ITEM 1. BUSINESS
Overview
We were incorporated as a Nevada corporation on January 30, 1995 under the name American Tire Corporation and changed our name to Amerityre Corporation in December 1999. Since our inception in 1995, we have been engaged in the research and development of technologies related to the formulation of polyurethane compounds and the manufacturing process for producing tires from polyurethane.
We believe that we have developed unique polyurethane formulations that allow for the creation of tire products with superior performance characteristics, including abrasion resistance and load-bearing capabilities, compared to those of conventional rubber tires. In addition, we believe that the manufacturing processes we have developed are more efficient than traditional tire manufacturing processes, in part because our polyurethane compounds do not require the processing steps, extreme heat, and high pressure that are necessary to cure rubber. Using our polyurethane technologies, we believe tires can be produced that are cost-competitive, more durable and more fuel efficient than existing rubber tires. As a company focused on the advanced chemistry and potential
innovative applications of polyurethane, we believe there is a significant opportunity to apply our materials to several industries. The escalating price of rubber, combined with its inherent limitations, demonstrates the need for and potential benefits of alternative materials. We believe that significant product performance improvements can be realized by substitution of our unique polyurethane compounds for both rubber and inferior polyurethane compounds.
We intend to expand our intellectual property portfolio through our own research and development as well as co-development efforts with industry leaders. We have had numerous patents granted and we have additional patent applications pending relating to our technology. By expanding our intellectual property, we believe that we will strengthen our competitive position and continue to be an innovator in the development of polyurethane technologies.
Products
Our polyurethane material technology is based on two key proprietary formulations; closed-cell polyurethane foam, which is a lightweight material with high load-bearing capabilities for light-use applications; and Elastothane®, a high performance polyurethane elastomer with high load-bearing capabilities suitable for heavy-use applications. The sale of closed-cell polyurethane foam tires accounts for approximately 93% of our total revenues at this time. However, we believe that the technology to formulate polyurethane for specialty applications and produce tires and tire-related products using our proprietary formulations is significant to our potential future growth. Our business model provides for a diversified revenue stream, and we intend to generate additional revenue through license agreements relating to the use of our patented manufacturing methods and commercialization of the products produced with our technology.
Low Duty Closed-Cell Polyurethane Foam Tires
We currently manufacture several lines of closed-cell polyurethane foam tires for bicycles, wheelchairs, lawn and garden products, such as wheelbarrows and hand trucks, and outdoor power equipment products. Our closed-cell polyurethane foam products are often referred to as flat-free because they have no inner tube, do not require inflation and will not go flat even if punctured. Our closed-cell polyurethane foam tires are mounted on the wheel rim in much the same way as a pneumatic tire. Our closed-cell polyurethane foam products are virtually maintenance free, eliminating the need to make tedious puncture repairs and offering superior wear compared to rubber based tires.
Although we currently have the capacity to produce up to 2,000,000 closed-cell foam tires per year at our Boulder City, Nevada facility, Long-term, we intend to expand commercialization of our closed-cell foam tire products through strategic relationships with licensees who will manufacture the closed-cell foam tires for use on original equipment products.
Amerifill™ Tire Fill Material
In May 2008, we began the sale of high-quality polyurethane foam for use in the commercial tire fill market. The tire fill material is marketed under the name Amerifill®. Amerifill® is based on Amerityre’s proven, premier “flat-free” closed-cell polyurethane foam technology. Tire fill materials are used in many tire applications, including construction, industrial and mining applications, to “flat-proof” and extend the life of rubber tires. Amerifill® is based on MDI polyurethane chemical formulations, which have been shown to be very stable and environmentally safe. Most tire fill materials available today are petroleum-based compounds that have been shown to reduce the useful life of the tire and to pose environmental hazards. We have evaluated Amerifill® in the field and in side-by-side comparison testing conducted by independent test laboratories. We have shown that Amerifill® performs better under load, runs cooler and is more durable than current comparable materials.
Polyurethane Elastomer Forklift and Skid Steer Tires
We have completed the development phase of our new lines of fork lift and skid steer tires that will compete with tires that currently use heavier and more expensive rubber. We’ve been able to demonstrate the capability of manufacturing MDI polyurethane forklift tires at the rate of one tire per minute. Based on our
manufacturing model, we believe that MDI polyurethane forklift and skid steer tires can be manufactured and sold at prices competitive with rubber tires.
Polyurethane Foam Fire Retardant Material
We have formulated and tested small quantities of a flame retardant polyurethane foam for use as packaging material. The flame retardant material has performed well in flammability testing and exceeded the requirements of the UL 94-HB (Horizontal Burn) test. We are currently evaluating commercial applications for this product and the related capital equipment costs and expenses associated with producing and marketing this product in commercial quantities.
Products in Development
We are developing tires and treads for tires using Elastothane® for a variety of applications as discussed below. In order to design and produce polyurethane tires suitable for these applications, we have invented the manufacturing equipment necessary to produce these tires in limited quantities and currently have multiple patents and pending patent applications with respect to various aspects of this technology. This work is ongoing and we expect to make improvements to the processes and equipment as needed so that products can be produced in commercial quantities. Elastothane® and the technology to produce tires using this proprietary formulation are significant to us because we believe that they allow for the creation of tires that can be produced quickly and less expensively than traditional rubber pneumatic tires, while meeting or exceeding the performance characteristics of those tires.
Polyurethane Elastomer Retread Material
We have been developing a manufacturing process for retreading off the road (“OTR”) and medium commercial truck tires with Elastothane®. We believe this retreading process will have broad application for the mining, construction, industrial and commercial truck tire markets. Our tire retreading process involves applying the polyurethane tread compound to the rubber tire casing without high heat, pressure or curing.
In September 2006, we entered into a manufacturing license agreement with Qingdao Qizhou Rubber Company, LTD. (“Qingdao”), a Chinese company, to manufacture retreads using our polyurethane elastomer compound for large size OTR tires used in mining operations. However, Qingdao has told us that due to the slow-down in the international economy, it cannot provide us with a target date for commencing the production of OTR tire retreads. If Qingdao’s OTR tire retread facility becomes operational, Qingdao will purchase the polyurethane elastomer chemical systems necessary to produce the OTR tire retreads directly from us.
Polyurethane Elastomer Non-Pneumatic or “Solid” Tires
We have completed the developmental phase of a non-pneumatic zero-pressure temporary/spare tire using Elastothane®. This solid Elastothane® tire was developed for potential use as a temporary/spare tire for passenger vehicles. These tires do not contain air and do not require inflation. However, in its current state of development, the non-pneumatic temporary spare tire costs and weighs more than a conventional pneumatic temporary tire.
Polyurethane Elastomer Passenger Car Tire and the Arcus® Run-Flat Tire
In 2001, we developed polyurethane elastomer pneumatic passenger car tires that we were able to drive for over 500 miles without air pressure and with several holes in the sidewalls. These tires did not contain traditional tire reinforcement materials, such as beads, belts and plies. We then developed Arcus®, a patented system for integrating these reinforcement materials in our Elastothane® tires. The Arcus® Run-Flat Tire is designed to operate at normal air pressure, yet continue to perform normally for up to 200 miles without air.
We have produced a limited number of Arcus® passenger car tires and have conducted independent laboratory testing to demonstrate these tires comply with the Federal Motor Vehicle Safety Standards, or FMVSS. In April 2004, our Arcus® Run-Flat tire was successfully tested by an accredited test laboratory approved by the National Highway Traffic Safety Administration, or NHTSA, to certify compliance with the laboratory test
procedures required under FMVSS 109, the current safety standard for pneumatic passenger car tires. We know of no other company that has produced a pneumatic polyurethane passenger car tire that has passed these standards. Additionally, an independent laboratory test demonstrated that our Arcus® Run-Flat tire had 45% less rolling resistance than a comparable rubber run-flat car tire. The independent laboratory test indicated that the lower rolling resistance would result in more than a 12% increase in fuel economy for a car equipped with Arcus® Run-Flat tires.
In November 2007, we successfully completed the final components of FMVSS 139 (the U.S. safety standard) testing on our Arcus® run-flat tire design. Components of the testing include bead unseating, tire strength and the strenuous high speed component, as well as an endurance component. We continue to manufacture prototype passenger car tires to evaluate the properties of the tires in the laboratory and on vehicles. We have also provided prototype tires to other tire or automotive manufacturers for performance evaluation, which may include uniform tire quality grading or other performance testing and/or testing to non-U.S. safety standards. In addition, we have been working to finalize the elements of the manufacturing process that is intended to achieve a production rate of one tire per minute.
Raw Materials and Supplies
The two principal chemical raw materials required to manufacture our products are known generically as polyols and isocyanates. We purchase our chemical raw materials from multiple third-party suppliers. In addition, we purchase various quantities of additional chemical additives that are mixed with the polyols and isocyanates. These additional chemicals are also available from multiple suppliers. Critical raw materials are generally sourced from at least two vendors to assure adequate supply and price competition.
We believe that sufficient quantities of chemical raw materials can be obtained through normal sources to avoid interruption of production. However, with respect to both polyols and isocyanates, worldwide demand is increasing and may exceed current capacity. If we are successful in implementing our business strategy, the quantities of chemical raw materials required by us or by others that utilize our technology may increase significantly. Shortages, if any, may result in price increases that we may or may not be able to pass on to our customers by means of corresponding changes in product pricing. Therefore, raw material price increases or our inability to pass price increases through to customers could adversely affect our results of operations.
In addition to the chemical raw materials, we purchase steel and plastic wheel components for use in tire and wheel assemblies. We purchase these components from multiple third-party suppliers. In fiscal 2008 and 2009 we experienced price increases for steel wheel components but no supply delays or shortages. However, we anticipate that we may experience an increase in steel wheel components at such time as the Chinese government cancels any export rebates it may be currently providing Chinese wheel manufactures. We believe that we can continue to purchase wheel components from multiple sources without any difficulty.
Operations/Manufacturing
Our closed-cell polyurethane foam products are manufactured utilizing single or multiple stationed carousel centrifugal molding presses. We produce closed-cell foam products using these presses by pouring a proprietary polyurethane formula into a mold, which then spreads out in the mold through centrifugal force. The molding process occurs by reacting MDI with polyol and other chemicals. The chemical reaction causes a cross linking of the chemicals, which thereafter become solid. The manufacturing process for a closed-cell polyurethane foam product takes less than two minutes. The closed-cell polyurethane foam product can then be removed from the mold and the process is repeated.
Our polyurethane car tire technology is best summarized as a combination of specially formulated chemicals coupled with unique manufacturing processes and tire building techniques. We have also invented manufacturing processes to make tires for vehicles from polyurethane elastomer. We believe this manufacturing process offers significant advantages over the process for producing rubber tires. We believe that manufacturing a passenger car tire using our manufacturing technology will significantly reduce the cost of a tire manufacturing plant. Because of our simplified manufacturing process, much of the equipment typically required to produce
rubber tires is not necessary, and an Elastothane™ tire manufacturing plant will require much less square footage and require less energy to run.
All of our closed-cell polyurethane foam products are inspected following the manufacturing process and prior to shipment to ensure quality. Any closed-cell foam products considered by our quality control personnel to be defective are disposed of through traditional refuse collection services or can be ground into pellets, which can be melted and reused to make other products and reduce waste of raw materials. We expect to implement similar quality control procedures with respect to any Elastothane™ products that we produce.
Information Systems
We use commercial computer aided design, or CAD, software in connection with engineering and designing our products. This software allows us to integrate our proprietary manufacturing and production data with our design technology, enabling our engineering department to leverage our previous manufacturing and test results to predict the performance characteristics of new product designs. For general business purposes, we use commercially available software for financial, distribution, manufacturing, customer relationships and payroll management.
Sales, Marketing and Distribution
Historically, we have been primarily a technology company in the development stage, manufacturing a limited number of products for the purpose of validating our polyurethane materials and manufacturing technology. We now have three product lines available for the market, polyurethane foam tires, tire fill materials, and solid forklift and skid steer tires. We continue to manufacture test tires for different applications for the solid tire business.
We have an extensive line of closed-cell polyurethane foam tire products for various product segments and continue to increase our different tire size offerings. Our four full-time sales representatives are actively targeting customers that utilize tires in significant volume. Our sales representatives are also working to establish broader distribution for our products in the aftermarket by contacting major regional distributors, retail cooperatives and chains that distribute and otherwise sell our products.
Tire fill is a product used in flat proofing tires. We target suppliers and OEM (original equipment manufacturer) users of tire fill in the construction, industrial and mining applications.
Solid tires are the newest product we have introduced. We announced earlier in the year an agreement with K2 Industrial Tires for the sales and marketing of solid press-on forklift tires. We have a complete line for the press-on tires both smooth and traction tread applications. We continue to experiment with other applications with the solid tire business as this covers broad range applications and different sizes in the tire business.
We continue looking for international marketing partners for overseas sales of our products.
Customers
We have one customer, Central Purchasing, which accounted for approximately 20%, 20%, and 23% of total sales during the fiscal years ended June 30, 2009, 2008 and 2007, respectively. We don't believe that the loss of this customer would have a material adverse effect on our business. In general, our customers include OEMs of lawn and garden products, and outdoor power equipment, regional distributors, retail cooperatives and chains that sell lawn and garden products, bicycle tires and hand truck tires to the aftermarket.
Competition
There are several companies that produce not-for-highway-use or light-use tires from polyurethane foam such as Green Tire, UK, Alshin Tire USA, Woo Tire China and Krypton-India, India. We believe our closed-cell polyurethane foam tires differ from the polyurethane foam tires offered by the above competitors because our products contain millions of closed-cell versus open-cell air bubbles. By closing the cells, our products have higher
load bearing characteristics than tire products with open-cell polyurethane foam, while effectively producing a ride quality comparable to a pneumatic tire.
In addition to manufacturers of polyurethane foam tires, we compete directly with companies that manufacture and market traditional not-for-highway-use, light-use pneumatic, semi-pneumatic, and solid tires made from rubber. The not-for-highway use tire industry has historically been highly competitive and several of our competitors have financial resources that substantially exceed ours. In addition, many of our competitors are very large companies, such as Kenda, Taiwan, Maxxis International, Taiwan, and Carlisle Tire, USA, that have established brand name recognition, have established distribution networks for their products, and have developed consumer loyalty to such products.
There are several companies that produce pneumatic tire fill material, such as Carpenter, Pathway Polymers and Arnco. These companies are larger than us and have established distribution networks for their products. We believe that most tire fill materials available today are petroleum-based compounds that have been shown to reduce the useful life of the tire and to pose environmental hazards. Governments in both Europe and the United States have either passed or are considering legislation that will eventually outlaw the use or disposal of these hazardous fill materials. Our Amerifill® tire fill material is based on MDI polyurethane chemical formulations, which have been shown to be very stable and environmentally safe. We have shown that Amerifill® performs better under load, runs cooler and is more durable than current comparable materials.
We have evaluated Amerifill® in the field and in side-by-side comparison testing conducted by independent test laboratories. We believe these tests have demonstrated that our light weight foam Amerifill® material is cost-competitive and suitable for approximately 75% of the market. While our elastomer Amerifill® material is not price competitive with oil based fill products, it has significant environmental benefits compared with those products.
We know of no other companies that have the technology necessary to formulate and produce polyurethane elastomer compounds suitable for either highway or OTR tire use. To our knowledge, no other company has produced polyurethane pneumatic and/or non-pneumatic passenger car tires that comply with FMVSS for those tires. However, there are several domestic and international companies that produce rubber tires for highway or OTR use, most of which are larger and have greater financial resources than we do. Significant competitors in the highway tire market include Goodyear, Bridgestone/Firestone and Michelin. Significant competitors in the OTR tire market include Bridgestone/Firestone and Michelin.
Intellectual Property Rights
We seek to obtain patent protection for, or to maintain as trade secrets, those inventions that we consider important to the development of our business. We rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and branding. We control access to our proprietary technology and enter into confidentiality agreements with our employees and other third parties. We own seven issued U.S. patents and have several additional pending U.S. and foreign patent applications. We use various trademarks in association with marketing our products, including the names Arcus®, Amerityre®, Atmospheric®, Elastothane®, Amerifill®, Kik™ and Tire Technology for the 21st Century®
Trade Secrets
Our polyurethane material technology is based on two key proprietary formulations, a closed-cell polyurethane foam, which is a lightweight material with high load-bearing capabilities for light-use applications, and a polyurethane elastomer, which is a high performing material with high load-bearing capabilities for heavy-use applications.
We restrict access to our key proprietary formulations to a limited number of our executive officers and managers. Documentation of our proprietary formulations is secured in a safe deposit box. We have not applied for patent protection of our proprietary formulations because such applications would require us to publicly disclose these formulations. Instead, we have chosen to maintain these formulations as trade secrets.
Patents
Set forth in the schedule below are patents that have been issued or for which a patent application is pending with respect to our technology.
Description of Patent
U.S. Patent App/Serial No.
Issued Date or Date Filed
Brief Description/Purpose
Spin Casting Apparatus for Manufacturing an Item From Polyurethane Foam
5,906,836
5/25/1999
Broader application to products other than tires for centrifugal method of manufacturing
Method for Making Tires and the Like
6,165,397
12/26/2000
Applies to pouring the material at the inside diameter (where the tire starts) during the manufacturing process
Non-Pneumatic Tire and Rim Combination
6,431,235
8/13/2002
Applies to how the polyurethane foam tires mechanically locks to the wheel/rim without tire beads
Run-Flat Tire with Elastomeric Inner Support
6,679,306
1/20/2004
Applies to a polyurethane insert within a tire to create a “run-flat” system
Elastomeric Tire with Arch Shaped Shoulders
6,971,426
12/06/2005
Applies the design of the Arcus® run-flat tire (the first polyurethane elastomer tire to run with or without air)
Tire Core Package for Use in Manufacturing a Tire with Belts, Plies and Beads and Process of Tire Manufacture
6,974,519
12/13/2005
Applies to how we put the plies, beads and belts on a mandrel or bladder to be placed inside a mold for manufacturing a tire
Method and Apparatus for Forming a Core of Plies, Belts and Beads and for positioning the core in a mold for forming an Elastomeric tire
7,094,303
8/2/2004
Applies to improvements on how we put the plies, beads and belts on a mandrel or bladder to be placed inside a mold for manufacturing a tire
Method and Apparatus for Vacuum Forming an Elastomeric Tire
7,399,972
9/4/2004
Applies to polyurethane tires and the method we employ to evacuate air from the mold while moving material through the mold utilizing a vacuum process to eliminate air pockets within the matrix of the material
Method and Apparatus for Vacuum Forming a Wheel from a Urethane Material
7,377,596
4/29/2005
Applies to the method we employ to coat a light gauge steel or aluminum wheel by evacuating air from the mold while moving material through the mold utilizing a vacuum process to eliminate pockets of air within the matrix of the material. The resulting product becomes a “Composite” wheel.
Plies Sleeve for use in Forming an Elastomeric Tire
7,438,961
1/10/2006
Applies to the how the tire beads and tire plies are assembled prior to putting them on a mandrel or a core/bladder
Run-Flat Tire Insert System
7,398,809
6/27/05
Applies to how to utilize an insert on a wheel within a corresponding pneumatic tire
Air-No-Air Elastomeric Tire
Pending
8/12/05
Applies to a pneumatic tire that can run with our without air
Airless Spare Tire
Pending
11/25/05
Applies to a non-pneumatic tire
Belt For Use in Forming a Core for Manufacturing an Elastomeric Tire
Pending
4/3/07
Applies to the belt package used in a pneumatic tire
Apparatus for Vacuum Forming a Tire, Wheel or Other Item from an Elastomeric Material
Pending
5/22/06
Applies to an improvement in the vacuum forming equipment used to manufacture a tire and other items
Bead alignment clip and system for its use for locating and maintaining a tire bead positioning onto a core build mandrel in forming a core for manufacturing an elastomeric tire
Pending
3/9/2007
Applies to the manufacturing of a pneumatic tire that requires a tire bead for internal reinforcement
Improved alignment system for positioning tire beads onto a tire core sidewall
Pending
9/17/2007
Applies to placement of tire beads inside tire mold
Trademarks
Set forth in the schedule below are the United States trademarks that have been registered or for which a trademark application has been filed.
Trademarks
Registration/Serial #
Issued/Filed
Amerityre®
2,401,989
11/7/2000
Logo®
3,118,909
7/25/2006
Tire Technology for the 21st Century®
3,190,582
6/20/2005
Arcus®
2,908,077
12/7/2004
Atmospheric®
3,089,313
5/9/2006
Elastothane®
3,139,489
9/9/2003
Amerifill®
3,440,176
9/5/06
Flexfill™
3,499,944
9/21/07
Kik™
3,608,633
9/11/08
We also own certain trademark applications and/or trademark registrations relating to the Arcus trademark in several foreign jurisdictions.
Employees
As of August 31, 2009 we had 17 full-time employees, including 11salaried and 6 hourly employees. We may hire temporary labor for manufacturing needs as required. We believe that we will be able to hire a sufficient quantity of qualified laborers in the local area to meet our employment needs. Our manufacturing process does not require special training, other than orientation to our production techniques and specific equipment. None of our employees is represented by a labor union or a collective bargaining agreement. We consider our relations with our employees to be good.
Research and Development
Our research and development activities are focused primarily on the continued development of our passenger car tire technology and the use of our proprietary chemical systems (i.e. Amerifill™ and Elastothane®) for use in multiple applications as discussed above. We continue to fine tune tire products for various markets (i.e. solid-fork lift tires and cost-efficient manufacturing processes). We have also developed non-tire related applications (i.e., polyurethane foam fire retardant material) and, provided we have sufficient funding, we will continue to devote a portion of our research and development efforts outside of the tire industry. Our research and development expenses have totaled $190,030, $572,097and $834,647 for fiscal 2009, 2008 and 2007, respectively.
Regulatory Environment
Tire manufacturers must comply with a wide range of government- and industry- imposed standards and regulations. In order to commercially market motor vehicle tires in the U.S., manufacturers must comply with the FMVSS, which are promulgated by the National Highway Traffic Safety Administration. In addition to FMVSS,
tire manufacturers are subject to a variety of national and local laws and regulations, many of which deal with the environment and health and safety issues, including specific requirements related to tire strength, performance and endurance. Regulations may change in response to judicial proceedings, legislative and administrative proposals, government policies, competition, and technological developments.
ITEM 1A.
ITEM 1A. RISK FACTORS
Due to our history of operating losses, our auditors are uncertain that we will be able to continue as a going concern.
Our financial statements have been prepared assuming that we will continue as a going concern. For the years ended June 30, 2009, June 30, 2008 and June 30, 2007, we had net losses of approximately $3.62 million, $4.22 million and $5 million, respectively. The independent auditors’ report issued in conjunction with the financial statements for the year ended June 30, 2009 contains an explanatory paragraph indicating that the foregoing matters raise substantial doubt about our ability to continue as a going concern. We cannot guarantee that we can generate net income, increase revenues or successfully expand our operation in the future, and if we cannot do so, the company may not be able to survive and any investment in the company may be lost.
Because our auditors have expressed a going concern opinion, our ability to obtain additional financing could be adversely affected.
We have incurred significant losses since inception, which have resulted in an accumulated deficit of $54,643,220 at June 30, 2009. Because of these continued losses and our accumulated deficit, we have included a going concern paragraph in Note 5 to our financial statements included in this report, 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.
Historically, we have lost money from operations and we have made no provision for any contingency, unexpected expenses or increases in costs that may arise.
We are an early-stage company and our products have not obtained broad market acceptance. Since inception, we have been able to cover our operating losses from the sale of our securities. We do not know if these sources of funds will be available to cover future operating losses. If we are not able to obtain adequate sources of funds to operate our business we may not be able to continue as a going concern.
Our business operations and plans could be adversely affected in the event we need additional financing and are unable to obtain such funding when needed. To the extent that our business strategy requires expanding our operations, such expansion could be costly to implement and may cause us to experience significant continuing losses. It is possible that our available short-term assets and anticipated revenues may not be sufficient to meet our operating expenses, business expansion plans, and capital expenditures for the next twelve months. Insufficient funds may prevent us from implementing our business strategy or may require us to delay, scale back or eliminate certain opportunities for the commercialization of our technology and products. If we cannot generate adequate sales of our products, or increase our revenues through licensing of our technology or other means, then we may be forced to cease operations.
In order to succeed as a company, we must continue to develop commercially viable products and sell adequate quantities of products at prices sufficient to generate profits. 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 products. These factors include whether competitors produce alternative or superior products and whether the cost of implementing our products is competitive in the marketplace.
In addition, we are attempting to increase revenues through licensing our technology and manufacturing rights, selling polyurethane chemical systems to customers that produce their own products, and offering contract design and engineering services. If these proposals are not viable in the marketplace, we may not generate significant revenues from these efforts.
A continuing recession in the U.S. and general downturn in the global economy could have an adverse impact on our business, operating results or financial position.
The U.S. economy has been in recession and there has been a general downturn in the global economy. A continuation or worsening of these conditions, including credit and capital markets disruptions, could have an adverse impact on our business, operating results or financial position in a number of ways. We may experience declines in revenues and cash flows as a result of reduced orders, payment delays or other factors caused by the economic problems of our customers and prospective customers. We may experience supply chain delays, disruptions or other problems associated with financial constraints faced by our suppliers and customers. We may incur increased costs or experience difficulty with about ability to borrow in the future or otherwise with financing our operating, investing or financing activities. Any of these potential problems could hinder our efforts to increase our sales and might, if severe and extensive enough, cause our sales to decline, jeopardizing our ability to operate.
We may experience delays in resolving unexpected technical issues experienced in completing development of new technology that will increase development costs and postpone anticipated sales and revenues.
As we develop and improve our products, we frequently must solve chemical, manufacturing and/or equipment-related issues. Some of these issues are ones that we cannot anticipate because the products we are developing are new. If we must revise existing manufacturing processes or order specialized equipment to address a particular issue, we may not meet our projected timetable for bringing products to market. Such delays may interfere with existing manufacturing schedules, negatively affect revenues and increase our cost of operations.
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 licensing, 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. In order to become profitable through the commercialization of our technology and products, our products must be cost-effective and economical to produce and distribute on a commercial scale. Furthermore, if our technologies and products do not achieve, or if they are unable to maintain, market acceptance or regulatory approval, we may not be profitable.
Our success depends, in part, on our ability to license, market and distribute our technologies and products effectively. We have limited manufacturing, marketing and distribution capabilities. We may not properly ascertain or assess any and all risks inherent in the industry. We may not be successful in entering into new licensing or marketing arrangements, engaging independent distributors, or recruiting, training and retaining a larger internal marketing staff and sales force. If we are unable to meet the challenges posed by our planned licensing, manufacturing, distribution and sales growth, our business may fail.
We are subject to governmental regulations, including environmental and health and safety regulations.
Our business operations are subject to a variety of national, state and local laws and regulations, many of which deal with the environment and health and safety issues. We believe we are in material compliance with applicable environmental and worker health and safety requirements. However, material future expenditures may be necessary if compliance standards change or material unknown conditions that require remediation are discovered. If we fail to comply with present and future environmental and worker health and safety laws and regulations, we could be subject to future liabilities or interruptions in our operations, which could have a material adverse affect on our business.
The markets in which we sell our products are highly competitive.
The markets for our products are highly competitive on a global basis, with a number of companies having significantly greater resources and market share than us. Many of our competitors also maintain a significantly higher level of brand recognition than we do. Because of greater resources and more widely accepted brand names, many of our competitors may be able to adapt more quickly to changes in the markets we have targeted or devote greater resources to the development and sale of new products. Most of the products we have developed have not
obtained broad market acceptance and rely on our emerging technology. To improve our competitive position, we will need to make significant ongoing investments in manufacturing, customer service and support, marketing, sales, research and development and intellectual property protection. We do not know if we will have sufficient resources to continue to make such investments or if we will maintain or improve our competitive position within the markets we serve.
We attempt to protect the critical elements of our proprietary technology as trade secrets. Because of our reliance on trade secrets, we are unable to prevent third parties from independently developing technologies that are similar or superior to our technology or from successfully reverse engineering or otherwise replicating our technology.
In certain cases, where the disclosure of information required to obtain a patent would divulge critical proprietary data, we may choose not to patent elements of our proprietary technology and processes which we have developed or may develop in the future and instead rely on trade secret laws to protect certain elements of our proprietary technology and processes. For example, we rely on trade secrets to protect our key polyurethane formulations. These formulations are critical elements of and central to our proprietary technology. Our trade secrets could be compromised by third parties, or intentionally or accidentally by our employees. It is also possible that others will independently develop technologies that are similar or superior to our technology. Third parties may also legally reverse engineer our products. Independent development, reverse engineering, or other legal copying of those elements of our proprietary technology that we attempt to protect as trade secrets could enable third parties to benefit from our technologies without compensating us. 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 when proprietary claims are unsubstantiated. The prosecution of litigation to protect our trade secrets or the defense of such claims is costly and unpredictable 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. The independent development of technologies that are similar or superior to our technology or the reverse engineering of our products by third parties would have a material adverse effect on our business and results of operations. In addition, the loss of our ability to use any of our trade secrets or other proprietary technology would have a material adverse effect on our business and results of operations. Because trade secrets do not ensure exclusivity and pose such issues with respect to enforcement, third parties may decline to partner with us or may pay lesser compensation for use of our technology which is protected only by trade secrets.
Our business depends on the protection of our patents and other intellectual property and may suffer if we are unable to adequately protect such intellectual property.
Our success and ability to compete are substantially dependent upon our intellectual property. We rely on patent, trademark and copyright laws, trade secret protection and confidentiality or license agreements with our employees, customers, strategic partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate. There are events that are outside of our control that pose a threat to our intellectual property rights as well as to our products and services. For example, effective intellectual property protection may not be available in every country in which we license our technology or our products are distributed. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any impairment of our intellectual property rights could harm our business and our ability to compete. Also, protecting our intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results. In addition, other parties may independently develop similar or competing technologies designed around any patents that may be issued to us.
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 and we may seek further patents on future innovations. Our ability to either manufacture products or license our technology is substantially dependent on the validity and enforcement of these patents and patents pending. We cannot guaranteethat our patents will not be invalidated, circumvented or challenged, that patents will be issued for our patents pending, that the rights granted under the patents will provide us competitive advantages or that our current and future patent applications will be granted.
Third parties may invalidate our patents
Third parties may seek to challenge, invalidate, circumvent or render unenforceable any patents or proprietary rights owned by or licensed to us based on, among other things:
·
subsequently discovered prior art;
·
lack of entitlement to the priority of an earlier, related application; or
·
failure to comply with the written description, best mode, enablement or other applicable requirements.
United States patent law requires that a patent must disclose the “best mode” of creating and using the invention covered by a patent. If the inventor of a patent knows of a better way, or “best mode,” to create the invention and fails to disclose it, that failure could result in the loss of patent rights. Our decision to protect certain elements of our proprietary technologies as trade secrets and to not disclose such technologies in patent applications, may serve as a basis for third parties to challenge and ultimately invalidate certain of our related patents based on a failure to disclose the best mode of creating and using the invention claimed in the applicable patent. If a third party is successful in challenging the validity of our patents, our inability to enforce our intellectual property rights could seriously harm our business.
We may be liable for infringing the intellectual property rights of others.
Our products and technologies may be the subject of claims of intellectual property infringement in the future. Our technologies may not be able to withstand any third-party claims or rights against their use. Any intellectual property claims, with or without merit, could be time-consuming, expensive to litigate or settle, could divert resources and attention and could require us to obtain a license to use the intellectual property of third parties. We may be unable to obtain licenses from these third parties on favorable terms, if at all. Even if a license is available, we may have to pay substantial royalties to obtain it. If we cannot defend such claims or obtain necessary licenses on reasonable terms, we may be precluded from offering most or all of our products or services and our business and results of operations will be adversely affected.
Tires for highway use must meet applicable safety standards prior to marketing which could delay anticipated revenues and increase expenses, while off-the-road tires, although not subject to specific safety standards, are subject to discretionary industry performance evaluations based on product application.
Tires intended for highway use must meet applicable federal safety standards through various testing processes. Our prototype polyurethane car tires, temporary spare tire, and medium commercial truck retread material are all subject to such standards. The testing procedures involve submission of sample products to approved independent testing facilities, a process that may entail both significant time and expense. OTR tires, including tire retread material, must meet the performance standards established by the manufacturers and end-users based on the criteria established by them after taking into account their specific needs, such as load capacity, terrain and proposed uses. The applicable standards may be changed at any time and meeting current or future performance standards may require reevaluation and additional research and testing.
We have received approval for only a limited number of our highway-use products. In the future, we may be unable to obtain the requisite approval for the sale of some of our products. Therefore, the timing of product placement in the market may be difficult to determine, may require additional research, development and testing expenses, and we may not receive revenues from such products as planned. Such delays, our inability to obtain the requisite approval and potential additional expenses could have a negative impact on cash flows, results of operations and business planning.
Because our proposed tire products are derived from new technology, our product liability insurance costs will likely increase and we may be exposed to product liability risks that could adversely affect profitability.
Even if tests indicate that our tires meet performance standards and our new highway-use tire products are approved for use, these products may subject us to significant product liability claims because the technology is new
and there is little history of on-road use. Moreover, because our products are and will be used in applications where their failure could result in substantial injury or death, we could also be subject to product liability claims. Introduction of such new products and increased use of our existing products will most likely increase our product liability premiums and defense of potential claims could increase insurance costs even further, which could substantially increase our expenses. Any insurance we obtain may not be sufficient to cover the losses incurred through such lawsuits.
Significant increases in the price of chemical raw materials, 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.
The materials used to produce our products are susceptible to price fluctuations due to supply and demand trends, the economic climate and other unforeseen trends. We have recently experienced increases in the cost of wheel components for our tire/wheel assemblies due to the increased cost of steel and have also seen increases in our chemical raw materials pricing. Our raw materials pricing could increase further in the future. Because we are introducing products that will compete, in part, on the basis of price, we may be unable to pass cost increases on to our customers. If we are unable to pass on raw material cost increases to our customers, our future results of operations and cash flow will be materially adversely affected.
Our ability to execute our business plan would be harmed if we are unable to retain or attract key personnel.
Our polyurethane technology has been developed by a small number of the members of our management team and only a limited number of the members of our management team maintain the technical knowledge to produce our products. Our future success depends, to a significant extent, upon our ability to retain and attract the services of these and other key personnel. The loss of the services of one or more members of our management team could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements could be difficult, and competition for such personnel of similar experience is intense. We do not carry key person insurance on any of our officers.
If the minimum bid price of our stock is does not exceed the minimum $1 bid price for at least ten consecutive business days between this filing and March 15, 2010, our stock will be subject to delisting from NASDAQ which could have a negative impact on shareholder liquidity.
On September 16, 2009, we received a notice from the staff of The NASDAQ Stock Market, indicating that, because our stock has not maintained a minimum bid price of $1 per share for the last 30 consecutive business days, a deficiency exists under NASDAQ Listing Rule 5550(a)(2). However, NASDAQ Listing Rule 5810(c)(3)(A) provides us a 180 calendar day grace period to regain compliance. The grace period will expire on March 15, 2010. We will automatically regain compliance with NASDAQ rules if, at any time during this grace period the bid price for its shares closes at $1 or more per share for a minimum of ten consecutive business days. If we have not regained compliance by the end of this grace period we will receive a written notification that our securities are subject to delisting. Although the September 16, 2009 notification has no immediate effect on the listing of our common stock pending the expiration of the grace period, if we do not regain compliance and are delisted, trading in our stock will be more difficult and shareholder and investor liquidity could suffer.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of June 30, 2009, we did not have any unresolved comments with the staff of the Securities and Exchange Commission.
ITEM 2.
ITEM 2. PROPERTIES
In June 2009, we negotiated an adjustment to the extended lease for our executive and manufacturing facilities located at 1501 Industrial Road, Boulder City, Nevada. The property consists of a 49,200 square-foot building, which includes approximately 5,500 square-feet of office space, situated on approximately 4.15 acres. The term of the lease is 1 year expiring June 14, 2010. The base rent is $15,000 per month.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of June 30, 2009, we were not involved in any legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders of the Company during the fourth quarter of the fiscal year ended June 30, 2009.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Beginning, March 21, 2006, our common stock has been traded on the NASDAQ Capital Market under the symbol "AMTY." Prior to that date, our common stock was quoted on the NASD’s OTC Bulletin Board. The following table sets forth for the periods indicated the high and low sale prices of our common stock. Prices represent inter-dealer quotations without adjustment for retail markups, markdowns or commissions and may not represent actual transactions.
The closing price of our common stock on the NASDAQ Capital Market on September 11, 2009 was $0.33 per share. As of September 11, 2009, there were approximately 500 holders of record of our common stock and 27,607,774 shares of common stock outstanding based on information provided by our transfer agent, Interwest Transfer Company, 1981 E. Murray-Holladay Road, Holladay, Utah 84117.
On September 16, 2009, we received a notice from the staff of The NASDAQ Stock Market, indicating that, because our stock has not maintained a minimum bid price of $1 per share for the last 30 consecutive business days, a deficiency exists under NASDAQ Listing Rule 5550(a)(2). However, NASDAQ Listing Rule 5810(c)(3)(A) provides us a 180 calendar day grace period to regain compliance. The grace period will expire on March 15, 2010. We will automatically regain compliance with NASDAQ rules if, at any time during this grace period the bid price for our shares closes at $1 or more per share for a minimum of ten consecutive business days. If we have not regained compliance by the end of this grace period we will receive a written notification that our securities are subject to delisting. The September 16, 2009 notification has no immediate effect on the listing of our common stock pending the expiration of the grace period.
On September 21, 2009, we closed a private placement of our restricted common stock. We sold an aggregate of 2,366,664 shares and received net proceeds of $496,999 in the private placement. No officers, directors or affiliates of the Company participated in the private placement. The shares were sold pursuant to subscription documents between the Company and each investor. We believe the offer and sale of the securities described above were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”), for the private placement of these securities pursuant to Section 4(2) of the Act and/or Regulation D thereunder because the securities were sold in a transaction not involving a public offering.
Dividends
We have not paid any dividends on our common stock since our inception and do not anticipate paying any dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent upon then-existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our Board of Directors deems relevant.
Performance Graph
The following Performance Graph and related information compares the cumulative five-year total return to stockholders on our common stock relative to the cumulative total returns of the Russell MicroCap index and the NASDAQ Composite index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on July 1, 2004 and its relative performance is tracked through June 30, 2009.
The comparisons shown in the graph below are based on historical data and we caution that the stock price performance shown in the graph below is not indicative of, and is not intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from public financial quotation services believed to be reliable, but we are not responsible for any errors or omissions in such information. The following graph and related information shall not be deemed “soliciting materials” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into such filing.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this report. The selected balance sheet data as of June 30, 2008 and 2009 and the selected statements of operations data for each of the three years ended June 30, 2007, 2008 and 2009 have been derived from our audited financial statements, which are included elsewhere in this report. The selected balance sheet data at June 30, 2005, 2006 and 2007 and selected statements of operations data for the years ended June 30, 2005 and 2006 have been derived from our audited financial statements not included in this report. Historical results are not necessarily indicative of the results to be expected in the future.
(1)Fiscal year ended June 30, 2008 includes deferred compensation expense for services of $110,144, in accordance with SFAS 123 (R).
(2) 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. We recognized a total of $6,134,000 in expense associated with the issuance of these options and deferred $1,000,000 as stock offering costs. In February 2006, we closed a private placement of our securities and charged the $1,000,000 of deferred stock offering costs against the gross proceeds of the offering. We estimated the fair value of the stock options at the grant date by using the Black-Scholes option pricing model.
(3) Fiscal years ended June 30, 2007, 2008, and 2009 include deferred compensation expense for employee stock options of $783,503, $370,027 and $64,077, respectively, in accordance with SFAS 123(R).
(4) All liabilities are current liabilities. We do not currently have any long-term liabilities.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance or financial condition. Such statements are only predictions and the actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Part I. Item 1A. Risk Factors" as well as those discussed elsewhere in this report. The historical results set forth in this discussion and 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
Since our inception in 1995, we have been engaged in the research and development of technologies related to the formulation of polyurethane compounds and the manufacturing process for producing tires constructed of polyurethane. We believe that we have developed unique polyurethane formulations that, when used in tire applications, substantially simplify the production process and allow for the creation of products with superior performance characteristics, including abrasion resistance and load-bearing capabilities, than conventional rubber tires. We also believe that the manufacturing processes we have developed to produce polyurethane tires are more efficient than traditional tire manufacturing processes, in part because our polyurethane compounds do not require the multiple processing steps, extreme heat, and high pressure that are necessary to cure rubber. Using our polyurethane technologies, we believe tires can be produced that last longer, are less susceptible to failure and offer improved fuel economy.
Our aggregate revenues for the year ended June 30, 2009, June 30, 2008 and June 30, 2007 were $3.20 million, $2.89 million and $3.43 million, respectively, and our aggregate cost of revenues during those same periods was $2.33 million, $1.92 million and $2.38 million, respectively. For the years ended June 30, 2009, June 30, 2008 and June 30, 2007, we had net losses of approximately $3.62 million, $4.22 million and $5 million, respectively. During the last 7 months of the 2009 fiscal year, we implemented several cost reduction measures that we expect will continue reduce our overall selling, general and administrative expenses throughout the 2010 fiscal year. We expect the increase in revenues from the expanded commercialization activities should reduce net loss in the near term and move us closer to profitability.
Polyurethane foam tire sales are our most significant products to date, however, we believe Elastothane® and Amerifill® are significant to our potential future growth. We are concentrating on marketing three principal product areas: low duty cycle foam tires, tire fill and solid tires. We continue to work on developing and testing composite tires and pneumatic tires. Our most recent activities in these areas are set forth below:
Low duty foam tires - The sale of polyurethane foam tires to original equipment manufacturers, distributors and retail stores continues to account 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. We are continuing our marketing efforts and expanding our product lines.
Tire fill - Through research and testing, we have found that our Amerifill® material is not compatible with most tire fill equipment in use today; therefore our customers must also acquire the necessary tire fill equipment to use our materials. In order to penetrate this market we are supplying our customers with tire fill equipment at our cost. Profits from this initiative will be derived from the sale of Amerifill® to our customers. Since launching this program in the spring of 2008, we have supplied a number of fill machines and have now begun to supply the Amerifill® material.
Solid tires - In July 2009, we shipped the first orders of our new line of long wearing, polyurethane forklift tires to K-2 Industrial Tire Inc. ("K-2"). K-2 has partnered with us for worldwide introduction and distribution of the Kryon(TM) brand tire line. K-2 intends to offer a complete line of press-on tires for the forklift industry with our unique, proprietary polyurethane formulations. The Kryon forklift tires are made of non-marking polyurethane, a significant advantage over non-marking rubber tires that are usually priced at a premium to regular rubber tires. Other potential commercial applications for the solid polyurethane elastomer tires include skid steer and aperture tires.
Composite tires - We believe there are multiple applications for use of our polyurethane elastomer material as treads for new or retread tire casings. However, economic constraints may have limited development and market penetration in this area. The first commercial application for this technology was initiated by Desert Research Technology (“DRT), to manufacture paddle-type sand tires. The first potential commercial application for this technology was initiated in fiscal 2008 by Desert Research Technology (“DRT), to manufacture paddle-type sand tires. We have supplied DRT with samples of the chemical system necessary to produce the tires. Our licensee, Qingdao Qizhou Rubber Company, LTD. (“Qingdao”) has told us they will be further delayed in commencing OTR tire retreads due to financial constraints and we cannot estimate the extent of the delay at this time. However, if Qingdao’s OTR tire retread facility is eventually made operational, Qingdao will purchase the polyurethane elastomer chemical systems necessary to produce the OTR tire retreads directly from us.
Pneumatic tires - We continue to evaluate the properties of our tires in the laboratory and on vehicles. We have also provided prototype tires to other tire or automotive manufacturers for performance evaluations, which may include uniform tire quality grading or other performance testing and/or testing to non-U.S. safety standards. In addition, we are still working to finalize elements of the manufacturing process. We are discussing the construction and installation of a pilot manufacturing facility capable of demonstrating this production capability with potential strategic partners.
Factors Affecting Results of Operations
Historically, our operating expenses have exceeded our revenues resulting in net losses of approximately $3.62 million, $4.22 million and $5 million in fiscal years ended June 30, 2009, 2008 and 2007, respectively. In each of these periods, our operating expenses consisted primarily of the following:
·
Cost of sales, which consists primarily of raw materials, components and production of our products, including applied labor costs and benefits expenses, maintenance, facilities and other operating costs associated with the production of our products;
·
Selling, general and administrative expenses, which consist primarily of salaries, commissions and related benefits paid to our employees and related selling and administrative costs including professional fees;
·
Research and development expenses, which consist primarily of equipment and materials used in the development of our technologies;
·
Consulting expenses, which consist primarily of amounts paid to third-parties for outside services;
·
Depreciation and amortization expenses which result from the depreciation of our property and equipment, including amortization of our intangible assets; and
·
Amortization of deferred compensation that results from the expense related to certain stock options to our employees.
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 accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, deferred compensation and contingencies. We base our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances. These estimates allow us to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
We believe the following accounting policies are our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that may be uncertain. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.
Revenue Recognition
Revenue for products is recognized when the sales amount is determined, shipment of goods to the customer has occurred and collection is reasonably assured. Generally, we ship all of our products FOB origination. License fee revenue is recognized as earned, and no revenue is recognized until the inception of the license term.
Valuation of Intangible Assets and Goodwill
At June 30, 2009, we had capitalized patent and trademark costs, net of accumulated amortization, totaling $601,774. The patents which have been granted are being amortized over a period of 20 years. Patents which are pending or are being developed are not amortized until a patent has been issued. Amortization expense for the fiscal years ended June 30, 2009, 2008 and 2007 was $30,041, $21,638, and $23,209, respectively. We evaluate the recoverability of intangibles and review the amortization period on a continual basis utilizing the guidance of Statement of Financial Accounting Standards “SFAS” No. 142, "Goodwill and Other Intangible Assets." In June 2009, our management team assessed several of our pending patents and trademarks and decided to abandon several of them due to they no longer apply to our current manufacturing processes. We test our patents and trademarks for impairment at least annually and whenever events or changes in circumstances indicated that the carrying value may not be recoverable. We consider the following indicators, among others, when determining whether or not our patents are impaired:
·
any changes in the market relating to the patents that would decrease the life of the asset;
·
any adverse change in the extent or manner in which the patents are being used;
·
any significant adverse change in legal factors relating to the use of the patents;
·
current-period operating or cash flow loss combined with our history of operating or cash flow losses;
·
future cash flow values based on the expectation of commercialization through licensing; and
·
current expectations that, more likely than not, the patents will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
Inventory
Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or market. The inventory consists of chemicals, finished goods produced in our plant and products purchased for resale.
Stock-Based Compensation
Equity securities issued for services rendered have been accounted for at the fair market value of the securities on the date of authorization.
On July 1, 2005, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payments to employees and Directors, including employee stock options and stock purchases related to our employee stock option and award plans. SFAS 123(R) supersedes our previous accounting under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in the fiscal year ended June 30, 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS 123(R).
We adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of July 1, 2005, the first day of our fiscal year ended June 30, 2006. Our financial statements as of and for the period ended June 30, 2007, 2008, and 2009 reflect the impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for the fiscal year ending June 30, 2009 was $64,077, related to employee stock options granted during the year. Stock-based compensation expense recognized under SFAS 123(R) for the fiscal year ending June 30, 2008 and June 30, 2007 was $370,027and $783,503 respectively.
SFAS 123(R) 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. Under SFAS 123(R), stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in our Statement of Operations for the fiscal years ended June 30, 2007, 2008, and 2009 is based on the grant date fair value estimated in accordance with SFAS 123(R), and only includes compensation expense for share-based payment awards that were granted after July 1, 2006 and vested during the fiscal year ended June 30, 2007, 2008, and 2009. Stock-based compensation expense recognized in our Statement of Operations for the fiscal year ended June 30, 2007, 2008, and 2009 assumes all awards will vest. Therefore, no reduction has been made for estimated forfeitures.
The valuation of options and warrants granted to unrelated parties for services are measured as of the earlier of the date at which a commitment for performance by the counterparty to earn the equity instrument is reached, or the date the counterparty’s performance is complete. Pursuant to the requirements of Emerging Issues Task Force No. 96-18, the options and warrants will be revalued in situations where they are granted prior to the completion of the performance.
Seasonality
A substantial majority of our sales are to customers within the United States. We experience some seasonality in the sale of our closed-cell polyurethane foam tires for bicycles and lawn and garden products because sales of these products generally decline during the winter months in the United States. Sales of our closed-cell polyurethane form tire products generally peak during the spring and summer months; typically resulting in greater sales volumes during the third and fourth quarters of the fiscal year.
Results of Operations
Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality and potential variability of our revenues and cash flows. These key performance indicators include:
·
Sales revenue, net of returns and trade discounts, which is an indicator of our overall business growth and the success of our sales and marketing efforts;
·
Gross profit, which is an indicator of both competitive pricing pressures and the cost of sales of our products;
·
Growth in our customer base, which is an indicator of the success of our sales efforts; and
·
Distribution of revenue across our products offered.
The following summary table presents a comparison of our results of operations for the fiscal years ended June 30, 2007, 2008 and 2009 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below.
(1)
Includes deferred compensation for employee stock options of $783,503, $370,027 and $64,077 for the fiscal years ended June 30, 2007, 2008 and 2009, respectively.
(2)
Includes deferred compensation stock options to consultants for services of $110,144 for the fiscal year ended June 30, 2008 only.
Year Ended June 30, 2009 Compared to the Year Ended June 30, 2008
Net Revenues. Sales of our closed-cell polyurethane foam products accounted for 87% of all of our sales revenue during the fiscal year ended June 30, 2009. For the fiscal year ended June 30, 2009 we had $2,796,095 of net polyurethane foam product sales compared to $2,617,337 for 2008. Net polyurethane foam product sales for the fiscal year ended June 30, 2009 increased slightly by $178,758, or 6.8%, as compared with 2008 due primarily to a higher demand on a weak consumer market. Our number of product units sold to our original equipment manufacturer, retail chain and distributor customers increased by 51% over the fiscal year ended June 30, 2008. During the fiscal year ended June 30, 2009, we had $55,937 and $11,709 of returns of our products and trade discounts, respectively, compared to $37,218 and $14,095, respectively, for the fiscal year ended June 30, 2008. During the fiscal year ended June 30, 2009, we had $33,333 of revenues derived from licensing fees, or 1% of total net revenues, compared to $210,000 of revenues derived from licensing fees, or 7% of total net revenues for the fiscal year ended June 30, 2008. Also, during the fiscal year ended June 30, 2009, we had $372,161 of revenues derived from sales of tool and equipment, or 12% of total net revenues, compared to $62,690 of revenues derived from sales of equipment, or 2% of total net revenues for the fiscal year ended June 30, 2008. The substantial increase in sales of equipment for fiscal 2009 as compared to fiscal 2008 is related to the sale of pouring equipment and models for the new line of forklift tires, while equipment sales during fiscal 2008 all relate to the sale of tire fill equipment.
Cost of Revenues. For the fiscal year ended June 30, 2009, our cost of revenues related to our closed-cell polyurethane foam products increased 8%, compared to 2008 due to increase in product sales. For the fiscal year ended June 30, 2009 we had $1,994,930 of cost of revenues related to our closed-cell polyurethane foam products compared to $1,855,160 for 2008. As a result of the increase in our cost of revenues, our gross margin for products
sales decreased to 29% as compared to the prior year. We have revised the selling prices for our products at the beginning of the fiscal year to adjust for raw material increases to our customers. We believe that our product sales margin can continue to improve as our increased sales efforts generate additional product orders to take further advantage of manufacturing efficiencies. We believe we currently have sufficient foam product manufacturing equipment and employees to put into affect a substantial increase in production without incurring proportionately equivalent increases in labor costs or manufacturing equipment overheads.
In fiscal 2009, our cost of revenues related to fill equipment increased 409%, compared to 2008 due to increase in tools and fill equipment sales. In fiscal 2008, we sold only fill equipment to our customers on a break-even basis to penetrate the tire fill market. Due to some unexpected ancillary expenses, this initiative has cost us $2,545.
Gross Profit. For the fiscal year ended June 30, 2009, we had $874,147 of total gross profit compared to $969,631 for 2008. The gross profit related to our closed-cell polyurethane foam products represents $801,165, or 92%, of the total gross profit. The additional gross profit of $72,983 resulted from licensing fees and equipment sales. Gross profit for the fiscal year ended June 30, 2009 decreased by $95,484, or 10%, as compared with 2008 due primarily to a decrease in licensing fees. Our gross profit margin decreased to 27% in 2009 from 34% in 2008 due primarily to the decrease in license fees revenues. For the fiscal year ending June 30, 2010, we believe that the price adjustments implemented in the beginning of the fiscal year 2009 coupled with an improving consumer market should enable us to increase our product and equipment sales while maintaining the gross margins we experienced during the fiscal years ended June 30, 2008 and 2007.
Selling, General, and Administrative Expenses. For the fiscal year ended June 30, 2009, we had $3,586,412 of SG&A expenses, including the amortization of deferred compensation, compared to $4,141,411 for 2008. As we focused our commercialization efforts, our SG&A for the fiscal year ended June 30, 2009 decreased by $554,999 or 13%, as compared with 2008 due primarily to decreased expenses in the following areas:
- Approximately $227,000 in payroll and payroll taxes;
- Approximately $75,000 in sales and marketing expenses;
- Approximately $174,000 in professional fees;
- Approximately $50,000 in facilities related expenses;
- Approximately $65,000 in medical insurance;
- Approximately $85,000 in director fees and expenses;
The decreases were offset by increases of:
- Approximately $104,000 in office related expenses;
-
Approximately $290,000 in bad debt expenses; and
In addition to the SG&A expenses listed above, we had deferred compensation, which is primarily related to the grant of options to our employees for the purchase of restricted stock. We adopted SFAS 123 (R) on July 1, 2005 and as a result, we amortized $64,077 of deferred compensation compared to $370,027 for 2008 in the fiscal year ended June 30, 2009.
Research and Development Expenses. For the fiscal year ended June 30, 2009 we had $190,030 of research and development expenses compared to $572,097 for 2008. Our research and development expenses for the fiscal year ended June 30, 2009 decreased by $382,067, or 67%, as compared with 2008 due primarily to us not having to make significant cash investments in research and development tooling and equipment. Although we will continue to identify and pursue additional applications for our polyurethane technology outside the tire industry, we expect research and development expenses to decrease during the fiscal year ending June 30, 2010.
Consulting Expenses. For the fiscal year ended June 30, 2009 we had $355,209 of consulting expenses compared to $393,392 for 2008. Our consulting expenses for the fiscal year ended June 30, 2009, decreased by $38,183, or 10% as compared with the same period in 2008. The decrease in our consulting expenses for the current period is due to the April 2009 termination of two consulting agreements with our former CEO, Richard Steinke and our former Chief Chemical Systems Formulator, Manuel Chacon which resulted in the cancellation of unvested options.
Depreciation and Amortization Expenses. For the fiscal year ended June 30, 2009 we had $258,311 of depreciation and amortization expenses compared to $294,252 for 2008. Our depreciation and amortization expenses for the fiscal year ended June 30, 2009 decreased by $35,941, or 12%, as compared with 2008 due primarily to no longer expensing fully depreciated assets, partially offset by the depreciation expense for newly acquired assets during the period.
Net Loss. For the fiscal year ended June 30, 2009, we had a net loss of $3,623,899 compared to a net loss of $4,223,424 for 2008. Our net loss for the fiscal year ended June 30, 2009 decreased by $599,525 as compared with 2008 due primarily to the reduction in payroll and payroll taxes, sales and marketing, research and development, and other general and administrative expenses partially offset by the increase in bad debt expenses and office related expenses.
Year Ended June 30, 2008 Compared to the Year Ended June 30, 2007
Net Revenues. Sales of our closed-cell polyurethane foam products accounted for 91% of all of our sales revenue during the fiscal year ended June 30, 2008. For the fiscal year ended June 30, 2008 we had $2,617,337 of net polyurethane foam product sales compared to $2,620,587 for 2007. Net polyurethane foam product sales for the fiscal year ended June 30, 2008 decreased by $3,250, or 0.12%, as compared with 2007 due primarily to a slightly lower demand resulting primarily from weakness in the consumer markets reflecting uncertainty in global economic conditions. Our number of product units sold to our original equipment manufacturer, retail chain and distributor customers increased only 3% over the fiscal year ended June 30, 2007. During the fiscal year ended June 30, 2008, we had $37,218 and $14,095 of returns of our products and trade discounts, respectively, compared to $35,404 and $12,461, respectively, for the fiscal year ended June 30, 2007. During the fiscal year ended June 30, 2008, we had $210,000 of revenues derived from licensing fees, or 7% of total net revenues, compared to $266,667 of revenues derived from licensing fees, or 8% of total net revenues for the fiscal year ended June 30, 2007. Also, during the fiscal year ended June 30, 2008, we had $62,690 of revenues derived from sales of equipment, or 2% of total net revenues, compared to $540,000 of revenues derived from sales of equipment, or 16% of total net revenues for the fiscal year ended June 30, 2007. The substantial decrease in sales of equipment for fiscal 2008 as compared to fiscal 2007 is entirely related to the sale of pouring equipment to Qingdao during fiscal 2007, while equipment sales during fiscal 2008 all relate to the sale of tire fill equipment.
Cost of Revenues. For the fiscal year ended June 30, 2008, our cost of revenues related to our closed-cell polyurethane foam products increased 2%, compared to 2007 due to a substantial increase in raw material costs. As a result of these cost increases, our gross margin for products sales decreased slightly to 29% from 30% the prior year. In fiscal 2008, we began supplying fill equipment to our customers on a break-even basis to penetrate the tire fill market. Due to some unexpected ancillary expenses, this initiative cost us $2,545. For the fiscal year ended June 30, 2007, we had $540,000 in revenues from the sale of equipment but $556,677 in cost of revenues related to specialized one-of-a-kind pouring equipment sold to Qingdao. This cost of this equipment also exceeded our estimate due to the unique characteristics of the equipment. Based on our experience to date, we now plan for cost contingencies and change orders when providing customers with equipment quotes on new or specialized equipment.
Gross Profit. For the fiscal year ended June 30, 2008, we had $969,631 of total gross profit compared to $1,043,909 for 2007. The gross profit related to our closed-cell polyurethane foam products represents $762,177, or 79%, of the total gross profit. The additional gross profit of $207,454 resulted from licensing fees and equipment sales. Gross profit for the fiscal year ended June 30, 2008 decreased by $74,277, or 7%, as compared with 2007 due primarily to a decrease in licensing fees and a small decrease in net sales from our closed-cell polyurethane foam
products. However, our gross profit margin increased to 34% in 2008 from 31% in 2007 due primarily to the decrease in loss associated with sales of equipment as explained above.
Selling, General, and Administrative Expenses. For the fiscal year ended June 30, 2008, we had $4,141,411 of SG&A expenses, including the amortization of deferred compensation, compared to $4,655,456 for 2007. As we focused our commercialization efforts, our SG&A for the fiscal year ended June 30, 2008 decreased by $514,045 or 11%, as compared with 2007 due primarily to decreased expenses in the following areas:
- Approximately $367,000 in payroll and payroll taxes;
- Approximately $163,000 in sales and marketing expenses;
- Approximately $102,000 in travel & entertainment not associated with product development and marketing expenses;
The decreases were offset by increases of:
- Approximately $58,000 in facilities related expenses;
- Approximately $113,000 for office related expenses; and
-
Approximately $262,000 in professional fees; and
- Approximately $105,000 in insurance expenses
In addition to the SG&A expenses listed above, we had deferred compensation, which is primarily related to the grant of options to our employees for the purchase of restricted stock. We adopted SFAS 123 (R) on July 1, 2005 and as a result, we amortized $370,027 of deferred compensation compared to $783,503 for 2007 in the fiscal year ended June 30, 2008.
Research and Development Expenses. For the fiscal year ended June 30, 2008 we had $572,097 of research and development expenses compared to $834,647 for 2007. Our research and development expenses for the fiscal year ended June 30, 2008 decreased by $262,550, or 31%, as compared with 2007 due primarily to us not have to make significant cash investments in research and development tooling and equipment.
Consulting Expenses. For the fiscal year ended June 30, 2008 we had $393,392 of consulting expenses compared to $286,274 for 2007. During the fiscal year ending June 30, 2008, our consulting expenses increased primarily due to our entering into a consulting agreement with our former Chief Executive Officer, effective September 1, 2007,and a consulting agreement with our former Chief Chemical Systems Formulator, effective May 1, 2008. We incurred $177,779 in consulting expenses for the fiscal year ended June 30, 2007 due primarily to costs associated with outside consulting services with our marketing and capital raising efforts and on other operational strategies. In additional, we incurred $108,494 in outside consulting expenses associated with our search for a new chief executive officer.
Depreciation and Amortization Expenses. For the fiscal year ended June 30, 2008 we had $294,252 of depreciation and amortization expenses compared to $379,127 for 2007. Our depreciation and amortization expenses for the fiscal year ended June 30, 2008 decreased by $84,875, or 22%, as compared with 2007 due primarily to no longer expensing fully depreciated assets, partially offset by the depreciation expense for newly acquired assets during the period.
Net Loss. For the fiscal year ended June 30, 2008, we had a net loss of $4,223,424 compared to a net loss of $5,007,822 for 2007. Our net loss for the fiscal year ended June 30, 2008 decreased by $784,398 as compared with 2007 due primarily to the reduction in payroll and payroll taxes, sales and marketing, research and development, and other general and administrative expenses partially offset by the increase in professional fees, facilities related expenses, office related expenses, and consulting services.
Liquidity and Capital Resources
Our principal sources of liquidity consist of cash and cash equivalents and payments received from our customers. We have no long-term liabilities, and we do not have any significant credit arrangements. Historically, our expenses have exceeded our revenues, resulting in operating losses. From time to time, we have obtained additional liquidity to fund our operations through the sale of shares of our common stock. In assessing our liquidity, our management reviews and analyzes our current cash balances on-hand, short-term investments, accounts receivable, accounts payable, capital expenditure commitments and other obligations.
Cash Flows
The following table sets forth our consolidated cash flows for the fiscal years ended June 30, 2007, 2008 and 2009.
Net Cash Used By Operating Activities. Our primary sources of operating cash in fiscal 2009 were receipts from our customers and cash provided by financing activities. Our primary uses of operating cash are payments made to our vendors, employees and technical consultants. Net cash used by operating activities was $2,373,851 for the fiscal year ended June 30, 2009 compared to $3,776,659 for the fiscal year ended June 30, 2008. The decrease in cash used in operating activities is due primarily to a large decrease in inventory, other assets (deposits on equipment and project in process), and a large increase in accounts payable and accrued expenses. Non-cash items include depreciation and amortization and the issuance of common stock and stock options for services and employee compensation. Our net loss was $3,623,899 for the year ended June 30, 2009 compared to a net loss of $4,223,424 for the year ended June 30, 2008.
Net Cash Used In Investing Activities. Net cash used in investing activities was $89,659 for the fiscal year ended June 30, 2009 and $310,752 for the fiscal year ended June 30, 2008. Our primary use of investing cash for the fiscal year ended June 30, 2009 was $52,303 for patents and trademarks and $37,356 for property and equipment. Our primary uses of investing cash for the fiscal year ended June 30, 2008 were $101,257 for patents and trademarks and $210,239 for property and equipment.
Net Cash Provided by Financing Activities. For the fiscal year ended June 30, 2009 our financing activities provided net cash of $790,952. There were no financing activities during the fiscal year ended June 30, 2008. Our primary source of cash for the fiscal year ended June 30, 2009 was $494,567 obtained from the sale of common stock, $310,000 obtained from related party convertible notes payable against our receivables, and receipts from customers.
On April 1, 2009, we entered into a credit agreement under which we could receive loans up to an aggregate of $500,000. Loans under the agreement are made as advances against our accounts receivable, are subject to interest of 2% per month, are secured by our accounts receivable, and are due monthly subject to renewal by the lender. On June 3, 2009, we agreed to an amendment to the agreement adding a right, at the lender’s discretion, to convert outstanding loan principal and interest to common stock at a conversion price of $0.27 per share, the closing market price on June 2, 2009.
In the quarter ended June 30, 2009, we have received loans through promissory notes issued per the credit agreement totaling $310,000, $300,000 from Henry Moyle and $10,000 from Frank Dosal, both directors. At this filing date, neither director has demanded payment or elected to convert outstanding principal and interest to stock.
There were no financing activities during the fiscal year ended June 30, 2008.
Contractual Obligations and Commitments
The following table summarizes our contractual cash obligations and other commercial commitments at June 30, 2009.
(1) In November 2007, we negotiated an extension of the lease for our executive and manufacturing facilities located at 1501 Industrial Road, Boulder City, Nevada. The property consists of a 49,200 square-foot building, which includes approximately 5,500 square-feet of office space, situated on approximately 4.15 acres. In June 2009, we negotiated an adjustment to the extended lease for monthly base rent of $15,000. The lease agreement has a term of one year starting on June 15, 2009.
Cash Position, Outstanding Indebtedness, and Future Capital Requirements
Our total indebtedness at June 30, 2009 was $1,028,650 and our total cash and cash equivalents were $28,634, none of which is restricted. Our total indebtedness at June 30, 2009 includes $464,309 in accounts payable, a $310,000 in related party convertible notes, and $254,341in accrued expenses and deferred revenues,. Our accrued expenses include estimated expenses relating to the April 2009 termination of our employment agreement with our former President and Chief Executive Officer, Gary N. Benninger. Mr. Benninger’s employment agreement provides for termination payments and related accrued benefits, which amount and time frame for payment are currently subject to negotiation. We have no long-term liabilities.
In an effort to increase revenues, we have recently expanded our product lines and begun the sale of polyurethane foam tire fill and solid polyurethane elastomer tires. In the past, we offered aggressive sales projections based on our assessment of our planned sales initiatives. Despite the overall downturn experienced in both the U.S. and international economies over the past several quarters, we believe the revenues reported for the fiscal year ended June 30, 2009 are only beginning to reflect our progress toward our sales projections, which we anticipate will become more apparent during the next six to nine months. In view of these conditions, our ability to continue as a going concern is dependent upon our ability to obtain additional financing or capital sources, to meet our financing requirements, and ultimately to achieve profitable operations.
Although we believe that we will successfully implement our business plan to provide for additional revenues to offset operating costs, management cannot give any assurances that it will be able to do so or that we will ever operate profitably. Our business plan assumes, among other things, that our revenues will increase from the sale of the new product lines, our raw materials expenses may increase, and our expenses from operations will decrease due to the cost reduction measures currently being implemented.
Our financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have historically incurred significant losses which have resulted in a total retained deficit of $54,643,220 at June 30, 2009 which raises substantial doubt about our ability to continue as a going concern (See Note 5 to the attached financial statements). 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.
As described above, we have taken certain steps to reduce our operating and financial requirements while
expanding our revenues in an effort to enable us to continue as a going concern until such time that revenues are sufficient to cover expenses, including: (1) we implemented numerous cost reduction measures, including reduced officer and board compensation, over the last seven months of the 2009 fiscal year that we expect will continue to reduce our overall selling, general and administrative expenses throughout the 2010 fiscal year; (2) we revised the selling prices for our products at the beginning of the fiscal year to adjust for raw material increases to our customers; (3) we re-focused our sales and marketing efforts on three product areas with products already in production, low duty cycle foam tires, tire fill and solid tires, have expanded sales in all three areas and expect to continue to increase sale during the fiscal year. We expect the increase in revenues from the expanded sales activity should reduce net loss in the near term and move us closer to profitability.
To supplement our cash needs during the 2010 fiscal year, on September 21, 2009, we completed a private placement of our common stock for aggregate proceeds of approximately $500,000. In connection with the preparation of our financial statements for the year ended June 30, 2009, we have analyzed our cash needs for fiscal 2010. Based on this analysis, we concluded that our available cash, including the cash raised in the private placement, should be sufficient to meet our current minimum working capital, capital expenditure and other cash requirements for fiscal 2010. We may also issue common stock in lieu of cash as compensation for certain employment, development, and other professional services. However we believe we may need additional capital if our sales revenues do not meet our expectations. In any case, we will most likely need additional capital to fully implement our business plans.
Our ability to obtain further financing through the offer and sale of our securities is subject to market conditions and other factors beyond our control. We cannot assure you that we will be able to obtain financing on favorable terms or at all. If our cash is insufficient to fund our business operations, our business operations could be adversely affected in the event we do not obtain additional financing and are unable to obtain such funding when needed. Insufficient funds may require us to delay, scale back or eliminate expenses and or employees. If we cannot generate adequate sales of our products, or increase our revenues through other means, then we may be forced to cease operations.
Off-Balance Sheet Arrangements
We do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS 141(R), Business Combinations, an amendment of SFAS 141, which provides additional guidance on business combinations including defining the acquirer, recognizing and measuring the identifiable assets acquired and the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS Nos. 141(R) is scheduled to become effective for us for financial statements issued for fiscal year 2009. We are currently evaluating the effects, if any, that this statement will have on our future financial position, results of operations and operating cash flows.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, which amended ARB 51, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is scheduled to become effective for us for financial statements issued for fiscal year 2009. We are currently evaluating the effects, if any, that this statement will have on our future financial position, results of operations and operating cash flows.
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 ("SFAS No. 161"). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how the instruments are accounted for under SFAS No. 133 and its related interpretations, and how the instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. The guidance in
SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (fiscal year 2009 for the Company). The Company is currently evaluating the potential impact of the adoption of SFAS No. 161 on its disclosures in the Company's financial statements.
In May of 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This statement identifies literature established by the FASB as the source for accounting principles to be applied by entities which prepare financial statements presented in conformity with generally accepted accounting principles (GAAP) in the United States. This statement is effective 60 days following approval by the SEC of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” This statement will require no changes in the Company’s financial reporting practices.
In May of 2008 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 163, “Accounting for Financial Guarantee Insurance - an interpretation of FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises”. This statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This statement also clarifies how Statement 60 applies to financial guarantee insurance contracts. This statement is effective for fiscal years beginning after December 15, 2008. This statement has no effect on the Company’s financial reporting at this time.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general accounting standards and disclosure for events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective for interim and annual financial periods ending after June 15, 2009 and requires prospective application. The Company adopted SFAS 165 during the fourth quarter ended June 30, 2009, and its application had no impact on the Company’s financial statements. The Company evaluated subsequent events through the date the accompanying financial statements were issued, which was September 28, 2009.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162. SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles and establishes the “FASB Accounting Standards Codification™” (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP). Rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual financial periods ending after September 15, 2009. On this effective date, the Codification will supersede all then-existing Non-SEC accounting and reporting standards. All other non-grandfathered Non-SEC accounting literature not included in the Codification will become non-authoritative. Once the Codification is in effect, all of its content will carry the same level of authority, effectively superseding SFAS 162. The Company will adopt SFAS 168 during its interim period ending September 30, 2009 and does not anticipate that the adoption of this standard will have a material impact on its financial statements.
ITEM 7A.
ITEM 7A. 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 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements required by this item are included on the pages immediately following the Index to Financial Statements appearing on page
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in our independent accountants, HJ & Associates, LLC, or disagreements with them on matters of accounting or financial disclosure.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
We maintain 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, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), an evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and our principal 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 management, including our principal executive officer and our principal 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.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We are responsible for the preparation and integrity of our published financial statements. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, include amounts based on judgments and estimates made by our management. We also prepared the other information included in the annual report and are responsible for its accuracy and consistency with the financial statements.
We are responsible for establishing and maintaining a system of internal control over financial reporting, which is intended to provide reasonable assurance to our management and Board of Directors regarding the reliability of our financial statements. The system includes but is not limited to:
·
a documented organizational structure and division of responsibility;
·
established policies and procedures, including a code of conduct to foster a strong ethical climate which is communicated throughout the company;
·
regular reviews of our financial statements by qualified individuals; and
·
the careful selection, training and development of our people.
There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Also, the effectiveness of an internal control system may change over time. We have implemented a system of internal control that was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.
We have assessed our internal control system in relation to criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based upon these criteria, we believe that, as of June 30, 2009, our system of internal control over financial reporting was effective.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.
Amerityre Corporation
September 25, 2009
By:
/s/ Michael Kapral
Michael Kapral
Chief Executive Officer
/s/ Anders A. Suarez
Anders A. Suarez
Chief Financial Officer
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
The information called for by Part III of Form 10-K (Item 10
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed with this report.
1.
Financial Statements:
See Index to Financial Statements on page
2.
Financial Statement Schedules:
Financial statement schedules are omitted because they are not required or are not applicable or the required information is shown in the financial statements or notes thereto.
3.
Exhibits:
The exhibits to this report are listed on the Exhibit Index below.
(b)
Description of exhibits
Exhibit Number
Description
3.1
Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.01 to our registration statement on Form 8-A12G (File No. 000-50053)).
3.2
Certificate of Amendment to the Articles of Incorporation of the Company (incorporated by reference to Exhibit 3 to our current report on Form 8-K dated November 17, 2004).
3.3
Bylaws of the Company (incorporated by reference to Exhibit 3.02 to our registration statement on Form 8-A12G (File No. 000-50053)).
4.1
Form of Stock Certificate (incorporated by reference to Exhibit 4.01 to our registration statement on Form 8-A12G (File No. 000-50053)).
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
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: September 25, 2009
AMERITYRE CORPORATION
By: /s/Michael Kapral
Michael Kapral
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 25th day of September 2009.
/s/ Michael Kapral
Michael Kapral
Chief Executive Officer
(Principal Executive Officer)
/s/Anders A. Suarez
Anders A. Suarez
Chief Financial Officer
(Principal Financial Officer)
/s/Louis M. Haynie
Louis M. Haynie
Chairman of the Board of Directors
/s/Henry D. Moyle
Henry D. Moyle
Director
/s/Wesley G. Sprunk
Wesley G. Sprunk
Director
/s/
Gary N. Benninger
Director
/s/Steve M. Hanni
Steve M. Hanni
Director
/s/Frank Dosal
Frank Dosal
Director
AMERITYRE CORPORATION
Audited Financial Statements
Report of Independent Registered Public Accounting Firm
Balance Sheets as of June 30, 2009 and 2008
Statements of Operations for the years ended June 30, 2009, 2008, and 2007
Statements of Stockholders' Equity for the years ended June 30, 2009, 2008, and 2007
Statements of Cash Flows for the years ended June 30, 2009, 2008, and 2007
Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Amerityre Corporation
Boulder City, Nevada
We have audited the balance sheets of Amerityre Corporation as of June 30, 2009 and 2008, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provided a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Amerityre Corporation as of June 30, 2009 and 2008 and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2009, in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management’s assessment of the effectiveness of Amerityre Corporation’s internal controls over financial reporting as of June 30, 2009, including in the accompanying 10-K and, accordingly, we do not express an opinion thereon.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 5 to the financial statements, the Company has suffered recurring losses from operations that have resulted in an accumulated deficit. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 5. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/HJ & Associates, LLC
HJ & Associates, LLC
Salt Lake City, Utah
September 28, 2009
The accompanying notes are an integral part of these financial statements.
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2009 and 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
Amerityre Corporation, (the “Company”) was incorporated under the laws of the State of Nevada on January 30, 1995, under the name American Tire Corporation. The Company was organized to take advantage of existing proprietary and non-proprietary technology available for the manufacturing of specialty tires. The Company engages in the manufacturing, marketing, distribution and sales of “flatfree” specialty tires and tire-wheel assemblies and currently is manufacturing these tires at its manufacturing facility located in Boulder City, Nevada. During the year ended June 30, 2001, the name of the Company was changed to Amerityre Corporation.
b. Accounting Method
The Company’s financial statements are prepared using the accrual method of accounting. The Company has elected a June 30 year-end.
c. Reclassifications
Prior period amounts have been adjusted to conform to the current year presentation. Payroll and payroll taxes and bad debt expense previously included as separate line items are now reclassified to be included in selling, general and administrative expenses.
d. Basic and Fully Diluted Net Loss Per Share
Basis and Fully Diluted net loss per share is computed using the weighted-average number of common shares outstanding during the period.
The Company’s outstanding stock options and warrants have been excluded from the basic net loss per share calculation. The Company excluded 4,679,780, 5,527,370 and 5,182,370 common stock equivalents for the years ended June 30, 2009, 2008 and 2007, respectively because they are anti-dilutive.
e. Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2009 and 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f. Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Net deferred tax assets consist of the following components as of June 30, 2009 and 2008:
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years ended June 30, 2009 and 2008 due to the following:
At June 30, 2009, the Company had net operating loss carryforwards of approximately $44,400,000 that may be offset against future taxable income from the year 2008 through 2029. No tax benefit has been reported in the June 30, 2009 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
The Company files income tax returns in the U.S. federal jurisdiction, and in Utah. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2004. The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. The Company’s policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2009 and 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
g. Inventory
Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or market. The cost of finished goods includes the cost of raw material, direct and indirect labor, and other indirect manufacturing costs. The inventory consists of chemicals, finished goods produced in the Company’s plant and products purchased for resale.
Raw Materials
$
191,384
$
275,283
Finished Goods
450,703
544,120
Total Inventory
$
642,087
$
819,403
We had an inventory reserve amount of $42,362 and $21,312 recorded as of June 30, 2009 and 2008, respectively, for items that have a slow turnover ratio.
h. Property and Equipment
Property and equipment are stated at cost. Expenditures for small tools, ordinary maintenance and repairs are charged to operations as incurred. Major additions and improvements are capitalized. When we retire or dispose of assets, the costs and accumulated depreciation or amortization are removed from the respective accounts and we recognize any related gain or loss. Repairs and maintenance are charged to expense when incurred. Major replacements that substantially extend the useful life of an asset are capitalized and depreciated. Depreciation is computed using the straight-line method over estimated useful lives as follows:
Leasehold improvements
5 years, or over lease term
Equipment
5 to 10 years
Furniture and fixtures
7 years
Automobiles
5 years
Software
3 years
Depreciation expense for the years ended June 30, 2009, 2008 and 2007 was $228,270, $272,614 and $355,918, respectively.
i. 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. License fee revenue is recognized as earned, and no revenue is recognized until the inception of the license term.
j. Patents and Trademarks
Patent and trademark costs have been capitalized at June 30, 2009, totaling $739,065 with accumulated amortization of $137,291 for a net book value of $601,774. Patent and trademark costs capitalized at June 30, 2008 totaled $765,784 with accumulated amortization of $107,250 for a net book value of $658,534. 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 being amortized. Amortization will begin once the patents have been issued. Amortization expense for the years ended June 30, 2009, 2008 and 2007 was $30,041, $21,638and $23,209, respectively. The Company evaluates the recoverability of intangibles and reviews the amortization period on a continual basis utilizing the guidance of SFAS 142, “Goodwill and Other Intangible Assets.” Several factors are used to evaluate intangibles, including, but not limited to, management’s plans for future operations, recent operating results and projected, undiscounted cash flows.
In June 2009, our management team assessed several of our pending patents and trademarks and decided to abandon several of them due to they no longer apply to our current manufacturing processes. For the year ended June 30, 2009, we abandoned a total of $79,022 in patents and trademarks that do not apply to our current manufacturing processes. Included in the total patent and trademark costs are $242,817 of patent and trademark costs pending that are not currently being amortized.
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2009 and 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j. Patents and Trademarks (continued)
The estimated amortization expense, based on current intangible balances, for the next fiscal years beginning July 1, 2009 is as follows:
$
27,750
$
25,350
$
23,700
$
21,650
$
20,340
k. Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising expense for the years ended June 30, 2009, 2008 and 2007 was $24,893, $117,169and $160,980, respectively.
l. Stock Based-Compensation Expense
On July 1, 2005, we adopted Statement of Financial Accounting Standards No. (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payments to employees and directors including employee stock options and stock purchases related to the Company’s employee stock option and award plans based on estimated fair values. SFAS 123 (R) supersedes our previous accounting under Accounting Principles Board Option No. 25, “Accounting for Stock Issued to Employees” (“APB25”) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123 (R). We have applied the provisions of SAB 107 in our adoption of SFAS 123 (R).
We adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of July 1, 2005, the first day of our fiscal year 2006. Our financial statements as of and for the fiscal years ended June 30, 2007, 2008 and 2009 reflect the impact of SFAS 123 (R). Stock-based compensation expense recognized under SFAS 123 (R) for the fiscal years ended June 30, 2009, 2008 and 2007 was $64,077, $370,027, and $783,503 respectively, and related to employee stock options issued during those fiscal years.
SFAS 123 (R) 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. Prior to the adoption of SFAS 123 (R), we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense had been recognized in our Statement of Operations because the exercise price of the stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At June 30, 2006, we had no unvested share-based payment awards for which compensation expense should be recognized during the fiscal year ended June 30, 2007, 2008, and 2009. Stock-based compensation expense recognized in our Statements of Operations for the fiscal years ended June 30, 2007, 2008 and 2009 only include compensation expense for share-based payment awards granted, but not yet vested after July 1, 2006, and are based on the grant date fair value estimated in accordance with SFAS 123 (R).
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2009 and 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
l. Stock Based-Compensation Expense (continued)
Stock-based compensation expense recognized in our Statements of Operations for fiscal year ended June 30, 2007, 2008 and 2009 assume all awards will vest, therefore no reduction has been made for estimated forfeitures.
m. Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162. SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles and establishes the “FASB Accounting Standards Codification™” (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP). Rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual financial periods ending after September 15, 2009. On this effective date, the Codification will supersede all then-existing Non-SEC accounting and reporting standards. All other non-grandfathered Non-SEC accounting literature not included in the Codification will become non-authoritative. Once the Codification is in effect, all of its content will carry the same level of authority, effectively superseding SFAS 162. The Company will adopt SFAS 168 during its interim period ending September 30, 2009 and does not anticipate that the adoption of this standard will have a material impact on its financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general accounting standards and disclosure for events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective for interim and annual financial periods ending after June 15, 2009 and requires prospective application. The Company adopted SFAS 165 during the fourth quarter ended June 30, 2009, and its application had no impact on the Company’s financial statements. The Company evaluated subsequent events through the date the accompanying financial statements were issued, which was September 28, 2009.
In May of 2008 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 163, “Accounting for Financial Guarantee Insurance - an interpretation of FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises”. This statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This statement also clarifies how Statement 60 applies to financial guarantee insurance contracts. This statement is effective for fiscal years beginning after December 15, 2008. This statement has no effect on the Company’s financial reporting at this time.
In May of 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This statement identifies literature established by the FASB as the source for accounting principles to be applied by entities which prepare financial statements presented in conformity with generally accepted accounting principles (GAAP) in the United States. This statement is effective 60 days following approval by the SEC of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” This statement will require no changes in the Company’s financial reporting practices.
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 ("SFAS No. 161"). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how the instruments are accounted for under SFAS No. 133 and its related interpretations, and how the instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. The guidance in SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (fiscal year 2009 for the Company). The Company is currently evaluating the potential impact of the adoption of SFAS No. 161 on its disclosures in the Company's financial statements.
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2009 and 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS 141(R) replaces SFAS No. 141, Business Combinations, but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS 141(R) expands on the disclosures previously required by SFAS 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any non-controlling interests in the acquired business. SFAS 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. We do not expect SFAS No. 141(R) to have a material impact on our results of operations, financial position, or cash flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51. SFAS 160 requires that non-controlling (or minority) interests in subsidiaries be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement. SFAS 160 also establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. SFAS 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years; early adoption is not permitted. We do not expect SFAS 160 to have a material impact on our results of operations, financial position, or cash flows.
n. Shipping and Handling
We follow Emerging Issues Task Force Statement No. 00-10, “Shipping and Handling Fees and Costs”, which requires that freight costs charged to customers be classified as revenues. Freight expenses are included in costs of sales.
o.
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 selling, general and administrative expenses. During the fiscal year ended June 30, 2008 we recouped a net of $8,086 in bad debt expenses previously charged in prior fiscal years. During the fiscal year ended June 30, 2009, bad debt expense increased as a result of our decision to adopt the most conservative accounting approach to outstanding receivables of certain customers. We are still confident that we will collect the outstanding balances however we decided to classify them as bad debt to be in accordance with of our trade receivables policy. Bad debt expense was $284,714 $(7,897), and $(1,965), for the fiscal years ended June 30, 2009, 2008 and 2007, respectively.
In the quarter ended June 30, 2009, we have received loans through promissory notes issued per the credit agreement totaling $310,000, $300,000 from Henry Moyle and $10,000 from Frank Dosal, both directors. The terms of the credit agreement requires the Company to employ our trade receivables as security.
p. Equity Securities
Equity securities issued for services rendered have been accounted for at the fair market value of the securities on the date of authorization.
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2009 and 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
q. Concentrations of Risk
The Company maintains several accounts with financial institutions. Currently, the accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s balances exceeded the insured amount by approximately $1,601,191and $5,688,000 as of June 30, 2008, and 2007 respectively.
Credit losses, if any, have been provided for in the financial statements and are based on management’s expectations. The Company’s accounts receivable are subject to potential concentrations of credit risk. The Company does not believe that it is subject to any unusual risks or significant risks in the normal course of its business.
We have one customer who accounted for 20%, 20%, and 20% of our sales for the years ended June 30, 2009, 2008 and 2007, respectively.
r. Valuation of Options and Warrants
The valuation of options and warrants granted to unrelated parties for services are measured as of the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instrument is reached, or (2) the date the counterparty’s performance is complete. Pursuant to the requirements of EITF 96-18, the options and warrants will continue to be revalued in situations where they are granted prior to the completion of the performance.
s. Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
In June 2009, we negotiated an adjustment to the extended lease for our executive and manufacturing facilities located at 1501 Industrial Road, Boulder City, Nevada. The property consists of a 49,200 square-foot building, which includes approximately 5,500 square-feet of office space, situated on approximately 4.15 acres. The term of the lease is 1 year expiring June 14, 2010. The base rent is $15,000 per month. Our overall obligation amounts to $180,000 for the fiscal year 2010.
Effective April 24, 2009, the Company’s board of directors terminated the employment agreement between the Company and its President and Chief Executive Officer, Gary N. Benninger. Mr. Benninger’s employment agreement has an expiration date of August 31, 2009. Mr. Benninger’s employment agreement provides for termination payments and related accrued benefits, which amount and time frame for payment are currently subject to negotiation between the Company and Mr. Benninger.
In addition, the Company terminated the consulting agreements between the Company and Richard A. Steinke and Manuel (Manny) Chacon, who have been providing the Company with technology development and chemical formulating services, respectively. Each consulting agreement has an expiration date of August 31, 2009. The consulting agreements do not have a provision for early termination. The Company may continue to utilize the services of these consultants on an as-needed basis.
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2009 and 2008
NOTE 3 - STOCK TRANSACTIONS
During the year ended June 30, 2009, the Company had the following stock transactions:
Pursuant to the terms of his employment agreement, effective August 31, 2008, we issued 25,000 shares of common stock to Gary N. Benninger. The shares were valued at $4.04 per share, based on the closing price of the shares on the date of the stock award. In December 2008, however, Mr. Benninger returned the shares for cancellation.
In December 2008, we approved the issuance of an aggregate of 10,000 shares (5,000 shares each) of our restricted common stock to two of our former non-employee Directors as additional compensation for their board services for the period from March 31, 2008 to November 30, 2008. The value of the shares was $3,000, based on the closing price of $0.30 per share.
In December 2008, the Board of Directors agreed to reduce annual board compensation to a total of $12,000, all payable through the grant of common stock (30,000 shares based on the closing price of $0.40 per share on December 1, 2008 payable quarterly). In addition to the above compensation, the Board of Directors has approved annual compensation for the chairman of the Audit Committee of $25,000, payable quarterly in cash and/or stock.
In February 2009, we issued an aggregate of 37,500 shares (7,500 shares each) of our restricted common stock to our non-employee directors as partial compensation for their services as members of our board of directors for the period commencing December 1, 2008 through February 28, 2009. The aggregate value of the shares was $15,000, based on the closing price of $0.40 per share, on the date the shares were approved to be issued during December 2008.
In February 2009, we issued 6,250 shares of our restricted common stock to the Chairman of our audit committee as partial compensation for his services as Chairman for the period commencing December 1, 2008 through February 28, 2009. The value of the shares was $2,500, based on the closing price of $0.40 per share, on the date the shares were approved to be issued during December 2008.
On February 19, 2009, we issued 686,479 shares of our common stock to certain warrant holders. The warrant holders were originally issued an aggregate of 550,000 warrants to purchase our common stock in connection with a private placement in May 2007. The original warrant agreements included anti-dilution provisions such that the above holders were entitled to receive a reduced exercise price and additional warrants, up to a negotiated maximum, if we sold shares at a price below the exercise price of the outstanding warrants of $4.50. The warrant holders exercised all of the original warrants as well as the anti-dilution warrants via the cashless exercise provisions of the warrants.
Through June 30, 2009, we received $520,367 in cash proceeds related to the February 2009 private placement of our securities. The February private placement was in the form of units (the “Units”) sold a price of $1.00 per Unit for an aggregate purchase price of $490,805 (the “February 2009 Private Placement’). Each Unit consisted of four (4) shares of common stock and one (1) warrant to purchase one share of common stock, exercisable for two years at an exercise price of $0.50 per share. We sold an aggregate of 515,955 Units, or 2,063,820 shares and 515,955 warrants. Certain of our Directors participated in the offering and purchased an aggregate of 25,155 Units for aggregate cash proceeds of $3,762 and services totaling $28,500, or an average of approximately $1.175 per Unit, which amount represents a price in excess of the per share market value of the our Common Stock at the time of purchase.
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2009 and 2008
NOTE 4 - STOCK OPTIONS AND WARRANTS
General Option Information
During the fiscal year ended June 30, 2008 we issued options to acquire an aggregate of 375,000 shares of our common stock to certain employees in connection with their employment (the “Employment Options”). In addition, we issued options to acquire an aggregate of 150,000 shares of our common stock to certain consultants for services. The exercise price for the options granted during the year 2008 range from $1.79 to $4.04 per share.
During the fiscal year ended June 30, 2009, 100,000 of the employment options were cancelled and 100,000 of the consultant options were cancelled in connection with the termination of employment and consulting agreements.
During the fiscal year ended June 30, 2009, we did not issue any additional options.
We use the Black-Scholes model to value stock options. The Black-Scholes model requires the use of employee exercise behavior data and the use of a number of assumptions including volatility of our stock price, the weighted average risk-free interest rate, and the weighted average expected life of the options. Because we do not pay dividends, the dividend rate variable in the Black-Scholes model is zero. We estimated the fair value of the stock options at the grant date based on the following weighted average assumptions:
A summary of the status of our outstanding stock options as of June 30, 2009 and June 30, 2008 and changes during the periods then ended is presented below:
The following table summarizes the range of outstanding and exercisable options as of June 30, 2009:
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2009 and 2008
NOTE 4 - STOCK OPTIONS AND WARRANTS (Continued)
As of June 30, 2009, the unrecognized stock-based compensation related to stock options was approximately $141,764. This cost is expected to be expensed over the two years.
The following table summarizes outstanding warrants to purchase our common stock at June 30, 2009:
Number of Warrants
Outstanding at
June 30, 2009
Expiration Date
Exercise Price
103,825
2/1/2011
$5.50
515,955
2/11/2011
$0.50
NOTE 5 - 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 retained deficit of $54,643,220 at June 30, 2009 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 reduce our operating and financial requirements while expanding our revenues in an effort to enable us to continue as a going concern until such time that revenues are sufficient to cover expenses, including: (1) we implemented numerous cost reduction measures, including reduced officer and board compensation, over the last seven months of the 2009 fiscal year that we expect will continue to reduce our overall selling, general and administrative expenses throughout the 2010 fiscal year; (2) we revised the selling prices for our products at the beginning of the fiscal year to adjust for raw material increases to our customers; (3) we re-focused our sales and marketing efforts on three product areas with products already in production, low duty cycle foam tires, tire fill and solid tires, have expanded sales in all three areas and expect to continue to do so during the fiscal year. We expect the increase in revenues from the expanded commercialization activities should reduce net loss in the near term and move us closer to profitability.
To supplement our cash needs during the 2010 fiscal year, on September 21, 2009, we completed a private placement of our common stock for aggregate proceeds of approximately $500,000. In connection with the preparation of our financial statements for the year ended June 30, 2009, we have analyzed our cash needs for fiscal 2010. Based on this analysis, we concluded that our available cash, including the cash raised in the private placement, should be sufficient to meet our current minimum working capital, capital expenditure and other cash requirements for fiscal 2010. We may also issue common stock in lieu of cash as compensation for certain employment, development, and other professional services. However we believe we may need additional capital if our sales revenues do not meet our expectations. In any case, we will most likely need additional capital to fully implement our business plans. If necessary, we may seek to raise additional capital through the issuance of debt or equity securities. Our ability to obtain financing through the offer and sale of our securities is subject to market conditions and other factors beyond our control.
Our ability to continue as a going concern is dependent upon our ability to successfully accomplish the plan described above, and 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.
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2009 and 2008
NOTE 6 - NOTE RECEIVABLE
In June 2007, we issued 200,000 shares of common stock in connection with the exercise of 200,000 options at an exercise price of $4.00 per share for aggregate proceeds of $200,000 in cash and an additional two (2) notes in the amount of $300,000 each. The notes are payable in equal annual installments over a 3 year period and bear interest at 8.5% per annum. In December 2008, the original notes were replaced with a single note in the amount of $439,502. The note is payable in four (4) equal installments and bear interest of 4.5% per annum, together with accrued interest, commencing on November 30, 2009. This note receivable has been included in the stockholders’ equity section until the shares issued have been paid in full.
NOTE 7 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES
On April 1, 2009, we entered into a credit agreement under which we could receive loans up to an aggregate of $500,000. Loans under the agreement are made as advances against our accounts receivable, are subject to interest of 2% per month, are secured by our accounts receivable, and are due monthly subject to renewal by the lender. On June 3, 2009, we agreed to an amendment to the agreement adding a right, at the lender’s discretion, to convert outstanding loan principal and interest to common stock at a conversion price of $0.27 per share, the closing market price on June 2, 2009. In the quarter ended June 30, 2009, we have received loans through promissory notes issued per the credit agreement totaling $310,000, $300,000 from Henry Moyle and $10,000 from Frank Dosal, both directors. These notes are due on demand and are included in current liabilities.
NOTE 8 - SIGNIFICANT EVENTS
Our existing employment agreements provide that the respective annual salaries may be adjusted by the Compensation Committee from time to time. Due to the our financial condition during the year ended June 30, 2009, the Compensation Committee and the Board of Directors determined that it was necessary to take certain cost cutting measures, including reductions in base salaries for senior executive officers. In December 2008, each senior executive officer agreed to accept a 10% reduction in base salary. In April 2009, each senior executive officer agreed to accept a further reduction in salary, with the most highly compensated officers accepting a reduction down to a maximum base salary of $10,000 per month. These extraordinary reductions were necessary to maintain our ability to continue operations.
As part of our continuing overall cost reduction and restructuring measures, effective April 24, 2009, our board of directors terminated the employment agreement with our President and Chief Executive Officer, Gary N. Benninger. In addition, the board terminated the consulting agreements with Richard A. Steinke and Manuel (Manny) Chacon, who have been providing the Company with technology development and chemical formulating services, respectively.
Michael Kapral was appointed to replace Mr. Benninger as President and CEO. Mr. Kapral joined the Company in March 2008 as Vice President of Marketing. Mr. Kapral’s employment compensation will remain consistent with the terms of his current employment agreement, that includes a base salary of $150,000 per year (currently reduced to $120,000 under the Company’s executive compensation reduction plan), which expires March 31, 2011.
NOTE 9 - SUBSEQUENT EVENTS
Subsequent to the fiscal year ended June 30, 2009, the Compensation Committee and the Board of Directors approved the grant of stock bonus awards to Michael Kapral, Anders Suarez and James Moore. The three officers were each granted 100,000 shares of stock (valued at $21,000 each) in recognition of their extraordinary efforts on the Company’s behalf.
On September 21, 2009, we closed a private placement of our restricted common stock. We sold an aggregate of 2,366,664 shares and received net proceeds of $496,999 in the private placement.
The Company has evaluated and disclosed all subsequent events in accordance with FASB 165 through the filing of this Annual Report on September 28, 2009.