AMTY Amerityre Corporation (PK)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance or financial condition.  Such statements are only predictions and the actual events or results may differ materially from the results discussed in or implied by the forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “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.

Overview

Amerityre 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:

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 experienced strong demand for our polyurethane foam tires in the 1^st quarter, in line with our expectations. Higher sales were driven by continued strength in the overall economy as well as seasonal factors that have traditionally boosted sales this time of year. While the tariff dispute with China continues to provide a headwind to our imported wheel rim costs and the overall US economy, for the majority of our products we continue to manage these costs without raising prices to our customers. We reluctantly implemented a small price increase on our large industrial wheels to partially offset cost increases for our 12 inch rims during the first quarter of fiscal year 2020.

Polyurethane Elastomer Industrial Tires – We had negligible sales of elastomer forklift and elastomer industrial tires during the first fiscal quarter. We produced samples for a new tire project for a new customer, and we anticipate additional samples will be produced this current quarter. It is too early to project whether this work will result in meaningful ongoing sales volumes going forward but the Company is optimistic this work will bear fruit in the form of new business opportunities in future quarters. 

The Company continued to see increasing sales of tires using its new elastomer formulation Elastothane^TM 500. Large scale adoption of this tire has been slow due to a lack of product exposure as well as its higher price tag relative to our polyurethane foam product. Field testing of this formulation with select customers continues to be successful. We continue to believe this new formulation represents a significant development for our product portfolio.

Agricultural Tires – Agricultural tires sales remain depressed due to low farm incomes and a lack of available funds from farmers. Chinese tariffs on US grown soybeans and other agricultural products remains a drag on commodity pricing domestically and demand overseas. The prospect for improved agricultural commodity pricing remains poor in our opinion. We continue to look for new opportunities with OEMs and distributors for our tires. The introduction of our Elastothane^TM 500 formulation has enabled us to improve our tire offerings in several agricultural applications, which we believe will present new business opportunities once the farmers have money to invest in new equipment.

Due to the Company’s limited resources, tire projects which require significant investment have been put on hold. We believe investment in R&D for new and improved products is important to the continued turnaround of our overall business, and we plan to 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 use 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 with strong tire industry experience.  The Company’s continued emphasis on proper product pricing and targeted marketing campaigns continue to drive more profitable sales.   Our website continues to be an educational tool for the marketplace about our products, and it continues to generate some online sales. Higher sales of polyurethane (“PU”) foam tires in first quarter of fiscal year 2020 versus the same period last year was the result of a large customer beginning its seasonal tire purchases earlier in Fiscal year 2020 than last year.

Revenue for the first quarter of fiscal year 2020 was 18.4% higher than the year earlier period. Our strategy continues to be to focus on market segments where we have identified technological and product performance advantages. Other than the cost of our imported wheel rims, raw material pricing remained fairly stable during the recent quarter, but higher than the year ago period. Our imported wheel rims are still subject to price fluctuations due to larger tariffs as the trade dispute between the U.S. and China continues. Our gross margins consequently declined in the recent quarter compared to the same period the previous year, driven by higher raw material costs. Improving top line sales revenue growth remains our primary goal. Our ability to broaden our customer base has enabled us to overcome challenging business conditions in key segments such as the depressed agricultural sector to maintain our overall sales revenue levels over the past 3 years. We are optimistic that these new customers will develop into larger revenue opportunities as applications for our tires continues to grow. Continued strength in the US economy is also a key factor in our future revenue growth, and weakness in the overall economy remains a risk factor going forward in fiscal year 2020.

Factors Affecting Results of Operations

Our operating expenses consisted primarily of the following:

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 are in addition to revenue, inventory and stock valuation with accounting policies disclosed in our financial statements. The following 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.

Valuation of Intangible Assets and Goodwill

Patent and trademark costs have been capitalized at September 30, 2019, totaling $487,633 with accumulated amortization of $381,456 for a net book value of $106,177. Patent and trademark costs capitalized at September 30, 2018, the prior year, totaled $487,633 with accumulated amortization of $360,743 for a net book value of $126,890.

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 of September 30, 2019 and 2018, 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 periods ended September 30, 2019 and 2018, respectively.

Amortization expense for the years ended September 30, 2019 and 2018 was $4,425 and $5,715 respectively.  The Company evaluates the recoverability of intangibles and reviews the amortization period on a continual basis utilizing the guidance of Financial 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:

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:

The following summary table presents a comparison of our results of operations for the fiscal quarters ended September 30, 2019 and 2018 with respect to certain key financial measures.  The comparisons illustrated in the table are discussed in greater detail below.

Quarter Ended September 30, 2019 Compared to September 30, 2018

Net Revenues.  Net revenues of $979,297 for the quarter ended September 30, 2019, represents an 18.4% increase over net revenues of $827,244 for the same period in 2018. These results were in line with expectations. We expect our polyurethane foam products to constitute the majority of our sales during the upcoming fiscal year.

Cost of Revenues.  Cost of revenues for the quarter ended September 30, 2019 was $690,599 or 70.5% of sales compared to $561,012 or 67.8% of sales for the same period in 2018. This decrease in Gross Margin was due to increases in chemical raw material and steel wheel costs as well as increases in labor overtime costs. We anticipate that raw material costs will stabilize in the upcoming fiscal year, but the magnitude of the increased costs associated with trade tariffs is uncertain at this time. 

Gross Profit.  Gross profit for the quarter ended September 30, 2019 was $288,698 compared to $266,232 for the same period in 2018. Gross profit for the quarter ended September 30, 2019 increased by $22,466 or 8.6% over the same period in 2018 due to higher costs of revenue as outlined in the discussion above.  The September 30, 2019 gross profit reflects a 29.5% gross margin for product sales compared to a gross margin on product sales of 32.2% in 2018.

Research & Development Expenses (R&D).  Research and development expenses for the quarter ended September 30, 2019 were $26,016 compared to $23,073 for the same period in 2018. 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 September 30, 2019 were $43,471 as compared to $50,924 for the same period in 2018. The difference between periods relates to lower commission expenses paid during the period, as a larger proportion of sales in the current period were generated by in-house sales personnel rather than external sales representatives.

General & Administrative Expenses.  General and administrative expenses for the quarter ended September 30, 2019 were $193,430 compared to $189,548 for the same period in 2018. We continue to control costs and find more efficient ways to conduct our business activities.

Other Income, net.  Other income for the quarter ended September 30, 2019 was $3,122 compared to other income of $1,630 for the same period in 2018. The primary driver in this variance is lower interest expense due to the payoff of debt.

Net Income.  Net income for the quarter ended September 30, 2019 of $28,903 compared to a net income of $4,317 for the same period in 2018, an increase in net income of $24,586.

Net Cash (Used)/Provided by Operating Activities. Our primary sources of operating cash during the quarter ended September 30, 2019 came from collections from customers on balances from June 30, 2019 and sales for the quarter. Our primary use of operating cash was an increase in prepaid and other current assets, specifically related to renewal of insurance policies (a normal reoccurrence in our first quarter of fiscal year 2020), increase in inventory levels in preparation for shipment of a large order in early October and a larger accounts payable balance at September 30, 2019 versus June 30, 2019 (a variance due to when the quarter ended).  Net cash used by operating activities was $78,859 for the quarter ended September 30, 2019 compared to net cash provided by operating activities of $94,279 for the same period in 2018. 

Non-cash items include depreciation and amortization and stock based compensation.  Our net income was $28,903 for the quarter ended September 30, 2019 compared to a net income of $4,317 for the same period in 2018.  The net income for the quarter ended September 30, 2019 included non-cash expenses for depreciation and amortization of $25,194 and stock-based compensation of $10,119.  As of September 30, 2018, depreciation and amortization was $20,473 and stock-based compensation totaled $9,785.

Net Cash Used by Investing Activities. Net cased used by investing activities was $12,641 for the quarter ended September 30, 2019 as we purchased new computers and rebuilt production equipment.

Net Cash Used by Financing Activities.  Net cash used by financing activities was $2,842 for the quarter ended September 30, 2019 and $4,651 for the same period in 2018. The primary use of cash for the quarter ended September 30, 2019 was payment of notes payable.

Our principal sources of liquidity consist of cash and payments received from our customers.  We do not have any significant revolving credit arrangements.  Historically, our expenses have exceeded our sales, resulting in operating losses.  From time to time, we have obtained additional liquidity to fund our operations through the sale of shares of our common stock and the placement of short-term debt instruments.  At the end of 2016, we were able to obtain term bank debt financing to finance critical manufacturing equipment and operating enhancements, the majority of which was placed in service in fiscal year 2017 and has been paid off in October 2019.  Management continues to evaluate financing options but is choosing to delay financing at terms that subject the Company to high costs of debt and we are reluctant to raise money through stock sales at what we believe are highly dilutive share prices.  Additionally, management has notified our preferred shareholder that we are suspending future payments of preferred cash dividend payments, so the Company can increase its working capital levels.

We have historically not succeeded in establishing favorable revolving short term financing such as lines of credit. In the quarter ended March 31, 2015, we entered into 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 we deem needed. As of September 30, 2019, we have not needed to activate this financing option due to increased focus on adherence to established collection policies and proactive communication with repeat customers, including adjusting credit limits to allow for increased sales volume where warranted.

Cash Position, Outstanding Indebtedness and Future Capital Requirements

At November 6, 2019, our total cash balance was $365,862, none of which is restricted; accounts receivables was $266,205; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was $754,629. Our total indebtedness, specifically which management reviews for cash management, was $1,245,045 and includes $493,139 in accounts payable and accrued expenses, $2,000 in current portion of long-term debt, $61,906 in long-term debt and $688,000 in total operating lease liability.

We continue to take actions to improve our liquidity and access to capital resources. In order to fully execute the annual strategic business plan discussed during our shareholder meeting in November 2018, we required more capital resources. However, management continues to maintain that an equity financing at the current market conditions would be too dilutive and not in the best interests of our shareholders. We will pursue potential opportunities to secure short-term loans, long-term bank financing, revolving lines of credit with banking institutions and equity based transactions with interested financial firms and strategic industry partners in our effort to improve the Company’s financial position and enhance shareholder value.

The Company currently does not have an existing revolving credit facility but we were able to obtain term bank debt financing at the end of 2016 to finance critical manufacturing equipment and operating enhancements the majority of which was placed in service in fiscal year 2017. We continue to work with our vendors to obtain extended credit terms and increase credit lines where needed. Additionally, we continue to focus on adherence to established collection policies and proactive communication with repeat customers, including adjusting credit limits to allow for increased sales volume where warranted.

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.

To help address our cash resources which at times may be limited, we have held discussions with banks and other lenders regarding establishing a line of credit for short term cash needs, however at this time we have not succeeded in establishing such a line of credit.  We have entered into 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 we deem needed. As of September 30, 2019, we have not needed to activate this financing option as explained above.

Management continues to execute its strategic plan focusing on “Profitability as a Mindset”.  The Company’s emphasis on proper product pricing and new marketing campaigns has driven more profitable sales. Improvement in results has continued and the Company has been successful in reducing its required breakeven sales level. 

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 ended September 30, 2019, 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.  However, to expand manufacturing and sales operations beyond the current level, additional capital may be required.

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 November 8, 2019, the Company has approximately 1,626,000 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 fund the expansion of our manufacturing operations or to obtain additional working capital. Because of our low stock price, we are seeking shareholder approval to increase our authorized common stock at our annual shareholders meeting on December 4, 2019.

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, our sales prospects in light of new products, increased sales and resulting profits, 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 year ended June 30, 2019. 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.