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, 2013.
Recently Issued Accounting Guidance
We have reviewed accounting guidance and interpretations thereof issued by the FASB, AICPA and the SEC that have effective dates during the periods reported and in future periods. Management does not believe that any of those pronouncements will have a material impact on the Company’s present or future 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, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
Work-in progress
|
|
$
|
679,870
|
|
$
|
663,100
|
|
Component parts
|
|
|
8,051,900
|
|
|
7,530,506
|
|
Finished goods
|
|
|
2,821,505
|
|
|
2,457,337
|
|
Reserve for obsolete and excess inventories
|
|
|
(1,307,583)
|
|
|
(1,312,600)
|
|
|
|
$
|
10,245,692
|
|
$
|
9,338,343
|
|
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, 2013 and 2012 were
8,027,147
and
8,124,386
, respectively.
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 and that it is not reasonably possible at this time that any additional liabilities will result from the resolution of these matters that would have a material adverse effect on the Company’s results of operations, financial position, or cash flows.
Stuyvesant Falls Power Litigation
. The Company is currently involved in litigation with Niagara Mohawk Power Corporation d/b/a National Grid (“Niagara”) and other parties, which provides electrical power to the Company’s facility in Stuyvesant Falls, New York.
In fiscal year 2011, Niagara began sending invoices to the Company for electricity used at the Company’s Stuyvesant Falls plant.
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.
Niagara’s attempts to collect such invoices were stopped in December 2010 by a temporary restraining order, although a court has not yet ruled on the merits of all of Niagara’s claims.
Among other things, Niagara seeks approximately $
469,000
, which it alleges represents the value of electricity provided prior to the commencement of litigation going back to 2003.
The Company has posted a $
250,000
bond which Niagara could draw against for electricity provided and not collected since the December 2010 temporary restraining order in the event Niagara prevails in its lawsuit.
The amount of the bond exceeds the cumulative invoiced electricity charges generated by Niagara since the issuance of the temporary restraining order.
As of September 30, 2013, the Company has not recorded a provision for this matter as management intends to vigorously defend this litigation and believes it is not probable that the Company will be required to pay for electricity as Niagara claims.
The Company believes, however, that any liability it may incur should it not prevail in the litigation would not have a material adverse effect on its financial condition, its result of operations, or its cash flows.
Dräger Patent Litigation.
On or about October 4, 2013, Dräger Medical GmbH and certain affiliates (the “Dräger Plaintiffs”) filed a patent infringement lawsuit against the Company in the District of Delaware, asserting that the Company infringes United States Patent Nos. 7,487,776 and 8,286,633, both protecting particular combinations of carbon dioxide absorption cartridges and adapters which fit on anesthesia machines. The Dräger Plaintiffs assert that the Company’s sales of certain models of its Litholyme and Carbolyme single-use carbon dioxide absorption cartridges infringe both patents.
The Company has answered the Complaint, asserting invalidity of the patents, non-infringement, and implied license under the doctrine of permissive repair.
On October 25, 2013, the Dräger Plaintiffs filed a motion for preliminary injunction requesting that the Company be enjoined from selling certain models of its Litholyme and Carbolyme cartridges during the pendency of the litigation. The Court has set a hearing date of January 17, 2014 on the motion for preliminary injunction.
As of September 30, 2013, the Company has not recorded a provision for this matter because the Company cannot estimate a possible loss or range of loss for this matter because the Dräger Plaintiffs have not specified damages claimed and the proceedings are in the early stages.
The Company intends to vigorously contest the motion for preliminary injunction and defend against the litigation brought by the Dräger Plaintiffs and pursue counterclaims for invalidity, non-infringement, and implied license
.
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
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 with 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 Facility was amended on November 12, 2013 extending the maturity date to
November 11, 2014
.
The Credit Facility will be available on a revolving basis until it expires on November 11, 2014, at which time all amounts outstanding under the Credit Facility will be due and payable. Advances under the Credit Facility will be made pursuant to a Revolving Credit Note executed by the Company in favor of Enterprise Bank & Trust. Such advances will bear interest at a rate equal to
3.50
% in excess of the 30-day LIBOR rate.
Advances may be prepaid in whole or in part without premium or penalty.
Under the Credit Agreement, advances are generally subject to customary borrowing conditions. The Credit Agreement also contains 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. The Credit Agreement also contains certain events of default that are 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 30-day LIBOR rate was
0.18
% on September 30, 2013.
At September 30, 2013 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, 2013
.
6.
Baralyme® Agreement
A reconciliation of deferred revenue resulting from the agreement with Abbott Laboratories (“Abbott”), with the amounts received under the agreement, and amounts recognized as net sales is as follows:
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Three Months ended
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|
September 30,
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|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
-
|
|
$
|
114,700
|
|
|
|
|
|
|
|
|
|
Revenue recognized
as net sales
|
|
|
-
|
|
|
(114,700)
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Less - Current portion
of deferred revenue
|
|
|
-
|
|
|
-
|
|
|
|
$
|
-
|
|
$
|
-
|
|
7.
Share Repurchases
On November 21, 2012 the Company’s Board of Directors approved the purchase of up to
100,000
shares of the Company’s common stock.
This authority terminated on February 19th, 2013.
Pursuant to this authorization, the Company repurchased
94,139
shares of stock at an average price of $
2.54
for an aggregate total purchase price of $
240,952
.
On February 25, 2013 the Company’s Board of Directors authorized the repurchase of up to
100,000
shares of the Company’s common stock for a period of 90 days.
Repurchases may be made in the open market or in privately negotiated transactions, with the timing and terms of such transaction in the discretion of the Chairman of the Board unless terminated by the Board, the repurchase authority renews for successive 90 day periods.
The repurchase authority may be terminated by the Board at any time and without notice.
Pursuant to this authorization, the Company repurchased a total of
3,100
shares in the third quarter of fiscal 2013 at an average price of $
2.69
per share for an aggregate total purchase price of $
8,408
.
8.
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.
The company has relied on the reversal of existing temporary deferred tax liabilities and tax planning strategies to support the value of its deferred tax assets.
In the quarter ended September 30, 2013 the company’s cumulative losses have exceeded the value available through those strategies and a valuation allowance of approximately $
31,000
has been established. To the extent that the Company’s losses continue in future quarters, the tax benefit of those losses would be subject to a valuation allowance.