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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