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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