The following described
financial statements of Allied Healthcare Products, Inc. are included in response to this item:
NOTES TO FINANCIAL STATEMENTS
Allied Healthcare Products,
Inc. (the “Company” or “Allied”) is a manufacturer of respiratory products used in the health care industry
in a wide range of hospital and alternate site settings, including post-acute care facilities, home health care and trauma care.
The Company's product lines include respiratory care products, medical gas equipment and emergency medical products.
2.
|
Summary of Significant Accounting Policies
|
The significant accounting
policies followed by Allied are described below.
Use of estimates
The policies utilized by
the Company in the preparation of the financial statements conform to accounting principles generally accepted in the United States
of America, and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts
could differ from those estimates.
Revenue recognition
Revenue is recognized for
all sales, including sales to agents and distributors, at the time products are shipped and title has transferred, provided that
a purchase order has been received or a contract executed, there are not uncertainties regarding customer acceptance, the sales
price is fixed and determinable and collectability is reasonably assured. Sales discounts, returns and allowances are included
in net sales, and the provision for doubtful accounts is included in selling, general and administrative expenses. Additionally,
it is the Company’s practice to include revenues generated from freight billed to customers in net sales with corresponding
freight expense included in cost of sales in the Statement of Operations. The Company reports sales taxes on sales transactions
on a net basis in the Statement of Operations, and therefore does not include sales taxes in revenues or costs.
The sales price is fixed
by Allied’s acceptance of the buyer’s firm purchase order. The sales price is not contingent, or subject to additional
discounts. Allied’s standard shipment terms are “F.O.B. shipping point” as stated in Allied’s Terms and
Conditions of Sale. The customer is responsible for obtaining insurance for and bears the risk of loss for product in-transit.
Additionally, sales to customers do not include the right to return merchandise without the prior consent of Allied. In those cases
where returns are accepted, product must be current and restocking fees must be paid by the respective customer. A provision has
been made for estimated sales returns and allowances. These estimates are based on historical analysis of credit memo data and
returns.
Allied does not provide
installation services for its products. Most products shipped are ready for immediate use by the customer. The Company’s
in-wall medical system components, central station pumps and compressors, and headwalls do require installation by the customer.
These products are typically purchased by a third-party contractor who is ultimately responsible for installation services. Accordingly,
the customer purchase order or contract does not require customer acceptance of the installation prior to completion of the sale
transaction and revenue recognition. Allied’s standard payment terms are net 30 days from the date of shipment, and payment
is specifically not subject to customer inspection or acceptance, as stated in Allied’s Terms and Conditions of Sale. The
buyer becomes obligated to pay Allied at the time of shipment. Allied requires credit applications from its customers and performs
credit reviews to determine the creditworthiness of new customers. Allied requires letters of credit, where warranted, for international
transactions. Allied also protects its legal rights under mechanics lien laws when selling to contractors.
The Company offers limited
warranties on its products. The standard warranty period is one year. The Company’s cost of providing warranty
service for its products for the years ended June 30, 2018, June 30, 2017, and June 30, 2016 was $299,034, $136,606, and $89,895,
respectively. The related liability for warranty service amounted to $150,000 at June 30, 2018 and $100,000 at June 30, 2017.
Marketing
and Advertising Costs
Promotional and advertising costs are expensed as incurred
and are included in selling, general and administrative expenses in the Statement of Operations. Advertising expenses for the
years ended June 30, 2018, 2017 and 2016 were $2,000, $5,550, and $15,699, respectively.
Cash and cash equivalents
For purposes of the statement
of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when acquired to be
cash equivalents.
The Company maintains funds
in bank accounts that, at times, may exceed the limit insured by the Federal Deposit Insurance Corporation. The risk of loss attributable
to these uninsured balances is mitigated by depositing funds only in high credit quality financial institutions. The Company has
not experienced any losses in such accounts.
Foreign currency transactions
Allied has international
sales which are denominated in U.S. dollars, the functional currency for these transactions.
Accounts receivable and concentrations of
credit risk
Accounts receivable are
recorded at the invoiced amount. The Company performs ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses based on past experience and an analysis of current amounts
due, and historically such losses have been within management's expectations. The Company maintains an allowance for doubtful accounts
to reflect the uncollectibility of accounts receivable based on past collection history and specific risks indentified 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. The Company’s customers
can be grouped into three main categories: medical equipment distributors, construction contractors and health care institutions.
At June 30, 2018, the Company believes that it has no significant concentration of credit risk.
Inventories
Inventories are stated
at the lower of cost, determined using the last-in, first-out (“LIFO”) method, or market. If the first-in, first-out
method (which approximates replacement cost) had been used in determining cost, inventories would have been $2,376,537 and $2,472,188
higher at June 30, 2018 and 2017, respectively. Changes in the LIFO reserve are included in cost of sales. Cost of sales was reduced
by $242,885, $90,510, and $86,698 in fiscal 2018, 2017, and 2016 respectively, as a result of LIFO liquidations. Costs in inventory
include raw materials, direct labor and manufacturing overhead.
Inventory is recorded net
of a reserve for obsolete and excess inventory which is determined 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. The reserve for obsolete
and excess inventory was $1,619,417 and $1,597,648 at June 30, 2018 and 2017, respectively.
Property, plant and equipment
Property, plant and equipment
are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, which range
from 3 to 35 years. Expenditures for repairs, maintenance and renewals are charged to income as incurred. Expenditures, which improve
an asset or extend its estimated useful life, are capitalized. When properties are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income.
Impairment of long-lived assets
The Company evaluates impairment
of long-lived assets under the provisions of ASC Topic 360: “Property, Plant and Equipment.” ASC 360 provides a single
accounting model for long-lived assets to be disposed of and reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. Under ASC 360, if the sum of the expected future cash flows
(undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment
loss will be recognized. No impairment losses of long-lived assets or identifiable intangibles were recorded by the Company for
fiscal years ended June 30, 2018, 2017, and 2016.
Collective Bargaining Agreement
At June 30, 2018, the Company
had approximately 202 full-time employees. Approximately 115 employees in the Company’s principal manufacturing facility
located in St. Louis, Missouri, are covered by a collective bargaining agreement that will expire on May 31, 2021.
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 of June 30, 2018 and 2017, the
Company had $180,000 and $215,000 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.
Fair value of financial instruments
The Company’s financial
instruments include cash, accounts receivable and accounts payable. The carrying amounts for cash, accounts receivable and accounts
payable approximate their fair value due to the short maturity of these instruments.
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 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. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts expected to be realized. 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
considers the availability of future taxable income to the extent such income is considered likely to occur based on the Company’s
earnings history, current income trends and projections.
In light of 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. To the extent the Company’s
deferred tax assets exceeded the amount supportable through reversals of existing deferred tax liabilities and tax planning strategies
a valuation allowance is recorded against the excess deferred tax assets.
The Company recognizes
tax liabilities when, despite the Company’s belief that its tax return positions are supportable, the Company believes that
certain positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the largest
amount of benefit that is greater than 50 percent likely of being realized upon settlement. To the extent the Company deems it
necessary to record a liability for its tax positions, the current portion of the liability is included in income taxes payable
and the noncurrent portion is included in other liabilities on the balance sheet. If upon the final tax outcome of these matters
the ultimate liability is different than the amounts recorded, such differences are reflected in income tax expense in the period
in which such determination is made. The Company files a federal and multiple state income tax returns. With few exceptions the
Company’s federal and state income tax returns are open for fiscal years ending after June 30, 2015.
The Company classifies
interest expenses on taxes payable as interest expense. Penalties are classified as a component of other expenses.
Research and development costs
Research and development
costs are expensed as incurred and are included in selling, general and administrative expenses. Research and development expenses
for the years ended June 30, 2018, 2017 and 2016 were $472,077, $410,458, and $463,902, respectively.
Earnings per share
Basic earnings per share
are based on the weighted average number of shares of common stock outstanding during the year. 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 year.
The weighted average number of basic and diluted shares outstanding for the years ended June 30, 2018, 2017 and 2016 was 4,013,537
shares. The dilutive effect of the Company's employee and director stock option plans are determined by use of the treasury stock
method. There are no potential common shares excluded from the calculation of net loss per share, as their effect would be anti-dilutive
for the years ended June 30, 2018, 2017 and 2016 respectively.
The following information is necessary to calculate
earnings per share for the periods presented:
Year ended June 30,
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, as reported
|
|
$
|
(2,192,170
|
)
|
|
$
|
(2,088,666
|
)
|
|
$
|
(2,304,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
4,013,537
|
|
|
|
4,013,537
|
|
|
|
4,013,537
|
|
Effect of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average diluted common shares outstanding
|
|
|
4,013,537
|
|
|
|
4,013,537
|
|
|
|
4,013,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.55
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.57
|
)
|
Diluted
|
|
$
|
(0.55
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options excluded from computation of diluted income per share amounts because
their effect would be anti-dilutive
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Employee stock-based compensation
The company follows the
provisions of ASC Topic 718: “Compensation – Stock Compensation”, which sets accounting requirements for “share-based”
compensation to employees, including employee stock purchase plans, and requires companies to recognize in the statement of operations
the grant-date fair value of the stock options and other equity-based compensation.
The fair value of options
granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following table summarizes the weighted
average assumptions utilized in the Black-Scholes option pricing model for options granted during the fiscal years ended June 30,
2018, 2017 and 2016.
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value
|
|
$
|
0.99
|
|
|
$
|
0.86
|
|
|
$
|
0.78
|
|
Weighted-average volatility
|
|
|
44
|
%
|
|
|
37
|
%
|
|
|
30
|
%
|
Weighted-average expected life (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Weighted-average risk-free interest rate
|
|
|
2.11
|
%
|
|
|
1.74
|
%
|
|
|
1.91
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility is based
on the historical volatility of the Company’s common stock to estimate future volatility. The risk-free rates are taken from
rates as published by the Federal Reserve and represent the yields on actively traded treasury securities for terms equal or approximately
equal to the expected terms of the options. The expected term is calculated using the SEC Staff Accounting Bulletin 107 (ASC 718-10-S99)
simplified method. Forfeitures are recognized as they occur. The dividend yield is zero based on the fact that the Company has
no intention of paying dividends in the near term.
Share-based compensation
expense included in the Statement of Operations for the fiscal years ended June 30, 2018, 2017 and 2016 was approximately $3,000,
$2,000 and $3,000, respectively. Unrecognized shared-based compensation cost related to unvested stock options as of June 30, 2018
amounts to approximately $1,000. The cost is expected to be recognized over the next fiscal year.
The Company recognized
an income tax benefit for share-based compensation arrangements of approximately $1,000 for the years ended June 30, 2016, 2017
and 2018, all of which were fully offset by an increase in the deferred tax asset valuation allowance.
No stock options were exercised
during fiscal years 2018, 2017 and 2016.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued an update to the accounting guidance on revenue recognition. The new guidance
provides a comprehensive, principles-based approach to revenue recognition, and supersedes most previous revenue recognition guidance.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services.
To achieve the core principle, the guidance
establishes the following five steps: 1) identify the contract(s) with a customer, 2) identify the performance obligation in the
contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract,
and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also details the accounting treatment
for costs to obtain or fulfill a contract. The guidance also requires improved disclosures on the nature, amount, timing, and uncertainty
of revenue that is recognized. In August 2015, the FASB issued an update to the guidance to defer the effective date by one year,
such that the new standard will be effective for annual reporting periods beginning after December 15, 2017 and interim periods
therein. The new guidance can be applied retrospectively to each prior reporting period presented, or retrospectively with the
cumulative effect of the change recognized at the date of the initial application. The Company will apply the new guidance effective
July 1, 2018 using the modified retrospective method to contracts that are not completed as of July 1, 2018. The Company has substantially
completed its assessment of the new guidance and the adoption of this guidance, including the cumulative effect of any adjustment
to the opening balance of retained earnings and does not believe it will not have a material impact to its consolidated 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.
The Company is party to a Loan and Security Agreement with Summit Financial Resources, L.P. (“Summit”),
dated effective February 27, 2017, as amended April 16, 2018 (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 June 30, 2018 availability
under the agreement was $2,000,000.
The Credit Facility will
be available, subject to its terms, on a revolving basis until it expires on February 27, 2020, 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, 2020, 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, 2020 and the date of such prepayment or termination.
Under the Credit Agreement,
advances are generally subject to customary borrowing conditions and to Summit’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 Summit would
have the option to accelerate maturity and payment of the Company’s obligations under the Credit Facility.
At June 30, 2018, the Company
had no aggregate indebtedness, including capital lease obligations, short-term debt and long term debt. The prime rate as reported
in the Wall Street Journal was 5.00% on June 30, 2018.
The Company was in compliance
with all of the covenants associated with the Credit Facility at June 30, 2018.
The
Company leases certain of its equipment under non-cancelable operating lease agreements. Minimum lease payments under operating
leases at June 30, 2018 are as follows:
|
|
|
Operating
|
|
Fiscal Year
|
|
|
Leases
|
|
|
|
|
|
|
|
2019
|
|
|
$
|
88,047
|
|
|
2020
|
|
|
|
4,946
|
|
|
Total minimum lease payments
|
|
|
$
|
92,993
|
|
Rental
expense incurred on operating leases in fiscal 2018, 2017, and 2016 totaled $131,764, $132,657 and $143,683, respectively.
The provision for income
taxes consists of the following:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
9,938
|
|
|
|
7,299
|
|
|
|
11,286
|
|
Total current
|
|
|
9,938
|
|
|
|
7,299
|
|
|
|
11,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
424,038
|
|
|
|
(625,953
|
)
|
|
|
(100,174
|
)
|
State
|
|
|
91,789
|
|
|
|
(84,424
|
)
|
|
|
(3,495
|
)
|
Valuation Allowance
|
|
|
(352,727
|
)
|
|
|
739,578
|
|
|
|
393,814
|
|
Total deferred
|
|
|
163,100
|
|
|
|
29,201
|
|
|
|
290,145
|
|
|
|
$
|
173,038
|
|
|
$
|
36,500
|
|
|
$
|
301,431
|
|
A reconciliation of income
taxes, with the amounts computed at the statutory federal rate is as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Computed tax at federal statutory rate
|
|
($
|
555,261
|
)
|
|
($
|
697,736
|
)
|
|
($
|
681,156
|
)
|
State income taxes, net of federal tax (benefit) provision
|
|
|
(54,471
|
)
|
|
|
(49,124
|
)
|
|
|
(38,971
|
)
|
Non deductible expenses
|
|
|
9,775
|
|
|
|
15,491
|
|
|
|
13,915
|
|
Federal research credit
|
|
|
(16,880
|
)
|
|
|
(9,661
|
)
|
|
|
(15,144
|
)
|
Net operating loss carryforward adjustment
|
|
|
131,244
|
|
|
|
-
|
|
|
|
-
|
|
Book tax depreciation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
517,736
|
|
State NOLs
|
|
|
(39,979
|
)
|
|
|
39,697
|
|
|
|
|
|
Stock Options - Expired
|
|
|
4,424
|
|
|
|
15,308
|
|
|
|
122,508
|
|
Changes resulting from new tax law
|
|
|
1,080,362
|
|
|
|
-
|
|
|
|
-
|
|
Other, net
|
|
|
(33,449
|
)
|
|
|
(17,053
|
)
|
|
|
(11,271
|
)
|
Valuation Allowance
|
|
|
(352,727
|
)
|
|
|
739,578
|
|
|
|
393,814
|
|
Total
|
|
$
|
173,038
|
|
|
$
|
36,500
|
|
|
$
|
301,431
|
|
On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the
Tax Cuts and Jobs Act (the “TCJA”), which became effective on that date. The TCJA significantly revises U.S. tax law
by lowering the U.S. federal statutory income tax rate from 35% to 21% effective January 1, 2018.
ASC Topic 740, requires the effects of changes in tax laws to be recognized in the period in which the
legislation is enacted. Accordingly, in the second quarter of fiscal 2018, the Company recorded a one-time charge of $136,386
within its income tax provision in connection with the TCJA. The net expense of $136,386 relates to revaluation of the Company’s
valuation allowance.
The deferred tax assets
and deferred tax liabilities recorded on the balance sheet as of June 30, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Bad debts
|
|
$
|
25,500
|
|
|
$
|
38,500
|
|
Intangible assets
|
|
|
2,530
|
|
|
|
4,620
|
|
Accrued liabilities
|
|
|
257,692
|
|
|
|
347,079
|
|
Accrued pension liability
|
|
|
-
|
|
|
|
18,031
|
|
Stock options
|
|
|
30,411
|
|
|
|
52,211
|
|
Net operating loss and credit carryforwards
|
|
|
3,511,943
|
|
|
|
4,554,491
|
|
Total Assets
|
|
|
3,828,076
|
|
|
|
5,014,932
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
11,606
|
|
|
|
9,179
|
|
Inventory
|
|
|
697,669
|
|
|
|
1,057,326
|
|
Depreciation
|
|
|
317,360
|
|
|
|
628,017
|
|
Other
|
|
|
81,186
|
|
|
|
84,328
|
|
Total Liabilities
|
|
|
1,107,821
|
|
|
|
1,778,850
|
|
Valuation Allowance
|
|
|
(2,199,592
|
)
|
|
|
(2,552,319
|
)
|
Total deferred taxes
|
|
$
|
520,663
|
|
|
$
|
683,763
|
|
At June 30, 2018, there
were $13.2 million dollars of federal net operating loss carryforwards which will expire in 2031 through 2038. In addition, the
Company has state tax net operating losses of approximately $7.9 million that expire in varying years from 2018 through 2038.
The Company files a federal
and multiple state income tax returns. With few exceptions the Company’s federal and state income tax returns are open for
fiscal years ending after June 30, 2015.
The Company has not taken
any uncertain tax positions on its federal or state income tax filings for open tax years.
6.
|
Employee Retirement Benefits
|
The Company offers a retirement
savings plan under Section 401(k) of the Internal Revenue Code to certain eligible salaried employees. Each employee may elect
to enter a written salary deferral agreement under which a portion of such employee's pre-tax earnings may be contributed to the
plan.
During the fiscal years
ended June 30, 2018, 2017 and 2016, the Company made contributions of $197,999, $204,951, and $228,854, respectively, to the retirement
savings plan. The Company contributes 2% of eligible salaried employee’s annual income to the plan. In addition, the Company
provides a 25% match on the first 8% of employee deferrals for eligible employees.
The risk of participating
in multi-employer pension plan is different from single-employer plans. Assets contributed to a multi-employer plan by one employer
may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to
the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
The Company’s participation
in a multi-employer pension plan for the year ended June 30, 2018, is outlined in the table below. The “EIN/PN” column
provides the Employee Identification Number (EIN) and the three-digit plan number (PN). The most recent Pension Protection Act
(PPA) zone status for 2017 and 2016 is for the plan year-ends as indicated below. The zone status is based on information that
the Company obtained from the annual funding notice for District No. 9 International Association of Machinists and Aerospace Workers
Pension Trust. Among other factors, plans in the red zone are less than 65 percent funded, plans in the yellow zone are between
65 and 80 percent funded, and plans in the green zone are at least 80 percent funded. The “FIP/RP Status Pending/Implemented”
column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been
implemented. In addition to regular plan contributions, the Company may be subject to a surcharge if the plan is in the red zone.
The “Surcharge Imposed” column indicates whether a surcharge has been imposed on contributions to the plan. The last
column lists the expiration date(s) of the collective-bargaining agreement (CBA) to which the plan is subject.
|
|
|
|
|
PPA
Zone Status
|
|
|
|
|
|
Contributions
by the Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIP/RP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pending/
|
|
|
|
|
|
|
|
|
|
|
|
Surcharge
|
|
|
Expiration
|
|
Pension Trust Fund
|
|
|
EIN/PN
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
Implemented
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
Imposed
|
|
|
|
Date
of CBA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
District No. 9
|
|
|
51-0138317/001
|
|
|
|
Green
|
|
|
|
Green
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
Association of
Machinist and Aerospace
Workers Pension Plan
|
|
|
|
|
|
|
12/31/2017
|
|
|
|
12/31/2016
|
|
|
|
N/A
|
|
|
$
|
269,928
|
|
|
$
|
277,127
|
|
|
$
|
279,968
|
|
|
|
No
|
|
|
|
5/31/2021
|
|
The Company was not listed
in the Form 5500 for the above plan as of the plan year ends as providing more than 5 percent of total contributions.
7.
|
Stock Based Compensation
|
The Company has established
a 2009 Incentive Stock Plan. The Employee Plan provides for the granting of options to the Company's executive officers and key
employees to purchase shares of common stock at prices equal to the fair market value of the stock on the date of grant. Options
to purchase up to 300,000 shares of common stock may be granted under the Employee Plan. Options generally become exercisable ratably
over a four year period or one-fourth of the shares covered thereby on each anniversary of the date of grant, commencing on the
first or second anniversary of the date granted. The right to exercise the options generally expires in ten years from the date
of grant, or earlier if an option holder ceases to be employed by the Company.
In addition, the Company
has established a 2005 Directors Non-Qualified Stock Option Plan and a 2013 Incentive Plan for Non-Employee Directors (collectively
the “Directors Plans”). The Directors Plans provide for the granting of options to the Company's directors who are
not employees of the Company to purchase shares of common stock at prices equal to the fair market value of the stock on the date
of grant. Options to purchase up to 75,000 shares of common stock may be granted under the Directors Plans. Options shall become
exercisable with respect to one-fourth of the shares covered thereby on each anniversary of the date of grant, commencing on the
second anniversary of the date granted, except for certain options which become exercisable with respect to all of the shares covered
thereby one year after the grant date. The right to exercise the options expires in ten years from the date of grant, or earlier
if an option holder ceases to be a director of the Company.
Upon stock-settled compensation
exercises and awards, the Company issues new shares of common stock.
A summary of stock
option transactions in fiscal 2016, 2017 and 2018, respectively, pursuant to the Employee Plans and the Directors Plans is as
follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
Average
|
|
Contractual
|
|
Intrinsic
|
|
|
Shares
|
|
Exercise Price
|
|
Term (years)
|
|
Value
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
|
211,500
|
|
|
$
|
8.40
|
|
|
|
|
|
|
|
|
|
Options Granted
|
|
|
3,000
|
|
|
$
|
2.34
|
|
|
|
|
|
|
|
|
|
Options Exercised
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Options Forfeited or Expired
|
|
|
(164,500
|
)
|
|
$
|
8.56
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
50,000
|
|
|
$
|
7.56
|
|
|
|
4.5
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Granted
|
|
|
3,000
|
|
|
$
|
2.26
|
|
|
|
|
|
|
|
|
|
Options Exercised
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Options Forfeited or Expired
|
|
|
(8,000
|
)
|
|
$
|
10.59
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
45,000
|
|
|
$
|
6.67
|
|
|
|
4.6
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Granted
|
|
|
3,000
|
|
|
$
|
2.22
|
|
|
|
|
|
|
|
|
|
Options Exercised
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Options Forfeited or Expired
|
|
|
(3,000
|
)
|
|
$
|
13.46
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
45,000
|
|
|
$
|
5.92
|
|
|
|
4.3
|
|
|
$
|
-
|
|
Exercisable at June 30, 2018
|
|
|
42,000
|
|
|
$
|
6.18
|
|
|
|
3.9
|
|
|
$
|
-
|
|
The following table provides
additional information for options outstanding and exercisable at June 30, 2018:
Options Outstanding
Range of Exercise Prices
|
|
Number
|
|
|
Weighted Average
Remaining Life
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$2.22 - 6.99
|
|
|
18,000
|
|
|
|
6.9 years
|
|
|
$
|
3.30
|
|
$7.00
|
|
|
15,000
|
|
|
|
3.2 years
|
|
|
$
|
7.00
|
|
$7.01 - 10.08
|
|
|
12,000
|
|
|
|
1.9 years
|
|
|
$
|
8.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.22 - 10.08
|
|
|
45,000
|
|
|
|
4.3 years
|
|
|
$
|
5.92
|
|
Options Exercisable
Range of Exercise Prices
|
|
Number
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
$2.22 - 6.99
|
|
|
15,000
|
|
|
$
|
3.51
|
|
$7.00
|
|
|
15,000
|
|
|
$
|
7.00
|
|
$7.01 -10.08
|
|
|
12,000
|
|
|
$
|
8.49
|
|
|
|
|
|
|
|
|
|
|
$2.22 - 10.08
|
|
|
42,000
|
|
|
$
|
6.18
|
|
See Note 2 for discussion
of accounting for stock awards and related fair value disclosures.
8.
|
Supplemental Balance Sheet Information
|
|
|
|
|
June 30,
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
Work in progress
|
|
|
|
$
|
388,252
|
|
|
$
|
468,839
|
|
Component parts
|
|
|
|
|
6,775,870
|
|
|
|
7,271,908
|
|
Finished goods
|
|
|
|
|
2,285,836
|
|
|
|
2,368,855
|
|
Reserve for obsolete and excess inventory
|
|
|
|
|
(1,619,417
|
)
|
|
|
(1,597,648
|
)
|
|
|
|
|
$
|
7,830,541
|
|
|
$
|
8,511,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
|
|
|
|
|
|
|
|
(years)
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
3-10
|
|
$
|
18,073,352
|
|
|
$
|
18,073,352
|
|
Buildings
|
|
28-35
|
|
|
13,055,628
|
|
|
|
13,055,628
|
|
Land and land improvements
|
|
5-7
|
|
|
919,566
|
|
|
|
919,566
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment at cost
|
|
|
|
|
32,048,546
|
|
|
|
32,048,546
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(27,225,397
|
)
|
|
|
(26,314,505
|
)
|
|
|
|
|
$
|
4,823,149
|
|
|
$
|
5,734,041
|
|
Depreciation expense was approximately $0.9 million, $1.0 million, and $1.2 million for the fiscal years ended June 30, 2018, 2017 and 2016, respectively.
Other accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation expense
|
|
|
|
$
|
1,060,777
|
|
|
$
|
1,132,534
|
|
Customer deposits
|
|
|
|
|
370,885
|
|
|
|
612,908
|
|
Other
|
|
|
|
|
419,021
|
|
|
|
264,524
|
|
|
|
|
|
$
|
1,850,683
|
|
|
$
|
2,009,966
|
|
9.
|
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. On May 26, 2017 the Company again moved for leave to appeal the March 31, 2016 decision. That motion
was granted on October 7, 2017 by the New York State Court of Appeals. The Company filed its brief and record on January 26, 2018.
Niagara and the other party to the lawsuit, Albany Engineering Corporation, filed their responses on July 16, 2018 and the Company
filed its reply on August 14, 2018. The matter will next be scheduled for argument, most likely in 2019.
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. On December 21, 2016, Niagara filed a motion to the trial court asking that it hold additional
proceedings to establish what damages, if any, are owed to Niagara as the result of the appellate decision. The Company filed its
response on January 23, 2017. On April 25, 2017, the court denied Niagara’s motion in its entirety finding that no damages
could be awarded based on the Appellate Division’s decision. Niagara has filed a Notice of Appeal from that decision, but
to date, has not filed the appeal.
As of June 30, 2018, 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
In March 2007, the Company
entered into a three year employment contract with its chief executive officer. The contract is subject to automatic annual renewals
after the initial term unless notification is given. The contract was amended and restated in December 2009 without extending its
term. 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.
The
Company operates in one segment consisting of the
manufacturing, marketing and distribution of a variety of respiratory
products used in the health care industry to hospitals, hospital equipment dealers, hospital construction contractors, home health
care dealers and emergency medical product dealers. The Company’s product lines include respiratory care products, medical
gas equipment and emergency medical products.
The Company does not have
any one single customer that represents more than 10 percent of total sales. Sales by region, and by product, are as follows:
|
|
Sales by Region
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Domestic United States
|
|
$
|
25,711,912
|
|
|
$
|
26,258,439
|
|
|
$
|
27,437,238
|
|
Europe
|
|
|
1,428,245
|
|
|
|
951,441
|
|
|
|
773,129
|
|
Canada
|
|
|
795,357
|
|
|
|
690,010
|
|
|
|
916,528
|
|
Latin America
|
|
|
1,855,013
|
|
|
|
2,087,670
|
|
|
|
3,168,891
|
|
Middle East
|
|
|
857,066
|
|
|
|
694,387
|
|
|
|
843,092
|
|
Far East
|
|
|
3,107,339
|
|
|
|
2,821,895
|
|
|
|
2,803,451
|
|
Other International
|
|
|
5,021
|
|
|
|
8,188
|
|
|
|
10,158
|
|
|
|
$
|
33,759,953
|
|
|
$
|
33,512,030
|
|
|
$
|
35,952,487
|
|
|
|
Sales by Product
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Respiratory care products
|
|
$
|
9,037,704
|
|
|
$
|
9,105,694
|
|
|
$
|
9,077,370
|
|
Medical gas equipment
|
|
|
17,645,413
|
|
|
|
17,660,524
|
|
|
|
19,712,286
|
|
Emergency medical products
|
|
|
7,076,836
|
|
|
|
6,745,812
|
|
|
|
7,162,831
|
|
|
|
$
|
33,759,953
|
|
|
$
|
33,512,030
|
|
|
$
|
35,952,487
|
|
11.
|
Quarterly Financial Data (unaudited)
|
Summarized
quarterly financial data for fiscal 2018 and 2017 appears below (all amounts in thousands except per share amounts):
|
|
June 30,
|
|
|
March 31,
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
Three months ended,
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Net sales
|
|
$
|
8,677
|
|
|
$
|
8,467
|
|
|
$
|
8,719
|
|
|
$
|
7,897
|
|
|
$
|
8,222
|
|
|
$
|
8,581
|
|
|
$
|
8,269
|
|
|
$
|
8,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,951
|
|
|
|
1,233
|
|
|
|
1,909
|
|
|
|
1,357
|
|
|
|
1,569
|
|
|
|
1,735
|
|
|
|
1,695
|
|
|
|
1,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(97
|
)
|
|
|
(888
|
)
|
|
|
(244
|
)
|
|
|
(767
|
)
|
|
|
(459
|
)
|
|
|
(403
|
)
|
|
|
(373
|
)
|
|
|
(817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(143
|
)
|
|
|
(901
|
)
|
|
|
(381
|
)
|
|
|
(767
|
)
|
|
|
(495
|
)
|
|
|
(403
|
)
|
|
|
(375
|
)
|
|
|
(816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
|
(0.04
|
)
|
|
|
(0.22
|
)
|
|
|
(0.09
|
)
|
|
|
(0.19
|
)
|
|
|
(0.13
|
)
|
|
|
(0.10
|
)
|
|
|
(0.09
|
)
|
|
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
|
(0.04
|
)
|
|
|
(0.22
|
)
|
|
|
(0.09
|
)
|
|
|
(0.19
|
)
|
|
|
(0.13
|
)
|
|
|
(0.10
|
)
|
|
|
(0.09
|
)
|
|
|
(0.20
|
)
|
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.