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 September 30, 2004
[ ] 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 of 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
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(Issuer's telephone number)
N/A
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(Former name, former address, and former fiscal year, if changed since last
report.)
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 November 12, 2004, the
issuer had 18,724,168 shares of common stock, par value $0.001, outstanding.
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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 September 30, 2004 and our audited balance
sheet at June 30, 2004; and the related unaudited statements of operations and
cash flows for the three month periods ended September 30, 2004 and 2003, are
attached hereto.
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AMERITYRE CORPORATION
BALANCE SHEETS
ASSETS
SEPTEMBER 30, JUNE 30,
2004 2004
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(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 1,746,759 $ 1,591,289
Accounts receivable - net 157,848 167,002
Inventory 619,379 557,516
Prepaid expenses 45,546 99,007
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Total Current Assets 2,569,532 2,414,814
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PROPERTY AND EQUIPMENT
Leasehold improvements 173,336 163,896
Molds and models 321,994 315,282
Equipment 2,262,880 2,253,217
Furniture and fixtures 70,033 70,033
Vehicles 25,851 25,851
Software 184,901 184,901
Less - accumulated depreciation (1,653,690) (1,567,187)
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Total Property and Equipment 1,385,305 1,445,993
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OTHER ASSETS
Patents and trademarks - net 330,796 156,792
Deposits 43,180 43,180
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Total Other Assets 373,976 199,972
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TOTAL ASSETS $ 4,328,813 $ 4,060,779
============ ============
The accompanying notes are an integral part of these financial statements.
4
AMERITYRE CORPORATION
BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, JUNE 30,
2004 2004
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(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 65,376 $ 42,866
Accrued expenses 12,607 15,817
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Total Current Liabilities 77,983 58,683
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Total Liabilities 77,983 58,683
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock: 5,000,000 shares authorized
of $0.001 par value, -0- shares issued and
outstanding - -
Common stock: 25,000,000 shares authorized of
$0.001 par value, 18,722,168 and 18,429,168
shares issued and outstanding, respectively 18,722 18,429
Additional paid-in capital 39,284,439 30,594,482
Expenses prepaid with common stock (505,228) (219,988)
Deferred stock issuance cost (1,000,000) -
Retained deficit (33,547,103) (26,390,827)
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Total Stockholders' Equity 4,250,830 4,002,096
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,328,813 $ 4,060,779
============ ============
The accompanying notes are an integral part of these financial statements.
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AMERITYRE CORPORATION
Statements of Operations
(Unaudited)
For the Three Months Ended
September 30,
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2004 2003
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NET SALES $ 339,772 $ 348,945
COST OF SALES 246,787 369,822
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GROSS PROFIT (DEFICIT) 92,985 (20,877)
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EXPENSES
Consulting - 89,550
Advisory group expense (Note 4) 6,134,000 -
Payroll and payroll taxes 417,562 306,847
Depreciation and amortization 92,346 58,653
Research & testing 298,367 9,017
Bad debt expense 582 -
Selling, general and administrative 320,175 301,538
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Total Expenses 7,263,032 765,605
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LOSS FROM OPERATIONS (7,170,047) (786,482)
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OTHER INCOME
Interest income 7,927 5,678
Other income 5,844 1,210
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Total Other Income 13,771 6,888
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NET LOSS $ (7,156,276) $ (779,594)
============ ============
BASIC LOSS PER SHARE $ (0.38) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 18,662,788 17,384,868
============ ============
The accompanying notes are an integral part of these financial statements.
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AMERITYRE CORPORATION
Statements of Cash Flows
(Unaudited)
For the Three Months Ended
September 30,
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2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,156,276) $ (779,594)
Adjustments to reconcile net loss to net
cash (used) by operating activities:
Depreciation and amortization 92,346 58,653
Amortization of expenses prepaid
with common stock 312,760 89,550
Re-valuation of deferred consulting (6,475)
Options issued for advisory group service 6,134,000 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 9,154 (68,688)
(Increase) decrease in inventory (61,863) (24,223)
(Increase) decrease in prepaid expenses 53,461 (31,397)
(Increase) in other assets (912)
Increase in accounts payable and
accrued expenses 19,300 176,692
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Net Cash (Used) by Operating Activities (597,118) (586,394)
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CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for patents and trademarks (33,597) (2,850)
Purchase of equipment (25,815) (254,292)
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Net Cash (Used) by Investing Activities $ (59,412) $ (257,142)
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The accompanying notes are an integral part of these financial statements.
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AMERITYRE CORPORATION
Statements of Cash Flows (Continued)
(Unaudited)
For the Three Months Ended
September 30,
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2004 2003
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CASH FLOWS FROM FINANCING ACTIVITIES
Receipt of subscriptions receivable $ - $ 16,632
Common stock issued for cash 812,000 -
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Net Cash Provided by Financing Activities 812,000 16,632
------------ ------------
NET INCREASE/(DECREASE)IN CASH AND CASH
EQUIVALENTS 155,470 (826,904)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,591,289 2,490,604
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,746,759 $ 1,663,700
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES
CASH PAID FOR:
Interest $ - $ -
Income taxes $ - $ -
NON-CASH FINANCING ACTIVITIES
Common stock issued for prepaid compensation $ 598,000 $ -
Options issued for advisory group service $ 6,134,000 $ -
The accompanying notes are an integral part of these financial statements.
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AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
September 30, 2004 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 months
ended September 30, 2004 are not necessarily indicative of the results that
may be expected for the current fiscal year ending June 30, 2005. Certain
prior year balance sheet and 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 approximately $33,547,103 at September 30, 2004 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 during the fiscal year 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 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.
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AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
September 30, 2004 and June 30, 2004
NOTE 2 -GOING CONCERN, Continued
To supplement our cash needs during the fiscal year we intend to (1) obtain
supplemental funding through the exercise of outstanding in the money options;
(2) issue common stock in lieu of cash as compensation for employment,
development, and other professional services; and (3) sell our equity
securities for cash in either a private placement or registered offering.
We estimate that the combination of our accounts receivable and our cash and
cash equivalents will meet our operational needs through January 2005. We
anticipate that for the balance of this fiscal year we will need an additional
$1,875,000 to implement our plan and to meet our working capital requirements.
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 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 (see Note 4). 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
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Risk free interest rate 2.49%
Expected life 2 years
Expected volatility 59.83%
Dividend yield 0.00%
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AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
September 30, 2004 and June 30, 2004
NOTE 3 - STOCK OPTIONS, Continued
A summary of the status of the Company's outstanding stock options as of
September 30, 2004 and June 30, 2004 and changes during the periods then ended
is presented below:
September 30, June 30,
2004 2004
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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 3,000,000 7.00 90,000 5.73
Expired/Cancelled - - - -
Exercised (213,000) (3.81) (634,000) 2.80
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Outstanding end of period 4,709,000 $ 5.78 1,922,000 $ 3.66
========== ========== ========== ==========
Exercisable 1,709,000 $ 3.65 1,922,000 $ 3.66
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Outstanding Exercisable
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Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at Sep. 30, Contractual Exercise at Sep. 30, Exercise
Exercise Prices 2004 Life Price 2004 Price
---------- ---------- ---------- ---------- ---------- ----------
$ 2.00 130,000 0.50 $ 2.00 130,000 $ 2.00
3.00 500,000 0.83 3.00 500,000 3.00
3.80 30,000 2.00 3.80 30,000 3.80
4.00 989,000 0.94 4.00 989,000 4.00
6.70 60,000 1.25 6.70 60,000 6.70
7.00 3,000,000 4.96 7.00 - -
---------- ---------- ---------- ---------- ----------
$ 2.00-7.00 4,709,000 3.49 $ 5.78 1,709,000 $ 3.65
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NOTE 4 - MATERIAL EVENTS
During the period we entered into an agreement with Centurion Holdings, LLC
("Centurion") to form an advisory group. Centurion will provide the following
services:
1. For a period of two years, commencing on September 22, 2004, Centurion
will consult with and assist us in connection with: (a) the development of a
5-year operating strategy and a 3-year operating plan that focuses on
increasing our market value based on strategic partnering and technology
licensing; (b) structuring our capitalization with a view toward placing our
equity securities for minimum offering proceeds of $10,000,000; (c) obtaining
a NASDAQ listing for our common stock, and such other matters as our Board of
Directors may determine during the two year term and any extension thereof.
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2. Lee Iacocca and Joseph Grano, Jr., will serve as Chairman and Vice-
Chairman, respectively, of our Advisory Group for a minimum of two years
commencing September 22, 2004, which term can be extended for one additional
year on our mutual consent.
3. We will pay to Centurion the following compensation: (a) commencing on
the last day of the month during which occurs the closing of the sale of our
equity securities or of securities convertible into our equity securities in
an amount (aggregating all such sales from and after the date hereof) of
$10,000,000, and on the last day of each month thereafter until September 30,
2006, a fee of $41,667 per month; and (b) reimburse Centurion for all
reasonable out-of-pocket expenses associated with the performance by it of the
services described herein, in an amount up to a maximum of $250,000 per year.
In addition, we issued Centurion and other individuals, options to acquire an
aggregate of 3,000,000 shares of the Company's common stock.
The closing price per share for our common stock on September 13, 2004, the
date our Board of Directors authorized the grant of the Options, was $6.95.
The exercise price for the Options is $7.00 per share (the "Exercise Price"),
subject to the terms, conditions and restrictions set forth in the Options.
See Note 3 - STOCK OPTIONS.
NOTE 5 - SUBSEQUENT EVENTS
In October 2004, we issued 2,000 shares of our common stock for cash of
$8,000, or $4.00 per share, in connection with the exercise of outstanding
stock options.
In May 2004, we executed an exclusive 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. The exclusivity of the license is dependent on Liberty Circle meeting
annual minimum purchase requirements for the purchase of chemical systems from
us once the installation of the manufacturing equipment is completed and
production commences. We anticipate that it will take approximately 9 to 12
months to complete the equipment installation. In connection with the
agreement, we will also provide Liberty Circle with equipment setup, training
and manufacturing support. Liberty Circle was to have funded the equipment
purchase on or before October 24, 2004, but has failed to do so. The Agreement
provides that we may terminate the proposed transaction in the event Liberty
Circle fails to meet the funding requirement. It is management's opinion that
Liberty Circle has failed to comply with the terms of the Agreement and that
we may terminate the Agreement at our option. We are continuing discussions
with Liberty Circle to establish terms for completing the proposed
transaction.
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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" set forth in this Report 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 assumes 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
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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 developed additional proprietary
technology relating to Flatfree[TM] polyurethane foam tires. We have completed
the fundamental technical development of the processes to manufacture
Flatfree[TM] polyurethane foam tires for non-highway use. 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.
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Polyurethane Foam Tire Technology and Products
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The Products produced from our Flatfree[TM] polyurethane foam tire technology
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
---------------------------------
As indicated above, we have also been engaged in the fundamental development
of the process to manufacture polyurethane elastomer tires for highway and
agricultural use based on our proprietary technology. The polyurethane
elastomer material is identified by us as Elastothane[TM]. Elastothane [TM]
and the technology to produce tires using Elastothane[TM] 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. We are conducting additional
testing to determine if car tires produced utilizing our technology can comply
with FMVSS 139, a new standard for new pneumatic tires, taking effect in June
2007.
In addition, we have invented the manufacturing equipment necessary to produce
the polyurethane car tires. We have filed applications for method and process
patents with respect to various aspects of this technology. We have completed
fabrication of a prototype centrifugal spin-casting machine used 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 ongoing and we expect to continue to make
improvements to the method, process and equipment as needed.
During the period 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. We are continuing to
develop this technology and intend to make several prototype tires and conduct
independent laboratory testing to determine if the tires comply with
applicable Federal Motor Vehicle Safety Standards. 14
Licensing of Manufacturing Technology
-------------------------------------
In May 2004, we executed an exclusive 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. The exclusivity of the license is dependent on Liberty Circle meeting
annual minimum purchase requirements for the purchase of chemical systems from
us once the installation of the manufacturing equipment is completed and
production commences. We anticipate that it will take approximately 9 to 12
months to complete the equipment installation. In connection with the
agreement, we will also provide Liberty Circle with equipment setup, training
and manufacturing support.
Liberty Circle was to have funded the equipment purchase on or before October
24, 2004, but has failed to do so. The Agreement provides that we may
terminate the proposed transaction in the event Liberty Circle fails to meet
the funding requirement. It is managements opinion that Liberty Circle has
failed to comply with the terms of the Agreement and that we may terminate the
Agreement at our option. We are continuing discussions with Liberty Circle to
establish terms for completing the proposed transaction.(See FINANCIAL
STATEMENTS, Note 4 - SUBSEQUENT EVENTS.)
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 intends to present a turn-key type manufacturing opportunity 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 and Peru. However we have no
manufacturing agreements with any of these parties at this time.
Three Month Period Ended September 30, 2004 compared Three Month Period Ended
September 30, 2003
-----------------------------------------------------------------------------
Net Sales and Costs of Sales: Our net sales for the three month period ended
September 30, 2004 were $339,772 compared to $348,945 for the same period in
2003, an slight decrease of $9,173. Our cost of sales for the three month
period ended September 30, 2004 were $246,787, or approximately 73% of sales
compared to $369,822, or approximately 106% of sales, for the three month
period ended September 30, 2003. The improvement in our gross margin for the
current period as compared to the prior year is a result of manufacturing
efficiencies implemented during the previous 12 months 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 advantage of additional 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. In addition, we
continually seek reductions in raw material and component costs from our
suppliers.
15
We continue to 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. During the reporting period, our chemical pricing remained relatively
constant, but there is no guarantee such pricing will remain at current
levels.
Corporate Expense. For the three month period ended September 30, 2004, total
operating expenses were $7,263,032, consisting of payroll and payroll taxes of
$417,562, depreciation and amortization of $92,346, research and testing
$298,367, bad debt expense of $582, selling, general and administrative
expenses of $320,175, and 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 period. The
value of the options was calculated using the Black-Scholes option pricing
model. Our selling, general and administrative expenses for the three month
period ended September 30, 2004 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 a proposed offering of our securities. (See
FINANCIAL STATEMENTS, Note 3 - STOCK OPTIONS.)
Without taking into account the expense associated with the issuance of
options, our operating expenses increased approximately $363,467 during the
current period compared to last year. The increase can almost entirely be
attributed to increases in research and testing expenses of $289,350, and
payroll and payroll taxes of $110,715, offset by a reduction in consulting
expenses of $89,550. We expect our operating expenses to remain relatively
constant for the remainder of the fiscal year at an estimated $375,000 per
month.
For the three month period ended September 30, 2003, total operating expenses
were $765,605, consisting of consulting of $89,550, payroll and payroll taxes
of $306,847, depreciation and amortization of $58,653, research and testing
expenses of $9,017 and selling, general and administrative expenses of
$301,538, resulting in a loss from operations of $786,482.
Interest Expense: We had no interest expense during the three month periods
ended September 30, 2004 and September 30, 2003.
Other Income: For the three month period ended September 30, 2004, we had
other income consisting of: interest income of $7,927 associated with the
temporary investment of cash not immediately needed in ordinary daily business
and interest earned on outstanding receivables; and $5,844 of other income.
For the three month period ended September 30, 2003, we had other income
consisting of: interest income of $5,678 associated with temporary investment
of cash not immediately needed in ordinary daily business and interest earned
on outstanding receivables and $1,210 of miscellaneous income.
We experienced a net loss of $7,156,276 for the three month period ended
September 30, 2004. Our basic loss per share for the period was $0.38, based
the weighted average number of shares outstanding of 18,662,788. We
experienced a net loss of $779,594 for the three month period ended September
30, 2003. Our basic loss per share for the period was $0.04, based on weighted
average number of shares outstanding of 17,384,868.
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 September 30, 2004, we had current assets of $2,569,532, an increase of
$154,718 over the $2,414,814 in current assets we had at June 30, 2004. Our
current liabilities were $77,983 at September 30, 2004, a slight increase over
the $58,683 in current liabilities we had at June 30, 2004. At September 30,
2004, we had a working capital surplus of $2,491,549, an increase over the
$2,356,131 at June 30, 2004. We had cash and cash equivalents of $1,746,759
and net accounts receivable of $157,848 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 equivalents at September 30, 2004, is attributable to the
cash received from the exercise of outstanding options and a slight increase
in inventory during the reporting period.
Net cash used by our operating activities for the reporting period was
$597,118 compared to $586,394 for the comparable period in 2003. Our
operations for period ending September 30, 2004 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 2003 were
funded primarily the same way.
At September 30, 2004, we had net property and equipment of $1,385,305, after
deducting $1,653,690 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 almost entirely attributed to accumulated depreciation for
the period. At September 30, 2004, our property and equipment consisted of
leasehold improvements, $173,336; molds and models, $321,994; equipment,
$2,262,880; furniture and fixtures, $70,033; vehicles, $25,851; and software,
$184,901.
We have a retained deficit of $33,547,103 at September 30, 2004. Because we
had an 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 during the fiscal year 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 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.
17
To supplement our cash needs during the fiscal year we intend to (1) obtain
supplemental funding through the exercise of outstanding in the money options;
(2) issue common stock in lieu of cash as compensation for employment,
development, and other professional services; and (3) sell our equity
securities for cash in either a private placement or registered offering. (See
"Risk Factors" below.)
We estimate that the combination of our accounts receivable and our cash and
cash equivalents will meet our operational needs through January 2005. We
anticipate that for the balance of this fiscal year we will need an additional
$1,875,000 to implement our plan and to meet our working capital requirements.
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, we anticipate that sales of certain of our lawn and garden Products to
those customers located in Northern portion of the United States could be
reduced as a result of fall and winter climate and weather conditions.
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. During the quarter ended September 30, 2004, we suffered a
net loss of $7,156,276. 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.
To date we have been able to cover our operating losses from accounts
receivables and the sale of our securities. We expect to fund our general
operations for fiscal year 2005 in the same manner. However, our cost
estimates do not include provisions for any contingence, unexpected expenses
or increases in costs that may arise.
18
Our business operations and plans will be harmed if we are unable to obtain
additional funding.
We believe that our available short-term assets and anticipated revenues may
not be sufficient to meet our operating expenses, business expansion plans,
and capital expenditures through the end of the fiscal year ending June 30,
2005. 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.
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.
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.
Management can offer no assurance with respect to its ability to create
additional revenues, obtain additional equity financing or execute its long-
term business plan.
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.
19
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.
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.
20
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.
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 six 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 fiscal year 2005, we may elect to amend our product pricing to reflect
the increase in component costs. During the last three months, our chemical
pricing remained relatively constant, but there is no guarantee such 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.
Our stock price may decline by future sales of our shares or the perception
that such sales may occur. If we issue additional shares of common stock in
private financings under an exemption from the registration laws, 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.
Some of our outstanding restricted shares of common stock are either eligible
for sale pursuant to Rule 144 or have been registered under the Securities Act
for resale by the holders. We are unable to estimate the amount, timing, or
nature of future sales of outstanding common stock.
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 proposed equity placements that
will dilute current shareholders.
We are submitting a proposal to our shareholders at our annual meeting of
shareholders scheduled for November 15, 2004 (See Part II Item 5) to increase
our authorized common stock from 25,000,000 shares to 40,000,000 shares. Our
board of directors has the authority to issue the authorized but unissued
shares of our common stock without action by the shareholders, so if the
proposal is approved, our board of directors may issue up to the entire amount
of the increased authorized but unissued shares. 21
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.
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.
22
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:
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.
23
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Effective July 1, 2004, our Board of Directors authorized the issuance of
65,000 shares of restricted common stock to Richard A. Steinke, our President
and Chief Executive Office as employment compensation from July 1, 2004
through June 30, 2005. The value of the shares was $598,000, based on the
closing price of $9.20 per share on the date of the board resolution.
Effective July 1, 2004, we amended the exclusive license agreement with our
President and two unrelated parties to license certain intellectual property
rights known as "Apparatus for Making Foam Products" and "Method for Making
Polyurethane Tires with an Outer Skin" embodied in U.S. Patent Nos. 4,943,223
and 4,855,096, respectively. The amendment eliminates all royalty payments in
exchange for 15,000 shares of our restricted common stock as a one-time
payment to the licensees for their assignment and transfer of the technology
to the Company. The closing price of our common stock as quoted on the OTC
Bulletin Board on July 1, 2004 was $9.75 per share, for a value of $146,250.
All of our securities issued in the foregoing transactions were issued in
reliance on the exemption from registration and prospectus delivery
requirements of the Act set forth in Section 3(b) and/or Section 4(2) of the
Securities Act and the regulations promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
ITEM 5. OTHER INFORMATION
Notice of Annual Meeting
------------------------
Our annual meeting of the shareholders (the "Annual Meeting") will be held in
the Santa Maria Room at the Sunset Station Hotel and Casino, 1301 West Sunset
Road, Henderson, Nevada 89014, on Monday, November 15, 2004, at 10:00 am,
Pacific Time, to:
1. Elect five directors to serve until the expiration of their respective
terms and until their respective successors are elected and qualified;
2. Ratify the selection of HJ & Associates, LLC as our independent auditor
for our fiscal year ending June 30, 2005;
3. Vote on the proposed increase of authorized capital from 25,000,000
shares of common stock to 40,000,000 shares of common stock; and
4. Transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
The foregoing matters are described in more detail in our Proxy Statement that
was sent to shareholders on or about October 15, 2004.
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.
25
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: November 15, 2004 AMERITYRE CORPORATION
/S/RICHARD A. STEINKE
----------------------------------
Richard A. Steinke
President and Chief Executive Officer
Dated: November 15, 2004 /S/ANDERS A. SUAREZ
-----------------------------------
Anders A. Suarez
Chief Financial Officer and
Principal Accounting Officer