UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: DecemberMarch 31, 20162017
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________.
Commission file number: 000-50053
AMERITYRE CORPORATION
(Exact name of small business issuer as specified in its charter)
| NEVADA | 87-0535207 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 1501 INDUSTRIAL ROAD, BOULDER CITY, NEVADA | 89005 |
| (Address of principal executive offices) | (Zip Code) |
(702) 293-1930
(Issuer’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒
Emerging Growth Companies ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of Registrant’s Common Stock as of February 8,May 10, 2017: 42,325,287
42,647,868
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PART I - FINANCIAL INFORMATION
AMERITYRE CORPORATION
Balance Sheets
December 31, 2016 | June 30, 2016 | March 31, 2017 | June 30, 2016 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| ASSETS | ||||||||||||||||
| CURRENT ASSETS | ||||||||||||||||
| Cash | $ | 298,801 | $ | 267,302 | $ | 510,807 | $ | 267,302 | ||||||||
| Accounts receivable | 243,953 | 293,358 | 259,378 | 293,358 | ||||||||||||
| Inventory - net | 584,046 | 614,895 | 547,194 | 614,895 | ||||||||||||
| Prepaid and other current assets | 107,843 | 103,803 | 129,761 | 103,803 | ||||||||||||
| Total Current Assets | 1,234,643 | 1,279,358 | 1,447,140 | 1,279,358 | ||||||||||||
| PROPERTY AND EQUIPMENT | ||||||||||||||||
| Leasehold improvements | 196,223 | 153,543 | 196,223 | 153,543 | ||||||||||||
| Molds and models | 577,549 | 577,549 | 577,549 | 577,549 | ||||||||||||
| Equipment | 2,988,844 | 2,960,246 | 2,988,844 | 2,960,246 | ||||||||||||
| Furniture and fixtures | 74,921 | 74,921 | 74,921 | 74,921 | ||||||||||||
| Construction in progress | 45,969 | 10,198 | 49,732 | 10,198 | ||||||||||||
| Software | 305,924 | 305,924 | 305,924 | 305,924 | ||||||||||||
| Less - accumulated depreciation | (3,889,071 | ) | (3,849,937 | ) | (3,906,635 | ) | (3,849,937 | ) | ||||||||
| Total Property and Equipment | 300,359 | 232,444 | 286,558 | 232,444 | ||||||||||||
| OTHER ASSETS | ||||||||||||||||
| Patents and trademarks - net | 161,731 | 175,379 | 154,906 | 175,379 | ||||||||||||
| Non-current inventory | 173,551 | 180,050 | 194,066 | 180,050 | ||||||||||||
| Deposits | 11,000 | 11,000 | 11,000 | 11,000 | ||||||||||||
| Total Other Assets | 346,282 | 366,429 | 359,972 | 366,429 | ||||||||||||
| TOTAL ASSETS | $ | 1,881,284 | $ | 1,878,231 | $ | 2,093,670 | $ | 1,878,231 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| CURRENT LIABILITIES | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 389,281 | $ | 348,499 | $ | 473,752 | $ | 348,499 | ||||||||
| Current portion of long-term debt | 18,904 | 20,518 | 19,141 | 20,518 | ||||||||||||
| Current portion of lease liability | 6,922 | 6,249 | 7,285 | 6,249 | ||||||||||||
| Total Current Liabilities | 415,107 | 375,266 | 500,178 | 375,266 | ||||||||||||
| Long-term debt | 133,779 | 100,142 | 129,111 | 100,142 | ||||||||||||
| Long-term lease liability | 4,756 | 8,394 | 2,792 | 8,394 | ||||||||||||
| Total Long-Term Liabilities | 138,535 | 108,536 | ||||||||||||||
| TOTAL LIABILITIES | 553,642 | 483,802 | 632,081 | 483,802 | ||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||||
Preferred stock: 5,000,000 shares authorized of $0.001 par value, 2,000,000 shares issued and outstanding, respectively | 2,000 | 2,000 | 2,000 | 2,000 | ||||||||||||
Common stock: 75,000,000 shares authorized of $0.001 par value, 42,325,287 and 42,175,287 shares Issued and outstanding, respectively | 42,325 | 42,175 | ||||||||||||||
Common stock: 75,000,000 shares authorized of $0.001 par value, 42,647,868 and 42,175,287 shares Issued and outstanding, respectively | 42,647 | 42,175 | ||||||||||||||
| Additional paid-in capital | 62,599,131 | 62,579,558 | 62,604,245 | 62,579,558 | ||||||||||||
| Stock payable | - | 4,500 | 5,047 | 4,500 | ||||||||||||
| Accumulated deficit | (61,315,814 | ) | (61,233,804 | ) | (61,192,350 | ) | (61,233,804 | ) | ||||||||
| Total Stockholders’ Equity | 1,327,642 | 1,394,429 | 1,461,589 | 1,394,429 | ||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,881,284 | $ | 1,878,231 | $ | 2,093,670 | $ | 1,878,231 | ||||||||
The accompanying notes are an integral part of these financial statements.
AMERITYRE CORPORATION
Statements of Operations
(Unaudited)
For the Three Months Ended December 31, | For the Six Months Ended December 31, | For the Three Months Ended March 31, | For the Nine Months Ended March 31, | |||||||||||||||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
| NET SALES | $ | 879,607 | $ | 914,888 | $ | 1,715,760 | $ | 1,928,821 | $ | 1,133,610 | $ | 936,612 | $ | 2,849,370 | $ | 2,865,433 | ||||||||||||||||
| COST OF GOODS SOLD | 612,336 | 696,671 | 1,167,788 | 1,463,447 | 693,500 | 618,366 | 1,861,288 | 2,081,813 | ||||||||||||||||||||||||
| GROSS PROFIT | 267,271 | 218,217 | 547,972 | 465,374 | 440,110 | 318,246 | 988,082 | 783,620 | ||||||||||||||||||||||||
| EXPENSES | ||||||||||||||||||||||||||||||||
| Research and development | 56,185 | 55,962 | 109,044 | 109,567 | 54,130 | 56,839 | 163,174 | 166,406 | ||||||||||||||||||||||||
| Sales and marketing | 58,961 | 68,595 | 126,191 | 166,259 | 65,000 | 53,639 | 191,191 | 219,898 | ||||||||||||||||||||||||
| General and administrative | 147,477 | 269,800 | 339,783 | 494,640 | 170,813 | 172,270 | 510,596 | 666,910 | ||||||||||||||||||||||||
| Total Expenses | 262,623 | 394,357 | 575,018 | 770,466 | 289,943 | 282,748 | 864,961 | 1,053,214 | ||||||||||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 4,648 | (176,140 | ) | (27,046 | ) | (305,092 | ) | 150,167 | 35,498 | 123,121 | (269,594 | ) | ||||||||||||||||||||
| OTHER INCOME/(EXPENSE) | ||||||||||||||||||||||||||||||||
| Interest expense | (1,879 | ) | (935 | ) | (5,064 | ) | (1,534 | ) | (1,773 | ) | (870 | ) | (6,837 | ) | (2,404 | ) | ||||||||||||||||
| Interest income | 47 | 36 | 100 | 109 | 70 | 28 | 170 | 137 | ||||||||||||||||||||||||
| Total Other Income/(Expense) | (1,832 | ) | (899 | ) | (4,964 | ) | (1,425 | ) | (1,703 | ) | (842 | ) | (6,667 | ) | (2,267 | ) | ||||||||||||||||
| NET INCOME (LOSS) | 2,816 | (177,039 | ) | (32,010 | ) | (306,517 | ) | 148,464 | 34,656 | 116,454 | (271,861 | ) | ||||||||||||||||||||
| Preferred Stock Dividend | (25,000 | ) | (25,000 | ) | (50,000 | ) | (50,000 | ) | (25,000 | ) | (25,000 | ) | (75,000 | ) | (75,000 | ) | ||||||||||||||||
| NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | (22,184 | ) | $ | (202,039 | ) | $ | (82,010 | ) | $ | (356,517 | ) | ||||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | 123,464 | $ | 9,656 | $ | 41,454 | $ | (346,861 | ) | |||||||||||||||||||||||
| BASIC AND DILUTED LOSS PER SHARE | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | ||||||||||||||||||||
| BASIC AND DILUTED INCOME (LOSS) PER SHARE | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | (0.01 | ) | |||||||||||||||||||||||
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | 42,325,287 | 41,731,809 | 42,313,874 | 41,681,483 | 42,382,635 | 41,951,935 | 42,336,460 | 41,770,978 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
AMERITYRE CORPORATION
Statements of Cash Flows
(Unaudited)
For the Six Months Ended December 31, | For the Nine Months Ended March 31, | |||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
| Net loss | $ | (32,010 | ) | $ | (306,517 | ) | ||||||||||
| Adjustments to reconcile net loss to net cash provided (used) by operating activities: | ||||||||||||||||
| Net income (loss) | $ | 116,454 | $ | (271,861 | ) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | ||||||||||||||||
| Depreciation and amortization expense | 52,782 | 81,028 | 77,171 | 116,338 | ||||||||||||
| Change in allowance for bad debt recovery | - | (289 | ) | |||||||||||||
| Change in allowance for bad debt (recovery) | - | (289 | ) | |||||||||||||
| Stock based compensation related to consultant, employee and director options | 15,223 | 41,795 | 20,706 | 56,238 | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | 49,405 | 7,764 | 33,980 | (165,609 | ) | |||||||||||
| Inventory and inventory reserve | 37,348 | 5,899 | 53,685 | 25,318 | ||||||||||||
| Prepaid and other current assets | (62,033 | ) | (68,268 | ) | (83,951 | ) | (38,339 | ) | ||||||||
| Accounts payable and accrued expenses | (9,218 | ) | (7,656 | ) | 55,253 | 5,731 | ||||||||||
| Net Cash Provided (Used) by Operating Activities | 51,497 | (246,244 | ) | 273,298 | (272,473 | ) | ||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||
| Purchase of property and equipment | (11,424 | ) | - | (15,187 | ) | - | ||||||||||
| Net Cash Used by Investing Activities | (11,424 | ) | - | (15,187 | ) | - | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
| Payments on lease liability | (2,965 | ) | (2,018 | ) | (4,566 | ) | (3,322 | ) | ||||||||
| Payments on notes payable | (5,609 | ) | (1,167 | ) | (10,040 | ) | (1,603 | ) | ||||||||
| Preferred stock dividends | - | (50,000 | ) | - | (75,000 | ) | ||||||||||
| Net Cash (Used) by Financing Activities | (8,574 | ) | (53,185 | ) | ||||||||||||
| Net Cash Used by Financing Activities | (14,606 | ) | (79,925 | ) | ||||||||||||
| NET INCREASE (DECREASE) IN CASH | 31,499 | (299,429 | ) | 243,505 | (352,398 | ) | ||||||||||
| CASH AT BEGINNING OF PERIOD | 267,302 | 455,717 | 267,302 | 455,717 | ||||||||||||
| CASH AT END OF PERIOD | $ | 298,801 | $ | 156,288 | $ | 510,807 | $ | 103,319 | ||||||||
| SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES | ||||||||||||||||
| Interest paid | $ | 5,064 | $ | 1,534 | $ | 6,837 | $ | 2,404 | ||||||||
| Income taxes paid | $ | - | $ | - | $ | - | $ | - | ||||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||||||||||
| Capitalized lease | $ | - | $ | 19,337 | $ | - | $ | 19,337 | ||||||||
| Reclassification of accounts receivable – related party to accounts receivable | $ | - | $ | 6,312 | $ | - | $ | 6,312 | ||||||||
| Equipment purchase accrued for, not paid in cash | $ | - | $ | 7,641 | $ | - | $ | 7,641 | ||||||||
| Write off of previously reserved forklift tires | $ | 81,224 | $ | - | $ | 81,224 | $ | - | ||||||||
| Purchase of fixed assets through debt | $ | 95,625 | $ | - | $ | 95,625 | $ | - | ||||||||
| Accrued preferred stock dividends | $ | 50,000 | $ | - | $ | 75,000 | $ | - | ||||||||
| Issuance of stock for stock payable | $ | 4,500 | $ | - | $ | 4,500 | $ | - | ||||||||
| Issuance of stock for accrued expense | $ | 5,000 | $ | - | ||||||||||||
The accompanying notes are an integral part of these financial statements.
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. We believe the disclosures and information presented are adequate to make the information not misleading. These interim condensed financial statements should be read in conjunction with our most recent audited financial statements and notes thereto included in our June 30, 2016 Annual Report on Form 10-K. Operating results for the sixnine months ended DecemberMarch 31, 20162017 are not necessarily indicative of the results that may be expected for the current fiscal year ending June 30, 2017.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies disclosed therein have not changed since our audited financial statements and notes thereto included in our June 30, 2016 Annual Report on Form 10-K, except as noted below.
Reclassifications
Certain reclassifications, which have no effect on net loss, have been made in the prior period financial statements to conform to the current presentation, specifically the separation of “store” inventory as part of other current assets at DecemberMarch 31, 2015.2016.
Basic and Fully Diluted Net Loss Per Share
Basic and Fully Diluted net lossincome (loss) per share is computed using the weighted-average number of common shares outstanding during the period.
Our outstanding stock options and warrants and shares issuable upon conversion of outstanding convertible notes have been excluded from the basic and fully diluted net lossincome per share calculation. We excluded 4,280,000 and 3,700,0004,300,000 common stock equivalents for the quarters ended DecemberMarch 31, 20162017 and 2015,2016, respectively, because they are anti-dilutive.anti-dilutive with strike prices above market value at period end.
Recent Accounting Pronouncements
Recently Adopted and Recently Issued Accounting Guidance
Issued
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (consensus of Emerging Issues Task Force)”. This Accounting Standards Update addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. If early adopted, an entity must adopt all of the amendments in the same period. The Company is currently assessing the impact, if any, to the Company’s financial statements.
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
NOTE 3 - INVENTORY
Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or net realizable value. The inventory consists primarily of chemicals, finished goods produced in our plant and products purchased for resale.
| December 31, 2016 | June 30, 2016 | March 31, 2017 | June 30, 2016 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Raw Materials | $ | 206,609 | $ | 257,260 | $ | 216,436 | $ | 257,260 | ||||||||
| Finished Goods | 594,327 | 663,666 | 570,441 | 663,666 | ||||||||||||
| Inventory reserve | (43,339 | ) | (125,981 | ) | (45,617 | ) | (125,981 | ) | ||||||||
| Inventory - net | $ | 757,597 | 794,945 | $ | 741,260 | 794,945 | ||||||||||
Our inventory reserve reflects items that were deemed to be defective or obsolete based on an analysis of all inventories on hand.
In fiscal years 2017 and 2016, the Company critically reviewed all slow moving inventory to determine if defective or obsolete. If not defective or obsolete we presented these items as non-current inventory because all inventory is ready and available for sale at any moment.
For those items that are spare maintenance materials or parts kept on hand as backup components of major production lines,equipment, or “store inventories”, the Company capitalizes the amount if above our capitalization policy for property and equipment. In the past the Company included these items as part of its raw materials inventory. As of DecemberMarch 31, 20152016 these items, amounting to $10,815, have been reclassified into other current assets.
NOTE 4 - DEBT
A former board member, Silas O. Kines, who passed away on January 11, 2012, was also the principal owner of Forklift Tire of Florida and K-2 Industrial Tire, Inc. In accordance with the Commission Agreement with Forklift Tire of Florida, dated February 2, 2011, between Amerityre Corporation and K-2 Industrial Tire, Inc., K-2 is due a five percent (5%) commission on all forklift tire sales. In exchange for the forklift models transferred to Amerityre under that agreement, the first $96,000 in commission payments will be used to extinguish the long term liability recorded on the transaction. As of DecemberMarch 31, 2016,2017, $2,000 and $63,426$63,133 (June 30, 2016, $11,752 and $53,840) were recorded for the current and long-term portion, respectively, of the related liability.
In June 2016, the Company executed a term note with U.S. Bank to finance critical manufacturing equipment and operating enhancements. Manufacturing equipment of approximately $29,000 was placed into service in July 2016. The remaining operating enhancements are expected to be in service at the end of fiscal 2017. Total amount financed was $55,068, at 5.59% interest, with payments of $1,059 due for 60 months starting July 2016.
In July 2016, the Company executed a term note with U.S. Bank to finance critical plant facility equipment which was placed into service in July 2017.2016. The total amount financed was $37,666 at 5.59% interest, with payments of $720 due for 60 months starting October 2016.
| Payments due by period | ||||||||||||||||||||
| Total | Less than 1 year | 1 to 3 years | 3 to 5 years | After 5 years | ||||||||||||||||
| Bank debt (both US Bank facilities above) | $ | 87,257 | $ | 16,904 | $ | 59,726 | $ | 10,627 | $ | - | ||||||||||
| Total cash obligations | $ | 87,257 | $ | 16,904 | $ | 59,726 | $ | 10,627 | $ | - | ||||||||||
| Payments due by period | ||||||||||||||||||||
| Total | Less than 1 year | 1 to 3 years | 3 to 5 years | After 5 years | ||||||||||||||||
| Bank debt (both US Bank facilities above) | $ | 83,119 | $ | 17,141 | $ | 59,726 | $ | 6,252 | $ | - | ||||||||||
| Total cash obligations | $ | 83,119 | $ | 17,141 | $ | 59,726 | $ | 6,252 | $ | - | ||||||||||
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
NOTE 5 - CAPITAL LEASE
In July 2015, the Company entered into a capital lease for research and development equipment for $19,337.
The following is a schedule by years of future minimum lease payments under capital leases together with present value of the net minimum lease payments as of DecemberMarch 31, 2016:2017:
| 2017 | $ | 4,349 | $ | 2,174 | ||||
| 2018 | 8,697 | 8,697 | ||||||
| 2019 | 725 | 725 | ||||||
| 2020 | - | - | ||||||
| 2021 | - | - | ||||||
| Total minimum lease payments | 13,771 | 11,596 | ||||||
| Less: executory costs | - | - | ||||||
| Net minimum lease payments | 13,771 | 11,596 | ||||||
| Less: amount representing interest | (2,107 | ) | (1,533 | ) | ||||
| Present value of net minimum payments | $ | 11,664 | $ | 10,063 |
NOTE 6 - STOCK OPTIONS AND WARRANTS
Prior Issuances of options
On December 1, 2015, 480,000 options were granted to the Company’s Chief Executive Officer (then our Chief Operating Officer) as part of his employment offer. The options have a strike price of $0.10, vest December 1, 2016 and expire December 1, 2020.
On January 19, 2016, the Board granted all non-executive Board members 100,000 options, with the audit committee chair receiving an additional 50,000 options, for Board services rendered for the Board term ending December 2016. The options have a strike price of $0.10, vest at the end of the Board term in December 2016 and expire December 2019.
On January 19, 2016, 50,000 options were granted to the Company’s Chief Financial Officer as part of renewal of her employment agreement. The options have a strike price of $0.10, vest ratably January 21, 2016 to December 1, 2016 and expire December 1, 2019. In addition to the option renewal $550 a month in health insurance reimbursement was included in the renewal. All other terms remain the same.
Option issuances and vesting during the sixnine month period ending DecemberMarch 31, 20162017
On December 1, 2016, 480,000 options were granted to the Company’s Chief Executive Officer as part of his employment offer. The options have a strike price of $0.10, vest December 1, 2017 and expire December 1, 2020. Year to date expense related to these options is $146$583 as of DecemberMarch 31, 2016.2017.
As of DecemberMarch 31, 2016,2017, there was $ 3,2341,021 of unrecognized stock-based compensation expense related to stock options that will be recognized over the vest period of the underlying option.
We estimated the fair value of the stock options granted in the current fiscal year above at the grant date based on the following weighted average assumptions:
| Risk free interest rate | 1.450 | % | ||
| Expected life | 3.0 | years | ||
| Expected volatility | 126.36 | % | ||
| Dividend yield | 0.00 | % |
Year to date expense related to these options is $15,077$15,660 as of DecemberMarch 31, 2016.2017.
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
NOTE 6 - STOCK OPTIONS AND WARRANTS, Continued
A summary of the status of our outstanding stock options as of DecemberMarch 31, 20162017 and June 30, 2016, and changes during the periods then ended is presented below:
| December 31, 2016 | June 30, 2016 | March 31, 2017 | June 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||
| Weight Average | Intrinsic | Weight Average | Intrinsic | Weight Average | Intrinsic | Weight Average | Intrinsic | |||||||||||||||||||||||||||||||||||||||||
| Shares | Exercise Price | Value | Shares | Exercise Price | Value | Shares | Exercise Price | Value | Shares | Exercise Price | Value | |||||||||||||||||||||||||||||||||||||
| Outstanding beginning of period | 3,800,000 | $ | 0.13 | 2,270,000 | $ | 0.14 | 3,800,000 | $ | 0.13 | 2,270,000 | $ | 0.14 | ||||||||||||||||||||||||||||||||||||
| Granted | 480,000 | $ | 0.10 | 1,530,000 | $ | 0.10 | 480,000 | $ | 0.10 | 1,530,000 | $ | 0.10 | ||||||||||||||||||||||||||||||||||||
| Expired/Cancelled | - | $ | 0.00 | - | $ | 0.00 | - | $ | 0.00 | - | $ | 0.00 | ||||||||||||||||||||||||||||||||||||
| Exercised | - | $ | 0.00 | - | $ | 0.00 | - | $ | 0.00 | - | $ | 0.00 | ||||||||||||||||||||||||||||||||||||
| Outstanding end of period | 4,280,000 | $ | 0.12 | $ | - | 3,800,000 | $ | 0.13 | $ | - | 4,280,000 | $ | 0.12 | $ | - | 3,800,000 | $ | 0.13 | $ | - | ||||||||||||||||||||||||||||
| Exercisable | 3,800,000 | $ | 0.13 | $ | - | 3,070,000 | $ | 0.13 | $ | - | 3,960,000 | $ | 0.12 | $ | - | 3,070,000 | $ | 0.13 | $ | - | ||||||||||||||||||||||||||||
The following table summarizes the range of outstanding and exercisable options as of DecemberMarch 31, 2016:2017:
| Outstanding | Exercisable | Outstanding | Exercisable | |||||||||||||||||||||||||||||||||||||||||
Range of Exercise Prices | Range of Exercise Prices | Number Outstanding at December 31, 2016 | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable at December 31, 2016 | Weighted Average Remaining Contractual Life | Range of Exercise Prices | Number Outstanding at March 31, 2017 | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable at March 31, 2017 | Weighted Average Remaining Contractual Life | ||||||||||||||||||||||||||||||||
| $ | 0.08 | 150,000 | 4.92 | $ | 0.08 | 150,000 | 4.92 | 0.08 | 150,000 | 4.67 | $ | 0.08 | 150,000 | 4.67 | ||||||||||||||||||||||||||||||
| $ | 0.10 | 2,680,000 | 2.60 | $ | 0.10 | 2,200,000 | 2.34 | 0.10 | 2,680,000 | 2.35 | $ | 0.10 | 2,360,000 | 2.35 | ||||||||||||||||||||||||||||||
| $ | 0.17 | 1,450,000 | 3.92 | $ | 0.17 | 1,450,000 | 3.92 | 0.17 | 1,450,000 | 3.67 | $ | 0.17 | 1,450,000 | 3.67 | ||||||||||||||||||||||||||||||
| 4,280,000 | 3,800,000 | 4,280,000 | 3,960,000 | |||||||||||||||||||||||||||||||||||||||||
General Warrant Information
In September 2013, the Company obtained an extension on the remaining $100,000 secured convertible promissory note that was issued in the private placement that closed in September 2010. This note was paid off as of June 30, 2015. In exchange for the extension, the note holder received 500,000 common stock warrants and $6,500 in accrued interest and fees. The common stock warrants expire three years from the date of issuance, are exercisable at $0.13 per share, and vest on the next date the value of Amerityre common stock reaches $0.25 per share. As of September 30, 2016 the warrants expired.
NOTE 7 - LIQUIDITY– STOCK AWARDS AND ISSUANCES
As of January 31, 2017, 225,000 shares were granted to time, we have obtained additional liquidity to fund our operations through the saleCompany’s Board of Director’s as Board compensation for the term ending November 2017. Each non-executive Board member receives 50,000 shares, with the Audit Committee Chair receiving 75,000 shares. The shares vest ratably January – December 2017, valued at a fixed rate of our common$0.0155, the closing stock and the placement of short-term debt instruments. At the end of fiscal year 2016 and early fiscal year 2017, we were able to obtain term bank debt financing to finance critical manufacturing and facility equipment and operating enhancements which will be placed in service in fiscal yearprice on January 31, 2017. Management continues to evaluate financing options but is choosing to delay financing at terms that will subject the Company to high costs of debt and are reluctant to raise money through stock sales at what we believe are highly dilutive share prices. Additionally, management has notified our preferred shareholder that we will be suspending future payments of their preferred cash dividend payments, so the Company can increase its working capital levels.
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements
March 31, 2017
On March 23, 2017, the Company’s Chief Executive Officer, finalized the negotiation of the replacement and extension of his employment contract. While all material compensation terms were finalized February 23, 2017 other items within the agreement, filed via Form 8-k on March 27, 2017, were finalized as of March 23, 2017. The Agreement replaces the current employment agreement and extends his term of employment to December 31, 2018. Inclusive in this new agreement is a stock award of 2.4 million shares of the Company’s common stock vesting ratably over twenty-three months (February 2017 – December 2018), valued at a fixed rate of $0.0168, the closing stock price on February 22, 2017.
As all of the above awards may be issued once vested, the Company is accounting for the above in stock payable. As of March 31, 2017 stock payable is $5,047.
On February 23, 2017 the Board of Director’s approved a partial payment of Mr. Sullivan’s 2016 bonus in stock. This partial payment of $5,000 resulted in the issuance of 322,581 shares of stock.
NOTE 7 - LIQUIDITY, Continued
As of February 8,March 31, 2017 the Company has net income year to date. As such, the Company is working with its tax professionals to utilize available net operating loss carryforwards. Due to the difference between our taxed effected net income as of this period end and the net operating loss of approximately 7,428,713 shares authorized and available for issuance. Although we are reluctant$17,300,000 as of June 30, 2016, the Company continues to raise money through stock sales at what we believe are dilutive share prices, these authorized but unissued and unreserved shares of our common stock can be utilized if necessary to fund the expansion of our manufacturing operations or to obtain additional working capital.apply a 100% valuation allowance on any remaining deferred tax asset.
NOTE 89 - SUBSEQUENT EVENTS
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 developedpossess unique polyurethane formulations that allow us to makemanufacture products with superior performance characteristics includingin the areas of abrasion resistance, energy efficiency and load-bearing capabilities, when compared to conventional rubber tires. We also believe that our manufacturing processes are more energy efficient than the traditional rubber tire manufacturing processes, in part because our polyurethane compounds do not require the multiple processing steps and extreme heat and high pressure that are necessary to cure rubber. Using our polyurethane technologies, we believe we produce tires can be produced whichthat last longer, are less susceptible to failure and are friendly to the environment.
We are concentrating on three segments of the tire market: closed-cell polyurethane foam tires, polyurethane elastomer tires and agricultural tires. OurWe continue to focus continues to beon applications and markets where our advantages in product technology give us an opportunity to provide unique products and obtain premium pricing. Our most recent activities in these areas are set forth below:
Closed-Cell Polyurethane Tires – The sale of polyurethane foam tires to original equipment manufacturers, tire distributors and tire dealers accounts for the majority of our revenue. During the recent quarter this market segment represented over 95% of our total sales. We have the ability to produce a broad range of products for the light duty tire market. Our efforts in product development and marketing allow us to continue to buildfocus on building customer relationships and expand sales with original equipment manufacturers and tire distributors. We continue our focus on creatingto create unique product solutions for customers with specific tire size and performance requirements. Our international sales continue to be negatively impacted by the strong US dollar exchange rate versus foreign currencies.
Polyurethane Elastomer Tires – During the fourth quarter of fiscal year 2016 we relaunched the forklift tire product line with select customers. We expect shipmentsShipments of forklift tires to restart inrestarted during the third quarter of fiscal year 2017.recent quarter. We continue to develop new elastomer tire products for specific customer applications, such as our new scissor lift tires. We expect salestire. Sales in this market segment during the quarter were minimal, but we expect sales to increase in the coming quarters as these newour products are introduced to new customers and gain market acceptance.
Agricultural Tires – Sales of agricultural tires continue to be negatively impacted by the dramatic downturn in farm commodity prices. Farmprices and farm income levels continue to be depressed which has reduced the available money for investment in farm equipment.levels. Recent projections have indicated that crop prices and farm income will continue to remain at historically low levels and farm income will continue to sufferduring 2017, but there is optimism that these levels may have reached bottom, with improvement expected in the coming months. Large agricultural equipment suppliers continue to expect 2017 to be a challenging year for farmer income and farm-related spending. Our focus has been to2018. We continue to invest in marketing initiatives to educate the agricultural trade show attendance to increase awarenesscommunity about the benefits of our products, in the farming community, so we are well positioned to take advantage of the eventual rebound in farm income. Given this backdrop, we are not anticipating dramatic agricultural sales gains for fiscal year 2017 compared to fiscal year 2016. We continue to pursue additional distribution relationships, both domestically and internationally, to increase our market penetration for our agricultural tires. We have found that theThe strength of the US Dollar versus other foreign currencies has negatively impacteddollar continues to provide a headwind to our international business. We expect that exchange rate effects will continue to dampen our international sales efforts in the coming quarters. We have continued development of new products in our seeder and haybaler tire styleslines in response to specific customer requirements, and we expect this will help drive additional sales in this product line. requirements.
Due to the Company’s limited resources, tire projects which are contingent on additional significant investment for development, such as composite and automotive tires, have been put on hold and will be revisited at a later date until such funds becomewhen funding becomes available.
As described above, our product line covers diverse market segments which are unrelated in terms of customer base, product, distribution, market demands and competition. Our sales team is comprised of three independent manufacturer representatives whose experience is complementary to our product portfolio, plus our in-house sales department. The Company’s emphasis on proper product pricing and new marketing campaigns continues to drive higher margin and more profitable sales, as shown by our profitable quarterlyrecord results in the third and fourth quartersquarter three of fiscal 2016, as well as the second quarter in fiscal year 2017.FY2017. We continue to look for ways to reduce manufacturingmanage our costs to improve gross margins in the face of these difficult economic conditions in our target markets. We have a solid backlog of orders for closed cell foam product to be delivered over the next 12 months, but we expect that the challenging economic environment, particularlythis operational discipline will be key to maintaining profit margins going forward as we are beginning to experience increases in the agricultural market, will continue to provide strong headwinds and negatively impact our drive towards consistent and increasing profitability.raw material costs.
During our Annual Meeting in November 2016, the Company’s Senior Management outlined its strategic plan for increasing the Company’s sales, profitability, and market awareness. Atpresence. This presentation was an update of the plan we unveiled during our previous annual meeting in November 2015. The continued improvement in our quarterly and year to date results for FY2017 are evidence that time Management again expressedthis strategy has been successful. As part of the need for additional working capital in order to execute its plan in a timely manner. In the absence of additional capital,most recent presentation, it was statedcommunicated that any initiativesall required investments associated with this effort would need to be paid fromprimarily by internally generated cash flow. Duringflow rather than relying on external financing. We successfully upgraded and launched our new website during the fourthrecent quarter, of fiscal 2016, the Company was successfulutilizing funding from a previously secured term loan. We have successfully moved forward with marketing and product development initiatives in procuringFY2017 at a term loan to finance needed investments in manufacturing equipment, laboratory instruments, and website development. However, a lack of available capital prevented the Company from executing its other strategic marketing initiatives, which we believe has negatively impacted the Company’s market position and profitability. Without additional capital in fiscal year 2017, the implementation of the Company’s strategic plan will be delayed unless initiativespace that can be financed outsupported by our current level of internally generatedbusiness and cash flow. Current projects underway include a redesigngeneration. Consequently we are not anticipating the need to do any fundraising activities in the near future to support our current strategic plan.
Since the recent U.S. Presidential and updateCongressional elections, there have been reports of expected proposed changes to the U.S. tax code, tariffs on imported goods, and other legislation that could impact our company websitebusiness. To date none of this has come to pass. An emphasis on “Buy American” programs by our government, as well as investment inOEMs who use flat free tires on their American made products, could positively impact our business, software systems to improve productivity in the sales group.
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 contractor and direct labor conducting research and development, equipment and materials used in new product development and product improvement using our technologies; |
| · | Consulting expenses, which consist primarily of amounts paid to third-parties for outside services; |
| · | Depreciation and amortization expenses which result from the depreciation of our property and equipment, including amortization of our intangible assets; and |
| · | Stock based compensation expense related to stock and stock option awards issued to employees and consultants for services performed for the Company. |
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, 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
Patent and trademark costs have been capitalized at DecemberMarch 31, 2016,2017, totaling $479,633 with accumulated amortization of $317,902$324,727 for a net book value of $161,731.$154,906. Patent and trademark costs capitalized at DecemberMarch 31, 2015,2016, totaled $479,633 with accumulated amortization of $290,588$297,421 for a net book value of $189,045.$182,212.
The patents which have been granted are being amortized over a period of 20 years. Patents which are pending or are being developed are not amortized. Amortization begins once the patents have been issued. As of DecemberMarch 31, 20162017 and 2015,2016, respectively, there were no pending patents. Annually, pending or expired patents are inventoried and analyzed, which resulted in the recognition of a loss on abandonment, expiration or retirement of patents and trademarks of $-0- for each of the years ended DecemberMarch 31, 20162017 and 2015,2016, respectively.
Amortization expense for the years ended DecemberMarch 31, 2017 and 2016 was $20,473 and 2015 was $13,648 and $13,666$20,498 respectively. The Company evaluates the recoverability of intangibles and reviews the amortization period on a continual basis utilizing the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other. We consider the following indicators, among others, when determining whether or not our patents are impaired:
| · | any changes in the market relating to the patents that would decrease the life of the asset; |
| · | any adverse change in the extent or manner in which the patents are being used; |
| · | any significant adverse change in legal factors relating to the use of the patents; |
| · | current period operating or cash flow loss combined with our history of operating or cash flow losses; |
| · | future cash flow values based on the expectation of commercialization through licensing; and |
| · | current expectations that, more likely than not, the patents will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. |
Inventory
Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or net realizable. 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.
Stock-Based Compensation
We account for stock-based compensation under the provisions of FASB ASC 718, Compensation – Stock Compensation. Our financial statements as of and for the fiscal yearsperiods ended DecemberMarch 31, 20162017 and 20152016 reflect the impact of FASB ASC 718. Stock-based compensation expense recognized under FASB ASC 718 for the fiscal years ended DecemberMarch 31, 2017 and 2016 was $25,706 and 2015 was $15,223 and $41,795,$56,238, respectively, related to employee stock options and employee stock grants.
FASB ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Statement of Operations. Stock-based compensation expense recognized in our Statements of Operations for fiscal years ended DecemberMarch 31, 20162017 and 20152016 assume all awards will vest; therefore no reduction has been made for estimated forfeitures.
Results of Operations
Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality and potential variability of our sales and cash flows. These key performance indicators include:
| · | Sales consisting of product sales; |
| · | Sales, 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 goods sold of our products and the mix of product and license fees, if any; |
| · | Growth in our customer base, which is an indicator of the success of our sales efforts; and |
| · | Distribution of sales across our products offered. |
The following summary table presents a comparison of our results of operations for the three and sixnine months ended DecemberMarch 31, 20162017 and 20152016 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below.
For the Three Months Ended December 31, | For the Six Months Ended December 31 | For the Three Months Ended March 31, | For the Nine Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||
| (in 000’s) | Change | (in 000’s) | Change | (in 000’s) | Change | (in 000’s) | Change | |||||||||||||||||||||||||||||||||||||||||
| 2016 | 2015 | 2016 vs. 2015 | 2016 | 2015 | 2016 vs. 2015 | 2017 | 2016 | 2017 vs. 2016 | 2017 | 2016 | 2017 vs. 2016 | |||||||||||||||||||||||||||||||||||||
| Net revenues | $ | 879 | $ | 915 | (3.8 | %) | $ | 1,716 | $ | 1,929 | (11.0 | %) | $ | 1,134 | $ | 936 | 21.2 | % | $ | 2,849 | $ | 2,865 | (0.6 | %) | ||||||||||||||||||||||||
| Cost of revenues | (612 | ) | (697 | ) | (12.2 | %) | (1,168 | ) | (1,464 | ) | (20.2 | %) | (694 | ) | (618 | ) | 12.3 | % | (1,861 | ) | (2,082 | ) | (10.6 | %) | ||||||||||||||||||||||||
| Gross profit | 267 | 218 | 22.5 | % | 548 | 465 | 17.8 | % | 440 | 318 | 38.4 | % | 988 | 783 | 26.2 | % | ||||||||||||||||||||||||||||||||
| Research and development expenses | (56 | ) | (56 | ) | 0.0 | % | (109 | ) | (110 | ) | (0.9 | %) | (54 | ) | (57 | ) | (5.3 | %) | (163 | ) | (166 | ) | (1.8 | %) | ||||||||||||||||||||||||
| Sales and marketing expense | (59 | ) | (69 | ) | (14.5 | %) | (126 | ) | (166 | ) | (24.1 | %) | (65 | ) | (54 | ) | 20.4 | % | (191 | ) | (220 | ) | (13.2 | %) | ||||||||||||||||||||||||
| General and administrative expense | (147 | ) | (270 | ) | (45.4 | %) | (339 | ) | (495 | ) | (31.4 | %) | (171 | ) | (172 | ) | (0.5 | %) | (511 | ) | (667 | ) | (23.4 | %) | ||||||||||||||||||||||||
| Other income (expense) | (2 | ) | - | 100.0 | % | (5 | ) | (1 | ) | 400.0 | % | (2 | ) | - | 100.0 | % | (7 | ) | (2 | ) | 250.0 | % | ||||||||||||||||||||||||||
| Net income (loss) | 3 | (177 | ) | (101.7 | %) | (31 | ) | (307 | ) | (89.9 | %) | 148 | 35 | 322.9 | % | 116 | (272 | ) | (142.6 | %) | ||||||||||||||||||||||||||||
| Preferred stock dividend | (25 | ) | (25 | ) | 0.0 | % | (50 | ) | (50 | ) | 0.0 | % | (25 | ) | (25 | ) | 0.0 | % | (75 | ) | (75 | ) | 0.0 | % | ||||||||||||||||||||||||
| Net loss attributable to common shareholders | $ | (22 | ) | $ | (202 | ) | (89.1 | %) | $ | (81 | ) | $ | (357 | ) | (77.2 | %) | ||||||||||||||||||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | 123 | $ | 10 | 1130 | % | $ | 41 | $ | (347 | ) | (111.8 | %) | |||||||||||||||||||||||||||||||||||
Three Months Ended DecemberMarch 31, 20162017 Compared to DecemberMarch 31, 20152016
Net Sales. Net sales of $879,607$1,133,610 for the quarter ended DecemberMarch 31, 2016,2017, represents a 3.8% decrease21.2% increase over net sales of $914,888$936,612 for the same period in 2015.2016. These results were in line withbetter than our expectations.expectations as increased optimism for a better general economy improved demand from many of our customers. Our sales were driven primarily by closed cell foam tire sales. Wesales, where we continue to have a positive response to our marketing and pricing plans for our polyurethane foam tires.plans. Our forecast for the remainder of fiscal 2017 anticipates continued depressed agricultural tire sales, due to the continuation of the conditions causing depressed farm income. We expect our polyurethane foam products to constitute the majority of our sales during the remainder of fiscal year 2017.
Cost of Revenues. Cost of revenues for the quarter ended DecemberMarch 31, 20162017 was $612,336$693,500 or 69.6%61.2% of sales compared to $696,671$618,366 or 76.1%66.0% of sales for the same period in 2015.2016. Cost of revenues were lowerhigher due to decreasesincreased sales levels, however as a percentage of sales cost of revenues was approximately 5% lower than the same period in 2016. This improvement was due to lower raw materials expenditures, continued diligence in producing tires efficiently, usematerial costs compared with the previous year as well as better control of fully depreciated assets causing manufacturing depreciation expenseother costs due to be lower, and lower manufacturing and shipping supplies when compared to the prior period.better production efficiencies. The Company continues to maintain sufficient production capacity to meet anticipated customer demand without incurring a proportionate increase in overall production costs.
Gross Profit. Gross profit for the quarter ended DecemberMarch 31, 20162017 was $267,271$440,110 compared to $218,217$318,246 for the same period in 2015.2016. Gross profit for the quarter ended December 31, 2016 increased by $49,054$121,864, or 22.5%38.3% over the same period in 20152016, due to the decrease in the cost of revenue outlined in the discussionincreased sales as noted above. The DecemberMarch 31, 20162017 gross profit reflects a 30.4%38.8% gross margin foron product sales compared to a gross margin on product sales of 23.9%34.0% in the quarter ending DecemberMarch 31, 2015.2016.
Research & Development Expenses (R&D). Research and development expenses for the quarter ended DecemberMarch 31, 20162017 were $56,185$54,130 compared to $55,968$56,839 for the same period in 2015.2016. We continue to focus our R&D efforts on product formulation optimization and new product development. The Company plans to continuemaintain this level of expenditure as R&D is a key component of the company’s business improvement initiatives.
Sales & Marketing Expenses. Sales and marketing expenses for the quarter ended DecemberMarch 31, 20162017 were $58,961$65,000 as compared to $68,595$53,639 for the same period in 2015.2016. Sales and marketing expenses decreased $9,634increased between periods primarily due to higher sales commissions offset by lower wages, paid commissionssalary and travel costs, offset by increased trade show expenses as we attended two trade shows during this quarter.costs.
General & Administrative Expenses. General and administrative expenses for the quarter ended DecemberMarch 31, 20162017 were $147,477$170,813 compared to $269,801$172,270 for the same period in 2015. This decrease2016. These results remained level with the previous year’s results due to management’s continued focus on cost control as part of $122,324 between periods is driven by savings in wages (due to the timing of executive bonuses in 2015), stock based compensation, warranty expense and professional fees.Company’s strategic operating plan.
Other Expense. Other expense for the quarter ended DecemberMarch 31, 20162017 was $1,832($1,703) compared to $899($842) for the same period in 2015.2016. Other expense consists solely of interest expense and increased in the period due to our new bank debt facilities.
Net Income (Loss). Net income for the quarter ended DecemberMarch 31, 20162017 of $2,816$148,464 represents a 101.7%322.9% improvement compared to the net lossincome for the quarter ended DecemberMarch 31, 20152016 of $177,040. Cost$34,656. Continued successful implementation of the Company’s strategic plan resulted in cost savings business structures and other improvements that the Company put into placeimproved revenues resulting in fiscal year 2016 are continuing to positively impact results with our first ever second quarter with net income.record quarterly results.
Net Sales. Net sales of $1,715,760$2,849,370 for the sixnine months ended DecemberMarch 31, 2016,2017, represents an 11.0%a 0.6% decrease over net sales of $1,928,821$2,865,433 for the same period in 2015.2016. These results were in line with our expectations as we anticipated that weagricultural tire markets would not have strong pivot tire sales for the period. Our sales were primarily closed cell foam tire sales.remain weak. We continue to have a positive response to our marketing and pricing plansefforts for our polyurethane foam tires. Our forecast for remainder of fiscal 2017 anticipates continued depressed agricultural tire sales, due to the continuation of business conditions causing depressed farm income. We expect ourare optimistic that the increase in closed cell polyurethane foam products to constituteproduct sales we saw in the majorityrecent quarter will continue for the 4th quarter of our sales during the remainder of fiscal year 2017.FY2017.
Cost of Revenues. Cost of revenues for the sixnine months ended DecemberMarch 31, 20162017 was $1,167,788$ 1,861,288 or 68.1%65.3% of sales compared to $1,463,447$2,081,813 or 75.9%72.7% of sales for the same period in 2015.2016. Cost of revenues were lower due to decreases in raw materials expenditures, better manufacturing efficiency,efficiencies, use of fully depreciated assets causing manufacturing depreciation expense to be lower, lower manufacturing repairs and maintenance, and lower manufacturing and shipping supplies, offset by increases in raw materials expenditures related to increased sales and higher direct labor cost when compared to the prior period. The Company continues to maintain sufficient production capacity to meet anticipated customer demand without incurring a proportionate increase in overall production costs.
Gross Profit. Gross profit for the sixnine months ended DecemberMarch 31, 20162017 was $547,972$988,082 compared to $465,374$783,620 for the same period in 2015.2016. Gross profit for the six months ended December 31, 2016 increased by $82,598$204,462 or 15.0%26.1% over the same period in 20152016 due to the decrease in cost of revenue outlined in the discussion above.factors discussed previously. The DecemberMarch 31, 20162017 gross profit reflects a 31.9%34.7% gross margin foron product sales compared to a gross margin on product sales of 21.4%27.3% in 2015.the same period of 2016.
Research & Development Expenses (R&D). Research and development expenses for the sixnine months ended DecemberMarch 31, 20162017 were $109,044$163,174 compared to $109,567$166,406 for the same period in 2015.2016. While research and development expenses are flat between the periods we continue to focus on product formulation research and new product development.
Sales & Marketing Expenses. Sales and marketing expenses for the sixnine months ended DecemberMarch 31, 20162017 were $126,191 as$191,191 compared to $166,259$219,898 for the same period in 2015.2016. Sales and marketing expenses decreased $40,068$28,707 between periods primarily due to the impact of the company’s new commission program, lower overall sales leading to lower commission payments,salary costs, and lower travel costs, offset by increased trade show expenses as we attended threerelated to our attendance at four trade shows during this sixnine month period.
General & Administrative Expenses. General and administrative expenses for the sixnine months ended DecemberMarch 31, 20162017 were $339,783$510,596 compared to $494,640$666,910 for the same period in 2015. General and administrative expenses decreased $154,8572016. This decrease between periods primarily dueof $156,314 is driven by lower costs related to savings in wages, (due to the timing of awarding executive bonuses in 2015), stock based compensation, warranty expense and professional fees.
Other Expense. Other expense for the sixnine months ended DecemberMarch 31, 20162017 was $4,964($6,667) compared to $1,425($2,267) for the same period in 2015.2016. Other expense consists solely of interest expense and increased in the period due to our new bank debt facilities.
Net LossIncome (Loss). Net lossincome for the sixnine months ended DecemberMarch 31, 20162017 of $32,010$116,454 represents an 89.9%a 142.6% improvement from the net loss for the sixnine months ended DecemberMarch 31, 20152016 of $306,517.($271,861).
Liquidity and Capital Resources
Our principal sourcessource of liquidity consistconsists of cash and payments received from our customers. We do not have any significant revolving credit arrangements. Historically, our expenses have exceeded our sales, resulting in operating losses. From time to time, we have obtained additional liquidity to fund our operations through the sale of shares of our common stock and the placement of short-term debt instruments. At the end of fiscal years 2016 and early 2017, we were able to obtain term bank debt financing to finance critical manufacturing and facility equipment and operating enhancements which will be placed in service in fiscal year 2017. Management continuesImprovements in our operating results and general cash position have prompted us to evaluate financing options but is choosing to delay financing at terms that will subject the Company to high costs of debt and are reluctant to raise money through stock sales at what we believe are highly dilutive share prices.refrain from outside financing. Additionally, management has notified our preferred shareholder that we will be suspending future payments of their preferred cash dividend payments, so the Company can increase its working capital levels.
We have historically not succeeded in establishing favorable revolving short term financing such as lines of credit. In the quarter ended March 31, 2015, we entered into a short term receivable factoring agreement with a third party to sell our receivable invoices. This agreement enables us to sell individual customer invoices for faster cash flow to the Company as we deem needed. As of DecemberMarch 31, 20162017, we have not needed to activate this financing option due to increased focus on adherence toexecuting established collection policies and proactive communication with repeat customers, including adjusting credit limits to allow for increased sales volume where warranted.
Cash Flows
The following table sets forth our cash flows for the quarters ended DecemberMarch 31, 20162017 and 2015.2016.
| Six Months ended Dec. 31, | Nine months ended Mar. 31, | |||||||||||||||
| (in 000’s) | (in 000’s) | |||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||
| Net cash provided (used) by operating activities | $ | 51 | $ | (246 | ) | $ | 273 | $ | (272 | ) | ||||||
| Net cash used in investing activities | (11 | ) | - | |||||||||||||
| Net cash used by investing activities | (15 | ) | - | |||||||||||||
| Net cash used by financing activities | (9 | ) | (53 | ) | (15 | ) | (80 | ) | ||||||||
| Net increase (decrease) in cash during the period | $ | 31 | $ | (299 | ) | $ | 243 | $ | (352 | ) | ||||||
Net Cash Used by Operating Activities. Our primary sources of operating cash for the sixnine months ended DecemberMarch 31, 20152017 came from collections from customers. Our primary use of operating cash was an increase in prepaid and other current assets, specifically related to renewal of insurance policies.policies, and a decrease of accounts payable and accrued expenses. Net cash provided by operating activities was $51,497$273,298 for the quarter ended DecemberMarch 31, 20162017 compared to net cash used by operating activities of $246,244$272,473 for the same period in 2015.2016.
Non-cash items include depreciation and amortization and stock based compensation. Our net lossincome was $ 32,010$116,454 for the sixnine months ended DecemberMarch 31, 20162017 compared to a net loss of $306,517($271,861) for the same period in 2015.2016. The net lossincome for fiscal 20162017 included non-cash expenses for depreciation and amortization of $52,782$77,171 and stock-based compensation (both stock issued and options) of $15,223.$20,706. As of DecemberMarch 31, 2015,2016, depreciation and amortization was $81,028$116,338 and stock-based compensation (both stock issued and options) totaled $41,795.$56,238.
Net Cash Used by Investing Activities. Net cash used by investing activities was $11,424$15,187 for the sixnine months ended DecemberMarch 31, 20162017 and $0 for the same period in 2015. 2016. For the sixnine months ended DecemberMarch 31, 20162017 we purchased critical facility equipment of which $11,424$15,187 was paid in cash the remainder financed through bank financing.
Net Cash Used by Financing Activities. Net cash used by financing activities was $8,574$14,606 for the sixnine months ended DecemberMarch 31, 20162017 and $53,185$79,925 for the same period in 2015. 2016. The primary use of cash for the quarter ended DecemberMarch 31, 20162017 was payment toward the capital lease of $2,965$4,566 and payment of notes payable of $5,609.$10,040.
Contractual Obligations and Commitments
The following table summarizes our contractual cash obligations and other commercial commitments at DecemberMarch 31, 2016.2017.
| Payments due by period | Payments due by period | ||||||||||||||||||||||||||||||||||||||
| Total | Less than 1 year | 1 to 3 years | 3 to 5 years | After 5 years | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | After 5 years | ||||||||||||||||||||||||||||||
| Facility lease (1) | $ | 482,400 | $ | 136,800 | $ | 345,600 | $ | - | $ | - | $ | 448,200 | $ | 137,700 | $ | 310,500 | $ | - | $ | - | |||||||||||||||||||
| Capital lease (2) | 11,678 | 6,922 | 4,756 | - | - | 10,077 | 7,285 | 2,792 | - | - | |||||||||||||||||||||||||||||
| Bank debt (3) | 87,257 | 16,904 | 59,726 | 10,627 | - | 83,119 | 17,141 | 59,726 | 6,252 | - | |||||||||||||||||||||||||||||
| Total contractual cash obligations | $ | 581,335 | $ | 160,626 | $ | 410,082 | $ | 10,627 | $ | - | $ | 541,396 | $ | 162,126 | $ | 373,018 | $ | 6,252 | $ | - | |||||||||||||||||||
| (1) | In May 2015, we negotiated a five (5) year extension of the lease on our executive office and manufacturing facility located at 1501 Industrial Road, Boulder City, Nevada. The property consists of a 49,200 square foot building. We currently occupy all 49,200, inclusive of approximately 5,500 square feet of office space, situated on approximately 4.15 acres. All other terms and conditions of the building lease remain in effect. |
| (2) | In July 2015, we entered into a capital lease for research and development equipment for $19,337. |
| (3) | In June and July 2016, in two separate bank promissory notes, we financed critical manufacturing and facility equipment and operating enhancements which will be placed in service throughout fiscal year 2017. |
Cash Position, Outstanding Indebtedness and Future Capital Requirements
At February 6,May 9, 2017, our total cash balance was $266,143,$457,018, none of which is restricted; accounts receivables was $439,782;$266,143; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was $673,485.$694,154. Our total indebtedness was $526,931$499,409 and includes $364,467$344,245 in accounts payable and accrued expenses, $17,531$17,822 in current portion of long-term debt, $11,154$9,525 in capital lease liability and $133,779$127,629 in long-term debt.