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 product line can be divided into 3 main formulation types. 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.
Despite the negative 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 third quarter 2021 were 10.6% higher than the sales level in fiscal third 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, 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 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 in December 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 confident that some of these opportunities will result in new business for Amerityre 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 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 directors, 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.
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:
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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 Company, in light of the impact COVID-19 has had on our business, has decided to implement a price increase on most of its products starting on April 1, 2021. We have seen over the past 4 months significant increases in the pricing of our raw materials. 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 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 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 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.
The following summary table presents a comparison of our results of operations for the fiscal quarters ended March 31, 2021 and 2020 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
March 31,
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For the Nine Months Ended
March 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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2021
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2020
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2021 vs. 2020
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2021
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2020
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2021 vs. 2020
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Net revenues
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$
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1,241
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$
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1,122
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10.6
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%
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$
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3,497
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$
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3,169
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10.4
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%
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Cost of revenues
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(884
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)
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(769
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)
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15.0
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%
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(2,495
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)
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(2,229
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)
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11.9
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%
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Gross profit
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357
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353
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1.1
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%
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1,002
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940
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6.6
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%
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Research & Development
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(26
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(27
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)
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(3.7
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%)
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(77
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)
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(89
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)
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(13.5
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%)
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Sales and Marketing
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(59
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)
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(53
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)
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11.3
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%
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(170
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)
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(147
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)
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15.6
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%
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General and Administrative
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(192
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)
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(173
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)
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11.3
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%
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(588
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)
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(539
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)
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9.1
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%
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Other income (expense)
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-
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-
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0.0
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%
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144
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3
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4700.0
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%
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Net income
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80
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100
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(20.0
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%)
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312
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168
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85.1
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%
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Preferred stock dividend
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-
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(25
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)
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(100.0
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%)
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-
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(75
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)
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(100.0
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%)
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Net income
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$
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80
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$
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75
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6.7
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%
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$
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312
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$
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93
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234.4
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%
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Quarter Ended March 31, 2021 Compared to March 31, 2020
Net Revenues. Net revenues of $1,240,997 for the quarter ended March 31, 2021, represents a 10.6% increase over net revenues of $1,121,805 for the same period in 2020. These results exceeded our expectations. The improved results were mainly driven by higher than expected polyurethane foam tire sales from current customers. We were fortunate that the majority of customers were able to remain open and benefit from increasing business activity as other businesses emerge from shutdowns due to COVID. Revenue for the quarter was constrained by the lack of available raw material, as discussed earlier. The net effect of this raw material situation was to delay sales to the FY 2021 4th quarter. Although a few customers cancelled orders because of these delays, the majority of customers, as of now, have kept their orders in place, which has resulted in our sales backlog being 25% higher than the normal backlog level for this time of year. However, as delays continue to exist, we may see more customers cancel their orders and find tires elsewhere, which could hurt our revenues in upcoming quarters. 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 March 31, 2021 was $883,946 or 71.2% of sales compared to $768,943 or 68.5% of sales for the same period in 2020. We experienced higher raw material costs, particularly chemical feedstocks, during the recent quarter. Our chemical suppliers have informed us that there will likely be continued price increases in the coming months for our raw materials due to the impact of operating issues at the supplier manufacturing facilities on an already tight chemical market. Despite the changes in the government due to the election, we also expect tariffs on Chinese goods 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 price increases on the products sold to our customers. However, continuing increases in raw material costs may result in a situation where Amerityre cannot provide product profitably at a price acceptable to its customers, resulting in Amerityre effectively being priced out of its markets.
Gross Profit. Gross profit for the quarter ended March 31, 2021 was $357,051 compared to $352,862 for the same period in 2020. This increase of $4,189 or 1.1% over the same period in 2020, was primarily driven by the greater sales of product offsetting the higher costs mentioned in the previous section. The March 31, 2021 gross profit reflects a 28.8% gross margin for product sales compared to a gross margin on product sales of 31.5% in 2020.
Research & Development Expenses (R&D). Research and development expenses for the quarter ended March 31, 2021 were $26,192 compared to $26,614 for the same period in 2020. We continue to selectively 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 March 31, 2021 were $59,068 compared to $52,652 for the same period in 2020. The difference between periods relates to higher sales commissions paid, offset by lower trade show expenses, when compared to the same three-month period in 2020
General & Administrative Expenses. General and administrative expenses for the quarter ended March 31, 2021 were $191,589 compared to $173,297 for the same period in 2020, driven by higher compensation costs, including stock compensation, partially offset by lower legal and depreciation costs.
Net Income. Net income for the quarter ended March 31, 2021 was $80,651, compared to net income of $100,296 for the same period in 2020. This represents a decrease in net income of $19,645 or a 20.0% versus the same period in 2020.
Nine Months Ended March 31, 2021 Compared to March 31, 2020
Net Revenues. Net revenues of $3,497,273 for the nine-month period ended March 31, 2021, represents a 10.4% increase over net sales of $3,168,542 for the same period in 2020. 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, our current sales backlog level, as well as an increasing stronger overall economy, we expect sales for the rest of the fiscal year to be strong, unless we see higher than expected order cancellations due to delays or price levels that are too high for our markets.
Cost of Revenues. Cost of revenues for the nine-month period ended March 31, 2021 was $2,495,055 or 71.3% of sales compared to $2,228,300 or 70.3% of sales for the same period in 2020. The previously noted increases in raw material costs were the main factor in these results. We were able to mitigate some of these costs through the sale of higher margin products compared to the previous period in 2020.
Gross Profit. Gross profit for the nine-month period ended March 31, 2021 was $1,002,218 compared to $940,242 for the same period in 2020, an increase of $61,976 or 6.6% over the same period in 2020. The March 31, 2021 gross profit reflects a 28.7% gross margin for product sales compared to a gross margin on product sales of 29.7% in 2020.
Research & Development Expenses (R&D). Research and development expenses for the nine-month period ended March 31, 2021 were $77,170 compared to $88.527 for the same period in 2020. The lower expenses in the fiscal year 2021 period are driven by lower external tire testing expenses compared to the year earlier period.
Sales & Marketing Expenses. Sales and marketing expenses for the nine-month period ended March 31, 2021 were $169,970 compared to $147,432 for the same period in 2020. The difference between periods relates to higher sales commissions paid, offset by lower trade show expenses, when compared to the same nine-month period in 2020.
General & Administrative Expenses. General and administrative expenses for the nine-month period ended March 31, 2021 were $588,089 compared to $539,663 for the same period in 2020, driven by higher compensation costs, including stock compensation, partially offset by lower legal and depreciation costs.
Other Income, net. Other income for the quarter ended Mach 31, 2021 was $144,297 compared to $2,974 for the same period in 2020. 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 nine-month period ended March 31, 2021 of $311,286 compared to a net income of $167,594 for the same period in 2020, an increase in net income of $143,692, or 85.1%.
Liquidity and Capital Resources
Cash Flows
The following table sets forth a summary of our cash flows for the periods below.
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Nine Months ended March 31,
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(in 000’s)
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2021
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2020
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Net cash provided by (used in) operating activities
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$
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53
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$
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(73
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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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(37
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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 increase in cash during the period
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$
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42
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$
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(135
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)
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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) 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 quarter 1 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. In February 2020, the Company secured a $50,000 line of credit with a local community bank. As of March 31, 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.
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 March 31, 2021, 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 May 12, 2021, our total cash balance was $691,307, none of which is restricted; accounts receivables were $334,681; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was $598,553. Our total indebtedness, specifically which management reviews for cash management, was $1,044,076 and includes $520,400 in accounts payable and accrued expenses, $2,000 in current portion of long-term debt, $61,326 in long-term debt and $460,350 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 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 period ended March 31, 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 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 May 12, 2021, the Company has approximately 22,547,000 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 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, the possibility and expected effect of delays in reopening or 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 and beyond, our ability to increase our authorized capital and 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.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” in this report and 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, and vaccine hesitancy and slowing vaccination rates. Additionally, there is a risk that our price increases may result in lower revenues. 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.