ALLIED HEALTHCARE PRODUCTS, INC. COVID-19 Outbreak and Aftermath of Pandemic
The Company believes that the Covid-19 pandemic resulted in increased sales in of ventilator products in fiscal 2021, however, this peak in demand ended in fiscal 2021 and the impacts of the COVID-19 continue to develop. In fiscal 2022 demand dropped from the peak, and the Company believes that COVID-19 is no longer contributing positively to product demand. The pandemic is partially responsible for broad economic changes which have impacted the Company in fiscal 2021, and fiscal 2022 and continue to impact the Company as the Company begins fiscal 2023. Inflation has raised the cost of products and services the Company uses to provide its products. In fiscal year 2021, the Company estimates that inflationary price increases raised product cost by approximately$500,000 . In fiscal year 2022, the Company estimates that inflationary price increases raised product cost by an additional$1.3 million dollars . While theFederal Reserve initially believed some of the inflation in the economy was transitory in nature, the Company believes inflation will continue to increase cost in fiscal 2023.
Since the onset of the pandemic the Company has found it harder to hire and retain hourly workers. This has led to the requirement for additional overtime for existing employees, inefficiency, and contributed to delays in shipments.
In fiscal year 2022, the Company faced production difficulties, including supply
chain issues. A portion of these challenges were the result of general pressures
on supply chains as the global economy emerged from lockdowns. For the Company,
this has resulted in longer lead times and shortages of components. It has been
difficult to replace those vendors not delivering components in a timely manner.
In addition, our purchasing department effectiveness has suffered due to the
amount of time required to expedite parts. At times, purchase orders have not
been placed in a timely manner, lengthening the lead time and causing part
shortages. Internally, we have had difficulty producing machined parts on a
timely basis due to a shortage of skilled labor and a vacancy in a key machine
shop management position. These problems have led to product shortages and a
large increase in customer orders not shipped and past due. This results in a
lower level of sales and liquidity. The Company believes these impacts will
continue in fiscal year 2023 and the Company's shipments and sales will remain
under pressure as a result.
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Results of Operations
The Company manufactures and markets respiratory products, including respiratory
care products, medical gas equipment and emergency medical products. Set forth
below is certain information with respect to amounts and percentages of net
sales attributable to respiratory care products, medical gas equipment and
emergency medical products for the fiscal years ended June 30, 2022 , 2021,
and
2020.
Dollars in thousands
Year ended June 30, 2022
Net % of Total
Sales Net Sales
Respiratory care products $ 8,178 30.3 %
Medical gas equipment 13,449 49.7 %
Emergency medical products 5,420 20.0 %
Total $ 27,047 100.0 %
Dollars in thousands
Year ended June 30, 2021
Net % of Total
Sales Net Sales
Respiratory care products $ 8,083 22.3 %
Medical gas equipment 15,943 43.9 %
Emergency medical products 12,253 33.8 %
Total $ 36,279 100.0 %
Dollars in thousands
Year ended June 30, 2020
Net % of Total
Sales Net Sales
Respiratory care products $ 8,556 26.8 %
Medical gas equipment 15,283 47.9 %
Emergency medical products 8,055 25.3 %
Total $ 31,894 100.0 %
The following table sets forth, for the fiscal periods indicated, the percentage
of net sales represented by the various income and expense categories reflected
in the Company's Statement of Operations.
Year ended June 30, 2022 2021 2020
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 90.7 80.4 82.5
Gross profit 9.3 19.6 17.5
Selling, general and administrative expenses 26.2 21.1 27.1 Loss from operations
(16.9) (1.5) (9.6)
Interest expense 0.7 0.3 0.2
PPP loan forgiveness 0.0 (6.6) 0.0
Other, net 0.0 0.0 0.1Income (loss) before provision for income taxes (17.6) 4.8 (9.9) Provision for (benefit from) income taxes
2.2 0.2 (0.4)
Net income (loss) (19.8) % 4.6 % (9.5) %
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Critical Accounting Policies
Revenue recognition:
The Company's revenues are derived primarily from the sales of respiratory products, medical gas equipment and emergency medical products. The products are generally sold directly to distributors, customers affiliated with buying groups, individual customers and construction contractors, throughout the world.
The Company recognizes revenue from product sales upon satisfaction of its performance obligation which occurs on the transfer of control of the product, which is generally upon shipment or delivery, depending on the delivery terms set forth in the customer contract. Payment terms between Allied and its customers vary by the type of customer, country of sale, and the products offered. The term between invoicing and the payment due date is not significant. Management exercises judgment in estimating variable consideration. Provisions for early payment discounts, rebates and returns and other adjustments are provided for in the period the related sales are recorded. Historical data is readily available and reliable, and is used for estimating the amount of the reduction in gross sales. The Company provides rebates to wholesalers. Rebate amounts are based upon purchases using contractual amount for each product sold. Factors used in the rebate calculations include the identification of which products have been sold subject to a rebate and the customer or price terms that apply. Using known contractual allowances, the Company estimates the amount of the rebate that will be paid, and records the liability as a reduction of gross sales when it records the sale of the product. Settlement of the rebate generally occurs in the month following the sale. The Company regularly analyzes the historical rebate trends and adjusts reserves for changes in trends and terms of rebate programs. Historically, adjustments to prior years' rebate accruals have not been material to net income. Other allowances charged against gross sales include cash discounts and returns, which are not significant. Cash discounts are known within 15 to 30 days of sale, and therefore can be reliably estimated. Returns can be reliably estimated because the Company's historical returns are low, and because sales return terms and other sales terms have remained relatively unchanged for several periods. Product warranties are also not significant. The Company does not allocate transaction price as the Company has only one performance obligation and its contracts do not span multiple periods. All taxes imposed on and concurrent with revenue producing transactions and collected by the Company are excluded from the measurement of transaction price.
Inventory reserve for obsolete and excess inventory:
Inventory is recorded net of a reserve for obsolete and excess inventory which is determined primarily based on an analysis of inventory items with no usage in the preceding year and for inventory items for which there is greater than two years' usage on hand. This analysis considers those identified inventory items to determine, in management's best estimate, if parts can be used beyond one year, if there are alternate uses or at what values such parts may be disposed for. AtJune 30, 2022 and 2021, inventory is recorded net of a reserve for obsolete and excess inventory of$2.4 million and$2.2 million , respectively.
Income taxes:
The Company accounts for income taxes under the FASB Accounting Standards
Codification ("ASC") Topic 740: "Income Taxes." Under ASC 740, the deferred tax
provision is determined using the liability method, whereby deferred tax assets
and liabilities are recognized based upon temporary differences between the
financial statement and income tax bases of assets and liabilities using enacted
tax rates that are expected to apply to taxable income when such assets and
liabilities are anticipated to be settled or realized. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized as tax expense
or benefit in the period that includes the enactment date of the change.
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Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Management uses a more likely than not criterion in its assessment and considers all available evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. In assessing the need for a valuation allowance, the Company first considers the reversals of existing temporary deferred tax liabilities and available tax planning strategies. To the extent these items are not sufficient to cause the realization of deferred tax assets, the Company would then consider the availability of future taxable income only to the extent such income is considered likely to occur based on the Company's earnings history, current income trends and projections. Considering its history of operating losses, the Company does not rely on the existence of future taxable income as it currently cannot conclude future taxable income is likely to occur. The Company does rely on reversals of existing temporary deferred tax liabilities and tax planning strategies to the extent available to support the value of its existing deferred tax assets. Prior to 2022, the Company relied on tax planning strategies which consisted of revocation of the LIFO inventory method and the recognition of a gain in the sale of excess land to support the value of a portion of the Company's deferred tax assets. In light of continued losses and its assessment of the Company's ability to continue as a going concern, management concluded that the previously relied upon tax planning strategies were no longer available to support any amount of deferred tax assets. Accordingly, the Company recorded a full valuation allowance for the excess of deferred tax assets over deferred tax liabilities as ofJune 30, 2022 .
Accounts receivable net of allowances:
Accounts receivable are recorded net of an allowance for doubtful accounts, which is determined based on an analysis of past due accounts including accounts placed with collection agencies, and an allowance for returns and credits, which is based on historical analysis of credit memo data and returns. The Company maintains an allowance for doubtful accounts to reflect the collectability of accounts receivable based on past collection history and specific risks identified among uncollected accounts. Accounts receivable are charged to the allowance for doubtful accounts when the Company determines that the receivable will not be collected and/or when the account has been referred to a third party collection agency. AtJune 30, 2022 and 2021, accounts receivable is recorded net of allowances of$170,000 .
Valuation of Long-Lived Assets:
The impairment of long-lived assets is assessed when changes in circumstances (such as, but not limited to, a decrease in market value of an asset, current and historical operating losses or a change in business strategy) indicate that their carrying value may not be recoverable. This assessment is based on management's expectations and judgments regarding future business and economic conditions, future market values and disposal costs. Actual results and events could differ significantly from management's estimates. Based upon our most recent analysis, we believe that no impairment exists atJune 30, 2022 . There can be no assurance that future impairment tests will not result in a charge to net earnings (loss). Self-insurance:
The Company maintains a self-insurance program for a portion of its health care costs. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and the estimated liability for claims incurred but not reported. As ofJune 30, 2022 and 2021, the Company had approximately$125,000 and$120,000 , respectively, of accrued liabilities related to health care claims. In order to establish the self-insurance reserves, the Company utilized actuarial estimates of expected claims based on analyses of historical data. Share Based Compensation: The Company calculates share based compensation using the Black-Sholes-Merton ("Black-Scholes") option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. For the twelve-month periods endedJune 30, 2022 , 2021, and 2020, Allied recorded approximately$16,000 ,$14,000 and$2,000 , respectively, in share-based employee compensation. This compensation cost is included in the general and administrative expenses in the accompanying Statements of Operations.
Fiscal 2022 Compared to Fiscal 2021
The Company had a loss of$4.8 million before taxes for fiscal 2022, compared to income of$1.8 million before taxes for fiscal 2021. It recorded an income tax provision of$599,672 in fiscal 2022, compared to an income tax provision of$72,484 in fiscal 2021. 19 Table of Contents
Net sales for fiscal 2022 of$27.0 million were$9.3 million or 25.6% lower than net sales of$36.3 million in fiscal 2021. Domestically, sales decreased by$3.5 million dollars while international sales, which represented 23.6% of fiscal 2022 sales, were$5.7 million lower. The$9.3 million decrease in sales includes a$2.5 million decrease in medical gas equipment and a$6.8 million decrease in emergency medical products consisting of a$4.9 million decrease in AHP300 ventilator sales. In the fiscal year endedJune 30, 2021 the Company fulfilled orders that were taken at the start of the pandemic in fiscal 2020. Sales in fiscal 2022 were also negatively impacted by supply chain delays, production delays, and a staffing shortage in our manufacturing operation. The Company expects these trends to continue in fiscal 2023. International business is dependent upon hospital construction projects, and the development of medical facilities and emergency services in those regions in which the Company operates, as well as the economic and political climates in those international markets. Orders for the Company's products for the year endedJune 30, 2022 of$28.5 million were$1.1 million or 3.7% lower than orders for the year endedJune 30, 2021 of$29.6 million . Domestic orders are down 2.1% from the prior fiscal year while international orders, which represented 25.0% of orders for fiscal 2022, were 7.8% lower than orders for the prior year same period. The decrease in orders was primarily due to a$1.7 million decrease in orders for AHP300 ventilators. This decrease was partially offset by a$0.3 million increase in medical gas equipment and$0.6 million increase in respiratory care products. Respiratory care product sales, which include homecare products, were$8.2 million in fiscal 2022 compared to$8.1 million in 2021. Respiratory care products include carbon dioxide absorbents. For the year endedJune 30, 2022 and 2021 the Company had carbon dioxide absorbent sales of Carbolime® and Litholyme® of$3.7 million . Medical gas equipment sales, which include construction products, of$13.4 million in fiscal 2022 were approximately$2.5 million , or 15.7% lower than prior year levels of$15.9 million , while orders for these products increased by 2.0%. The decrease in sales was attributable to production and shipping problems and the timing of customer releases. Emergency medical product sales in fiscal 2022 of$5.4 million were$6.9 million or 56.1% lower than fiscal 2021 sales of$12.3 million . International sales of emergency medical products decreased by$4.9 million from the prior year while domestic sales decreased by$1.9 million . International sales, which are included in the product lines discussed above, decreased$5.7 million , or 47.1%, to$6.4 million in fiscal 2022 compared to sales of$12.1 million in fiscal 2021. The decrease was primarily for AHP300 ventilators. Gross profit in fiscal 2022 was$2.5 million , or 9.3% of sales, compared to a gross profit of$7.1 million , or 19.6% of sales in fiscal 2021. The$4.6 million decrease in gross profit is mainly attributable to a$9.3 million decrease in sales. The decrease in gross profit was also attributable to increase of cost due to inflation for our purchased raw materials and components. Selling, General, and Administrative ("SG&A") expenses for fiscal 2022 were$7.1 million compared to SG&A expenses of$7.6 million in fiscal 2021. The decrease is primarily due to a$0.5 million decrease in personnel costs consisting of salaries and benefits and a$0.3 million decrease in legal fees in fiscal 2022. These decreases were partially offset by a$0.2 million increase for environmental remediation expenses in fiscal 2022. Interest income in fiscal 2022 was$176 compared to interest income of$233 in fiscal 2021. Interest expense in fiscal 2022 was$191,450 compared to interest expense of$115,975 in fiscal 2021.
Other income and expenses in fiscal 2021 include
The Company's effective tax rate in 2022 was a provision of 12.5% compared to a provision of 4.1% in 2021. The change in the effective tax rate in 2022 was attributable to an increase in the valuation allowance in 2022 and non-deductible expenses attributable to the Company's PPP Loan forgiveness
in
2021.
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The realization of the Company's deferred tax assets has been based on the reversal of existing temporary deferred tax liabilities and tax planning strategies and to the extent those items are not sufficient to support the value of recorded deferred tax assets a valuation allowance is recorded. For the year ended 2020 the Company recorded an additional allowance of$178,111 offset by an increase in the value of tax planning strategies of$138,873 resulting in a net increase in the allowance of$39,238 . For the year ended 2021, the company recorded an additional allowance of$723,248 . The allowance was further increased by a reduction in the value of the tax planning strategy of$63,676 resulting in a total increase to the allowance of$786,921 . For the year endedJune 30, 2022 , management concluded previously relied upon tax planning strategies were no longer available and the Company recorded an additional allowance of$1,735,227 fully reserving the value of its net deferred tax assets. Net loss in fiscal 2022 was$5.4 million or$1.34 per basic and diluted earnings per share compared to a net income of$1.7 million , or$0.42 per basic and diluted earnings per share in fiscal 2021. In 2022 and 2021 the weighted number of shares used in the calculation of basic earnings per share was 4,013,537. In 2022 and 2021 the weighted number of shares used in the calculation of diluted earnings per share was 4,013,537 and 4,026,446, respectively.
Fiscal 2021 Compared to Fiscal 2020
The Company had income of$1.8 million before taxes for fiscal 2021, compared to a loss of$3.1 million before taxes for fiscal 2020. It recorded an income tax provision of$72,484 in fiscal 2021, compared to an income tax benefit of$130,359 in fiscal 2020. Net sales for fiscal 2021 of$36.3 million were$4.4 million or 13.8% higher than net sales of$31.9 million in fiscal 2020. Domestically, sales increased by$1.0 million dollars while international sales, which represented 33.4% of fiscal 2021 sales, were$3.4 million higher. The increase in domestic sales was largely attributable to increases in sales of construction products and emergency medical products. International business is dependent upon hospital construction projects, and the development of medical facilities and emergency services in those regions in which the Company operates, as well as the economic and political climates in those international markets. Orders for the Company's products for the year endedJune 30, 2021 of$29.6 million were$11.2 million or 27.5% lower than orders for the year endedJune 30, 2020 of$40.8 million . As a result of the COVID-19 pandemic in fiscal year 2020, the Company experienced significantly increased orders for the emergency medical products sold by the Company, including the Company's AHP300 ventilator and the EPV200 ventilator. In fiscal year 2021 the pace of orders materially decreased. Respiratory care product sales, which include homecare products, were$8.1 million in fiscal 2021 compared to$8.6 million in 2020. Respiratory care products include carbon dioxide absorbents. For the year endedJune 30, 2021 and 2020 the Company had carbon dioxide absorbent sales of Carbolime® and Litholyme® of$3.7 million . Medical gas equipment sales, which include construction products, of$15.9 million in fiscal 2021 were approximately$0.6 million , or 3.9% higher than prior year levels of$15.3 million . The increase in sales was largely attributable to an increase sales of non-construction products of$1.5 million . This increase was partially offset by a decrease in international construction sales of$0.7 million . Emergency medical product sales in fiscal 2021 of$12.3 million were$4.2 million or 51.9% higher than fiscal 2020 sales of$8.1 million . International sales of emergency medical products increased by$3.3 million from the prior year while domestic sales increased by$0.9 million . The onset of the COVID-19 pandemic increased demand for the Company's emergency products including the AHP300 ventilator. International sales, which are included in the product lines discussed above, increased$3.4 million , or 39.1%, to$12.1 million in fiscal 2021 compared to sales of$8.7 million in fiscal 2020. Gross profit in fiscal 2021 was$7.1 million , or 19.6% of sales, compared to a gross profit of$5.6 million , or 17.6% of sales in fiscal 2020. The$1.5 million increase in gross profit is mainly attributable to a$4.4 million increase in sales.
The Company invested approximately
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Selling, General, and Administrative ("SG&A") expenses for fiscal 2021 were $7.6
million compared to SG&A expenses of $8.6 million in fiscal 2020. The decrease
is primarily due to the $1.1 million provision in fiscal 2020 for environmental
cleanup costs at the Company's facility in Stuyvesant Falls, New York and a
decrease of $0.2 million for business travel expenses in fiscal 2021. These
decreases were partially offset by a $0.2 million increase for legal and
insurance expenses in fiscal 2021.
Interest income in fiscal 2021 was $233 compared to interest income of $654 in
fiscal 2020. Interest expense in fiscal 2021 was $115,975 compared to interest
expense of $64,682 in fiscal 2020.
Other income and expenses in fiscal 2021 include
The Company's effective tax rate in 2021 was a provision of 4.1% compared to a benefit of 4.1% in 2020. The change in the effective tax rate in 2021 was attributable to non-deductible expenses attributable to the Company's expected PPP Loan forgiveness and a decrease in the value of tax planning strategies. The realization of the Company's deferred tax assets has been based on the reversal of existing temporary deferred tax liabilities and tax planning strategies and to the extent those items are not sufficient to support the value of recorded deferred tax assets a valuation allowance is recorded. For the year endedJune 30, 2019 the Company recorded an additional allowance of$536,240 . For the year ended 2020 the Company recorded an additional allowance of$178,111 offset by an increase in the value of tax planning strategies of$138,873 resulting in a net increase in the allowance of$39,238 . For the year ended 2021, the company recorded an additional allowance of$723,248 . The allowance was further increased by a reduction in the value of the tax planning strategy of$63,676 resulting in a total increase to the allowance of$786,921 . To the extent that the Company's losses continue, the tax benefit of those losses would be fully offset by a valuation allowance. Net income in fiscal 2021 was$1.7 million or$0.42 per basic and diluted earnings per share compared to a net loss of$3.0 million , or$0.75 per basic and diluted earnings per share in fiscal 2020. In 2021 and 2020 the weighted number of shares used in the calculation of basic earnings per share was 4,013,537. In 2021 and 2020 the weighted number of shares used in the calculation of diluted earnings per share was 4,026,446 and 4,013,537, respectively.
Financial Condition, Liquidity and Capital Resources
The following table sets forth selected information concerning Allied's
financial condition at
Dollars in thousands 2022 2021
2020
Cash, cash equivalents and restricted cash$ 5,047 $ 726 $ 2,600 Working Capital$ 10,099 $ 6,271 $ 5,949 Total Debt$ 10,578 $ 2,091 $ 2,392 Current Ratio 2.69:1 1.88:1 1.67:1 The Company's working capital was$10.1 million atJune 30, 2022 compared to$6.3 million atJune 30, 2021 . The$3.8 million increase in working capital is attributed to a cash and restricted cash increase of$4.1 million , a decrease in accounts payable of$0.7 million and decrease in other accrued liabilities of$1.3 million . During fiscal 2022, these increases were partially offset by a$0.6 million decrease in accounts receivable, a$1.0 million decrease in inventory, a debt increase of$0.5 million and a$0.3 million in customer deposits. Accounts payable and other accrued liabilities are subject to normal fluctuations in purchasing levels and the timing of payments within the quarter. Accounts receivable as measured in days sales outstanding ("DSO") is 38 DSO atJune 30, 2022 , down from 40 DSO atJune 30, 2021 . The Company does adjust product forecast, order quantities, and safety stock based on changes in demand patterns in order to manage inventory levels. The net increase in cash and restricted cash for the fiscal year endedJune 30, 2022 was$4.3 million . The net decrease in cash for the fiscal year endedJune 30, 2021 was$1.9 million . Cash flows used in operating activities for the fiscal year endedJune 30, 2022 consisted of net loss of$5.4 million , a$0.7 million decrease in accounts payable and$0.8 million decrease in other accrued liabilities. These cash out flows were offset by a decrease of Accounts receivable of$0.6 million , a decrease in inventory of$1.0 million and a$0.3 million increase in customer deposits, supplemented by$0.5 million in non-cash charges for amortization and depreciation. 22
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Cash flows used in operating activities for the fiscal year endedJune 30, 2021 consisted of a decrease in Customer deposits of$2.2 million , a decrease of Accounts payable of$1.1 million and increase of Inventory of$0.5 million . These cash out flows were offset by a decrease of Accounts receivable of$0.2 million and net income of$1.7 million , supplemented by$0.6 million in non-cash charges for amortization and depreciation. The Company's financial statements have been presented assuming that the Company will continue as a going concern. The Company's rate of cash used in operating activities has accelerated and there is doubt as to whether the Company's liquidity and capital resources are sufficient to allow the Company to meet its needs for the next twelve months. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. The Company is seeking to fill open positions, expedite needed components, improve the performance of management, and find new sources of components where necessary. The Company has engaged a consulting firm to assess and improve its operational capabilities. These actions are intended to mitigate the substantial doubt raised by the Company's historical operating results and current shipping difficulties. There can be no assurance that such a plan will be successful.
Sale-Leaseback of St. Louis Property
OnJune 16, 2022 the Company entered into a sale agreement for the Company's headquarters and manufacturing facilities located at1720 Sublette Avenue inSt. Louis, Missouri . Simultaneously with the closing of the sale of the property, the Company entered into a lease with the buyer with a fifteen year term. Under the terms of the lease agreement, the Company's initial basic rent is approximately$57,400 per month, with annual increases of approximately 2% each year of the initial term. Pursuant to the agreement for the sale of theSt. Louis headquarters property,$1,500,000 of the sales proceeds is held in escrow to pay for the repair and/or replacement of certain agreed upon items, including the roof, HVAC system and certain lighting in the offices. Any funds remaining in the Improvement Escrow will be paid to the Company when the improvements are substantially completed. Of the Company's$4.3 million increase in cash during fiscal year 2022,$8.1 million was due to the closing of the sale leaseback. The sale leaseback has also resulted in an increase in the Company's operating cash needs by the amount of the rent under the new lease, which is$57,400 per month.
North Mill Loan Agreement
The Company is party to a Loan and Security Agreement withNorth Mill Capital, LLC ("North Mill"), as successor in interest toSummit Financial Resources, L.P. , dated effectiveFebruary 27, 2017 , as amendedApril 16, 2018 ,April 24, 2019 ,December 18, 2020 ,October 7, 2021 andJune 13, 2022 (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 . AtJune 30, 2022 borrowing under the agreement was$2,466,360 , maximum available borrowing based on eligible collateral was$3,345,123 , resulting in availability of$878,763 . Availability of funds under the Credit Agreement is based on the Company's eligible accounts receivable and eligible inventory but will not exceed$4,000,000 . In determining eligible Accounts Receivable Advances several classifications are considered ineligible and are subtracted from the Company's total Accounts Receivable before calculating eligible Accounts Receivable. Ineligible receivables include receivables from governmental entities, receivables to be paid by credit card, uninsured international receivables, receivables over 90 days old, and receivables from customers with a significant concentration of receivables over 90 days old. The Company may be advanced up to 85% of eligible Accounts Receivable under the loan agreement. Accounts Receivable is dependent on sales revenue. Decreased sales revenue has resulted in decreased Accounts Receivable available for loan collateral. AtJune 30, 2022 the Company had Accounts Receivable of$1,672,581 included as eligible collateral in determining total available borrowing advances under the loan
agreement.
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In determining eligible inventory several categories of inventory are subtracted
from total inventory. Work in Process Inventory, Packaging and Supplies, and
Inventory Reserves are subtracted from total inventory to calculate eligible
inventory. The Company may be advanced up to 25% of eligible inventory. Advances
from inventory are limited by the lesser of the calculated eligible inventory,
two million dollars ($2,000,000 ), or the amount advanced from eligible Accounts
Receivable. At June 30, 2022 the Company had $1,672,581 from Inventory included
as eligible collateral in determining total available borrowing under the loan
agreement. At June 30, 2022 Inventory Advances were limited by the eligible
Accounts Receivable Advance of $1,672,581 .
The Credit Facility will be available, subject to its terms, on a revolving
basis until it expires on September 30, 2024 , 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 (
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 atJune 30, 2022 .
PPP Loan
OnApril 13, 2020 , the Company entered into a Payroll Protection Program (PPP) loan agreement (the "SBA Loan") withJefferson Bank and Trust Company under the recently enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") administered by theU.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 loan, including all principal and accrued interest, was forgiven on
AtJune 30, 2022 the Company had$10.6 million indebtedness, including lease obligations, short-term debt, and long term debt. The prime rate as reported in theWall Street Journal was 4.75% onJune 30, 2022 . 24
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The following table summarizes the Company's contractual obligations atJune 30, 2022 : Payments due by period Less than 1-3 3-5 More than Contractual Obligations Total 1 year years years 5 years Long-Term Debt$ 10,577,556 $ 2,603,249 $ 318,926 426,243 7,229,138 Capital Lease Obligations - - - - - Operating Leases$ 6,790 $ 4,527 $ 2,263 $ - - Unconditional Purchase Obligations - - - - - Other Long-Term Obligations - - - - -
Total Contractual Cash Obligations
Capital expenditures were approximately$75,000 ,$167,000 , and$758,000 in fiscal 2022, 2021, and 2020, respectively. The Company believes that cash flows from operations and available borrowings under its credit facilities will be sufficient to finance fixed payments and planned capital expenditures of$1.6 million in 2023. Pursuant to the agreement for the sale of theSt. Louis headquarters property,$1,500,000 of the sales proceeds is held in escrow to pay for the repair and/or replacement of certain agreed upon items, including the roof, HVAC system and certain lighting in the offices. It is anticipated that these capital expenditures will be completed in 2023. AtJune 30, 2022 , the Company had$10.6 million outstanding debt. During fiscal 2022 the Company had$28.5 million in borrowings and$28.1 million in repayments under the Credit Agreement. The Company received cash from a failed sale-leaseback reflected as a financial liability on the Companies balance sheet of$8.1 million net of financing costs of$0.2 million . Cash used in operations was$4.1 million in fiscal 2022. Cash used in operations in fiscal 2021 was$3.8 million and cash from operations in fiscal 2020 was$0.6 million . Our cash flows may be further negatively impacted by decreases in sales, market conditions, and adverse changes in working capital. While we believe that our borrowing capacity under the Credit Agreement provides sufficient financial flexibility, continued negative cash flows could negatively affect our ability to access the Credit Agreement or to repay amounts borrowed and we might need to secure additional sources of funds, which may or may not be available to us. In 2022, inflation in the price of raw materials and purchased components negatively impacted earnings by approximately$1.3 million dollars . The Company experienced a material direct impact of$21,000 in 2022, and$35,000 in 2021, from changes in trade policy or tariffs. The Company also believes a portion of its increased raw materials costs were due to tariffs imposed on steel and aluminum import. The Company makes its foreign sales inU.S. dollars and, accordingly, sales proceeds are not affected by exchange rate fluctuations. However, fluctuations in exchange rates can affect the price of our products in local currency, which does impact the pace of incoming orders.
Quarterly Results
The following table sets forth selected operating results for the eight quarters endedJune 30, 2022 . The information for each of these quarters is unaudited, but includes all normal recurring adjustments which the Company considers necessary for a fair presentation thereof. These operating results, however, are not necessarily indicative of results for any future period. Further, operating results may fluctuate as a result of the timing of orders, the Company's product and customer mix, the introduction of new products by the Company and its competitors, and overall trends in the health care industry and the economy. While these patterns have an impact on the Company's quarterly operations, the Company is unable to predict the extent of this impact in any particular period. 25 Table of Contents
Dollars in thousands, except per share data
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
Three months ended, 2022 2022 2021 2021 2021 2021 2020 2020
Net sales $ 6,015 $ 6,867 $ 6,807 $ 7,358 $ 7,018 $ 7,967 $ 11,104 $ 10,190
Gross profit 443 440 707 937 1,188 1,435 2,612 1,874
Income (loss) from operations (1,266) (1,232) (1,130) (952) (745) (381) 734 (135)
Net income (loss) (1,935) (1,280) (1,162) (984) 1,553 (413) 700 (153)
Basic earnings (loss) per share (0.48) (0.32) (0.29)
(0.25) 0.39 (0.10) 0.17 (0.04)
Diluted earnings (loss) per share (0.48) (0.32) (0.29)
(0.25) 0.39 (0.10) 0.17 (0.04)
Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly amounts will not necessarily equal the
total for the year. 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 such claims over its self-insured retention will be covered by the Company's product liability insurance. In addition, the Company has received a demand letter from a vendor for$586,000 and is committed to ongoing expenses related to the remediation of its property inStuyvesant Falls, New York . See Part I, Item 3 for a discussion of these material legal proceedings.
Off Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements.
Recently Issued Accounting Pronouncements
See Part II, Item 8, Note 2 "Summary of Significant Accounting Policies" for a discussion of recent accounting pronouncements and their impact on the Company's financial statements, if any.
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