|
Item 1.
|
Financial
Statements
|
ALLIED HEALTHCARE
PRODUCTS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
8,268,978
|
|
|
$
|
8,846,359
|
|
|
$
|
16,709,391
|
|
|
$
|
17,309,196
|
|
Cost of sales
|
|
|
6,573,722
|
|
|
|
7,067,748
|
|
|
|
13,456,965
|
|
|
|
13,832,294
|
|
Gross profit
|
|
|
1,695,256
|
|
|
|
1,778,611
|
|
|
|
3,252,426
|
|
|
|
3,476,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
2,068,657
|
|
|
|
2,466,359
|
|
|
|
4,442,776
|
|
|
|
4,799,371
|
|
Loss from operations
|
|
|
(373,401
|
)
|
|
|
(687,748
|
)
|
|
|
(1,190,350
|
)
|
|
|
(1,322,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(334
|
)
|
|
|
(838
|
)
|
|
|
(986
|
)
|
|
|
(1,902
|
)
|
Other, net
|
|
|
1,633
|
|
|
|
21,854
|
|
|
|
1,671
|
|
|
|
41,662
|
|
|
|
|
1,299
|
|
|
|
21,016
|
|
|
|
685
|
|
|
|
39,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
|
(374,700
|
)
|
|
|
(708,764
|
)
|
|
|
(1,191,035
|
)
|
|
|
(1,362,229
|
)
|
Benefit from income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(123,907
|
)
|
Net loss
|
|
$
|
(374,700
|
)
|
|
$
|
(708,764
|
)
|
|
$
|
(1,191,035
|
)
|
|
$
|
(1,238,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
4,013,537
|
|
|
|
4,013,537
|
|
|
|
4,013,537
|
|
|
|
4,013,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - diluted
|
|
|
4,013,537
|
|
|
|
4,013,537
|
|
|
|
4,013,537
|
|
|
|
4,013,537
|
|
See accompanying Notes to Financial Statements.
ALLIED HEALTHCARE
PRODUCTS, INC.
BALANCE SHEET
ASSETS
|
|
(Unaudited)
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
847,193
|
|
|
$
|
1,703,663
|
|
Accounts receivable, net of allowances of $170,000
|
|
|
3,266,871
|
|
|
|
4,094,462
|
|
Inventories, net
|
|
|
8,850,949
|
|
|
|
8,875,270
|
|
Income tax receivable
|
|
|
18,852
|
|
|
|
12,555
|
|
Other current assets
|
|
|
216,078
|
|
|
|
255,711
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
13,199,943
|
|
|
|
14,941,661
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
6,223,880
|
|
|
|
6,747,570
|
|
Deferred income taxes
|
|
|
1,430,385
|
|
|
|
1,430,385
|
|
Other assets, net
|
|
|
48,289
|
|
|
|
76,065
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,902,497
|
|
|
$
|
23,195,681
|
|
See accompanying
Notes to Financial Statements.
(CONTINUED)
ALLIED HEALTHCARE
PRODUCTS, INC.
BALANCE SHEET
(CONTINUED)
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
(Unaudited)
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,364,226
|
|
|
$
|
1,864,603
|
|
Other accrued liabilities
|
|
|
1,738,229
|
|
|
|
2,341,203
|
|
Deferred income taxes
|
|
|
717,420
|
|
|
|
717,420
|
|
Total current liabilities
|
|
|
3,819,875
|
|
|
|
4,923,226
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock; $0.01 par value; 1,500,000 shares
authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Series A preferred stock; $0.01 par value; 200,000
shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock; $0.01 par value; 30,000,000 shares authorized; 5,213,902
shares issued at December 31, 2016 and June 30, 2016; 4,013,537 shares outstanding at December 31, 2016 and June
30, 2016
|
|
|
52,139
|
|
|
|
52,139
|
|
Additional paid-in capital
|
|
|
48,484,101
|
|
|
|
48,482,899
|
|
Accumulated deficit
|
|
|
(10,472,830
|
)
|
|
|
(9,281,795
|
)
|
Less treasury stock, at cost; 1,200,365 shares at
December 31, 2016 and June 30, 2016, respectively
|
|
|
(20,980,788
|
)
|
|
|
(20,980,788
|
)
|
Total stockholders' equity
|
|
|
17,082,622
|
|
|
|
18,272,455
|
|
Total liabilities and stockholders'
equity
|
|
$
|
20,902,497
|
|
|
$
|
23,195,681
|
|
See accompanying
Notes to Financial Statements.
ALLIED HEALTHCARE
PRODUCTS, INC.
STATEMENT OF CASH
FLOWS
(UNAUDITED)
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,191,035
|
)
|
|
$
|
(1,238,322
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
562,963
|
|
|
|
631,844
|
|
Stock based compensation
|
|
|
1,202
|
|
|
|
1,788
|
|
Provision for doubtful accounts and sales
|
|
|
|
|
|
|
|
|
returns and allowances
|
|
|
10,641
|
|
|
|
2,860
|
|
Deferred taxes
|
|
|
-
|
|
|
|
(123,907
|
)
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
816,950
|
|
|
|
(150,311
|
)
|
Inventories
|
|
|
24,321
|
|
|
|
92,667
|
|
Income tax receivable
|
|
|
(6,297
|
)
|
|
|
(9,775
|
)
|
Other current assets
|
|
|
39,633
|
|
|
|
(23,926
|
)
|
Accounts payable
|
|
|
(500,377
|
)
|
|
|
604,287
|
|
Other accrued liabilities
|
|
|
(602,974
|
)
|
|
|
(89,389
|
)
|
Net cash used in
operating activities
|
|
|
(844,973
|
)
|
|
|
(302,184
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(11,497
|
)
|
|
|
(99,300
|
)
|
Net cash used in investing activities
|
|
|
(11,497
|
)
|
|
|
(99,300
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(856,470
|
)
|
|
|
(401,484
|
)
|
Cash and cash equivalents at beginning
of period
|
|
|
1,703,663
|
|
|
|
2,039,946
|
|
Cash and cash equivalents at
end of period
|
|
$
|
847,193
|
|
|
$
|
1,638,462
|
|
See accompanying
Notes to Financial Statements.
ALLIED HEALTHCARE
PRODUCTS, INC.
NOTES TO FINANCIAL
STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting and Reporting Policies
Basis of Presentation
The accompanying unaudited
financial statements of Allied Healthcare Products, Inc. (the “Company”) have been prepared in accordance with the
instructions for Form 10-Q and do not include all of the information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for any
quarter are not necessarily indicative of the results for any other quarter or for the full year. These statements should be read
in conjunction with the financial statements and notes to the financial statements thereto included in the Company’s Annual
Report on Form 10-K for the year ended June 30, 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 reporting
periods starting in 2017. 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:
|
|
December 31, 2016
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Work-in progress
|
|
$
|
548,909
|
|
|
$
|
431,802
|
|
Component parts
|
|
|
7,384,577
|
|
|
|
7,374,776
|
|
Finished goods
|
|
|
2,396,258
|
|
|
|
2,567,607
|
|
Reserve for obsolete and excess
|
|
|
|
|
|
|
|
|
inventories
|
|
|
(1,478,795
|
)
|
|
|
(1,498,915
|
)
|
|
|
$
|
8,850,949
|
|
|
$
|
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 December 31, 2016 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 six months ended December 31, 2016 and 2015 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. A ruling
on this motion is expected in the third quarter of fiscal year 2017. As of December 31, 2016, 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
At the
beginning of the period, the Company was a party to a Loan and Security Agreement, dated November 17, 2009, with Enterprise
Bank & Trust (the “Credit Agreement”) pursuant to which the Company obtained a secured revolving credit
facility which provided for borrowing availability of up to $5,000,000 (the “Credit Facility”). The Credit
Facility expired without renewal on November 9, 2016. The Company is considering alternative sources of credit financing to
replace the Credit Facility. While the Company believes it would be able to obtain replacement financing, if necessary, the
terms, availability and costs associated with such replacement financing may be materially less favorable than those of the
Credit Facility.
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 six months ended December
31, 2016 the Company recorded the tax benefit of losses incurred in the amount of approximately $130,000 and $436,000, respectively.
As the realization of the tax benefit of the net operating loss is not assured, an additional valuation allowance of approximately
$130,000 and $436,000 was also recorded. For the three and six months ended December 31, 2015 the Company recorded the tax benefit
of losses incurred in the amount of approximately $214,000 and $427,000 net of additions to the valuation allowance of a like amount.
The total valuation allowance recorded by the Company as of December 31, 2016 and 2015 was approximately $2,248,000 and $1,677,000,
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.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three months ended December 31, 2016 compared to three
months ended December 31, 2015
Allied had net sales
of $8.3 million for the three months ended December 31, 2016, down $0.5 million from net sales of $8.8 million in the prior year
same quarter resulting from lower orders and customer releases for shipment. Domestic sales were down 6.0% while international
sales, which represented 24.6% of second quarter sales, were down 8.1% from the prior year same quarter.
Orders for the Company’s
products for the three months ended December 31, 2016 of $7.8 million were $0.3 million or 3.7% lower than orders for the prior
year same quarter of $8.1 million. Domestic orders are up 3.0% over the prior year same quarter while international orders, which
represented 21.0% of second quarter orders, were 21.4% lower than orders for the prior year same quarter. International sales and
orders are subject to fluctuation in international demand. These fluctuations are at times due to political and economic uncertainty
internationally. International sales continue to be impacted by political and economic uncertainty in regions and countries such
as Russia, Ukraine, and South America, including Venezuela. Economic uncertainty is reflected in the current relative strength
of the United States Dollar versus currencies in those regions.
Gross profit for the
three months ended December 31, 2016 was $1.7 million, or 20.5% of net sales, compared to $1.8 million, or 20.5% of net sales,
for the three months ended December 31, 2015. The $0.1 million decrease in gross profit is primarily attributable to the decrease
in sales, the related lower production levels and less effective utilization of fixed overhead cost, and product mix. Decreases
to gross profit from the decrease in sales were partially offset by spending decreases, including a $130,000 decrease in manufacturing
salaries.
Selling, general and
administrative expenses for the three months ended December 31, 2016 were $2.1 million compared to selling, general and administrative
expenses of $2.5 million for the three months ended December 31, 2015. Legal expenses are approximately $180,000 lower than in
the prior year and personnel cost consisting primarily of salaries and benefit expenses are approximately $147,000 lower than in
the prior year.
Loss from operations
was $373,401 for the three months ended December 31, 2016 compared to loss from operations of $687,748 for the three months ended
December 31, 2015.
Allied had a loss before
benefit from income taxes in the second quarter of fiscal 2017 of $374,700 compared to loss before benefit from income taxes in
the second quarter of fiscal 2016 of $708,764. The Company’s tax provision net of valuation allowance reflects a tax
benefit of $0 for the three months ended December 31, 2016 and 2015. In the quarter ended December 31, 2016, the tax benefit
of losses in the amount of approximately $130,000 was fully offset by a valuation allowance of equivalent amount. To
the extent that the Company’s losses continue in future quarters, the tax benefit of those losses will be fully offset by
a valuation allowance.
Net loss for the second
quarter of fiscal 2017 was $374,700 or $0.09 per basic and diluted share compared to net loss of $708,764 or $0.18 per basic and
diluted share for the second quarter of fiscal 2016. The weighted average number of common shares outstanding, used in the calculation
of basic and diluted earnings per share for the second quarters of fiscal 2017 and 2016 were 4,013,537.
Six months ended December 31, 2016 compared to six months
ended December 31, 2015
Allied had net sales
of $16.7 million for the six months ended December 31, 2016, down $0.6 million, or 3.5% from net sales of $17.3 million in the
prior year same period resulting from lower order levels and a decrease in customer orders released for shipment. Domestic sales
were down 5.2% from the prior year same period while international sales were up 2.5% from the prior year same period. International
business represented 24.4% of sales for the first six months of fiscal 2017.
Orders for the Company’s
products for the six months ended December 31, 2016 of $16.0 million were $0.2 million or 1.2% lower than orders for the prior
year same period of $16.2 million. Domestic orders are down 0.3% over the prior year same period while international orders, which
represented 21.9% of orders for the first six months of fiscal 2017, were 4.1% lower than orders for the prior year same period.
International sales and orders are subject to fluctuation in international demand. These fluctuations are at times due to political
and economic uncertainty internationally. International sales continue to be impacted by political and economic uncertainty in
regions and countries such as Russia, Ukraine, and South America, including Venezuela. Economic uncertainty is reflected in the
current relative strength of the United States Dollar versus currencies in those regions.
Gross profit for the
six months ended December 31, 2016 was $3.3 million, or 19.8% of net sales, compared to $3.5 million, or 20.1% of net sales, for
the six months ended December 31, 2015. The $0.2 million decrease in gross profit is primarily attributable to the decrease in
sales.
Selling, general and
administrative expenses for the six months ended December 31, 2016 were $4.4 million compared to selling, general and administrative
expenses of $4.8 million for the six months ended December 31, 2015. Legal expenses are approximately $240,000 lower than in the
prior year, while salaries and benefits were $80,000 lower than in the prior year.
Loss from operations
was $1.2 million for the six months ended December 31, 2016 compared to loss from operations of $1.3 million for the six months
ended December 31, 2015.
Allied had loss before
benefit from income taxes in the first six months of fiscal 2017 of $1,191,035, compared to loss before benefit from income taxes
in the first six months of fiscal 2016 of $1,362,229. The Company’s tax provision net of valuation allowance reflects a tax
benefit of $0 for the six months ended December 31, 2016. The Company’s tax provision net of valuation allowance reflected
a tax benefit of approximately $124,000 for the six months ended December 31, 2015. In the six months ended December 31, 2016,
the tax benefit of losses in the amount of approximately $436,000 was fully offset by a valuation allowance of equivalent amount.
In the six months ended December 31, 2015 the tax benefit of losses was approximately $427,000, net of the effect of deferred taxes
in the amount of $45,000 and an increase in the valuation allowance of $258,000. The tax benefit recognized in the six months ended
December 31, 2015 was the result of the expiration of tax benefits associated with stock options not previously covered by the
valuation allowance. To the extent that the Company’s losses continue in future quarters, the tax benefit of those losses
will be fully offset by a valuation allowance.
Net loss for the six
months ended December 31, 2016 was $1,191,035 or $0.30 per basic and diluted share compared to net loss of $1,238,322 or $0.31
per basic and diluted share for the first six months of fiscal 2016. The weighted average number of common shares outstanding,
used in the calculation of basic and diluted earnings per share for the first six months of fiscal 2017 and 2016 was 4,013,537.
Liquidity and Capital Resources
The Company believes
that available resources, including its collateral base which would allow it to obtain credit financing if needed, are sufficient
to meet operating requirements in the next twelve months.
The Company’s
working capital was $9.4 million at December, 2016 compared to $10.0 million at June 30, 2016. Cash and cash equivalents decreased
by $0.9 million and Accounts Receivable decreased by $0.8 million. During fiscal 2017, these decreases in working capital were
offset by a $0.5 million decrease in in Accounts Payable and a $0.6 million decrease in Other Accrued Liabilities. Accounts Payable
and Other Accrued Liabilities are subject to normal fluctuations in purchasing levels and the timing of payments within the quarter.
Accounts Receivable was $3.3 million at December 31, 2016, a decrease from $4.1 million at June 30, 2016. Accounts Receivable as
measured in days sales outstanding (“DSO”) was 38 DSO at December 31, 2016; a decrease from 40 DSO at June 30, 2016.
The Company does adjust product forecast, order quantities and safety stock based on changes in demand patterns in order to manage
inventory levels.
At
September 30, 2016, the Company was party to a Loan and Security Agreement, dated November 17, 2009, with Enterprise Bank &
Trust (the “Credit Agreement”), under which the Company had $5,000,000 available for borrowing on the line of credit
(the “Credit Facility”). The Credit Agreement expired without renewal on November 9, 2016.
The Company is considering
alternative sources of credit financing to replace the Credit Facility. While the Company believes it would be able to obtain replacement
financing, if necessary, the
terms, availability and costs associated with such replacement financing may be materially less favorable than those of the Credit
Facility.
Management has implemented
cost saving measures which have reduced the Company’s usage of cash, including overhead reductions and deferral of non-essential
capital expenditures. While there are no assurances that these measures will be successful, management believes that the Company
currently has sufficient liquidity given its cash needs. If the Company’s cost saving measures are not successful in the
long term, and the Company’s revenue does not increase, the Company will need to obtain debt financing to fund its operations.
At December 31, 2016 the Company had no aggregate indebtedness, including capital lease obligations, short-term debt and long
term debt.
Inflation
has not had a material effect on the Company’s business or results of operations during the first quarter of fiscal 2017.
Litigation and Contingencies
The
Company becomes, from time to time, a party to personal injury litigation arising out of incidents involving the use of its products.
The Company believes that any potential judgments resulting from these claims over its self-insured retention will be covered by
the Company’s product liability insurance. See Part II, Item 1 – Legal Proceedings, below, for more information concerning
litigation.
Critical Accounting Policies
The impact and any
associated risks related to the Company’s critical accounting policies on business operations are discussed throughout “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect the Company’s
reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see
the Company’s Annual Report on Form 10-K for the year ended June 30, 2016.
Recently Issued Accounting Guidance
See Note 1 –
Summary of Significant Accounting and Reporting Policies for more information on recent accounting pronouncements and their impact,
if any, on the Company’s financial statements. Management believes there have been no material changes to our critical accounting
policies.