NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting and Reporting Policies
Basis of Presentation
The accompanying unaudited
financial statements of Allied Healthcare Products, Inc. (the “Company”) have been prepared in accordance with the
instructions for Form 10-Q and do not include all of the information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for any
quarter are not necessarily indicative of the results for any other quarter or for the full year. These statements should be read
in conjunction with the financial statements and notes to the financial statements thereto included in the Company’s Annual
Report on Form 10-K for the year ended June 30, 2016.
Recently Issued Accounting Guidance
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” or “Update”)
No. 2014-09, “Revenue from Contracts with Customers.” This ASU is a comprehensive new revenue recognition model that
requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the
consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods
beginning after December 15, 2016 and early adoption is not permitted. On July 9, 2015 the FASB voted to defer the effective date
of this standard by one year to December 15, 2017 for the interim and annual reporting periods beginning after that date and permitted
early adoption of the standard, but not before the original effective date of December 15, 2016. Companies may use either a full
retrospective or modified retrospective approach to adopt this ASU. We are currently evaluating which transition approach to use
and the full impact this ASU will have on our future financial statements.
In August 2014, the
FASB issued ASU No. 2014-15, to communicate amendments to FASB Account Standards Codification Subtopic 205-40, “Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The ASU requires management to evaluate
relevant conditions, events and certain management plans that are known or reasonably knowable as of the evaluation date when determining
whether substantial doubt about an entity’s ability to continue as a going concern exists. Management will be required to
make this evaluation for both annual and interim reporting periods. Management will have to make certain disclosures if it concludes
that substantial doubt exists or when it plans to alleviate substantial doubt about the entity’s ability to continue as a
going concern. The standard is effective for annual periods ending after December 15, 2016 and for interim reporting periods starting
in 2017. Early adoption is permitted. We currently believe there will be no impact on our financial statement disclosures.
In July 2015, the FASB
issued ASU No. 2015-11 to simplify the subsequent measurement of inventory. Under this new standard, an entity should measure inventory
at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2016. The amendments in this guidance should be applied
prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently
evaluating the impact to our future financial statements.
In November 2015, the
FASB issued Accounting Standards Update No. 2015-17 (“ASU 2015-17”),
Income Taxes (Topic 740): Balance Sheet Classification
of Deferred Taxes
. The amendments in ASU 2015-17 seek to simplify the presentation of deferred income taxes and require that
deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is
effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those
annual periods, with early application permitted for all entities as of the beginning of an interim or annual reporting period.
The Company is in the process of evaluating the impact of this update on its financial statements.
In February 2016, the
FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to recognize assets
and liabilities for leases with lease terms of more than 12 months and disclose key information about leasing arrangements. Consistent
with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee
primarily will depend on its classification as a finance or operating lease. The update is effective for reporting periods beginning
after December 15, 2018. Early adoption is permitted. The Company is in the process of evaluating the impact of this update on
its financial statements.
In March 2016, the
FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606) Principal versus Agent Considerations (Reporting
Revenue Gross versus Net)” (“ASU 2016-08”). ASU 2016-08 further clarifies principal and agent relationships within
ASU 2014-09. Similar to ASU 2014-09, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted
in the first quarter of fiscal year 2017. The Company is evaluating the impact that adoption of this new standard will have on
its financial statements.
In March 2016, the
FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting”
(“ASU 2016-09”). ASU 2016-09 is intended to simplify several aspects of accounting for share-based payment awards.
The effective date will be the first quarter of fiscal year 2018, with early adoption permitted. The Company is evaluating the
impact that adoption of this new standard will have on its financial statements.
In April 2016, the
FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing”
(“ASU 2016-10”). The amendments in ASU 2016-10 are expected to reduce the cost and complexity of applying the
guidance on identifying promised goods or services in contracts with customers and to improve the operability and understandability
of licensing implementation guidance related to the entity’s intellectual property. Similar to ASU 2014-09, the effective
date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017.
The Company is evaluating the impact that adoption of this new standard will have on its financial statements.
In August 2016, the
FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments,”
(“ASU 2016-15”). ASU 2016-15 reduces the existing diversity in practice in financial reporting by clarifying existing
principles in ASC 230, “Statement of Cash Flows,” and provides specific guidance on certain cash flow classification
issues. The effective date for ASU 2016-15 will be the first quarter of fiscal year 2018 with early adoption permitted. The Company
is evaluating the impact that adoption of this new standard will have on its financial statements.
Fair Value of Financial Instruments
The Company’s
financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable. The carrying amounts for
cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short maturity of these
instruments.
2. Inventories
Inventories are comprised as follows:
|
|
September 30, 2016
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Work-in progress
|
|
$
|
439,098
|
|
|
$
|
431,802
|
|
Component parts
|
|
|
7,690,919
|
|
|
|
7,374,776
|
|
Finished goods
|
|
|
2,413,807
|
|
|
|
2,567,607
|
|
Reserve for obsolete and excess
|
|
|
|
|
|
|
|
|
inventories
|
|
|
(1,484,538
|
)
|
|
|
(1,498,915
|
)
|
|
|
$
|
9,059,286
|
|
|
$
|
8,875,270
|
|
3. Earnings per share
Basic earnings per
share are based on the weighted average number of shares of all common stock outstanding during the period. Diluted earnings per
share are based on the sum of the weighted average number of
shares
of common stock and common
stock equivalents outstanding during the period. The number of basic and diluted shares outstanding for the three months ended
September 30, 2016 and 2015 were 8,027,147.
4. Commitments and
Contingencies
Legal Claims
The Company is subject
to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its
business activities. The Company intends to continue to conduct business in such a manner as to avert any FDA action seeking to
interrupt or suspend manufacturing or require any recall or modification of products.
The
Company has recognized the costs and associated liabilities only for those investigations, claims and legal proceedings for which,
in its view, it is probable that liabilities have been incurred and the related amounts are estimable. Based upon information currently
available, management believes that existing accrued liabilities are sufficient.
Stuyvesant Falls
Power Litigation
. The Company is currently involved in litigation with Niagara Mohawk Power Corporation d/b/a National Grid
(“Niagara”), which provides electrical power to the Company’s facility in Stuyvesant Falls, New York, and one
other party. The Company maintains in its defense of the lawsuit that it is entitled to a certain amount of free electricity based
on covenants running with the land which have been honored for more than a century. After the commencement of the litigation, Niagara
began sending invoices to the Company for electricity used at the Company’s Stuyvesant Falls plant. Niagara’s attempts
to collect such invoices were stopped in December 2010 by a temporary restraining order. Among other things, Niagara seeks as damages
the value of electricity received by the Company without charge. The total value of electricity at issue in the litigation is not
known with certainty and Niagara has alleged different amounts of damages. Niagara alleged in its Second Amended Verified Complaint,
dated February 6, 2012, damages of approximately $469,000 in free electricity from May 2003 through May 2010. Niagara also alleged
in its Motion For Summary Judgment, filed on March 14, 2014, damages of approximately $492,000 in free electricity from May 2010
through the date of the filing. In April 2015, Allied received an invoice for electrical power at the Stuyvesant Falls plant with
an “Amount Due” balance of $696,000 as of March 31, 2015 without any description as to the period of time covered by
the invoice.
The Company filed a
Motion for Summary Judgment on March 14, 2014, seeking dismissal of Niagara’s claims and oral arguments on the motions were
held on June 13, 2014. On October 1, 2014, the Court granted the Company’s motion, denied Niagara’s motion and ruled
that the Company is entitled to receive electrical power pursuant to the power covenants. On October 26 and October 30, 2014, Niagara
and the other party filed separate notices of appeal of the Court’s decision. On March 31, 2016 the Supreme Court of New
York, Appellate Division, Third Department reversed the trial court decision and held that the free power covenants are no longer
enforceable. The Company’s application for leave to appeal this ruling was dismissed as premature by the New York Court of
Appeals on September 20, 2016. Avenues for appeal remain and the Company intends to exercise all available options to enforce the
free power covenants which have been in place for over 100 years.
The appellate decision
terminated the enforceability of the free power covenants as of March 31, 2016. The appellate decision did not order the Company
to pay any amounts for power consumed prior to such date and the Company believes that it is not liable for any such damages as
a result of the appellate decision. Niagara has indicated it intends to make a motion to the trial court asking that it hold additional
proceedings to establish damages. Niagara’s time for filing such motion expires on December 21, 2016. As of September 30,
2016, the Company has not recorded a provision for this matter. The Company commenced paying for power at the Stuyvesant Falls
facility in April 2016.
Employment Contract
The Company has entered
into an employment contract with its chief executive officer with annual renewals. The contract includes termination without cause
and change of control provisions, under which the chief executive officer is entitled to receive specified severance payments generally
equal to two times ending annual salary if the Company terminates his employment without cause or he voluntarily terminates his
employment with “good reason.” “Good Reason” generally includes changes in the scope of his duties or location
of employment but also includes (i) the Company’s written election not to renew the Employment Agreement and (ii) certain
voluntary resignations by the chief executive officer following a “Change of Control” as defined in the Agreement.
5. Financing
As of September 30,
2016, the Company is party to a Loan and Security Agreement, dated November 17, 2009, with Enterprise Bank & Trust (the “Credit
Agreement”) pursuant to which the Company obtained a secured revolving credit facility. Currently, the agreement provides
for borrowing availability of up to $5,000,000 (the “Credit Facility”). The Company’s obligations under the Credit
Facility are secured by certain assets of the Company pursuant to the terms and subject to the conditions set forth in the Credit
Agreement.
The Credit Agreement
was amended on November 9, 2015 extending the maturity date to November 9, 2016. Subject to the conditions and limitations set
forth in the Credit Agreement, the Credit Facility was available on a revolving basis until it expired on November 9, 2016, at
which time all amounts outstanding under the Credit Facility were due and payable. Advances under the Credit Facility were made
pursuant to a Revolving Credit Note (as defined in the Credit Agreement) executed by the Company in favor of Enterprise Bank &
Trust. Such advances bare interest at a rate equal to 3.50% in excess of the 30-day LIBOR rate. Advances could be prepaid in whole
or in part without premium or penalty.
While the Credit Agreement
provided for stated availability of $5.0 million, in connection with renewal on November 9, 2015, a new covenant was added requiring
the Company to maintain minimum “liquidity” of $1.25 million. Liquidity is defined as the difference between cash and
cash equivalents and the aggregate principal balance of borrowings under the Credit Agreement and is measured at the last day of
each fiscal quarter, commencing on December 31, 2015. Based on the Company’s cash and cash equivalents as of September 30,
2016, the Company would only be permitted to borrow up to $.11 million as of such date. Decreases in the Company’s cash position
will effectively reduce the amount the Company was able to borrow and/or require accelerated repayments.
Under the Credit Agreement,
advances were generally subject to customary borrowing conditions. The Credit Agreement also contained covenants with which the
Company must comply during the term of the Credit Facility. Among other things, such covenants restrict the Company’s ability
to incur certain additional debt; make specified restricted payments, dividends and capital expenditures; authorize or issue capital
stock; enter into certain transactions with affiliates; consolidate or merge with or acquire another business; sell certain of
its assets or dissolve or wind up the Company. In addition, effective November 9, 2015, the Credit Agreement included the minimum
liquidity requirement described above. The Credit Agreement also contained certain events of default that were customary for financings
of this type including, without limitation: the failure to pay principal, interest, fees or other amounts when due; the breach
of specified representations or warranties contained in the loan documents; cross-default with certain other indebtedness of the
Company; the entry of uninsured judgments that are not bonded or stayed; failure to comply with the observance or performance of
specified agreements contained in the loan documents; commencement of bankruptcy or other insolvency proceedings; and the failure
of any of the loan documents entered into in connection with the Credit Facility to be in full force and 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 4.00% above the otherwise applicable interest rate (provided, that the interest rate may not exceed
the highest rate permissible under law), and the lender would have the option to accelerate maturity and payment of the Company’s
obligations under the Credit Facility.
The Credit Agreement
expired in accordance with its terms on November 9, 2016. The Company will consider alternative sources of credit financing to
replace the credit facility if necessary.
The 30-day LIBOR rate
was 0.53% on September 30, 2016.
At September 30, 2016,
the Company had no aggregate indebtedness, including capital lease obligations, short-term debt, and long term debt.
The Company was in
compliance with all of the covenants associated with the Credit Facility at September 30, 2016.
6. Income Taxes
The Company accounts for income taxes under 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 presently enacted tax rates. Valuation allowances are established when necessary to reduce deferred tax assets
to the amounts expected to be realized. In the quarter ended September 30, 2016 the Company recorded the tax benefit of losses
incurred during the current quarter in the amount of approximately $306,000. As the realization of the tax benefit of the
net operating loss is not assured an additional valuation allowance of approximately $306,000 was recorded. The total valuation
allowance recorded by the Company as of September 30, 2016 was approximately $2,119,000. To the extent that the Company’s
losses continue in future quarters, the tax benefit of those losses will be subject to a valuation allowance.