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YoY shift: Lean +
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.19pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
+0.09pp
Flat
Net-tone change vs last year's 10-K.
MD&A
+0.29pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
adversely+3
conflict+2
loss+1
declines+1
shortages+1
Positive rising
effective+2
strength+1
integrity+1
Risk Factors (Item 1A)
7,271 words
ITEM 1A. RISK FACTORS
Risks Related to our Business
Investing in our common stock involves a high degree of risk. You should carefully consider the following Risk Factors before deciding whether to invest in Amerityre. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the Risk Factors below occur, our business, financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline.
Recent market condition changes in the chemical markets have forced us to increase the prices we charge customers for our products and could have a material adverse effect on demand for our products, results of operations, and our financial condition.
During the past 2 years we have evaluated and increased our product pricing, most recently in May 2022, to offset these raw material cost increases. We continue to work with our suppliers to secure adequate quantities of raw materials to meet the increased demand for our products. While management believes these responses to be necessary to address these issues, there can be no assurance they will be sufficient, nor that they will not cause us to customer orders or customers, which would have a material effect on our financial condition and results of operations.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
bottlenecks+1
unfortunately+1
late+1
recession+1
Positive rising
successful+2
positive+1
great+1
able+1
successfully+1
MD&A (Item 7)
3,590 words
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Overview
Amerityre 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, 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 to and are friendlier to the environment when compared to competitor offerings.
If the inflationary pressures in the United States and elsewhere continue, we could experience reduced margins and lose future business .
The current inflationary pressures may adversely affect our margins particularly since we have lacked the capital to accumulate material inventory. Although we have blanket order with some of our customers the duration on fixed pricing is limited, often to three months, due to increasing price risk on our materials. This customer pricing pressure may also result in the loss of contracts and/or future business. Finally, we are experiencing rising labor costs which may further tighten margins. Additionally, given our location next to California that recently enacted legislation requiring fast food locations to pay hourly employees at least $22 per hour and beginning in 2024 with mandatory inflationary increases even capped at 3.5% per year, we may see pressure on our wages to hourly employees as well as other labor cost increases.
The effects of Russia ’ s invasion of Ukraine on the capital markets and the economy is uncertain, we may have to deal with a recessionary economy and economic uncertainty including possible adverse effects upon the capital markets.
While the effects of Russia’s invasion of Ukraine and the resulting international sanctions are uncertain, they have already had an immediate effect on the global and United States economy by causing, among other things, increased inflation and substantial increases in the prices of oil, gas and other commodities. The conflict has created increased uncertainty in the capital markets with declines in leading market indexes. The duration of this conflict and its impacts are uncertain but may contribute to a likely recession.
If we incur material losses due to a weakening economy or other factors, we may encounter difficulty in raising capital to meet our capital expenditure or working capital needs.
While we incurred a small net income from operations in four of the past five fiscal years, Amerityre lost money from operations in all periods prior to fiscal year 2017. While we are optimistic that we will be able to continue this positiveprofitability trend, there is no guarantee that this will be the case, particularly given the economic uncertainty regarding the strength of the world economy in the coming year.
Since inception, we have been able to cover our operating losses from the sale of our securities. If we were to experience losses or negative net cash flow from operations in the future, there is no guarantee that funding sources will be available to cover future operating losses, and funding sources that are available could have a dilutive effect on our current investors. If we are unable to obtain adequate sources of funds to operate our business, we may not be able to continue as a going concern. Based on our financial results of the past two fiscal years we do not anticipate liquidity issues.
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Our business operations and plans could be adversely affected in the event we need additional financing and are unable to obtain such funding. The capital markets in general and for microcap companies are subject to a variety of risks including the recent weakness that is adversely affecting smaller companies like us, such as a lack of business diversification and domestic and global economic declines. To the extent that our business strategy requires expanding our operations, such expansion could be costly to implement and may cause us to experience significant losses. Insufficient funds may prevent us from implementing our business strategy or may require us to delay, scale back or eliminate certain opportunities for the commercialization of our technology and products. If we cannot generate adequate sales of our products or increase our revenues through licensing of our technology or other means, we may be forced to cease operations.
Our results of operations have been and may in the future be adversely impacted by another COVID-19 pandemic.
The COVID-19 pandemic resulted in significant volatility in the U.S. and global economies and led to a dramatic reduction in economic activity worldwide. We continue to experience adverse supply chain issues which are attributable to COVID-19. During the pandemic Amerityre continued normal operations as an essential business. Due to COVID-19, we have sustained price increases from our suppliers which have reduced our gross profit margins, although we seemingly have avoided issues. To date we have successfully implemented our own price increases to offset some of these cost increases. There is also a risk that some customers may not be able to pay for Amerityre products already shipped due to reductions in their revenues and a deterioration of their financial position as a result of supply chain shortages.
We cannot predict whether new strains of the virus pose the risk of future shutdowns, which could hinder our ability to manufacture and sell our products and materially adversely affect our results of operations.
A reduction in the growth rate of the U.S. or global economy could have an adverse impact on our business, operating results and financial position .
The national shutdown of the U.S. economy due to COVID-19 put the U.S. and global economies in a tailspin. While the US economy recovered, current financial market conditions and US government fiscal policy has begun to adversely affect the economy, and it appears the economy is heading for an extended slowdown as the US Federal Reserve raises market interest rates to fight inflation. Further, while market conditions in the agricultural commodity markets have improved over the past year, other potential headwinds to economic growth overall are the continuation and/or increase in tariffs, a trade war, renegotiated trade agreements with international trading partners, and Federal Reserve policies that tighten credit or cause other imbalances in the economy. A continuation or worsening of these conditions, including credit and capital markets disruptions, could have an adverse impact on our business, operating results and financial position. We may experience declines in revenues and cash flows because of reduced orders, payment delays or other factors caused by the economic problems of our customers and prospective customers. We may experience supply chain delays, disruptions or other problems associated with financial constraints faced by our suppliers and customers. Any of these potential problems could hinder our efforts to increase our sales and might, if severe and extensive enough, cause our sales to decline, jeopardizing our ability to successfully operate.
Because we face competition in all phases of our business, we may not be able to increase or maintain revenue or profitability, which may have an adverse effect our results of operations or stock price.
Several factors may affect future sales of our products even if we are successful in increasing our revenue base. These factors include whether competitors produce alternative or superior products, whether the cost of our products is competitive in the marketplace, and whether we can establish effective product sales and distribution networks. The tire industry is a highly competitive, global industry. Most of our competitors are larger companies with greater financial resources. Their access to greater resources enables them to adapt more quickly to changes in the markets we have targeted. Our competitors can devote greater resources to the development and marketing of new products. Most of the products we have developed have not obtained broad market acceptance and rely on our emerging technologies. To significantly improve our competitive position, we will need to make significant ongoing investments in manufacturing, customer support, marketing, sales, research and development and intellectual property protection. Intense competitive activity in the tire industry has caused and will likely continue to cause pressures on our business, as well as pressure on certain of our customers or suppliers. Further, to the extent negative macroeconomic events, such as COVID-19 pandemic, affect the industry generally, we may have difficulty navigating and adjusting to such circumstances relative to our larger, better-capitalized competitors in the tire industry. For example, by virtue of their larger scale of operations and wider market access, many of our larger competitors have been able to continue offering relatively lower prices for their products in the wake of increases in the costs of supplies and production, whereas we have been forced to increase our prices in response to market developments such as supply shortages caused by factors such as adverse weather conditions, geopolitical friction and COVID-19. To succeed as a company, we must continue to manufacture quality products and sell adequate quantities of products at prices sufficient to generate profits. We may not accomplish these objectives, which may have an adverse effect on our results of operations or stock price.
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Further, we trade on the OTCQB which generally is an illiquid market, are subject to the Securities and Exchange Commission (the “SEC”)’s penny stock rules and have no analyst coverage, all of which creates illiquidity and makes raising capital more difficult and expensive.
We may experience delays in resolving unexpected technical issues in the development of new technology, resulting in increased development costs and delays of anticipated sales and revenues.
As we develop and improve our products, we frequently address chemical, manufacturing and/or equipment-related issues. Some of these challenges cannot be anticipated because the products we are developing are new. The revision of existing manufacturing processes or procurement of specialized equipment may result in delays, and we may not meet our projected timetable for bringing products to market. Such delays may interfere with existing manufacturing activities, negatively affect revenues and/or increasing our cost of operations.
We have entered new market segments where we have limited resources, and we may be unable to successfully manage planned growth .
We have less marketing and product development resources at our disposal compared to our competitors in the tire industry. To remain profitable, our products must be cost-effective, economical to produce, and have the ability to be distributed on a commercially viable scale. Furthermore, if our technologies and products do not achieve or maintain market acceptance, we may not be profitable.
Our success depends on our ability to license, market and distribute, and commercialize our technologies and products effectively. We have limited manufacturing, marketing and distribution resources. Those resources we do have will therefore be critical to the success of new product offerings, and any unexpected issues therewith could be materially harmful to our business plans. We may not properly ascertain or assess any and all risks inherent in the industry. We may not be successful in entering into new licensing or marketing arrangements on favorable terms or at all. If we are unable to meet the challenges posed by our planned licensing, manufacturing, distribution and sales growth, our business may fail.
Our limited resources and working capital levels may hinder our ability to take advantage of business development opportunities in our various market segments, reducing growth and profitability of the Company.
Although our available working capital has increased over the past fiscal year, we continue to have limited resource levels relative to our competitors. This has forced us to prioritize choices regarding the pursuit of new market opportunities. Our inability to raise significant additional working capital has resulted in the Company deferring potentially attractive market opportunities. The Company continues to finance new business opportunities using internally generated cash flow. If we are not able to raise additional capital going forward, it is possible that additional opportunities to improve the Company’s market position will be lost.
We are subject to governmental regulations, including environmental and health and safety regulations.
Our business operations are subject to a variety of national, state and local laws and regulations, many of which deal with environmental, health and safety, and employment issues. While we believe we are in material compliance with applicable environmental, worker health and safety and employment requirements, there can be no assurances that we are correct, that we will continue to comply, or that new laws or regulations will not be passed that limit our ability to continue or expand our operations without expending significant additional funding on compliance. Our raw materials and tire manufacturing process are less hazardous than traditional rubber tire manufacturing. However, significant expenditures may be necessary if future compliance standards change or unknown conditions that require remediation are discovered. Further, there is a trend in some neighboring states, like California, Washington, and Oregon, towards passing employee friendly legislation. For example, a California court recently upheld a challenge to a statute classifying “gig economy” workers such as Uber drivers as employees under California employment law, rather than independent contractors. These laws increase compliance costs and the cost of doing business. We cannot predict what legislation Nevada may pass, or what case law may develop interpreting such laws. If we fail to comply with present and future laws and regulations, we could be subject to future liabilities or interruptions in our operations and costs, which could have a material adverse effect on our business.
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We attempt to protect the critical elements of our proprietary technology as trade secrets. Because of our reliance on trade secrets, we are unable to prevent third parties from independently developing technologies that are similar or superior to our technology or from successfully reverse engineering or otherwise replicating our technology.
In certain cases, where the disclosure of information required to obtain a patent would divulgecritical proprietary data, we may choose not to patent elements of our proprietary technology and intellectual property. Instead, we rely on trade secret laws to protect certain elements of our proprietary technology and processes, such as our key polyurethane formulations. These formulations are critical elements of our proprietary technology. While we enter into non-disclosure agreements with our employees and certain third parties with which we do business, our trade secrets could nonetheless be compromised by third parties, or intentionally or accidentally by our employees. It is also possible that others will independently develop technologies that are similar or superior to our technology. Third parties may also legally reverse engineer our products. Independent development, reverse engineering, or other legal copying of those elements of our proprietary technology could enable third parties to benefit from our technologies without compensating us. The protection of proprietary technology through claims of trade secret status has been the subject of increasing claims and litigation by various companies both in order to protect proprietary rights as well as for competitive reasons, even when proprietary claims are unsubstantiated. The prosecution of litigation to protect our trade secrets or the defense of such claims is costly and unpredictable given the uncertainty and rapid development of the principles of law pertaining to this area. Intellectual property litigation has had two trends which can make it prohibitively expensive - (i) the use of litigation funding companies and (ii) the presence of large law firms. The effect is to increase legal and expert litigation fees. These factors also arise with respect to the following patent risk factors. We may also be subject to claims by other parties with regard to the use of technology information and data that may be deemed proprietary to others. The independent development of technologies that are similar or superior to our technology or the reverse engineering of our products by third parties would have a material adverse effect on our business and results of operations. In addition, the loss of our ability to use any of our trade secrets or other proprietary technology would have a material adverse effect on our business and results of operations. Because trade secrets do not ensure exclusivity and pose such issues with respect to enforcement, third parties may decline to partner with us or may pay lesser compensation for use of our technology which is protected only by trade secrets.
Our business depends on the protection of our patents and other intellectual property and may suffer if we are unable to adequately protect such intellectual property .
Our success and ability to compete are substantially dependent upon our intellectual property. We rely on patent, trademark and copyright laws, trade secret protection and confidentiality or license agreements with our employees, customers, strategic partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate. There are events that are outside of our control that pose a threat to our intellectual property rights as well as to our products and services. For example, effective intellectual property protection may not be available in every country in which we license our technology, or our products are distributed. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. The risk of unauthorized access to our intellectual property and other confidential business information is further exacerbated with the general trend toward remote working in the past six-months, and as a result we may be more susceptible to computer hackers seeking access to our proprietary information. Any impairment of our intellectual property rights could harm our business and our ability to compete. Also, protecting our intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results. In addition, other parties may independently develop similar or competing technologies designed around any patents that may be issued to us.
We have been granted a number of U.S. patents relating to certain aspects of our manufacturing technology and processes and use of polyurethane to make tires, and we may seek further patents on future innovations. Our ability to either manufacture products or license our technology is substantially dependent on the validity and enforcement of these patents and patents pending. We cannot guarantee that our patents will not be invalidated, circumvented, or challenged, that patents will be issued for our patents pending, that the rights granted under the patents will provide us competitive advantages or that our current and future patent applications will be granted.
Third parties may invalidate our patents.
Third parties may seek to challenge, invalidate, circumvent or render unenforceable any patents or proprietary rights owned by or licensed to us based on, among other things:
subsequently discovered prior art or engineering designs;
lack of entitlement to the priority of an earlier, related application; or
failure to comply with the written description, best mode, enablement or other applicable requirements.
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United States patent law requires that a patent must disclose the “best mode” of creating and using the invention covered by a patent. If the inventor of a patent knows of a better way, or “best mode,” to create the invention and fails to disclose it, that failure could result in the loss of patent rights. Our decision to protect certain elements of our proprietary technologies as trade secrets and to not disclose such technologies in patent applications, may serve as a basis for third parties to challenge and ultimately invalidate certain of our related patents based on a failure to disclose the best mode of creating and using the invention claimed in the applicable patent. If a third party is successful in challenging the validity of our patents, our inability to enforce our intellectual property rights could seriouslyharm our business.
We may be liable for infringing the intellectual property rights of others .
Our products and technologies may be the subject of claims of intellectual property infringement in the future. Our technologies may not be able to withstand any third-party claims or rights against their use. Any intellectual property claims, with or without merit, could be time-consuming, expensive to litigate or settle, could divert resources and attention and could require us to obtain a license to use the intellectual property of third parties. We may be unable to obtain licenses from these third parties on favorable terms, if at all. Even if a license is available, we may have to pay substantial royalties to obtain it. If we cannot defend such claims or obtain necessary licenses on reasonable terms, we may be precluded from offering most or all of our products or services and our business and results of operations will be adversely affected.
Because our tire products are derived from relatively new technology, our product liability insurance costs will likely increase and we may be exposed to product liability risks that could adversely affect profitability .
Even if tests indicate that our tires meet industry performance standards, these products may subject us to significant product liability claims because the technology is relatively new and there is little history of long-term use in particular applications. Moreover, because our products are and will be used in applications where their failure could result in injury, we could also be subject to product liability claims. Introduction of such new products and increased use of our existing products will most likely increase our product liability premiums and defense of potential claims could increase insurance costs even further, which could substantially increase our expenses. Any insurance we obtain may not be sufficient to cover the losses incurred through such lawsuits.
Significant increases in the price of chemicals, steel and other raw materials used in our products could increase our production costs and decrease our profit margins or make our products less competitive in the marketplace due to price increases .
The materials used to produce our products are susceptible to price fluctuations due to supply and demand trends, economic factors, and other unforeseen factors. If we are successful in implementing our business strategy, the quantities of chemical raw materials required by us or by others that utilize our technology may increase significantly. Shortages have recently resulted in chemical price increases. The COVID-19 pandemic has seen us experience increased chemical and supply costs and reduced our gross profit margins. We have experienced increases in the cost of wheel components due to the increased cost of steel and the imposition of tariffs. Existing trade agreements with foreign countries may be subject to change in the future, with tariffs or import duties being levied by the US government increasing the cost of our foreign-based raw materials. Chinese tariffs have resulted in an increase in our cost of our imported components. Because we are introducing products that will compete, in part, on the basis of price, we may be unable to pass cost increases on to our customers in order to stay competitive. If we are unable to pass on raw material cost increases to our customers, our future results of operations and cash flow will be materially adversely affected. Because of factors such as COVID-19, we may encounter issues with our manufacturing facility or resources supply which may materially and adversely impact our business.
Our ability to execute our business plan would be harmed if we are unable to retain or attract key personnel .
Our technology has been developed by a small team and only a limited number of team members maintain the technical knowledge to produce our products. Our future success depends, to a significant extent, upon our ability to retain and attract the services of our key personnel. The loss of the services of our Chief Executive Officer could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements could be difficult, and competition for experienced personnel is intense. We do not carry key person insurance on any of our officers.
If our data or our users ’ content is hacked, including through privacy and data security breaches, our business could be damaged, and we could be subject to liability. Because the personal information that we, our customers or our vendors collect may be vulnerable to breach, theft or loss, any of these factors could adversely affect our reputation and operations.
Our business is and we expect it will continue to be reliant upon the Internet. Cyber security events have caused significant damage to large well-known companies. If our systems are hacked and our confidential information is misappropriated, we could be subject to liability. Further, if third party vendors experience data or cyber security breaches, sensitive business or customer information could be subject to similar risks.
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Possession and use of personal information of our customers and vendors subjects us to risks and costs that could harm our business. We also collect and maintain personal information of our employees in the ordinary course of our business. Errors in the storage, use or transmission of personal information could result in a breach of customer or employee privacy. Possession and use of personal information in our operations also subjects us to possible regulatory burdens that could require notification of data breaches and restrict our use of personal information. We cannot guarantee that there will not be a breach, loss or theft of personal information that we store or our third parties’ store. If we are hacked and there is a breach, theft or loss of personal information could have a material adverse effect on our reputation and results of operations and result in liability under state and federal privacy statutes and legal or administrative actions by state attorneys general, private litigants, and federal regulators and by such other international laws including the European Union’s GDPR and their respective enforcement mechanisms, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may fail to detect the existence of a breach of user content and be unable to prevent unauthorized access to user and company content. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often not recognized until launched against a target. They may originate from less regulated third world countries where lax local enforcement and poverty create opportunities for hacking. If our security measures are breached, or our personal information or that of our customers, suppliers, employees, or independent contractors is otherwise accessed through unauthorized means, or if any such actions are believed to occur, we may be materially harmed.
As of the date of this filing we have not experienced a breach of data security.
If we fail to comply with laws and regulations relating to privacy, data protection, information security, advertising and consumer protection, government access requests, or new laws in one or more of these areas are enacted, it could result in proceedings, actions, or penaltiesagainst us and could adversely affect our business, financial condition, and results of operations.
We rely on a variety of marketing techniques, and we are or may become subject to various laws and regulations that govern such marketing and advertising practices. A variety of federal, state, and international laws and regulations govern the collection, use, retention, sharing, and security of personal data.
Laws and regulations relating to privacy, data protection, information security, marketing and advertising, and consumer protection are evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other regulations or our current practices. As a result, our practices may not have complied or may not comply in the future with all such laws, regulations, requirements, and obligations. We have implemented various features, integrations, and capabilities as well as contractual obligations intended to enable us to comply with applicable privacy and security requirements in our collection, use, and transmittal of data, but these features do not ensure our compliance and may not be effectiveagainst all potential privacy concerns. As a United States company, we may be obliged to disclose data pursuant to government requests under United States law. Compliance with such requests may be inconsistent with local laws in other countries where our customers reside. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any privacy or consumer protection-related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject, or other legal obligations relating to privacy or consumer protection, whether federal, state, or international, could adversely affect our reputation, brand, and business, and may result in claims, proceedings, or actions against us by governmental entities, customers, users of our website, third party service providers, or others, or may require us to change our operations and/or cease using certain types of data. Any such claims, proceedings, or actions could hurt our reputation, brand, and business, force us to incur significant expenses in defense of such proceedings or actions, result in adverse publicity, distract our management, increase our costs of doing business, result in a loss of customers or vendors, and result in the imposition of monetary penalties.
The legislative and regulatory bodies or self-regulatory organizations in various jurisdictions both inside and outside the United States may expand current laws or regulations, enact new laws or regulations, or issue revised rules or guidance regarding privacy, data protection, consumer protection, information security, and online advertising. For example, in June 2018 the State of California enacted the California Consumer Privacy Act of 2018 (the “CCPA”), which took effect on January 1, 2020. The CCPA requires companies that process personal information on California residents to make new disclosures to consumers about such companies’ data collection, use, and sharing practices and inform consumers of their personal information rights such as deletion rights, allows consumers to opt out of certain data sharing with third parties, and provides a new cause of action for data breaches. Additionally, in November 2020, California enacted the California Privacy Rights Act of 2020 (the “CPRA”), which amends and expands the scope of the CCPA, while introducing new privacy protections that extend beyond those included in the CCPA and its implementing regulations. The CCPA, as amended and expanded by the CPRA, is one of the most prescriptive general privacy law in the United States and may lead to similar laws being enacted in other U.S. states or at the federal level. Most of the provisions of the CPRA become fully operative beginning on January 1, 2023.
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The State of Nevada has also passed a law, which took effect on October 1, 2019, that amends the state’s online privacy law to allow consumers to submit requests to prevent websites and online service providers (“Operators”) from selling personally identifiable information that Operators collect through a website or online service. As to Nevada, as of October 1, 2021, Nevada’s amended privacy law imposes additional obligations on qualifying “data brokers” and permits consumers to opt out of a broader range of sales of their personal information. The Nevada act applies to any person whose primary business is “purchasing covered information” about Nevada residents “with whom the person does not have a direct relationship” if the information is purchased “from operators or other data brokers and making sales of such covered information.” Qualifying data brokers must establish a designated request address through which a Nevada consumer can ask to opt out of the sale of their covered information. In summary, Nevada consumers now have a broad right to opt out whenever a qualifying “operator” or “data broker” makes covered information available in exchange for money. This aligns Nevada’s opt-out right more closely with similar consumer privacy rights in Colorado and Virginia. At least 35 states and the District of Columbia in 2022 introduced or considered almost 200 consumer privacy bills. More and more states may continue to enact similar laws. Proposed federal legislation, like the American Data Privacy and Protection Act, will likely continue to be debated and, at some point, may be enacted in some form.
As to other states, on March 2, 2021, the Governor of Virginia signed into law the Virginia Consumer Data Protection Act (the “VCDPA”). The VCDPA creates consumer rights, similar to the CCPA, but also imposes security and assessment requirements for businesses. In addition, on July 7, 2021, Colorado enacted the Colorado Privacy Act (“CoCPA”), joining the growing list of states adopting comprehensive consumer privacy laws. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data. Each of these privacy, security, and data protection laws and regulations, and any other such changes or new laws or regulations, could impose significant limitations, require changes to our business model or practices, or restrict our use or storage of personal information, which may increase our compliance expenses and make our business more costly or less efficient to conduct. In addition, any such changes could compromise our ability to develop an adequate marketing strategy and pursue our growth strategy effectively, which, in turn, could adversely affect our business, financial condition, and results of operations. Further, the data protection laws of various jurisdictions often differ greatly and the regulatory landscape in general is constantly changing, and we may be unable to effectively adapt and comply particularly with respect to our website and online sales Section 6(3) of a Connecticut statute signed May 10, 2022, states a data controller shall “establish, implement and maintain reasonable administrative, technical and physical data security practices to protect the confidentiality, integrity and accessibility of personal data appropriate to the volume and nature of the personal data at issue.” The effective date for that law is July 1, 2023. Utah’s Consumer Privacy Act provides consumers the right to know what personal data a business collects, how the business uses the personal data, and whether the business sells the personal data. The effective date is December 31, 2023. Additionally, Maine recently enacted the Data Collection Protection Act, creating the Maine Data Collection Protection Act, which prohibits data collectors from collecting and aggregating, selling, or using specific types of public documents or information.
In addition, federal and state governmental authorities continue to evaluate the privacy implications inherent in the use of third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes. The U.S. government has enacted, has considered, or is considering legislation or regulations that could significantly restrict the ability of companies and individuals to utilize online behavioral tracking, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could, if widely adopted, result in the use of third-party cookies and other methods of online tracking becoming significantly less effective. The regulation of the use of these cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms and consequently, materially and adversely affect our business, financial condition, and results of operations.
Risks Related to our Common Stock
Because our common stock is subject to the “ penny stock ” rules, brokers cannot generally solicit the purchase of our common stock, which adversely affects its liquidity and market price.
The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the OTCQB is presently less than $5.00 per share and therefore our common stock is considered a penny stock according to SEC rules. Further, we do not expect our stock price to rise above $5.00 in the immediate future. The penny stock designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules limit the ability of broker-dealers to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares.
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Moreover, as a result of apparent regulatory pressure from the SEC and the Financial Industry Regulatory Authority, a growing number of broker-dealers decline to permit investors to purchase and sell or otherwise make it difficult to sell shares of penny stocks. The penny stock designation may continue to have a depressive effect upon our common stock price.
If our common stock becomes subject to a “ chill ” imposed by the Depository Trust Company (the “ DTC ” ), your ability to sell your shares may be limited.
The DTC acts as a depository or nominee for street name shares that investors deposit with their brokers. DTC in the last several years has increasingly imposed a chill or freeze on the deposit, withdrawal and transfer of common stock of issuers whose common stock trades on the tiers of the OTC Markets like that of the Company. Depending on the type of restriction, a chill or freeze can prevent shareholders from buying or selling shares and prevent companies from raising money. A chill or freeze may remain imposed on a security for a few days or an extended period of time (in at least one instance a number of years). While we have no reason to believe a chill or freeze will be imposed against our common stock in the future, if it were your ability to sell your shares would be limited. In such event, your investment will be adversely affected.
Due to factors beyond our control, our stock price may be volatile.
Any of the following factors could affect the market price of our common stock:
Our future financial results;
Any downturn in the economy in the United States, including currently as a result of increased interest rates;
The effect of tariffs and other political factors which increases our costs and causes economic issues for farmers who cease or reduce purchases of our products;
Regulatory changes including new laws and rules which adversely affect us;
Our public disclosure of the terms of any financing which we consummate in the future;
Our failure to generate increasing material revenues;
Our failure to remain profitable;
Any acquisitions we may consummate;
Announcements by us or our competitors of significant contracts;
Changes in our management; or
Changes in market valuations of similar companies.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.
Because we may issue preferred stock without the approval of our shareholders and have other anti-takeover defenses, it may be more difficult for a third party to acquire us and could depress our stock price .
In general, our Board of Directors may issue, without a vote of our shareholders, one or more additional series of preferred stock that have more than one vote per share. Without these restrictions, our Board could issue preferred stock to investors who support us and our management and give effective control of our business to our management. Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and a decline in interest of our common stock. This could make it more difficult for shareholders to sell their common stock. This could also cause the market price of our common stock shares to drop significantly, even if our business is performing well.
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Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our common stock.
It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since these firms cannot recommend the purchase of our common stock under the penny stock rules referenced in an earlier risk factor. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It may also make it more difficult for us to attract new investors at times when we require additional capital.
Our common stock may be affected by limited trading volume and price fluctuations, which could adversely impact the value of our common stock.
There has been limited trading in our common stock and there can be no assurance that an active trading market in our common stock will either develop or be maintained. Our common stock may experience significant price and volume fluctuations in the future, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future.
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our shareholders sell substantial amounts of our outstanding common stock, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, could make it difficult to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. In May 2020, our 2013 Series Preferred Shares automatically converted into 20,000,000 shares of common stock constituting approximately 27% of our outstanding common stock as of the date of this report. These shares are subject to the limitations of Rule 144(e )(1) under the Securities Act of 1933 which, among other things, limit the number of shares which can be sold to 1% of our outstanding stock every three months.
susceptible
failure
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 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 represents 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, and lawn/garden tires.
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Despite the ongoing negative effects of COVID-19, supply chain bottlenecks, and severe inflation on the overall US economy, we experienced higher than expected record demand for our polyurethane foam tires in the recent quarter. Sales for the fiscal fourth quarter 2022 were 40.8% higher than the sales level in fiscal fourth quarter 2021. We continue to see strong sales demand, as we engage new customers and expand our customer base.
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 strong growth. We expect these tires to continue to grow in popularity as more people discover these tires for industrial applications. In fiscal year 2022 we sold a record number of golf cart tire assemblies (18 x 8.50 tire assemblies).
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, with other industrial and agricultural applications representing other opportunities. Overall sales volumes of our forklift tires remain small, less than 0.1% of our total sales revenue. Price sensitive consumers continue to favor imported solid rubber press-on forklift tires rather than our products. We have not devoted significant resources towards promoting this product line. We have been working with OEMs to utilize our elastomer formulations for large industrial equipment tires and agricultural applications.
Light Density Elastomer Tires – The Company continues to see great interest in its light-density elastomer formulation for use in tire applications where customers need higher abrasion resistance and load bearing capability. Our Elastothane® 500 formulation provides better abrasion resistance and overall performance in these areas compared to our closed cell foam formulation. Lawn and garden tire applications continue to drive increased sales of this formulation. We expect Agricultural tires sales to increase in the coming quarters as farm income benefits from higher crop prices and farmers have more disposable income. We continue to approach OEMs and large distributors about promoting and utilizing our tires for certain agricultural applications, but to date we have not been able to secure a partnership that brings us significant business. and several are evaluating sample tires.
We believe investment in new and improved products is vital 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 evaluation 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.
A major component of the strategic operating plan we discussed during our annual meeting in December 2021 was the desire to increase our product distribution through partnerships with large OEMs and distributors. We continue to pursue discussions with various entities to establish these relationships, but unfortunately we have not been successful in completing an arrangement. However, we maintain that an agreement with a partner that can provide an established distribution network and/or financial resources is important to enable Amerityre to quickly scale its product portfolio in key market segments.
As described above, our product line covers diverse market segments which are unrelated in terms of customer base, product distribution, market demands and competition. Our sales team is comprised of independent manufacturer representatives with inside sales support. The Company’s continued emphasis on proper product pricing continues to drive more profitable sales. Our website educates the marketplace about our products as well as offers a growing 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;
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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 directors, 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.
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, both in new customer accounts and sales of new products to existing customers, 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 years ended June 30, 2022 and 2021 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
Net revenues
Cost of revenues
Gross profit
Research and development expenses
Sales and marketing expense
General and administrative expense (1)
Gain on debt extinguishment
Loss on assets, due to write down or disposal
Other income
Net income
(1) Includes stock-based compensation expense of $116,123 and $88,806 for the fiscal years ended June 30, 2022, and 2021, respectively.
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Year Ended June 30, 2022 Compared to the Year Ended June 30, 2021
Net revenues . Net revenues of $6,495,530 for the year ended June 30, 2022, represents an increase of $1,632,118 or 33.6%, over net revenues of 4,863,412 during the year ended June 30, 2021. These represent record revenue results for Amerityre. The results were primarily driven by increased demand for polyurethane foam tires from current customers We expect sales for the upcoming fiscal year to be level with fiscal year 2022 results, as the negative effects of an expected slowing US economy are offset by sales to new customer accounts.
Cost of revenues . Cost of revenues for the year ended June 30, 2022, was $4,740,931 or 73.0% of revenues compared to $3,579,227 or 73.6% of revenues for the year ended June 30, 2021. We experienced higher raw material costs, particularly chemical feedstocks, during the recent quarter which pressured gross profit margins. We were successful at maintaining margins through the price increases we implemented during the year. We expect raw material prices to stabilize in fiscal year 2023, as US government monetary policy slows the economy and demand slows to a point where available supply and demand equalize, we will continue to monitor our product pricing to determine if any adjustments are required due to operating cost changes. We recognize that continuing increases in raw material costs may result in reduced product sales if we are forced to turn away sales because we cannot sell product at a price that is profitable.
Gross Profit . Gross profit for the year ended June 30, 2022, of $1,754,599 represents a 36.7% increase over gross profit of $1,284,185 for the year ended June 30, 2021. The fiscal year 2022 gross profit reflects a 27.0% gross margin for product sales compared to a gross margin on product sales of 26.4% for fiscal year 2021. The level gross margin figures year over year indicates that our product pricing strategy was successful in covering the cost increases in raw materials and other operating costs.
Research and Development expenses . Research and development expense of $101,817 for the year ended June 30, 2022, which is basically the same expense of $102,265 for the year ended June 30, 2021. Expenditure on research and development continues to be focused on addressing company needs on new formulations and new product development. All research and development activities continue to be financed from our internally generated cash flow.
Sales and Marketing expenses. Sales and marketing expense of $281,440 for the fiscal year ended June 30, 2022, represents a 24.9% increase over expenses of $224,686 for the fiscal year ended June 30, 2021. The difference between periods relates to higher sales commission expense due to higher overall sales
General and Administrative expenses. General and administrative expenses of $963,890 for the year ended June 30, 2022, represents a 11.8% increase over the same expense of $860,693 for the year ended June 30, 2021. The increase was caused by higher executive compensation, higher merchant processing fees by customers paying with a credit card, offset by lower legal fees and warranty expense. We continue to pursue more efficient ways to conduct our business activities.
Other Income (Expense). Other income was $24,435 for the year ended June 30, 2022, which is lower than the figure from fiscal year 2021. Other income of $161,795 in the fiscal year ended June 30, 2021, includes forgiveness of our loan from the Small Business Administration Paycheck Protection Program plus various small grants available from Federal and State agencies during the fiscal year, offset by loss on the full impairment of equipment available for sale.
Net Income. The net income for the year ended June 30, 2022, of $431,887 represents a 67.2% increase from the $258,336 net income for the year ended June 30, 2021. Removing the one-time, positive effect of the $149,500 PPP loan forgiveness, the net income increase year over year was 296.8%. The fiscal year net income of $431,887 represents a record annual profit for Amerityre.
Liquidity and Capital Resources
Cash Flows
The following table sets forth our cash flows for the fiscal years ended June 30, 2022, and 20201.
Years ended June 30,
Net cash provided by/(used in) operating activities
Net cash used in investing activities
Net cash (used in) financing activities
Net increase/(decrease) in cash during period
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The Company has evaluated its current cash position relative to its cash requirements in the future and has determined its cash levels are sufficient to cover its cash needs. The Company enjoys a strong level of cash on hand as well as an unused credit line facility. These cash resources have been critical during the past year as working capital needs have increased due to the 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 is also planning to upgrade production equipment during fiscal year 2023, and we are completing an analysis to determine if debt financing is required to complete the project.
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. In February 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 in February 2022 due to a late customer payment. The amount borrowed was paid back in full in March 2022. As of March 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
On September 14, 2022, our total cash balance was $1,099,392, none of which is restricted; accounts receivables were $408,463; and inventory, net of reserves for slow moving or obsolete inventory, and other current assets was $1,021,508. Our total indebtedness, specifically which management reviews for cash management, was $1,022,792 and includes $696,829 in accounts payable and accrued expenses, $2,000 in current portion of long-term debt, $60,713 in long-term debt and $263,250 in total operating lease liability.
We continue to take actions to improve our liquidity and access to capital resources. Management believes that an equity financing in the current market environment at the current share price would be too dilutive and not in the best interests of our shareholders. In the past year we have successfully increased the limit on our existing bank line of credit. We have utilized this line of credit as short-term access to capital which has allowed us to make strategic purchases of raw materials.
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 year ended June 30, 2022, we have analyzed our cash needs for the next twelve months. We believe that our available cash, accounts receivables, and existing bank credit lines 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 another significant decrease in demand from our customers. The emergence of new and transmittable variants of COVID-19 may result in possible resurgence of the virus and new restrictions in certain geographies and among certain businesses. 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” for a description of the material risks that the Company currently faces in connection with COVID-19. If there is a new shutdown of the economy, reduction in demand for our products or other adverse effect on our business, we may lack sufficient working capital to meet our needs for the next 12 months.
The Company has, 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 September 14, 2022, the Company has approximately 13,527,000 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.
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, the impact of inflation and the effect of rising interest rates on the economy and our business, the possible recession, future tariffs particularly on Chinese imports, our level of overtime, 2023 capital improvements, the effect of COVID-19, expected increases in agricultural spending and any resultant positive effect on our business, prospective partnerships and business relationships with large OEMs including some with whom we are currently in discussions, the continued strength of our current polyurethane foam tire market segment, the prudence of our research and development investments, the sufficiency of our cash on hand and credit line facility, 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 “Risk Factors” 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 due to of new information, future events, changed circumstances or any other reason after the date this report is filed.
