Results of Operations
Covid-19 Outbreak
Due to the COVID-19 pandemic, in recent quarters the Company saw an
unprecedented increase in demand and orders for its AHP300 ventilators, EPV200
ventilators, other respiratory care products, and other emergency medical
devices. Orders have now stabilized. Orders for the Company's products for the
six months ended December 31, 2020 of $16.2 million were $0.8 million or 5.2%
higher than orders for the prior year same period of $15.4 million. 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's ability to meet this demand has
been impaired, at times, by 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 sought to increase production.
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.
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 of our Annual Report on Form 10-K for more
information.
Three months ended December 31, 2020 compared to three months ended December 31,
2019
Allied had net sales of $11.1 million for the three months ended December 31,
2020, up $3.8 million from net sales of $7.3 million in the prior year same
quarter. Domestic sales were up 24.7% and international sales, which represented
38.8% of second quarter sales, were up 131.7% from the prior year same quarter.
The increase in sales is the result of shipment of orders received in previous
quarters. These orders are primarily for the AHP300 ventilator and other
products used to increase capacity to treat COVID-19 patients.
Orders for the Company's products for the three months ended December 31, 2020
of $8.4 million were $0.7 million or 9.1% higher than orders for the prior year
same quarter of $7.7 million. Domestic orders are up 1.6% over the prior year
same quarter while international orders, which represented 32.6% of second
quarter orders, were 29.5% higher 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.
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Gross profit for the three months ended December 31, 2020 was $2.6 million, or
23.4% of net sales, compared to $1.3 million, or 17.8% of net sales, for the
three months ended December 31, 2019. Gross profit for the quarter was favorably
impacted by the increase in sales volume. Manufacturing overhead spending
increased from the prior year by approximately $0.4 million as the Company
increased its capacity to manufacture those products that have had higher demand
related to the COVID-19 pandemic.
Selling, general and administrative expenses for the three months ended
December 31, 2020 were $1.9 million compared to selling, general and
administrative expenses of $2.9 million for the three months ended December 31,
2019. The decrease is primarily due to the $0.9 million provision that was
recorded in the second quarter of Fiscal 2020 for environmental cleanup costs at
the Company's facility in Stuyvesant Falls, New York.
Incomefrom operations was $0.7 million for the three months ended December 31,
2020 compared to loss from operations of $1.5 million for the three months ended
December 31, 2019.
Allied had income before benefit from income taxes in the second quarter of
fiscal 2021 of $0.7 million compared to loss before benefit from income taxes in
the second quarter of fiscal 2020 of $1.5 million. The Company's tax provision
net of valuation allowance reflects a tax benefit of $0 for the three months
ended December 31, 2020 and 2019. As a result of the Consolidated Appropriations
Act of 2021 signed by the President on December 27, 2020, approximately
$2,400,000 of expenses incurred that were attributed to the Company's PPP loan
became deductible in the three months ended December 31, 2020. The deductibility
of these expenses created a tax loss for the three months ended December 31,
2020. In the quarter ended December 31, 2020 the tax benefit of losses in the
amount of approximately $410,000 was fully offset by a valuation allowance of
equivalent amount. In the quarter ended December 31, 2019 the Company recorded
the tax benefit of losses incurred in the amount of approximately $387,000 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. To the extent the Company has
taxable income, the taxable income will be offset by net operating loss
carryforwards.
Net income for the second quarter of fiscal 2021 was $0.7 million or $0.17 per
basic and diluted share compared to net loss of $1.5 million or $0.38 per basic
and diluted share for the second quarter of fiscal 2020. The weighted average
number of common shares outstanding, used in the calculation of basic earnings
per share for the second quarters of fiscal 2021 and 2020 were 4,013,537. The
weighted average number of common shares outstanding, used in the calculation of
diluted earnings per share for the second quarters of fiscal 2021 and 2020 were
4,024,952 and 4,013,537 respectively.
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Six months ended December 31, 2020 compared to six months ended December 31,
2019
Allied had net sales of $21.3 million for the six months ended December 31,
2020, up $6.0 million, or 39.2% from net sales of $15.3 million in the prior
year same period. Domestic sales were up 15.2% from the prior year same period
while international sales were up 105.2% from the prior year same period.
International business represented 39.4% of sales for the first six months of
fiscal 2021. The increase in sales is the result of shipment of orders received
in previous quarters. These orders are primarily for the AHP300 ventilator and
other products used to increase capacity to treat COVID-19 patients.
Orders for the Company's products for the six months ended December 31, 2020 of
$16.2 million were $0.8 million or 5.2% higher than orders for the prior year
same period of $15.4 million. Domestic orders are down 0.9% from the prior year
same period while international orders, which represented 31.0% of orders for
the first six months of fiscal 2021, were 22.4% higher than orders for the prior
year same period. The increase in orders are primarily for the AHP300 ventilator
and accessories.
Gross profit for the six months ended December 31, 2020 was $4.5 million, or
21.1% of net sales, compared to $2.6 million, or 17.0% of net sales, for the six
months ended December 31, 2019. The $1.9 million increase in gross profit is
mainly attributable the $6.0 million increase in sales.
Selling, general and administrative expenses for the six months ended
December 31, 2020 were $3.9 million compared to selling, general and
administrative expenses of $4.7 million for the six months ended December 31,
2019. The decrease is primarily due to the $0.9 million provision that was
recorded in the second quarter of Fiscal 2020 for environmental cleanup costs at
the Company's facility in Stuyvesant Falls, New York.
Incomefrom operations was $0.6 million for the six months ended December 31,
2020 compared to loss from operations of $2.1 million for the six months ended
December 31, 2019.
Allied had income before benefit from income taxes in the first six months of
fiscal 2021 of $0.5 million compared to loss before benefit from income taxes in
the first six months of fiscal 2020 of $2.1 million. The Company's tax
provision net of valuation allowance reflects a tax benefit of $0 for the six
months ended December 31, 2020 and 2019. As a result of the Consolidated
Appropriations Act of 2021 signed by the President on December 27, 2020,
approximately $2,400,000 of expenses incurred that were attributed to the
Company's PPP loan became deductible in the six months ended December 31, 2020.
The deductibility of these expenses created a tax loss for the six months ended
December 31, 2020. In the six months ended December 31, 2020 the tax benefit of
losses in the amount of approximately $449,000 was fully offset by a valuation
allowance of equivalent amount. In the six months ended December 31, 2019 the
Company recorded the tax benefit of losses incurred in the amount of
approximately $541,000 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. To
the extent the Company has taxable income, the taxable income will be offset by
net operating loss carryforwards.
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Net income for the six months ended December 31, 2020 was $0.5 million or $0.14
per basic and diluted share compared to net loss of $2.1 million or $0.53 per
basic and diluted share for the first six months of fiscal 2020. The weighted
average number of common shares outstanding, used in the calculation of basic
earnings per share for fiscal 2021 and 2020 were 4,013,537. The weighted average
number of common shares outstanding, used in the calculation of diluted earnings
per share for fiscal 2021 and 2020 were 4,027,788 and 4,013,537 respectively.
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 $5.4 million at December 31, 2020 compared to
$5.9 million at June 30, 2020. Cash decreased by $1.5 million, other accrued
liabilities increased by $0.3 million and debt increased by $2.9 million. During
the quarter, these decreases in working capital were offset by an increase in
inventory by $1.3 million, an increase in Accounts receivable of 0.6 million,
and a decrease in customer deposits by $2.2 million. The increase in inventory
was part of the Company's efforts to fulfill increased orders in prior periods
for respiratory care products. Accounts payable and other accrued liabilities
are subject to normal fluctuations in purchasing levels and the timing of
payments within the quarter. Accounts receivable was $3.7 million at
December 31, 2020 and as measured in days sales outstanding ("DSO") was 32 DSO
compared to a 35 DSO at June 30, 2020. The Company does adjust product forecast,
order quantities and safety stock based on changes in demand patterns in order
to manage inventory levels.
North Mill Loan
The Company is 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, April 24,
2019 and December 18, 2020 (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 and inventory but will not exceed $4,000,000. At
December 31, 2020 availability under the agreement was $1.5 million.
The Credit Facility will be available, subject to its terms, on a revolving
basis until it expires on February 27, 2023, 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.
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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 ($10,000 per month). In the event the Company prepays or terminates
the Credit Facility prior to February 27, 2022, 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, 2022 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 would
have the option to accelerate maturity and payment of the Company's obligations
under the Credit Facility.
The Company was in compliance with all of the covenants associated with the
Credit Facility at December 31, 2020.
PPP Loan
On April 22, 2020, the Company entered into a Payroll Protection Program (PPP)
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 used 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.
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All or a portion of the SBA Loan may be forgiven by the SBA upon application by
the Company 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 or at the Company's election 24 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 40% 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%. The Company has submitted its application for
forgiveness and is awaiting approval from the SBA. 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 has submitted an application
for forgiveness of the entire principal amount of the SBA Loan but cannot
guarantee whether or to what extent such forgiveness will be granted.
Payments of unforgiven principal and interest are deferred until the date that
SBA remits the Company's loan forgiveness amount to the lender, 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 December 31, 2020 the Company had $4.5 million indebtedness, including lease
obligations, short-term debt, and long term debt. The prime rate as reported in
the Wall Street Journal was 3.25% on December 31, 2020.
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, 2020.
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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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