AMERITYRE CORPORATION 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 endedJune 30, 2021 , as well as those discussed elsewhere in this report including under "Item 1A - Risk Factors." The historical results set forth in this discussion and analyses are not necessarily indicative of trends with respect to any actual or projected future financial performance. This discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report. OverviewAmerityre engages in the research and development, manufacturing, and sale of solid polyurethane foam and polyurethane elastomer tires. We have developed unique polyurethane formulations that allow us to make products with superior performance characteristics, compared to conventional rubber tires, in the areas of abrasion resistance, energy efficiency and load-bearing capabilities. Our manufacturing processes are more energy efficient than the traditional rubber tire manufacturing processes, in part because our polyurethane compounds do not require the multiple processing steps, extreme heat, and high pressure necessary to cure rubber. We believe tires produced with our proprietary polyurethane formulations last longer, are less susceptible to failure and are friendlier to the environment when compared to competitor offerings. We focus our business on applications and markets where our advantages in product technology, tire performance, and customer service give us an opportunity to obtain premium pricing. Our product development and marketing efforts are focused on building customer relationships and expanding sales with original equipment manufacturers ("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 record demand for our polyurethane foam tires in the recent quarter. Sales for the fiscal third quarter 2022 were 38.8% higher than the sales level in fiscal third quarter 2021. We continue to see strong sales as our current customer base is experiencing a resurgence in their businesses and our domestically produced tires continue to be 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. Because of our inability to gain traction with price sensitive consumers thus far, and we continue to elect not to devote significant resources towards promoting this product line. However, we continue to receive sample orders from OEMs to evaluate the potential use of 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
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A major component of our FY 2022 strategic operating plan is to establish a partnership or other type of business combination with a larger OEM, tire manufacturer, or strategic investor 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. To date we have been unsuccessful in closing a significant partnership deal. 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. InJanuary 2022 we implemented a price increase on our tire assemblies to mitigate the effects of these cost increases, and we have announced another small price increase for most products effectiveMay 1st, 2022 . This has enabled us to maintain our gross margins for the recent quarter. With the supplemental price increase inMay 2022 , we believe we can minimize the negative impacts of the announced price increases of our raw materials. 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. Additionally, the recent return of higher inflation rates has prompted theFederal Reserve to raise interest rates in response. This action is historically often followed by a general market recession, which has the potential to materially adversely affect our product demand and sales, be it by driving up production costs and product prices, reducing customer spending, or other factors. See "Item 1A. Risk Factors." 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 inAmerityre incurring 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 and customer service continues to drive more profitable sales. Our website educates the marketplace about our products as well as offers an outlet for online sales.
Factors Affecting Results of Operations
Our operating expenses consisted primarily of the following:
• Cost of sales,
which consists
primarily of
raw materials,
components and
production
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 States generally accepted accounting principles. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. On an
ongoing basis, we evaluate our estimates, including those related to
uncollectible receivables, inventory valuation, deferred compensation and
contingencies. We base our estimates on historical performance and on various
other assumptions that we believe to be reasonable under the circumstances.
These estimates allow us to make judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.
At present we do not have any critical accounting policies that require critical management judgments and estimates about matters that may be uncertain.
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Results of Operations
Our management reviews and analyzes several key performance indicators 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 March 31, 2022 and 2021 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 Nine Months Ended
March 31, March 31,
(in 000's) Change (in 000's) Change
2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Net revenues $ 1,722 $ 1,241 38.8 % $ 4,571 $ 3,497 30.7 %
Cost of revenues (1,152 ) (884 ) 30.3 % (3,286 ) (2,495 ) 31.7 %
Gross profit 570 357 59.7 % 1,285 1,002 28.2 %
Research & Development (23 ) (26 ) (11.5 %) (69 ) (77 ) (10.4 %)
Sales and Marketing (66 ) (59 ) 11.9 % (208 ) (170 ) 22.4 %
General and Administrative (221 ) (192 ) 15.1 % (666 ) (588 ) 13.3 %
Other income (expense) 18 - 100.0 % 22 144 (85.0 %)
Net income $ 278 $ 80 247.5 % $ 364 $ 312 17.0 %
Quarter Ended
Net Revenues. Net revenues of$1,721,832 for the quarter endedMarch 31, 2022 , represents a 38.8% increase over net revenues of$1,240,997 for the same period in 2021, and is an all-time record quarterly revenue total forAmerityre . These results exceeded our expectations as demand for our products increased while 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 represent the majority of our total sales going forward. The increase in net sales reflects both higher sales prices and higher unit sales across all of our product lines. Cost of Revenues. Cost of revenues for the quarter endedMarch 31, 2022 was$1,151,551 or 66.9% of sales compared to$883,946 or 71.2% of sales for the same period in 2021. We experienced higher raw material costs, particularly chemical feedstocks, during the recent quarter, but higher sales prices and a favorable product mix allowed us to increase our Gross Margins compared to the year earlier period. Our raw material chemical suppliers continue to inform us that higher raw material prices are expected at least through the remainder of calendar year 2022. The procurement of materials from overseas sources continues to be difficult and expensive. We expect these headwinds to continue to pressure our Gross Margins throughout the remainder of calendar year 2022. We have implemented price increases for our products inJanuary 2022 and have announced a second set of price increases effectiveMay 2022 to mitigate the effect of these price increases. 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 sales prices. Gross Profit. Gross profit for the quarter endedMarch 31, 2022 was$570,281 compared to$357,051 for the same period in 2021. This increase of$213,230 or 59.7% over the same period in 2021, was primarily driven by greater sales volumes. The gross margin for the quarter endedMarch 31, 2022 was 33.1% compared to a gross margin of 28.8% for the same period in 2021. The increase in gross margins was due to higher sales prices and sales of more profitable products compared to the earlier period 13
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Research & Development Expenses (R&D). Research and development expenses for the
quarter ended
Sales & Marketing Expenses. Sales and marketing expenses for the quarter endedMarch 31, 2022 were$65,956 as compared to$59,068 for the same period in 2021. The difference between periods relates to higher sales commissions paid due to higher sales volumes. General & Administrative Expenses. General and administrative expenses for the quarter endedMarch 31, 2022 were$220,891 compared to$191,589 for the same period in 2021, driven by higher compensation costs, bank fees, and consulting expenses partially offset by lower legal costs. Other Income (Expense), net. Other income, net, for the quarter endedMarch 31, 2022 was$18,424 compared to$449 for the same period in 2021. The largest driver of this variance is a vendor rebate received in the quarter endedMarch 31, 2022 . This same rebate was received in a different quarter in the fiscal year endedJune 30, 2021 .
Net Income. Net income for the quarter ended
Nine Months Ended
Net Revenues. Net revenues of$4,570,945 for the nine-month period endedMarch 31, 2022 , represents a 30.7% increase over net sales of$3,497,273 for the same period in 2021. These record results exceeded our expectations as we continued to navigate the challenges presented by the COVID-19 pandemic and other factors, including limited raw material availability, higher supply costs and other supply chain issues. The increase in net revenues was driven by higher sales prices for our products as well as strong post-COVID demand for our products Cost of Revenues. Cost of revenues for the nine-month period endedMarch 31, 2022 was$3,285,827 or 71.9% of sales compared to$2,495,055 or 71.3% of sales for the same period in 2021. We experienced higher raw material costs, particularly chemical feedstocks, during the recent quarter which pressured gross profit margins. These headwinds were partially mitigated by the price increases we implemented on our products and a more favorable product mix than expected. We expect these market conditions to continue to pressure our Gross Margins at least throughout fiscal year 2022. Gross Profit. Gross profit for the nine-month period endedMarch 31, 2022 was$1,285,118 compared to$1,002,218 for the same period in 2021, an increase of$282,900 or 28.2% over the same period in 2021. TheMarch 31, 2022 gross profit reflects a 28.1% gross margin for product sales compared to a gross margin on product sales of 28.7% in 2021. The current period results were adversely affected by higher raw material prices. Research & Development Expenses (R&D). Research and development expenses for the nine-month period endedMarch 31, 2022 were$69,332 compared to$77,170 for the same period in 2021. We continue to invest in product formulation and new product development where management deems appropriate to support our business plan.
Sales & Marketing Expenses. Sales and marketing expenses for the nine-month
period ended
General & Administrative Expenses. General and administrative expenses for the nine-month period endedMarch 31, 2022 were$667,131 compared to$588,089 for the same period in 2021, driven by higher compensation costs, bank fees, and consulting expense, partially offset by lower legal costs. Other Income, net. Other income for the quarter endedMarch 31, 2022 was$22,341 compared to$144,297 for the same period in 2021. The primary driver of this variance is the forgiveness of our loan from theSmall Business Administration Paycheck Protection Program, received inNovember 2020 and forgiven in the 2021 period, with no comparable event in the 2022 period. Net Income. Net income for the nine-month period endedMarch 31, 2022 of$362,619 compared to a net income of$311,286 for the same period in 2021, an increase in net income of$51,333 , or 17.0%. Excluding the one-time benefit of the Small Business Administration PPP loan in the year earlier period, the increase in net income between periods was$200,903 , or 124.7% 14
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Liquidity and Capital Resources
Cash Flows
The following table sets forth a summary of our cash flows for the periods
below.
Nine Months ended March. 31,
(in 000's)
2022 2021
Net cash provided (used) by operating activities $ 200 $ 53
Net cash used by investing activities (149 ) (11 )
Net cash used by financing activities - -
Net increase (decrease) in cash during the period $ 51 $ 42
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 (with $100,000 of available credit). 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 major driver in our cash provided by operating activities was the collection of accounts receivable offset by increased costs (and therefore value) of inventory on the balance sheet.
Our principal sources of liquidity consist of cash on hand and payments received from our customers. InFebruary 2020 , the Company secured a$50,000 line of credit with a local community bank. The Company drew down from this line of credit for the first time inFebruary 2022 due to a late customer payment. The amount borrowed was paid back in full inMarch 2022 . As ofMarch 31, 2022 , the Company also negotiated to increase the line from$50,000 to$100,000 and reduce the variable interest rate from 5.75% to 4.50%. Historically, the current management team has been reluctant to pursue financing at terms that subject the Company to the high costs of debt or raise money through the sale of equity at prices we believe do not reflect the true value of the Company.
Cash Position, Outstanding Indebtedness and Future Capital Requirements
AtMay 11, 2022 , our total cash balance was$640,771 , none of which is restricted, accounts receivables was$646,232 , inventory, net of reserves for slow moving or obsolete inventory, and other current assets was$1,113,096 . Our total indebtedness, specifically which management reviews for cash management, was$1,282,303 and includes$545,873 in accounts payable and accrued expenses,$360,652 in deferred revenue,$2,000 in current portion of long-term debt,$60,878 in long-term debt and$312,900 in total operating lease liability. We continue to take actions to improve our liquidity and access to capital resources. Management continues to maintain that an equity financing in the current market environment would be too dilutive and not in the best interests of our shareholders. We have been successful in securing a line of credit with our bank. In assessing our liquidity, management reviews and analyzes our current cash, accounts receivable, accounts payable, capital expenditure commitments, cash requirements and other obligations. In connection with the preparation of our financial statements for the fiscal year endedJune 30, 2021 , we have analyzed our cash needs for the next 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 that may be more contagious or more resistant to vaccines and treatments may lead to possible resurgences of the virus. This could result in new restrictions onAmerityre , 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 endedJune 30, 2021 for a description of the material risks that the Company currently faces including in connection with COVID-19. If there is a new shutdown of the economy, reduction in demand for our products or other adverse effect on our business, we may lack sufficient working capital to meet our needs for the next 12 months. 15
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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 ofMay 13, 2022 , the Company has approximately 13,577,000 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, 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 tire manufacturers, or strategic investors, 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 endedJune 30, 2021 as supplement by this Report. For example, there is a risk that the economic repercussions from inflation and theFederal Reserve increasing interest rates in response thereto, supply chain disruptions and a possible resurgence of the COVID-19 pandemic in the future may be more severe or prolonged than we currently expect. 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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