Item 1. Financial Statements
ALLIED HEALTHCARE PRODUCTS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
9,115,786
|
|
|
$
|
9,210,369
|
|
|
$
|
26,573,489
|
|
|
$
|
28,418,882
|
|
Cost of sales
|
|
|
7,367,731
|
|
|
|
7,530,816
|
|
|
|
21,120,617
|
|
|
|
22,654,421
|
|
Gross profit
|
|
|
1,748,055
|
|
|
|
1,679,553
|
|
|
|
5,452,872
|
|
|
|
5,764,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative expenses
|
|
|
2,708,270
|
|
|
|
2,639,976
|
|
|
|
8,166,352
|
|
|
|
8,135,616
|
|
Loss from operations
|
|
|
(960,215
|
)
|
|
|
(960,423
|
)
|
|
|
(2,713,480
|
)
|
|
|
(2,371,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(689
|
)
|
|
|
(2,500
|
)
|
|
|
(4,055
|
)
|
|
|
(9,547
|
)
|
Other, net
|
|
|
9,187
|
|
|
|
(507,792
|
)
|
|
|
26,671
|
|
|
|
(492,566
|
)
|
|
|
|
8,498
|
|
|
|
(510,292
|
)
|
|
|
22,616
|
|
|
|
(502,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
|
(968,713
|
)
|
|
|
(450,131
|
)
|
|
|
(2,736,096
|
)
|
|
|
(1,869,042
|
)
|
Benefit from income taxes
|
|
|
-
|
|
|
|
(171,050
|
)
|
|
|
(277,910
|
)
|
|
|
(710,236
|
)
|
Net loss
|
|
($
|
968,713
|
)
|
|
($
|
279,081
|
)
|
|
($
|
2,458,186
|
)
|
|
($
|
1,158,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
($
|
0.12
|
)
|
|
($
|
0.03
|
)
|
|
($
|
0.31
|
)
|
|
($
|
0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
($
|
0.12
|
)
|
|
($
|
0.03
|
)
|
|
($
|
0.31
|
)
|
|
($
|
0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
8,027,147
|
|
|
|
8,029,076
|
|
|
|
8,027,147
|
|
|
|
8,085,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - diluted
|
|
|
8,027,147
|
|
|
|
8,029,076
|
|
|
|
8,027,147
|
|
|
|
8,085,091
|
|
See accompanying Notes to Financial Statements.
ALLIED HEALTHCARE PRODUCTS, INC.
BALANCE SHEET
ASSETS
|
|
(Unaudited)
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,529,312
|
|
|
$
|
3,687,919
|
|
Accounts receivable, net of allowances
|
|
|
|
|
|
|
|
|
of $170,000
|
|
|
3,872,894
|
|
|
|
4,221,970
|
|
Inventories, net
|
|
|
10,292,576
|
|
|
|
9,338,343
|
|
Income tax receivable
|
|
|
39,070
|
|
|
|
36,766
|
|
Other current assets
|
|
|
461,972
|
|
|
|
420,978
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,195,824
|
|
|
|
17,705,976
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
9,196,386
|
|
|
|
9,722,344
|
|
Deferred income taxes
|
|
|
1,942,368
|
|
|
|
1,667,699
|
|
Other assets, net
|
|
|
201,050
|
|
|
|
242,712
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
27,535,628
|
|
|
$
|
29,338,731
|
|
See accompanying Notes to Financial Statements.
(CONTINUED)
ALLIED HEALTHCARE PRODUCTS, INC.
BALANCE SHEET
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
(Unaudited)
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,867,404
|
|
|
$
|
1,317,202
|
|
Other accrued liabilities
|
|
|
1,961,260
|
|
|
|
1,861,241
|
|
Deferred income taxes
|
|
|
842,298
|
|
|
|
845,539
|
|
Total current liabilities
|
|
|
4,670,962
|
|
|
|
4,023,982
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock; $0.01 par value; 1,500,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Series A preferred stock; $0.01 par value; 200,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock; $0.01 par value; 30,000,000 shares authorized; 10,427,878 shares issued at March 31, 2014 and June 30, 2013; 8,027,147 shares outstanding at March 31, 2014 and June 30, 2013
|
|
|
104,279
|
|
|
|
104,279
|
|
Additional paid-in capital
|
|
|
48,593,102
|
|
|
|
48,584,999
|
|
Accumulated deficit
|
|
|
(4,851,927
|
)
|
|
|
(2,393,741
|
)
|
Less treasury stock, at cost; 2,400,731 shares at
|
|
|
|
|
|
|
|
|
March 31, 2014 and June 30, 2013, respectively
|
|
|
(20,980,788
|
)
|
|
|
(20,980,788
|
)
|
Total stockholders' equity
|
|
|
22,864,666
|
|
|
|
25,314,749
|
|
Total liabilities and stockholders' equity
|
|
$
|
27,535,628
|
|
|
$
|
29,338,731
|
|
See accompanying Notes to Financial Statements.
ALLIED HEALTHCARE PRODUCTS, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
($
|
2,458,186
|
)
|
|
($
|
1,158,806
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
946,837
|
|
|
|
991,768
|
|
Stock based compensation
|
|
|
8,103
|
|
|
|
33,232
|
|
Provision for doubtful accounts and sales
|
|
|
|
|
|
|
|
|
returns and allowances
|
|
|
6,994
|
|
|
|
15,394
|
|
Deferred taxes
|
|
|
(277,910
|
)
|
|
|
(757,361
|
)
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
342,082
|
|
|
|
1,393,485
|
|
Inventories
|
|
|
(954,233
|
)
|
|
|
275,942
|
|
Income tax receivable
|
|
|
(2,304
|
)
|
|
|
46,042
|
|
Other current assets
|
|
|
(40,994
|
)
|
|
|
(99,683
|
)
|
Accounts payable
|
|
|
550,202
|
|
|
|
(484,071
|
)
|
Deferred revenue
|
|
|
-
|
|
|
|
(114,700
|
)
|
Other accrued liabilities
|
|
|
100,020
|
|
|
|
47,799
|
|
Net cash (used in) provided by operating activities
|
|
|
(1,779,389
|
)
|
|
|
189,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(379,218
|
)
|
|
|
(896,816
|
)
|
Net cash used in investing activities
|
|
|
(379,218
|
)
|
|
|
(896,816
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
-
|
|
|
|
(249,360
|
)
|
Net cash used in financing activities
|
|
|
-
|
|
|
|
(249,360
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(2,158,607
|
)
|
|
|
(957,135
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
3,687,919
|
|
|
|
5,284,543
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,529,312
|
|
|
$
|
4,327,408
|
|
See accompanying Notes to Financial Statements.
ALLIED HEALTHCARE PRODUCTS, INC.
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:
|
|
March 31, 2014
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
Work-in progress
|
|
$
|
683,789
|
|
|
$
|
663,100
|
|
Component parts
|
|
|
7,954,805
|
|
|
|
7,530,506
|
|
Finished goods
|
|
|
2,941,342
|
|
|
|
2,457,337
|
|
Reserve for obsolete and excess
|
|
|
|
|
|
|
|
|
inventory
|
|
|
(1,287,360
|
)
|
|
|
(1,312,600
|
)
|
|
|
$
|
10,292,576
|
|
|
$
|
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 March 31, 2014 and 2013 were 8,027,147
and 8,029,076, respectively. The number of basic and diluted shares outstanding for the nine months ended March 31, 2014 and 2013
was 8,027,147 and 8,085,091, 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 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 as damages the value of electricity received by the Company without charge. While the
total value of electricity at issue in the litigation is not known with certainty, Niagara alleges in its Motion for Summary Judgment,
filed on March 14, 2014, damages of approximately $492,000 in free electricity since May 2010. Alternatively, Niagara asserts
that, in the event that the power covenant is still enforceable, the Company is responsible for delivery fees relating to any
free power to which it is entitled. The Company filed its own motion for summary judgment on March 14, 2014 seeking dismissal
of Niagara’s claims. Oral arguments on the parties’ motions for summary judgment are set for June 13, 2014. As of
March 31, 2014, 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. Additionally, the
Company believes 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. A hearing on the motion for preliminary
injunction was held on February 7, 2014. On March 24, 2014, the Court ruled in Allied’s favor and denied Dräger’s
motion for a preliminary injunction, stating among other things that Dräger had not carried its burden of showing that Allied
had infringed Dräger’s patents.
As of March 31, 2014, 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 defend against any further
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 0.15% on March 31, 2014.
At March 31, 2014
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 March 31, 2014.
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:
|
|
Three Months ended
|
|
|
Nine Months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
114,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue recognized as net sales
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(114,700
|
)
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less - Current portion of deferred revenue
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
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 19
th
, 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. Unless terminated by the Board, the repurchase authority renews for successive 90 day periods. Repurchases
may be made in the open market or in privately negotiated transactions, with the timing and terms of such transaction at the discretion
of the Chairman of the Board. 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 exceeded the value available through
those strategies and a valuation allowance was established. In the quarter ended March 31, 2014 the Company recorded the
tax benefit of losses incurred during the current quarter in the amount of approximately $361,000. As the realization of
the tax benefit of the net operating loss is not assured an additional valuation allowance of approximately $361,000 was also
recorded. The total valuation allowance recorded by the Company as of March 31, 2014 was approximately $716,000. 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.
9. Demutualization
of Product Liability Insurer
The Company’s
product liability insurer, Medmarc Insurance Group, demutualized and was acquired by ProAssurance Corporation on January 1, 2013.
As a policyholder of a mutual insurance company, Allied was entitled to receive a portion of the proceeds received by Medmarc.
In January 2013 the Company received a cash payment of approximately $516,000 as its share of these proceeds. These proceeds are
included in Other Income and Expenses. The Company does not anticipate receiving future proceeds of a material amount.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three months ended March 31, 2014 compared to three months
ended March 31, 2013
Allied had net sales
of $9.1 million for the three months ended March 31, 2014, down $0.1 million from net sales of $9.2 million in the prior year
same quarter. Domestic sales were down 9.2% while international sales, which represented 28.5% of third quarter sales, were up
27.9% from the prior year same quarter.
Orders for the Company’s
products for the three months ended March 31, 2014 of $8.8 million were $0.3 million or 3.3% lower than orders for the prior year
same quarter of $9.1 million. Domestic orders are down 11.8% over the prior year same quarter while international orders, which
represented 26.3% of third quarter orders, were 32.1% higher than orders for the prior year same quarter. The decrease in orders
for the three months ended March 31, 2014 from the prior year was primarily due to lower activity levels and orders in the Construction
market. The Company continues to believe that the purchase of equipment and durable goods and the purchase of equipment by hospitals
and municipalities have been cut to meet budgets and conserve cash due to the slow recovery of the economy since the recession
in 2008 and uncertainty regarding the impact of the Affordable Care Act. Orders and sales remain below pre-recession levels.
Gross profit for the
three months ended March 31, 2014 was $1.7 million, or 18.7% of net sales, compared to $1.7 million, or 18.5% of net sales, for
the three months ended March 31, 2013.
Selling, general and
administrative expenses for the three months ended March 31, 2014 were $2.7 million compared to selling, general and administrative
expenses of $2.6 million for the three months ended March 31, 2013. Legal expenses are approximately $365,000 higher than in the
prior year. This increase has been offset by decreases in other expense accounts including a $148,000 decrease in salaries and
benefits and a $39,000 reduction in outside consultants.
Loss from
operations was $960,215 for the three months ended March 31, 2014 compared to loss from operations of $960,423 for the three
months ended March 31, 2013. Other income and expenses for the three months ended March 31, 2013 include approximately
$516,000 of income to the Company as a result of the demutualization of the Company’s product liability insurer. This
income was a one-time event.
Allied had a loss
before benefit from income taxes in the third quarter of fiscal 2014 of $968,713 compared to loss before benefit from income taxes
in the third quarter of fiscal 2013 of $450,131. The Company’s tax provision net of valuation allowance reflects a
tax benefit of $0 for the three months ended March 31, 2014 compared to a tax benefit of $171,050 for the three months ended March
31, 2013. As previously disclosed in the Company’s annual report on Form 10-K for the 2013 fiscal year, the realization
of the Company’s deferred tax assets have been based on the reversal of existing temporary deferred tax liabilities and
tax planning strategies. In the quarter ended September 30, 2013 the Company’s tax benefit of cumulative losses exceeded
the supportable value of the deferred tax assets and the Company began recording a valuation allowance for losses in excess of
the supportable values. In the quarter ended March 31, 2014 the tax benefit of losses in the amount of approximately $361,000
was offset by a valuation allowance of approximately $361,000. To the extent that the Company’s losses continue in
future quarters, the tax benefit of those losses will be fully offset by a valuation allowance.
Net loss for the third
quarter of fiscal 2014 was $968,713 or $0.12 per basic and diluted share compared to net loss of $279,081 or $0.03 per basic and
diluted share for the third quarter of fiscal 2013. Net loss for the 2013 period includes the one-time payment related to the
demutualization of the Company’s product liability insurer. The weighted average number of common shares outstanding, used
in the calculation of basic and diluted earnings per share for the third quarters of fiscal 2014 and 2013 were 8,027,147 and 8,029,076,
respectively.
Nine months ended March 31, 2014 compared to nine months
ended March 31, 2013
Allied had net sales
of $26.6 million for the nine months ended March 31, 2014, down $1.8 million, or 6.3% from net sales of $28.4 million in the prior
year same period resulting from lower order levels and a decrease in customer orders released for shipment. Domestic sales were
down 7.3% from the prior year same period while international sales were down 4.2% from the prior year same period. International
business represented 26.1% of sales for the first nine months of fiscal 2014.
Sales for the nine
months ended March 31, 2014 and 2013 included $0 and $114,700 respectively for the recognition of income of payments resulting
from the agreement with Abbott Laboratories to cease the production and distribution of Baralyme®. Income from the agreement
was recognized at $57,350 per month until the expiration of the agreement in August 2012. Allied continues to sell Carbolime®,
a carbon dioxide absorbent with a different formulation than Baralyme®, as well as Litholyme®, a new premium carbon dioxide
absorbent. The Company ceased the sale of Baralyme® on August 27, 2004.
Orders for the Company’s
products for the nine months ended March 31, 2014 of $26.9 million were $1.1 million or 3.9% lower than orders for the prior year
same period of $28.0 million. Domestic orders are down 5.5% over the prior year same period while international orders, which
represented 25.8% of orders for the first nine months of fiscal 2014, were 0.2% lower than orders for the prior year same period.
The drop in domestic orders is primarily in the Hospital and Emergency markets. Ambulance services are funded by local governments
which have been operating under severe budget constraints. The Company believes that this has negatively impacted orders and sales
to this market over the past several years, and in the first nine months of 2014. The Company also believes that as a result of
the Affordable Healthcare Act, hospitals have tightened purchases further. The Company believes that international orders and
sales reflects reductions in governmental medical expenditures in several countries including Venezuela and Russia. The Company
does not believe this decrease indicates a drop in market share.
Gross profit for the
nine months ended March 31, 2014 was $5.5 million, or 20.7% of net sales, compared to $5.8 million, or 20.4% of net sales, for
the nine months ended March 31, 2013. The decrease in gross profit is primarily the result of lower sales levels, and the decrease
in income recognized from the agreement with Abbott Laboratories in the prior year. Gross profit, as a percentage of sales, was
negatively impacted by the $114,700 reduction in payments resulting from the Abbott agreement recognized in sales and income.
Gross profit for the nine months ended March 31, 2014 was also negatively impacted by an approximately $138,000 increase in Medical
Excise Devise tax, as a result of the tax imposed by the Affordable Care Act beginning on January 1, 2013. The tax is 2.3% of
the selling price of the taxable product, subject to certain exceptions.
Selling, general and
administrative expenses for the nine months ended March 31, 2014 were $8.2 million compared to selling, general and administrative
expenses of $8.1 million for the nine months ended March 31, 2013. Legal expenses are approximately $657,000 higher than in the
prior year. This increase has been offset by decreases in other expense accounts including a $322,000 decrease in salaries and
benefits, $114,000 reduction in outside services and a $72,000 reduction in telephone expenses as a result of a change in telephone
service providers.
Loss from operations
was $2.7 million for the nine months ended March 31, 2014 compared to loss from operations of $2.4 million for the nine months
ended March 31, 2013. Other income and expenses for the nine months ended March 31, 2013 include approximately $516,000 of income
to the Company as a result of the demutualization of the Company’s product liability insurer. This income was a one-time
event.
Allied had loss before
benefit from income taxes in the first nine months of fiscal 2014 of $2.7 million, compared to loss before benefit from income
taxes in the first nine months of fiscal 2013 of $1.9 million. The Company recorded a tax benefit of $277,910 for the nine
months ended March 31, 2014 compared to a tax benefit of $710,236 for the nine months ended March 31, 2013. As previously disclosed
in the Company’s annual report on Form 10-K for the 2013 fiscal year, the realization of the Company’s deferred tax
assets have been based on the reversal of existing temporary deferred tax liabilities and tax planning strategies. In the nine
months ended March 31, 2014 the Company’s tax benefit of cumulative losses have exceeded the supportable value of the deferred
tax assets and a valuation allowance of approximately $716,000 has been established. To the extent that the Company’s
losses continue in future quarters, the tax benefit of those losses would be fully offset by a valuation allowance.
Net loss
for the nine months ended March 31, 2014 was $2,458,186 or $0.31 per basic and diluted share compared to net loss of $1,158,806
or $0.14 per basic and diluted share for the first nine months of fiscal 2013. Net loss for the 2013 period includes the one-time
payment related to the demutualization of the Company’s product liability insurer. The weighted average number of common
shares outstanding, used in the calculation of basic and diluted earnings per share for the first nine months of fiscal 2014 and
2013 were 8,027,147 and 8,085,091, respectively.
Liquidity and Capital Resources
The Company’s
working capital was $11.5 million at March 31, 2014 compared to $13.7 million at June 30, 2013. The decrease in working capital
was primarily a result of cash and cash equivalents decreasing by $2.2 million largely due to the decrease in sales and resulting
net loss and an increase in accounts payable of $0.6 million. Accounts receivable as measured in days of sales outstanding (“DSO”)
was 40 DSO at March 31, 2014; up from 39 DSO at June 30, 2013. In addition, accounts receivable decreased by $0.3 million as a
result of lower sales. At March 31, 2014 these decreases in working capital were offset by an increase in inventory of $1.0 million
as a result of the decrease in sales demand.
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 has 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. See Note 5 – Financing to the Company’s
consolidated unaudited financial statements for more information concerning the Credit Facility.
Any 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 the 30-day LIBOR rate plus 3.50%. Advances may be prepaid in whole
or in part without premium or penalty. The 30-day LIBOR rate was 0.15% on March 31, 2014.
Management has implemented
cost saving measures which it believes will reduce the Company’s usage of cash, including overhead reductions and deferral
of non-essential capital expenditures, however there are no assurances that these measures will be successful. If these cost saving
measures are not successful, the Company may need to borrow under the Credit Facility to fund its operations. The Credit Facility
expires on November 11, 2014, at which time any outstanding borrowings would be due and payable, with interest. If the Company
does not have sufficient cash to repay the outstanding principal and interest under the Credit Facility, it would be required
to refinance the Credit Facility. While the Company believes that in such event it would have a sufficient borrowing base to secure
the necessary financing, the Company could incur additional costs due to higher interest rates or fees. At March 31, 2014 the
Company had no aggregate indebtedness, including capital lease obligations, short-term debt and long term debt.
Inflation
has not had a material effect on the Company’s business or results of operations during the first six months of fiscal 2014.
Litigation and Contingencies
The Company becomes,
from time to time, a party to personal injury litigation arising out of incidents involving the use of its products. The Company
believes that any potential judgments resulting from these claims over its self-insured retention will be covered by the Company’s
product liability insurance. The Company is also currently a defendant in a patent infringement claim brought by Dräger Medical
GmbH and its affiliates related to certain models of the Company’s Litholyme and Carbolyme single-use carbon dioxide absorption
cartridges. See Part II, Item 1 – Legal Proceedings, below, for more information concerning litigation.
Critical Accounting Policies
The impact and any
associated risks related to the Company’s critical accounting policies on business operations are discussed throughout “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect the Company’s
reported and expected financial results. For a detailed discussion on the application of these and other accounting policies,
see the Company’s Annual Report on Form 10-K for the year ended June 30, 2013.
Recently Issued Accounting Guidance
See Note 1 –
Summary of Significant Accounting and Reporting Policies for more information on recent accounting pronouncements and their impact,
if any, on the Company’s financial statements. Management believes there have been no material changes to our critical accounting
policies.