Notes to the Unaudited Financial Statements

December 31, 2012 and June 30, 2012

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, 2012 Annual Report on Form 10-K.  Operating results for the three and six months ended December 31, 2012 are not necessarily indicative of the results that may be expected for the current fiscal year ending June 30, 2013.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, accounts payable, and notes payable.  The carrying amount of cash and accounts payable approximates their fair value because of the short-term nature of these items.  The carrying amount of the notes payable approximates fair value as the individual borrowings bear interest at rates that approximate market interest rates for similar debt instruments.

Stock Based-Compensation Expense

We account for stock-based compensation under the provisions of Accounting Standards Codification 718, Compensation – Stock Compensation (ASC 718).  Our financial statements as of and for the three and six months ended December 31, 2012 and 2011 reflect the impact of ASC 718.  Stock-based compensation expense related to director and employee options recognized under ASC 718 for the six months ended December 31, 2012 and 2011 was $43,755 and $44,777, respectively.

ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Statement of Operations.  Stock-based compensation expense recognized in our Statements of Operations for the three and six months ended, 2012 and 2011 assumes all awards will vest therefore no reduction has been made for estimated forfeitures.  We have awarded some options with a performance requirement and no amounts will be recorded until the requirement is met.

 

Our outstanding stock options, convertible preferred stock, convertible secured promissory notes and stock warrants, all of which are common stock equivalents, have been excluded from the basic and fully diluted net loss per share calculation.  We excluded 7,691,573 and 3,983,286 common stock equivalents for the six months ended December 31, 2012 and 2011, respectively, because they are anti-dilutive.

 

Income Tax

We file federal income tax returns in the U.S. and state income tax returns in those state jurisdictions where we are required to file.  With few exceptions, we are no longer subject to U.S. federal, state or and local income tax examinations by tax authorities for years before 2008.  We have adopted the provisions of Accounting Standards Codification 740, Income Taxes (ASC 740).

There are no tax positions included in the balance at December 31, 2012 for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.  Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

Our policy is to recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses.

Certain prior year balances have been reclassified to conform to the current year presentation.

 

AMERITYRE CORPORATION

Notes to the Unaudited Financial Statements

December 31, 2012 and June 30, 2012

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

  Related Party Transactions

 

Amerityre’s Chairman of the Board and Chief Executive Officer, Timothy L. Ryan, is also the principal owner of Rhino Rubber LLC, a manufacturing and distribution company for solid industrial tires and wheels.  During the six months ended December 31, 2012 and 2011, Rhino Rubber LLC purchased a total of $4,164 and $17,103, respectively, in tire products from Ameritye.  As of December 31, 2012 and 2011, the accounts receivable balances for Rhino Rubber LLC were $27,807 and $26,424, respectively.  The terms and conditions of those related-party sales transactions were the same as those afforded to any of Amerityre’s customers.

 

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.  Forklift Tire of Florida is a distributor primarily of Amerityre’s forklift product line.  During the six months ended December 31, 2012 and 2011, Forklift Tire of Florida purchased a total $0 and $12,211, respectively, in tire products from Amerityre.  As of December 31, 2012 and 2011, the accounts receivable balances for Forklift Tire of Florida were $2,324 and $11,863, respectively.  The terms and conditions of those related-party sales transactions were the same as those afforded to any of Amerityre’s customers.  In accordance with the Commission Agreement, 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 December 31, 2012, $21,192 and $53,840 were recorded for the current and long-term portion, respectively, of the related liability. Since his passing, Mr. Kines is no longer considered a related party. As a result, the related receivables are not reflected as related party receivables on the balance sheet at December 31, 2012.

NOTE 4 - CONVERTIBLE NOTES PAYABLE

In September 2010, we closed a private placement of secured convertible promissory notes (the “Notes”).  We sold an aggregate of $755,800 in Notes.  The Notes had a one year term with simple interest of 6.0%.  The Notes are convertible at the holders’ option to our common stock at a conversion rate of $0.35 per share.  The Notes are secured by all assets of the Company.  Principal and interest are due at maturity of the Notes, if the Notes are not converted.  If the holder elects such conversion, for each two shares in the conversion, the holder shall also receive one warrant to purchase an additional share, exercisable at $0.60 per share for an exercise period of 2 years from the date of conversion.  No officers, directors or affiliates of the Company participated in the private placement.  The Notes were sold pursuant to subscription documents between the Company and each investor.  In connection with the private placement of secured convertible promissory notes, on September 15, 2010, the Company issued 142,856 shares of restricted common stock as finders' fees.  The aggregate value of the shares issued as finders’ fees was $50,000, based on the closing price of $0.36 per share.  As of December 31, 2012, $410,000 of the Notes were redeemed; $195,800 of the Notes converted into 559,429 shares of common stock; and $150,000 of the Notes extended maturity until January 31, 2013. In January 2013, an additional $50,000 of the Notes were redeemed and $100,000 of the Notes extended maturity until April 30, 2013. The extended notes bear a simple interest rate of 9% per annum.  Accrued interest on the Notes payable at December 31, 2012 was $3,375.

NOTE 5 - STOCK TRANSACTIONS

On May 29, 2012, the Board of Directors approved a resolution designating 1,500,000 shares of preferred stock, $0.001 par value, as Series A Contingent Convertible Preferred Stock (the “Series A Shares”).  On June 1, 2012, the Company filed a Certificate of Designation with the Nevada Secretary of State for Series A Contingent Convertible Preferred Stock.  The Certificate of Designation was approved by the Nevada Secretary of State on June 4, 2012.  From June 30, 2012 through September 30, 2012, the Company conducted a private placement of the Series A Shares. The Series A Shares have no dividend rights and have voting rights only on any matters directly affecting the rights and privileges of the Series A Shares.

 

The Series A Shares have liquidation preference amounting to a return of the initial par value per share only, with no further participation in any distributions to other shareholders. Any issued Series A Shares will automatically convert to the Company’s common stock at a ratio of four shares of common stock for each share of the Series A Shares after the later of six months from the date of issuance or the date on which the Corporation shall have available shares of common stock which are authorized, un-issued and not reserved for any other event or contingency, in an amount sufficient to convert all of the shares of Series A Shares issued and outstanding on the date of the proposed conversion.  As of the close of the private placement on September 30, 2012, the Company had received and accepted subscription documents, and the related cash deposits, for the

AMERITYRE CORPORATION

Notes to the Unaudited Financial Statements

December 31, 2012 and June 30, 2012

NOTE 5 - STOCK TRANSACTIONS, Continued

purchase of 1,135,000 of the Series A Shares.  Proceeds from the private placement of the Series A Shares were $1,074,864, net of issuance costs of $60,136.

On August 1, 2012, the Board of Directors authorized an aggregate of 750,000 shares of restricted common stock to its directors for additional services provided during the six months ended June 30, 2012. The total value of the shares issued was $150,000 based on the closing market price on the authorization date of $0.20 per share.  The value of the shares was accrued as stock-based compensation expense for the year ended June 30, 2012. The shares were issued in September 2012.

 

NOTE 6 - STOCK OPTIONS AND WARRANTS

General Option Information

On July 6, 2011, the Board of Directors cancelled the “2004 Non-Employee Directors’ Stock Incentive Plan” and approved the “Directors’ 2011 Stock Option and Award Plan”.  The Company also maintains the 2005 Stock Option and Award Plan, which was previously approved by shareholders, for the purpose of granting option awards to its employees and consultants.   Under the 2011 Plan, a total of 3,300,000 shares are authorized for issuance.  Each non-executive director was granted options to purchase 300,000 shares at that day’s closing price, $0.17.  The options vest over three years as follows: 100,000 on June 30, 2012, 100,000 on June 30, 2013 and 100,000 on June 30, 2014.  These options expire two years after vesting.  The Director who serves as Audit Chair during the fiscal year will receive an additional 50,000 options per year under the same terms.  CEO Timothy L. Ryan was granted 200,000 options per year under the same terms, under the 2005 Stock Option and Award Plan.

At the August 1, 2012 Board of Directors’ meeting, Brian W. Hesje assumed the role of Audit Committee Chairman. For his service as the Audit Committee Chairman, the Board of Directors approved a grant of 300,000 stock options based on the closing market price on the issuance date of $0.26 per share. Under the Directors’ 2011 Stock Option and Award Plan, 150,000 of the options will vest on June 30, 2013 and 150,000 will vest on June 30, 2014.

We estimated the fair value of the stock options at the grant date based on the following range of weighted average assumptions:

 

 

A summary of the status of our outstanding stock options as of December 31, 2012 and June 30, 2012 and changes during the periods then ended is presented below:

 

The following table summarizes the range of outstanding and exercisable options as of December 31, 2012:

 

 

AMERITYRE CORPORATION

Notes to the Unaudited Financial Statements

December 31, 2012 and June 30, 2012

NOTE 6 - STOCK OPTIONS AND WARRANTS, Continued

General Warrant Information

During the six months ended December 31, 2012, none of the outstanding secured convertible promissory notes (the “Notes”) converted to common stock. As of December 31, 2012, there were 279,715 warrants issued and outstanding.

NOTE 7 – 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.

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.

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.

NOTE 8 – SUBSEQUENT EVENTS

 

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.  On January 28, 2013, the Nevada Secretary of State accepted the Company’s filing of a Certificate of Amendment to increase the authorized number of common stock shares. As of this filing, 835,000 shares of the convertible preferred stock have automatically converted into common stock.  We are in the process of exchanging the convertible preferred stock certificates for common stock certificates.

In January 2013, the Company redeemed for cash $50,000 of the secured convertible promissory notes (the ”Notes) and extended the maturity date on $100,000 of the Notes to April 30, 2013.

 

 Management has evaluated subsequent events per the requirements of Topic 855 and has determined that there are no additional subsequent events to be reported.