1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________.
Commission file number: 33-94318-C
AMERITYRE CORPORATION
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(Exact name small business issuer as specified in its charter)
NEVADA 87-0535207
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1501 INDUSTRIAL ROAD, BOULDER CITY, NEVADA 89005
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(Address of principal executive offices) (Zip Code)
(702) 294-2689
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filled all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: At May 13, 2005, the issuer
had 19,475,216 shares of common stock, par value $0.001, outstanding.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB pursuant to the rules and
regulations of the Securities and Exchange Commission and, therefore, do not
include all information and footnotes necessary for a complete presentation of
our financial position, results of operations, cash flows, and stockholders'
equity in conformity with generally accepted accounting principles. In the
opinion of management, all adjustments considered necessary for a fair
presentation of the results of operations and financial position have been
included and all such adjustments are of a normal recurring nature.
Our unaudited balance sheet at March 31, 2005 and our audited balance sheet at
June 30, 2004; the related unaudited statements of operations for the three
and nine month periods ended March 31, 2005 and 2004, and the unaudited
statement of cash flows for the nine month periods ended March 31, 2005 and
2004, are attached hereto.
3
AMERITYRE CORPORATION
BALANCE SHEETS
ASSETS
MARCH 31, JUNE 30,
2005 2004
------------ -------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 2,820,487 $ 1,591,289
Accounts receivable - net 199,3821 167,002
Inventory 673,689 557,516
Prepaid expenses 79,366 99,007
Deferred stock offering expenses 67,468 -
------------ ------------
Total Current Assets 3,840,392 2,414,814
------------ ------------
PROPERTY AND EQUIPMENT
Leasehold improvements 131,723 163,896
Molds and models 346,959 315,282
Equipment 2,275,729 2,253,217
Furniture and fixtures 70,033 70,033
Vehicles - 25,851
Software 184,901 184,901
Less - accumulated depreciation (1,782,038) (1,567,187)
------------ ------------
Total Property and Equipment 1,227,307 1,445,993
------------ ------------
OTHER ASSETS
Construction in progress 60,000 -
Patents and trademarks - net 352,303 156,792
Deposits 43,180 43,180
------------ ------------
Total Other Assets 455,483 199,972
------------ ------------
TOTAL ASSETS $ 5,523,182 $ 4,060,779
============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
4
AMERITYRE CORPORATION
BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, JUNE 30,
2005 2004
------------ -------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 127,490 $ 42,866
Accrued expenses 25,348 15,817
Deferred revenue - special projects 2,500 -
------------ ------------
Total Current Liabilities 155,338 58,683
------------ ------------
Total Liabilities 155,338 58,683
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock: 5,000,000 shares authorized
of $0.001 par value, -0- shares issued and
outstanding - -
Common stock: 40,000,000 shares authorized of
$0.001 par value, 19,475,216 and 18,429,168
shares issued and outstanding, respectively 19,4733 18,429
Additional paid-in capital 41,896,207 30,594,482
Expenses prepaid with common stock (153,8188) (219,988)
Deferred stock issuance cost (1,000,000) -
Retained deficit (35,394,018) (26,390,827)
------------ ------------
Total Stockholders' Equity 5,367,844 4,002,096
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,523,182 $ 4,060,779
============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
5
AMERITYRE CORPORATION
Statements of Operations
(Unaudited)
For the Three Months Ended
March 31,
----------------------------
2005 2004
------------ ------------
NET SALES $ 486,727 $ 448,753
COST OF SALES 394,828 294,854
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GROSS MARGIN 91,899 153,899
------------ ------------
EXPENSES
Consulting 77,000 67,373
Payroll and payroll taxes 606,880 383,688
Depreciation and amortization 91,865 79,461
Research & testing 70,183 199,628
Bad debt expense 444 -
Selling, general and administrative 247,352 524,928
------------ ------------
Total Expenses 1,093,724 1,255,078
------------ ------------
LOSS FROM OPERATIONS (1,001,825) (1,101,179)
------------ ------------
OTHER INCOME
Interest income 5,819 4,691
Other Income 6,901 -
------------ ------------
TOTAL OTHER INCOME 12,720 4,691
------------ ------------
NET LOSS $ (989,105) $ (1,096,488)
============ ============
BASIC LOSS PER SHARE $ (0.05) $ (0.06)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES 18,774,411 18,040,426
============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
6
AMERITYRE CORPORATION
Statements of Operations
(Unaudited)
For the Nine Months Ended
March 31,
----------------------------
2005 2004
------------ ------------
NET SALES $ 1,130,300 $ 1,032,356
COST OF SALES 857,506 824,388
------------ ------------
GROSS MARGIN 272,794 207,968
------------ ------------
EXPENSES
Consulting 77,000 303,173
Advisory group expense 6,134,000 -
Payroll and payroll taxes 1,453,350 1,088,496
Depreciation and amortization 286,819 215,418
Research & testing 479,348 400,217
Bad debt expense 1,216 -
Selling, general and administrative 878,148 1,128,453
------------ ------------
Total Expenses 9,309,881 3,135,757
------------ ------------
LOSS FROM OPERATIONS (9,037,087) (2,927,789)
------------ ------------
OTHER INCOME
Interest income 19,447 13,641
Other Income 14,449 1,516
------------ ------------
TOTAL OTHER INCOME 33,896 15,157
------------ ------------
NET LOSS $ (9,003,191) $ (2,912,632)
============ ============
BASIC LOSS PER SHARE $ (0.48) $ (0.16)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES 18,746,079 17,687,515
============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
7
AMERITYRE CORPORATION
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
March 31,
----------------------------
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,003,191) $ (2,912,632)
Adjustments to reconcile net loss to net
cash (used) by operating activities:
Depreciation and amortization 286,819 215,418
Common stock issued for services 200,520 335,753
Amortization of expenses prepaid with
common stock 664,169 760,991
Re-valuation of deferred consulting - 115,687
Options issued for advisory group services 6,134,000 -
Changes in assets and liabilities:
(Increase) in accounts receivable (32,380) (139,565)
(Increase) in inventory (116,173) (70,999)
(Increase) decrease in prepaid expenses (47,827) 1,536
Increase in accounts payable and
accrued expenses 96,655 14,677
------------- -------------
Net Cash (Used) by Operating Activities (1,817,408) (1,679,134)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for construction in progress (60,000) (178,072)
Cash paid for patents and trademarks (66,682) (24,110)
Purchase and sale of equipment (50,712) (229,887)
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Net Cash (Used) by Investing Activities $ (177,394) $ (432,069)
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The accompanying notes are an integral part of these unaudited financial
statements.
8
AMERITYRE CORPORATION
Statements of Cash Flows (Continued)
(Unaudited)
For the Nine Months Ended
March 31,
----------------------------
2005 2004
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CASH FLOWS FROM FINANCING ACTIVITIES
Receipt of subscriptions receivable $ - $ 16,632
Common stock issued for cash 3,224,000 1,662,091
------------ ------------
Net Cash Provided by Financing Activities 3,224,000 1,678,723
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,229,198 (432,480)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,591,289 2,490,604
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,820,487 $ 2,058,124
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES
CASH PAID FOR:
Interest $ - $ -
Income taxes $ - $ -
NON-CASH OPERATING ACTIVITIES
Common stock issued for services rendered $ 200,520 $ 335,753
NON-CASH FINANCING ACTIVITIES
Options issued for advisory group service
receivable $ 6,134,000 $ -
The accompanying notes are an integral part of these unaudited financial
statements.
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AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
March 31, 2005 and June 30, 2004
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
by us pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted in accordance with such rules and regulations. The information
furnished in the interim condensed financial statements include normal
recurring adjustments and reflects all adjustments, which, in the opinion of
management, are necessary for a fair presentation of such financial
statements. Although we believe the disclosures and information presented are
adequate to make the information not misleading, it is suggested that these
interim condensed financial statements be read in conjunction with our most
recent audited financial statements and notes thereto included in our June 30,
2004 Annual Report on Form 10-KSB. Operating results for the three and nine
months ended March 31, 2005 are not necessarily indicative of the results that
may be expected for the current fiscal year ending June 30, 2005. Certain
prior year income statement balances have been reclassified to conform with
current year presentation.
NOTE 2 - GOING CONCERN
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
accumulated deficit of $35,394,018 at March 31, 2005 which raises substantial
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.
We have taken certain steps to maintain our operating and financial
requirements in an effort to enable us to continue as a going concern until
such time that revenues are sufficient to cover expenses, including: (1)
evaluating (A) our cost of goods and equipment utilization and requirements of
our manufacturing operations, and (B) our sales and marketing plan on a
product sector basis; (2) incorporating revisions to our methods, processes
and costs in order to achieve necessary manufacturing efficiencies (i.e., line
automation, reduced material costs, reduced product waste, etc.); and (3)
seeking reduced material and component costs from suppliers.
In addition, to expand revenue opportunities, we have commenced a program of
(1) licensing manufacturing and distribution rights to certain of our
polyurethane tire products to third-party manufacturers based on such factors
as geographical locations and boundaries; (2) selling manufacturing equipment
to third-party manufacturers to manufacture products utilizing our
manufacturing equipment and processes; (3) selling our proprietary
polyurethane chemical systems to third-party manufacturers that utilize our
manufacturing equipment and processes; and (4) offering contract design and
engineering services to the tire and auto industries.
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AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
March 31, 2005 and June 30, 2004
NOTE 2 - GOING CONCERN, Continued
To supplement our cash needs during the fiscal year we have (1) obtained
supplemental funding through the exercise of outstanding in the money options;
and (2) issued common stock in lieu of cash as compensation for employment,
development, and other professional services. We estimate that the combination
of our accounts receivable and our cash and cash equivalents will meet our
operational needs through December 2005. We are currently evaluating
additional funding strategies to help outset any cash shortfalls that may
occur after that time.
Our ability to continue as a going concern is dependent upon our ability to
successfully accomplish the plan described above, and eventually attain
profitable operations.
The accompanying financial statements do not include any adjustments that
might be necessary should we be unable to continue as a going concern.
NOTE 3 - STOCK ISSUANCES
During the three month period ended March 31, 2005, we issued 586,000 shares
of our common stock for cash of $2,344,0000, in connection with the exercise
of 586,000 outstanding stock options at $4.00 per share by current and former
directors. In addition, we issued 120,748 shares of our common stock to
employees in connection with the cashless exercise of outstanding options.
In January 2005, pursuant to a resolution of our Board of Directors, we
granted several employees stock awards aggregating 19,300 shares of common
stock valued at $123,520, or $6.40 per share.
In January 2005, pursuant to a resolution of our Board of Directors, we issued
10,000 shares of our common stock valued at $77,000, or $7.70 per share, to a
third-party consultant for professional services.
NOTE 4 - STOCK OPTIONS
During the period ended September 30, 2004, we issued options to acquire an
aggregate of 3,000,000 shares of our common stock to certain non-employees in
connection with an advisory agreement. The option vested immediately and the
exercise price is $7.00 per share. We recognized a total of $6,134,000 in
expense associated with the issuance of these options and deferred $1,000,000
as stock issuance costs until related funding is received. We estimated the
fair value of the stock options at the grant date by using the Black-Scholes
option pricing model based on the following assumptions:
For the period ended
September 30, 2004
--------------------
Risk free interest rate 2.49%
Expected life 2 years
Expected volatility 59.83%
Dividend yield 0.00%
11
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
March 31, 2005 and June 30, 2004
A summary of the status of the Company's outstanding stock options as of March
31, 2005 and June 30, 2004 and changes during the periods then ended is
presented below:
March 31, June 30,
2005 2004
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
Outstanding, beginning of
period 1,922,000 $ 3.66 2,466,000 $ 3.42
Granted 3,185,000 4.55 90,000 5.73
Expired/Cancelled (195,252) - - -
Exercised (936,748) (3.77) (634,000) 2.80
---------- ---------- ---------- ----------
Outstanding end of period 3,975,000 $ 6.29 1,922,000 $ 3.66
========== ========== ========== ==========
Exercisable 895,000 $ 3.90 1,922,000 $ 3.66
========== ========== ========== ==========
Outstanding Exercisable
----------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at Mar. 31, Contractual Exercise at Mar. 31, Exercise
Exercise Prices 2005 Life Price 2005 Price
---------- ---------- ---------- ---------- ---------- ----------
$ 3.00 500,000 0.33 3.00 500,000 3.00
3.80 30,000 1.50 3.80 30,000 3.80
4.00 200,000 2.19 4.00 200,000 4.00
6.40 185,000 3.85 6.40 105,000 6.40
6.70 60,000 0.75 6.70 60,000 6.70
7.00 3,000,000 4.46 7.00 - -
---------- ---------- ---------- ---------- ----------
$ 23.00-7.00 3,975,000 3.72 $ 5.81 895,000 $ 3.80
========== ========== ========== ========== ==========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statements
---------------------
You should read the following discussion and analysis in conjunction with the
Financial Statements and related Notes contained elsewhere in this Form 10-QSB
("Report"). The information in this Report is not a complete description of
our business or the risks associated with an investment in our common stock.
We urge you to carefully review and consider the various disclosures made by
us in this Report and in our other reports filed with the SEC, including our
Annual Report on Form 10-KSB for the year ended June 30, 2004.
The section below entitled "Risk Factors" and similar types of discussions in
other SEC filings, discuss some of the important risks that may affect our
business, results of operations and financial condition. You should carefully
consider those risks, in addition to the other information in this Report and
in our other filings with the SEC, before deciding to invest in our Company or
to maintain or decrease your investment.
This Report may contain "forward-looking" statements within the meaning of
Section 17A of the Securities Exchange Act of 1933, as amended, and Section
21E of the Securities Exchange Act, as amended. Examples of forward-looking
statements include, but are not limited to: (a) projections of our revenues,
capital expenditures, growth, prospects, dividends, capital structure and
other financial matters; (b) statements of our plans and objectives; (c)
statements of our future economic performance; (d) statements of assumptions
underlying other statements and statements about us and our business relating
to the future; and (e) any statements using the words "believes," "budget,"
"target," "goal," "anticipate," "expect," "plan," "outlook," "objective,"
"may," "project," "intend," "estimate," or similar expressions. These
statement are only predictions. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions
that are difficult to predict.
Therefore, our actual results could differ materially and adversely from those
expressed in any forward-looking statements as a result of various factors.
Moreover, neither we nor any other person assume responsibility for the
accuracy and completeness of the forward-looking statements. We are under no
duty to update any of the forward-looking statements after the date of this
Report to conform such statements to actual results or to changes in our
expectations.
Overview
--------
We were incorporated as a Nevada corporation on January 30, 1995 under the
name American Tire Corporation, to take advantage of certain proprietary and
nonproprietary technology available for the manufacturing of Flatfree[TM]
tires from polyurethane foam. We changed our name to Amerityre Corporation in
December 1999. Since our inception, we have completed the fundamental
technical development of the processes to manufacture Flatfree[TM]
polyurethane foam tires for non-highway use and also developed additional
proprietary technology relating thereto. In addition, since August 2001, we
have been engaged in the development of the technology to produce polyurethane
elastomer tires for highway and agricultural use.
13
Polyurethane Foam Tire Technology and Products
----------------------------------------------
The products produced from our Flatfree[TM] polyurethane foam tire technology
("Products") are considered "non-pneumatic" because they do not require
inflation. Our Products are multi-density in nature and consist of specially
formulated polyurethanes creating a closed cell foam construction which
effectively reproduces the ride quality of a pneumatic tire. The closed cell
foam construction, which forms one of the key components of our technology,
contains millions of closed cells containing compressed air. Therefore, our
Products are best identified as "Flatfree" in that they have no inner tube,
do not require inflation and will not go flat even if they are punctured. Our
Products have been designed for low-duty, non-highway use on outdoor power
equipment, bicycles, wheelbarrows and hand trucks, as well as wheel chairs and
golf cars.
Polyurethane Elastomer Technology
---------------------------------
We have also been engaged in the development of the process to manufacture
polyurethane elastomer tires for highway and agricultural use based on our
existing technology and multiple new and/or improved methods and processes.
The polyurethane elastomer material is identified by us as Elastothane[R].
Elastothane[R] and the technology to produce tires using Elastothane[R] are
significant to us because we believe that combined they will result in a tire
that can be produced quickly and less expensively than traditional rubber
pneumatic tires, while meeting or exceeding the performance of those tires.
We have produced a limited number of prototype polyurethane car tires and
conducted independent laboratory testing to demonstrate that the tires comply
with Federal Motor Vehicle Safety Standard No. 109, applicable to new
pneumatic tires. Compliance with FMVSS 109 is necessary to commercially market
pneumatic car tires within the United States. However, FMVSS 139, a new
standard for new pneumatic tires, takes effect in July 2007. FMVSS 139,
retains many of the test components of FMVSS 109, with the following major
changes:
(1) Endurance and Low Inflation Pressure Test. Test remains 34 hours, but
extends the final load step from 22 hours to 24 hours. Load percentages have
been reduced from 90/100/110% to 85/90/100%. In addition, at the end of the 34
hours of endurance testing, the tire will be run under-inflated (20psi) at 120
km/h (75 mph) for 90 minutes;
(2) Speed test. Test remains a total of 90 minutes with a 2 hour warm-up;
however, speeds for each 30 minute segment have been increased from 75/80/85
mph to 140/150/160 km/h [87/93/99 mph], respectively; and
(3) Aging effects performance test. Implementation of the aging effects
performance test has been deferred until the NHTSA has completed additional
research and issues a new proposal.
Because our technology for manufacturing passenger car tires from polyurethane
has only recently been invented, we continue to perform tests on our materials
and prototype tires to help us better understand their performance
characteristics. These tests are ongoing and constitute a significant portion
of our research and development expenses. At this time, we know of no
pneumatic passenger car tires, rubber or polyurethane, that have passed the
test requirements of FMVSS 139. Over the next several months we will be
conducting additional testing to determine if car tires produced utilizing our
technology can comply with FMVSS 139.
14
In addition, we have invented the manufacturing equipment necessary to produce
the polyurethane car tires in limited quantities. We have filed several
applications for method and process patents with respect to various aspects of
this technology. We have completed fabrication of prototype manufacturing
equipment to mold the polyurethane elastomer tires and we are fabricating
certain additional pieces of manufacturing equipment that are necessary to
assemble the reinforcement materials (i.e., beads, belts and plies) utilized
in connection with manufacturing the tire. This work is continuing and we
expect to make improvements to the method, process and equipment as needed.
During the nine month period ended March 31, 2005, we filed an application for
patent with the US Patent and Trademark Office relating to the method and
apparatus for manufacturing a temporary/spare tire out of polyurethane
elastomer. Our initial project is a 'zero' pressure non-pneumatic
temporary/spare tire that combines a polyurethane elastomer tire material with
a conventional wheel. These tires do not contain air and do not require
inflation. The initial prototype tires have been developed for prospective use
as temporary/spare tires for compact to mid-sized vehicles.
In April 2005, we announced that a prototype non-pneumatic temporary/spare
tire had passed FMVSS 129 testing. FMVSS 129, is the applicable safety
standard for new, non-pneumatic tires that must be met before the tires can be
offered commercially.
We believe that this is a major breakthrough in tire technology because, to
the best of our knowledge, no other company has developed a non-pneumatic tire
that has successfully met FMVSS 129 standard.
We have focused our development of the "zero" pressure tire technology
initially on spare tires for small and mid-size automobiles (tires that carry
a load up to 1,250 lbs) because those tires comprise a significant portion of
the temporary/spare marketplace. For 2005, small and mid-size passenger car
production worldwide is estimated to be approximately 20 million units, with a
corresponding number of temporary/spare tires required.
With successful testing achieved on certain models of the non-pneumatic
temporary/spare tire, we intend to initiate discussions with automobile
manufacturers about making these tires available to their customers as an
original equipment temporary/spare tire. In addition, we will continue testing
prototype designs of the non-pneumatic temporary/spare tire for full-size
vehicles, light truck and SUV applications. However, passing FMVSS 129 does
not guarantee that we will be able to obtain contracts to supply non-pneumatic
tire products to automobile manufacturers.
Licensing of Manufacturing Technology
-------------------------------------
In May 2004, we executed a license agreement with Liberty Circle, S.A. to
manufacture and market certain of our Flatfree[TM] polyurethane foam tire
products in Latin America. The Agreement included provisions for us to produce
and install manufacturing equipment and the proprietary polyurethane chemical
systems needed for Liberty Circle to produce the polyurethane foam tires
during the current fiscal year. However, Liberty Circle failed to fund the
purchase commitment and we have terminated the Agreement. As a result, we have
renewed our efforts to license this technology to other interested parties. As
of the date of this report we do not have any definitive license agreements
with respect to this technology.
15
In July 2004, we entered into an agreement with International Research and
Development Corporation ("IRD"), La Jolla, California, to introduce our
polyurethane tire manufacturing technology in developing countries around the
world. IRD has presented a turn-key type manufacturing opportunity to many
interested parties in several regions throughout the world where it believes
manufacturing opportunities for our tire technology exist. IRD has introduced
our technology to delegations from Sri Lanka, India, Mexico, Peru, Saudi
Arabia and Dubai. In addition, independent delegations from Brazil and Bahrain
are currently evaluating the prospects of licensing the technology. However,
as of the date of this report, we do not have any definitive licensing
agreements with any of these parties.
Our Results of Operations for the Nine Month Period Ended March 31, 2005
compared to the Nine Month Period Ended March 31, 2004
-----------------------------------------------------------------------------
Net Sales and Costs of Sales: Our net sales for the nine month period ended
March 31, 2005 were $1,130,300, compared to $1,032,356 for the comparable
period ended March 31, 2004, an increase of $97,944 or 9.5%.
Our cost of sales for the nine months ended March 31, 2005 was $857,506, or
76% of sales, for a gross margin of $272,794 or 24%. Our cost of sales for
the nine months ended March 31, 2004 was $824,388, or 80% of sales, for a
gross margin of $207,968 or 20%.
The improvement in our gross margin for the current period as compared to the
prior year is a result of manufacturing efficiencies such as (a) increasing
the size of chemical batches, (b) dedicating production shifts to
manufacturing single products (i.e., longer production runs), and (c) reducing
labor costs by implementing line automation. We believe that our gross margin
can continue to improve as our sales efforts generate additional product
orders in such quantities to take further advantage of the manufacturing
efficiencies. We believe we currently have sufficient manufacturing equipment
and employees to merit a substantial increase in production without incurring
a proportionately equivalent increase in labor costs.
We have experienced an increase in the cost of wheel components for our
tire/wheel assemblies due to the increasing cost of steel. We have not passed
the increases on to our customers and have elected to seek alternative
suppliers for components that are priced more competitively. However, if the
cost of steel wheel components continues to rise during fiscal year 2005, we
may elect to amend our product pricing to reflect the increase in component
costs. Also, during the three month period ended March 31, 2005, our chemical
pricing increased approximately 14% and we expect to see some additional
upward pressure on chemical pricing during the next three months.
Corporate Expense: Our total operating expenses for the nine month period
ended March 31, 2005 were $9,309,881. These expenses consisted of: consulting
expense of $77,000; payroll and payroll taxes of $1,453,350; depreciation and
amortization of $286,819; research and testing $479,348; bad debt expense
$1,2167, selling, general and administrative expenses $878,148; along with an
expense of $6,134,000 for advisory group services associated with the grant of
options to acquire an aggregate of 3,000,000 shares of our common stock to
third-party consultants during the nine month period. The value of the options
was calculated using the Black-Scholes option pricing model and expensed
during the three month period ended September 30, 2004, as reported in our
quarterly report on Form 10QSB for that period, and is included in the
operating expenses for the nine month period ended March 31, 2005.
16
Selling, general and administrative expenses for the nine month period ended
March 31, 2005 do not include $1,000,000 in deferred stock issuance costs.
This amount has been recorded as a reduction in stockholders' equity due to
its association with the prospective offering of our securities. (See
FINANCIAL STATEMENTS, Note 4 - STOCK OPTIONS.)
Without taking into account the expense associated with the issuance of
options, our operating expenses remained consistent during the nine month
period compared to last year. Increases in research and testing expenses,
payroll and payroll taxes, depreciation and amortization expenses, and
selling, general and administrative expenses were offset by a substantial
reduction in consulting expenses. We expect our operating expenses to remain
relatively constant for the remainder of the fiscal year at an estimated
$325,000 per month.
Our total operating expenses for the nine months ended March 31, 2004 were
$3,135,757. These expenses consisted as follows: consulting $303,173; payroll
and payroll taxes $1,088,496; depreciation and amortization $215,418; selling
general and administrative $1,128,453; and research and testing $400,217,
resulting in a loss from operations of $2,927,789. Additionally, our selling,
general and administrative expenses for the nine month period ended March 31,
2004, did not include $131,455 in deferred consulting expenses. The aggregate
amount was recorded as a reduction in stockholders' equity because it was
associated with the granting of options to non-employees for services that had
not then been performed. The variable fair value of those options was
calculated using the Black-Scholes option pricing model.
Interest Expense: We had no interest expense during the nine month periods
ended March 31, 2005 and 2004.
Other Income: For the nine month period ended March 31, 2005, we had interest
income of $19,447. This income was associated with the temporary investment of
cash not immediately needed in ordinary daily business and interest earned on
outstanding receivables. In addition we had other income of $14,449. For the
nine month period ended March 31, 2004, we had aggregated interest and other
income of $15,157.
We experienced a net loss of $9,003,191 for the nine months ended March 31,
2005, with a basic loss per share of $0.48 per share. In the prior year
period, we experienced a net loss of $2,912,632, with a basic loss per share
of $0.16.
Liquidity and Capital Resources
-------------------------------
During the period we financed our operations through collecting accounts
receivable and issuing common stock for cash (paid in connection with the
exercise of outstanding stock options), prepayment of certain salaries and
payment of professional services.
At March 31, 2005, we had current assets of $3,840,392, an increase from the
$2,414,814 in current assets we had at June 30, 2004. Our current liabilities
were $155,338 at March 31, 2005, an increase from the $58,683 over current
liabilities at June 30, 2004, due to an increase in Product component costs
during the reporting period. At March 31, 2005, we had a working capital
surplus of $3,685,054, an increase from the $2,356,131 in working capital
surplus at June 30, 2004. We had cash and cash equivalents of $2,820,487 and
net accounts receivable of $199,382 compared to cash and cash equivalents of
$1,591,289 and net accounts receivable of $167,002 at June 30, 2004. Our
increase in cash and cash equivalents at March 31, 2005, is attributable to
cash received from the issuance of our common stock in connection with the
exercise of outstanding options.
17
Net cash used by our operating activities for the reporting period was
$1,817,408 compared to $1,679,134 for the comparable period in 2004. Our
operations for the period ending March 31, 2005 were funded primarily by cash
and cash equivalents, accounts receivables, and the issuance of common stock
for services and salary. Our operations for comparable period in 2004 were
funded primarily the same way.
At March 31, 2005, we had net property and equipment of $1,227,3078, after
deducting $1,782,038 of accumulated depreciation. At June 30, 2004, we had net
property and equipment of $1,445,993, after deduction of accumulated
depreciation of $1,567,187. The decrease in net property and equipment for
reporting period is attributed to accumulated depreciation for the period and
the disposition of a company vehicle. At March 31, 2005, our property and
equipment consisted of leasehold improvements, $131,723; molds and models,
$346,959; equipment, $2,275,72930; furniture and fixtures, $70,033; and
software, $184,901.
We have a retained deficit of $35,394,018 at March 31, 2005. Because we had a
retained deficit of $26,390,827 at June 30, 2004, our audit report contains a
going concern modification as to our ability to continue as a going concern.
We have taken certain steps to maintain our operating and financial
requirements in an effort to enable us to continue as a going concern until
such time that revenues are sufficient to cover expenses, including: (1)
evaluating (A) our cost of goods and equipment utilization and requirements of
our manufacturing operations, and (B) our sales and marketing plan on a
product sector basis; (2) incorporating revisions to our methods, processes
and costs in order to achieve necessary manufacturing efficiencies (i.e., line
automation, reduced material costs, reduced product waste, etc.); and (3)
seeking reduced material and component costs from suppliers.
In addition, to expand revenue opportunities we have commenced a program of
(1) licensing manufacturing and distribution rights to certain of our
polyurethane tire products to third-party manufacturers based on such factors
as geographical locations and boundaries; (2) selling manufacturing equipment
to third-parties manufacturers to manufacture certain of our polyurethane tire
products; (3) selling our proprietary polyurethane chemical systems to third-
party manufacturers that utilize our manufacturing equipment; and (4) offering
contract design and engineering services to the tire and auto industries.
To supplement our cash needs during the fiscal year we have (1) obtained
supplemental funding through the exercise of outstanding in the money options;
and (2) issued common stock in lieu of cash as compensation for employment,
development, and other professional services. We estimate that the combination
of our accounts receivable and our cash and cash equivalents will meet our
operational needs through December 2005.
In February 2005, we engaged a broker-dealer to act as our placement agent in
a best-efforts offering to raise up to $11,000,000 through the private
placement of our equity securities. Following that date, because we determined
that we had sufficient funds for our immediate operational requirements, the
proposed private placement was terminated without any offers or sales being
made. At this time we are evaluating other financing strategies.
18
Impact of Inflation
-------------------
We do not anticipate that inflation will have a material impact on our current
operations.
Seasonality
-----------
Because the significant portion of our current customers reside in the United
States the sale of our lawn and garden Products tends to be seasonal in
nature.
Risk Factors
------------
You should carefully consider the following risks and other information
contained in this Report and in our other SEC filings before you decide to
invest in us or to maintain or increase your investment. The risks and
uncertainties described below are not the only ones facing us. Additional
risks and uncertainties may also adversely impact and impair our business. If
any of the following risks actually occur, our business, results of operations
or financial condition would likely suffer. In such case, the trading price of
our common stock could decline, and you may lose all or part of your
investment.
Due to our history of operating losses, our auditors are uncertain that we
will be able to continue as a going concern.
Our Financial Statements have been prepared assuming that we will continue as
a going concern. For the nine month period ended March 31, 2005, we suffered
a net loss of $9,003,191. During the fiscal years ended June 30, 2004 and
2003 we suffered net losses of $4,721,255 and $3,091,972, respectively. The
independent auditors' report issued in conjunction with the financial
statements for the year ended June 30, 2004 contains an explanatory paragraph
indicating that the foregoing matters raise substantial doubt about our
ability to continue as a going concern. There is no assurance that we can
generate net income, increase revenues or successfully expand our operation in
the future.
Our cash and cash equivalent reserves may not be adequate to cover our costs
of operations.
Since inception we have been able to cover our operating losses from accounts
receivables and the sale of our securities. However, our financials to include
provisions for any contingency, unexpected expenses or increases in costs that
may arise.
Our business operations and plans could be adversely affected if we are unable
to obtain additional funding when needed. We do not know whether additional
financing will be available when needed, or if it is available, whether it
will be available on acceptable terms.
It is possible that our available short-term assets and anticipated revenues
may not be sufficient to meet our operating expenses, business expansion
plans, and capital expenditures for the next twelve months. Insufficient funds
may prevent us from implementing our business strategy or may require us to
delay, scale back or eliminate certain opportunities for the commercialization
of our technology and products. If we cannot generate adequate sales of our
products, or increase our revenues through licensing of our technology or
other means, then we may be forced to cease operations.
19
In order to succeed as a Company, we must continue to develop commercially
viable products and sell adequate quantities of products at a high enough
price to generate a profit. We may not accomplish these objectives. Even if we
are successful in increasing our revenue base, a number of factors may affect
future sales of our product. These factors include: (i) whether competitors
produce alternative or superior products; and (ii) whether the cost of
implementing our products is competitive in the marketplace.
In addition, we are proposing to attempt to increase revenues through
licensing our technology and manufacturing rights, and offering contract
design and engineering services. If these proposals are not viable in the
marketplace, we may not generate any revenues from these efforts.
Because our auditors have expressed a going concern opinion, our ability to
obtain additional financing could be adversely affected.
We have incurred significant losses, which have resulted in an accumulated
deficit of $26,390,827 at June 30, 2004. Because of these continued losses and
our accumulated deficit, we have included a going concern paragraph in Note 7
to our financial statements included in our Form 10-KSB for the year ended
June 30, 2004 and our Form 10-KSB for the year ended June 30, 2003, addressing
substantial doubt about our ability to continue as a going concern. This going
concern paragraph could adversely affect our ability to obtain favorable
financing terms in the future or to obtain any additional financing if needed.
Because we have limited experience, we may be unable to successfully manage
planned growth as we complete the transition from a technology development
company to a manufacturing and marketing company.
We have limited experience in the commercial manufacturing and marketing
arena, limited product sales and marketing experience, and limited staff and
support systems, especially compared to competitors in the tire industry.
Although we have hired consultants to assist us in this transition period,
there can be no assurance that we will properly ascertain or assess any and
all risks inherent in the industry.
In addition, our success depends, in part, on our ability to market and
distribute our products effectively. We have limited experience in the sale
and marketing of our lawn and garden products and little to no experience in
the marketing and sale of our proposed highway use products. We have limited
manufacturing, marketing and distribution capabilities and we will need to
retain consultants that have contacts in and understand the tire industry
marketplace. We may not be successful in entering into new marketing
arrangements, whether engaging independent distributors or recruiting,
training and retaining a larger internal marketing staff and sales force. If
we do not meet the challenges posed by our planned manufacturing, distribution
and sales growth, the company may fail.
20
Because of our reliance on trade secrets, we may be at risk for potential
claims or litigation related to our technology.
In certain cases, where the disclosure of information required to obtain a
patent would divulge proprietary data, we may choose not to patent parts of
the proprietary technology and processes which we have developed or may
develop in the future and rely on trade secrets to protect the proprietary
technology and processes. The protection of proprietary technology through
claims of trade secret status has been the subject of increasing claims and
litigation by various companies both in order to protect proprietary rights as
well as for competitive reasons even where proprietary claims are
unsubstantiated. The prosecution of proprietary claims or the defense of such
claims is costly and uncertain given the uncertainty and rapid development of
the principles of law pertaining to this area. We may also be subject to
claims by other parties with regard to the use of technology information and
data that may be deemed proprietary to others.
Our business depends on the protection of our intellectual property and may
suffer if we are unable to adequately protect our intellectual property.
We have been granted several U.S. patents and have several U.S. patent
applications pending relating to certain aspects of our manufacturing
technology and use of polyurethane to make tires. We believe that our ability
to either manufacture products and/or license our technology is substantially
dependent on the validity and enforcement of these patents and patents
pending. We cannot provide assurance that our patent will not be invalidated,
circumvented or challenged, that the rights granted under the patents will
give us competitive advantages or that our patent applications will be
granted.
Proposed new products for highway use must meet safety standards prior to
marketing which could delay anticipated revenues and increase expenses.
Our proposed new products for highway use must meet applicable federal safety
standards through various testing processes. Our prototype polyurethane car
tires and proposed temporary spare tire are both subject to such standards.
The testing procedures involve submission of products to approved independent
testing facilities, a process that may entail both significant time and
significant expense. Therefore, the timing of new product placement in the
market may be hard to determine, additional research, development and testing
expenses may be incurred, and we may not receive revenues from such products
as planned. Such delays and potential additional expenses could have a
negative impact on cash flows and business planning.
Because our proposed highway use products are derived from new technology,
product liability insurance costs will likely increase and we may be exposed
to product liability risks that could adversely affect profitability.
Despite prior testing and approval of new highway use products, such products
may subject us to unforeseen liabilities because the technology is new and
there is no extensive history of use. Introduction of such new products will
most likely increase product liability premiums and defense of potential
claims could increase insurance cost even further which could substantially
increase our expenses.
21
Significant increases in the price of steel and other raw materials used in
our products could increase our production costs and decrease our profit
margins or make our products less competitive in the marketplace due to price
increases.
Over the last nine months, we have experienced an increase in the cost of
wheel components for our tire/wheel assemblies due to the increasing cost of
steel. We have not passed the additional cost of the steel wheel components on
to our customers, however, if the cost of steel wheel components continues to
rise during the next twelve months, we may elect to amend our product pricing
to reflect the increase in component costs. Also, during the last three
months we've seen a 14% increase in our chemical pricing and there is no
guarantee pricing will remain at current levels. Although we continually seek
reductions in raw material and component costs from our suppliers, and even
seek alternative suppliers in some cases, large price increases may have to be
passed on to our customers and could adversely affect our sales.
Future sales of our common stock may cause our stock price to decline.
Some of our outstanding restricted shares are eligible for resale by the
holders under Rule 144 and the sale or even the perception that a sale of such
shares may occur could cause our stock price to decline. We are unable to
estimate the amount, timing, or nature of future sales of outstanding
restricted shares. If we issue additional shares of common stock in a private
financing under an exemption from registration, then those shares will
constitute restricted shares as defined in Rule 144 under the Securities Act.
The restricted shares may only be sold if they are registered under the
Securities Act, or sold under Rule 144, or another exemption from registration
under the Securities Act.
In addition, we may issue stock in a registered offering or in a transaction
that would require registration of the underlying shares. In either case,
once a registration was effective, there could be an increased number of
shares available for sale in the public market which could reduce the market
price.
Anticipated fund-raising activities include possible equity placements that
will dilute current shareholders.
We are authorized to issue up to 40,000,000 shares of common stock. Our board
of directors has the authority to issue the authorized but unissued shares of
our common stock without action by the shareholders.
In addition, we have authorized 5,000,000 shares of preferred stock. Although
no preferred shares have been issued to date, the board of directors has the
authority to determine rights and privileges respecting voting rights,
preferences as to dividends and liquidation, and conversion rights with
respect to any preferred shares issued, all of which designations may be
superior to those attached to the common stock. The board of directors has the
authority to issue up to the entire amount of the authorized but unissued
shares of preferred stock without action by the shareholders.
Any such issuances, whether of common stock or some designated class of
preferred shares, will reduce the percentage ownership and may dilute the book
value of the shares held by existing shareholders.
22
Our stock price can be extremely volatile.
Our common stock is traded on the OTC Bulletin Board. There can be no
assurance that an active public market will continue for the common stock, or
that the market price for the common stock will not decline below its current
price. Such price may be influenced by many factors, including, but not
limited to, investor perception of us and our industry and general economic
and market conditions. The trading price of the common stock could be subject
to wide fluctuations in response to announcements of our business developments
or our competitors, quarterly variations in operating results, and other
events or factors. In addition, stock markets have experienced extreme price
volatility in recent years. This volatility has had a substantial effect on
the market prices of companies, at times for reasons unrelated to their
operating performance. Such broad market fluctuations may adversely affect the
price of our common stock.
We do not expect to pay dividends.
We have not paid dividends since inception on our common stock, and we do not
contemplate paying dividends in the foreseeable future on our common stock in
order to use all of our earnings, if any, to finance expansion of our business
plans.
If we fail to remain current on our reporting requirements, we could be
removed from the OTC Bulletin Board which would limit the ability of broker-
dealers to sell our securities and the ability of stockholders to sell their
securities in the secondary market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended,
and must be current in their reports under Section 13, in order to maintain
price quotation privileges on the OTC Bulletin Board. If we fail to remain
current on our reporting requirements, we could be removed from the OTC
Bulletin Board. As a result, the market liquidity for our securities could be
severely adversely affected by limiting the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in the
secondary market.
Our common stock could be subject to the "Penny Stock" rules of the SEC; the
trading market in our securities is limited; transactions in our stock can be
complicated and may reduce the value of an investment in our stock.
The SEC has adopted Rule 15g-9 which defines a "penny stock" as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share. In the event our securities have
a market price per share less than $5.00, transaction involving our securities
would require:
- that a broker or dealer approve a person's account for transactions in
penny stocks; and
- the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny stock to
be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
23
- obtain financial information and investment experience objectives of the
person; and make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
- sets forth the basis on which the broker or dealer made the suitability
determination; and
- that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny
stocks.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
the end of the period covered by this Report. The Company's disclosure
controls and procedures are designed to ensure that information required to be
disclosed by the Company in its periodic SEC filings is recorded, processed
and reported within the time periods specified in the SEC's rules and forms.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company required to be included in the Company's periodic SEC filings. There
was no change in the Company's internal control over financial reporting that
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
24
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of our security holders during the
quarter ended March 31, 2005.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit 31.01 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.
Exhibit 31.02 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.
Exhibit 32.01 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Exhibit 32.02 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 16, 2005 AMERITYRE CORPORATION
/S/RICHARD A. STEINKE
----------------------------------
Richard A. Steinke
President and Chief Executive Officer
Dated: May 16, 2005 /S/ANDERS A. SUAREZ
-----------------------------------
Anders A. Suarez
Chief Financial Officer and
Principal Accounting Officer