UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
FORM 10-Q☒Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended December 31, 20172021
☐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
ALLIED HEALTHCARE PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
1720 Sublette Avenue, St. Louis, Missouri63110 (Address of principal executive offices, including zip code)
(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 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 ◻ 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.
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 Securities registered pursuant to Section 12(b) of the Act:
The number of shares of common stock outstanding at January 31, INDEX
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 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ALLIED HEALTHCARE PRODUCTS, INC. STATEMENT OF OPERATIONS (UNAUDITED) Three months ended Six months ended December 31, December 31, 2021 2020 2021 2020 Net sales $ 6,807,339 $ 11,103,528 $ 14,164,932 $ 21,293,076 Cost of sales 6,100,821 8,491,333 12,521,419 16,807,070 Gross profit 706,518 2,612,195 1,643,513 4,486,006 Selling, general and administrative expenses 1,836,094 1,878,307 3,725,226 3,887,405 Income (loss) from operations (1,129,576) 733,888 (2,081,713) 598,601 Other (income) expenses: Interest expense 42,042 33,452 73,775 51,703 Interest income (8) (42) (13) (199) Other, net (9,648) — (9,508) — 32,386 33,410 64,254 51,504 Income (loss) before income taxes (1,161,962) 700,478 (2,145,967) 547,097 Provision for income taxes — — — — Net income (loss) $ (1,161,962) $ 700,478 $ (2,145,967) $ 547,097 Basic income (loss) per share $ (0.29) $ 0.17 $ (0.53) $ 0.14 Diluted income (loss) per share $ (0.29) $ 0.17 $ (0.53) $ 0.14 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 4,024,952 4,013,537 4,027,788 See accompanying Notes to Financial Statements. 3 ALLIED HEALTHCARE PRODUCTS, INC. BALANCE SHEET (Unaudited) December 31, June 30, 2021 2021 Current assets: Cash and cash equivalents $ 183,043 $ 726,223 Accounts receivable, net of allowances of $170,000 2,391,007 2,929,751 Inventories, net 8,763,706 9,450,731 Income tax receivable 18,173 9,800 Other current assets 472,061 268,136 Total current assets 11,827,990 13,384,641 Property, plant and equipment, net 3,499,945 3,727,384 Operating lease assets 10,760 13,078 Deferred income taxes 577,088 577,088 Total assets $ 15,915,783 $ 17,702,191 See accompanying Notes to Financial Statements. 4 ALLIED HEALTHCARE PRODUCTS, INC. (CONTINUED) (Unaudited) December 31, June 30, 2021 2021 Current liabilities: Current portion of operating lease liability $ 5,065 $ 4,777 Revolving credit facility 3,364,111 2,077,440 Accounts payable 1,356,556 1,898,747 Customer deposits 944,734 575,930 Other accrued liabilities 1,772,829 2,557,135 Total current liabilities 7,443,295 7,114,029 Long-term operating lease liability 5,695 8,301 Long-term environmental liability 24,000 — Commitments and contingencies Stockholders' equity: Preferred stock; $0.01 par value; 1,500,000 shares authorized; 0 shares issued and outstanding 0 0 Series A preferred stock; $0.01 par value; 200,000 shares authorized; 0 shares issued and outstanding 0 0 Common stock; $0.01 par value; 30,000,000 shares authorized; 5,213,902 shares issued at December 31, 2021 and June 30, 2021; 4,013,537 shares outstanding at December 31, 2021 and June 30, 2021 52,139 52,139 Additional paid-in capital 48,516,637 48,507,738 Accumulated deficit (19,145,195) (16,999,228) Less treasury stock, at cost; 1,200,365 shares at December 31, 2021 and June 30, 2021, respectively (20,980,788) (20,980,788) Total stockholders’ equity 8,442,793 10,579,861 Total liabilities and stockholders’ equity $ 15,915,783 $ 17,702,191 See accompanying Notes to Financial Statements. 5 ALLIED HEALTHCARE PRODUCTS, INC. STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY (UNAUDITED) Three Months Ended December 31, 2021 Additional Common Paid-in Accumulated Treasury Stock Capital Deficit Stock Total Balance at September 30, 2021 $ 52,139 $ 48,512,726 $ (17,983,233) $ (20,980,788) $ 9,600,844 Stock based compensation 0 3,911 0 0 3,911 Net loss 0 0 (1,161,962) 0 (1,161,962) Balance at December 31, 2021 $ 52,139 $ 48,516,637 $ (19,145,195) $ (20,980,788) $ 8,442,793 Three Months Ended December 31, 2020 Additional Common Paid-in Accumulated Treasury Stock Capital Deficit Stock Total Balance at September 30, 2020 $ 52,139 $ 48,494,261 $ (18,839,797) $ (20,980,788) $ 8,725,815 Stock based compensation 0 3,501 0 0 3,501 Net income 0 0 700,478 0 700,478 Balance at December 31, 2020 $ 52,139 $ 48,497,762 $ (18,139,319) $ (20,980,788) $ 9,429,794 Six Months Ended December 31, 2021 Additional Common Paid-in Accumulated Treasury Stock Capital Deficit Stock Total Balance at June 30, 2021 $ 52,139 $ 48,507,738 $ (16,999,228) $ (20,980,788) $ 10,579,861 Stock based compensation — 8,899 — — 8,899 Net loss — — (2,145,967) — (2,145,967) Balance at December 31, 2021 $ 52,139 $ 48,516,637 $ (19,145,195) $ (20,980,788) $ 8,442,793 Six Months Ended December 31, 2020 Additional Common Paid-in Accumulated Treasury Stock Capital Deficit Stock Total Balance at June 30, 2020 $ 52,139 $ 48,493,732 $ (18,686,416) $ (20,980,788) $ 8,878,667 Stock based compensation — 4,030 — — 4,030 Net income — — 547,097 — 547,097 Balance at December 31, 2020 $ 52,139 $ 48,497,762 $ (18,139,319) $ (20,980,788) $ 9,429,794 See accompanying Notes to Financial Statements. 6 ALLIED HEALTHCARE PRODUCTS, INC. STATEMENT OF CASH FLOWS (UNAUDITED) Six months ended December 31, 2021 2020 Cash flows from operating activities: Net income (loss) $ (2,145,967) $ 547,097 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 227,439 320,825 Stock based compensation 8,899 4,030 Provision for doubtful accounts and sales returns and allowances 1,071 16,397 Changes in operating assets and liabilities: Accounts receivable 537,673 (609,609) Inventories 687,025 (1,291,566) Income tax receivable (8,373) (9,120) Other current assets (203,925) (101,181) Accounts payable (542,191) 120,268 Customer deposits 368,804 (2,176,161) Other accrued liabilities (760,306) (234,729) Net cash used in operating activities (1,829,851) (3,413,749) Cash flows from investing activities: Capital expenditures — (167,163) Net cash used in investing activities — (167,163) Cash flows from financing activities: Borrowings under revolving credit agreement 16,310,049 21,098,996 Payments under revolving credit agreement (15,023,378) (18,989,656) Net cash provided by financing activities 1,286,671 2,109,340 Net increase (decrease) in cash and cash equivalents (543,180) (1,471,572) Cash and cash equivalents at beginning of period 726,223 2,600,083 Cash and cash equivalents at end of period $ 183,043 $ 1,128,511 See accompanying Notes to Financial Statements. 7 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, 2021. Fair Value of Financial Instruments The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and Recently Adopted Accounting Pronouncements The Company adopted ASU 2016-13: Financial Instruments - Credit Losses as of the beginning of the fiscal year 2022. This update introduces the current expected credit loss (CECL) model, which requires an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity is required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. The adoption of this standard did not have a material impact on the Company’s financial statements. In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 was effective for the Company beginning in the first quarter of 2022. The adoption of this standard did not have a material impact on the Company’s financial statements and related disclosures. 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 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 December 31, 2021, 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. 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. 8 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 5) and faces several challenges, related to COVID-19, which are currently negatively impacting the Company. The Company has experienced increasing cost for both raw materials and components. The Company plans, where possible, to increase prices on certain products to maintain margins at acceptable levels offsetting these cost increases. 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. 2. 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 1 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. 9 The Company operates in 1 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 Six months ended December 31, December 31, 2021 2020 2021 2020 Domestic United States $ 5,125,047 $ 6,797,291 $ 10,996,383 $ 12,900,780 Europe 111,763 2,078,512 183,824 3,447,073 Canada 139,230 512,592 295,020 880,533 Latin America 546,012 632,526 1,002,935 1,795,794 Middle East 136,166 511,256 272,551 1,017,982 Far East 749,121 571,086 1,414,219 1,249,683 Other International — 265 — 1,231 $ 6,807,339 $ 11,103,528 $ 14,164,932 $ 21,293,076 Sales by Product Three months ended Six months ended December 31, December 31, 2021 2020 2021 2020 Respiratory care products $ 2,049,817 $ 1,838,325 $ 3,933,528 $ 3,986,664 Medical gas equipment 3,251,096 4,354,549 6,959,634 8,313,070 Emergency medical products 1,506,426 4,910,654 3,271,770 8,993,342 $ 6,807,339 $ 11,103,528 $ 14,164,932 $ 21,293,076 3. Inventories Inventories are comprised as follows: December 31, 2021 June 30, 2021 $ 697,605 $ 829,962 8,781,839 8,994,457 1,458,411 1,800,461 Reserve for obsolete and excess inventories (2,174,149) (2,174,149) $ 8,763,706 $ 9,450,731 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 ofbasic 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 10 Environmental Remediation On January 30, 2020, the Company filed a Citizen Participation Plan with The Company’s best estimate of the expected cost to remediate the site is $1.1 million. This amount was recorded as an expense in Liability for future environmental expenditures Balance - July 1, 2021 $ 976,720 Charges to income 0 Remedial and investigatory spending 319,162 Balance - December 31 , 2021 $ 657,558 December 31, 2021 June 30, 2021 Reflected in the Balance sheet as: Current, included in Other Liabilities $ 633,558 $ 976,720 Long-term environmental 24,000 — Total liability $ 657,558 $ 976,720 Employment Contract 6. Financing North Mill Loan 11 The Credit Facility will be available, subject to its terms, on a revolving basis until it expires on February 27, 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 ($ such prepayment or termination. Under the Credit Agreement, advances are generally subject to customary borrowing conditions and to 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 The Company was in compliance with all of the covenants associated with the Credit Facility at December 31, 2021. At December 31, The Company accounts for income taxes under ASC Topic 740: “Income Taxes.” Under ASC 740, the deferred tax provision is determined using the liability method, whereby deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and income tax bases of assets and liabilities using presently enacted tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In the three and six months ended December 31, 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 three months ended December 31, 2020. The deductibility of these expenses created a tax loss for the three and six months ended December 31, 2020. For the three and six months ended December 31, 12 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Covid-19 Outbreak Due to the COVID-19 pandemic, in the last quarter of 2020, the Company saw an unprecedented increase in demand and orders for its AHP300 ventilators, EPV200 ventilators, other respiratory care products, and other emergency medical devices. The Company initially 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 believes that the pandemic did result in increased sales in fiscal 2021, however, this increase in demand ended in fiscal 2021 and demand has since been negatively impacted by the development of vaccines and alternative treatment protocols. As a result, demand for the Company’s ventilator and respiratory products has been reduced from the peak of the pandemic. Any increase in COVID-19 hospitalizations could decrease future demand for other products as hospitals reduce “non-essential procedures” as occurred at various times during fiscal years 2020 and 2021. The economic effects on hospitals and providers have negatively impacted the market for the Company’s construction products as 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 future COVID-19 outbreaks. The pandemic is partially responsible for broad economic changes which have impacted the Company in fiscal 2021 and continue to impact the Company as the Company begins fiscal 2022. Inflation has raised the cost of products and services the Company uses to provide its products. In fiscal year 2022, the Company estimates that inflationary price increases raised product cost by approximately $650,000. While the Federal Reserve believes some of the inflation in the economy is transitory in nature, the Company believes inflation will continue to increase cost in fiscal 2022. Since the onset of the pandemic the Company has found it harder to hire and retain hourly workers. This has led to the requirement for additional overtime for existing employees, inefficiency, and contributed to delays in shipments. Travel restrictions have led to less travel spending. However, the restrictions have limited our interactions with customers and end-users. The Company believes these personal interactions are vital to communicate the advantages of our products and support orders and sales. The Company is also experiencing difficulty in obtaining raw materials and components as well as production difficulties. Many of the production challenges can be attributed to difficulty retaining and hiring employees and increased worker absences due to COVID-19. As a result of these difficulties, shipments have been lower than the Company would otherwise expect. The supply chain issues and staffing issues have reduced Sales, Net Income and Liquidity. The Company continues its efforts to resolve these issues through attempts at additional hiring, expediting of components, and a search for alternative vendors, although there is no assurance it will be successful in doing so. 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 of our Annual Report on Form 10-K for the year ended June 30, 2021 and the supplement provided in Part II, Item 1A, Risk Factors in this Report for more information. Three months ended December 31, 2020 Allied had net sales of 13 Orders for the Company’s products for the three months ended December 31, introduction of alternative treatments. Gross profit for the three months ended December 31, COVID-19 pandemic. Selling, general and administrative expenses for the three months ended December 31, legal fees. Loss from operations was 2020. Allied had a Net loss for the second quarter of fiscal Six months ended December 31, 2020 Allied had net sales of 2022. The $7.1 million decrease in sales includes a $3.7 million dollar decrease in International AHP300 sales, a $0.9 million dollar decrease in Domestic AHP300 ventilator sales, and a $2.5 million decrease in other Emergency and Medical Gas equipment. In the six months ended December 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 six months ended December 31, 14 Gross profit for the six months ended December 31, 2020. Gross profit was unfavorably impacted by the decrease in sales volume. Manufacturing overhead spending decreased from the prior year by approximately $1.1 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. Selling, general and administrative expenses for the six months ended December 31, Loss from operations was 2020. Allied had a loss before To the extent the Company has taxable income, the taxable income will be offset by net operating loss carryforwards. Net loss for the six months ended December 31, Liquidity and Capital Resources The below. The Company’s working capital was North Mill Loan 15 Availability of funds under the Credit Agreement Accounts Receivable is dependent on sales revenue. Decreased sales revenue has resulted in decreased Accounts Receivable available for loan collateral. At December 31, 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 The Credit Facility will be available, subject to its terms, on a revolving basis until it expires on February 27, 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). In the event the Company prepays or terminates the Credit Facility prior to February 27, 2022, 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, 2022 and the date of such prepayment or termination. Under the Credit Agreement, advances are generally subject to customary borrowing conditions and to 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 Credit Facility. The Company was in compliance with all of the covenants associated with the Credit Facility at December 31, 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. At December 31, 2021 the Company had $3.4 million indebtedness, including lease obligations, short-term debt, and long term debt. The prime rate as reported in the Wall Street Journal was 3.25% on December 31, 2021. 16 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, 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. Item 3.Quantitative and Qualitative Disclosure about Market Risk At December 31, The Company had no holdings of derivative financial or commodity instruments at December 31, Item 4.Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of those controls and procedures performed as of December 31, Changes in internal control over financial reporting There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, Part II.OTHER INFORMATION Item 1. Legal Proceedings. 17 The Company’s best estimate of the expected cost to remediate the site is $1.1 million. This amount was recorded as an expense in Item 1A. Risk Factors. In connection with information set forth in this Quarterly Report on Form 10-Q, readers should also consider the risk factors discussed under Item 1A. Risk Factors, in Part I of our Form 10-K for the fiscal year ended June 30, 2021, together with the supplement below. The risks set forth in our fiscal year 2021 Form 10-K, as supplemented in this Item 1A, Risk Factors, could materially and adversely affect our business, financial condition, and results of operations. Our declining sales and shipments are negatively impacting our ability to borrow under our line of credit. If that trend continues, we may have to find additional sources of financing. Even if alternative sources of financing are available, our long term success requires that we increase sales and become profitable. The Company’s losses from operations force it to rely on the Credit Agreement to meet short term liquidity needs. Availability of funds under the Credit Agreement is based on the Company’s eligible accounts receivable and eligible inventory not to exceed $4,000,000. Decreased sales revenue has resulted in decreased Accounts Receivable available for loan collateral. At December 31, 2021 the Company had Accounts Receivable of $1,801,602 included as eligible collateral in determining total available borrowing advances under the loan agreement. The Company may also draw advances equal up to 25% of eligible inventory, limited by the lesser of the calculated eligible inventory, two million dollars ($2,000,000), or the amount advanced from eligible Accounts Receivable. At December 31, 2021 borrowing under the agreement was $3,364,111, maximum available borrowing based on eligible collateral was $3,603,204, resulting in availability of $239,093. If the Company’s revenue continues to decline, availability under the Credit Agreement will decrease, in which case the Company may need to negotiate with its lender, North Mill, to increase availability under the line of credit. If the Company were unable to reach such an agreement with the lender, the Company could attempt to negotiate a larger credit facility 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. If this were to happen, 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. 18 Item 6.Exhibits (a) Exhibits: 10.6.4 31.1 31.2 32.1 Sarbanes-Oxley Certification of Chief Executive Officer (furnished herewith)* 32.2 Sarbanes-Oxley Certification of Chief Financial Officer (furnished herewith)* 101.INS Inline XBRL Instance Document** 101.SCH Inline XBRL Taxonomy Extension Schema Document** 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document** 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document** 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document** 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document** 104 Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit) *Notwithstanding any incorporation of this Quarterly Report on Form 10-Q in any other filing by the Registrant, Exhibits furnished herewith and designated with an asterisk (*) shall not be deemed incorporated by reference to any other filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 unless specifically otherwise set forth therein. **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. 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLIED HEALTHCARE PRODUCTS, INC. /s/ Daniel C. Dunn Daniel C. Dunn Chief Financial Officer Date: February 14, 20 |