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. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, 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.
Overview
Amerityre 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 most recent activities in these areas are set forth below:
Light Duty Polyurethane Foam Tires – The sale of polyurethane foam tires to original equipment manufacturers, distributors and dealers accounts for the majority of our revenue. We produce a broad range of products for the light duty tire market, including bicycle tires, hand truck tires, mobility tires, and lawn/garden tires. 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.
Despite the effects of COVID-19 on the overall business climate, we experienced higher than expected demand for our polyurethane foam tires in the recent quarter. Sales for the fiscal second quarter 2021 were 9.9% higher than the sales level in fiscal second quarter 2020. Some of these sales are likely “catch up” sales related to the reopening of our customers from the COVID shutdown, but we are seeing the same strong sales trends that we saw last year during the pre-COVID period.
Polyurethane Elastomer Industrial Tires – 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. 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 offer the 480 x 12 and 570 x 12 tires in both polyurethane foam and light density elastomer formulations. We expect these tires to continue to grow in popularity in the coming quarters.
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. Elastothane TM 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 continue to believe this new formulation represents a significant upside opportunity for our product portfolio.
Agricultural Tires – Agricultural tires sales continue to be negatively impacted by low farm income levels. However, the recent increase in farm commodity prices may result in more disposal income for farmers in 2021. We continue to approach OEMs and large distributors about promoting and utilizing our tires for certain applications, but progress with these potential customers has been limited to date. 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 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.
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 external sales team is comprised of independent manufacturer representatives. 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:
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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;
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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;
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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;
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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
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Stock based compensation expense related to stock and stock option awards issued to employees and consultants for services performed for the Company.
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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, 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.
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.
Valuation of Intangible Assets and Goodwill
Patent and trademark costs have been capitalized at December 31, 2020, totaling $487,633 with accumulated amortization of $403,396 for a net book value of $84,237. Patent and trademark costs capitalized at December 31, 2019, totaled $487,633 with accumulated amortization of $385,880 for a net book value of $101,753.
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. Amortization begins once the patents have been issued. As of December 31, 2020, and 2019, respectively, there were no pending patents. Annually, pending or expired patents are inventoried and analyzed, which resulted in the recognition of a loss on abandonment, expiration or retirement of patents and trademarks of $-0- for each of the three and six month periods ended December 31, 2020 and 2019, respectively.
Amortization expense for the periods ended December 31, 2020 and 2019 was $8,667 and $8,849 respectively. The Company evaluates the recoverability of intangibles and reviews the amortization period on a continual basis utilizing the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other. 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, more likely than not, the patents will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
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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:
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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;
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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 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 fiscal quarters ended December 31, 2020 and 2019 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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(in 000’s)
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Change
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(in 000’s)
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Change
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2020
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2019
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2020 vs. 2019
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2020
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2019
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2020 vs. 2019
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Net revenues
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$
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1,205
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$
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1,067
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12.9
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%
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$
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2,256
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$
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2,047
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10.2
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%
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Cost of revenues
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(904
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(768
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17.6
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%
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(1,611
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)
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(1,460
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)
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10.3
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%
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Gross profit
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301
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299
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0.3
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%
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645
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587
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9.9
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%
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Research & Development
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(31
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(36
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(13.9
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%)
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(51
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)
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(62
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(17.7
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%)
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Sales and Marketing
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(51
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)
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(51
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0.0
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%
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(111
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(95
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)
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16.8
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%
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General and Administrative
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(186
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)
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(174
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)
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6.9
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%
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(396)
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)
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(366
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8.2
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%
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Other income (expense)
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143
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-
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100.0
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%
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144
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3
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4,700
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%
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Net income
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176
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38
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363.2
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%
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231
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67
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244.8
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%
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Preferred stock dividend
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-
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(25
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(100.0
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%)
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-
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(50
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(100.0
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%)
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Net income
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$
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176
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$
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13
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1,253.8
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%
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$
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231
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$
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17
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1,258.8
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%
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Quarter Ended December 31, 2020 Compared to December 31, 2019
Net Revenues. Net revenues of $1,204,990 for the quarter ended December 31, 2020, represents a 12.9% increase over net revenues of $1,067,440 for the same period in 2019. These results exceeded our expectations. The improved results were mainly driven by higher than expected polyurethane foam tire sales from current customers benefitting from business reopening from the COVID-19 shutdown. We expect our polyurethane foam products to continue to account for the majority of our sales during the upcoming fiscal year.
Cost of Revenues. Cost of revenues for the quarter ended December 31, 2020 was $903,543 or 75.0% of sales compared to $768,758 or 72.0% of sales for the same period in 2019. We experienced higher raw material costs, particularly chemical feedstocks, during the recent quarter. Our chemical suppliers have informed us that there will likely be significant price increases in the coming months for our raw materials due to operating issues at the supplier manufacturing facilities and increased difficulties in receipt of imported material. Despite the changes in the government due to the election, we also expect tariffs to remain in place for the foreseeable future. We expect these headwinds to continue to pressure our Gross Margins for the rest of the fiscal year, at a minimum. We are looking at ways to mitigate these adverse factors, including the adjustment of product pricing to our customers.
Gross Profit. Gross profit for the quarter ended December 31, 2020 was $301,447 compared to $298,682 for the same period in 2019. This increase of $2,765 or 9.9% over the same period in 2019, was primarily driven by the greater sales of higher margin products. The December 31, 2020 gross profit reflects a 25.0% gross margin for product sales compared to a gross margin on product sales of 28.0% in 2019.
Research & Development Expenses (R&D). Research and development expenses for the quarter ended December 31, 2020 were $30,507 compared to $35,897 for the same period in 2019. 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 ended December 31, 2020 were $51,102, virtually identical to the $51,309 spent on Sales and Marketing expenses for the same period in 2019.
General & Administrative Expenses. General and administrative expenses for the quarter ended December 31, 2020 were $186,014 compared to $172,936 for the same period in 2019, driven by higher compensation costs partially offset by lower legal and depreciation costs.
Other Income (Expense), net. Other income, net, for the quarter ended December 31, 2020 was $143,028 compared to an expense position of $145 for the same period in 2019. The primary driver of this variance was the forgiveness of our loan from the Small Business Administration Paycheck Protection Program.
Net Income. Net income for the quarter ended December 31, 2020 was $176,852, compared to net income of $38,395 for the same period in 2019, resulting in a positive increase in net income of $138,457. or a 363.2% increase in net income versus the same period in 2019.
Six Months Ended December 31, 2020 Compared to December 31, 2019
Net Revenues. Net revenues of $2,256,276 for the six-month period ended December 31, 2020, represents a 10.2% increase over net sales of $2,046,737 for the same period in 2019. These results were above our expectations and driven by increased demand for polyurethane foam tires from current customers. With the expected continuation of the reopening of businesses closed due to COVID -19, as well as an increasing stronger overall economy, we expect sales for the rest of the fiscal year to be strong.
Cost of Revenues. Cost of revenues for the six-month period ended December 31, 2020 was $1,611,109 or 71.4% of sales compared to $1,459,357 or 71.3% of sales for the same period in 2019. This result was achieved despite the previously noted increases in raw material costs. We were able to mitigate some of these costs through the sale of higher margin products compared to the previous period in 2019.
Gross Profit. Gross profit for the six-month period ended December 31, 2020 was $645,167 compared to $587,380 for the same period in 2019, an increase of $57,787 or 9.9% over the same period in 2019. The December 31, 2020 gross profit reflects a 28.6% gross margin for product sales compared to a gross margin on product sales of 28.7% in 2019.
Research & Development Expenses (R&D). Research and development expenses for the six-month period ended December 31, 2020 were $50,978 compared to $61,913 for the same period in 2019. The lower expenses in the fiscal year 2020 period are driven by lower tire testing expenses compared to the year earlier period.
Sales & Marketing Expenses. Sales and marketing expenses for the six-month period ended December 31, 2020 were $110,902 compared to $94,780 for the same period in 2019. The difference between periods relates to higher sales commissions paid, offset by lower trade show expenses, when compared to the same six-month period in 2019.
General & Administrative Expenses. General and administrative expenses for the six-month period ended December 31, 2020 were $396,500 compared to $366,366 for the same period in 2019. The difference between periods is due to higher compensation costs partially offset by lower legal expenses and depreciation costs.
Other Income, net. Other income for the quarter ended December 31, 2020 was $143,848 compared to $2,977 for the same period in 2019. The primary driver of this variance is the forgiveness of our loan from the Small Business Administration Paycheck Protection Program.
Net Income. Net income for the six-month period ended December 31, 2020 of $230,635 compared to a net income of $67,298 for the same period in 2019, an increase in net income of $163,337, or 244.8%.
Liquidity and Capital Resources
Cash Flows
The following table sets forth a summary of our cash flows for the periods below.
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Six Months ended Dec. 31,
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(in 000’s)
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2020
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2019
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Net cash used in operating activities
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$
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(29
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)
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$
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(162
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)
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Net cash used in investing activities
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(11
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)
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(30
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)
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Net cash used in financing activities
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-
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(25
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)
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Net decrease in cash during the period
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$
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(40
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)
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$
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(217
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)
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Net Cash Used by Operating Activities. In 2020, the Company decided to use a portion of its available cash to make a lump sum payment for annual insurance premiums rather than finance these expenditures over the course of the year. As a result, our prepaid assets increased in the period. During the fiscal 2021 second quarter we also saw a rise in finished product inventories in advance of our Christmas holiday shutdown, in order to be prepared for customer product shipments in early January. Net cash used in operating activities was $29,042 for the period ended December 31, 2020 compared to net cash provided by operating activities of $161,525 for the same period in 2019.
Non-cash items include depreciation and amortization, stock-based compensation, the forgiveness of our loan from the Small Business Administration Paycheck Protection Program, proceeds of which were received in fiscal year 2020, and asset impairment. Amortization includes the amortization of our right to use asset, our facility rent. Our net income was $230,635 for the six-month period ended December 31, 2020 compared to net income of $67,298 for the same six-month period in 2019. The net income for the six-month period ended December 31, 2020 included non-cash expenses for depreciation and amortization of $108,161, stock-based compensation of $23,810, debt forgiveness of $149,570, and loss on impairment of assets $20,078. As of December 31, 2019, depreciation and amortization was $120,762 and stock-based compensation totaled $19,654.
Net Cash Used by Investing Activities. Net cash used by investing activities was $10,785 for the six-month period ended December 31, 2020 and $30,318 for the same period in 2019. In fiscal year 2021, we invested in leasehold improvements by replacing our plant office HVAC units.
Net Cash Used by Financing Activities. Net cash used by financing activities was $315 for the six-month period December 31, 2020 and $25,121 for the same period in 2019. In fiscal year 2021 this was payment towards notes payable related to our forklift tires.
Our principal sources of liquidity consist of cash and payments received from our customers. In February 2020, the Company secured a $50,000 line of credit with a local community bank. As of December 31, 2020, the line had not been used.
Historically, management 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.
As part of its effort to maintain adequate working capital levels, Amerityre has not declared dividends on its preferred stock since June 2016. These unpaid dividends have accrued in the amount of $25,000 per quarter since that time. The preferred stock automatically converted on May 13, 2020 into 20,000,000 shares of common stock.
We continue to have access to a short-term receivable factoring agreement with a third party to sell our receivable invoices. This agreement enables us to sell individual customer invoices for faster cash flow to the Company. As of December 31, 2020, we have not needed to activate this financing option due to increased focus on enforcement of established collection policies and proactive communication with customers.
Cash Position, Outstanding Indebtedness and Future Capital Requirements
At February 8, 2021, our total cash balance was $673,535, none of which is restricted; accounts receivables were $429,709; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was $605,814. Our total indebtedness, specifically which management reviews for cash management, was $1,057,996 and includes $497,645 in accounts payable and accrued expenses, $2,000 in current portion of long-term debt, $61,551 in long-term debt and $496,800 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, and additional financing was secured in April 2020 from the U.S. government Paycheck Protection Program, a Small Business Administration loan program initiated to combat the negative effects of COVID-19 on U.S. small businesses. These new sources of liquidity have been key tools to provide the Company with the tools to overcome negative effects of the coronavirus on our business.
We are focused on the sale and distribution of profitable product lines. Management continues to look for further financing facilities at affordable terms that will allow the Company to maintain sufficient working capital to capitalize on new sales growth opportunities. We are limiting our capital expenditures to that required to maintain current manufacturing capability or support key business initiatives identified in our strategic sales plan.
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 period ended December 31, 2020, 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. We expect to limit manufacturing and sales operation investments until the negative effects of the COVID-19 pandemic can be fully quantified and addressed. Although we have seen a significant increase in business activity in the recent quarter, we are not assured that a resurgence of the COVID-19 virus will not cause another significant decrease in demand from our customers If there is a new shutdown of the economy, and because we do not qualify at present for additional Paycheck Protection Program funding, 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 February 8, 2021, the Company has approximately 27,547,000 shares authorized and available for issuance. Although we are reluctant to raise money through stock sales at what we believe are dilutive share prices, these authorized but unissued and unreserved shares of our common stock can be utilized if necessary, to raise new funds.
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.
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 the COVID-19 pandemic and the reopening of the economy and anticipated increase in product sales resulting therefrom, the possibility and expected effect of future shutdowns in connection with COVID-19, operational actions taken by us to reduce expenditures as the economy continues to recover, expected sales levels for the remainder of the fiscal year ending June 30, 2021, our ability to increase our authorized capital and pursue future financings, increased demand for our products and resulting sales and profits, continued strength of our current polyurethane foam tire market segment, the prudence of our research and development investments 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 ended June 30, 2020. 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. 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.