AMERITYRE CORPORATION This discussion and analysis contain 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 "Part I. Item 1A. Risk Factors" 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. OverviewAmerityre engages in the research and development, manufacturing, and sale of polyurethane 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. We 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: 18
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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. Due to the effect of COVID-19, we experienced lower than expected demand for our polyurethane foam tires in the 4th quarter of fiscal year 2020. However, sales steadily increased throughout the quarter from a heavily depressed level inApril 2020 . While the tariffs imposed by the US government on imported Chinese products continue to impact our wheel hub costs, a favorable product mix of higher margin tires helped us to overcome these higher costs. Polyurethane Elastomer Industrial Tires - Overall sales volumes of our forklift tires continue to be very small, less than 0.1% of our total sales revenue. Price sensitive consumers continue to favor imported rubber tires rather than our products. Due to other project priorities, we have not put significant resources towards promoting this product line, and we do not expect this to change in the near future. The Company continued to promote its new elastomer formulation for use in tire applications where customers have asked for a more durable tire in specific applications. Elastothane TM 500 formulation provides higher static load bearing capability as well as higher abrasion resistance compared to our closed cell foam formulation. We have seen increased sales of this formulation for tires in lawn and garden applications We continue to believe this new formulation represents a significant upside opportunity for our product portfolio. Agricultural Tires - Agricultural tires sales continue again to be negatively impacted by low commodity prices and resulting low farm income. Chinese tariffs on US grown soybeans has lowered demand for US grown soybeans inChina and has hurt US farmers. The prospect for improved agricultural commodity pricing is not promising in our opinion. We have initiated discussions with some OEMs and large distributors about using our tires for certain applications, but their belief that farmers will not pay extra for a premium product has limited our success to date. The introduction of our ElastothaneTM 500 formulation has enabled us to offer a better product alternative for abrasive applications. Due to the Company's limited resources, tire projects requiring significant resources and investment have been put on hold. We believe investment in R&D for new and improved products is important to the continued success of our overall business, and we will selectively invest in promising opportunities that fit in our current financial model. We have several product evaluation programs ongoing in different applications which have the potential to develop into significant business in the coming quarters. We expect our current R&D investments to continue to prove to be a prudent investment of our capital resources. As described above, our product line covers diverse market segments which are unrelated in terms of customer base, product distribution, market demands and competition. Our external sales team is comprised of independent manufacturer representatives, whose experience is complementary to our product portfolio. The Company's continued emphasis on proper product pricing and new marketing campaigns continue to drive more profitable sales. Our website has educated the marketplace about our products as well as generate some online sales. As expected, the increasingly challenging economic environment, worsened by the COVID-19 pandemic and the trade war withChina , negatively impacted sales performance during the fiscal 4th quarter of fiscal year 2020, and sales for this period were approximately 20% lower than expected. Other than the cost of our imported wheel rims, raw material pricing was fairly stable during the fiscal year 2020. Our wheel rims, which we largely import fromChina , are still subject to larger pricing fluctuations and the threats of larger tariffs as the trade dispute shows no sign of abating. We continued to exhibit stringent cost controls in the 4th quarter, resulting in higher gross profit and record net income for fiscal year 2020 despite revenues in the 4th quarter that were approximately 20% lower than expected. We are anticipating that raw material costs will remain fairly stable through the first half of fiscal year 2021. The biggest issue for our business remains sales revenue growth. We continue to work at broadening our customer base, and our strategy is to focus on market applications and market segments where we have identified technological and product advantages. Despite an overall decline in demand during the 4th quarter of fiscal year 2020, we were successful in securing business from several new customers. to offset some of this decline. We see the upcoming year as an opportunity to further leverage these gains, provided there is no new shutdown of the economy due to COVID-19 and the negative impacts of the pandemic do not adversely affect the economy. 19
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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 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.
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.
Revenue Recognition
The majority of our revenue is derived from short-term sales contracts. We account for revenue in accordance with Accounting Standards Codification ("ASC") Topic 606, "Revenue from Contracts with Customers".
Revenue for our products is recognized at the time in which our performance obligation is satisfied which we have defined as "control" of the product by the customer. "Control" is defined as a customer having "rights/obligations of physical control over the product or has the rights and intention to control the product." Based on the terms of our contracts, a customer's "control" is based on analysis of the following; (i) when a customer arranges their own shipping, and once the product has left our dock,Amerityre recognizes revenue for the product. In effect by arranging their own shipping the customer is "taking control" of the product when it leaves our warehouse; or (ii) when a customer does not arrange their own shipping, we cannot recognize revenue until it is delivered and the customer takes "control" of the product. This establishes a "deferred revenue" event until such time as delivery of the product has been completed and we have proof from the shipper of the delivery (and change in control). Shipping and Handling Shipping and Handling fees require that freight costs charged to customers be classified as revenues. Freight expenses are included in costs of sales and are recognized as incurred. Due to our adoption of ASC 606 as discussed above, we defer the revenues of shipping and handling until the related revenue is also recognized. 20
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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 ofJune 30, 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 the years endedJune 30, 2020 and 2019, respectively. Amortization expense for the years endedJune 30, 2020 and 2019 was$17,696 and$22,004 respectively. The Company evaluates the recoverability of intangibles and reviews the amortization period on a continual basis utilizing the guidance of 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.
Inventory
Inventory is stated at the lower of cost (computed on a first-in, first-out
basis) or net realizable value. The cost of finished goods includes the cost of
raw material, direct and indirect labor, and other indirect manufacturing costs.
The inventory consists of chemicals, finished goods produced in the Company's
plant and products purchased for resale.
Stock-Based Compensation
We account for stock-based compensation under the provisions of FASB ASC 718,
Compensation - Stock Compensation. Our financial statements as of and for the
fiscal years ended June 30, 2020 and June 30, 2019 reflect the impact of FASB
ASC 718. Stock-based compensation expense recognized under FASB ASC 718 for the
fiscal years ended June 30, 2020 and 2019 was $44,300 and $38,015 , respectively,
related to employee stock options and employee stock grants.
FASB ASC 718 requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model. The value of
the portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our Statement of Operations.
Stock-based compensation expense recognized in our Statements of Operations for
fiscal years ended June 30, 2020 and June 30, 2019 assume all awards will vest;
therefore no reduction has been made for estimated forfeitures.
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Table of Contents 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.
During fiscal year 2020, the Company achieved record positive annual net income
(before preferred dividends), reversing a prior year net loss. The following
summary table presents a comparison of our results of operations for the fiscal
years ended June 30, 2020 and June 30, 2019 , with respect to certain key
financial measures. The comparisons illustrated in the table are discussed in
greater detail below.
Percent
Fiscal Years Ended June 30, Change
(in 000's)
2020 2019 2020 vs. 2019
Net revenues $ 3,941 $ 3,590 9.8 %
Cost of revenues (2,839 ) (2,536 ) 11.9 %
Gross profit 1,103 1,054 4.6 %
Research and development expenses (118 ) (92 ) 28.3 %
Sales and marketing expense (193 ) (198 ) (2.5 )%
General and administrative expense (1) (744 ) (746 ) (0.3 )%
Loss on assets, due to write down or disposal (17 ) - 100 %
Other income (expense) 12 23 (47.8 )%
Net income 43 41 7.5 %
Preferred stock dividend (83 ) (100 ) (17.0 )%
Net loss attributable to common shareholders $ (40 ) $
(59 ) (33.3 )%
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(1) Includes stock-based compensation expense of
Year Ended
Net revenues. Net revenues of
Cost of revenues. Cost of revenues for the year endedJune 30, 2020 was$2,838,667 or 72.0% of revenues compared to$2,536,581 or 70.7% of revenues for the year endedJune 30, 2019 . Slightly higher raw material costs along with the effect of selling lower margin products were the main drivers of performance. Gross Profit. Gross profit for the year endedJune 30, 2020 of$1,102,537 represents a 4.6% increase over gross profit of$1,053,636 for the year endedJune 30, 2019 . The fiscal year 2020 gross profit reflects a 28.0% gross margin for product sales compared to a gross margin on product sales of 29.3% for fiscal 2019. While our overall gross profit did increase 4.6% due to higher sales, the gross profit margin decreased year over year due higher costs listed above. The higher sales allowed us to increase total gross profit despite lower gross margins. 22
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Research and Development expenses. Research and development expense of$117,525 for the year endedJune 30, 2020 represents a 28.3% increase over the same expense of$91,680 for the year endedJune 30, 2019 . The difference between periods is attributed to costs of a bike tire evaluation program during fiscal year 2020 and contractor costs for new tire development. We continue to invest in product formulation and new product development where appropriate to support our business plan. Sales and Marketing expenses. Sales and marketing expense of$192,951 for the year endedJune 30, 2020 represents a 2.5% decrease over expenses of$197,545 for the year endedJune 30, 2019 . The difference between periods relates to lower sales commission expense due to the mix of products sold, when compared to the same period in 2019.
General and Administrative expenses. General and administrative expenses of
Other Income (Expense). Other expense of$5,003 for the year endedJune 30, 2020 includes charges for impairment of equipment available for sale and the write down of obsolete inventory. Other income of$23,477 in the year endedJune 30, 2019 is reflective of the receipt of a federal grant from theUSDA to upgrade our facility lighting. Net Income. The net income for the year endedJune 30, 2020 of$42,533 represents a 7.5% increase from the$41,012 net income for the year endedJune 30, 2019 . Despite the negative impact of COVID -19 on 4th quarter fiscal year 2020 sales performance and the one-time expenses mentioned above this net income result represents a record year forAmerityre profitability.
Liquidity and Capital Resources
Cash Flows The following table sets forth our cash flows for the fiscal years endedJune 30, 2020 and 2019. Years ended June 30, (in 000's) 2020 2019 Net cash provided by operating activities$ 42 $
485
Net cash used in investing activities (56 ) (105 ) Net cash provided by/(used in) financing activities 124 (37 ) Net increase in cash during period$ 110 $ 343 Net Cash Provided By Operating Activities. Our primary sources of operating cash during fiscal year 2020 came from our net income and collection of accounts receivable and sales of inventory, offset by lower accounts payable and lease liability balances at year end due to the timing of payment of our accounts payable. Net cash provided by operating activities was$41 ,809for the year endedJune 30, 2020 compared to net cash provided of$484,659 for the same period in 2019. Non-cash items include depreciation and amortization and stock-based compensation. Our net income was$42,533 for the year endedJune 30, 2020 compared to a net income of$41,012 for the same period in 2019. The net income for fiscal year 2020 included non-cash expenses for stock-based compensation (primarily stock issued) of$44,300 and a significant increase in amortization expense related to our right to use operating lease for our facility. In fiscal year 2019, stock-based compensation (both stock issued and options) totaled$38,015 and our liability related to our right to use operating lease was lower due to coming to the end of one lease period and adopting the new lease accounting standard.Net Cash Used In Investing Activities. Net cash used by investing activities was$56,488 for the year endedJune 30, 2020 and$104,504 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 lighting. Net Cash Provided By/(Used In) Financing Activities. Net cash provided by financing activities was$124,409 for the year endedJune 30, 2020 , versus$36,983 used for the same period in 2019. In line with the Company's initiative to pay off high interest term debt, a total of$25,161 was used in financing activities to retire our long term debt for the year endedJune 30, 2020 and$36,983 for the same period in 2019. In the fourth quarter of fiscal year 2020 the Company secured a Small Business Administration Paycheck Protection Program loan for$149,570 . 23
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Our principal sources of liquidity consist of cash and payments received from our customers. InFebruary 2020 , the Company secured a$50,000 line of credit with a local community bank. As ofJune 30, 2020 , the line had not been used. InApril 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 aboutNovember 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, provided theSmall Business Administration finalizes the forgiveness application process in the fiscal 1st quarter of 2021. 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 did not declare 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 ofSeptember 9, 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
AtSeptember 9, 2019 , our total cash balance was$522,272 , none of which is restricted; accounts receivables were$303,800 ; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was$570,430 . Our total indebtedness was$1,219,827 and includes$382,568 in accounts payable,$63,514 in accrued expenses,$2,776 in deferred revenue,$230,583 in current portion of long-term debt, and$540,385 in long-term debt. 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 theU.S. government Paycheck Protection Program, aSmall Business Administration loan program initiated to combat the negative effects of COVID-19 onU.S. small businesses. These new sources of liquidity have been key tools to help the Company overcome negative effects of the coronavirus on our business. We are focused on the sale and distribution of profitable product lines. Management continues to look for further financing facilities at affordable terms that will allow the Company to maintain sufficient 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. 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 endedJune 30, 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 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
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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 the negative impact of COVID-19 on our business and the economy, our profitability and future growth, including with respect to our customer base and our ability to expand our operations and products into international markets, economic conditions in general and in the agricultural market in particular, tariffs imposed byChina and theU.S. arising from the current geo-political tension between those jurisdictions, our ability to 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 all or 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 this report. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include the duration and significance of negative economic conditions resulting from the COVID-19 pandemic and government, customer and supplier actions in response thereto, demand for our products and the growth rate of our customer base and operations in the wake of the COVID-19 pandemic. Further information on the risks and uncertainties affecting our business is contained in Part I. Item 1A. - Risk Factors. 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.
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