of secured convertible promissory notes.


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Contractual Obligations and Commitments

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

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

Cash Position, Outstanding Indebtedness and Future Capital Requirements

At September 30, 2013, our total cash was $28,296, none of which is restricted; accounts receivables, net of reserves for bad debt, was $380,414; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was $616,210. Our total indebtedness was $1,241,734. Our total indebtedness at September 30, 2013 includes $478,191 in accounts payable, $504,967 in principal and interest for notes and short-term borrowings, $186,517 in accrued expenses, $18,219 in current portion of long-term debt and $53,840 in long-term debt.

Over the past year, the Company 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 an 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, the Company has worked with its 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.

The Company is intent, in spite of losing a significant number of sales growth opportunities due to cash flow constraints, on focusing on the sale and distribution of profitable product lines. Therefore the Company 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 sales growth opportunities. No additional capital expenditures are anticipated over the next twelve months unless they support sales development and product improvement. The Company 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. We have also redeemed or converted $655,800 of the $755,800 in secured convertible promissory notes (the "Notes") placed in September 2010. Since May 2013, we have entered into a number of short-term loan agreements to obtain funding for the purchase of chemicals for large customer purchase orders. These short-term agreements are repaid using the cash receipts from the related customer receivables.

At the Annual Stockholder's Meeting, held on December 4, 2012, the stockholders voted to amend the Company's Articles 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.


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In connection with the preparation of our unaudited financial statements for the quarter ended September 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 sales 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.

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