AMERITYRE CORPORATION The following discussion and analysis contain forward-looking statements 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 the Risk Factors contained in our 2019 Annual Report as well as those discussed elsewhere in this report. The historical results set forth in this discussion and analysis are not necessarily indicative of trends with respect to any actual or projected future financial performance. This discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report. OverviewAmerityre engages in the research and development, manufacturing, and sale of solid polyurethane foam tires. We have developed unique polyurethane formulations that allow us to make products with superior performance characteristics in the areas of abrasion resistance, energy efficiency and load-bearing capabilities, when compared to conventional rubber tires. We also believe that 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 that are 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. Our strategy continues to be based on focusing resources on the development of market segments where we have identified technological and product performance advantages. Top line sales revenue growth in the fiscal 2020 3rd quarter was 21.9% higher than the third quarter of fiscal 2019. Costs for raw materials remained stable during the fiscal third quarter of 2020. We continue to broaden our customer base while working to increase product sold to existing customers. With the US economy facing a major downturn in the coming months due to the COVID-19 pandemic, weakness in the overall economy remains a significant risk factor in the last quarter of fiscal year 2020 as well as fiscal year 2021. To date, we have been successful in continuing to operate our business as a supplier to essential businesses. We have implemented social distancing in our workplace and implemented new work practices for cleaning work areas. These measures have not impacted the performance of our plant, and none of our employees have been infected. We have had some customers inform us that their business has slowed due to mandated business closures, and as a result theirAmerityre orders will be reduced and/or delayed. Our suppliers have told us they do not expect any issues with supplying us raw materials when we require them. Several customers have requested additional time to pay their bills but currently all customer account balances are paid. We continue to concentrate on three segments of the flat free tire market: light duty polyurethane foam tires, polyurethane elastomer industrial tires and agricultural tires. Our focus continues to be applications and markets where our advantages in product technology, tire performance, and customer service give us an opportunity to obtain premium pricing. Our most recent activities in these areas are set forth below: Light Duty Polyurethane Foam Tires - The sale of polyurethane foam tires to original equipment manufacturers, distributors and dealers accounts for the majority of our revenue. We produce a broad range of products for the light duty tire market. 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. We continued to experience strong demand for our polyurethane foam tires in the fiscal 2020 third quarter, exceeding our expectations. Higher sales were driven by a strong overall economy for the majority of the quarter, as well as seasonal factors that have traditionally boosted sales this time of year. The Coronavirus pandemic did not adversely affect our fiscal 2020 third quarter results, however, we expect there will be an adverse effect on demand for our product in fiscal 2020 4th quarter, as theUSA and many parts of the world face an historical drop-in economic activity. At this time, it is not possible to estimate the exact magnitude of the revenue drop we will experience, but we expect that our sales will be adversely affected for at least the next 2 fiscal quarters. Polyurethane Elastomer Industrial Tires - We had negligible sales of elastomer forklift and elastomer industrial tires during the fiscal 2020 third quarter. We continue to generate interest in our elastomer tires produced in our ElastothaneTM 500 formulation. Our trial programs for these tires continues to generate interest in various market segments. 11
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Agricultural Tires - Agricultural tires sales continue to remain under pressure due to international trade issues and low farm incomes. The recent breakout of the Coronavirus pandemic has introduced another significant headwind to the Agricultural sector. Adding to these factors, the collapse in oil prices has reduced demand for and the price of ethanol, which will further reduce demand for corn. We continue to have discussions with original equipment manufacturers (OEMs) and distributors to identify new opportunities for our elastomer products, but lack of demand from the farming community will continue to depress demand for our products in the Agricultural sector. Due to the Company's limited resources and the current business climate, business development projects which require significant investment have been put on hold. We believe investment in new and improved products is important to the continued growth of our business, and we will continue to selectively invest in promising opportunities that fit our current financial plan.
As described above, our product line covers a wide range of diverse market segments which are unrelated in terms of customer base, product distribution, market demands and competition. Our external sales team is comprised of independent manufacturer representatives with strong tire industry experience. The Company's strategy of targeted marketing campaigns, custom product development, and proper product pricing continue to drive more profitable sales. Our website remains a valuable tool for educating our customers about our products.
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.
The Company recently borrowed $149,570 under the Small Business Administration
Paycheck Protection Program and will be working with the Small Business
Administration starting first quarter fiscal year 2021 on forgiveness
provisions. This sum likely be recognized as income in the second quarter of
fiscal 2021.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with United States generally accepted accounting principles. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. On an
ongoing basis, we evaluate our estimates, including those related to
uncollectible receivables, inventory valuation, deferred compensation and
contingencies. We base our estimates on historical performance and on various
other assumptions that we believe to be reasonable under the
circumstances. These estimates allow us to make judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources.
We believe the following accounting policies are our critical accounting
policies because they are important to the portrayal of our financial condition
and results of operations and they require critical management judgments and
estimates about matters that may be uncertain. If actual results or events
differ materially from those contemplated by us in making these estimates, our
reported financial condition and results of operations for future periods could
be materially affected.
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Valuation of Intangible Assets and
Patent and trademark costs have been capitalized at
The patents which have been granted are being amortized over a period of 20 years. Patents which are pending or are being developed are not amortized. Amortization begins once the patents have been issued. As ofMarch 31, 2020 , and 2019, respectively, there were no pending patents. Annually, pending or expired patents are inventoried and analyzed, which resulted in the recognition of a loss on abandonment, expiration or retirement of patents and trademarks of$-0 - for each of the three and nine month periods endedMarch 31, 2020 and 2019, respectively. Amortization expense for the nine month endedMarch 31, 2020 and 2019 was$13,273 and$17,144 respectively. The Company evaluates the recoverability of intangibles and reviews the amortization period on a continual basis utilizing the guidance ofFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 350, Intangibles -Goodwill and Other. We consider the following indicators, among others, when determining whether or not our patents are impaired:
• any changes in the market relating to the patents that would decrease
the life of the asset;
• any adverse change in the extent or manner in which the patents are
being used;
• any significant adverse change in legal factors relating to the use of
the patents;
• current period operating or cash flow loss combined with our history of
operating or cash flow losses;
• future cash flow values based on the expectation of commercialization
through licensing; and
• current expectations that, more likely than not, the patents will be
sold or otherwise disposed of significantly before the end of its
previously estimated useful life.
Results of Operations
Our management reviews and analyzes several key performance indicators in order
to manage our business and assess the quality and potential variability of our
sales and cash flows. These key performance indicators include:
• Revenues, net of returns and trade discounts, which consists of product
sales and services and is an indicator of our overall business growth
and the success of our sales and marketing efforts;
• Gross profit, which is an indicator of both competitive pricing
pressures and the cost of goods sold of our products and the mix of
product and license fees, if any;• Growth in our customer base, 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, 2020 and 2019 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
2020 2019 2020 vs. 2019 2020 2019 2020 vs. 2019
Net revenues $ 1,122 $ 927 21.0 % $ 3,169 $ 2,539 24.8 %
Cost of revenues (769 ) (638 ) 20.5 % (2,229 ) (1,836 ) 21.4 %
Gross profit 353 289 22.1 % 940 703 33.7 %
Research &
Development (27 ) (23 ) 17.4 % (89 ) (71 ) 25.4 %
Sales and Marketing (53 ) (43 ) 23.3 % (147 ) (147 ) 0.0 %
General and
Administrative (173 ) (169 ) 2.4 % (539 ) (522 ) 3.3 %
Other income
(expense) - 16 (100. %) 3 16 (82.4 %)
Net income (loss) 100 70 44.9 % 168 (21 ) (940.0 %)
Preferred stock
dividend (25 ) (25 ) 0.00 % (75 ) (75 ) 0.0 %
Net income (loss)
attributable to
common shareholders $ 75 $ 45 70.5 % $ 93 $ (96 ) (197.9 %)
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Quarter Ended
Net Revenues. Net revenues of$1,121,805 for the quarter endedMarch 31, 2020 , represents a 21.0% increase over net revenues of$926,811 for the same period in 2019. These better than expected results were driven by higher polyurethane foam tires from current customers. We expect our polyurethane foam products to continue to account for the majority of our sales during the upcoming fiscal quarter. Cost of Revenues. Cost of revenues for the quarter endedMarch 31, 2020 was$768,943 or 68.5% of sales compared to$637,804 or 68.8% of sales for the same period in 2019 We anticipate that raw material cost volatility will remain stable for the rest of fiscal year 2020, with no additional costs associated with trade tariffs. Gross Profit. Gross profit for the quarter endedMarch 31, 2020 was$352,862 compared to$289,007 for the same period in 2019. Gross profit for the quarter endedMarch 31, 2020 increased by$63,855 or 22.1% over the same period in 2019 due to higher revenues. TheMarch 31, 2020 gross margin of 31.5 was slightly higher than the 31.2% achieved in the same period in 2019.
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, 2020 were$52,652 compared to$43,184 for the same period in 2019. The difference between periods is due to increased commissions expense. General & Administrative Expenses. General and administrative expenses for the quarter endedMarch 31, 2020 were$173,297 compared to$168,984 for the same period in 2019. Other Income (Expense), net. Other expense, net, for the quarter endedMarch 31, 2020 was ($3 ) compared to other income, net, of$16,337 for the same period in 2019. The primary driver of this variance is lower interest expense due to the payoff of debt offset by the absence of the receipt of aUSDA federal grant for building lighting upgrades in 2019.
Net Income. Net income for the quarter ended
Nine Months Ended
Net Revenues. Net revenues of$3,168,542 for the nine-month period endedMarch 31, 2020 , represents a 24.8% increase over net revenues of$2,539,160 for the same period in 2019. These results were above our expectations and driven by increased demand for polyurethane foam tires from current customers. Cost of Revenues. Cost of revenues for the nine-month period endedMarch 31, 2020 was$2,228,300 or 70.3% of sales compared to$1,836,081 or 72.3% of sales for the same period in 2019. The Gross margin of 29.66% for the nine months endingMarch 31, 2020 was approximately 2% higher than the 27.69% from the same period in 2019, and was driven by sales of higher margin products. We expect raw material costs to remain steady in the FY 2020 4th quarter.
Gross Profit. Gross profit for the nine-month period ended
Research & Development Expenses (R&D). Research and development expenses for the nine-month period endedMarch 31, 2020 were$88,527 compared to$71,087 for the same period in 2019. The higher expenses in the fiscal year 2020 period are due to costs associated with payroll and our new bike tire evaluation and test program. The Company plans to continue to invest in R&D as a key component of our new product and business improvement initiatives. 14
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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, 2020 were$539,663 compared to$522,427 for the same period in 2019. The difference between periods was due to higher payroll costs, planned higher legal costs related to the engagement of newSEC counsel, offset by lower repairs, amortization and depreciation expenses. Other Income, net. Other income for the nine-month period endedMarch 31, 2020 was$2,974 compared to$17,320 for the same period in 2019. The primary driver in this variance is lower interest expense due to the payoff of debt offset by the absence of the receipt of aUSDA federal grant for building lighting upgrades in 2019.
Net Income (Loss). Net income for the nine-month period ended
Liquidity and Capital Resources
Cash Flows
The following table sets forth a summary of our cash flows for the periods
below.
Nine Months ended Mar. 31,
(in 000's)
2020 2019
Net cash (used) provided by operating activities $ (73 ) $ 188
Net cash used in investing activities (37 ) (100 )
Net cash used in financing activities (25 ) (14 )
Net (decrease) increase in cash during the period $ (135 ) $ 74
Net Cash Provided/(Used) by Operating Activities. In 2019, the Company decided
to use a portion of its available cash to make a lump sum payment for annual
insurance premiums rather than finance these expenditures over the course of the
year. As a result, our prepaid assets increased in the period. Finished good
inventories were higher than normal at the end of the FY 2020 third quarter due
to an inventory build of product which we shipped in the first week of April
2020 . In addition, our receivable balance at period end was high, much of which
has subsequently been collected; offset by a lower accounts payable and accrued
expense balance at period end. Net cash used in operating activities was $72,976
for the period ended March 31, 2020 compared to net cash provided by operating
activities of $188,340 for the same period in 2019.
Non-cash items include depreciation and amortization and stock-based
compensation. Amortization includes the amortization of our right to use asset,
our facility rent. Our net income was $167,594 for the period ended March 31,
2020 compared to a net loss of $20,548 for the same period in 2019. The net
income for the period ended March 31, 2020 included non-cash expenses for
depreciation and amortization of $181,390 and stock-based compensation of
$31,977 . As of March 31, 2019 , depreciation and amortization was $65,282 and
stock-based compensation totaled $27,897 .
Net Cash Used by Investing Activities. Net cash used by investing activities was
$37,276 for the period ended March 31, 2020 and $99,738 for the same period in
2019. In fiscal year 2020, we invested in manufacturing equipment and upgraded
our in-house computer infrastructure and server. In fiscal year 2019, we
upgraded our plant lightening.
Net Cash Used by Financing Activities. In line with the Company's initiative to
pay off high interest term debt with available cash, a total of $25,121 was used
in financing activities for the period ended March 31, 2020 and $14,065 for the
same period in 2019. The use of cash for the period ended March 31, 2020 was
used to retire all of our term debt early.
Our principal sources of liquidity consist of cash and payments received from
our customers. In February 2020 , the Company secured a $50,000 line of credit
with a local community bank. As of March 31, 2020 , the line had not been used.
In April 2020 , the Company secured a Small Business Administration Paycheck
Protection Program loan for $149,570 , which has a term of 2 years at 1%
interest. The first payment is expected to be due on or about November 15, 2020 .
However, an analysis of the terms of the loan leads management to conclude that
it is likely that the Company can meet all requirements necessary to have this
loan forgiven before any loan payments need to be made.
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Historically, management has been reluctant to pursue financing at terms that subject the Company to the high costs of debt, or raise money through the sale of equity at prices we believe do not reflect the true value of the Company. As part of its effort to maintain adequate working capital levels,Amerityre has not declared dividends on its preferred stock sinceJune 2016 . These unpaid dividends have accrued in the amount of$25,000 per quarter since that time. The preferred stock automatically converted onMay 13, 2020 into 20,000,000 shares of common stock. We continue to have access to a short-term receivable factoring agreement with a third party to sell our receivable invoices. This agreement enables us to sell individual customer invoices for faster cash flow to the Company. As ofMarch 31, 2020 , we have not needed to activate this financing option due to increased focus on enforcement of established collection policies and proactive communication with customers.
Cash Position, Outstanding Indebtedness and Future Capital Requirements
AtMay 13, 2020 , our total cash balance was$640,124 , none of which is restricted; accounts receivables was$206,069 ; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was$655,795 . Our total indebtedness, which management reviews for cash management, was$1,343,271 and includes$1,129,795 in accounts payable, accrued expenses and operating lease liability;$2,000 in current portion of long-term debt and$61,906 in long-term debt; and$149,570 in Paycheck Protection Program funding. We continue to take actions to improve our liquidity and access to capital resources. To fully execute the annual strategic business plan discussed during our shareholder meeting inDecember 2019 , we require more capital resources. However, 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 inApril 2020 from the US government Paycheck Protection Program, aSmall Business Administration loan program initiated to combat the negative effects of the novel coronavirus (COVID-19) on US small businesses. These new sources of liquidity will be key tools to help the Company overcome negative effects of the coronavirus on our business. We are intent on focusing on the sale and distribution of profitable product lines. Management continues to look for further financing facilities at affordable terms that will allow the Company to maintain sufficient raw material and finished goods inventory to capitalize on sales growth opportunities. We are limiting our capital expenditures to that required to maintain current manufacturing capability or support key business initiatives identified in our strategic sales plan. We continue to work to reduce our overall costs wherever possible. We believe that the Company's emphasis on proper product pricing and new marketing campaigns has driven more profitable sales. In assessing our liquidity, management reviews and analyzes our current cash, accounts receivable, accounts payable, capital expenditure commitments and other obligations. In connection with the preparation of our financial statements for the period endedMarch 31, 2020 , we have analyzed our cash needs for the next twelve months. We have concluded that our available cash and accounts receivables are sufficient to meet our current minimum working capital, capital expenditure and other cash requirements for this period. We expect to limit manufacturing and sales operation investments beyond the current level until the negative effects of the COVID-19 pandemic can be quantified and addressed. Although we believe that the economy will ultimately improve over this 12 month period, we cannot assure you that the economy will rebound as anticipated. If either the pandemic does not sufficiently abate or the economic consequences are more severe, we may lack sufficient working capital to meet our needs for the next 12 months.
The Company has, on occasion, instituted initiatives to incentivize sales of slower-moving inventory through promotional pricing. These programs will continue to be selectively utilized in the upcoming quarters to monetize inventory, promote individual product lines, and improve our cash flow.
As of
Off-Balance Sheet Arrangements
We do not currently have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which would have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. In addition, we do not engage in trading activities involving
non-exchange traded contracts.
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Cautionary Note Regarding Forward Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the negative impact of COVID-19 on our business and the economy, economic conditions in general and in the agricultural market in particular, tariffs imposed byChina and the US arising from the current geo-political tension between those jurisdictions, our ability to increase our authorized capital and pursue future financings, our sales prospects in light of new products, increased sales and resulting profits, continued strength of our current polyurethane foam tire market segment, our ability to timely obtain raw materials at reasonable costs and in sufficient quantities to manufacture products and meet consumer demand, our ability to have a portion of our Paycheck Protection Program loan forgiven and the amount that will ultimately be forgiven, 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 2019 Annual Report and the COVID-19 risk factor in this report. New risk factors emerge from time-to-time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements described in this report, whether as a result of new information, future events, changed circumstances or any other reason after the date this report is filed. 17
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