AHPI Allied Healthcare Products Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒  Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2022

☐  Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from________ to ________

Commission File Number: 0-19266

1720 Sublette Avenue, St. Louis, Missouri 63110

(Address of principal executive offices, including zip code)

(314) 771-2400

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter periods that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past ninety days. Yes  ⌧ No  ◻

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ⌧ No  ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ◻  No ☒

Securities registered pursuant to Section 12(b) of the Act:

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The number of shares of common stock outstanding at May 2, 2022 is 4,013,537 shares.

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INDEX

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SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Statements contained in this Report, which are not historical facts or information, are “forward-looking statements.” Words such as “believe,” “expect,” “intend,” “will,” “should,” and other expressions that indicate future events and trends identify such forward-looking statements. These forward-looking statements involve risks and uncertainties, which could cause the outcome and future results of operations, and financial condition to be materially different than stated or anticipated based on the forward-looking statements. Such risks and uncertainties include both general economic risks and uncertainties, risks and uncertainties affecting the demand for and economic factors affecting the delivery of health care services, both in the United States and in our overseas markets, impacts of the U.S. Affordable Care Act, our history of net losses and negative cash flows, the COVID-19 pandemic, and other specific matters which relate directly to the Company’s operations and properties as discussed in the Company’s annual report on Form 10-K for the year ended June 30, 2021 and the supplemental risk factor provided in Part II, Item 1A, Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 3022. The Company cautions that any forward-looking statements contained in this report reflect only the belief of the Company or its management at the time the statement was made. Although the Company believes such forward-looking statements are based upon reasonable assumptions, such assumptions may ultimately prove inaccurate or incomplete. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement was made.

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See accompanying Notes to Financial Statements.

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See accompanying Notes to Financial Statements.

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See accompanying Notes to Financial Statements.

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See accompanying Notes to Financial Statements.

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ALLIED HEALTHCARE PRODUCTS, INC.

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revenues until the fourth quarter of fiscal year 2022 at the earliest. Supply chain and staffing issues have led to higher levels of delayed shipments to customers. This delay in the fulfillment of customer orders has led to lower sales, earnings and liquidity. The Company is seeking to fill open positions, expedite needed components, and find new sources of components where necessary. To reduce expenses, several positions within the Company have been eliminated to reduce salary and benefit cost. To increase sales, the Company plans to continue to emphasize the benefits of its AHP300 ventilator to pursue opportunities in that market. The Company’s ability to generate sufficient liquidity will be largely determined by the success of management’s plans to address these challenges.

The Company believes the combination of cash on hand at March 31, 2022, cash flows from operations and additional borrowings on the credit facility (Note 6) will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued. Management is currently planning to renew the credit facility and believes it will be able to do so in the ordinary course of business. To the extent these measures do not provide sufficient liquidity, the Company will consider additional borrowings through the sale leaseback of its corporate headquarters and delaying certain expenditures until sufficient capital becomes available.

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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 satisfaction of its performance obligation which occurs on the transfer of control of the product, 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. For certain customers or product orders, Allied may require advance payments. The contract liabilities are reflected as customer deposits on the Company’s balance sheet.

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 adjusts 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. All taxes imposed on and concurrent with revenue producing transactions and collected by the Company are excluded from the measurement of transaction price.

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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:

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3. Inventories

Inventories are comprised as follows:

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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 shares outstanding for the three and nine months ended March 31, 2022 and 2021 were 4,013,537. The number of diluted shares outstanding for the three months ended March 31, 2022 and 2021 were 4,013,537. The number of diluted shares outstanding for the nine months ended March 31, 2022 and 2021 were 4,013,537 and 4,027,310 respectively.

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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 has recognized 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.

Environmental Remediation

The Company is subject to federal and state requirements for protection of the environment, including the remediation of contaminated sites. The Company’s policy is to accrue and charge to current expense identified exposures related to environmental remediation sites when it is probable that a liability has been incurred and the amount can be reasonably estimated. The amount of the liability is based on the best estimate or the low end of a range of reasonably possible exposure for investigation, cleanup, and monitoring costs to be incurred. Estimated remediation costs are not discounted to present value.

On January 30, 2020, the Company filed a Citizen Participation Plan with the New York Department of Environmental Conservation under its Brownfield Cleanup Program. The plan was filed with respect to the Company’s property in Stuyvesant Falls, New York. The plan recognizes that the soil and groundwater at the Stuyvesant Falls facility is impacted by chemical compounds exceeding regulatory standards. On October 13, 2020, the Company executed a Brownfield Cleanup Program Agreement with the Department of Environmental Conservation with respect to the property. Under the agreement, the Company has voluntarily agreed to conduct, at its expense, certain remedial investigations and remedial actions with respect to suspected soil and groundwater contamination at the site with oversight by the department.

The Company’s best estimate of the expected cost to remediate the site is $1.3 million. The Company recorded $1.1 million as an expense in the fiscal year ended June 30, 2020 and is reflected in other accrued liabilities and selling, general and administrative expenses in the Company’s financial statements. During the quarter ended March 31, 2022, the Company recorded an additional $133,000 charge to income and reclassified $0.5 million to long-term liability to reflect the rescheduling of the remediation. As of March 31, 2022, the Company has paid approximately $486,000 in remediation expenses which have been charged to the reserve.

Liability for future environmental expenditures

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Employment Contract

On April 20, 2021, the Company entered into an employment contract with its chief executive officer, Joseph F. Ondrus, Jr., which provides for an initial term of three years with annual renewals. The contract includes termination without cause and change of control provisions, under which the chief executive officer is entitled to continued payments of annual salary and benefits 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.

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6. Financing

North Mill Loan

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, April 24, 2019, December 18, 2020 and October 7, 2021 (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 $4,000,000. At March 31, 2022 availability under the agreement was approximately $304,000.

The Credit Facility will be available, subject to its terms, on a revolving basis until it expires on February 27, 2023, 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 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 ($10,000 per month).

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.

The Company was in compliance with all of the covenants associated with the Credit Facility at March 31, 2022.

At March 31, 2022 the Company had $3.2 million indebtedness, including lease obligations, short-term debt, and long term debt. The prime rate as reported in the Wall Street Journal was 3.50% on March 31, 2022.

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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 three and nine months ended March 31, 2022 the Company recorded the tax benefit of losses incurred in the amount of approximately $326,000 and $873,000, 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. As a result of the Consolidated Appropriations Act of 2021 signed by the President on December 27, 2020, approximately $2,400,000 of expenses incurred that were attributed to the Company’s PPP loan became deductible in the nine months ended March 31, 2021. The deductibility of these expenses created a tax loss for the nine months ended March 31, 2021. For the three and nine months ended March 31, 2021 the Company recorded the tax benefit of losses incurred in the amount of approximately $133,000 and $582,000, 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. The total valuation allowance recorded by the Company as of March 31, 2022 and 2021 was approximately $4,418,000 and $3,357,000, respectively. To the extent that the Company incurs losses in future quarters, the tax benefit of those losses will be subject to a valuation allowance. To the extent the Company has taxable income, the taxable income will be offset by net operating loss carryforwards.

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Orders for the Company’s products for the three months ended March 31, 2022 of $7.4 million were $0.6 million, or 8.8%, higher than orders for the prior year same quarter of $6.8 million. Domestic orders were down 5.9% over the prior year same quarter while international orders, which represented 30.0% of third quarter orders, were 78.2% higher than orders for the prior year same quarter. The decrease in orders was from a $0.4 million increase in respiratory care products, a $0.1 million increase in medical gas equipment and a $0.1 million increase in emergency medical products.

Gross profit for the three months ended March 31, 2022 was $0.4 million, or 5.8% of net sales, compared to $1.4 million, or 17.5% of net sales, for the three months ended March 31, 2021. Gross profit for the quarter was unfavorably impacted by the decrease in sales volume and utilization of fixed manufacturing cost. Gross profit was also unfavorably impacted by a $0.2 million increase in material variances resulting primarily from an increase in the price of raw materials and purchased components.  

Selling, general and administrative expenses for the three months ended March 31, 2022 were $1.7 million compared to selling, general and administrative expenses of $1.8 million for the three months ended March 31, 2021. The decrease is primarily due to a $0.2 million decrease in personnel costs consisting of salaries and benefits. This decrease was partially offset by a $0.1 million charge for environmental remediation.

Loss from operations was $1.2 million for the three months ended March 31, 2022 compared to a loss from operations of $0.4 million for the three months ended March 31, 2021.

Allied had a loss before benefit from income taxes in the third quarter of fiscal 2022 of $1.3 million compared to a loss before benefit from income taxes in the third quarter of fiscal 2021 of $0.4 million. The Company’s tax provision net of valuation allowance reflects a tax benefit of $0 for the three months ended March 31, 2022 and 2021. In the quarter ended March 31, 2022 the tax benefit of losses in the amount of approximately $326,000 was fully offset by a valuation allowance of equivalent amount.  In the quarter ended March 31, 2021 the Company recorded the tax benefit of losses incurred in the amount of approximately $133,000 net of additions to the valuation allowance of like 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. To the extent the Company has taxable income in the future, the taxable income will be offset by net operating loss carryforwards.

Net loss for the third quarter of fiscal 2022 was $1.3 million or $0.32 per basic and diluted share compared to net loss of $0.4 million or $0.10 per basic and diluted share for the third quarter of fiscal 2021. The weighted average number of common shares outstanding, used in the calculation of basic earnings per share for the third quarters of fiscal 2022 and 2021 were 4,013,537. The weighted average number of common shares outstanding, used in the calculation of diluted earnings per share for the third quarters of fiscal 2022 and 2021 were 4,013,537.

Nine months ended March 31, 2022 compared to nine months ended March 31, 2021

Allied had net sales of $21.0 million for the nine months ended March 31, 2022, down $8.3 million, or 28.3% from net sales of $29.3 million in the prior year same period. Domestic sales were down 14.5% from the prior year same period while international sales were down 52.9% from the prior year same period. International business represented 23.2% of sales for the first nine months of fiscal 2022. The $8.3 million decrease in sales includes a $1.6 million decrease in medical gas equipment and a $6.5 million decrease in emergency medical products consisting of a $5.0 million decrease in AHP300 ventilator sales. In the nine months ended March 31, 2021 the Company fulfilled orders that were taken at the start of the pandemic in earlier quarters. Sales in fiscal 2022 were also negatively impacted by supply chain delays and a staffing shortage in our manufacturing operations.

Orders for the Company’s products for the nine months ended March 31, 2022 of $22.3 million were $0.6 million or 2.6% lower than orders for the prior year same period of $22.9 million. Domestic orders are down 2.7% from the prior year same period while international orders, which represented 27.3% of orders for the first nine months of fiscal 2022, were 2.5% lower than orders for the prior year same period. The decrease in orders was primarily due to a $1.8 million decrease in orders for AHP300 ventilators. This decrease was offset by a $0.9 million increase in medical gas equipment and $0.4 million increase in respiratory care products.

Gross profit for the nine months ended March 31, 2022 was $2.1 million, or 10.0% of net sales, compared to $5.9 million, or 20.1% of net sales, for the nine months ended March 31, 2021. Gross profit was unfavorably impacted by the decrease in sales volume. Manufacturing overhead spending decreased from the prior year by approximately $1.0 million as the Company decreased its capacity to manufacture those products that have had in the prior year higher demand related to the COVID-19 pandemic.

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Selling, general and administrative expenses for the nine months ended March 31, 2022 were $5.4 million compared to selling, general and administrative expenses of $5.7 million for the nine months ended March 31, 2021. The decrease is primarily due to a $0.2 million decrease in legal fees and a $0.3 million decrease in personnel costs consisting of salaries and benefits. This decrease was partially offset by a $0.1 million charge for environmental remediation.

Loss from operations was $3.3 million for the nine months ended March 31, 2022 compared to income from operations of $0.2 million for the nine months ended March 31, 2021.

Allied had a loss before benefit from income taxes in the first nine months of fiscal 2022 of $3.4 million compared to income before benefit from income taxes in the first nine months of fiscal 2021 of $0.1 million. The Company’s tax provision net of valuation allowance reflects a tax benefit of $0 for the nine months ended March 31, 2022 and 2021. As a result of the Consolidated Appropriations Act of 2021 signed by the President on December 27, 2020, approximately $2,400,000 of expenses incurred that were attributed to the Company’s PPP loan became deductible in the nine months ended March 31, 2021. The deductibility of these expenses created a tax loss for the nine months ended March 31, 2021. In the nine months ended March 31, 2022 the tax benefit of losses in the amount of approximately $873,000 was fully offset by a valuation allowance of equivalent amount.  In the nine months ended March 31, 2021 the Company recorded the tax benefit of losses incurred in the amount of approximately $582,000 net of additions to the valuation allowance of like 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. To the extent the Company has taxable income, the taxable income will be offset by net operating loss carryforwards.

Net loss for the nine months ended March 31, 2022 was $3.4 million or $0.85 per basic and diluted share compared to net income of $0.1 million or $0.03 per basic and diluted share for the first nine months of fiscal 2021. The weighted average number of common shares outstanding, used in the calculation of basic earnings per share for fiscal 2022 and 2021 were 4,013,537. The weighted average number of common shares outstanding, used in the calculation of diluted earnings per share for fiscal 2022 and 2021 were 4,013,537 and 4,027,310 respectively.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are its cash, cash equivalents, other items of working capital and available borrowing under the Credit Facility discussed below.

The Company’s working capital was $3.7 million at March 31, 2022 compared to $6.3 million at June 30, 2021. The $2.6 million decrease in working capital is attributed to a cash decrease of $0.3 million, an inventory decrease of $0.8 million, an accounts receivable decrease of $0.3 million, a debt increase of $1.1 million, a accounts payable increase of $0.9 million and an $0.5 million increase in customer deposits.  During the first nine months of fiscal 2022, these decreases in working capital were offset by an $0.2 million increase in other current assets and a $1.2 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 $2.6 million at March 31, 2022 and as measured in days sales outstanding (“DSO”) was 37 DSO compared to a 40 DSO at June 30, 2021. The Company does adjust product forecast, order quantities and safety stock based on changes in demand patterns in order to manage inventory levels.

North Mill Loan

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, April 24, 2019, December 18, 2020 and October 7, 2021 (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 $4,000,000. At March 31, 2022 borrowing under the agreement was $3,221,532, maximum available borrowing based on eligible collateral was $3,525,688, resulting in availability of $304,156.

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Availability of funds under the Credit Agreement is based on the Company’s eligible accounts receivable and eligible inventory but will not exceed $4,000,000. In determining eligible Accounts Receivable Advances several classifications are considered ineligible and are subtracted from the Company’s total Accounts Receivable before calculating eligible Accounts Receivable. Ineligible receivables include receivables from governmental entities, receivables to be paid by credit card, uninsured international receivables, receivables over 90 days old, and receivables from customers with a significant concentration of receivables over 90 days old. The Company may be advanced up to 85% of eligible Accounts Receivable under the loan agreement.

Accounts Receivable is dependent on sales revenue. Decreased sales revenue has resulted in decreased Accounts Receivable available for loan collateral. At March 31, 2022 the Company had Accounts Receivable of $1,762,844 included as eligible collateral in determining total available borrowing advances under the loan agreement.

In determining eligible inventory several categories of inventory are subtracted from total inventory. Work in Process Inventory, Packaging and Supplies, and Inventory Reserves are subtracted from total inventory to calculate eligible inventory. The Company may be advanced up to 25% of eligible inventory. Advances from inventory are limited by the lesser of the calculated eligible inventory, two million dollars ($2,000,000), or the amount advanced from eligible Accounts Receivable. At March 31, 2022 the Company had $1,762,844 from Inventory included as eligible collateral in determining total available borrowing under the loan agreement. At March 31, 2022 Inventory Advances were limited by the eligible Accounts Receivable Advance of $1,762,844.  

The Credit Facility will be available, subject to its terms, on a revolving basis until it expires on February 27, 2023, 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 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 ($10,000 per month).

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. The Company was in compliance with all of the covenants associated with the Credit Facility at March 31, 2022.

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As discussed previously, the Company’s sales and generation of Accounts Receivable have been negatively impacted by supply chain disruptions, inflation in the cost of raw materials and components and labor shortages. While management has plans in place to mitigate these challenges, further reductions in orders and shipments will lead to a reduction in availability under the Credit Facility, which could have a material adverse impact on our liquidity and ability to meet our operating requirements. If the Company were unable to reach an agreement with North Mill to increase availability, the Company could attempt to negotiate a larger line of credit with another lender. However, there is no assurance that the Company could secure either increased availability from North Mill or a new credit facility from a new lender, in which case the Company would have to use other assets to obtain liquidity, such as a sale-leaseback of some or all of its real estate. While management has reason to believe that it would be able to find a financing party willing to engage in a sale-leaseback, there is no assurance that it will be able to do so or that it will be able to obtain an offer on terms acceptable to the Company. In addition, a sale-leaseback would result in the incurrence of additional rent expense in the future.

At March 31, 2022 the Company had $3.2 million indebtedness, including lease obligations, short-term debt, and long term debt. The prime rate as reported in the Wall Street Journal was 3.50% on March 31, 2022.

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, 2021.

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.

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Changes in internal control over financial reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

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**Filed herewith as Exhibit 101 are the following materials formatted in XBRL: (i) Statement of Operations, (ii) Balance Sheet, (iii) Statement of Cash Flows and (iv) Notes to Financial Statements.

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