ITEM 2
. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance or financial condition. Such statements are only predictions and the actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. The historical results set forth in this discussion and analysis are not necessarily indicative of trends with respect to any actual or projected future financial performance. This discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report.
Overview
Amerityre incorporated as a Nevada corporation on January 30, 1995 under the name American Tire Corporation and changed its name to Amerityre Corporation in December 1999.
Amerityre engages in the research and development, manufacturing and sale of polyurethane tires. We believe that we have developed unique polyurethane formulations that allow us to make products with superior performance characteristics, including abrasion resistance, energy efficiency and load-bearing capabilities, than conventional rubber tires. We also believe that our manufacturing processes are more energy efficient than traditional rubber 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.
Our polyurethane material technology is based on two proprietary formulations; closed-cell polyurethane foam, which is a lightweight material with high load-bearing capabilities for low duty cycle applications; and Elastothane®, a high performance polyurethane elastomer with high load-bearing capabilities for high duty cycle
applications.
We are concentrating on three segments of the tire market: closed-cell polyurethane foam tires, polyurethane elastomer forklift tires and agricultural tires.
Closed-Cell Polyurethane Foam Tires
We currently manufacture several lines of closed-cell polyurethane foam tires for bicycles,
hand trucks, lawn and garden, wheelbarrow, and medical mobility products. Our closed-cell polyurethane foam products are often referred to as flat-free because they have no inner tube, do not require inflation and will not go flat even if punctured. Our closed-cell polyurethane foam tires are mounted on the wheel rim in much the same way as a pneumatic tire. Our closed-cell polyurethane foam products are virtually maintenance free, eliminating the need to make tedious puncture repairs; provide extended tire life; and offer superior energy efficiency compared to rubber based tires. Foam tires and components accounted for 90.7% of fiscal 2013 sales. Hand truck and wheel barrow products are driving sales growth in this segment during fiscal 2014.
Polyurethane Elastomer Forklift Tires
We have developed solid polyurethane forklift tires made of Elastothane®. We currently produce and sell over 20 sizes for Class 1, 4 and 5 forklifts. We believe our tires are superior to rubber tires as they are non-marking, more energy efficient, carry greater load weight than rubber, operate in lower temperature environments and have longer service lives. Forklift tires accounted for 6.3% of fiscal 2013 sales. Sales in this segment are below expectations during fiscal 2014.
Agricultural Tires
Amerityre has developed two products for the agricultural tire market, one used in irrigation and one used in planting. Both products have successfully field tested and we are developing sales and marketing strategies and manufacturing plans for these products. Agricultural tires accounted for 3.0% of fiscal 2013 sales. This segment is producing significant sales growth during fiscal 2014.
Factors Affecting Results of Operations
Our operating expenses consisted primarily of the following:
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Cost of goods sold, which consist primarily of raw materials, direct labor and manufacturing overhead, including allocations of building rent, depreciation, general liability insurance and other operating costs associated with the production of our products;
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Research and development expenses, which consist primarily of employee salaries and wages, allocated overhead costs and other engineering costs used in new product development and product improvement projects;
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Sales and marketing expenses, which consist primarily of employee salaries and wages, sales commissions, travel expenses, allocated overhead costs and other sales and marketing costs;
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General and administrative expenses, which consist primarily of employee salaries and wages, stock based compensation expense, legal and professional fees, allocated overhead costs and other general and administrative costs; and
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Other income and expense, which consist primarily of interest expense, gains or losses on the disposal of assets and miscellaneous other income and expenses.
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Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses. On an ongoing basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, deferred compensation and contingencies. We base our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances. These estimates allow us to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
We believe the following accounting policies are our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that may be uncertain. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.
Revenue Recognition
Revenue for products is recognized when the sales amount is determined, shipment of goods to the customer has occurred and collection is reasonably assured. Generally, we ship most of our products FOB origination.
Valuation of Intangible Assets and Goodwill
At December 31, 2013, we had capitalized patent and trademark costs, net of accumulated amortization, totaling $490,747. The patents which have been granted are being amortized over a period of 20 years. Patents which are pending or are being developed are not amortized 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:
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any changes in the market relating to the patents that would decrease the life of the asset;
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any adverse change in the extent or manner in which the patents are being used;
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any significant adverse change in legal factors relating to the use of the patents;
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current-period operating or cash flow loss combined with our history of operating or cash flow losses;
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future cash flow values based on the expectation of commercialization through licensing; and
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current expectations that a patent will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
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Inventory
Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or market. The inventory consists primarily of chemicals, finished goods produced in our plant and products purchased for resale.
Stock-Based Compensation
Equity securities issued for services rendered have been accounted for at the fair market value of the securities on the date of authorization. The stock-based compensation expense recognized under ASC 718 for the six months ended December 31, 2013 and 2012 was $35,790 and $43,755, 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 third and fourth quarters of the fiscal year. With an expansion of our original equipment manufacturer relationships, the second quarter of fiscal 2014 has shown an increase in sales over previous years.
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:
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Net sales, which consists of product sales and equipment sales, if any;
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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;
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Gross profit, which is an indicator of both competitive pricing pressures and the cost of goods sold of our products and the mix of product and equipment sales and license fees, if any;
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Growth in our customer base, which is an indicator of the success of our sales efforts; and
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Distribution of sales across our products offered.
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The following summary table presents a comparison of our results of operations for the three and six months ended December 31, 2013 and 2012 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below.
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For the Three Months Ended
December 31,
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For the Six Months Ended
December 31
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2013
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2012
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Change
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2013
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2012
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Change
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Research & Development Expenses
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Sales & Marketing Expenses
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General & Administrative Expenses
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Three Months Ended December 31, 2013 Compared to December 31, 2012
Net Sales
. Net sales of $1,260,800 for the three months ended December 31, 2013, reflects a 73.4% increase over net sales of $727,194 for the three months ended December 31, 2012. Sales between periods increased largely due to increases in the hand truck, medical mobility and agriculture product lines.
Cost of Goods Sold.
Cost of goods sold for the three months ended December 31, 2013 was $1,064,624 or 84.4% of sales compared to $609,892 or 83.9% of sales for the same period in 2012. As a percent of sales, the cost of goods sold increased 0.5% between periods primarily due to a reallocation of manufacturing overhead costs previously charged to general and administrative expense; a decrease in depreciation expense resulting from fully depreciated assets; a favorable standard cost revaluation adjustment that occurred in 2012; and favorable purchase price variances achieved in 2013.
Gross Profit
. Gross profit for three months ended December 31, 2013 was $196,176 compared to $117,302 for the same period in 2012. Gross profit increased by $78,874 or 67.2% between periods primarily due to the increase in net sales. As a percent of sales, gross profit decreased 0.5% largely due to lower margins on sales to original equipment manufacturer customers.
Research & Development Expenses
. Research and development expenses for the three months ended December 31, 2013 were $40,455 compared to $53,934 for the same period in the prior year. Research and development expenses between periods decreased by $13,479 or 25.0% primarily due to a reduction in salaries resulting from the loss of the company chemist, which was partially offset by the department allocation of costs previously charged to general and administrative expense.
Sales & Marketing Expenses.
Sales and marketing expenses for the three months ended December 31, 2013 were $101,966 as compared to $123,840 for the same period in the prior year. Sales and marketing expenses decreased $21,874 between periods primarily due to a reduction in salaries and travel expenses, which was partially offset by the department allocation of costs previously charged to general and administrative expense.
General & Administrative Expenses
. General and administrative expenses for the three months ended December 31, 2013 were $207,889 compared to $280,589 for the same period in 2012. General and administrative expenses decreased $72,700 or 25.9% between periods primarily due to a/an:
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Decrease of $69,923 from the departmental allocation of certain overhead costs, such as rent, utilities and general liability insurance, previously charged entirely to general and administrative expense.
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Increase of $9,716 in warranty expense related to tire failures and returns for the forklift product line.
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Increase of $10,458 in bad debt expense primarily due to a bad debt recovery in the 2012 period.
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Decrease of $13,716 in consulting and director fees related to special projects.
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Other Income/(Expense).
Other income for the three months ended December 31, 2013 was $39,148 compared to $3,583 for the same period in 2012. Other income/(expense) increased $35,565 between periods primarily due to an increase in interest expense of $37,264 resulting from an increase in the number of unsecured notes and short-term borrowings in 2013.
Net Loss
. Net loss for the three months ended December 31, 2013 was $193,282 compared to a net loss of $344,644 for the same period in 2012. The $151,362 decrease in the net loss between periods is primarily due to the 73.4% increase in sales between the periods.
Six Months Ended December 31, 2013 Compared to December 31, 2012
Net Sales
. Net sales of $2,298,125 for the six months ended December 31, 2013, reflects a 40.1% increase over net sales of $1,640,404 for the six months ended December 31, 2012. Sales between periods increased largely due to increases in the hand truck, wheelbarrow and agriculture product lines.
Cost of Goods Sold.
Cost of goods sold for the six months ended December 31, 2013 was $1,880,143 or 81.8% of sales compared to $1,339,984 or 81.7% of sales for the same period in 2012. As a percent of sales, the cost of goods sold increased 0.1% between periods primarily due to a reallocation of manufacturing overhead costs previously charged to general and administrative expense; a decrease in depreciation expense resulting from fully depreciated assets; a favorable standard cost revaluation adjustment that occurred in 2012; and favorable purchase price variances achieved in 2013.
Gross Profit
. Gross profit for six months ended December 31, 2013 was $417,982 compared to $300,420 for the same period in 2012. Gross profit increased by $117,562 or 39.1% between periods primarily due to the increase in net sales. As a percent of sales, gross profit decreased 0.1% largely due to lower margins on sales to original equipment manufacturer customers.
Research & Development Expenses
. Research and development expenses for the six months ended December 31, 2013 were $76,368 compared to $75,780 for the same period in the prior year. The $588 increase between periods reflects an increase due to the departmental allocation of costs previously charged to general and administrative expense, offset by a decrease in salaries due to the loss of the company chemist.
Sales & Marketing Expenses.
Sales and marketing expenses for the six months ended December 31, 2013 were $221,654 as compared to $238,650 for the same period in the prior year. Sales and marketing expenses decreased $16,696 between periods primarily due to a decrease in salaries and travel expenses. The reductions in salaries and travel costs were partially offset by an increase in sales commissions from higher sales volumes; an increase in trade show costs; and an increase due to the departmental allocation of costs previously charged to general and administrative expense.
General & Administrative Expenses
. General and administrative expenses for the six months ended December 31, 2013 were $435,083 compared to $597,845 for the same period in 2012. General and administrative expenses decreased $162,762 or 27.2% between periods primarily due to a/an:
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Decrease of $90,645 from the departmental allocation of certain overhead costs, such as rent, utilities and general liability insurance, previously charged to general and administrative expense.
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Decrease of $23,494 in warranty expense related to tire failures and returns for the forklift product line.
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Reduction in the independent audit fees of $17,969 incurred between the periods.
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Increase of $38,115 in bad debt expense primarily due to a bad debt recovery in the 2012 period.
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Decrease of $38,681 in consulting and director fees related to special projects.
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Other Income/(Expense).
Other income for the six months ended December 31, 2013 was $52,725 compared to $10,977 for the same period in 2012. Other income/(expense) increased $41,748 between periods primarily due to an increase in interest expense of $43,263 resulting from an increase in the number of unsecured notes and short-term borrowings in 2013.
Net Loss
. Net loss for the six months ended December 31, 2013 was $367,848 compared to a net loss of $622,532 for the same period in 2012. The $254,684 decrease in the net loss between periods is primarily due to the 40.1% increase in sales between the periods.
Liquidity and Capital Resources
Our principal sources of liquidity consist of cash and payments received from our customers. We do not have any significant credit arrangements. Historically, our expenses have exceeded our sales, resulting in operating losses. From time to time, we have obtained additional liquidity to fund our operations through the sale of shares of our common stock and the placement of short-term debt instruments. In assessing our liquidity, management reviews and analyzes our current cash, accounts receivable, accounts payable, capital expenditure commitments and other obligations.
Cash Flows
The following table sets forth our cash flows for the six months ended December 31, 2013 and 2012.
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For the Six Months Ended
December 31,
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2013
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2012
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Net Cash Used by Operating Activities
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Net Cash Used by Investing Activities
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Net Cash Provided by Financing Activities
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Net Increase/(Decrease) in Cash During Period
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Net Cash Used by Operating Activities.
The primary sources of cash from operating activities during the six months ended December 31, 2013 came from an increase in accounts payable and accrued expenses, and a decrease in inventories. Our primary use of cash for operating activities was an increase in accounts receivable resulting from an increased sales volume. Net cash used by operating activities was $130,515 for the six months ended December 31, 2013 compared to net cash used by operating activities of $443,056 for the same period in 2012. The decrease in net cash used by operating activities compared to the prior year period is largely due to the $254,684 decrease in the net loss.
Net Cash Used by Investing Activities.
Net cash used by investing activities was $22,319 for the six months ended December 31, 2013 and $160,557 for the same period in 2012. Our use of cash for the six months ended December 31, 2013 was for the purchase of models and molds used in the manufacturing process. Our primary uses of cash for the six months ended December 31, 2012 were the purchase of property and equipment, including an automated sandblaster to improve efficiency; a larger curing oven to improve production throughput; and an upgraded telephone system to improve customer service.
Net Cash Provided by Financing Activities
. Net cash provided by financing activities was $217,475 for the six months ended December 31, 2013 compared to net cash used by financing activities of $509,042 for the same period last year. The primary source of cash for the six months ended December 31, 2013 were proceeds of $507,222 from short-term loans secured by customer purchase orders and a short-term note payable. The primary use of cash for the six months ended December 31, 2013 consisted of $273,470 for the repayment of short-term loans. The primary source of cash for the six months ended December 31, 2012 were proceeds related to the private placement of preferred stock of $814,864. The primary use of cash for the six months ended December 31, 2012 consisted of $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, 2013.
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Payments due by period
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Total
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Less than 1 year
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1 to 3 years
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3 to 5 years
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After 5 years
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Total contractual cash obligations
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(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 31,2013, our total cash was $173,388, none of which is restricted; accounts receivables, net of reserves for bad debt, was $592,821; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was $625,768. Our total indebtedness was $1,715,797. Our total indebtedness at December 31, 2013 includes $660,959 in accounts payable, $684,537 in principal and interest for notes and short-term borrowings, $218,117 in accrued expenses, $16,985 in current portion of long-term debt and $53,840 in long-term debt.
Over the past year, the Company has been working on various proposals to secure short-term loans as well as long-term bank financing and equity based investments. During the third quarter of fiscal 2013, we were reasonably assured that at least $800,000 could be raised in a private offering of unsecured notes. However we only received $285,000 in cash proceeds from that offering. At the same time, we were informed that the support we anticipated for the bank financing would not be forthcoming. The reduced funding under the private offering along with the lack of support for the bank financing resulted in the reinstatement of the going concern opinion. In September 2013, we entered into an agreement in principle with a group of investors which would again allow us to pursue long-term bank financing. Preparation of the bank loan application is currently in process; however we have met certain obstacles that have delayed its completion. It is estimated that the loan application process will take another 2-3 months to complete. In the meantime, we will continue to pursue other financing opportunities.
The Company currently does not have an existing credit facility. Over the past year, the Company has worked with its vendors to obtain extended credit terms and increase credit lines. We also continue to maintain strong customer credit policies and procedures and aggressively pursue receivable collections.
The Company is intent, in spite of losing a significant number of sales growth opportunities due to cash flow constraints, on focusing on the sale and distribution of profitable product lines. Therefore the Company is aggressively pursuing an expand and grow business plan that will require securing a financial facility required to maintain sufficient raw material and finished goods inventory levels to capitalize on sales growth opportunities. No additional capital expenditures are anticipated over the next twelve months unless they support sales development and product improvement.
The Company has increased its efforts to obtain financing through means that previously were not considered such as preferred stock offerings, structured debt, private equity funding 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. In January 2013, the Company received $285,000 in cash receipts from the sale of unsecured notes. We have also redeemed or converted $655,800 of the $755,800 in secured convertible promissory notes (the “Notes”) placed in September 2010. Since May 2013, we have entered into a number of short-term loan agreements to obtain funding for the purchase of chemicals for large customer purchase orders. The majority of these short-term agreements are repaid using the cash receipts from the related customer receivables. Negotiations are currently underway to secure equity financing with an institutional investor, a revolving line of credit with a private investor or an unsecured note with a shareholder group.
At the Annual Stockholder’s Meeting, held on December 4, 2013, the stockholders voted to amend the Company’s Articles of Incorporation to increase the number of authorized shares of common stock from 55,000,000 shares to 75,000,000 shares. The increase allows us the capacity to pursue equity offerings of convertible preferred stock and common stock.
In connection with the preparation of our unaudited financial statements for the three and six months ended December 31, 2013, we have analyzed our cash needs for the next twelve months. We have concluded that our available cash and accounts receivables are not sufficient to meet our current minimum working capital, capital expenditure and other cash requirements for this period. Moreover, we cannot assure that we will be able to obtain financing on favorable terms or at all. If we cannot obtain equity or bank financing, generate adequate sales of our products or increase our sales through other means, then we may be forced to cease operations.
The accompanying financial statements do not include any adjustments that might be necessary in the event we are unable to continue as a going concern.