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, 2017.
Recently Issued Accounting Guidance
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 was 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 new guidance will be effective
for the Company commencing in the 2019 fiscal year. The Company presently anticipates adopting on a modified retrospective basis
to each prior reporting period presented with the election of applicable practical expedients.
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, which for the Company will be the first quarter the 2020 fiscal year. Early adoption is permitted. The
Company is in the process of evaluating the impact of this update on its financial statements.
Fair Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable
and revolving credit facility. The carrying amounts for cash and cash equivalents, accounts receivable, accounts payable
and revolving credit facility approximate their fair value due to the short maturity of these instruments.
2. Inventories
Inventories are comprised as follows:
|
|
March 31, 2018
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
Work-in progress
|
|
$
|
641,280
|
|
|
$
|
468,839
|
|
Component parts
|
|
|
7,158,913
|
|
|
|
7,271,908
|
|
Finished goods
|
|
|
2,166,673
|
|
|
|
2,368,855
|
|
Reserve for obsolete and excess inventory
|
|
|
(1,564,311
|
)
|
|
|
(1,597,648
|
)
|
|
|
$
|
8,402,555
|
|
|
$
|
8,511,954
|
|
3. 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 and nine months ended March 31, 2018 and 2017 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. On May 26, 2017 the Company again moved for leave to appeal the March 31, 2016 decision. That motion
was granted on October 7, 2017 by the New York State Court of Appeals. The Company filed its brief and record on January 26, 2018.
Niagara’s responses are due on May 16, 2018, with the Company’s reply due by May 31, 2018. Once fully briefed, the
matter will be scheduled for argument, most likely in 2019.
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 March 31, 2018,
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
Allied Healthcare
Products, Inc. (the “Company”) is party to a Loan and Security Agreement with Summit Financial Resources, L.P. (“Summit”),
dated effective February 27, 2017, as amended April 16, 2018 (as amended, the “Credit Agreement”). Pursuant to the
Credit Agreement, the Company obtained a secured revolving credit facility (the “Credit Facility”). The Company’s
obligations under the Credit Facility are secured by all of the Company’s personal property, both tangible and intangible,
pursuant to the terms and subject to the conditions set forth in the Credit Agreement. Availability of funds under the Credit Agreement
is based on the Company’s accounts receivable and inventory but will not exceed $2,000,000.
The Credit Facility
will be available, subject to its terms, on a revolving basis until it expires on February 27, 2020, 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, 2019,
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, 2019 and the date of such prepayment or termination.
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, 2018,
the Company had $682,772 of indebtedness, including capital lease obligations, short-term debt and long term debt, and $1,317,228
available to borrow from the line based on collateral requirements. The prime rate as reported in the Wall Street Journal was 4.75%
on March 31, 2018.
The Company was in
compliance with all of the covenants associated with the Credit Facility at March 31, 2018.
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, 2018 the Company recorded the tax benefit of losses incurred in the amount of approximately $260,000 and
$627,000, respectively. As the realization of the tax benefit of the net operating loss is not assured an additional valuation
allowance of a like amount was recorded.
For 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. As the realization of the tax benefit of the net operating loss is not assured an additional valuation allowance of a
like amount was recorded.
U.S. Tax Reform
On December 22, 2017,
President Trump signed into law new tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"), which
became effective January 1, 2018. The TCJA significantly revises U.S. tax law by, among other provisions lowering the U.S. federal
statutory income tax rate from 35% to 21%, and eliminating or reducing certain income tax deductions.
ASC Topic 740, requires
the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity
and significance of the TCJA's provisions, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") on December
22, 2017, which allows companies to record the tax effects of the TCJA on a provisional basis based on a reasonable estimate, and
then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available.
The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting,
but cannot extend beyond one year from enactment.
During the second quarter
of fiscal 2018, the Company recorded a one-time charge of $136,386 within its income tax provision in connection with the TCJA,
all of which related to the revaluation of the Company's deferred tax assets and liabilities net of a resultant impact of the revaluation
on the recorded valuation allowance. This one-time charge, which was recorded on a provisional basis had no impact on the three
months ended March 31, 2018 and impacted the Company's effective tax rate for the nine-month period by increasing it from 0% to
7%. The charge lowered its basic and diluted earnings per share by $0.03 for the nine months ended March 31, 2018. The provisional
amounts were based on the Company's present interpretations of the TCJA and current available information, including assumptions
and expectations about future events, such as its projected financial performance, and are subject to further refinement as additional
information becomes available (including the Company's actual full fiscal 2018 results of operations and financial condition, as
well as potential new or interpretative guidance issued by the FASB or the Internal Revenue Service and other tax agencies) and
further analyses are completed.