Results of Operations
COVID-19 Outbreak
On January 30, 2020 the World Health Organization ("WHO") announced a global
health emergency because of a new strain of coronavirus originating in Wuhan
China and the risks to the international community as the virus spreads globally
beyond its point of origin. In March 2020 the WHO classified the COVID-19
outbreak as a pandemic, based on the rapid increase in exposure globally.
As discussed in more detail in this Item 2, the Company has seen an
unprecedented increase in demand and orders for its AHP300 ventilators, EPV200
ventilators, other respiratory care products, and other emergency medical
devices. The Company has made capital investments, added employees, and
increased inventory purchases in order to increase production of these
ventilators and other products critical to the care of COVID-19 patients.
The Company faces supply chain challenges as demand for components critical for
the production of these products has spiked as all manufacturers of ventilators
and other critical medical equipment seek to increase production. The Company
cannot be certain that it will be able to obtain the needed components in a
timely fashion. In addition, while the Company has not yet seen material price
increases for its raw materials or necessary components, such increases are
possible.
At the same time, the COVID-19 pandemic could decrease demand for other products
as hospitals reduce "non-essential procedures." The economic effects on
hospitals and providers could negatively impact the market for the Company's
construction products if hospitals cut back on construction and capital
improvements. The duration and extent of this decreased demand is uncertain and
depends on decisions by government health authorities, hospitals and providers
in responding to and mitigating the COVID-19 outbreak.
Results for the quarter ended March 31, 2020 only partially reflects the impacts
discussed above. The full economic impact of the COVID-19 pandemic continues to
evolve as the date of this report. As such, the Company cannot predict with
certainty the full magnitude that the pandemic will have on the Company's
financial condition, liquidity, operations, suppliers, industry and workforce.
Please see Part II, Item 1A, Risk Factors for more information.
Three months ended March 31, 2020 compared to three months ended March 31, 2019
Allied had net sales of $8.1 million for the three months ended March 31, 2020,
down $0.2 million from net sales of $8.3 million in the prior year same quarter.
Domestic sales were unchanged while international sales, which represented 24.1%
of third quarter sales, were down 10.7% from the prior year same quarter.
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Total orders for the Company's products for the three months ended March 31,
2020 of $17.8 million were $9.9 million or 125.3% higher than orders for the
prior year same quarter of $7.9 million. Domestic orders are up 81.8% over the
prior year same quarter while international orders, which represented 43.4% of
third quarter orders, were 230.3% higher than orders for the prior year same
quarter.
Almost all of the increase in orders for the period was due to increased demand
for the Company's emergency products. In total, orders for the AHP300 ventilator
line for the three months ended March 31, 2020 were $7.4 million dollars, a $7.0
million increase over orders for the prior year same quarter of $0.3 million.
The increase in total orders for the AHP300 consisted of an increase of $2.7
million in domestic orders and $4.3 million in international orders. Orders for
the Company's other products for the quarter were $10.4 million, $2.8 million
higher than orders for the prior year same quarter of $7.6 million. These
products include medical devices used in direct patient care, in an emergency or
hospital setting, including suction pumps, oxygen regulators, air compressors,
nebulizers, demand valves, aspirators, and emergency use ventilators.
Gross profit for the three months ended March 31, 2020 was $1.6 million, or
19.8% of net sales, compared to $1.6 million, or 19.3% of net sales, for the
three months ended March 31, 2019.
Selling, general and administrative expenses for the three months ended March
31, 2020 and 2019 were $1.9 million.
Loss from operations was $305,000 for the three months ended March 31, 2020
compared to loss from operations of $353,000 for the three months ended March
31, 2019.
Other income and expenses for the three months ended March 31, 2020 was an
expense of $25,700 compared to income of $731,400 for the three months ended
March 31, 2019 which included approximately $750,000 of income realized by the
Company as a result of the settlement of litigation with Niagara Mohawk Power
Corporation d/b/a National Grid ("Niagara"), which provides electrical power to
the Company's facility in Stuyvesant Falls, New York, and one other party.
Interest expense for the three months ended March 31, 2020 was $26,000 compared
to interest expense of $19,000 for the three months ended March 31, 2019.
Allied had a loss before benefit from income taxes in the third quarter of
fiscal 2020 of $330,000 compared to income before provision for income taxes in
the third quarter of fiscal 2019 of $378,000. The Company's tax provision net
of valuation allowance reflects a tax benefit of $0 for the three months ended
March 31, 2020 and 2019. In the quarter ended March 31, 2020 the tax benefit of
losses in the amount of approximately $82,000 was fully offset by a valuation
allowance of equivalent amount. Due to the reduction in the cumulative to date
loss occurring in the three months ended March 31, 2019, a tax provision in the
amount of $100,000 was recorded offset by a reduction in the valuation
allowance. 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.
Net loss for the third quarter of fiscal 2020 was $330,000 or $0.08 per basic
and diluted share compared to net income of $378,000 or $0.09 per basic and
diluted share for the third 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 third quarters of fiscal 2020 and 2019 were
4,013,537.
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Nine months ended March 31, 2020 compared to nine months ended March 31, 2019
Allied had net sales of $23.4 million for the nine months ended March 31, 2020,
down $0.3 million, or 1.3% from net sales of $23.7 million in the prior year
same period. Domestic sales were down 2.7% from the prior year same period while
international sales were up 2.9% from the prior year same period. International
business represented 25.8% of sales for the first nine months of fiscal 2020.
Total orders for the Company's products for the nine months ended March 31, 2020
of $33.2 million were $10.0 million or 43.1% higher than orders for the prior
year same period of $23.2 million. Domestic orders are up 27.3% from the prior
year same period while international orders, which represented 35.6% of orders
for the first nine months of fiscal 2020, were 83.1% higher than orders for the
prior year same period. Changes in orders for specific products due to COVID-19
during the nine month period reflect the same patterns discussed for the current
quarter above.
Gross profit for the nine months ended March 31, 2020 was $4.2 million, or 17.9%
of net sales, compared to $3.6 million, or 15.2% of net sales, for the nine
months ended March 31, 2019. The $0.6 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 nine months ended March 31,
2020 were $6.6 million compared to selling, general and administrative expenses
of $6.0 million for the nine months ended March 31, 2019. 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 $0.2 million decrease in personnel cost consisting of
salary and fringe benefits.
Loss from operations was $2.5 million for the nine months ended March 31, 2020
compared to loss from operations of $2.3 million for the nine months ended March
31, 2019.
Other income and expenses for the nine months ended March 31, 2020 was an
expense of $51,500 compared to income of $705,500 for the nine months ended
March 31, 2019 which included approximately $750,000 of income realized by the
Company as a result of the settlement of litigation with Niagara Mohawk Power
Corporation d/b/a National Grid ("Niagara"), which provides electrical power to
the Company's facility in Stuyvesant Falls, New York, and one other party.
Interest expense for the nine months ended March 31, 2020 was $51,500 compared
to interest expense of $44,500 for the nine months ended March 31, 2019.
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Allied had a loss before benefit from income taxes in the first nine months of
fiscal 2020 of $2.5 million compared to loss before benefit from income taxes in
the first nine months of fiscal 2019 of $1.6 million. The Company's tax
provision net of valuation allowance reflects a tax benefit of $0 for the nine
months ended March 31, 2020 and 2019. In the nine months ended March 31, 2020
the tax benefit of losses in the amount of approximately $623,000 was fully
offset by a valuation allowance of equivalent amount. In the nine months ended
March 31, 2019 the Company recorded the tax benefit of losses incurred in the
amount of approximately $406,000 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.
Net loss for the nine months ended March 31, 2020 was $2.5 million or $0.62 per
basic and diluted share compared to net loss of $1.6 million or $0.41 per basic
and diluted share for the first nine 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 nine 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 $5.3 million at March 31, 2020 compared to
$7.4 million at June 30, 2019. Inventory decreased by $0.5 million, Customer
Deposits increased by $2.2 million and Other Accrued Liabilities increased by
$0.7 million. During fiscal 2020, these decreases in working capital were
partially offset by a $1.0 million increase in Cash and cash equivalents and
$0.4 million increase in Accounts Receivable. Accounts Receivable was $3.6
million at March 31, 2020, an increase from $3.2 million at June 30, 2019.
Accounts Receivable as measured in days sales outstanding ("DSO") was 43 DSO at
March 31, 2020; an increase from 39 DSO at 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.
The Company will spend about $1.2 million in capital expenditures as part of the
ramp-up of our operation to produce additional ventilators. These expenditures
are planned for the fourth quarter of the current fiscal year.
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Credit Arrangements
As of March 31, 2020, 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 March 31, 2020
availability under the agreement was $2.0 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 each calendar month, or
portion thereof.
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.
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On April 22, 2020, the Company entered into a loan agreement (the "SBA Loan")
with Jefferson Bank and Trust Company under the recently enacted Coronavirus
Aid, Relief, and Economic Security Act ("CARES Act") administered by the U.S.
Small Business Administration (the "SBA"). The Company received total proceeds
of $2.375 million from the SBA Loan. In accordance with the requirements of the
CARES Act, the Company will use proceeds from the SBA Loan for payroll costs and
other permitted uses. The SBA Loan is scheduled to mature on April 13, 2022 and
has a 1.00% interest rate and is subject to the terms and conditions applicable
to loans administered by the U.S. Small Business Administration under the CARES
Act.
All or a portion of the SBA Loan may be forgiven by the SBA upon application by
the Company beginning 60 days but not later than 120 days after loan approval
and upon documentation of expenditures in accordance with the SBA requirements.
Under the CARES Act, loan forgiveness is available for the sum of documented
payroll costs, covered rent payments, covered mortgage interest and covered
utilities during the eight week period beginning on the loan origination date,
subject to regulations and guidance provided by the United States Treasury. For
purposes of the CARES Act, payroll costs exclude compensation of an individual
employee in excess of $100,000, prorated annually. Not more than 25% of the
forgiven amount may be for non-payroll costs. Forgiveness is reduced if
full-time headcount declines, or if salaries and wages for employees with
salaries of $100,000 or less annually are reduced by more than 25%. In the event
the SBA Loan, or any portion thereof, is forgiven pursuant to the CARES Act, the
amount forgiven is applied to outstanding principal. The Company intends to seek
forgiveness of the SBA Loan to the maximum extent permitted but cannot guarantee
whether or to what extent such forgiveness will be granted.
Payments of unforgiven principal and interest are deferred until November 2020,
at which point the Company is required to repay such amounts in 18 equal monthly
payments. The SBA Loan is evidenced by a promissory note, which contains
customary events of default relating to, among other things, payment defaults
and breaches of representations and warranties. The SBA Loan may be prepaid by
the Company at any time prior to maturity with no prepayment penalties.
At March 31, 2020, the Company had no 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 3.25% on March 31, 2020.
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
March 31, 2020.
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Further losses or negative cash flow, including as a result of expenses
connected with (i) the investigation and possible environmental remediation of
the Stuyvesant Falls facility and (ii) the Company's response to the COVID-19
outbreak, could result in the Company requiring additional capital or liquidity,
which may not be available or may only be available on economically adverse
terms. To the extent the Company is able to satisfy the increased orders for its
respiratory care products, the increased revenue from such sales should provide
increased liquidity. In addition, the Company could consider additional
borrowings to the extent available, including without limitation through the
sale leaseback of its corporate headquarters.
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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ALLIED HEALTHCARE PRODUCTS, INC. 
