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, 2019.
Adoption of new lease standard
In February 2016, the
FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize leases on-balance sheet and disclose key information
about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset
and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance
or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard was
effective for Allied on July 1, 2019. The Company adopted the new standard on its effective date and used the effective date as
our date of initial application. Consequently, financial information recorded and the disclosures required under the new standard
are not provided for dates and periods before July 1, 2019. Additionally, the Company determined that as of the effective date
of the standard, it had no material impact on the financial statements or disclosures of the Company.
The new standard provides
a number of optional practical expedients in transition. We elected the package of practical expedients which does not require
us to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct
costs. Leasing activities are not significant to Allied’s business and there is no significant change in the Company’s
leasing activities upon adoption. The new standard also provides practical expedients for an entity’s ongoing accounting.
The Company elected the short-term lease recognition exemption for all leases with terms of less than 12 months.
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.
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.
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 income.
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,
|
|
|
|
2019
|
|
|
2018
|
|
Domestic United States
|
|
$
|
5,744,235
|
|
|
$
|
5,777,984
|
|
Europe
|
|
|
327,667
|
|
|
|
113,156
|
|
Canada
|
|
|
156,402
|
|
|
|
158,160
|
|
Latin America
|
|
|
754,992
|
|
|
|
509,713
|
|
Middle East
|
|
|
137,574
|
|
|
|
92,595
|
|
Far East
|
|
|
854,440
|
|
|
|
615,867
|
|
Other International
|
|
|
327
|
|
|
|
1,422
|
|
|
|
$
|
7,975,637
|
|
|
$
|
7,268,897
|
|
|
|
Sales by Product
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Respiratory care products
|
|
$
|
2,156,204
|
|
|
$
|
2,076,304
|
|
Medical gas equipment
|
|
|
3,780,565
|
|
|
|
3,672,592
|
|
Emergency medical products
|
|
|
2,038,868
|
|
|
|
1,520,001
|
|
|
|
$
|
7,975,637
|
|
|
$
|
7,268,897
|
|
3. Inventories
Inventories are comprised as follows:
|
|
September 30,
2019
|
|
|
June 30,
2019
|
|
Work-in progress
|
|
$
|
467,113
|
|
|
$
|
288,828
|
|
Component parts
|
|
|
6,925,668
|
|
|
|
7,151,228
|
|
Finished goods
|
|
|
1,743,636
|
|
|
|
1,693,974
|
|
Reserve for obsolete and excess inventories
|
|
|
(1,783,371
|
)
|
|
|
(1,800,935
|
)
|
|
|
$
|
7,353,046
|
|
|
$
|
7,333,095
|
|
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, 2019 and 2018 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 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.
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.
6. Financing
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 but will not
exceed $2,000,000. At September 30, 2019 availability under the agreement was $1.1 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 the each calendar month, or portion thereof.
Regardless of the
amount borrowed under the Credit Facility, the Company will pay a minimum amount of .25% (25 basis points) per month on the maximum
availability ($5,000 per month). In the event the Company prepays or terminates the Credit Facility prior to February 27, 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.
At September 30, 2019, the Company had $850,004
of indebtedness. The prime rate as reported in the Wall Street Journal was 5.00% on September 30, 2019.
The Company was in
compliance with all of the covenants associated with the Credit Facility at September 30, 2019.
7. 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 the quarter ended September 30, 2019
the Company recorded the tax benefit of losses incurred during the current quarter 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. In the quarter ended September 30, 2018 the Company recorded the tax benefit of losses incurred in
the amount of approximately $305,000. As the realization of the tax benefit of the net operating loss is not assured an additional
valuation allowance of approximately $305,000 was recorded. The total valuation allowance recorded by the Company as of September
30, 2019 and 2018 was approximately $2,890,000 and $2,505,000, 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.