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OFFON

ALLIED HEALTHCARE PRODUCTS, INC.

(AHPI)
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ALLIED HEALTHCARE PRODUCTS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/14/2021 | 03:03pm EDT
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. The Company believes that orders have now stabilized and orders for the Company's products for the nine months ended March 31, 2021 of $22.9 million were $10.3 million or 31.0% lower than orders for the prior year same period, when the pandemic began, of $33.2 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 was 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 March 31, 2021 compared to three months ended March 31, 2020

Allied had net sales of $8.0 million for the three months ended March 31, 2021, down $0.1 million from net sales of $8.1 million in the prior year same quarter. Domestic sales were down 2.6% and international sales, which represented 24.9% of third quarter sales, were up 1.5% from the prior year same quarter.

Orders for the Company's products for the three months ended March 31, 2021 of $6.8 million were $11.0 million or 61.8% lower than orders for the prior year same quarter of $17.8 million. Domestic orders are down 45.4% over the prior year same quarter while international orders, which represented 18.4% of third quarter orders, were 83.9% lower than orders for the prior year same quarter. The pandemic began in the prior year same quarter and there were unusually higher orders for products used to increase capacity for the care of COVID-19 patients.

Gross profit for the three months ended March 31, 2021 was $1.4 million, or 17.5% of net sales, compared to $1.6 million, or 19.8% of net sales, for the three months ended March 31, 2020. Gross profit for the quarter was unfavorably impacted by the decrease in sales volume.

Selling, general and administrative expenses for the three months ended March 31, 2021 were $1.8 million compared to selling, general and administrative expenses of $1.9 million for the three months ended March 31, 2020. The decrease is primarily due to a $73,000 reduction in business travel expenses as a result of COVID-19 travel restrictions.



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Lossfrom operations was $0.4 million for the three months ended March 31, 2021 compared to loss from operations of $0.3 million for the three months ended March 31, 2020.

Allied had loss before benefit from income taxes in the third quarter of fiscal 2021 of $0.4 million compared to loss before benefit from income taxes in the third quarter of fiscal 2020 of $0.3 million. The Company's tax provision net of valuation allowance reflects a tax benefit of $0 for the three months ended March 31, 2021 and 2020. In the quarter ended March 31, 2021 the tax benefit of losses in the amount of approximately $133,000 was fully offset by a valuation allowance of equivalent amount. In the quarter ended March 31, 2020 the Company recorded the tax benefit of losses incurred in the amount of approximately $82,000 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 loss for the third quarter of fiscal 2021 was $0.4 million or $0.10 per basic and diluted share compared to net loss of $0.3 million or $0.08 per basic and diluted share for the third quarter of fiscal 2020. 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 2021 and 2020 were 4,013,537.

Nine months ended March 31, 2021 compared to nine months ended March 31, 2020

Allied had net sales of $29.3 million for the nine months ended March 31, 2021, up $5.9 million, or 25.2% from net sales of $23.4 million in the prior year same period. Domestic sales were up 8.9% from the prior year same period while international sales were up 71.7% from the prior year same period. International business represented 35.5% of sales for the first nine 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 nine months ended March 31, 2021 of $22.9 million were $10.3 million or 31.0% lower than orders for the prior year same period of $33.2 million. Domestic orders are down 22.0% from the prior year same period while international orders, which represented 27.3% of orders for the first nine months of fiscal 2021, were 47.1% lower than orders for the prior year same period. Orders in the prior year were positively impacted by the onset of the COVID-19 pandemic.

Gross profit for the nine months ended March 31, 2021 was $5.9 million, or 20.1% of net sales, compared to $4.2 million, or 17.9% of net sales, for the nine months ended March 31, 2020. The $1.7 million increase in gross profit is mainly attributable the $5.9 million increase in sales.

Selling, general and administrative expenses for the nine months ended March 31, 2021 were $5.7 million compared to selling, general and administrative expenses of $6.6 million for the nine months ended March 31, 2020. 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 $0.2 million for the nine months ended March 31, 2021 compared to loss from operations of $2.4 million for the nine months ended March 31, 2020.



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Allied had income before benefit from income taxes in the first nine months of fiscal 2021 of $0.1 million compared to loss before benefit from income taxes in the first nine months of fiscal 2020 of $2.5 million. The Company's tax provision net of valuation allowance reflects a tax benefit of $0 for the nine months ended March 31, 2021 and 2020. 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 nine months ended March 31, 2021. The deductibility of these expenses created a tax loss for the nine months ended March 31, 2021. In the nine months ended March 31, 2021 the tax benefit of losses in the amount of approximately $582,000 was fully offset by a valuation allowance of equivalent amount. In the nine months ended March 31, 2020 the Company recorded the tax benefit of losses incurred in the amount of approximately $623,000 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 nine months ended March 31, 2021 was $0.1 million or $0.03 per basic and diluted share compared to net loss of $2.5 million or $0.62 per basic and diluted share for the first nine 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 4,027,310 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 $4.7 million at March 31, 2021 compared to $5.9 million at June 30, 2020. Cash decreased by $2.3 million, current other accrued liabilities increased by $0.5 million and current debt increased by $2.7 million. During the nine months, these decreases in working capital were offset by an increase in inventory by $0.7 million, a decrease in accounts payable of $1.1 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 $3.2 million at March 31, 2021 and as measured in days sales outstanding ("DSO") was 38 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 March 31, 2021 availability under the agreement was $1.7 million.



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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.

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 March 31, 2021.



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 equal monthly payments over the remainder of the two year term of the SBA Loan. 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, 2021 the Company had $3.9 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 March 31, 2021.



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.

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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© Edgar Online, source Glimpses

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Financials (USD)
Sales 2020 31,9 M - -
Net income 2020 -3,01 M - -
Net cash 2020 0,21 M - -
P/E ratio 2020 -15,7x
Yield 2020 -
Capitalization 16,3 M 16,3 M -
EV / Sales 2019 0,23x
EV / Sales 2020 1,48x
Nbr of Employees 218
Free-Float 57,4%
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NameTitle
Joseph F. Ondrus President, Chief Executive Officer & Director
Daniel C. Dunn CFO, Secretary, Treasurer & Vice President-Finance
John David Weil Chairman
Judith T. Graves Independent Director
Joseph Ernest Root Independent Director
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