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, 2017, June 30, 2016, and June 30, 2015 was $136,606, $89,895, and $176,169, respectively.
The related liability for warranty service amounted to $100,000 at June 30, 2017 and 2016.
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, 2017, 2016 and 2015 were $5,550, $15,699, and $32,675,
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, 2017, 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 $2,472,188 and $2,286,022
higher at June 30, 2017 and 2016, respectively. Changes in the LIFO reserve are included in cost of sales. Cost of sales was reduced
by $90,510, $86,698, and $0 in fiscal 2017, 2016, and 2015 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 $1,597,648 and $1,498,915 at June 30, 2017 and 2016, 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, 2017, 2016, and 2015.
Collective Bargaining Agreement
At June 30, 2017, the Company had approximately
218 full-time employees. Approximately 130 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, 2018.
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, 2017 and 2016, the
Company had $215,000 and $175,000 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 presently enacted tax rates. 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, 2014.
The Company classifies interest expenses
on taxes payable as interest expense. Penalties are classified as a component of other expenses.
Change in Accounting Principle and Reclassifications
As of the year ended
June 30, 2017, the Company retrospectively adopted FASB Accounting Standards Update 2015-17,
Income Taxes
(Topic 740):
Balance
Sheet Classification of Deferred Taxes
, which requires that deferred tax assets and liabilities be classified as a noncurrent
in a classified balance sheet. The effect of this change was to reclassify current deferred tax liabilities of $680,926 to noncurrent
assets at June 30, 2017. The consolidated balance sheet at June 30, 2016 has been retroactively restated for the change, which
resulted in a reclassification of current deferred tax liabilities of $717,420 to noncurrent assets.
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, 2017, 2016 and 2015 were $410,458, $463,902, and $528,285, respectively.
Earnings per share
On December 5, 2016,
the Company filed a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware to effect a one-for-two reverse stock split of the Company’s Common Stock (the
“Reverse Stock Split”). The Reverse Stock Split was effective on the Nasdaq Stock Exchange on December 7, 2016.
Outstanding share and
per-share amounts disclosed as of June 30, 2017 and for all other comparative periods provided have been retroactively adjusted
to reflect the effects of the Reverse Stock Split.
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, 2017, 2016 and 2015 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, 2017, 2016 and 2015 respectively.
The following information
is necessary to calculate earnings per share for the periods presented:
Year ended June 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, as reported
|
|
$
|
(2,088,666
|
)
|
|
$
|
(2,304,831
|
)
|
|
$
|
(1,777,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
(0.52
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.44
|
)
|
Diluted
|
|
$
|
(0.52
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
2017, 2016 and 2015.
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value
|
|
$
|
0.86
|
|
|
$
|
0.78
|
|
|
$
|
1.40
|
|
Weighted-average volatility
|
|
|
37
|
%
|
|
|
30
|
%
|
|
|
44
|
%
|
Weighted-average expected life (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Weighted-average risk-free interest rate
|
|
|
1.74
|
%
|
|
|
1.91
|
%
|
|
|
1.85
|
%
|
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. 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, 2017, 2016 and 2015 was approximately $2,000,
$3,000 and $5,000, respectively. Unrecognized shared-based compensation cost related to unvested stock options as of June 30, 2017
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 $2,000, $1,000 and $1,000 for the year ended June
30, 2015, 2016 and 2017, respectively, all of which were fully offset by an increase in the deferred tax asset valuation allowance.
No stock options were
exercised during fiscal years 2017, 2016 and 2015.
Recently Issued Accounting Pronouncements
In May 2014, the FASB
and International Accounting Standards Board jointly issued new principles-based accounting guidance for revenue recognition that
will supersede virtually all existing revenue guidance. The core principle of this 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 and 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. Lastly, disclosure requirements have been enhanced to provide sufficient information to enable
users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers. This guidance is effective for annual reporting periods beginning after December 15, 2016, including
interim periods within that reporting period. In July 2015, the FASB affirmed its proposal to defer the effective date by one year.
In May 2016, the FASB issued improvements and practical expedients to the standard that included clarification of the collectability
criterion, noncash considerations as well as clarification of options at transition. In December 2016, the FASB issued additional
corrections and improvements. The Company is in the process of evaluating the impact of this guidance. This new guidance, will
likely result in a change in the nature and extent of the related footnote disclosures. The Company plans to adopt the new
guidance when effective and presently anticipates adopting on a modified retrospective basis to each prior reporting period presented
with the election of applicable practical expedients.
In July 2015, the FASB
issued ASU No. 2015-11 to simplify the subsequent measurement of inventory. Under this new standard, an entity should measure inventory
at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2016. The amendments in this guidance should be applied
prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently
evaluating the impact to our future financial statements.
In February 2016, the
FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to recognize assets
and liabilities for leases with lease terms of more than 12 months and disclose key information about leasing arrangements. Consistent
with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee
primarily will depend on its classification as a finance or operating lease. The update is effective for reporting periods beginning
after December 15, 2018. Early adoption is permitted. The Company is in the process of evaluating the impact of this update on
its financial statements.
In March 2016, the
FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting”
(“ASU 2016-09”). ASU 2016-09 is intended to simplify several aspects of accounting for share-based payment awards.
The effective date will be the first quarter of fiscal year 2018, with early adoption permitted. The Company is evaluating the
impact that adoption of this new standard will have on its financial statements.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments,” (“ASU 2016-15”).
ASU 2016-15 reduces the existing diversity in practice in financial reporting by clarifying existing principles in ASC 230,
“Statement of Cash Flows,” and provides specific guidance on certain cash flow classification issues. The effective
date for ASU 2016-15 will be the first quarter of fiscal year 2018 with early adoption permitted.
The
Company is evaluating the impact that adoption of this new standard will have on its financial statements.
On February 27, 2017,
Allied Healthcare Products, Inc. (the “Company”) entered into a Loan and Security Agreement (the “Credit Agreement”)
with Summit Financial Resources, L.P. (“Summit”) pursuant to which 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, 2017 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, 2019, 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, the Company will be obligated to pay an
amount equal to twelve months of minimum monthly payments, minus the number of months elapsed since the effective date of the Credit
Agreement.
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, 2017, 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 4.25% on June 30, 2017.
The Company was in
compliance with all of the covenants associated with the Credit Facility at June 30, 2017.
The
Company leases certain of its equipment under non-cancelable operating lease agreements. Minimum lease payments under operating
leases at June 30, 2017 are as follows:
|
|
Operating
|
|
Fiscal Year
|
|
Leases
|
|
|
|
|
|
2018
|
|
$
|
61,744
|
|
2019
|
|
|
14,833
|
|
2020
|
|
|
919
|
|
Total minimum lease payments
|
|
$
|
77,496
|
|
Rental
expense incurred on operating leases in fiscal 2017, 2016, and 2015 totaled $132,657, $143,683 and $184,151, respectively.
The provision for income
taxes consists of the following:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
7,299
|
|
|
|
11,286
|
|
|
|
16,596
|
|
Total current
|
|
|
7,299
|
|
|
|
11,286
|
|
|
|
16,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(625,953
|
)
|
|
|
(100,174
|
)
|
|
|
(552,167
|
)
|
State
|
|
|
(84,424
|
)
|
|
|
(3,495
|
)
|
|
|
(66,542
|
)
|
Valuation Allowance
|
|
|
739,578
|
|
|
|
393,814
|
|
|
|
618,709
|
|
Total deferred
|
|
|
29,201
|
|
|
|
290,145
|
|
|
|
-
|
|
|
|
$
|
36,500
|
|
|
$
|
301,431
|
|
|
$
|
16,596
|
|
A reconciliation of
income taxes, with the amounts computed at the statutory federal rate is as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Computed tax at federal statutory rate
|
|
$
|
(697,736
|
)
|
|
$
|
(681,156
|
)
|
|
$
|
(598,643
|
)
|
State income taxes, net of federal tax (benefit) provision
|
|
|
(49,124
|
)
|
|
|
(38,971
|
)
|
|
|
(29,799
|
)
|
Non deductible expenses
|
|
|
15,491
|
|
|
|
13,915
|
|
|
|
14,683
|
|
Federal research credit
|
|
|
(9,661
|
)
|
|
|
(15,144
|
)
|
|
|
(6,738
|
)
|
Book tax depreciation adjustment
|
|
|
-
|
|
|
|
517,736
|
|
|
|
-
|
|
Expiring State NOLs
|
|
|
39,697
|
|
|
|
|
|
|
|
|
|
Stock Options - Expired
|
|
|
15,308
|
|
|
|
122,508
|
|
|
|
-
|
|
Other, net
|
|
|
(17,053
|
)
|
|
|
(11,271
|
)
|
|
|
18,384
|
|
Valuation Allowance
|
|
|
739,578
|
|
|
|
393,814
|
|
|
|
618,709
|
|
Total
|
|
$
|
36,500
|
|
|
$
|
301,431
|
|
|
$
|
16,596
|
|
The deferred tax assets
and deferred tax liabilities recorded on the balance sheet as of June 30, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Bad debts
|
|
$
|
38,500
|
|
|
$
|
40,000
|
|
Intangible assets
|
|
|
4,620
|
|
|
|
3,635
|
|
Accrued liabilities
|
|
|
347,079
|
|
|
|
391,645
|
|
Accrued pension liability
|
|
|
18,031
|
|
|
|
26,098
|
|
Stock options
|
|
|
52,211
|
|
|
|
68,688
|
|
Net operating loss and credit carryforwards
|
|
|
4,554,491
|
|
|
|
4,062,817
|
|
Total Assets
|
|
|
5,014,932
|
|
|
|
4,592,883
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
9,179
|
|
|
|
16,173
|
|
Inventory
|
|
|
1,057,326
|
|
|
|
1,134,160
|
|
Depreciation
|
|
|
628,017
|
|
|
|
841,040
|
|
Other
|
|
|
84,328
|
|
|
|
75,819
|
|
Total Liabilities
|
|
|
1,778,850
|
|
|
|
2,067,192
|
|
Valuation Allowance
|
|
|
(2,552,319
|
)
|
|
|
(1,812,726
|
)
|
Total deferred taxes
|
|
$
|
683,763
|
|
|
$
|
712,965
|
|
At June 30, 2017, there
were $11.7 million dollars of federal net operating loss carryforwards which will expire in 2031 through 2037. In addition, the
Company has state tax net operating losses of approximately $6.2 million that expire in varying years from 2017 through 2037.
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, 2014.
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, 2017, 2016 and 2015, the Company made contributions of $204,951, $228,854, and $221,508, 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, 2017, 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 2016 and 2015 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
|
|
|
2016
|
|
2015
|
|
Implemented
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Imposed
|
|
Date of CBA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
District No. 9
|
|
|
51-0138317/001
|
|
|
Green
|
|
Green
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
12/31/2015
|
|
12/31/2014
|
|
N/A
|
|
$
|
277,127
|
|
|
$
|
279,968
|
|
|
$
|
287,385
|
|
|
No
|
|
5/31/2018
|
Association of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinist and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace Workers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2015, 2016 and 2017, 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, 2014
|
|
|
233,000
|
|
|
$
|
8.60
|
|
|
|
|
|
|
|
|
|
Options Granted
|
|
|
3,000
|
|
|
$
|
3.16
|
|
|
|
|
|
|
|
|
|
Options Exercised
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Options Forfeited or Expired
|
|
|
(24,500
|
)
|
|
$
|
9.60
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
|
211,500
|
|
|
$
|
8.40
|
|
|
|
1.3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
-
|
|
Exercisable at June 30, 2017
|
|
|
42,000
|
|
|
$
|
6.98
|
|
|
|
4.3
|
|
|
$
|
-
|
|
The
following table provides additional information for options outstanding and exercisable at June 30, 2017:
Options Outstanding
Range of Exercise Prices
|
|
Number
|
|
|
Weighted Average
Remaining Life
|
|
Weighted Average
Exercise Price
|
|
2.26 - 6.99
|
|
|
15,000
|
|
|
7.4 years
|
|
$
|
3.51
|
|
7.00 - 7.00
|
|
|
15,000
|
|
|
4.2 years
|
|
$
|
7.00
|
|
7.01 -13.46
|
|
|
15,000
|
|
|
2.4 years
|
|
$
|
9.48
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.26 - 13.46
|
|
|
45,000
|
|
|
4.6 years
|
|
$
|
6.67
|
|
Options Exercisable
Range of Exercise Prices
|
|
Number
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
2.26 - 6.99
|
|
|
12,000
|
|
|
$
|
3.83
|
|
7.00 - 7.00
|
|
|
15,000
|
|
|
$
|
7.00
|
|
7.01 -13.46
|
|
|
15,000
|
|
|
$
|
9.48
|
|
|
|
|
|
|
|
|
|
|
$2.26 - 13.46
|
|
|
42,000
|
|
|
$
|
6.98
|
|
See Note 2 for discussion
of accounting for stock awards and related fair value disclosures.
|
8.
|
Supplemental Balance Sheet Information
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Inventories
|
|
|
|
|
|
|
Work in progress
|
|
$
|
468,839
|
|
|
$
|
431,802
|
|
Component parts
|
|
|
7,271,908
|
|
|
|
7,374,776
|
|
Finished goods
|
|
|
2,368,855
|
|
|
|
2,567,607
|
|
Reserve for obsolete and excess inventory
|
|
|
(1,597,648
|
)
|
|
|
(1,498,915
|
)
|
|
|
$
|
8,511,954
|
|
|
$
|
8,875,270
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
|
|
|
|
|
|
|
(years)
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
3-10
|
|
|
$
|
18,073,352
|
|
|
$
|
18,052,304
|
|
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
|
|
|
|
32,027,498
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(26,314,505
|
)
|
|
|
(25,279,928
|
)
|
|
|
|
|
|
|
$
|
5,734,041
|
|
|
$
|
6,747,570
|
|
Depreciation
expense was approximately $1.0 million, $1.2 million, and $1.3 million for the fiscal years ended June 30, 2017, 2016 and
2015, respectively.
Other accrued liabilities
|
|
|
|
|
|
|
|
|
Accrued compensation expense
|
|
$
|
1,132,534
|
|
|
$
|
1,099,935
|
|
Customer deposits
|
|
|
612,908
|
|
|
|
859,307
|
|
Other
|
|
|
264,524
|
|
|
|
381,961
|
|
|
|
$
|
2,009,966
|
|
|
$
|
2,341,203
|
|
|
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 and a decision
on this motion has not been rendered.
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, 2017, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Domestic United States
|
|
$
|
26,258,439
|
|
|
$
|
27,437,238
|
|
|
$
|
27,304,353
|
|
Europe
|
|
|
951,441
|
|
|
|
773,129
|
|
|
|
639,641
|
|
Canada
|
|
|
690,010
|
|
|
|
916,528
|
|
|
|
769,749
|
|
Latin America
|
|
|
2,087,670
|
|
|
|
3,168,891
|
|
|
|
3,343,361
|
|
Middle East
|
|
|
694,387
|
|
|
|
843,092
|
|
|
|
911,241
|
|
Far East
|
|
|
2,821,895
|
|
|
|
2,803,451
|
|
|
|
2,466,614
|
|
Other International
|
|
|
8,188
|
|
|
|
10,158
|
|
|
|
26,810
|
|
|
|
$
|
33,512,030
|
|
|
$
|
35,952,487
|
|
|
$
|
35,461,769
|
|
Sales by Product
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Respiratory care products
|
|
$
|
9,105,694
|
|
|
$
|
9,077,370
|
|
|
$
|
9,221,764
|
|
Medical gas equipment
|
|
|
17,660,524
|
|
|
|
19,712,286
|
|
|
|
18,772,376
|
|
Emergency medical products
|
|
|
6,745,812
|
|
|
|
7,162,831
|
|
|
|
7,467,629
|
|
|
|
$
|
33,512,030
|
|
|
$
|
35,952,487
|
|
|
$
|
35,461,769
|
|
|
11.
|
Quarterly Financial Data (unaudited)
|
Summarized
quarterly financial data for fiscal 2017 and 2016 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,
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Net sales
|
|
$
|
8,222
|
|
|
$
|
8,581
|
|
|
$
|
8,269
|
|
|
$
|
8,440
|
|
|
$
|
9,803
|
|
|
$
|
8,840
|
|
|
$
|
8,846
|
|
|
$
|
8,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,569
|
|
|
|
1,735
|
|
|
|
1,695
|
|
|
|
1,557
|
|
|
|
2,257
|
|
|
|
1,626
|
|
|
|
1,779
|
|
|
|
1,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(459
|
)
|
|
|
(403
|
)
|
|
|
(373
|
)
|
|
|
(817
|
)
|
|
|
166
|
|
|
|
(762
|
)
|
|
|
(688
|
)
|
|
|
(635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(495
|
)
|
|
|
(403
|
)
|
|
|
(375
|
)
|
|
|
(816
|
)
|
|
|
(282
|
)
|
|
|
(784
|
)
|
|
|
(709
|
)
|
|
|
(530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
|
(0.13
|
)
|
|
|
(0.10
|
)
|
|
|
(0.09
|
)
|
|
|
(0.20
|
)
|
|
|
(0.05
|
)
|
|
|
(0.20
|
)
|
|
|
(0.18
|
)
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
|
(0.13
|
)
|
|
|
(0.10
|
)
|
|
|
(0.09
|
)
|
|
|
(0.20
|
)
|
|
|
(0.05
|
)
|
|
|
(0.20
|
)
|
|
|
(0.18
|
)
|
|
|
(0.14
|
)
|
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.