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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549 


 
FORM 10-Q
 


(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:   December 31, 2014

o 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: 000-50053
GRAPHIC
AMERITYRE CORPORATION
(Exact name of small business issuer as specified in its charter)

NEVADA
87-0535207
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

1501 Industrial Rd., Boulder City, NV
89005
(Address of principal executive offices)
(Zip Code)

(702) 293-1930
(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨      Accelerated filer  ¨      Non-accelerated filer  ¨      Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x

The number of shares outstanding of Registrant’s Common Stock as of February 13, 2015: 41,570,287
 
 
TABLE OF CONTENTS

 
 
PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
 
AMERITYRE CORPORATION
Balance Sheets
 
   
December 31,
2014
   
June 30,
2014
 
   
(Unaudited)
       
ASSETS
           
             
CURRENT ASSETS
           
Cash
 
$
372,963
   
$
728,585
 
Accounts receivable - net
   
505,073
     
384,160
 
Accounts receivable - related party - net
   
14,875
     
17,089
 
Inventory - net
   
717,876
     
770,991
 
Prepaid and other current assets
   
68,646
     
39,631
 
                 
Total Current Assets
   
1,679,433
     
1,940,456
 
                 
PROPERTY AND EQUIPMENT
               
Leasehold improvements
   
162,683
     
162,683
 
Molds and models
   
848,139
     
824,979
 
Equipment
   
2,967,623
     
2,966,649
 
Furniture and fixtures
   
114,184
     
105,622
 
Construction in progress
   
-
     
975
 
Software
   
311,632
     
311,632
 
Less - accumulated depreciation
   
(3,990,143
)
   
(3,915,542
)
                 
Total Property and Equipment
   
414,118
     
456,998
 
                 
OTHER ASSETS
               
Patents and trademarks - net
   
270,921
     
286,947
 
Deposits
   
11,000
     
11,000
 
                 
Total Other Assets
   
281,921
     
297,947
 
                 
TOTAL ASSETS
 
$
2,375,472
   
$
2,695,401
 
 
The accompanying notes are an integral part of these financial statements.

 
AMERITYRE CORPORATION
Balance Sheets (Continued)
 
   
December 31,
2014
   
June 30,
2014
 
   
(Unaudited)
       
LIABILITIES AND STOCKHOLDER'S EQUITY
           
             
CURRENT LIABILITIES
           
Accounts payable and accrued expenses
 
$
586,608
   
$
617,678
 
Current portion of long-term debt
   
14,553
     
16,013
 
                 
Total Current Liabilities
   
601,161
     
633,691
 
                 
Long-term debt
   
53,840
     
53,840
 
                 
TOTAL LIABILITIES
   
655,001
     
687,531
 
                 
STOCKHOLDERS' EQUITY
               
Preferred stock: 5,000,000 shares authorized
of $0.001 par value, 2,000,000 shares issued and
    outstanding, respectively
   
2,000
     
2,000
 
Common Stock: 75,000,000 shares authorized of
$0.001 par value, 41,441,620
shares issued and outstanding, respectively
   
41,441
     
41,441
 
Additional paid-in capital
   
62,500,703
     
62,455,820
 
Common stock payable
   
5,147
     
-
 
Accumulated deficit
   
(60,828,820
)
   
(60,491,391
)
                 
Total Stockholders' Equity
   
1,720,471
     
2,007,870
 
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
2,375,472
   
$
2,695,401
 

The accompanying notes are an integral part of these financial statements.

 
AMERITYRE CORPORATION
Statements of Operations
(Unaudited)
 
   
For the Three Months Ended December 31,
   
For the Six Months Ended December 31,
 
   
2014
   
2013
   
2014
   
2013
 
                         
NET SALES
 
$
1,349,336
   
$
1,260,800
   
$
2,381,060
   
$
2,298,125
 
                                 
COST OF GOODS SOLD
   
1,035,209
     
1,064,624
     
1,836,865
     
1,880,143
 
                                 
GROSS PROFIT
   
314,127
     
196,176
     
544,195
     
417,982
 
                                 
EXPENSES
                               
Research and development
   
57,646
     
40,455
     
97,490
     
76,368
 
Sales and marketing
   
167,346
     
101,966
     
286,205
     
221,654
 
General and administrative
   
217,759
     
207,889
     
448,295
     
435,083
 
                                 
Total Expenses
   
442,751
     
350,310
     
831,990
     
733,105
 
                                 
LOSS FROM OPERATIONS
   
(128,624
)
   
(154,134
)
   
(287,795
)
   
(315,123
)
                                 
OTHER INCOME/(EXPENSE)
                               
Interest expense
   
-
     
(40,905
)
   
-
     
(54,792
)
Interest income
   
159
     
-
     
366
     
-
 
Loss on asset disposal
   
-
     
(1,585
)
   
-
     
(1,585
)
Miscellaneous Income
   
-
     
3,342
     
-
     
3,652
 
Total Other Income/(Expense)
   
159
     
(39,148
)
   
366
     
(52,725
)
                                 
NET LOSS
   
(128,465
)
   
(193,282
)
   
(287,429
)
   
(367,848
)
                                 
Preferred Stock Dividend
   
(25,000
)
   
-
     
(50,000
)
   
-
 
                                 
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
 
$
(153,465
)
 
$
(193,282
)
 
$
(337,429
)
 
$
(367,848
)
                                 
BASIC AND DILUTED LOSS PER SHARE
 
$
(0.00
)
 
$
(0.00
)
 
$
(0.01
)
 
$
(0.01
)
                                 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
   
41,441,620
     
39,801,403
     
41,441,620
     
39,771,511
 
 
The accompanying notes are an integral part of these financial statements.
 
 
AMERITYRE CORPORATION
Statements of Cash Flows
(Unaudited)
 
   
For the Six Months Ended
December 31,
 
   
2014
   
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
 
$
(287,429
)
 
$
(367,848
)
Adjustments to reconcile net loss to net cash used by operating activities:
               
Depreciation and amortization expense
   
90,627
     
105,719
 
Amortization of discount on convertible note
   
 -
     
 22,329
 
Change in allowance for bad debt expense (recovery)
   
(8,066
)
   
(8,045
)
Stock based compensation related to consultant, employee, and director options
   
13,571
     
35,790
 
Stock payable for services
   
5,147
     
-
 
Gain/loss on disposal of assets
   
-
     
(1,585
)
Changes in operating assets and liabilities:
               
 Accounts receivable
   
(110,633
)
   
(216,516
)
 Prepaid and other current assets
   
(29,015
)    
25,128
 
 Inventory and any change in inventory reserve
   
53,115
     
47,625
 
 Accounts payable and accrued expenses
   
(24,570
)    
226,888
 
            Net Cash Used by Operating Activities
   
( 297,253
)
   
( 130,515
)
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of property and equipment
   
(31,721
)
   
(22,319
)
Net Cash Used by Investing Activities
   
(31,721
)
   
(22,319
)
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from the issuance of unsecured notes payable
   
-
     
507,222
 
Redemption and payment of convertible and other notes payable
   
(1,460
)
   
(275,374
)
Preferred stock offering costs
   
(188
)
   
(14,373
)
    Preferred stock dividends
   
(25,000
)    
-
 
Net Cash (Used)/Provided by Financing Activities
   
 (26,648
)    
 217,475
 
NET (DECREASE)/INCREASE IN CASH
   
(355,622
)    
64,641
 
CASH AT BEGINNING OF PERIOD
   
728,585
     
108,747
 
CASH AT END OF PERIOD
 
$
372,963
   
$
173,388
 
                 
NON-CASH FINANCING ACTIVITIES
               
                 
   Interest paid
 
$
 -
   
$
8,154
 
   Income taxes paid
 
$
 -
   
$
 -
 
                 
SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES
               
                 
Accrual of preferred share dividends
 
$
25,000
   
$
 -
 
Reversal of deferred financing costs
 
$
31,500
   
$
-
 
 
The accompanying notes are an integral part of these financial statements.
 
 
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
December 31, 2014
 
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 includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements.  We believe the disclosures and information presented are adequate to make the information not misleading.  These interim condensed financial statements should be read in conjunction with our most recent audited financial statements and notes thereto included in our June 30, 2014 Annual Report on Form 10-K.  Operating results for the quarter ended December 31, 2014 are not necessarily indicative of the results that may be expected for the current fiscal year ending June 30, 2015.
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies disclosed therein have not changed since our audited financial statements and notes thereto included in our June 30, 2014 Annual Report on Form 10-K, except as noted below.
 
Trade Receivables
 
We generally charge-off trade receivables that are more than 120 days outstanding as bad-debt expense, unless management believes the amount to be collectable. The charge-off amounts are included in general and administrative expenses.   As of December 31, 2014 and 2013, the reserve for uncollectible accounts was $7,296 and $-0-, respectively.
 
Stock Based-Compensation Expense
 
We account for stock-based compensation under the provisions of Accounting Standards Codification 718, Compensation – Stock Compensation (ASC 718).  Our financial statements as of and for the quarters ended December 31, 2014 and 2013 reflect the impact of ASC 718.  Stock-based compensation expense related to director, employee or consultant options recognized under ASC 718 for the six months ended December 31, 2014 and 2013 was $13,571 and $35,790, respectively.
 
ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Statement of Operations.  Stock-based compensation expense recognized in our Statements of Operations for the six months ended December 31, 2014 and 2013 assumes all awards will vest; therefore no reduction has been made for estimated forfeitures.  We have awarded some options with a performance requirement and no amounts will be recorded until the requirement is met.

In fiscal year 2015 we modified our volatility analysis to represent a 2 year historical trend of our stock.  This modification to our valuation analysis related to options results in an immaterial difference to previous methodology and is employed consistently with all new option grants.
 
Basic and Fully Diluted Net Loss Per Share
 
Basic and Fully Diluted net loss per share is computed using the weighted-average number of common shares outstanding during the period.
 
Our outstanding stock options and warrants and shares issuable upon conversion of outstanding convertible notes have been excluded from the basic and fully diluted net loss per share calculation.  We excluded 2,834,000 and 2,532,571 common stock equivalents for the six months ended December 31, 2014 and 2013, respectively, because they are anti-dilutive.
 
 
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
December 31, 2014
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

Recent Accounting Pronouncements

Recently Adopted and Recently Issued Accounting Guidance

Issued

In August 2014, the FASB issued ASU 2014-15 Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's financial statements.

In January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20),” which eliminates the concept of extraordinary items. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. The new guidance is to be applied prospectively but may also be applied retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We expect to adopt the provisions of this new guidance on July 1, 2016. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.

Related Party Transactions
 
Amerityre’s Chairman of the Board and Chief Executive Officer, Timothy L. Ryan, is also the principal owner of Rhino Rubber LLC, a manufacturing and distribution company for solid industrial tires and wheels.  During the six months ended December 31, 2014 and 2013, Rhino Rubber LLC purchased a total of $3,988 and $4,994, respectively, in tire products from Amerityre.  As of December 31, 2014 and June 30, 2014, the accounts receivable balances for Rhino Rubber LLC were $14,875 and $17,089, respectively.
 
We currently distribute directly from our manufacturing facility in Boulder City, Nevada and in the past from an independent, contracted warehouse in Ravenna, Ohio.  This contract distribution point was unable to support customer requirements, became ineffective and stopped operations in the second quarter of 2014.  In order to keep commitments to customers and keep revenue growth positive, distribution and other related services were transferred to Rhino Rubber in Akron, Ohio.  Costs for these services were limited to freight, shipping and labor for mounting services.  Storage and other fees of $2,214 for the six months ended December 31, 2014 were charged to the Company by Rhino Rubber and used to offset the above accounts receivable balance.

NOTE 3 - INVENTORY

Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or market.  The inventory consists primarily of chemicals, finished goods produced in our plant and products purchased for resale.
 
   
December 31, 2014
   
June 30, 2014
 
   
(Unaudited)
       
Raw Materials
 
$
306,991
   
$
358,725
 
Finished Goods
   
529,473
     
525,722
 
Inventory reserve
   
(118,588
   
(113,456
)
Total Inventory
 
$
717,876
   
$
770,991
 
 
Our inventory reserve reflects items that were deemed to be slow moving or obsolete based on an analysis of all inventories on hand.
 
NOTE 4 - STOCK TRANSACTIONS

During the second quarter, we granted a consultant 128,667 common shares valued at $0.04 per share ($5,147) for work performed related to sales of our products in the three month period ending December 31, 2014.  These shares were issued in January 2015.

Additionally, in a prior period we had accrued deferred financing costs related to a private placement stock campaign.  Upon further investigation the accrual was in error and reversed in the second quarter of fiscal 2015, resulting in an increase to additional paid in capital.
 
 
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
December 31, 2014

NOTE 5 - STOCK OPTIONS AND WARRANTS

General Option Information

On July 6, 2011, the Board of Directors cancelled the “2004 Non-Employee Directors’ Stock Incentive Plan” and approved the “Directors’ 2011 Stock Option and Award Plan”.  The Company also maintains the 2005 Stock Option and Award Plan, which was previously approved by stockholders, for the purpose of granting option awards to its employees and consultants.   Under the 2005 Plan, a total of 3,000,000 shares are authorized for issuance, and under the 2011 Plan, a total of 3,300,000 shares are authorized for issuance.

During the six months ended December 31, 2014, 100,000 options were granted.  Additionally 140,000 options related to this transaction vested (20,000 options monthly May – November 2014 at $0.10); these options were granted to a consultant pursuant to a consulting agreement.  Year to date expense related to these options is $12,022 as of December 31, 2014.

On December 1, 2014, 480,000 options were granted to the Company’s Chief Operating Officer as part of his employment offer.  The options have a strike price of $0.10, vest December 1, 2015 and expire December 1, 2020.  Year to date expense related to these options is $1,549 as of December 31, 2014.
 
We estimated the fair value of the stock options at the grant date based on the following weighted average assumptions:
 
Risk-free interest rate
    1.190   1.345
%
Expected life
    3.8   4.5
years
Expected volatility
    147.43 % 152.40
%
Dividend yield
          0.00
%

A summary of the status of our outstanding stock options as of December 31, 2014 and June 30, 2014 and changes during the periods then ended is presented below:
 
   
December 31,  2014
   
June 30,  2014
 
   
Shares
   
Weighted Average
Exercise Price
   
Shares
   
Weighted Average
Exercise Price
 
Outstanding beginning of period
   
1,754,000
   
$
0.17
     
1,904,000
   
$
0.23
 
Granted
   
620,000
   
$
0.10
     
150,000
     
0.08
 
Expired/Cancelled
   
-
   
$
-
     
(300,000
)
   
0.50
 
Exercised
   
-
   
$
-
     
-
     
-
 
Outstanding end of period
   
2,374,000
   
$
0.15
     
  1,754,000
   
$
0.17
 
Exercisable
   
1,894,000
   
$
0.17
     
1,604,000
   
$
0.18
 
 
The following table summarizes the range of outstanding and exercisable options as of December 31, 2014:
 
     
Outstanding
   
Exercisable
 
 
Range of
Exercise Prices
   
 
Number Outstanding at
December 31, 2014
   
Weighted
Average
Remaining
Contractual Life
   
 
Weighted
Average
Exercise Price
   
 
Number
Exercisable at
December 31, 2014
   
Weighted
Average Remaining
Contractual Life
 
$
0.08
     
150,000
     
6.92
   
$
0.08
     
150,000
     
6.92
 
$
0.10
     
620,000
     
4.96
   
$
0.10
     
140,000
     
4.96
 
$
0.17
     
650,000
     
4.92
   
$
0.17
     
650,000
     
4.92
 
$
0.17
     
400,000
     
5.92
   
$
0.17
     
400,000
     
5.92
 
$
0.17
     
400,000
     
5.92
   
$
0.17
     
400,000
     
5.92
 
$
0.29
     
154,000
     
0.50
   
$
0.29
     
154,000
     
0.50
 
         
2,374,000
                     
1,894,000
         
 

 
 
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
December 31, 2014

General Warrant Information

In September 2013, the Company obtained an extension on the remaining $100,000 secured convertible promissory note that was issued in the private placement that closed in September 2010.  This note was paid off as of June 30, 2014.   In exchange for the extension, the note holder received 500,000 common stock warrants and $6,500 in accrued interest and fees.  The common stock warrants expire three years from the date of issuance, are exercisable at $0.13 per share, and vest on the next date the value of Amerityre common stock reaches $0.25 per share.  As of December 31, 2014 the warrants have not vested.
 
NOTE 6 – LIQUIDITY

At December 31, 2014, our total cash was $372,963, none of which was restricted and our total indebtedness was $655,001, compared to total cash of $173,388 and total indebtedness of $1,715,797 at December 31, 2013.  Our total indebtedness at December 31, 2014 includes $586,608 of accounts payable and accrued expenses and $68,393 of long-term debt (of which $14,553 is current).

In the second quarter fiscal 2015, our revenue fell short of expectations primarily due to a large long term customer not placing their customary order in the second quarter.  The lack of this customary order was a significant factor in the Company not achieving the expected milestone of achieving positive cash flows from operations. As a result, operations for the first two quarters of fiscal 2015 consumed $355,622 of the Company’s limited cash resources.

To help address our limited cash resources, we are in discussions with various opportunities to license our technology to third parties which we believe will bring in additional cash flows without diluting our common stock or requiring the addition of debt. Additionally, we are in discussions with banks and other lenders regarding establishing a line of credit for short term cash needs, however at this time we have not succeeded in establishing such a line of credit.

At the Annual Stockholder’s Meeting held on December 4, 2014, management presented a plan focusing on “Profitability as a Mindset”.  To that end, management continues to sharpen our sales model continue to add sales resources. We have purchased a customer list and placed advertisements in trade magazines to our target customer base and will further utilize the customer list through a more robust customer relationship management process through our the remainder of fiscal year 2015.

In connection with the preparation of our financial statements for the three and six months ended December 31, 2014, we have analyzed our cash needs for the next twelve months. We have concluded that our available cash and accounts receivables are sufficient to meet our current minimum working capital, capital expenditure and other cash requirements for this period.

NOTE 7 – SUBSEQUENT EVENTS

As disclosed above in Note 4, 128,667 common shares were issued in January 2015 pursuant to services rendered in the second quarter.

 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance or financial condition.  Such statements are only predictions and the actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. The historical results set forth in this discussion and analysis are not necessarily indicative of trends with respect to any actual or projected future financial performance.  This discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report.
 
Overview
 
Amerityre incorporated as a Nevada corporation on January 30, 1995 under the name American Tire Corporation and changed its name to Amerityre Corporation in December 1999.
 
Amerityre engages in the research and development, manufacturing and sale of polyurethane tires.  We believe that we have developed unique polyurethane formulations that allow us to make products with superior performance characteristics, including abrasion resistance, energy efficiency and load-bearing capabilities, in comparison to conventional rubber tires.  We also believe that our manufacturing processes are more energy efficient than the traditional rubber tires manufacturing processes, in part because our polyurethane compounds do not require the multiple processing steps, extreme heat, and high pressure that are necessary to cure rubber. Using our polyurethane technologies, we believe tires can be produced which last longer, are less susceptible to failure, are friendly to the environment and offer improved fuel economy.  

In an effort by our government to continually improve the quality of air, land and water it is important to note that select chemicals used in our formulations in the past are becoming difficult to source .With this in mind Amerityre has embarked on a project to find suitable replacements for these products through intensive R&D in a combined effort with our supplier base. As always Amerityre is committed to be compliant with all government regulations while insuring the quality of our products.
  
We are concentrating on three segments of the tire market: closed-cell polyurethane foam tires, polyurethane elastomer forklift tires and agricultural tires. Our most recent activities in these areas are set forth below:
 
Closed-Cell Polyurethane Tires – The sale of polyurethane foam tires to original equipment manufacturers, distributors and dealers accounts for most of our revenue at this time. We have the ability to produce a broad range of products for the low duty cycle tire market. During 2014, we introduced a new low cost formulation positioned to compete within the commodity segment of this market.   Marketing efforts continue to build customer relationships with original equipment manufacturers and further develop distribution networks to expand business and product sales.
 
Polyurethane Elastomer Forklift Tires – Manufacturing was suspended in the second quarter of 2013 due to quality and process issues.  We engaged a polyurethane specialist to lead the corrective action efforts and complete the development of a marketable forklift tire.  During 2014, the forklift product line was reintroduced into the marketplace. This process has been slow given the poor product performance experienced in 2012 and 2013. Results have been below expectations; however, we believe the product is now receiving increased marketplace acceptance.
 
Agricultural Tires – This product continues to demonstrate revenue growth during the period. With market acceptance and growing revenues for this new product line, we have placed additional resources to ensure product improvements and developments continue to expand at high levels. We have identified two leading global distributors to further market reach in this segment. Our market knowledge continues to grow as evidenced by several new product designs we have implemented during the period.  In addition, we have recently received a design patent on this product with several other applications in process.  This patent will protect the Company’s interest going forward and we anticipate we can bolster future revenues by providing application-specific solutions for customers.

Due to the Company’s limited resources, tire projects which are contingent on additional development, such as composite and automotive tires, have been put on hold and will be revisited at a later date.
 
As described above the market segments we are focused on are diverse markets which are unrelated in terms of customer base, product, distribution, market demands and competition. After completing a review of our cost structure, product pricing and marketing approaches, the new management team concluded that the sales organization should be organized according to a territory sales management approach rather than a product management approach. The sales team is comprised of four manufacturer representatives whose experience is complementary to our product portfolio. By contract this group does not represent any competing products and is committed to meet or beat agreed-upon revenue targets. We expect this new emphasis on proper product pricing and new marketing campaigns to drive more profitable sales for Amerityre, supporting our goal in establishing “Profitability as a Mindset”.  
 
 
Factors Affecting Results of Operations
 
Our operating expenses consisted primarily of the following:
 
 
·  
Cost of sales, which consists primarily of raw materials, components and production of our products, including applied labor costs and benefits expenses, maintenance, facilities and other operating costs associated with the production of our products;

 
·  
Selling, general and administrative expenses, which consist primarily of salaries, commissions and related benefits paid to our employees and related selling and administrative costs including professional fees;

 
·  
Research and development expenses, which consist primarily of equipment and materials used in new product development and product improvement using our technologies;

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

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

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

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with United States generally accepted accounting principles.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses.  On an ongoing basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, deferred compensation and contingencies.  We base our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances.  These estimates allow us to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We believe the following accounting policies are our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that may be uncertain.  If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.

Revenue Recognition

Revenue for products is recognized when the sales amount is determined, shipment of goods to the customer has occurred and collection is reasonably assured. Generally, we ship all of our products FOB origination.

Valuation of Intangible Assets and Goodwill

Patent and trademark costs have been capitalized at December 31, 2014, totaling $590,192 with accumulated amortization of $319,271 for a net book value of $270,921. Patent and trademark costs, net of accumulated amortization at December 31, 2013 totaled $490,747.

The patents which have been granted are being amortized over a period of 20 years. Patents which are pending or are being developed are not amortized. Amortization begins once the patents have been issued. Included in the total patent and trademark costs are $-0- and $6,207 of patent and trademark costs pending at December 31, 2014 and 2013, respectively, that were not being amortized.  
 

The Company evaluates the recoverability of intangibles and reviews the amortization period on a continual basis utilizing the guidance of Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other.  We consider the following indicators, among others, when determining whether or not our patents are impaired:

 
·  
any changes in the market relating to the patents that would decrease the life of the asset;

 
·  
any adverse change in the extent or manner in which the patents are being used;

 
·  
any significant adverse change in legal factors relating to the use of the patents;

 
·  
current period operating or cash flow loss combined with our history of operating or cash flow losses;

 
·  
future cash flow values based on the expectation of commercialization through licensing; and
 
 
·  
current expectations that, more likely than not, the patents will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
          
Inventory
 
Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or market.  The inventory consists primarily of chemicals, finished goods produced in our plant and products purchased for resale.
 
Stock-Based Compensation
 
Equity securities issued for services rendered have been accounted for at the fair market value of the securities on the date of authorization.  The stock-based compensation expense recognized under ASC 718 for the six months ended December 31, 2014 and 2013 was $13,571 and $35,790, respectively. The stock-based compensation expense recognized under ASC 718 for the three months ended December 31, 2014 and 2013 was $6,997 and $20,808, respectively.

Results of Operations
 
Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality and potential variability of our sales and cash flows.  These key performance indicators include:
 
 
·  
Net sales, which consist of product sales and equipment sales, if any;
 
 
 
·  
Sales, net of returns and trade discounts, which are an indicator of our overall business growth and the success of our sales and marketing efforts;
 
 
 
·  
Gross profit, which is an indicator of both competitive pricing pressures and the cost of goods sold of our products and the mix of product and equipment sales and license fees, if any;
 
 
 
·  
Growth in our customer base, which is an indicator of the success of our sales efforts; and
 
 
 
·  
Distribution of sales across our products offered.
 
 
The following summary table presents a comparison of our results of operations for the three and six months ended December 31, 2014 and 2013 with respect to certain key financial measures.  The comparisons illustrated in the table are discussed in greater detail below.

   
For the Three Months Ended
December 31,
       
For the Six Months Ended
December 31
       
   
(in 000’s)
   
Change
 
(in 000’s)
   
Change
 
   
2014
   
2013
   
2014 vs. 2013
 
2014
   
2013
   
2014 vs. 2013
 
Net revenues
 
$
1,349
   
$
1,261
     
7.0
%
 
$
2,381
   
$
2,298
     
3.6
%
Cost of revenues
   
1,035
     
1,065
     
(2.8
%)
   
1,837
     
1,880
     
(2.3
%)
Gross profit
   
314
     
196
     
60.2
%
   
544
     
418
     
30.1
%
Research  and development expenses
   
58
     
40
     
45
%
   
97
     
76
     
27.6
%
Sales and marketing expense
   
167
     
102
     
63.7
%
   
286
     
222
     
28.8
%
General and administrative expense
   
218
     
208
     
4.8
%
   
448
     
435
     
3.0
%
Other income (expense)
   
-
     
(40
)    
(100.0
%)
   
-
     
(53
)    
(100.0
%)
Net loss
   
(128
)
   
(193
)
   
(33.7
%)
   
(287
)
   
(368
)
   
(22.0
%)
Preferred stock dividend
   
(25
)
   
-
     
100.0
%
   
(50
)
   
-
     
100
%
Net loss attributable to common shareholders
 
$
(153
 
$
(193
)
   
(20.7
%)
 
$
(337
)
 
$
(368
)
   
(8.4
%)

Three Months Ended December 31, 2014 Compared to December 31, 2013
 
Net Sales.  Net sales of $1,349,336 for the three months ended December 31, 2014, reflects a 7.0% increase over net sales of $1,260,800 for the three months ended December 31, 2013. Sales between periods increased largely due to increases in the agricultural product line.

Cost of Revenues.  Cost of revenues for the three months ended December 31, 2014 was $1,035,209 or 76.7% of sales compared to $1,064,624 or 84.4% of sales for the same period in 2013. Cost of revenues decreased for the three months ended due to decreases in raw materials and overhead offset by higher direct labor when compared to prior year.
 
Gross Profit.  Gross profit for three months ended December 31, 2014 was $314,127 compared to $196,176 for the same period in 2013. Gross profit increased by $117,951 or 60.2% between periods directly as a result of increases in net sales and decreases in cost of revenues.
 
Research & Development Expenses.  Research and development expenses for the three months ended December 31, 2014 were $57,646 compared to $40,455 for the same period in the prior year. Research and development expenses between periods increased by $17,191 or 42.5% primarily due to increased testing and research expense incurred in the quarter.  All other expenses were generally consistent.

Sales & Marketing Expenses. Sales and marketing expenses for the three months ended December 31, 2014 were $167,346 as compared to $101,966 for the same period in the prior year. Sales and marketing expenses increased $65,380 between periods primarily due to higher commissions to outside sales representatives, higher travel expense to trade shows and higher advertising through trade magazines for our products.

General & Administrative Expenses.  General and administrative expenses for the three months ended December 31, 2014 were $217,759 compared to $207,889 for the same period in 2013. General and administrative expenses increased $9,870 or 4.8% between periods primarily due higher consultant fees which were offset somewhat by savings in salaries and wages.  All other expenses were generally consistent.
 
Other Income/(Expense).  Other income for the three months ended December 31, 2014 was $159 compared to ($39,148) for the same period in 2013. Other income/(expense) increased $39,307 between periods due to our ability to pay off all unsecured notes and short-term borrowings in 2014. 
 
Net Loss.  Net loss for the three months ended December 31, 2014 was $128,465 compared to a net loss of $193,282 for the same period in 2013, a decrease of $64,817.  However, net loss to common shareholders only decreased by $39,817 or 20.6% due to the preferred share dividend.
 
 
Six Months Ended December 31, 2014 Compared to December 31, 2013
 
Net Sales.  Net sales of $2,381,060 for the six months ended December 31, 2014, reflects a 3.6% increase over net sales of $2,298,125 for the six months ended December 31, 2013. Sales between periods increased largely due to increases in the agricultural product line.

Cost of Revenues.  Cost of revenues for the six months ended December 31, 2014 was $1,836,865 or 77.1% of sales compared to $1,880,143 or 81.8% of sales for the same period in 2013. Cost of revenues decreased for the six months ended due to decreases in raw materials and overhead offset by higher direct labor when compared to prior year.
 
Gross Profit.  Gross profit for six months ended December 31, 2014 was $544,195 compared to $417,982 for the same period in 2013. Gross profit increased by $126,213 or 30.1% between periods directly as a result of increases in net sales and decreases in cost of revenues.
 
Research & Development Expenses.  Research and development expenses for the six months ended December 31, 2014 were $97,490 compared to $76,368 for the same period in the prior year. The $21,122 increase between periods is primarily due to increased testing and research expense and higher salaries and wages.

Sales & Marketing Expenses. Sales and marketing expenses for the six months ended December 31, 2014 were $286,205 as compared to $221,654 for the same period in the prior year. Sales and marketing expenses increased $64,551 between periods primarily due higher commissions to outside sales reps, higher travel expense to trade shows and higher advertising through trade magazines for our products.

General & Administrative Expenses.  General and administrative expenses for the six months ended December 31, 2014 were $448,295 compared to $435,083 for the same period in 2013. General and administrative expenses increased $13,212 or 3.0% between periods primarily due to higher consultant fees which were offset somewhat by savings in salaries and wages.  Additionally, expenses related to stock based compensation were lower in 2014 compared to 2013 due to fewer options being granted as of December 31, 2014.
 
Other Income/(Expense).  Other income for the six months ended December 31, 2014 was $366 compared to ($52,725) for the same period in 2013. Other income/(expense) increased $53,091 between periods due to our ability to pay off all unsecured notes and short-term borrowings in 2014.

Net Loss.  Net loss for the six months ended December 31, 2014 was $287,429 compared to a net loss of $367,848 for the same period in 2013, a decrease of $80,419.  However, net loss to common shareholders decreased by $30,419 or 8.4% due to the preferred share dividend.

Liquidity and Capital Resources

Our principal sources of liquidity consist of cash and payments received from our customers.  We do not have any significant credit arrangements.  Historically, our expenses have exceeded our sales, resulting in operating losses.  From time to time, we have obtained additional liquidity to fund our operations through the sale of shares of our common stock and the placement of short-term debt instruments.  In assessing our liquidity, management reviews and analyzes our current cash, accounts receivable, accounts payable, capital expenditure commitments and other obligations.
 
Cash Flows
 
The following table sets forth our cash flows for the six months ended December 31, 2014 and 2013.
 
   
For the Six Months Ended
December 31,
 
   
(in 000’s)
 
   
2014
   
2013
 
Net Cash Used by Operating Activities
 
$
(297
)
 
$
(131
Net Cash Used by Investing Activities
   
(32
)
   
(22
)
Net Cash (Used)/Provided by Financing Activities
   
(27
   
217
 
Net (Decrease) in Cash During Period
 
$
(356
 
$
(64
 
 
Net Cash Used by Operating Activities. Our primary sources of operating cash during the period ended December 31, 2014 came from collections from customers, however our due to higher year end customer purchases our accounts receivable was also higher at year end. Our primary use of operating cash was an increase in prepaid and other current assets.  Net cash used by operating activities was $297,253 for the period ended December 31, 2014 compared to net cash used by operating activities of $130,515 for the same period in 2013. 
  
Net Cash Used by Investing Activities.  Net cash used by investing activities was $31,721 for the period ended December 31, 2014 and $22,319 for the same period in 2013.  Our use of cash for the period ended December 31, 2014 was for the purchase of models and molds and software, all used in the manufacturing process.  

Net Cash (Used)/Provided by Financing Activities.  Net cash used by financing activities was $26,648 for the period ended December 31, 2014 compared to net cash provided by financing activities of $217,475 for the same period last year. The primary use of cash for the period ended December 31, 2014 was redemption of $1,460 of notes payable and the payment of $25,000 preferred stock dividend.
 
Contractual Obligations and Commitments
 
The following table summarizes our contractual cash obligations and other commercial commitments at December 31, 2014.
 
   
Payments due by period
 
   
Total
   
Less than 1 year
   
1 to 3 years
   
3 to 5 years
   
After 5 years
 
Facility lease (1)
 
$
66,000
   
$
66,000
   
$
-
   
$
-
   
$
-
 
Total contractual cash obligations
 
$
66,000
   
$
66,000
   
$
-
   
$
-
   
$
-
 
                                            

(1)  In May 2014, we negotiated a one year extension of the lease on our executive office and manufacturing facility located at 1501 Industrial Road, Boulder City, Nevada.  The property consists of a 49,200 square foot building of which the landlord has negotiated to possibly occupy 7,000 square feet.  This space is not critical to our manufacturing processes and will not interrupt current business operations.  We currently occupy all 49,200, inclusive of approximately 5,500 square feet of office space, situated on approximately 4.15 acres.   The extended lease commenced on July 1, 2014 for the base rent of $11,000 per month.  All other terms and conditions of the building lease remain in effect.
 
Cash Position, Outstanding Indebtedness and Future Capital Requirements
 
At February 3, 2015, our total cash balance was $369,594, none of which is restricted; accounts receivables, net of reserves for bad debt, was $282,836; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was $841,099. Our total indebtedness was $479,379.  Our total indebtedness at February 3, 2015 includes $300,898 in accounts payable, $4,363 in interest for notes and short-term borrowings, $105,725 in accrued expenses, $14,553 in current portion of long-term debt and $53,840 in long-term debt.

Over the past year, we have been working on various proposals to secure short-term loans as well as long-term bank financing and equity based investments. This work resulted in $355,182 in proceeds from unsecured notes payable and our ability to place Preferred Shares resulting in proceeds of $1,980,478, net of offering costs.  These funds enabled us to pay off $867,257 in debt from 2014 and 2013, fund operations, plus keep operating cash available to fund fiscal year 2015 initiatives as we grow our revenue while maintaining a stable cost basis.
 
The Company currently does not have an existing credit facility. Over the past year, we have worked with our vendors to obtain extended credit terms and increase credit lines. We also continue to maintain strong customer credit policies and procedures and aggressively pursue receivable collections. 
 
 
We are intent, in spite of losing a significant number of sales growth opportunities due to cash flow constraints, on focusing on the sale and distribution of profitable product lines. Therefore we are aggressively pursuing an expand and grow business plan that will require securing a financial facility required to maintain sufficient raw material and finished goods inventory levels to capitalize on sales growth opportunities. No additional capital expenditures are anticipated over the next twelve months unless they support sales development and product improvement.  We continue to work to reduce our overall costs wherever possible.

In the second quarter fiscal 2015, our revenue fell short of expectations primarily due to a large long term customer not placing their customary order in the second quarter.  The lack of this customary order was a significant factor in the Company not achieving the expected milestone of achieving positive cash flows from operations. As a result, operations for the first two quarters of fiscal 2015 consumed $355, 622 of the Company’s limited cash resources.

To help address our limited cash resources, we are in discussions with various opportunities to license our technology to third parties which we believe will bring in additional cash flows without diluting our common stock or requiring the addition of debt. Additionally, we are in discussions with banks and other lenders regarding establishing a line of credit for short term cash needs, however at this time we have not succeeded in establishing such a line of credit.

At the Annual Stockholder’s Meeting held on December 4, 2014, management presented a plan focusing on “Profitability as a Mindset”.  To that end, management continues to sharpen our sales model continue to add sales resources. We have purchased a customer list and placed advertisements in trade magazines to our target customer base and will further utilize the customer list through a more robust customer relationship management process through our the remainder of fiscal year 2015.

As of December 31, 2014 the Company has approximately 10,471,000 shares authorized and available for issuance. These authorized but unissued and unreserved shares of our common stock can be utilized as necessary to fund the expansion of our manufacturing operations or to obtain additional working capital.
 
In connection with the preparation of our financial statements for the three and six months ended December 31, 2014, we have analyzed our cash needs for the next twelve months. We have concluded that our available cash and accounts receivables are sufficient to meet our current minimum working capital, capital expenditure and other cash requirements for this period.

 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in prevailing market interest rates affecting the return on our investments but do not consider this interest rate market risk exposure to be material to our financial condition or results of operations.  We invest primarily in United States Treasury instruments with short-term (less than one year) maturities.  The carrying amount of these investments approximates fair value due to the short-term maturities.  Under our current policies, we do not use derivative financial instruments, derivative commodity instruments or other financial instruments to manage our exposure to changes in interest rates or commodity prices.
 
ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As required by SEC Rule 13a-15(b), an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer, concluded that the design and operation of these disclosure controls and procedures were effective at the reasonable assurance level. There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
 
 
 PART II - OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS

None.
 
ITEM 1A. RISK FACTORS

In addition to “Part I. Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the year ended June 30, 2014.  The Company has identified the following:

Changes to government regulations applicable to chemicals used in our manufacturing process may require adjustments to our product formulations that could increase costs, delay production or even eliminate our ability to produce certain product lines if we are unable to identify substitute materials.

As of the date of this filing select chemicals used in our current polyurethane elastomer formulations are being phased out of production and no longer will be sold. While we expect to identify and validate replacement materials before our current supplies are exhausted, if we are not able to find appropriate substitute material we may be unable to continue to produce our polyurethane elastomer based formulations currently used for our forklift and agricultural tires. Eliminating these product lines would have a significant and material adverse effect on our current business and future business plans and prospects.

Shipping port slowdowns or closures due to labor disputes may delay or stop our manufacturing if components ordered from overseas do not arrive on schedule.

Production of certain products requires components sourced from international suppliers for which we have no cost effective alternative suppliers.  If overseas delivery of these components is delayed or halted due to labor strikes or port closures, our production could be delayed or halted, we would be unable to deliver completed products as ordered, and our revenue stream and ability to operate would be seriously compromised.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.
 
ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS
 
31.1
   
31.2
   
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2
   
101 INS
XBRL Instance Document
   
101 SCH
XBRL Taxonomy Extension Schema Document
   
101 CAL
XBRL Taxonomy Extension Calculation Linkbase Document
   
101 DEF
XBRL Taxonomy Extension Definition Linkbase Document
   
101 LAB
XBRL Taxonomy Extension Label Linkbase Document
   
101 PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated:  February 13, 2015
 
AMERITYRE CORPORATION
     
By:
     
/s/ Timothy L. Ryan
 
/s/ Lynda R. Keeton-Cardno
 
Timothy L. Ryan
Chief Executive Officer
(Principal Executive Officer)
 
Lynda R. Keeton-Cardno
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 
 
20