Item 1.
|
Financial Statements
|
ALLIED HEALTHCARE PRODUCTS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
8,097,215
|
|
|
$
|
8,316,027
|
|
|
$
|
23,382,636
|
|
|
$
|
23,691,922
|
|
Cost of sales
|
|
|
6,511,688
|
|
|
|
6,765,552
|
|
|
|
19,190,237
|
|
|
|
20,057,379
|
|
Gross profit
|
|
|
1,585,527
|
|
|
|
1,550,475
|
|
|
|
4,192,399
|
|
|
|
3,634,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
1,890,296
|
|
|
|
1,903,408
|
|
|
|
6,617,016
|
|
|
|
5,975,580
|
|
Loss from operations
|
|
|
(304,769
|
)
|
|
|
(352,933
|
)
|
|
|
(2,424,617
|
)
|
|
|
(2,341,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
25,754
|
|
|
|
18,590
|
|
|
|
51,542
|
|
|
|
44,548
|
|
Interest income
|
|
|
(48
|
)
|
|
|
(47
|
)
|
|
|
(100
|
)
|
|
|
(107
|
)
|
Legal settlement
|
|
|
-
|
|
|
|
(750,000
|
)
|
|
|
-
|
|
|
|
(750,000
|
)
|
Other, net
|
|
|
9
|
|
|
|
45
|
|
|
|
32
|
|
|
|
45
|
|
|
|
|
25,715
|
|
|
|
(731,412
|
)
|
|
|
51,474
|
|
|
|
(705,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(330,484
|
)
|
|
|
378,479
|
|
|
|
(2,476,091
|
)
|
|
|
(1,635,523
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss)
|
|
$
|
(330,484
|
)
|
|
$
|
378,479
|
|
|
$
|
(2,476,091
|
)
|
|
$
|
(1,635,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
(0.08
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.62
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
$
|
(0.08
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.62
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,155,099
|
|
|
$
|
195,454
|
|
Accounts receivable, net of allowances of $170,000
|
|
|
3,644,766
|
|
|
|
3,165,289
|
|
Inventories, net
|
|
|
6,821,211
|
|
|
|
7,333,095
|
|
Income tax receivable
|
|
|
18,453
|
|
|
|
12,178
|
|
Other current assets
|
|
|
312,002
|
|
|
|
244,908
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
11,951,531
|
|
|
|
10,950,924
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
3,585,970
|
|
|
|
4,001,081
|
|
Deferred income taxes
|
|
|
501,891
|
|
|
|
501,891
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,039,392
|
|
|
$
|
15,453,896
|
|
See accompanying Notes to Financial Statements.
(CONTINUED)
ALLIED HEALTHCARE PRODUCTS, INC.
BALANCE SHEET
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
(Unaudited)
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,690,963
|
|
|
$
|
1,469,232
|
|
Customer deposits
|
|
|
2,737,635
|
|
|
|
562,905
|
|
Other accrued liabilities
|
|
|
2,194,647
|
|
|
|
1,531,407
|
|
Total current liabilities
|
|
|
6,623,245
|
|
|
|
3,563,544
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2020 and June 30, 2019;4,013,537 shares outstanding at March 31, 2020 and June 30, 2019
|
|
|
52,139
|
|
|
|
52,139
|
|
Additional paid-in capital
|
|
|
48,493,203
|
|
|
|
48,491,317
|
|
Accumulated deficit
|
|
|
(18,148,407
|
)
|
|
|
(15,672,316
|
)
|
Less treasury stock, at cost; 1,200,365 shares at March 31, 2020 and June 30, 2019, respectively
|
|
|
(20,980,788
|
)
|
|
|
(20,980,788
|
)
|
Total stockholders' equity
|
|
|
9,416,147
|
|
|
|
11,890,352
|
|
Total liabilities and stockholders' equity
|
|
$
|
16,039,392
|
|
|
$
|
15,453,896
|
|
See accompanying Notes to Financial Statements.
ALLIED HEALTHCARE PRODUCTS, INC.
STATEMENT OF CHANGES IN STOCKHOLDER’S
EQUITY
(UNAUDITED)
|
|
Three Months Ended March 31, 2020
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Total
|
|
Balance at December 31, 2019
|
|
$
|
52,139
|
|
|
$
|
48,492,674
|
|
|
$
|
(17,817,923
|
)
|
|
$
|
(20,980,788
|
)
|
|
$
|
9,746,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
529
|
|
|
|
-
|
|
|
|
-
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(330,484
|
)
|
|
|
-
|
|
|
|
(330,484
|
)
|
Balance at March 31, 2020
|
|
$
|
52,139
|
|
|
$
|
48,493,203
|
|
|
$
|
(18,148,407
|
)
|
|
$
|
(20,980,788
|
)
|
|
$
|
9,416,147
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
52,139
|
|
|
$
|
48,489,734
|
|
|
$
|
(15,576,633
|
)
|
|
$
|
(20,980,788
|
)
|
|
$
|
11,984,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
791
|
|
|
|
-
|
|
|
|
-
|
|
|
|
791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
378,479
|
|
|
|
-
|
|
|
|
378,479
|
|
Balance at March 31, 2019
|
|
$
|
52,139
|
|
|
$
|
48,490,525
|
|
|
$
|
(15,198,154
|
)
|
|
$
|
(20,980,788
|
)
|
|
$
|
12,363,722
|
|
|
|
Nine Months Ended March 31, 2020
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Total
|
|
Balance at June 30, 2019
|
|
$
|
52,139
|
|
|
$
|
48,491,317
|
|
|
$
|
(15,672,316
|
)
|
|
$
|
(20,980,788
|
)
|
|
$
|
11,890,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
1,886
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,476,091
|
)
|
|
|
-
|
|
|
|
(2,476,091
|
)
|
Balance at March 31, 2020
|
|
$
|
52,139
|
|
|
$
|
48,493,203
|
|
|
$
|
(18,148,407
|
)
|
|
$
|
(20,980,788
|
)
|
|
$
|
9,416,147
|
|
|
|
Nine Months Ended March 31, 2019
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Total
|
|
Balance at June 30, 2018
|
|
$
|
52,139
|
|
|
$
|
48,488,220
|
|
|
$
|
(13,562,631
|
)
|
|
$
|
(20,980,788
|
)
|
|
$
|
13,996,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
2,305
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,635,523
|
)
|
|
|
-
|
|
|
|
(1,635,523
|
)
|
Balance at March 31, 2019
|
|
$
|
52,139
|
|
|
$
|
48,490,525
|
|
|
$
|
(15,198,154
|
)
|
|
$
|
(20,980,788
|
)
|
|
$
|
12,363,722
|
|
See accompanying Notes to Financial Statements.
ALLIED HEALTHCARE PRODUCTS, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,476,091
|
)
|
|
$
|
(1,635,523
|
)
|
Adjustments to reconcile net loss to net cash provided (used
in) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
462,274
|
|
|
|
635,868
|
|
Stock based compensation
|
|
|
1,886
|
|
|
|
2,305
|
|
Provision for doubtful accounts and sales
|
|
|
|
|
|
|
|
|
returns and allowances
|
|
|
21,623
|
|
|
|
20,178
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(501,100
|
)
|
|
|
303,444
|
|
Inventories
|
|
|
511,884
|
|
|
|
(62,904
|
)
|
Income tax receivable
|
|
|
(6,275
|
)
|
|
|
(8,120
|
)
|
Other current assets
|
|
|
(67,094
|
)
|
|
|
(39,666
|
)
|
Accounts payable
|
|
|
221,731
|
|
|
|
359,851
|
|
Customer Deposits
|
|
|
2,174,731
|
|
|
|
68,970
|
|
Other accrued liabilities
|
|
|
663,239
|
|
|
|
(55,440
|
)
|
Net cash provided by (used in) operating activities
|
|
|
1,006,808
|
|
|
|
(411,037
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(47,163
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(47,163
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit agreement
|
|
|
24,224,054
|
|
|
|
24,375,484
|
|
Payments under revolving credit agreement
|
|
|
(24,224,054
|
)
|
|
|
(23,964,749
|
)
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
410,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
959,645
|
|
|
|
(302
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
195,454
|
|
|
|
136,112
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,155,099
|
|
|
$
|
135,810
|
|
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, 2019.
Adoption of new lease standard
In February 2016, the
FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize leases on-balance sheet and disclose key information
about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset
and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance
or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard was
effective for Allied on July 1, 2019. The Company adopted the new standard on its effective date and used the effective date as
our date of initial application. Consequently, financial information recorded and the disclosures required under the new standard
are not provided for dates and periods before July 1, 2019. Additionally, the Company determined that as of the effective date
of the standard, it had no material impact on the financial statements or disclosures of the Company.
The new standard provides
a number of optional practical expedients in transition. We elected the package of practical expedients which does not require
us to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct
costs. Leasing activities are not significant to Allied’s business and there is no significant change in the Company’s
leasing activities upon adoption. The new standard also provides practical expedients for an entity’s ongoing accounting.
The Company elected the short-term lease recognition exemption for all leases with terms of less than 12 months.
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.
The Company has applied to the Brownfield Cleanup Program. Pursuant to the plan, the Company will conduct, at its expense, investigation
and remediation at the site with oversight by the Department of Environmental Conservation.
The Company’s
best estimate of the expected cost to remediate the site is $0.9 million. This amount was recorded as an expense in the three months
ended December 31, 2019 and is reflected in other accrued liabilities and selling, general and administrative expenses in the Company’s
financial statements. As of March 31, 2020, the Company has paid approximately $79,000 in remediation expenses which have been
charged to the initial reserve.
Fair Value of Financial Instruments
The Company’s
financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and the revolving credit facility.
The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to
the short maturity of these instruments. The carrying amount of the revolving credit facility approximates fair value due to the
debt having a variable interest rate.
Risk and Uncertainties, Going Concern, Liquidity and Management’s
Plan
A
novel strain of coronavirus (“COVID-19”) was first identified in Wuhan, China in December 2019. On March 11, 2020,
the World Health Organization designated COVID-19 as a global pandemic. To date, COVID-19 has surfaced in nearly all regions around
the world and resulted in business slowdowns or shutdowns in affected areas. Despite our efforts to manage and remedy and manage
the effects of this pandemic, the significance depends on factors beyond our control, including the duration and severity of the
outbreak as well as third-party actions taken to contain the spread and mitigate public health efforts. For the Company this creates
additional economic uncertainty. Risks for the Company include disruption in operations if a significant percentage of our workforce
is unable to work due to illness, forced curtailment of business operations and business travel by governmental authorities, and
failure of others in our supply chain and distribution channel to meet their obligations to us, or significant disruptions in their
ability to do so, which may be caused by their own financial or operational difficulties.
The Company
believes the combination of cash on hand at March 31, 2020, cash flows from operations, additional borrowings on the credit
facility (Note 6), and additional liquidity provided by the Paycheck Protection Program loan (Note 8) 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. 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. Historically, the Company has experienced, and continues to experience, net losses and
net losses from operations. Additionally, the Company expects to incur significant environmental costs that are planned to be
expended over the next year (Note 1). The Company’s liquidity needs will be largely determined by the success of the
Company executing management’s plan.
2. Revenues
The Company’s
revenues are derived primarily from the sales of respiratory products, medical gas equipment and emergency medical products. The
products are generally sold directly to distributors, customers affiliated with buying groups, individual customers and construction
contractors, throughout the world.
The Company recognizes
revenue from product sales upon the transfer of control, which is generally upon shipment or delivery, depending on the delivery
terms set forth in the customer contract. Payment terms between Allied and its customers vary by the type of customer, country
of sale, and the products offered. The term between invoicing and the payment due date is not significant. For certain customers
or product orders, Allied may require advance payments. These 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 makes adjustments to reserves for changes in trends and terms of rebate programs. Historically,
adjustments to prior years’ rebate accruals have not been material to net income.
Other allowances charged
against gross sales include cash discounts and returns, which are not significant. Cash discounts are known within 15 to 30 days
of sale, and therefore can be reliably estimated. Returns can be reliably estimated because the Company’s historical returns
are low, and because sales return terms and other sales terms have remained relatively unchanged for several periods. Product warranties
are also not significant.
The Company does not
allocate transaction price as the Company has only one performance obligation and its contracts do not span multiple periods.
The Company operates in one segment consisting of the manufacturing, marketing and
distribution of a variety of respiratory products used in the health care industry to hospitals, hospital equipment dealers, hospital
construction contractors, home health care dealers and emergency medical product dealers. The Company’s product lines include
respiratory care products, medical gas equipment and emergency medical products. The
Company does not have any one single customer that represents more than 10 percent of total sales. Sales by region, and by product,
are as follows:
|
|
Sales by Region
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic United States
|
|
$
|
6,142,406
|
|
|
$
|
6,128,063
|
|
|
$
|
17,338,254
|
|
|
$
|
17,819,577
|
|
Europe
|
|
|
148,255
|
|
|
|
327,357
|
|
|
|
545,372
|
|
|
|
707,296
|
|
Canada
|
|
|
186,032
|
|
|
|
212,219
|
|
|
|
555,410
|
|
|
|
585,542
|
|
Latin America
|
|
|
782,650
|
|
|
|
515,753
|
|
|
|
2,345,441
|
|
|
|
1,642,390
|
|
Middle East
|
|
|
205,633
|
|
|
|
236,834
|
|
|
|
429,590
|
|
|
|
382,845
|
|
Far East
|
|
|
632,239
|
|
|
|
892,044
|
|
|
|
2,167,995
|
|
|
|
2,534,292
|
|
Other International
|
|
|
-
|
|
|
|
3,757
|
|
|
|
574
|
|
|
|
19,980
|
|
|
|
$
|
8,097,215
|
|
|
$
|
8,316,027
|
|
|
$
|
23,382,636
|
|
|
$
|
23,691,922
|
|
|
|
Sales by Product
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Respiratory care products
|
|
$
|
2,289,920
|
|
|
$
|
2,292,547
|
|
|
$
|
6,507,371
|
|
|
$
|
6,707,384
|
|
Medical gas equipment
|
|
|
3,848,923
|
|
|
|
4,371,944
|
|
|
|
11,453,496
|
|
|
|
12,191,622
|
|
Emergency medical products
|
|
|
1,958,372
|
|
|
|
1,651,536
|
|
|
|
5,421,769
|
|
|
|
4,792,916
|
|
|
|
$
|
8,097,215
|
|
|
$
|
8,316,027
|
|
|
$
|
23,382,636
|
|
|
$
|
23,691,922
|
|
3.
Inventories
Inventories are comprised as follows:
|
|
March 31, 2020
|
|
|
June 30, 2019
|
|
Work-in progress
|
|
$
|
458,675
|
|
|
$
|
288,828
|
|
Component parts
|
|
|
6,694,041
|
|
|
|
7,151,228
|
|
Finished goods
|
|
|
1,448,757
|
|
|
|
1,693,974
|
|
Reserve for obsolete and excess
|
|
|
|
|
|
|
|
|
inventories
|
|
|
(1,780,262
|
)
|
|
|
(1,800,935
|
)
|
|
|
$
|
6,821,211
|
|
|
$
|
7,333,095
|
|
4. Earnings per share
Basic earnings per
share are based on the weighted average number of shares of all common stock outstanding during the period. Diluted earnings per
share are based on the sum of the weighted average number of shares of common stock and common stock equivalents outstanding during
the period. The number of basic and diluted shares outstanding for the three and nine months ended March 31, 2020 and 2019 were
4,013,537.
5. Commitments and Contingencies
Legal Claims
The Company is subject
to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its
business activities. The Company 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
As more fully described in Note 1, the Company
has filed a Citizen Participation Plan with the New York Department of Environmental Conservation under its Brownfield Cleanup
Program 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. Pursuant to
the plan, the Company will conduct, at its expense, investigation and remediation at the site.
The Company’s best estimate
of the expected cost to remediate the site is $0.9 million. This amount was recorded as an expense in the three months ended
December 31, 2019 and is reflected in other accrued liabilities and selling, general and administrative expenses in the Company’s
financial statements. As of March 31, 2020, the Company has paid approximately $79,000 in remediation expenses which have
been charged to the initial reserve.
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.
6. Financing
The Company is party
to a Loan and Security Agreement with North Mill Capital, LLC (“North Mill”), as successor in interest to Summit Financial
Resources, L.P., dated effective February 27, 2017, as amended April 16, 2018 and April 24, 2019 (as amended, the “Credit
Agreement”). Pursuant to the Credit Agreement, the Company obtained a secured revolving credit facility (the “Credit
Facility”). The Company’s obligations under the Credit Facility are secured by all of the Company’s personal
property, both tangible and intangible, pursuant to the terms and subject to the conditions set forth in the Credit Agreement.
Availability of funds under the Credit Agreement is based on the Company’s accounts receivable but will not exceed $2,000,000.
At March 31, 2020 availability under the agreement was $2.0 million.
The Credit Facility
will be available, subject to its terms, on a revolving basis until it expires on February 27, 2021, at which time all amounts
outstanding under the Credit Facility will be due and payable. Advances will bear interest at a rate equal to 2.00% in excess of
the prime rate as reported in the Wall Street Journal. Interest is computed based on the actual number of days elapsed over a year
of 360 days. In addition to interest, the Credit facility requires that the Company pay the lender a monthly administration fee
in an amount equal to forty-seven hundredths percent (0.47%) of the average outstanding daily principal amount of loan advances
for each calendar month, or portion thereof.
Regardless of the
amount borrowed under the Credit Facility, the Company will pay a minimum amount of .25% (25 basis points) per month on the maximum
availability ($5,000 per month). In the event the Company prepays or terminates the Credit Facility prior to February 27, 2021,
the Company will be obligated to pay an amount equal to the minimum monthly payment multiplied by the number of months remaining
between February 27, 2021 and the date of such prepayment or termination.
Under the Credit Agreement,
advances are generally subject to customary borrowing conditions and to North Mill’s sole discretion to fund the advances.
The Credit Agreement also contains covenants with which the Company must comply during the term of the Credit Facility. Among other
things, such covenants require the Company to maintain insurance on the collateral, operate in the ordinary course and not engage
in a change of control, dissolve or wind up the Company.
The Credit Agreement
also contains certain events of default including, without limitation: the failure to make payments when due; the material breach
of representations or warranties contained in the Credit Agreement or other loan documents; cross-default with other indebtedness
of the Company; the entry of judgments or fines that may have a material adverse effect on the Company; failure to comply with
the observance or performance of covenants contained in the Credit Agreement or other loan documents; insolvency of the Company,
appointment of a receiver, commencement of bankruptcy or other insolvency proceedings; dissolution of the Company; the attachment
of any state or federal tax lien; attachment or levy upon or seizure of the Company’s property; or any change in the Company’s
condition that may have a material adverse effect. After an event of default, and upon the continuation thereof, the principal
amount of all loans made under the Credit Facility would bear interest at a rate per annum equal to 20.00% above the otherwise
applicable interest rate (provided, that the interest rate may not exceed the highest rate permissible under law), and would have
the option to accelerate maturity and payment of the Company’s obligations under the Credit Facility.
At March 31, 2020, the Company had no indebtedness.
The prime rate as reported in the Wall Street Journal was 3.25% on March 31, 2020.
The Company was in
compliance with all of the covenants associated with the Credit Facility at March 31, 2020.
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, 2020 the Company recorded the tax benefit of losses incurred in the amount of approximately $82,000 and $623,000, 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. Due to the reduction in the cumulative to date loss occurring in the three months ended March 31, 2019, the
Company recorded a provision for income taxes of approximately $100,000 along with a reduction in the valuation allowance for a
like amount. For the nine months ended March 31, 2019 the Company recorded the tax benefit of cumulative losses incurred to date
in the amount of approximately $406,000. 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. The total valuation allowance recorded by the Company as of March 31, 2020 and
2019 was approximately $3,348,000 and $2,606,000, 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.
8. Subsequent Events
COVID-19
On January 30, 2020
the World Health Organization (“WHO’) announced a global health emergency because of a new strain of coronavirus originating
in Wuhan China and the risks to the international community as the virus spreads globally beyond its point of origin. In March
2020 the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The
full impact of the COVID-19 outbreak continues to evolve as the date of this report. As such, it is uncertain as the full magnitude
that the pandemic will have on the Company’s financial condition, liquidity, operations, suppliers, industry and workforce.
Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate
the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity. The Company is dependent
on its workforce to deliver its products. As an essential supplier under state and local shelter in-place orders, the Company has
continued to operate through the date of this report. However, required social distancing directives and additional shelter in-place
directives could impact the Company’s ability to deploy its workforce. Disruptions to the supply chain may lead to a delayed
receipt by the Company of necessary raw materials and component inventory. The Company cannot estimate the length or gravity
of the impact of the COVID-9 outbreak on the Company’s results of future operations, financial position, or liquidity.
CARES
Act Loan
On
April 22, 2020, the Company entered into a loan agreement (the “SBA Loan”)
with Jefferson Bank and Trust Company under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”) administered by the U.S. Small Business Administration (the “SBA”). The Company received total
proceeds of $2.375 million from the SBA Loan. In accordance with the requirements of the CARES Act, the Company will
use proceeds from the SBA Loan for payroll costs and other permitted uses. The SBA Loan is scheduled to mature on April
13, 2022 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by the U.S.
Small Business Administration under the CARES Act.
All
or a portion of the SBA Loan may be forgiven by the SBA upon application by the Company beginning 60 days but not later than 120
days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act, loan
forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered
utilities during the eight week period beginning on the loan origination date, subject to regulations and guidance provided by
the United States Treasury. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess
of $100,000, prorated annually. Not more than 25% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if
full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by
more than 25%. In the event the SBA Loan, or any portion thereof, is forgiven pursuant to the CARES Act, the amount forgiven is
applied to outstanding principal. The Company intends to seek forgiveness of the SBA Loan to the maximum extent permitted but cannot
guarantee whether or to what extent such forgiveness will be granted.
Payments
of unforgiven principal and interest are deferred until November 2020, at which point the Company is required to repay such amounts
in 18 equal monthly payments. The SBA Loan is evidenced by a promissory note, which contains customary events of default relating
to, among other things, payment defaults and breaches of representations and warranties. The SBA Loan may be prepaid by the Company
at any time prior to maturity with no prepayment penalties.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
COVID-19 Outbreak
On January 30, 2020
the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating
in Wuhan China and the risks to the international community as the virus spreads globally beyond its point of origin. In March
2020 the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
As discussed in
more detail in this Item 2, the Company has seen an unprecedented increase in demand and orders for its AHP300 ventilators,
EPV200 ventilators, other respiratory care products, and other emergency medical devices. The Company has made capital
investments, added employees, and increased inventory purchases in order to increase production of these ventilators and
other products critical to the care of COVID-19 patients.
The Company faces
supply chain challenges as demand for components critical for the production of these products has spiked as all
manufacturers of ventilators and other critical medical equipment seek to increase production. The Company cannot be certain
that it will be able to obtain the needed components in a timely fashion. In addition, while the Company has not yet seen
material price increases for its raw materials or necessary components, such increases are possible.
At the same time, the
COVID-19 pandemic could decrease demand for other products as hospitals reduce “non-essential procedures.”
The economic effects on hospitals and providers could negatively impact the market for the Company’s construction products if hospitals cut back on construction and capital improvements. The duration and extent of this decreased demand is uncertain and depends on decisions by government health authorities, hospitals
and providers in responding to and mitigating the COVID-19 outbreak.
Results for the quarter
ended March 31, 2020 only partially reflects the impacts discussed above. The full economic impact of the COVID-19 pandemic continues
to evolve as the date of this report. As such, the Company cannot predict with certainty the full magnitude that the pandemic will
have on the Company’s financial condition, liquidity, operations, suppliers, industry and workforce. Please see Part II,
Item 1A, Risk Factors for more information.
Three months ended March 31, 2020 compared to three months
ended March 31, 2019
Allied had net sales
of $8.1 million for the three months ended March 31, 2020, down $0.2 million from net sales of $8.3 million in the prior year same
quarter. Domestic sales were unchanged while international sales, which represented 24.1% of third quarter sales, were down 10.7%
from the prior year same quarter.
Total orders for the Company’s products for the three
months ended March 31, 2020 of $17.8 million were $9.9 million or 125.3% higher than orders for the prior year same quarter of
$7.9 million. Domestic orders are up 81.8% over the prior year same quarter while international orders, which represented 43.4%
of third quarter orders, were 230.3% higher than orders for the prior year same quarter.
Almost all of the
increase in orders for the period was due to increased demand for the Company’s emergency products. In total, orders
for the AHP300 ventilator line for the three months ended March 31, 2020 were $7.4 million dollars, a $7.0 million increase
over orders for the prior year same quarter of $0.3 million. The increase in total orders for the AHP300 consisted of an
increase of $2.7 million in domestic orders and $4.3 million in international orders. Orders for the Company’s other
products for the quarter were $10.4 million, $2.8 million higher than orders for the prior year same quarter of $7.6 million.
These products include medical devices used in direct patient care, in an emergency or hospital setting, including suction
pumps, oxygen regulators, air compressors, nebulizers, demand valves, aspirators, and emergency use ventilators.
Gross profit for the
three months ended March 31, 2020 was $1.6 million, or 19.8% of net sales, compared to $1.6 million, or 19.3% of net sales, for
the three months ended March 31, 2019.
Selling, general and
administrative expenses for the three months ended March 31, 2020 and 2019 were $1.9 million.
Loss
from operations was $305,000 for the three months ended March 31, 2020 compared to loss from operations of $353,000 for
the three months ended March 31, 2019.
Other
income and expenses for the three months ended March 31, 2020 was an expense of $25,700 compared to income of $731,400 for
the three months ended March 31, 2019 which included approximately $750,000 of income realized by the Company as a result of the
settlement of 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. Interest expense for the three months
ended March 31, 2020 was $26,000 compared to interest expense of $19,000 for the three months ended March 31, 2019.
Allied
had a loss before benefit from income taxes in the third quarter of fiscal 2020 of $330,000 compared to income before provision
for income taxes in the third quarter of fiscal 2019 of $378,000. The Company’s tax provision net of valuation allowance
reflects a tax benefit of $0 for the three months ended March 31, 2020 and 2019. In the quarter ended March 31, 2020 the tax benefit
of losses in the amount of approximately $82,000 was fully offset by a valuation allowance of equivalent amount. Due
to the reduction in the cumulative to date loss occurring in the three months ended March 31, 2019, a tax provision in the amount
of $100,000 was recorded offset by a reduction in 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 third
quarter of fiscal 2020 was $330,000 or $0.08 per basic and diluted share compared to net income of $378,000 or $0.09 per basic
and diluted share for the third quarter of fiscal 2019. The weighted average number of common shares outstanding, used in the calculation
of basic and diluted earnings per share for the third quarters of fiscal 2020 and 2019 were 4,013,537.
Nine months ended March 31, 2020 compared to nine months
ended March 31, 2019
Allied had net sales
of $23.4 million for the nine months ended March 31, 2020, down $0.3 million, or 1.3% from net sales of $23.7 million in the prior
year same period. Domestic sales were down 2.7% from the prior year same period while international sales were up 2.9% from the
prior year same period. International business represented 25.8% of sales for the first nine months of fiscal 2020.
Total
orders for the Company’s products for the nine months ended March 31, 2020 of $33.2 million were $10.0 million or 43.1% higher
than orders for the prior year same period of $23.2 million. Domestic orders are up 27.3% from the prior year same period
while international orders, which represented 35.6% of orders for the first nine months of fiscal 2020, were 83.1% higher than
orders for the prior year same period. Changes in orders for specific products due to COVID-19 during the nine month period reflect the same patterns discussed for
the current quarter above.
Gross profit for the
nine months ended March 31, 2020 was $4.2 million, or 17.9% of net sales, compared to $3.6 million, or 15.2% of net sales, for
the nine months ended March 31, 2019. The $0.6 million increase in gross profit is mainly attributable to a $0.6 million decrease
in fringe benefits including medical benefits. The Company is self-insured for medical benefits and there is variation in the amount
of claims over time.
Selling, general and
administrative expenses for the nine months ended March 31, 2020 were $6.6 million compared to selling, general and administrative
expenses of $6.0 million for the nine months ended March 31, 2019. The increase is primarily due to the $0.9 million provision
for environmental cleanup costs at the Company’s facility in Stuyvesant Falls, New York. This increase was partially offset
by a $0.2 million decrease in personnel cost consisting of salary and fringe benefits.
Loss
from operations was $2.5 million for the nine months ended March 31, 2020 compared to loss from operations of $2.3 million
for the nine months ended March 31, 2019.
Other
income and expenses for the nine months ended March 31, 2020 was an expense of $51,500 compared to income of $705,500 for
the nine months ended March 31, 2019 which included approximately $750,000 of income realized by the Company as a result of the
settlement of 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. Interest expense for the nine months
ended March 31, 2020 was $51,500 compared to interest expense of $44,500 for the nine months ended March 31, 2019.
Allied
had a loss before benefit from income taxes in the first nine months of fiscal 2020 of $2.5 million compared to loss before
benefit from income taxes in the first nine months of fiscal 2019 of $1.6 million. The Company’s tax provision net
of valuation allowance reflects a tax benefit of $0 for the nine months ended March 31, 2020 and 2019. In the nine months ended
March 31, 2020 the tax benefit of losses in the amount of approximately $623,000 was fully offset by a valuation allowance of equivalent
amount. In the nine months ended March 31, 2019 the Company recorded the tax benefit of losses incurred in the amount
of approximately $406,000 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.
Net
loss for the nine months ended March 31, 2020 was $2.5 million or $0.62 per basic and diluted share compared to net loss of $1.6
million or $0.41 per basic and diluted share for the first nine months of fiscal 2019. The weighted average number of common shares
outstanding, used in the calculation of basic and diluted earnings per share for the first nine months of fiscal 2020 and 2019
was 4,013,537.
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 $5.3 million at March 31, 2020 compared to $7.4 million at June 30, 2019. Inventory decreased by $0.5 million,
Customer Deposits increased by $2.2 million and Other Accrued Liabilities increased by $0.7 million. During fiscal 2020, these
decreases in working capital were partially offset by a $1.0 million increase in Cash and cash equivalents and $0.4 million increase
in Accounts Receivable. Accounts Receivable was $3.6 million at March 31, 2020, an increase from $3.2 million at June 30, 2019.
Accounts Receivable as measured in days sales outstanding (“DSO”) was 43 DSO at March 31, 2020; an increase from 39
DSO at June 30, 2019. The Company does adjust product forecast, order quantities and safety stock based on changes in demand patterns
in order to manage inventory levels.
The Company will spend about $1.2 million
in capital expenditures as part of the ramp-up of our operation to produce additional ventilators. These expenditures are planned
for the fourth quarter of the current fiscal year.
Credit Arrangements
As of March 31, 2020,
the Company was party to a Loan and Security Agreement with North Mill Capital, LLC (“North Mill”), as successor in
interest to Summit Financial Resources, L.P., dated effective February 27, 2017, as amended April 16, 2018 and April 24, 2019 (as
amended, the “Credit Agreement”). Pursuant to the Credit Agreement, the Company obtained a secured revolving credit
facility (the “Credit Facility”). The Company’s obligations under the Credit Facility are secured by all of the
Company’s personal property, both tangible and intangible, pursuant to the terms and subject to the conditions set forth
in the Credit Agreement. Availability of funds under the Credit Agreement is based on the Company’s accounts receivable but
will not exceed $2,000,000. At March 31, 2020 availability under the agreement was $2.0 million. The Company expects that
it will use the Credit Facility to finance the Company’s operations in the short term.
The Credit Facility
will be available, subject to its terms, on a revolving basis until it expires on February 27, 2021, at which time all amounts
outstanding under the Credit Facility will be due and payable. Advances will bear interest at a rate equal to 2.00% in excess of
the prime rate as reported in the Wall Street Journal. Interest is computed based on the actual number of days elapsed over a year
of 360 days. In addition to interest, the Credit facility requires that the Company pay the lender a monthly administration fee
in an amount equal to forty-seven hundredths percent (0.47%) of the average outstanding daily principal amount of loan advances
for each calendar month, or portion thereof.
Regardless of the
amount borrowed under the Credit Facility, the Company will pay a minimum amount of .25% (25 basis points) per month on the maximum
availability ($5,000 per month). In the event the Company prepays or terminates the Credit Facility prior to February 27, 2021,
the Company will be obligated to pay an amount equal to the minimum monthly payment multiplied by the number of months remaining
between February 27, 2021 and the date of such prepayment or termination.
Under the Credit Agreement,
advances are generally subject to customary borrowing conditions and to North Mill’s sole discretion to fund the advances.
The Credit Agreement also contains covenants with which the Company must comply during the term of the Credit Facility. Among other
things, such covenants require the Company to maintain insurance on the collateral, operate in the ordinary course and not engage
in a change of control, dissolve or wind up the Company.
The Credit Agreement
also contains certain events of default including, without limitation: the failure to make payments when due; the material breach
of representations or warranties contained in the Credit Agreement or other loan documents; cross-default with other indebtedness
of the Company; the entry of judgments or fines that may have a material adverse effect on the Company; failure to comply with
the observance or performance of covenants contained in the Credit Agreement or other loan documents; insolvency of the Company,
appointment of a receiver, commencement of bankruptcy or other insolvency proceedings; dissolution of the Company; the attachment
of any state or federal tax lien; attachment or levy upon or seizure of the Company’s property; or any change in the Company’s
condition that may have a material adverse effect. After an event of default, and upon the continuation thereof, the principal
amount of all loans made under the Credit Facility would bear interest at a rate per annum equal to 20.00% above the otherwise
applicable interest rate (provided, that the interest rate may not exceed the highest rate permissible under law), and North Mill
would have the option to accelerate maturity and payment of the Company’s obligations under the Credit Facility.
On
April 22, 2020, the Company entered into a loan agreement (the “SBA Loan”)
with Jefferson Bank and Trust Company under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”) administered by the U.S. Small Business Administration (the “SBA”). The Company received total
proceeds of $2.375 million from the SBA Loan. In accordance with the requirements of the CARES Act, the Company will
use proceeds from the SBA Loan for payroll costs and other permitted uses. The SBA Loan is scheduled to mature on April
13, 2022 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by the U.S.
Small Business Administration under the CARES Act.
All
or a portion of the SBA Loan may be forgiven by the SBA upon application by the Company beginning 60 days but not later than 120
days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act, loan
forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered
utilities during the eight week period beginning on the loan origination date, subject to regulations and guidance provided by
the United States Treasury. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess
of $100,000, prorated annually. Not more than 25% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if
full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by
more than 25%. In the event the SBA Loan, or any portion thereof, is forgiven pursuant to the CARES Act, the amount forgiven is
applied to outstanding principal. The Company intends to seek forgiveness of the SBA Loan to the maximum extent permitted but cannot
guarantee whether or to what extent such forgiveness will be granted.
Payments
of unforgiven principal and interest are deferred until November 2020, at which point the Company is required to repay such amounts
in 18 equal monthly payments. The SBA Loan is evidenced by a promissory note, which contains customary events of default relating
to, among other things, payment defaults and breaches of representations and warranties. The SBA Loan may be prepaid by the Company
at any time prior to maturity with no prepayment penalties.
At March 31, 2020,
the Company had no indebtedness, including short-term debt, long term debt and an immaterial amount of capital leases. The prime
rate as reported in the Wall Street Journal was 3.25% on March 31, 2020.
Further reductions
in availability, either due to continued losses, or changes by North Mill to the Company’s borrowing base, could have a material
adverse impact on our liquidity and ability to meet our operating requirements. In such a case, the Company would need to access
additional sources of liquidity if it does not return to profitability. If the Company were unable to reach such an agreement with
North Mill to increase availability, the Company could also attempt to negotiate a larger credit facility with another lender,
but the Company would be obligated to pay the above described pre-payment penalty to North Mill. 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. The Company
was in compliance with all of the covenants associated with the Credit Facility at March 31, 2020.
Further losses or negative
cash flow, including as a result of expenses connected with (i) the investigation and possible environmental remediation of the
Stuyvesant Falls facility and (ii) the Company’s response to the COVID-19 outbreak, could result in the Company requiring
additional capital or liquidity, which may not be available or may only be available on economically adverse terms. To the extent
the Company is able to satisfy the increased orders for its respiratory care products, the increased revenue from such sales should
provide increased liquidity. In addition, the Company could consider additional borrowings to the extent available, including without
limitation through the sale leaseback of its corporate headquarters.
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, 2019.
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.