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, 2020.
Fair Value of Financial Instruments
The Company’s financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable and the revolving credit facility. 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. The carrying amount of the revolving credit facility approximates fair value due to the debt having a variable
interest rate.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial
Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”),
which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other
receivables, held-to-maturity debt securities, loans and other specified instruments, entities will be required to use a new forward-looking
“expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses.
The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit
quality by year of origination for most financing receivables. The guidance must be applied using a cumulative-effect transition
method. ASU 2016-13 is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal
years (the fiscal year ending June 30, 2022 for the Company), with early adoption permitted. The Company is currently evaluating
the impact that adopting this guidance may have on its financial statements.
Risk and Uncertainties, Going Concern, Liquidity and Management’s
Plan
A novel
strain of coronavirus (“COVID-19”) was first identified in Wuhan, China in December 2019. On March 11, 2020, the World
Health Organization designated COVID-19 as a global pandemic. To date, COVID-19 has surfaced in nearly all regions around the world
and resulted in business slowdowns or shutdowns in affected areas. Despite our efforts to manage and remedy the effects of this
pandemic, the significance depends on factors beyond our control, including the duration and severity of the outbreak as well as
third-party actions taken to contain the spread and mitigate public health efforts. For the Company this creates additional economic
uncertainty. Risks for the Company include disruption in operations if a significant percentage of our workforce is unable to work
due to illness, forced curtailment of business operations and business travel by governmental authorities, and failure of others
in our supply chain and distribution channel to meet their obligations to us, or significant disruptions in their ability to do
so, which may be caused by their own financial or operational difficulties.
The Company believes
the combination of cash on hand at September 30, 2020, additional borrowings on the credit facility (Note 6), reductions in inventory
levels and future earnings will be sufficient to meet its obligations as they become due in the ordinary course of business for
at least 12 months following the date these financial statements are issued. To the extent these measures do not provide sufficient
liquidity, the Company will consider additional borrowings through the sale leaseback of its corporate headquarters and delaying
certain expenditures until sufficient capital becomes available. Historically, the Company has experienced net losses and net losses
from operations. Additionally, the Company expects to incur significant environmental costs that are planned to be expended over
the next year (Note 5). The Company’s liquidity needs will be largely determined by the success of the Company executing
management’s plan.
2. Revenues
The Company’s
revenues are derived primarily from the sales of respiratory products, medical gas equipment and emergency medical products. The
products are generally sold directly to distributors, customers affiliated with buying groups, individual customers and construction
contractors, throughout the world.
The Company recognizes
revenue from product sales upon the transfer of control, which is generally upon shipment or delivery, depending on the delivery
terms set forth in the customer contract. Payment terms between Allied and its customers vary by the type of customer, country
of sale, and the products offered. The term between invoicing and the payment due date is not significant. For certain customers
or product orders, Allied may require advance payments. These contract liabilities are reflected as customer deposits on the Company’s
balance sheet.
Management exercises
judgment in estimating variable consideration. Provisions for early payment discounts, rebates and returns and other adjustments
are provided for in the period the related sales are recorded. Historical data is readily available and reliable and is used for
estimating the amount of the reduction in gross sales.
The Company
provides rebates to wholesalers. Rebate amounts are based upon purchases using contractual amount for each product sold.
Factors used in the rebate calculations include the identification of which products have been sold subject to a rebate and
the customer or price terms that apply. Using known contractual allowances, the Company estimates the amount of the rebate
that will be paid and records the liability as a reduction of gross sales when it records the sale of the product. Settlement
of the rebate generally occurs in the month following the sale.
The Company regularly analyzes the historical rebate trends
and makes adjustments to reserves for changes in trends and terms of rebate programs. Historically, adjustments to prior
years’ rebate accruals have not been material to net loss.
Other allowances charged
against gross sales include cash discounts and returns, which are not significant. Cash discounts are known within 15 to 30 days
of sale, and therefore can be reliably estimated. Returns can be reliably estimated because the Company’s historical returns
are low, and because sales return terms and other sales terms have remained relatively unchanged for several periods. Product warranties
are also not significant.
The Company does not allocate transaction
price as the Company has only one performance obligation and its contracts do not span multiple periods.
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
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Domestic United States
|
|
$
|
6,103,489
|
|
|
$
|
5,744,235
|
|
Europe
|
|
|
1,368,561
|
|
|
|
327,667
|
|
Canada
|
|
|
367,941
|
|
|
|
156,402
|
|
Latin America
|
|
|
1,163,268
|
|
|
|
754,992
|
|
Middle East
|
|
|
506,726
|
|
|
|
137,574
|
|
Far East
|
|
|
678,597
|
|
|
|
854,440
|
|
Other International
|
|
|
966
|
|
|
|
327
|
|
|
|
$
|
10,189,548
|
|
|
$
|
7,975,637
|
|
|
|
Sales by Product
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Respiratory care products
|
|
$
|
2,148,339
|
|
|
$
|
2,156,204
|
|
Medical gas equipment
|
|
|
3,958,521
|
|
|
|
3,780,565
|
|
Emergency medical products
|
|
|
4,082,688
|
|
|
|
2,038,868
|
|
|
|
$
|
10,189,548
|
|
|
$
|
7,975,637
|
|
3. Inventories
Inventories are comprised as follows:
|
|
September 30, 2020
|
|
|
June 30, 2020
|
|
Work-in progress
|
|
$
|
1,178,969
|
|
|
$
|
817,692
|
|
Component parts
|
|
|
9,870,241
|
|
|
|
8,299,972
|
|
Finished goods
|
|
|
2,055,842
|
|
|
|
1,660,158
|
|
Reserve for obsolete and excess
|
|
|
|
|
|
|
|
|
inventories
|
|
|
(1,849,134
|
)
|
|
|
(1,849,134
|
)
|
|
|
$
|
11,255,918
|
|
|
$
|
8,928,688
|
|
4. 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, 2020 and 2019 were 4,013,537.
5. 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 has recognized 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.
Environmental Remediation
The Company is
party to a Brownfield Cleanup Program Agreement with the New York Department of Environmental Conservation under its
Brownfield Cleanup Program with respect to the Company’s property in Stuyvesant Falls, New York. The agreement
recognizes that the soil and groundwater at the Stuyvesant Falls facility is impacted by chemical compounds exceeding
regulatory standards. Pursuant to the agreement, the Company will conduct, at its expense, investigation and remediation at
the site.
The Company’s
best estimate of the expected cost to remediate the site is $1.1 million. This amount was recorded as an expense during fiscal
2020 and is reflected in other accrued liabilities and selling, general and administrative expenses in the Company’s financial
statements. As of September 30, 2020, the Company has paid approximately $98,000 in remediation expenses which have been charged
to the initial reserve.
Liability for future environmental expenditures
Balance - July 1, 2020
|
|
$
|
1,037,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges to income
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remedial and investigatory spending
|
|
|
15,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2020
|
|
$
|
1,021,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2020
|
|
|
6/30/2020
|
|
Reflected in the Balance sheet as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current, included in Other Liabilities
|
|
$
|
867,194
|
|
|
$
|
514,000
|
|
|
|
|
|
|
|
|
|
|
Long-term environmental
|
|
|
154,000
|
|
|
|
523,000
|
|
|
|
|
|
|
|
|
|
|
Total liability
|
|
$
|
1,021,194
|
|
|
$
|
1,037,000
|
|
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.
North Mill Loan
The Company is party
to a Loan and Security Agreement with North Mill Capital, LLC (“North Mill”), as successor in interest to Summit Financial
Resources, L.P., dated effective February 27, 2017, as amended April 16, 2018 and April 24, 2019 (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 September 30, 2020 availability under the agreement was $0.8 million.
The Credit Facility
will be available, subject to its terms, on a revolving basis until it expires on February 27, 2021, at which time all amounts
outstanding under the Credit Facility will be due and payable. Advances will bear interest at a rate equal to 2.00% in excess of
the prime rate as reported in the Wall Street Journal. Interest is computed based on the actual number of days elapsed over a year
of 360 days. In addition to interest, the Credit facility requires that the Company pay the lender a monthly administration fee
in an amount equal to forty-seven hundredths percent (0.47%) of the average outstanding daily principal amount of loan advances
for each calendar month, or portion thereof.
Regardless of the
amount borrowed under the Credit Facility, the Company will pay a minimum amount of .25% (25 basis points) per month on the maximum
availability ($5,000 per month). In the event the Company prepays or terminates the Credit Facility prior to February 27, 2021,
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, 2021 and the date of such prepayment or termination.
Under the Credit Agreement,
advances are generally subject to customary borrowing conditions and to North Mill’s sole discretion to fund the advances.
The Credit Agreement also contains covenants with which the Company must comply during the term of the Credit Facility. Among other
things, such covenants require the Company to maintain insurance on the collateral, operate in the ordinary course and not engage
in a change of control, dissolve or wind up the Company.
The Credit Agreement
also contains certain events of default including, without limitation: the failure to make payments when due; the material breach
of representations or warranties contained in the Credit Agreement or other loan documents; cross-default with other indebtedness
of the Company; the entry of judgments or fines that may have a material adverse effect on the Company; failure to comply with
the observance or performance of covenants contained in the Credit Agreement or other loan documents; insolvency of the Company,
appointment of a receiver, commencement of bankruptcy or other insolvency proceedings; dissolution of the Company; the attachment
of any state or federal tax lien; attachment or levy upon or seizure of the Company’s property; or any change in the Company’s
condition that may have a material adverse effect. After an event of default, and upon the continuation thereof, the principal
amount of all loans made under the Credit Facility would bear interest at a rate per annum equal to 20.00% above the otherwise
applicable interest rate (provided, that the interest rate may not exceed the highest rate permissible under law), and would have
the option to accelerate maturity and payment of the Company’s obligations under the Credit Facility.
The Company was in
compliance with all of the covenants associated with the Credit Facility at September 30, 2020.
PPP
Loan
On
April 22, 2020, the Company entered into a Payroll Protection Program (PPP) loan agreement (the “SBA Loan”) with Jefferson
Bank and Trust Company under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
administered by the U.S. Small Business Administration (the “SBA”). The Company received total proceeds
of $2.375 million from the SBA Loan. In accordance with the requirements of the CARES Act, the Company used proceeds
from the SBA Loan for payroll costs and other permitted uses. The SBA Loan is scheduled to mature on April 13, 2022
and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business
Administration under the CARES Act.
All
or a portion of the SBA Loan may be forgiven by the SBA upon application by the Company upon documentation of expenditures in
accordance with the SBA requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll
costs, covered rent payments, covered mortgage interest and covered utilities during the eight week or at the Company’s
election 24 week period beginning on the loan origination date, subject to regulations and guidance provided by the United
States Treasury. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of
$100,000, prorated annually. Not more than 40% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if
full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced
by more than 25%. The Company has submitted its application for forgiveness and is awaiting approval from the SBA. In the
event the SBA Loan, or any portion thereof, is forgiven pursuant to the CARES Act, the amount forgiven is applied to
outstanding principal. The Company intends to seek forgiveness of the SBA Loan to the maximum extent permitted but cannot
guarantee whether or to what extent such forgiveness will be granted.
Payments
of unforgiven principal and interest are deferred until the date that SBA remits the Company’s loan forgiveness amount to
the lender, at which point the Company is required to repay such amounts in 18 equal monthly payments. The SBA Loan is evidenced
by a promissory note, which contains customary events of default relating to, among other things, payment defaults and breaches
of representations and warranties. The SBA Loan may be prepaid by the Company at any time prior to maturity with no prepayment
penalties.
At September 30, 2020
the Company had $3.6 million indebtedness, including lease obligations, short-term debt, and long term debt. The prime rate as
reported in the Wall Street Journal was 3.25% on September 30, 2020.
The Company accounts
for income taxes under ASC Topic 740: “Income Taxes.” Under ASC 740, the deferred tax provision is determined using
the liability method, whereby deferred tax assets and liabilities are recognized based upon temporary differences between the financial
statement and income tax bases of assets and liabilities using presently enacted tax rates. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be realized. In the quarter ended September 30, 2020
the Company recorded the tax benefit of losses incurred during the current quarter in the amount of approximately $39,000.
As the realization of the tax benefit of the net operating loss is not assured an additional valuation allowance of approximately
$39,000 was recorded. In the quarter ended September 30, 2019 the Company recorded the tax benefit of losses incurred in
the amount of approximately $154,000. As the realization of the tax benefit of the net operating loss is not assured an additional
valuation allowance of approximately $154,000 was recorded. The total valuation allowance recorded by the Company as of September
30, 2020 and 2019 was approximately $2,814,000 and $2,890,000, respectively. 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.