AMERITYRE CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance or financial condition. Such statements are only predictions and the actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. The historical results set forth in this discussion and analysis are not necessarily indicative of trends with respect to any actual or projected future financial performance. This discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report.

Overview Amerityre engages in the research and development, manufacturing and sale of polyurethane tires. We believe that we have developed unique polyurethane formulations that allow us to make products with superior performance characteristics, including abrasion resistance and load-bearing capabilities, than conventional rubber tires. We also believe that our manufacturing processes 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 which last longer, are less susceptible to failure and offer improved fuel economy. During the last quarter we began to streamline the manufacturing process to increase productivity, eliminate waste and improve product quality. As sales volumes build, this will allow Amerityre to optimize current available resources and assets without additional capital investment.

We are concentrating on three segments of the tire market: low duty cycle foam tires, solid forklift tires and agricultural tires. Our most recent activities in these areas are set forth below: Low duty cycle foam tires - The sale of polyurethane foam tires to original equipment manufacturers, distributors and dealers accounts for most of our revenue at this time. We have the ability to produce a broad range of products for the low duty cycle tire market. Marketing efforts are focused on building a distribution network to expand our business and product sales. A new dealer/distributor development program was rolled out in October 2012. This program is designed to build sales volume and add value to the Amerityre distribution network. Results are encouraging as we have received interest in this new program from potential customers across the country. We are currently engaged in setting up these new potential distributors with the target of having them in place for the spring lawn and garden season. In addition, key original equipment manufacturers (O.E.M) are currently testing Amerityre products for use on their equipment. The Company received a significant "test order" from the U.S. market leader in the supply of wheel barrows, which was delivered in February. In addition, several major mobility, and lawn and garden companies are expected to complete their testing of Amerityre products during the 3rd quarter of fiscal 2013. As a result of drought and unseasonal warm weather patterns that affected product consumption from major accounts, we anticipated a shift in sales from the 1st quarter to the 3rd quarter of fiscal 2013. During the 2nd quarter of fiscal, we experienced a 14% increase in the number of sales orders over the previous year. In addition, we have received new orders from several customers in the lawn and garden sector, which we will begin to deliver in the 3rd quarter of fiscal 2013. From these developments, we remain firm in our belief that sales during the 3rd and 4th quarter of fiscal 2013 will increase significantly over the prior year.

Solid forklift tires - Manufacturing process improvements were implemented during the 4th quarter of fiscal 2012. As a result, all forklift tires are being consistently produced at a high quality level. Sales and marketing efforts are underway to rebuild customer confidence in the product. Forklift tire sales volume for during the first half of fiscal 2013 are close to levels attained during the same period in the prior year. Furthermore, no warranty claims have been received since the implementation of the new process improvements. In addition, capital investments have been made to eliminate production bottlenecks in the curing and rim blasting departments. The result is a lower cost to produce forklift tires through increased productivity and lower labor cost. It is anticipated sales of forklift tires will grow well beyond fiscal 2012 levels as we have more than doubled the dealer network over the previous year. During the 3rd quarter of fiscal 2012, production was shut down to address process issues. Currently, production is running well and inventory availability has been established in the Boulder City warehouse and at our east coast distribution center.

Agricultural tires - We are currently pursuing two segments of the agricultural tire market. The Company completed a redesign of its agricultural products in the 4th quarter of fiscal 2012. The newly designed tires are now entering the market and sales are expected to grow significantly during the 3rd and 4th quarters of fiscal 2013. Drought conditions severely impacted sales for this product segment last year. We recently met with several irrigation manufacturers and reached an agreement to test the Amerityre pivot tire solution during the upcoming irrigation season. In addition, Amerityre will present its agriculture products at the largest U.S. farm exhibition in Tulare, California in February.

We also plan to introduce a new seeder tire dimension for a significant customer. This product will be ready for shipment in the 3rd quarter of fiscal 2013. Sales volumes during 3rd and 4th quarters of fiscal 2013 are projected to grow significantly over prior year.

Due to the Company's limited resources, tire projects which are contingent on additional development, such as composite and automotive tires, have been put on hold and will be revisited at a later date.

Factors Affecting Results of Operations Our operating expenses consisted primarily of the following: · Cost of sales, which consists primarily of raw materials, components and production of our products, including applied labor costs and benefits expenses, maintenance, facilities and other operating costs associated with the production of our products; · Selling, general and administrative expenses, which consist primarily of salaries, commissions and related benefits paid to our employees and related selling and administrative costs including professional fees; · Research and development expenses, which consist primarily of equipment and materials used in new product development and product improvement using our technologies; 13-------------------------------------------------------------------------------- Table of Contents · Consulting expenses, which consist primarily of amounts paid to third-parties for outside services; · Depreciation and amortization expenses which result from the depreciation of our property and equipment, including amortization of our intangible assets; and · Stock based compensation expense related to stock and stock option awards issued to employees and consultants for services performed for the Company.

Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, 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.

Valuation of Intangible Assets and Goodwill At December 31 2012, we had capitalized patent and trademark costs, net of accumulated amortization, totaling $517,349. The patents which have been granted are being amortized over a period of 20 years. Patents which are pending or are being developed are not amortized until a patent has been issued. We evaluate the recoverability of intangibles and review the amortization period on a continual basis utilizing the guidance of Accounting Standards Codification 350, Intangibles - Goodwill and Other (ASC 350). We test our patents and trademarks for impairment at least annually and whenever events or changes in circumstances indicated that the carrying value may not be recoverable. We consider the following indicators, among others, when determining whether or not our patents are impaired: · any changes in the market relating to the patents that would decrease the life of the asset; · any adverse change in the extent or manner in which the patents are being used; · any significant adverse change in legal factors relating to the use of the patents; · current-period operating or cash flow loss combined with our history of operating or cash flow losses; · future cash flow values based on the expectation of commercialization through licensing; and · current expectations that a patent will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

Inventory Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or market. The inventory consists primarily of chemicals, finished goods produced in our plant and products purchased for resale.

Stock-Based Compensation Equity securities issued for services rendered have been accounted for at the fair market value of the securities on the date of authorization. The stock-based compensation expense recognized under ASC 718 for the six month periods ended December 31, 2012 and 2011 was $43,755 and $44,777, respectively.

Seasonality A substantial majority of our sales are to customers within the United States.

We experience some seasonality in the sale of our closed-cell polyurethane foam tires for bicycles and, lawn and garden products because sales of these products generally decline during the winter months in the United States. Sales of our closed-cell polyurethane form tire products generally peak during the spring and summer months, typically resulting in greater sales volumes during the 3rd and 4th quarters of the fiscal year.

14-------------------------------------------------------------------------------- Table of Contents 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: · Net revenues, which consists of product sales revenues and equipment sales revenues, if any; · 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 revenues of our products and the mix of product and equipment sales and license fees, if any; · Growth in our customer base, which is an indicator of the success of our sales efforts; and · Distribution of revenue across our products offered.

The following summary table presents a comparison of our results of operations for the three and six month periods ended December 31, 2012 and 2011 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below.

For the Three Months Ended For the Six Months Ended December 31, December 31 2012 2011 Change 2012 2011 Change Net revenues $ 727,194 $ 1,048,698 (30.7 %) $ 1,640,404 $ 2,397,864 (30.2 %) Cost of revenues 515,048 657,538 (21.7 %) 1,054,476 1,534,486 (31.3 %) Gross profit 212,146 391,160 (45.8 %) 585,928 863,378 (32.1 %) Consulting expense 20,047 17,425 15.0 % 43,909 37,540 17.0 % Depreciation & amortization expenses 61,450 60,662 1.3 % 117,963 121,323 (2.8 %) Research & development expenses - 4,861 (100.0 %) 300 7,616 (96.1 %) Bad debt expense (11,438 ) (5,751 ) 98.9 % (29,673 ) (5,751 ) 416.0 % Selling, general & administrative expenses 483,148 535,155 (9.7 %) 1,064,985 1,108,186 (3.9 %) Interest income 58 2,690 (97.8 %) 554 6,620 (91.6 %) Interest expense (3,641 ) (6,822 ) (46.6 %) (11,530 ) (25,800 ) (55.3 %) Miscellaneous income - (5,024 ) (100.0 %) 270 (100.0 %) Net loss $ (344,644 ) $ (230,348 ) 49.6 % $ (622,532 ) $ (424,446 ) 46.7 % Three Months Ended December 30, 2012 Compared to December 30, 2011 Net Revenues. Net revenues of $727,194 for the three months ended December 31, 2012, represent a 30.7% decrease over net revenues of $1,048,698 for the three months ended December 31, 2011. Net revenues for the first half of fiscal 2013 continue to lag forecasts due to replacement shipments relating to forklift tires returned under warranty; chemical and production shortages which led to delayed and cancelled orders; and delays in the redesign of the pivot wheel. In addition, we have experienced reduced orders from certain distributors and licensees currently under agreements with Amerityre. Net revenues for the same period in fiscal 2012 were higher than normal due in part to the relaunch of the forklift product line; chemical and equipment sales under a new licensing agreement; and the launch of new products for agriculture.

Cost of revenues. Cost of revenues for the three months ended December 31, 2012 were $515,048 or 70.8% of net revenues compared to $657,538 or 62.7% of net revenues for the same period in 2011. Cost of revenues as a percent of net revenues increased for the three months ended December 31, 2012 over the same period in the prior year largely due to a shift from the use of temporary employees for production to full-time employees. The shift to full-time production employees was made to improve quality control and overall product quality. The use of full-time production employees resulted in an overall production cost increase due to higher labor rates and employee benefits.

Gross profit. Gross profit for three months ended December 31, 2012 was $212,146 compared to $391,160 for the same period in 2011. Gross profit for the three months ended December 31, 2012 decreased by $179,014 or 45.8% over the same period in 2011. As a percent of net revenues, gross profit for the three months ended December 31, 2012 increased 8.1% due to increased production labor costs that led to the increase in cost of revenues discussed above.

Consulting expenses. Consulting expenses for the three months ended December 31, 2012 were $20,047 as compared to $17,425 for the three months ended December 31, 2011. In order to achieve the Company's goals in IT systems, accounting and finance and manufacturing, management has engaged consultants to assist the Company's full-time staff on various projects. Consulting expenses are expected to fluctuate depending upon future product development, manufacturing initiatives and other projects Depreciation and amortization expenses. Depreciation and amortization for the three months ended December 31, 2012 was $61,450 compared to $60,662 for the same period last year. Depreciation and amortization increased only $788, or 1.3% compared to the same period in 2011. The nominal increase in depreciation between periods was due to fixed asset purchases that were offset by a decrease in depreciation from fully-depreciated assets and the abandonment of obsolete patents. In addition, during the six months ended December 31, 2012, the Company invested approximately $161,000 in manufacturing, telephone and other fixed assets. However a large portion of those assets had to undergo construction and assembly, and as a result were not placed in service until the latter part of the 2nd quarter fiscal 2013.

15-------------------------------------------------------------------------------- Table of Contents Research and development expenses. Research and development expenses for the three months ended December 31, 2012 were $0 compared to $4,861 for the same period in the prior year. The research and development expenses for the three months ended December 31, 2012 decreased by $4,861 as compared with the same period in 2011 primarily due to a decrease in outside testing services and a reduction in tooling costs.

Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses for the three months ended December 31, 2012 were $483,148 compared to $535,155 for the same period in 2011. SG&A expenses for the three months ended December 31, 2012 decreased $52,007 or 9.7% over the same period in 2011 due to a number of factors, including: ††† Director compensation, primarily stock based compensation, decreased approximately $11,100.

††† Sales related travel expenses increased approximately $18,300 due to increased sales and marketing activities.

††† Salaries and employee benefits increased approximately $49,700 due the addition of a chemist and accounting staff.

††† Variable and fixed cost overhead allocations to cost of sales increased approximately $68,000.

††† Repairs and maintenance of manufacturing and office equipment decreased approximately $11,200.

††† Monthly building rent decreased approximately $12,000 due to a lease renegotiation.

SG&A expenses as a percentage of sales for the three months ended December 31, 2012 increased to 66.4% of total revenues from 51.0% in the same period last year primarily due to the decrease in net revenues.

Net loss. Net loss for the three month period ended December 31, 2012 was $344,644 compared to a net loss of $230,348 for the same period in 2011. The $114,296 increase in the net loss is primarily due to the decrease in net revenues and the related impact on gross profit.

Six Months Ended December 31, 2012 Compared to December 31, 2011 Net revenues. Net revenues of $1,640,404 for the six months ended December 31, 2012, represents a 30.2% decrease over net revenues of $2,397,864 for the six months ended December 31, 2011. Revenues for the first half of fiscal 2013 continue to lag forecasts due to replacement shipments relating to forklift tires returned under warranty; chemical and production shortages which led to delayed and cancelled orders; and delays in the redesign of the pivot wheel. In addition, we have experienced reduced orders from certain distributors and licensees currently under agreements with Amerityre. Revenues for the same period in fiscal 2012 were higher than normal due in part to the relaunch of the forklift product line; chemical and equipment sales under a new licensing agreement; and the launch of new products for agriculture.

Cost of revenues. For the six months ended December 31, 2012, cost of revenues were $1,054,476 compared to $1,534,486 for the same period in 2011, representing a 31.3% decrease. However cost of sales as a percent of revenue remained relatively constant for the six months ended December 31, 2012 and 2011 at 64.3% and 64.0% of revenues, respectively. Cost of revenues decreased primarily due to the decrease in net revenues.

Gross profit. For the six months ended December 31, 2012, we had $585,928 of gross profit compared to $863,378 for the same period 2011. Gross profit for the six months ended December 31, 2012 decreased by $277,450 or 32.1%, over the same period in 2011 due primarily to the decrease in sales volume.

Consulting expenses. For the six months ended December 31, 2012, we had $43,909 in consulting expenses as compared to $37,540 consulting expenses during the six months ended December 31, 2011. In order to achieve the Company's goals in IT systems, accounting and finance and manufacturing, management has engaged consultants to assist the Company's full-time staff on various projects.

Consulting expenses are expected to fluctuate depending upon future product development, manufacturing initiatives and other projects.

Depreciation and amortization expenses. For the six months ended December 31, 2012, we had $117,963 of depreciation and amortization expenses compared to $121,323 for the same period last year. Depreciation and amortization decreased by $3,360, or 2.8% compared to the same period in 2011, principally due to the decrease in depreciation from fully-depreciated assets and the abandonment of obsolete patents. In addition, during the six months ended December 31, 2012, the Company invested approximately $161,000 in manufacturing, telephone and other fixed assets. However a large portion of those assets had to undergo construction and assembly, and as a result were not placed in service until the latter part of the 2nd quarter fiscal 2013.

Research and development expenses. For the six months ended December 31, 2012, we had $300 of research and development expenses compared to $7,616 for the same period in the prior year. Our research and development expenses for the six months ended December 31, 2012, decreased by $7,316, or 96.1%, as compared with the same period in 2011 primarily due to a decrease in outside testing services and a reduction in tooling expenses during the period.

Selling, general and administrative expenses. For the six months ended December 31, 2012, we had $1,064,985 of SG&A expenses, compared to $1,108,186 of SG&A expenses for the same period last year. SG&A expenses for the six months ended December 31, 2012 decreased $43,201 due to a number of factors, including decreases director compensation, the reallocation of variable and fixed overhead to cost of sales, and a reduction in rent resulting from a lease renegotiation.

SG&A expenses as a percentage of sales for the three months ended December 31, 2012 increased to 64.9% of total revenues from 46.2% in the same period last year primarily due to the decrease in net revenues.

Net loss. For the six months ended December 31, 2012, we had a net loss of $622,532 compared to a net loss of $424,446 for the same period in 2011, an increase of $198,086. The increase in the net loss is primarily due to the decrease in net revenues and the related impact on gross profit.

16-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our principal sources of liquidity consist of cash and payments received from our customers. We do not have any significant credit arrangements. Historically, our expenses have exceeded our 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 and the placement of short-term debt instruments. In assessing our liquidity, management reviews and analyzes our current cash, short-term investments, accounts receivable, accounts payable, capital expenditure commitments and other obligations.

Cash Flows The following table sets forth our cash flows for the six month periods ended December 30, 2012 and 2011.

For the Six Months Ended December 31, 2012 2011 Net cash provided/(used) by operating activities $ (443,056 ) $ 84,228 Net cash used by investing activities (160,557 ) (38,278 ) Net cash provided/(used) by financing activities 509,042 (20,653 ) Net increase/(decrease) in cash during period $ (94,571 ) $ 25,297 Net Cash Used By Operating Activities. Our primary sources of operating cash during the six month period ended December 31, 2012 came from a decrease in accounts receivables and an increase in accounts payable and accrued expenses.

Our primary use of operating cash was an increase in inventory. Net cash used by operating activities was $443,056 for the six months ended December 31, 2012 compared to net cash provided by operating activities of $84,228 for the same period in 2011. The decrease in cash flow from operating activities compared to the prior year period is largely due an increase in the net loss and an increase in inventories to meet customer demand.

Net Cash Used By Investing Activities. Net cash used by investing activities was $160,557 for the three month period ended December 31, 2012 and $38,278 for the same period in 2011. Our primary use of cash for investing activities for the six month period ended December 31, 2012 was $159,682 for the purchase of property and equipment.

Net Cash Provided by Financing Activities. Net cash provided by financing activities was $509,042 for the three months ended December 31, 2012 compared to net cash used by financing activities of $20,653 for the same period last year. The primary source of cash from financing activities for the six months ended December 31, 2012 was from proceeds related to the private placement of preferred stock of $814,864. The principal use of cash from financing activities for the six months ended December 31, 2012 was $300,000 for the redemption of secured convertible promissory notes.

Contractual Obligations and Commitments The following table summarizes our contractual cash obligations and other commercial commitments at December 31, 2012.

Payments due by period Less than 1 Total year 1 to 3 years 3 to 5 years After 5 years Facility lease (1) $ 198,000 $ 132,000 $ 66,000 $ - $ - Total contractual cash obligations $ 198,000 $ 132,000 $ 66,000 $ - $ - (1) In June 2012, we negotiated an extension to the lease for our executive and manufacturing facilities located at 1501 Industrial Road, Boulder City, Nevada. The property consists of a 49,200 square-foot building, which includes approximately 5,500 square-feet of office space, situated on approximately 4.15 acres. The two year lease extension commenced on July 1, 2012 and the base rent was reduced $4,000 per month to $11,000 per month. All other terms and conditions of the building lease remain in effect.

Cash Position, Outstanding Indebtedness and Future Capital Requirements At December 31, 2012, our total cash was $11,267, none of which is restricted and our total indebtedness was $918,611. Our total indebtedness at December 31, 2012 includes $487,252 in accounts payable, $153,375 in principal and interest for secured convertible promissory notes, $202,952 in accrued expenses, $21,192 in current portion of long-term debt, and $53,840 in long-term debt.

The Company currently does not have an existing credit facility. Management, over the past year, has worked with our vendors to obtain extended credit terms and increase credit lines. We have improved the lines of communications with our vendors often integrating the vendor into the decision making process. We have succeeded in these endeavors and appreciate the continued support of our vendors. During the same period, management has also improved its customer credit policies and procedures and is aggressively pursuing receivable collections.

17-------------------------------------------------------------------------------- Table of Contents Management is intent, in spite of losing a significant number of revenue growth opportunities due to cash flow constraints, on focusing on the sale and distribution of profitable product lines. Management has adopted a more aggressive business plan that involves the acquisition of higher output production equipment and maintaining sufficient raw material and finished goods inventory levels to capitalize on revenue growth opportunities. Over the past nine months, management has invested approximately $116,000 in capital equipment to improve employee efficiency, thus reducing overall costs, and to promote sales growth. These investments include the replacement of an outdated server and computer workstations; the installation of a fully automated telephone system to support customer sales orders; and forklift tire production equipment to support sales orders. No additional capital expenditures are anticipated over the next six months, unless they support sales development and product improvement. Management is also working to reduce its overall costs. For example, we renegotiated the building lease in June 2012, resulting in an annual rent decrease of $48,000.

The Company has increased its efforts to obtain financing through means that previously were not considered such as preferred stock offerings, structured debt and asset based lending. On September 30, 2012, we completed a private offering of convertible preferred stock, which generated net proceeds of $1,074,864. As of this filing, the Company has received $335,000 in cash receipts from the sale of unsecured notes and related short-term borrowings. We have also redeemed or converted $655,800 of the $755,800 in secured convertible promissory notes (the "Notes") placed in September 2010. In addition, we are currently attempting to obtain approval for financing in the form of structured debt. We anticipate having this financing transaction completed during the fourth quarter of fiscal 2013. We have also received several asset based lending proposals that are currently under review.

At the Annual Stockholder's Meeting, held on December 4, 2012, the stockholders voted to amend the Company's Article of Incorporation to increase the number of authorized shares of common stock from 40,000,000 shares to 55,000,000 shares.

The increase allows us to convert the preferred stock mentioned above into common stock. In addition, the increase provides the Company with approximately 11,133,000 shares authorized and available for issuance. These authorized but unissued and unreserved shares of our common stock can be utilized as necessary to fund the expansion of our manufacturing operations or to obtain additional working capital.

The success of the current business strategy is dependent upon obtaining additional working capital. In connection with the preparation of our financial statements for the quarter ended December 31, 2012, we have analyzed our cash needs for the next twelve months. We believe that our current fundraising efforts will be successful, but if we are unable to raise a minimum of $800,000 in working capital (of which $335,000 has been raised, see Note 8) through the financing efforts mentioned above, we would be required to raise additional working capital through alternative sources to continue operations.

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