Results of Operations

Three months ended December 31, 2019 compared to three months ended December 31, 2018

Allied had net sales of $7.3 million for the three months ended December 31, 2019, down $0.8 million from net sales of $8.1 million in the prior year same quarter. Domestic sales were down 7.8% while international sales, which represented 25.4% of second quarter sales, were down 15.3% from the prior year same quarter.

Orders for the Company's products for the three months ended December 31, 2019 of $7.7 million were $0.2 million or 2.5% lower than orders for the prior year same quarter of $7.9 million. Domestic orders are down 2.2% over the prior year same quarter while international orders, which represented 27.5% of second quarter orders, were 4.4% lower than orders for the prior year same quarter. International sales and orders are subject to fluctuation in international demand. International and construction sales and orders are subject to fluctuation in demand. Internationally, these fluctuations are at times due to political and economic uncertainty.

Gross profit for the three months ended December 31, 2019 was $1.3 million, or 17.8% of net sales, compared to $1.2 million, or 14.8% of net sales, for the three months ended December 31, 2018. The $0.1 million increase in gross profit is attributable to a decrease in overhead expenses by $0.4 million which consisted of a $0.2 million decrease in fringe benefits including medical benefit payments and a $0.1 million decrease in depreciation.

Selling, general and administrative expenses for the three months ended December 31, 2019 were $2.9 million compared to selling, general and administrative expenses of $2.0 million for the three months ended December 31, 2018. The increase is primarily due to the $0.9 million provision for environmental cleanup costs at the Company's facility in Stuyvesant Falls, New York.

Loss from operations was $1,512,455 for the three months ended December 31, 2019 compared to loss from operations of $761,786 for the three months ended December 31, 2018.

Allied had a loss before benefit from income taxes in the second quarter of fiscal 2020 of $1,531,484 compared to loss before benefit from income taxes in the second quarter of fiscal 2019 of $779,427. The Company's tax provision net of valuation allowance reflects a tax benefit of $0 for the three months ended December 31, 2019 and 2018. In the quarter ended December 31, 2019 the tax benefit of losses in the amount of approximately $387,000 was fully offset by a valuation allowance of equivalent amount. In the quarter ended December 31, 2018 the Company recorded the tax benefit of losses incurred in the amount of approximately $201,000 net of additions to the valuation allowance of like amount. To the extent that the Company's losses continue in future quarters, the tax benefit of those losses will be fully offset by a valuation allowance.





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Net loss for the second quarter of fiscal 2020 was $1,531,484 or $0.38 per basic and diluted share compared to net loss of $779,427 or $0.19 per basic and diluted share for the second quarter of fiscal 2019. The weighted average number of common shares outstanding, used in the calculation of basic and diluted earnings per share for the second quarters of fiscal 2020 and 2019 were 4,013,537.

Six months ended December 31, 2019 compared to six months ended December 31, 2018

Allied had net sales of $15.3 million for the six months ended December 31, 2019, down $0.1 million, or 0.6% from net sales of $15.4 million in the prior year same period. Domestic sales were down 4.2% from the prior year same period while international sales were up 11.1% from the prior year same period. International business represented 26.8% of sales for the first six months of fiscal 2020.

Orders for the Company's products for the six months ended December 31, 2019 of $15.4 million were $0.1 million or 0.7% higher than orders for the prior year same period of $15.3 million. Domestic orders are up 0.4% from the prior year same period while international orders, which represented 26.6% of orders for the first six months of fiscal 2020, were 0.5% lower than orders for the prior year same period.

Gross profit for the six months ended December 31, 2019 was $2.6 million, or 17.0% of net sales, compared to $2.1 million, or 13.6% of net sales, for the six months ended December 31, 2018. The $0.5 million increase in gross profit is mainly attributable to a $0.6 million decrease in fringe benefits including medical benefits. The Company is self-insured for medical benefits and there is variation in the amount of claims over time.

Selling, general and administrative expenses for the six months ended December 31, 2019 were $4.7 million compared to selling, general and administrative expenses of $4.1 million for the six months ended December 31, 2018. The increase is primarily due to the $0.9 million provision for environmental cleanup costs at the Company's facility in Stuyvesant Falls, New York. This increase was partially offset by a $0.3 million decrease in personnel cost consisting of salary and fringe benefits.

Loss from operations was $2.1 million for the six months ended December 31, 2019 compared to loss from operations of $2.0 million for the six months ended December 31, 2018.

Allied had a loss before benefit from income taxes in the first six months of fiscal 2020 of $2.1 million compared to loss before benefit from income taxes in the first six months of fiscal 2019 of $2.0 million. The Company's tax provision net of valuation allowance reflects a tax benefit of $0 for the six months ended December 31, 2019 and 2018. In the six months ended December 31, 2019 the tax benefit of losses in the amount of approximately $541,000 was fully offset by a valuation allowance of equivalent amount. In the six months ended December 31, 2018 the Company recorded the tax benefit of losses incurred in the amount of approximately $506,000 net of additions to the valuation allowance of like amount. To the extent that the Company's losses continue in future quarters, the tax benefit of those losses will be fully offset by a valuation allowance.





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Net loss for the six months ended December 31, 2019 was $2.1 million or $0.53 per basic and diluted share compared to net loss of $2.0 million or $0.50 per basic and diluted share for the first six months of fiscal 2019. The weighted average number of common shares outstanding, used in the calculation of basic and diluted earnings per share for the first six months of fiscal 2020 and 2019 was 4,013,537.

Liquidity and Capital Resources

The Company's primary sources of liquidity are its cash, cash equivalents, other items of working capital and available borrowing under the Credit Facility discussed below.

The Company's working capital was $5.5 million at December 31, 2019 compared to $7.4 million at June 30, 2019. Accounts Receivable decreased by $0.2 million, Accounts Payable increased by $0.4 million, Other Accrued Liabilities increased by $0.5 million and debt increased $1.0 million. During fiscal 2020, these decreases in working capital were partially offset by a $0.2 million increase in Inventory and a $0.2 million increase in Cash and cash equivalents. Accounts Payable is subject to normal fluctuations in purchasing levels and the timing of payments within the quarter and Other Accrued Liabilities increased by a $0.9 million provision for environmental costs. Accounts Receivable was $2.9 million at December 31, 2019, a decrease from $3.2 million at June 30, 2019. Accounts Receivable as measured in days sales outstanding ("DSO") was 39 DSO at December 31, 2019 and June 30, 2019. The Company does adjust product forecast, order quantities and safety stock based on changes in demand patterns in order to manage inventory levels.

As of December 31, 2019, the Company was party to a Loan and Security Agreement with North Mill Capital, LLC ("North Mill"), as successor in interest to Summit Financial Resources, L.P., dated effective February 27, 2017, as amended April 16, 2018 and April 24, 2019 (as amended, the "Credit Agreement"). Pursuant to the Credit Agreement, the Company obtained a secured revolving credit facility (the "Credit Facility"). The Company's obligations under the Credit Facility are secured by all of the Company's personal property, both tangible and intangible, pursuant to the terms and subject to the conditions set forth in the Credit Agreement. Availability of funds under the Credit Agreement is based on the Company's accounts receivable but will not exceed $2,000,000. At December 31, 2019 availability under the agreement was $0.4 million. The Company expects that it will use the Credit Facility to finance the Company's operations in the short term.

The Credit Facility will be available, subject to its terms, on a revolving basis until it expires on February 27, 2021, at which time all amounts outstanding under the Credit Facility will be due and payable. Advances will bear interest at a rate equal to 2.00% in excess of the prime rate as reported in the Wall Street Journal. Interest is computed based on the actual number of days elapsed over a year of 360 days. In addition to interest, the Credit facility requires that the Company pay the lender a monthly administration fee in an amount equal to forty-seven hundredths percent (0.47%) of the average outstanding daily principal amount of loan advances for the each calendar month, or portion thereof.





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Regardless of the amount borrowed under the Credit Facility, the Company will pay a minimum amount of .25% (25 basis points) per month on the maximum availability ($5,000 per month). In the event the Company prepays or terminates the Credit Facility prior to February 27, 2021, the Company will be obligated to pay an amount equal to the minimum monthly payment multiplied by the number of months remaining between February 27, 2021 and the date of such prepayment or termination.

Under the Credit Agreement, advances are generally subject to customary borrowing conditions and to North Mill's sole discretion to fund the advances. The Credit Agreement also contains covenants with which the Company must comply during the term of the Credit Facility. Among other things, such covenants require the Company to maintain insurance on the collateral, operate in the ordinary course and not engage in a change of control, dissolve or wind up the Company.

The Credit Agreement also contains certain events of default including, without limitation: the failure to make payments when due; the material breach of representations or warranties contained in the Credit Agreement or other loan documents; cross-default with other indebtedness of the Company; the entry of judgments or fines that may have a material adverse effect on the Company; failure to comply with the observance or performance of covenants contained in the Credit Agreement or other loan documents; insolvency of the Company, appointment of a receiver, commencement of bankruptcy or other insolvency proceedings; dissolution of the Company; the attachment of any state or federal tax lien; attachment or levy upon or seizure of the Company's property; or any change in the Company's condition that may have a material adverse effect. After an event of default, and upon the continuation thereof, the principal amount of all loans made under the Credit Facility would bear interest at a rate per annum equal to 20.00% above the otherwise applicable interest rate (provided, that the interest rate may not exceed the highest rate permissible under law), and North Mill would have the option to accelerate maturity and payment of the Company's obligations under the Credit Facility.

At December 31, 2019, the Company had $985,790 of indebtedness, including short-term debt, long term debt and an immaterial amount of capital leases. The prime rate as reported in the Wall Street Journal was 4.75% on December 31, 2019.

Further reductions in availability, either due to continued losses, or changes by North Mill to the Company's borrowing base, could have a material adverse impact on our liquidity and ability to meet our operating requirements. In such a case, the Company would need to access additional sources of liquidity if it does not return to profitability. If the Company were unable to reach such an agreement with North Mill to increase availability, the Company could also attempt to negotiate a larger credit facility with another lender, but the Company would be obligated to pay the above described pre-payment penalty to North Mill. There is no assurance that the Company could secure either increased availability from North Mill or a new credit facility from a new lender, in which case the Company would have to use other assets to obtain liquidity, such as a sale-leaseback of some or all of its real estate. The Company was in compliance with all of the covenants associated with the Credit Facility at December 31, 2019.





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Further losses or negative cash flow, including as a result of expenses connected with the investigation and possible environmental remediation of the Stuyvesant Falls facility, could result in the Company requiring additional capital or liquidity, which may not be available or may only be available on economically adverse terms. Specifically, the Company believes it can reduce negative cash flow through a combination of reductions in operating expenses and reductions in inventory. To the extent these measures do not provide sufficient liquidity, the Company will consider additional borrowings through the sale leaseback of its corporate headquarters and delaying certain expenditures until sufficient capital becomes available.





Litigation and Contingencies

The Company becomes, from time to time, a party to personal injury litigation arising out of incidents involving the use of its products. The Company believes that any potential judgments resulting from these claims over its self-insured retention will be covered by the Company's product liability insurance. See Part II, Item 1 - Legal Proceedings, below, for more information concerning litigation.

Critical Accounting Policies

The impact and any associated risks related to the Company's critical accounting policies on business operations are discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations," where such policies affect the Company's reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company's Annual Report on Form 10-K for the year ended June 30, 2019.

Recently Issued Accounting Guidance

See Note 1 - Summary of Significant Accounting and Reporting Policies for more information on recent accounting pronouncements and their impact, if any, on the Company's financial statements. Management believes there have been no material changes to our critical accounting policies.

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