AMERITYRE CORPORATION 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 represents 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. 19
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Despite the ongoing negative effects of COVID-19, supply chain bottlenecks, and severe inflation on the overall US economy, we experienced higher than expected record demand for our polyurethane foam tires in the recent quarter. Sales for the fiscal fourth quarter 2022 were 40.8% higher than the sales level in fiscal fourth quarter 2021. We continue to see strong sales demand, as we engage new customers and expand our customer base. 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 strong growth. We expect these tires to continue to grow in popularity as more people discover these tires for industrial applications. In fiscal year 2022 we sold a record number of golf cart tire assemblies (18 x 8.50 tire assemblies). 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. Light Density Elastomer Tires - The Company continues to see great interest in its light-density elastomer formulation for use in tire applications where customers need higher abrasion resistance and load bearing capability. Our Elastothane® 500 formulation provides better abrasion resistance and overall 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 farm income benefits from higher crop prices and farmers have more disposable income. We continue to approach OEMs and large distributors about promoting and utilizing our tires for certain agricultural applications, but to date we have not been able to secure a partnership that brings us significant business. and several are evaluating sample tires. We believe investment in new and improved products is vital 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 evaluation 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 2021 was the desire to increase our product distribution through partnerships with large OEMs and distributors. We continue to pursue discussions with various entities to establish these relationships, but unfortunately we have not been successful in completing an arrangement. However, we maintain that an agreement with a partner that can provide an established distribution network and/or financial resources is important to enableAmerityre to quickly scale its product portfolio in key market segments. 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 a growing 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 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
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;
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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 stock and stock option
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.
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, both
in new
customer
accounts
and sales
of new
products
to
existing
customers,
which is
an
indicator
of the
success of
our sales
efforts;
and
• Distribution of sales across our products offered.
The following summary table presents a comparison of our results of operations
for the fiscal years ended June 30, 2022 and 2021 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)
2022 2021 2022 vs. 2021
Net revenues $ 6,496 $ 4,863 33.6 %
Cost of revenues (4,741 ) (3,579 ) 32.5 %
Gross profit 1,755 1,284 36.7 %
Research and development expenses (102 ) (102 ) 0.0 %
Sales and marketing expense (281 ) (225 ) 24.9 %
General and administrative expense (1) (963 ) (860 ) 12.0 %
Gain on debt extinguishment - 150 (100.0 )%
Loss on assets, due to write down or disposal - (26 ) (100.0 )%
Other income 24 38 (36.8 )%
Net income $ 433 $ 259 67.8 %
(1) Includes stock-based compensation expense of
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Year Ended
Net revenues. Net revenues of$6,495,530 for the year endedJune 30, 2022 , represents an increase of$1,632,118 or 33.6%, over net revenues of 4,863,412 during the year endedJune 30, 2021 . These represent record revenue results forAmerityre . The results were primarily driven by increased demand for polyurethane foam tires from current customers We expect sales for the upcoming fiscal year to be level with fiscal year 2022 results, as the negative effects of an expected slowing US economy are offset by sales to new customer accounts. Cost of revenues. Cost of revenues for the year endedJune 30, 2022 , was$4,740,931 or 73.0% of revenues compared to$3,579,227 or 73.6% of revenues for the year endedJune 30, 2021 . We experienced higher raw material costs, particularly chemical feedstocks, during the recent quarter which pressured gross profit margins. We were successful at maintaining margins through the price increases we implemented during the year. We expect raw material prices to stabilize in fiscal year 2023, as US government monetary policy slows the economy and demand slows to a point where available supply and demand equalize, we will continue to monitor our product pricing to determine if any adjustments are required due to operating cost changes. We recognize that 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, 2022 , of$1,754,599 represents a 36.7% increase over gross profit of$1,284,185 for the year endedJune 30, 2021 . The fiscal year 2022 gross profit reflects a 27.0% gross margin for product sales compared to a gross margin on product sales of 26.4% for fiscal year 2021. The level gross margin figures year over year indicates that our product pricing strategy was successful in covering the cost increases in raw materials and other operating costs.
Research and Development expenses. Research and development expense of
Sales and Marketing expenses. Sales and marketing expense of$281,440 for the fiscal year endedJune 30, 2022 , represents a 24.9% increase over expenses of$224,686 for the fiscal year endedJune 30, 2021 . The difference between periods relates to higher sales commission expense due to higher overall sales General and Administrative expenses. General and administrative expenses of$963,890 for the year endedJune 30, 2022 , represents a 11.8% increase over the same expense of$860,693 for the year endedJune 30, 2021 . The increase was caused by higher executive compensation, higher merchant processing fees by customers paying with a credit card, offset by lower legal fees and warranty expense. We continue to pursue more efficient ways to conduct our business activities. Other Income (Expense). Other income was$24,435 for the year endedJune 30, 2022 , which is lower than the figure from fiscal year 2021. Other income of$161,795 in the fiscal year endedJune 30, 2021 , includes 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. Net Income. The net income for the year endedJune 30, 2022 , of$431,887 represents a 67.2% increase from the$258,336 net income for the year endedJune 30, 2021 . Removing the one-time, positive effect of the$149,500 PPP loan forgiveness, the net income increase year over year was 296.8%. The fiscal year net income of$431,887 represents a record annual profit forAmerityre .
Liquidity and Capital Resources
Cash Flows The following table sets forth our cash flows for the fiscal years endedJune 30, 2022 , and 20201. Years endedJune 30 , (in 000's) 2022 2021
Net cash provided by/(used in) operating activities
(136 ) Net cash used in investing activities (157 ) (14 ) Net cash (used in) financing activities (1 ) (1 ) Net increase/(decrease) in cash during period$ 289 $ (151 ) 22
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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 to upgrade production equipment during fiscal year 2023, and we are completing an analysis to determine if debt financing is required to complete the project.
The major driver in our cash provided by operating activities was the collection of accounts receivable offset by increased costs (and therefore value) of inventory on the balance sheet.
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. The Company drew down from this line of credit for the first time inFebruary 2022 due to a late customer payment. The amount borrowed was paid back in full inMarch 2022 . As ofMarch 31, 2022 , the Company also negotiated to increase the line from$50,000 to$100,000 and reduce the variable interest rate from 5.75% to 4.50%. 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
OnSeptember 14, 2022 , our total cash balance was$1,099,392 , none of which is restricted; accounts receivables were$408,463 ; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was$1,021,508 . Our total indebtedness, specifically which management reviews for cash management, was$1,022,792 and includes$696,829 in accounts payable and accrued expenses,$2,000 in current portion of long-term debt,$60,713 in long-term debt and$263,250 in total operating lease liability. We continue to take actions to improve our liquidity and access to capital resources. Management believes that an equity financing in the current market environment at the current share price would be too dilutive and not in the best interests of our shareholders. In the past year we have successfully increased the limit on our existing bank line of credit. We have utilized this line of credit as short-term access to capital which has allowed us to make strategic purchases of raw materials. 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, 2022 , we have analyzed our cash needs for the next twelve months. We believe that our available cash, accounts receivables, and existing bank credit lines 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. The emergence of new and transmittable variants of COVID-19 may result in possible resurgence of the virus and 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, 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, the impact of inflation and the effect of rising interest rates on the economy and our business, the possible recession, future tariffs particularly on Chinese imports, our level of overtime, 2023 capital improvements, the effect of COVID-19, 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 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. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors" in this report. 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 due to of new information, future events, changed circumstances or any other reason after the date this report is filed.
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