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, 2016.
Recently Issued Accounting Guidance
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” or “Update”)
No. 2014-09, “Revenue from Contracts with Customers.” This ASU is a comprehensive new revenue recognition model that
requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the
consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods
beginning after December 15, 2016 and early adoption is not permitted. On July 9, 2015 the FASB voted to defer the effective date
of this standard by one year to December 15, 2017 for the interim and annual reporting periods beginning after that date and permitted
early adoption of the standard, but not before the original effective date of December 15, 2016. Companies may use either a full
retrospective or modified retrospective approach to adopt this ASU. We are currently evaluating which transition approach to use
and the full impact this ASU will have on our future financial statements.
In August 2014, the FASB issued ASU No. 2014-15, to communicate amendments to FASB Account Standards Codification
Subtopic 205-40, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The
ASU requires management to evaluate relevant conditions, events and certain management plans that are known or reasonably knowable
as of the evaluation date when determining whether substantial doubt about an entity’s ability to continue as a going concern
exists. Management will be required to make this evaluation for both annual and interim reporting periods. Management will have
to make certain disclosures if it concludes that substantial doubt exists or when it plans to alleviate substantial doubt about
the entity’s ability to continue as a going concern. The standard is effective for annual periods ending after December 15,
2016 and for interim periods thereafter. Early adoption is permitted. We currently believe there will be no impact on our financial
statement disclosures.
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 November 2015, the
FASB issued Accounting Standards Update No. 2015-17 (“ASU 2015-17”),
Income Taxes (Topic 740):
Balance Sheet
Classification of Deferred Taxes
. The amendments in ASU 2015-17 seek to simplify the presentation of deferred income taxes
and require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods
within those annual periods, with early application permitted for all entities as of the beginning of an interim or annual reporting
period. The Company is in the process of evaluating the impact of this update on its 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 2016-08, “Revenue from Contracts with Customers (Topic 606) Principal versus Agent Considerations (Reporting
Revenue Gross versus Net)” (“ASU 2016-08”). ASU 2016-08 further clarifies principal and agent relationships within
ASU 2014-09. Similar to ASU 2014-09, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted
in the first quarter of fiscal year 2017. The Company is evaluating the impact that adoption of this new standard will have 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 April 2016, the
FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing”
(“ASU 2016-10”). The amendments in ASU 2016-10 are expected to reduce the cost and complexity of applying the
guidance on identifying promised goods or services in contracts with customers and to improve the operability and understandability
of licensing implementation guidance related to the entity’s intellectual property. Similar to ASU 2014-09, the effective
date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017.
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.
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, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Work-in progress
|
|
$
|
601,829
|
|
|
$
|
431,802
|
|
Component parts
|
|
|
7,234,755
|
|
|
|
7,374,776
|
|
Finished goods
|
|
|
2,254,999
|
|
|
|
2,567,607
|
|
Reserve for obsolete and excess
|
|
|
|
|
|
|
|
|
inventory
|
|
|
(1,472,120
|
)
|
|
|
(1,498,915
|
)
|
|
|
$
|
8,619,463
|
|
|
$
|
8,875,270
|
|
3. 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 March 31, 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 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 and nine months ended March 31, 2017 and 2016 were 4,013,537.
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.
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. Avenues for appeal remain and the Company intends to exercise all available options to enforce the
free power covenants which have been in place for over 100 years.
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. This decision is appealable by Niagara not later than May 25,
2017.
As of March 31, 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
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
On February 27, 2017,
Allied Healthcare Products, Inc. (the “Company”) entered into that certain 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 March 31, 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 March 31, 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 4.00% on March 31, 2017.
The Company was in
compliance with all of the covenants associated with the Credit Facility at March 31, 2017.
6. 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 three and nine months ended March
31, 2017 the Company recorded the tax benefit of losses incurred in the amount of approximately $142,000 and $578,000, respectively.
As the realization of the tax benefit of the net operating loss is not assured, an additional valuation allowance of approximately
$142,000 and $578,000 was also recorded. For the three and nine months ended March 31, 2016, the Company recorded the tax benefit
of losses incurred in the amount of $233,000 and $660,000 net of additions to the valuation allowance of like amounts net of the
effect of deferred taxes in the amount of $10,000 and ($35,000) for the three and nine month respectively. The total valuation
allowance recorded by the Company as of March 31, 2017 and 2016 was approximately $2,390,000 and $1,920,000, 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.