AMERITYRE CORP MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
This discussion and analysis section 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, 2021, 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 Amerityreengages in the research and development, manufacturing, and sale of solid polyurethane foam and polyurethane elastomer tires. We have developed unique polyurethane formulations that allow us to make products with superior performance characteristics, compared to conventional rubber tires, in the areas of abrasion resistance, energy efficiency and load-bearing capabilities. Our manufacturing processes are more energy efficient than the traditional rubber tire manufacturing processes, in part because our polyurethane compounds do not require the multiple processing steps, extreme heat, and high pressure necessary to cure rubber. We believe tires produced with our proprietary polyurethane formulations last longer, are less susceptible to failure and are friendlier to the environment when compared to competitor offerings. We focus our business on applications and markets where our advantages in product technology, tire performance, and customer service give us an opportunity to obtain premium pricing. Our product development and marketing efforts are focused on building customer relationships and expanding sales with original equipment manufacturers ("OEMs") and tire distributors. Our competitive advantage is creating unique product solutions for customers who have challenging tire performance requirements that cannot be met by competitor offerings. Closed cell Polyurethane Foam Tires - The sale of polyurethane foam tires to original equipment manufacturers, distributors, and dealers accounts for the majority of our sales revenue. We produce a broad range of tire sizes for the light duty tire market, including bicycle tires, hand truck tires, mobility tires, lawn/garden tires, golf car tires, and light industrial vehicle tires. Despite the ongoing negative effects of COVID-19 on the overall US economy, we experienced higher than expected demand for our polyurethane foam tires in the recent quarter. Sales for the fiscal second quarter 2022 were 32.3% higher than the sales level in fiscal second quarter 2021. We continue to see the strong sales trends that we saw during fiscal year 2021 as our current customer base is experiencing strong sales and our domestically produced tires are attractive to those new customers looking for an alternative source for their tires Our industrial tire product line, which includes our golf car tires, our 480 x 12 tires, and our 570 x 12 tires, continues to see outstanding demand in the marketplace. We expect this trend to continue in the coming quarters. Polyurethane Elastomer Tires - Our elastomer formulations are used to manufacture tires requiring higher levels of abrasion resistance and greater load bearing capability. Forklift tires constitute a large part of this market opportunity, with other industrial and agricultural applications representing other opportunities. Overall sales volumes of our forklift tires remain small, less than 0.1% of our total sales revenue. Price sensitive consumers continue to favor imported solid rubber press-on forklift tires rather than our products, and consequently we have decided not to devote 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, which may lead to new revenue sources in the future. Light Density Elastomer Tires - Demand for our light density elastomer formulation (ElastothaneTM 500) is higher in applications requiring greater abrasion resistance and load bearing capability than our polyurethane foam tires. Lawn and garden tire applications continue to drive increased sales of this formulation, although we have seen some custom tire applications for this formulation as well. We expect Agricultural tires sales to continue to increase in the coming quarters as farmers continue to see higher levels of disposable income. However, economic challenges such as raw material supply shortages could limit anticipated benefits or our ability to capitalize on them. We continue to approach OEMs and large distributors about promoting and utilizing our tires for specific targeted applications, and several are evaluating sample tires. We believe investment in new and improved products is important to the continued growth and success of our overall business, and we will selectively invest in promising opportunities that can be supported within our current financial model. We have several product evaluations programs ongoing which have the potential to develop into significant future business. We expect our current R&D investments to continue to prove to be a prudent investment of our capital resources. 11
A major component of our strategic operating plan is to establish a partnership or other type of business combination with a larger OEM or tire manufacturer who would have a larger distribution channel as well as financial resources to fully leverage our current tire portfolio as well as new products that can be developed using our formulations. We continue to pursue opportunities with larger entities that we believe may help us maximize the potential of our intellectual property and the overall value of the business. We continue to manage supply chain issues and increases in raw material and operating costs, which continue to pressure our Gross Profit Margins. In
January 2022we implemented another price increase on our tire assemblies to mitigate the effects of these cost increases. However, as evidenced by our lower Gross Margins for the recent quarter, we are slightly "behind the cost curve" as our previous price increases were not successful in offsetting all cost increases during the Fiscal 2022 second quarter. We expect that our newest price increase will help to improve our Gross Margins and we will continue to closely manage the cost drivers of our business and take appropriate corrective actions, including further price increases if warranted. However, there can be no assurance that any corrective measures we are undertaking now or that we may attempt in the future will improve our Gross Margins or otherwise achieve their intended purpose, including due to economic conditions and other factors which are beyond our control. Our sales growth over the past year has been very strong. However, it is unclear if the environment of rising costs and the corresponding higher sales prices will adversely affect demand for our products moving forward. We expect raw material availability to continue to be an issue in the upcoming quarters due to ongoing supply chain issues. While we continue to enjoy a strong backlog of business, we may be restricted as to how much product we can produce and sell if raw material is not available on a timely basis or at reasonable costs. We continue to work with our suppliers to ensure that negative supply impacts are minimized to the extent practicable, although in some cases this may result in Amerityreincurring higher raw material costs. As described above, our product line covers diverse market segments which are unrelated in terms of customer base, product distribution, market demands and competition. Our sales team is comprised of independent manufacturer representatives with inside sales support. The Company's continued emphasis on proper product pricing continues to drive more profitable sales. Our website educates the marketplace about our products as well as offers an outlet for online sales.
Factors Affecting Results of Operations
Our operating expenses mainly consisted of the following items:
• 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; • 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 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 Statesgenerally 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 currently have no critical accounting policies that require management’s critical judgments and estimates on matters that may be uncertain.
Table of Contents Results of Operations Our management reviews and analyzes several key performance indicators to manage our business and assess the quality and potential variability of our sales and cash flows. These key performance indicators include: • Revenues, net of returns and trade discounts, which consists of product sales and services and is an indicator of our overall business growth and the success of our sales and marketing efforts; • Gross profit, which is an indicator of both competitive pricing pressures and the cost of goods sold of our products and the mix of product and license fees, if any; • Growth in our customer base, which is an indicator of the success of our sales efforts; and • Distribution of sales across our products offered. The following summary table presents a comparison of our results of operations for the fiscal quarters ended
December 31, 2021and 2020 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below. For the Three Months Ended For the Six Months Ended December 31, December 31, (in 000's) Change (in 000's) Change 2021 vs. 2021 vs. 2021 2020 2020 2021 2020 2020 Net revenues $ 1,453 $ 1,20520.6 % $ 2,849 $ 2,25626.3 % Cost of revenues (1,123 ) (904 ) 24.4 % (2,134 ) (1,611 ) 32.5 % Gross profit 330 301 9.6 % 715 645 10.9 % Research & Development (24 ) (31 ) (22.6 %) (46 ) (51 ) (9.8 %) Sales and Marketing (74 ) (51 ) 45.1 % (142 ) (111 ) 27.9 % ) General and Administrative (213 ) (186 ) 13.9 % (445 ) (396 ) 12.4 % Other income (expense) 1 143 (99.3 %) 4 144 (97.2 %) Net income $ 20 $ 176(88.6 %) $ 86 $ 231(62.8 %)
Net Revenues. Net revenues of
$1,453,499for the quarter ended December 31, 2021, represents a 20.6% increase over net revenues of $1,204,990for the same period in 2020. These results exceeded our expectations as we continued to successfully navigate the challenges presented by the COVID-19 pandemic, including limited raw material availability, higher material costs and other supply chain issues. We expect our polyurethane foam products to continue to constitute the majority of our sales going forward. The increase is due to increases in our prices to offset the raw material prices plus increase in demand. Cost of Revenues. Cost of revenues for the quarter ended December 31, 2021was $1,123,434or 77.3% of sales compared to $903,543or 75.0% of sales for the same period in 2020. We experienced higher raw material costs, particularly chemical feedstocks, during the recent quarter which pressured gross profit margins. Our raw material chemical suppliers have informed us that there will likely be continued price increases in the coming months due to tight raw material supplies as well as continued high market demand. The supply chain issues in procuring material from overseas has caused higher costs and long delays for our steel rims. We expect these headwinds to continue to pressure our Gross Margins throughout the remainder of fiscal year 2022. We have mitigated some of these issues by increasing the sales prices of our tires. However, continuing increases in raw material costs may result in reduced product sales if we are forced to turn away sales because they are at sales price levels that are unprofitable, or if customers refuse to purchase our products at the increased prices. Gross Profit. Gross profit for the quarter ended December 31, 2021was $330,065compared to $301,447for the same period in 2020. This increase of $28,618or 9.6% over the same period in 2020, was primarily driven by greater sales volumes. The December 31, 2021gross profit reflects a 22.7% gross margin for product sales compared to a gross margin on product sales of 25.0% in 2020. Higher raw material costs that were not completely offset by higher sales prices for our tire products reduced our Gross Margins in the recent quarter. 13
Research & Development Expenses (R&D). Research and development expenses for the quarter ended
December 31, 2021were $24,399compared to $30,507for the same period in 2020. We continue to invest in product formulation and new product development where appropriate to support our business plan. Sales & Marketing Expenses. Sales and marketing expenses for the quarter ended December 31, 2021were $74,048as compared to $51,102for the same period in 2020. The difference between periods relates to higher sales commissions paid and trade show expenses as the Company attended its first trade show since 2019 in October 2021, when compared to the same three-month period in 2020. General & Administrative Expenses. General and administrative expenses for the quarter ended December 31, 2021were $213,392compared to $186,014for the same period in 2020, driven by higher compensation costs, bank fees, consulting expense partially offset by lower legal costs. Other Income (Expense), net. Other income, net, for the quarter ended December 31, 2021was $801compared to $143,028for the same period in 2020. The forgiveness of our loan from the Small Business Administration Paycheck Protection Program ("PPP loan") was received in November 2020and accounted for the majority of the gain in the quarter ended December 31, 2020. Net Income. Net income for the quarter ended December 31, 2021was $19,027, compared to net income of $176,852for the same period in 2020. The forgiveness of our PPP loan in the quarter ended December 31, 2020resulted in a gain of $149,570. Without this one-time gain, the difference in net income between the periods was $27,282, or a 31.3% decrease in net income. The decrease in net income for the period ended December 31, 2021was also driven by lower Gross Margins due to higher material and operating costs incurred during the quarter
Net Revenues. Net revenues of
$2,849,113for the six-month period ended December 31, 2021, represents a 26.3% increase over net sales of $2,256,276for the same period in 2020. These results exceeded our expectations as we continued to navigate the challenges presented by the COVID-19 pandemic, including limited raw material availability, higher supply costs and other supply chain issues. We expect our polyurethane foam products to continue to constitute the majority of our sales going forward. The increase is due to increases in our prices to offset the raw material prices plus increase in demand. Cost of Revenues. Cost of revenues for the six-month period ended December 31, 2021was $2,134,276or 74.9% of sales compared to $1,611,109or 71.4% of sales for the same period in 2020. We experienced higher raw material costs, particularly chemical feedstocks, during the recent quarter which pressured gross profit margins. Our chemical suppliers have informed us that there will likely be continued price increases in the coming months due to a tight supply of available raw materials in the market, as well as increased market demand. The supply chain issues, particularly in procuring material from overseas, has caused higher costs and long delays for our steel rims. We expect these headwinds to continue to pressure our Gross Margins throughout fiscal year 2022. We have mitigated some of these issues by increasing the sales prices of our tires.
Gross profit. Gross profit for the six-month period ended
Research & Development Expenses (R&D). Research and development expenses for the six-month period ended
December 31, 2021were $45,966compared to $50,978for the same period in 2020. We continue to invest in product formulation and new product development where management deems appropriate to support our business plan.
Sales and Marketing Expenses. Sales and marketing expenses for the six-month period ended
General & Administrative Expenses. General and administrative expenses for the six-month period ended
December 31, 2021were $446,200compared to $396,500for the same period in 2020, driven by higher compensation costs, bank fees, consulting expense partially offset by lower legal costs. 14
Other income, net. Other income for the quarter ended
Net Income. Net income for the six-month period ended
December 31, 2021of $84,127compared to a net income of $230,635for the same period in 2020, a decrease in net income of $146,508, or 62.8%. Without the effect of the PPP loan forgiveness mentioned earlier, the net income for the six-month period ending December 31, 2020would be $81,065, and the comparison with the period ending December 31, 2021would show a net income increase of $3,062, or 3.63% compared to the period ending December 31, 2020.
Cash and capital resources
Cash Flows The following table sets forth a summary of our cash flows for the periods below. Six Months ended
Dec. 31, (in 000's) 2021 2020
Net cash provided (used) by operating activities $178
Net cash used by investing activities
(150 ) (11 ) Net cash used by financing activities -
Net increase (decrease) in cash during the period $ 28
$ (40 )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 increased costs and extended time required to receive imported materials (which are paid for when they are ready to ship from the manufacturer, not after they are received for use by the Company) as well as Management's decision to increase chemical stock levels when extra material became available for purchase. The Company completed its upgrade of its Production pouring systems in September 2021, which was completely paid from cash reserves. The increase in cash provided by operating activities is due to lower levels of Account Receivables compared to the year earlier period.
The primary driver of our cash provided by operating activities was the collection of accounts receivable offset by the increased cost (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. In
February 2020, the Company secured a $50,000line of credit with a local community bank. As of December 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.
Cash position, outstanding debt and future capital requirements
February 9, 2022, our total cash balance was $359,764, none of which is restricted, accounts receivables was $660,321, inventory, net of reserves for slow moving or obsolete inventory, and other current assets was $713,581. Our total indebtedness, specifically which management reviews for cash management, was $1,102,085and includes $652,662in accounts payable and accrued expenses, $24,445in deferred revenue, $2,000in current portion of long-term debt, $60,878in long-term debt and $362,100in 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. 15
In assessing our liquidity, management reviews and analyzes our current cash, accounts receivable, accounts payable, capital expenditure commitments, cash requirements and other obligations. In connection with the preparation of our financial statements for the fiscal year ended
June 30, 2021, we have analyzed our cash needs for the next 12 months. We have concluded that our available cash and accounts receivables are sufficient to meet our current minimum working capital, capital expenditure and other cash requirements for this period. Although we have seen a significant increase in business activity in recent quarters, there can be no assurance that a resurgence of the COVID-19 virus will not cause a disruption in our markets that causes a significant decrease in demand from our customers. While many government restrictions have been relaxed and the economy has continued to open in more jurisdictions, the emergence of new variants of COVID-19 may lead to possible resurgences of the virus. This could result in new restrictions on our customers or suppliers located or servicing these affected jurisdictions. Among the adverse consequences caused by the pandemic have been continued supply chain disruptions, resulting in material shortages and delays, as well as increased material costs. The long-term financial impact on our business cannot be reasonably estimated at this time. As a result, the effects of COVID-19 may not be fully reflected in our financial results until future periods. Refer to "Item 1A - Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021for a description of the material risks that the Company currently faces including in connection with COVID-19. If there is a new shutdown of the economy, reduction in demand for our products or other adverse effect on our business, we may lack sufficient working capital to meet our needs for the next 12 months.
The Company has, from time to time, implemented initiatives to incentivize sales of slow moving inventory through promotional pricing. These programs will continue to be used selectively in future quarters to monetize inventory, promote individual product lines and improve our cash flow.
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.
Caution Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding economic conditions in general and in the agricultural market, in particular, positive sales trends and resulting profits, continued demand for our products and those produced by our customers, our intention to seek out and engage in a partnership or other arrangement with one or more OEMs, our ability to successfully manage and respond to supply chain issues and other uncertainties, our sales prospects in light of new products such as the potential development of tires for large industrial and agricultural equipment, price increases in response to increases in raw material costs and the results of such price increases on our gross margins, and the availability of capital and liquidity. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "could," "target," "potential," "is likely," "will," "expect" and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2021. In addition, there is a risk that the economic repercussions from COVID-19 and supply chain disruptions may be more severe or prolonged than we currently expect, particularly with the new strains emerging and the uncertainty if existing vaccinations will be effective against the new strains, and vaccine hesitancy. Additionally, there is a risk that our price increases or other challenges we face and actions we take in response may result in lower revenues or the loss of future business from our customers, or that any strategic partnerships or business arrangements do not yield the positive results intended or result in unanticipated adverse consequences, including due to potential friction between the parties. New risk factors emerge from time-to-time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements described in this report, whether as a result of new information, future events, changed circumstances or any other reason after the date this report is filed. 16
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