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 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 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 seek 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 September 30, 2020 compared to three months ended September
30, 2019
Allied had net sales of $10.2 million for the three months ended September 30,
2020, up $2.2 million from net sales of $8.0 million in the prior year same
quarter. Domestic sales were up 6.3% while international sales, which
represented 40.1% of first quarter sales, were up 83.1% 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 September 30, 2020
of $7.8 million were $0.1 million or 1.3% higher than orders for the prior year
same quarter of $7.7 million and $1.5 million or 16.3% lower than orders for the
fourth quarter of fiscal year 2020. Domestic orders are down 3.4% over the prior
year same quarter, while international orders, which represented 29.2% of first
quarter orders, were 14.8% higher than orders for the prior year same quarter.
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 September 30, 2020 was $1.9 million, or
18.6% of net sales, compared to $1.3 million, or 16.3% of net sales, for the
three months ended September 30, 2019. Gross profit for the quarter was
favorably impacted by the increase in sales volume. Manufacturing overhead
spending decreased from the prior year by approximately $0.5 million as the
Company increased its capacity to manufacture those products that have had
higher demand related to the COVID-19 pandemic.
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Selling, general and administrative expenses for the three months ended
September 30, 2020 were $2.0 million compared to $1.9 million for the three
months ended September 30, 2019. Personnel cost, primarily salary and fringe
benefits, increased by approximately $50,000 and legal expenses increased by
approximately $100,000. The increased personnel costs reflect additions to
headcount to increase our manufacturing capacity to fulfill increased orders for
respiratory care products due to COVID-19.
Loss from operations was $0.1 million for the three months ended September 30,
2020 compared to loss from operations of $0.6 million for the three months ended
September 30, 2019.
Allied had a loss before benefit from income taxes in the first quarter of
fiscal 2021 of $153,381 compared to a loss before benefit from income taxes in
the first quarter of fiscal 2020 of $614,123. The Company's tax provision net
of valuation allowance reflects a tax benefit of $0 for the three months ended
September 30, 2020 and 2019. In the quarter ended September 30, 2020 the tax
benefit of losses in the amount of approximately $39,000 was fully offset by a
valuation allowance of equivalent amount. In the quarter ended September 30,
2019 the Company recorded the tax benefit of losses incurred in the amount of
approximately $154,000 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 first quarter of fiscal 2021 was $153,381 or $0.04 per basic
and diluted share compared to net loss of $614,123 or $0.15 per basic and
diluted share for the first 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 first quarters of fiscal 2021 and 2020. were
4,013,537.
Liquidity and Capital Resources
The Company's primary sources of liquidity are its cash and cash equivalents,
other items in working capital and borrowing availability under the Credit
Agreement, discussed below.
The Company's working capital was $5.0 million at September 30, 2020 compared to
$5.9 million at June 30, 2020. Cash decreased by $2.6 million, accounts payable
increased by $0.5 million and debt increased by $1.2 million. During the
quarter, these decreases in working capital were offset by an increase in
inventory by $2.3 million and a decrease in customer deposits by $1.6 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
$3.3 million at September 30, 2020 and as measured in days sales outstanding
("DSO") was 31 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 Agreement
As of September 30, 2020, 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 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 and inventory but will not exceed $2,000,000. At
September 30, 2020 availability under the agreement was $0.8 million.
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.
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.
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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 September 30, 2020. The Company intends to seek a renewal of
the Credit Facility prior to its expiration.
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. 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.
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.
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 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 September 30, 2020 the Company had $3.6 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 September 30, 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.
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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