AMERITYRE: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)
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This discussion and analysis contain statements of a forward-looking nature relating to future events or our future financial performance or financial condition. Such statements are only predictions and the actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Part I. Item 1A. Risk Factors" as well as those discussed elsewhere in this report. The historical results set forth in this discussion and analyses 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. OverviewAmerityre engages in the research and development, manufacturing, and sale of solid polyurethane foam tires. We have developed unique polyurethane formulations that allow us to make products with superior performance characteristics, compared to conventional rubber tires, in the areas of abrasion resistance, energy efficiency and load-bearing capabilities. 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, extreme heat, and high pressure necessary to cure rubber. We believe tires produced with our proprietary polyurethane formulations last longer, are less susceptible to failure and are friendlier to the environment when compared to competitor offerings. We focus our business on applications and markets where our advantages in product technology, tire performance, and customer service give us an opportunity to obtain premium pricing. Our product development and marketing efforts are focused on building customer relationships and expanding sales with original equipment manufacturers and tire distributors. Our competitive advantage is creating unique product solutions for customers who have challenging tire performance requirements that cannot be met by competitor offerings. Closed cell Polyurethane Foam Tires - The sale of polyurethane foam tires to original equipment manufacturers, distributors, and dealers accounts for the majority of our sales revenue. We produce a broad range of tire sizes for the light duty tire market, including bicycle tires, hand truck tires, mobility tires, and lawn/garden tires. 20
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Despite the negative effects of COVID-19 on the overall US economy, we experienced higher than expected demand for our polyurethane foam tires in the recent quarter. Sales for the fiscal fourth quarter 2021 were 10.6% higher than the sales level in fiscal fourth quarter 2020. We continue to see the same strong sales trends that we saw during the pre-COVID period. Our current customers are increasing sales of their current products and we continue to engage new customers to expand our customer base.
Our industrial tire product line, which includes our golf car tires, 480 x 12 tires and 570 x 12 tires, continues to experience strong growth. We expect these tires to continue to gain popularity in the coming quarters.
Polyurethane Elastomer Tires - Our elastomer formulations are used to manufacture tires requiring higher levels of abrasion resistance and greater load bearing capability. Forklift tires constitute a large part of this market, with other industrial and agricultural applications representing other opportunities. Overall sales volumes of our forklift tires remain small, less than 0.1% of our total sales revenue. Price sensitive consumers continue to favor imported solid rubber press-on forklift tires rather than our products. We have not devoted significant resources towards promoting this product line. We have been working with OEMs to utilize our elastomer formulations for large industrial equipment tires and agricultural applications, and we await the results of trials that are currently ongoing. Light Density Elastomer Tires - The Company continues to see greater interest in its light-density elastomer formulation for use in tire applications where customers need higher abrasion resistance and load bearing capability. Our ElastothaneTM 500 formulation provides better performance in these areas compared to our closed cell foam formulation. Lawn and garden tire applications continue to drive increased sales of this formulation. We expect Agricultural tires sales to increase in the coming quarters as increases in the price of in farm commodity crops such as corn and soybeans should result in more disposable income for farmers. We continue to approach OEMs and large distributors about promoting and utilizing our tires for certain applications, and several are evaluating sample tires. The introduction of our ElastothaneTM 500 formulation has enabled us to offer a better product alternative for abrasive applications. We believe investment in new and improved products is important to the continued growth and success of our overall business, and we will selectively invest in promising opportunities that can be supported within our current financial model. We have several product evaluations programs ongoing which have the potential to develop into significant future business. We expect our current R&D investments to continue to prove to be a prudent investment of our capital resources. A major component of the strategic operating plan we discussed during our annual meeting inDecember 2020 was the desire to establish partnerships with large OEMs and distributors to increase our distribution capabilities. We continue to have discussions with various entities to establish these relationships, which we believe would be advantageous for both parties. Testing of our tires in several applications are ongoing by these potential partners, and we are hopeful that some of these opportunities will result in new business forAmerityre in the coming quarters. 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 independent manufacturer representatives with inside sales support. The Company's continued emphasis on proper product pricing continues to drive more profitable sales. Our website educates the marketplace about our products as well as offers an outlet for online sales.
Factors affecting the results of operations
Our operating expenses mainly consist of the following:
• Cost of sales, which mainly includes raw materials, components and
production costs 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 mainly consist 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 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;
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• 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 shares and stock options
awards issued to directors, 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.
Currently, we do not have critical accounting policies that require management’s critical judgments and estimates on matters that may be uncertain.
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:
• Revenues, net of
returns and
trade discounts,
which consists
of product sales
and services and
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 Company, in light of the impact COVID-19 has had on our business,
implemented a price increase on most of its products starting on April 1, 2021 .
We have seen over the past 7 months significant increases in raw material
pricing. The January winter storms in Texas took all polyol manufacturing
offline for several weeks as these facilities needed to be repaired and brought
back online. Combined with COVID-19 caused reductions in propylene manufacturing
capacity, the Company was fortunate to receive enough material to maintain
operations, albeit at significantly higher prices and an amount that limited our
ability to fulfill orders on a timely basis. It is expected that availability of
raw material feedstock supply in the chemical markets will increase in the
coming months, but it is not clear that pricing will return to the lower levels
of last year, or even stabilize at current elevated levels. Management will
continue to monitor the situation and is prepared to make further product
pricing adjustments if necessary. In the following paragraphs we address the
material factors that affect our business.
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The following summary table presents a comparison of our results of operations for the fiscal years endedJune 30, 2021 and 2020 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below. Percent Fiscal Years Ended June 30, Change (in 000's) 2021 2020 2021 vs. 2020 Net revenues$ 4,863 $ 3,941 23.4 % Cost of revenues (3,579 ) (2,839 ) 26.0 % Gross profit 1,284 1,103 16.4 % Research and development expenses (102 ) (118 ) (13.6 )% Sales and marketing expense (225 ) (193 ) 16.6 % General and administrative expense (1) (860 ) (744 ) 15.6 % Gain on debt extinguishment 150 - 100.0 % Loss on assets, due to write down or disposal (26 ) (17 ) 52.9 % Other income (expense) 38 12 216.7 % Net income 259 43 502.0 % Preferred stock dividend - (83 ) (100.0 )% Net income (loss) attributable to common shareholders $ 259 $ (40 ) 747.5 %
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(1) Includes stock-based compensation expense of
Year ended
Net revenues. Net revenues of$4,863,412 for the year endedJune 30, 2021 , represents an increase of$922,208 or 23.4%, over net revenues of$3,941,204 during the year endedJune 30, 2020 . These results were above our expectations and driven by increased demand for polyurethane foam tires from current customers, despite the negative effects of COVID-19 on the overall business environment. With the expected continued recovery of the economy and our current sales backlog level, we expect sales for the upcoming fiscal year to be strong, however delays in recovery and/or further hardship may be caused by surges in new variants of COVID-19 which could adversely affect these outcomes. Cost of revenues. Cost of revenues for the year endedJune 30, 2021 was$3,579,227 or 73.6% of revenues compared to$2,838,667 or 72.0% of revenues for the year endedJune 30, 2020 . We experienced higher raw material costs, particularly chemical feedstocks, during the recent quarter which pressured gross profit margins. Our chemical suppliers have informed us that there will likely be continued price increases in the coming months for our raw materials due to t increased demand in the market and limited available supply. The newUS Administration has signaled that the current tariff situation withChina will remain unchanged. We expect these headwinds to continue to pressure our Gross Margins for the first half of fiscal year 2022 at a minimum We are looking at ways to mitigate these adverse factors, including price increases on the products sold to our customers. However, continuing increases in raw material costs may result in reduced product sales if we are forced to turn away sales because we cannot sell product at a price that is profitable. Gross Profit. Gross profit for the year endedJune 30, 2021 of$1,284,185 represents a 16.4% increase over gross profit of$1,102,537 for the year endedJune 30, 2020 . The fiscal year 2021 gross profit reflects a 26.4% gross margin for product sales compared to a gross margin on product sales of 28.0% for fiscal 2020. Research and Development expenses. Research and development expense of$102,265 for the year endedJune 30, 2021 represents a 13.6% decrease over the same expense of$117,525 for the year endedJune 30, 2020 . The difference between periods is attributed to reduced investment in tire evaluation programs due to COVID-19 restrictions in fiscal year 2021. We continue to invest in product formulation and new product development where appropriate to support our business plan. Sales and Marketing expenses. Sales and marketing expense of$224,686 for the year endedJune 30, 2021 represents a 16.6% increase over expenses of$192,951 for the year endedJune 30, 2020 . The difference between periods relates to higher sales commission expense due to higher overall sales and the product mix sold, when compared to the same period in 2020,as well as no tradeshow expenses in fiscal year 2021 due to COVID 19 closures. 23
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General and Administrative expenses. General and administrative expenses of$860,693 for the year endedJune 30, 2021 represents a 15.6% increase over the same expense of$744,525 for the year endedJune 30, 2020 . The increase was caused by higher executive compensation, higher outside consulting expenses, an increase in insurance costs and warranty expenses, offset by lower legal fees and depreciation expense. We continue to control costs and find more efficient ways to conduct our business activities. Other Income (Expense). Other income was$161,795 for the year endedJune 30, 2021 , with the primary driver of this variance being the forgiveness of our loan from the Small Business Administration Paycheck Protection Program plus various small grants available from Federal and State agencies during the fiscal year, offset by loss on the full impairment of equipment available for sale. Other expense of$5,003 in the year endedJune 30, 2020 includes charges for impairment of equipment available for sale and the write down of obsolete inventory. Net Income. The net income for the year endedJune 30, 2021 of$258,336 represents a 516.7% increase from the$42,533 net income for the year endedJune 30, 2020 . A significant portion of the net income was the non-cash forgiveness of ourSmall Business Administration loan.
Liquidity and capital resources
Cash Flows The following table sets forth our cash flows for the fiscal years endedJune 30, 2021 and 2020. Years endedJune 30 , (in 000's) 2021 2020
Net cash (used in) / provided by operating activities
42
Net cash used in investing activities (14 ) (56 ) Net cash (used in)/provided by financing activities (1 )
124
Net (decrease) / increase in cash during the period
110 The Company has evaluated its current cash position relative to its cash requirements in the future and has determined its cash levels are sufficient to cover its cash needs. The Company enjoys a strong level of cash on hand as well as an unused credit line facility. These cash resources have been critical during the past year as working capital needs have increased due to the extended time required to receive imported materials (which are paid for when they are ready to ship from the manufacturer, not after they are received for use by the Company) as well as Management's decision to increase chemical stock levels when extra material became available for purchase. The Company is also planning on upgrading some production equipment by the end of the first quarter of fiscal year 2022, which are anticipated to be paid using our cash reserves. Our principal sources of liquidity consist of cash on hand and payments received from our customers. InFebruary 2020 , the Company secured a$50,000 line of credit with a local community bank. As ofJune 30, 2021 , this credit line had not been used. Historically, the current management team has been reluctant to pursue financing at terms that subject the Company to the high costs of debt, or raise money through the sale of equity at prices we believe do not reflect the true value of the Company.
Cash position, current debt and future capital needs
AtSeptember 15, 2021 , our total cash balance was$509,318 , none of which is restricted; accounts receivables were$263,920 ; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was$1,269,993 . Our total indebtedness, specifically which management reviews for cash management, was$848,866 and includes$374,239 in accounts payable and accrued expenses,$2,000 in current portion of long-term debt,$61,326 in long-term debt and$411,300 in total operating lease liability. 24
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We continue to take actions to improve our liquidity and access to capital resources. Management continues to maintain that an equity financing in the current market environment would be too dilutive and not in the best interests of our shareholders. We have been successful in securing a line of credit with our bank. These new sources of liquidity have been key tools to enable the Company to overcome negative effects of the coronavirus on our business. In assessing our liquidity, management reviews and analyzes our current cash, accounts receivable, accounts payable, capital expenditure commitments, cash requirements and other obligations. In connection with the preparation of our financial statements for the year endedJune 30, 2021 , we have analyzed our cash needs for the next twelve months. We have concluded that our available cash and accounts receivables are sufficient to meet our current minimum working capital, capital expenditure and other cash requirements for this period. Although we have seen a significant increase in business activity in recent quarters, there can be no assurance that a resurgence of the COVID-19 virus will not cause another significant decrease in demand from our customers. While many government restrictions have been relaxed and the economy has continued to open in more jurisdictions, the emergence of new and transmittable variants of COVID-19 appears to have led to a possible resurgence of the virus, particularly in populations with low vaccination rates and has resulted in new restrictions in certain geographies and among certain businesses. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods. Refer to "Item 1A - Risk Factors" for a description of the material risks that the Company currently faces in connection with COVID-19. If there is a new shutdown of the economy, reduction in demand for our products or other adverse effect on our business, we may lack sufficient working capital to meet our needs for the next 12 months.
The Company has occasionally implemented initiatives to induce sales of slower moving inventory through promotional pricing. These programs will continue to be used selectively over the coming quarters to monetize inventory, promote individual product lines and improve our cash flow.
From
Off-balance sheet provisions
We do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.
Caution Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding economic conditions in general and in the agricultural market, in particular, the impact of the COVID-19 pandemic and the continued reopening of the economy and anticipated increase in product sales resulting therefrom, increases to the prices we charge for our products in response to increased costs we incur to obtain the materials needed to manufacture them, expected increases in agricultural spending and any resultant positive effect on our business, prospective partnerships and business relationships with large OEMs including some with whom we are currently in discussions, the possibility and expected effect of delays from future shutdowns in connection with COVID-19, operational actions taken by us to reduce expenditures as the economy continues to recover, price increases and expected sales levels for the fiscal year endingJune 30, 2021 , our ability to pursue future financings, increased demand for our products and resulting sales and profits, the expansion of our customer base, continued strength of our current polyurethane foam tire market segment, the prudence of our research and development investments, the sufficiency of our cash on hand and credit line facility, and liquidity. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "could," "target," "potential," "is likely," "will," "expect" and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. 25
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These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors" in this report. In addition, there is a risk that the economic repercussions from COVID-19 may be more severe than we currently expect, particularly with the new strains emerging and the uncertainty if existing vaccinations will be effective against the new strains, and vaccine hesitancy and slowing vaccination rates which has led and may continue to lead to new outbreaks in certain geographic areas. Additionally, there is a risk that our price increases may result in lower revenues and further decreased gross profit margins. New risk factors emerge from time-to-time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements described in this report, whether as a result of new information, future events, changed circumstances or any other reason after the date this report is filed.
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