AMERITYRE CORPORATION 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. 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 and polyurethane elastomer 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, lawn/garden tires, golf car tires, and light industrial vehicle tires. Despite the ongoing 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 first quarter 2022 were 32.3% higher than the sales level in fiscal first quarter 2021. We continue to see strong sales trends that we saw during fiscal year 2021 as our current customer base is experiencing strong sales and our domestically produced tires are attractive to those new customers looking for a domestic source for their tires Our industrial tire product line, which includes our golf car tires, our 480 x 12 tires, and our 570 x 12 tires, continues to see outstanding demand in the marketplace. We expect this trend to continue 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, and we have not devoted significant resources towards promoting this product line. We have been working with original equipment manufacturers ("OEMs") to utilize our elastomer formulations for large industrial equipment tires and agricultural applications, which may lead to new revenue sources in the future. Light Density Elastomer Tires - Demand for our light density elastomer formulation (ElastothaneTM 500) in applications requiring greater abrasion resistance and load bearing capability than our polyurethane foam tires. Lawn and garden tire applications continue to drive increased sales of this formulation, although we have seen some custom tire applications for this formulation as well. We expect Agricultural tires sales to continue to increase in the coming quarters as farmers are seeing higher levels of disposable income than they have in years. However, economic challenges such as supply shortages could limit anticipated benefits or our ability to capitalize on them. We continue to approach OEMs and large distributors about promoting and utilizing our tires for certain applications, and several are evaluating sample tires. 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. 10
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A major component of our strategic operating plan is to establish a partnership or other type of business combination with a larger OEM or tire manufacturer who would have a larger distribution channel as well as financial resources to fully leverage our current tire portfolio as well as new products that can be developed using our formulations. The wide availability of capital in the markets has increased the amount of equity investment and merger/acquisition activity in the market. We are open to discussions and will continue to pursue opportunities that we believe will maximize the potential of our intellectual property and the overall value of the business. We continue to face supply chain issues and increases in raw material and operating costs which we expect will continue to pressure our Gross Profit Margins. We implemented another price increase inAugust 2021 on our tire assemblies to mitigate the effects of these increases in our costs. However, as evidenced by our lower Gross Margins for the quarter, the price increases were not successful at offsetting all cost increases during the quarter. We will continue to closely manage the cost drivers of our business and take appropriate corrective actions, including further price increases where warranted. Our sales growth over the past year has been very strong. However, it is unclear if the environment of rising costs and the corresponding higher sales prices will affect demand for our products moving forward. Raw material availability is also expected to continue to be an issue in the upcoming quarters as the existing supply chain issues are being resolved. While we continue to have a very strong backlog of business, we may be restricted as to how much product we can produce if raw material is not available on a timely basis. We are in constant contact with our suppliers to ensure that negative supply impacts are minimized, although in some cases this may result inAmerityre incurring higher material costs. 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 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 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 equity 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.
At present we do not have any critical accounting policies that require critical management judgments and estimates about matters that may be uncertain.
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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 10 months significant increases in raw material
pricing, caused in part due to supply chain disruptions arising from the
COVID-19 pandemic. The January 2021 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-related 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. Shortages
of other raw materials in the chemical markets may continue or increase in the
coming months, and it is therefore not clear that raw material pricing will
return to the lower levels of 2020, or even stabilize at current elevated
levels. Management continues to monitor the situation and is prepared to make
further product pricing adjustments if necessary. The following paragraphs
address these factors and the effects on our business during the fiscal quarter
ended September 30, 2021 .
The following summary table presents a comparison of our results of operations
for the fiscal quarters ended September 30, 2021 and 2020 with respect to
certain key financial measures. The comparisons illustrated in the table are
discussed in greater detail below.
Three Month Period Ended September 30, Percent Change
(in 000's)
2021 2020 2021 vs. 2020
Net revenues $ 1,396 $ 1,051 32.8 %
Cost of revenues (1,011 ) (708 ) 42.8 %
Gross profit 385 343 11.9 %
Research and development expenses (22 ) (20 ) 10.0 %
Sales and marketing expense (68 ) (60 ) 13.3 %
General and administrative expense (233 ) (210 ) 10.4 %
Loss on asset disposal - (3 ) (100.0 )%
Other income 3 4 (25.0 )%
Net income (loss) attributable to common
shareholders $ 65 $ 54 20.4 %
Quarter Ended
Net Revenues. Net revenues of$1,395,614 for the quarter endedSeptember 30, 2021 , represents an 32.8% increase over net revenues of$1,051,286 for the same period in 2020. These results exceeded our expectations as we continued to navigate the challenges presented by the COVID-19 pandemic, including limited raw material availability, higher supply costs and other supply chain issues. We expect our polyurethane foam products to continue to constitute the majority of our sales going forward. 12
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Cost of Revenues. Cost of revenues for the quarter endedSeptember 30, 2021 was$1,010,842 or 72.4% of sales compared to$707,566 or 67.3% of sales for the same period in 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 due to a slow recovery in manufacturing capacity for our raw materials as well as increased market demand. The supply chain issues in procuring material fromChina has caused higher costs and long delays for our steel rims. We expect these headwinds to continue to pressure our Gross Margins throughout fiscal year 2022. We have mitigated some of these issues by increasing the sales prices of our tires. However, continuing increases in raw material costs may result in reduced product sales if we are forced to turn away sales because they are at price levels that are unprofitable. Gross Profit. Gross profit for the quarter endedSeptember 30, 2021 was$384,772 compared to$343,720 for the same period in 2020, an increase of$41,052 or 11.9% ,over the same period in 2020. TheSeptember 30, 2021 gross margin reflects a 27.6% gross margin on product sales compared to a gross margin on product sales of 32.7% in 2020. The lower gross profit is the result of higher raw material costs and higher shipping costs on materials purchased from overseas. Research & Development Expenses (R&D). Research and development expenses for the quarter endedSeptember 30, 2021 were$21,567 compared to$20,471 for the same period in 2020. We continue to invest in product formulation and new product development where appropriate to support our business plan. Sales & Marketing Expenses. Sales and marketing expenses for the quarter endedSeptember 30, 2021 were$68,373 as compared to$59,800 for the same period in 2020. The difference between periods reflects higher commission expenses paid during the recent period due to higher sales volumes. General & Administrative Expenses. General and administrative expenses for the quarter endedSeptember 30, 2021 were$232,848 compared to$210,486 for the same period in 2020, driven by higher compensation costs. We continue to control costs and find more efficient ways to conduct our business activities.
Other Income, net. Other income for the quarter ended
Net Income. Net income for the quarter ended
Liquidity and Capital Resources
Cash Flows The following table sets forth our cash flows for the quarters endedSeptember 30, 2021 and 2020. Periods endedSept. 30 , (in 000's) 2021 2020
Net cash provided (used) by operating activities $ 94 $
(48 ) Net cash used by investing activities (134 )
-
Net cash used by financing activities -
-
Net increase (decrease) in cash during the period $ (40 ) $
(48 ) 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 completed its upgrade of its Production pouring systems inSeptember 2021 , which was completely paid from cash reserves. 13
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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 ofSeptember 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, Outstanding Indebtedness and Future Capital Requirements
AtNovember 10, 2021 , our total cash balance was$400,035 , none of which is restricted; accounts receivables was$474,123 ; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was$779,907 . Our total indebtedness, specifically which management reviews for cash management, was$774,243 and includes$324,217 in accounts payable and accrued expenses,$2,000 in current portion of long-term debt,$61,326 in long-term debt and$386,700 in total operating lease liability. 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. 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 fiscal 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 a disruption in our markets that causes a 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 variants of COVID-19 may lead to possible resurgences of the virus. This could result in new restrictions on our customers located or servicing these affected jurisdictions. Among the adverse consequences caused by the pandemic have been continued supply chain disruptions, resulting in material shortages and delays, as well as increased material costs. 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" in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 for a description of the material risks that the Company currently faces including 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, on occasion, instituted initiatives to incentivize sales of slower-moving inventory through promotional pricing. These programs will continue to be selectively utilized in the upcoming quarters to monetize inventory, promote individual product lines, and improve our cash flow.
As of
Off-Balance Sheet Arrangements
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.
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Cautionary Note 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, positive sales trends and resulting profits, our intention to seek out and engage in a partnership or other arrangement with one or more OEMs, our sales prospects in light of new products such as the potential development of tires for large industrial and agricultural equipment, price increases in response to increases in raw material costs and the availability of capital 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. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 . In addition, there is a risk that the economic repercussions from COVID-19 and supply chain disruptions may be more severe or prolonged 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. Additionally, there is a risk that our price increases or other challenges we face and actions we take in response may result in lower revenues, or that any strategic partnerships or business arrangements do not yield the positive results intended or result in unanticipated adverse consequences, including due to potential friction between the parties. 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. 15
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