EDGAR 10-K Filing

Company CIK: 874710
Filing Year: 2021
Filename: 874710_10-K_2021_0001104659-21-120284.json

---

ITEM 1. BUSINESS
Item 1. Business
General
Allied Healthcare Products, Inc. (“Allied”, the “Company”, “we”, or “us”) manufactures a variety of respiratory products used in the health care industry in a wide range of hospital and alternate site settings, including sub-acute care facilities, home health care and emergency medical care. The Company’s product lines include respiratory care products, medical gas equipment and emergency medical products.
The Company’s products are marketed under well-recognized and respected brand names to hospitals, hospital equipment dealers, hospital construction contractors, home health care dealers, emergency medical products dealers and others. Allied’s product lines include:
Respiratory Care Products
· respiratory care/anesthesia products
· home respiratory care products
Medical Gas Equipment
· medical gas system construction products
· medical gas system regulation devices
· disposable oxygen and specialty gas cylinders
· portable suction equipment
Emergency Medical Products
· respiratory/resuscitation products
· trauma and patient handling products
The Company’s principal executive offices are located at 1720 Sublette Avenue, St. Louis, Missouri 63110, and its telephone number is (314) 771-2400.
Markets and Products
In fiscal 2021, respiratory care products, medical gas equipment and emergency medical products represented approximately 22%, 44% and 34%, respectively, of the Company’s net sales. In comparison, in fiscal 2020, respiratory care products, medical gas equipment and emergency medical products represented approximately 27%, 48%, and 25%, respectively, of the Company’s net sales. The Company operates in a single industry segment and its principal products are described in the following table:
Product
Description
Principal
Brand Names
Primary Users
Respiratory Care Products
Respiratory Care/Anesthesia Products
Large volume compressors; ventilator calibrators; humidifiers and mist tents; and carbon dioxide absorbent
Timeter®; Carbolime®;
Litholyme®
Hospitals and sub-acute facilities
Home Respiratory Care Products
O2 cylinders; pressure regulators; nebulizers; portable large volume compressors; portable suction equipment and disposable respiratory products
Timeter®;
B&F®;
Schuco®
Patients at home
Medical Gas Equipment
Construction Products
In-wall medical gas system components; central station pumps and compressors and headwalls
Chemetron®; Oxequip®
Hospitals and sub-acute facilities
Regulation Devices
Flowmeters; vacuum regulators; pressure regulators and related products
Chemetron®; Oxequip®; Timeter®
Hospitals and sub-acute facilities
Disposable Cylinders
Disposable oxygen and gas cylinders
Lif-O-Gen®
First aid providers and specialty gas distributors
Suction Equipment
Portable suction equipment and disposable suction canisters
Gomco®;
Allied;
Schuco
Hospitals, sub-acute facilities and homecare products
Emergency Medical Products
Respiratory/Resuscitation
Demand resuscitation valves; bag mask resuscitators; emergency transport ventilators, oxygen regulators, SurgeX - surge suppressing post valve, mass casualty ventilation line, and the AHP300 Ventilator
LSP; Omni-Tech®; Allied
Emergency service providers
Trauma and Patient Handling Products
Spine immobilization products; pneumatic anti-shock garments, trauma burn kits and Xtra backboards
LSP
Emergency service providers
Respiratory Care Products
Market. Respiratory care products are used in the treatment of acute and chronic respiratory disorders such as asthma, emphysema, bronchitis and pneumonia. Respiratory care products are used in both hospitals and alternate care settings. Sales of respiratory care products are made through distribution channels focusing on hospitals and other sub-acute facilities. Sales of home respiratory care products are made through durable medical equipment dealers through telemarketing, and by contract sales with national chains.
Respiratory Care/Anesthesia Products. The Company manufactures and sells a broad range of products for use in respiratory care and anesthesia delivery, including carbon dioxide absorbents. These products include large volume air compressors, calibration equipment, humidifiers, croup tents, equipment dryers and a complete line of respiratory disposable products such as oxygen tubing, facemasks, cannulas and ventilator circuits.
Home Respiratory Care Products. Allied’s broad line of home respiratory care products include aluminum oxygen cylinders, oxygen regulators, pneumatic nebulizers, portable suction equipment and a full line of respiratory disposable products.
Medical Gas Equipment
Market. The market for medical gas equipment consists of hospitals, alternate care settings and surgery centers. The medical gas equipment group is broken down into three separate categories: construction products, regulation devices and suction equipment, and disposable cylinders.
Construction Products. Allied’s medical gas system construction products consist of in-wall medical system components, central station pumps and compressors, and headwalls. These products are typically installed during construction or renovation of a health care facility and are built in as an integral part of the facility’s physical plant. Typically, the contractor for the facility’s construction or renovation purchases medical gas system components from manufacturers and ensures that the design specifications of the health care facility are met.
Allied’s in-wall components, including outlets, manifolds, alarms, ceiling columns and zone valves, serve a fundamental role in medical gas delivery systems.
Central station pumps and compressors are individually engineered systems consisting of compressors, reservoirs, valves and controls designed to drive a hospital’s medical gas and suction systems. Each system is designed specifically for a given hospital or facility, which purchases pumps and compressors from suppliers. The Company’s sales of pumps and compressors are driven, in large part, by its share of the in-wall components market.
The Company’s construction products are sold primarily to hospitals, alternate care settings and hospital construction contractors. The Company believes that these products are installed in more than three thousand hospitals in the United States. The Company believes that most hospitals and sub-acute care facility construction spending is for expansion or renovation of existing facilities. Many hospital systems and individual hospitals undertake major renovations to upgrade their operations to improve the quality of care they provide, reduce costs and attract patients and personnel.
Regulation Devices and Suction Equipment. The Company’s medical gas system regulation products include flowmeters, vacuum regulators and pressure regulators, as well as related adapters, fittings and hoses which measure, regulate, monitor and help transfer medical gases from walled piping or equipment to patients in hospital rooms, operating theaters or intensive care areas.
Portable suction equipment is typically used when in-wall suction is not available or when medical protocol specifically requires portable suction. The Company also manufactures disposable suction canisters, which are clear containers used to collect the fluids suctioned by in-wall or portable suction systems. The containers have volume calibrations, which allow the medical practitioner to measure the volume of fluids suctioned.
The market for regulation devices and suction equipment includes hospital and sub-acute care facilities. Sales of these products are made through the same distribution channel as our respiratory care products. The Company believes that it holds a significant share of the U.S. market in both regulation devices and suction equipment.
Disposable Cylinders. Disposable oxygen cylinders are designed to provide oxygen for short periods of time in emergency situations. Since they are not subjected to the same pressurization as standard containers, they are much lighter and less expensive than standard gas cylinders. The Company markets filled disposable oxygen cylinders through industrial safety distributors and similar customers, principally to first aid providers, restaurants, industrial plants and other customers that require oxygen for infrequent emergencies.
Emergency Medical Products
Market. Emergency medical products are used in the treatment of trauma-induced injuries. The Company’s emergency medical products provide patient resuscitation or ventilation during cardiopulmonary resuscitation or respiratory distress as well as immobilization and treatment for burns. The Company expects that additional countries will develop trauma care systems in the future, although no assurance can be given that such systems will develop or that they will have a favorable impact on the Company. Sales of emergency medical products are made through specialized emergency medical products distributors to ambulance companies, fire departments and emergency medical systems volunteer organizations.
The emergency medical products are broken down into two categories: respiratory/resuscitator products and trauma patient handling products.
Respiratory/Resuscitation Products. The Company’s respiratory/resuscitation products include demand resuscitation valves, portable resuscitation systems, bag masks and related products, emergency transport ventilators, precision oxygen regulators, minilators, multilators and humidifiers.
Demand resuscitation valves are designed to provide 100% oxygen to breathing or non-breathing patients. In an emergency situation they can be used with a mask or tracheotomy tubes and operate from a standard regulated oxygen system. The Company’s portable resuscitation systems provide fast, simple and effective means of ventilating a non-breathing patient during cardiopulmonary resuscitation and 100% oxygen to breathing patients on demand with minimal inspiratory effort. The Company also markets a full line of disposable and reusable bag mask resuscitators, which are available in a variety of adult and child-size configurations. Disposable mouth-to-mask resuscitation systems have the added advantage of reducing the risk of transmission of communicable diseases.
The Company’s autovent transport ventilator can meet a variety of needs in different applications ranging from typical emergency medical situations to more sophisticated air and ground transport. Each autovent is accompanied by a patient valve, which provides effective ventilation during cardiopulmonary resuscitation or respiratory distress. When administration of oxygen is required at the scene of a disaster, in military field hospitals or in a multiple-victim incident, Allied’s minilators and multilators are capable of providing oxygen to one or a large number of patients.
The Company’s transport and mass casualty ventilation line has been designed to meet the unique ventilation demands that affect everyday inter-hospital and intra-hospital transport scenarios, and amplify exponentially during a mass casualty event or pandemic. Our ventilators for transport and mass casualty are rugged, easy to operate, and capable of providing reliable ventilation even in unpredictable environments and conditions. Additionally, they are affordable to purchase and require little periodic maintenance, minimizing the cost of ownership over time.
To complement the family of respiratory/resuscitation products, the Company offers a full line of oxygen product accessories. This line of accessory products includes reusable aspirators, tru-fit masks, disposable cuffed masks and related accessories.
Trauma and Patient Handling Products. The Company’s trauma and patient handling products include spine immobilization products, pneumatic anti-shock garments and trauma burn kits. Spine immobilization products include a backboard that is designed for safe immobilization of injury victims and provides a durable and cost effective means of emergency patient transportation and extrication. The infant/pediatric immobilization board is durable and scaled for children. The half back extractor/rescue vest is useful for both suspected cervical/spinal injuries and for mountain and air rescues. The Company’s pneumatic anti-shock garments are used to treat victims experiencing hypovolemic shock. Allied’s trauma burn kits contain a comprehensive line of products for the treatment of trauma and burns.
Sales and Marketing
Allied sells its products primarily to hospitals, hospital equipment dealers, hospital construction contractors, home health care dealers, emergency medical products dealers and others. The Company maintains a sales force of 12 sales professionals, all of whom are full-time employees of the Company.
The sales force includes three domestic hospital, homecare and emergency specialists, four domestic construction specialists, and three international sales representatives. A total of two sales managers lead the sales groups.
The domestic hospital specialists are responsible for sales of all Allied products with the exception of construction products within their territory. Sales of hospital products are accomplished through respiratory care/anesthesia distributors for the regulation devices, suction equipment, respiratory care/anesthesia products and disposable cylinders. The domestic construction specialists are responsible for sales of all Allied construction products within their territory. Emergency products are principally sold to ambulance companies, fire departments and emergency medical systems volunteer organizations through specialized emergency medical products distributors.
Construction products are sold direct to hospital construction contractors and through distributors.
The Company’s international specialists sell all Allied products within their territory. Allied’s net sales to foreign markets totaled 33% of total net sales in fiscal 2021, 27% in 2020 and 25% in 2019. International sales are made through a network of dealers, agents and U.S. exporters who distribute the Company’s products throughout the world. Allied has market presence in Canada, Mexico, Central and South America, Europe, the Middle East and the Far East.
Manufacturing
Allied’s manufacturing processes include fabrication, electro-mechanical assembly operations, plastics manufacturing, and chemical processing with automated packaging. A significant part of Allied’s manufacturing operations involves electro-mechanical assembly of proprietary products and the Company is vertically integrated in most elements of metal machining and fabrication. Most of Allied’s hourly employees are involved in machining, metal fabrication, plastics manufacturing and product assembly.
Allied manufactures small metal components from bar stock in a machine shop, which includes automatic screw machines, horizontal lathes and drill presses and computer controlled machining centers. The Company makes larger metal components from sheet metal using computerized punch presses, brake presses and shears. In its plastics manufacturing processes, the Company utilizes both extrusion and injection molding. In its chemical process, the Company utilizes mixing, drying, and sizing equipment. The Company believes that its production facilities and equipment are in good condition and sufficient to meet planned increases in volume over the next few years and that the conditions in local labor markets should permit the implementation of additional shifts and days operated.
Research and Development
Allied Healthcare Products’ research and development group is responsible for the development of new products. This group is staffed with mechanical and electrical engineers.
During fiscal year 2021 the research and development group worked on developing a new product slated for release in fiscal 2022. It also supported the production of our ventilators.
Government Regulation
The Company’s products and its manufacturing activities are subject to extensive and rigorous government regulation by federal and state authorities in the United States and other countries. In the United States, medical devices for human use are subject to comprehensive review by the United States Food and Drug Administration (the “FDA”). The Federal Food, Drug, and Cosmetic Act (“FDC Act”), and other federal statutes and regulations, govern or influence the research, testing, manufacture, safety, labeling, storage, record keeping, approval, advertising and promotion of such products. Noncompliance with applicable requirements can result in warning letters, fines, recall or seizure of products, injunction, refusal to permit products to be imported into or exported out of the United States, refusal of the government to clear or approve marketing applications or to allow the Company to enter into government supply contracts, or withdrawal of previously approved marketing applications and criminal prosecution.
The Company is required to file a premarket notification in the form of a premarket approval (“PMA”) with the FDA before it begins marketing a new medical device that offers new technology that is currently not on the market. The Company also must file a premarket notification in the form of a 510(k) with the FDA before it begins marketing a new medical device that utilizes existing technology for devices that are currently on the market. The 510(k) submission process is also required when the Company makes a change or modifies an existing device in a manner that could significantly affect the device’s safety or effectiveness.
Compliance with the regulatory approval process in order to market a new or modified medical device can be uncertain, lengthy and, in some cases, expensive. There can be no assurance that necessary regulatory approvals will be obtained on a timely basis, or at all. Delays in receipt or failure to receive such approvals, the loss of previously received approvals, or failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company manufactures and distributes a broad spectrum of respiratory therapy equipment, emergency medical equipment and medical gas equipment. To date, all of the Company’s FDA clearances have been obtained through the 510(k) clearance process. These determinations are very fact specific and the FDA has stated that, initially, the manufacturer is best qualified to make these determinations, which should be based on adequate supporting data and documentation. The FDA, however, may disagree with a manufacturer’s determination not to file a 510(k) and require the submission of a new 510(k) notification for the changed or modified device. Where the FDA believes that the change or modification raises significant new questions of safety or effectiveness, the agency may require a manufacturer to cease distribution of the device pending clearance of a new 510(k) notification. Certain of the Company’s medical devices have been changed or modified subsequent to 510(k) marketing clearance of the original device by the FDA. Certain of the Company’s medical devices, which were first marketed prior to May 28, 1976, and therefore, grandfathered and exempt from the 510(k) notification process, also have been subsequently changed or modified. The Company believes that these changes or modifications do not significantly affect the devices’ safety or effectiveness or make a major change or modification in the devices’ intended uses and, accordingly, submission of new 510(k) notification to the FDA is not required. There can be no assurance, however, that the FDA would agree with the Company’s determinations.
In addition, commercial distribution in certain foreign countries is subject to additional regulatory requirements and receipt of approvals that vary widely from country to country. The Company believes it is in compliance with regulatory requirements of the countries in which it sells its products.
The Medical Device Reporting regulation requires that the Company provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of its devices, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. The Medical Device Tracking regulation requires the Company to adopt a method of device tracking of certain devices, such as ventilators, which are life-supporting or life-sustaining devices used outside of a device user facility, some of which are permanently implantable devices. The regulation requires that the method adopted by the Company will ensure that the tracked device can be traced from the device manufacturer to the person for whom the device is indicated (i.e., the patient). In addition, the FDA prohibits a company from promoting an approved device for unapproved applications and reviews a company’s labeling for accuracy. Labeling and promotional activities also are in certain instances, subject to scrutiny by the Federal Trade Commission.
The Company’s medical device manufacturing facilities in St. Louis, MO and Stuyvesant Falls, NY are registered with the FDA, and have received ISO 1348:2016 MDSAP certification. The Company is subject to audit by the FDA, International Organization for Standardization (“ISO”), and European auditors for compliance with the Good Manufacturing Practices (“GMP”), the ISO, and CMDCAS, regulations for medical devices. These regulations require the Company to manufacture its products and maintain its products and documentation in a prescribed manner with respect to design, manufacturing, testing and control activities. The Company also is subject to the registration and inspection requirements of state regulatory agencies.
There can be no assurance that any required FDA or other governmental approval will be granted, or, if granted, will not be withdrawn. Governmental regulation may prevent or substantially delay the marketing of the Company’s proposed products and cause the Company to undertake costly procedures. In addition, the extent of potentially adverse government regulation that might arise from future administrative action or legislation cannot be predicted. Any failure to obtain, and maintain, such approvals could adversely affect the Company’s ability to market its products or proposed products.
Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. Medical products shipped to the European Community generally require CE certification. The letters “CE” are an abbreviation of Conformité Européenne, French for European conformity. Whether or not FDA approval has been obtained, approval of a device by a comparable regulatory authority of a foreign country generally must be obtained prior to the commencement of marketing in those countries. The time required to obtain such approvals may be longer or shorter than that required for FDA approval. In addition, FDA approval may be required under certain circumstances to export certain medical devices.
The Company is also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protections, fire hazard control and disposal of hazardous or potentially hazardous substances.
Patents, Trademarks and Proprietary Technology
The company owns and maintains domestic and foreign patents on several products it believes are useful to the business and provided the Company with an advantage over its competitors. The company continues to seek U.S. and foreign patents on the EPV200 and AHP300 ventilators.
Patents which will expire in the period of 2021 to 2037 in the aggregate are believed to be of material importance in the operation of Allied’s business. Allied believes no single patent, except that related to Litholyme®, is material in relation to Allied’s future business as a whole. Although the expiration of an individual patent may lead to increased competition, other factors such as a competitor’s need to obtain regulatory approvals prior to marketing a competitive product and the nature of the market, may allow Allied to continue to have commercial advantages after the expiration of the patent.
The company owns and maintains U.S. trademarks for Allied Healthcare Products Inc., Chemetron®, Gomco®, Oxequip®, Lif-O-Gen®, Life Support Products®, Timeter®, Vacutron® and Schuco®, its principle trademarks. Registrations for these trademarks are also owned and maintained in countries where such products are sold and such registrations are considered necessary to preserve the Company’s proprietary rights therein.
Environmental and Safety Regulation
The Company is subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the treatment, storage and disposal of toxic and hazardous wastes. The Company is also subject to the Federal Occupational Safety and Health Act and similar state statutes. From time to time, the Company has been involved in environmental proceedings involving cleanup of hazardous waste. See Item 3. “Legal Proceedings” for a discussion of the Company’s remediation obligations at its Stuyvesant Falls facility.
Competition
The Company has different competitors within each of its product lines. Many of the Company’s principal competitors are larger than the Company and have greater financial and other resources. The Company competes primarily on the basis of price, quality and service. The Company believes that it is well positioned with respect to product cost, brand recognition, product reliability, and customer service to compete effectively in each of its markets.
Employees
At June 30, 2021, the Company had approximately 189 full-time employees. Approximately 114 employees in the Company’s principal manufacturing facility located in St. Louis, Missouri, are covered by a collective bargaining agreement that will expire on July 31, 2024.
Information about our Executive Officers
This section provides information regarding the executive officers of the Company who are appointed by and serve at the pleasure of the Board of Directors:
Name
Age
Position
Joseph F. Ondrus
Director, President and Chief Executive Officer (1)
Earl R. Refsland
Director, President and Chief Executive Officer (2)
Daniel C. Dunn
Vice President of Finance, Chief Financial Officer, Secretary & Treasurer (3)
(1) Mr. Ondrus has been Director, President, and Chief Executive Officer of the Company since April 30, 2021. Prior to that time, Mr. Ondrus held the position of Vice President of Operations from September 2020 until April 2021 and Interim Director of Operations from July 2020 until September 2020. Prior to joining the Company, he held the position of Area Manager of Barrett Business Services, Inc. from 2018 to 2020 and served as General Manager of Tramco, Inc. from 2012 to 2017. Mr. Ondrus has over 40 years of experience in engineering, manufacturing and management.
(2) Mr. Refsland served as Director, President, and Chief Executive Officer from September 1999 until April 31, 2021, when he retired.
(3) Mr. Dunn has been Vice President - Finance, Chief Financial Officer, Secretary and Treasurer since July 2001. He previously held the position of Director of Finance at MetalTek International from 1998 to 2001. Prior to that time, Mr. Dunn held the position of Corporate Controller at Allied Healthcare Products, Inc. from 1994 to 1998.

---

ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
The Company's business, operations and financial condition are subject to various risks and uncertainties. You should carefully consider the risks and uncertainties described below, together with all of the other information in this annual report on Form 10-K and in the Company's other filings with the Securities and Exchange Commission (“SEC”) before making any investment decision with respect to the Company's securities. The risks and uncertainties described below may not be the only ones the Company faces. Additional risks and uncertainties not presently known by the Company or that the Company currently deems immaterial may also affect the Company's business. If any of these known or unknown risks or uncertainties actually occur or develop, the Company's business, financial condition, and results of operations could change.
COVID-19 RISKS
The global COVID-19 outbreak or other similar outbreaks of infections or diseases could substantially harm our business
The global COVID-19 outbreak and other possible pandemics, epidemics or other outbreaks of diseases or infections could have significant negative impacts on our business, expenses, revenues and profitability. These events can result in, and in the case of the COVID-19 outbreak, have resulted in disruptions to our business, including without limitation those arising from the following factors:
- Employee matters: The Company is dependent on its workforce to deliver its products. As an essential supplier, 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. The Company’s ability to operate is also contingent on maintaining healthy and safe work conditions. Incidents of COVID-19 in the Company’s workforce could lead to delays in production. While the Company is taking steps to protect its employees and maintain safe work conditions, such efforts cannot guarantee that its employees will not be impacted, directly or indirectly, by COVID-19. In addition, partially as a result of the COVID-19 pandemic and related governmental interventions the Company may have difficulty in obtaining the workers necessary to produce its products. Since the pandemic began, and continuing currently, the Company has experienced greater difficulty in hiring production employees. This has contributed to delays in the production and shipping of some products. It is difficult to quantify the economic results, as there are other reasons for the delays in shipping. Some orders have been cancelled as a result of the delays.
- Supply chain issues and inflation: Partially as a result of the COVID-19 outbreak there have been disruptions to the supply chain that may lead to a delayed receipt by the Company of necessary raw materials and component inventory. The Company is working with existing and alternative suppliers to obtain the necessary components for its products, however there is no guaranty it will succeed in doing so. In addition, the increased demand for certain components and supply chain interruptions have contributed to inflationary pressures for these inputs, which will affect the Company’s costs.
- Working capital: As previously reported, the Company’s financial condition has made it dependent on lines of credit and cost saving measures. Such cost saving measures included decreases in inventory. In order to meet the sudden increase in demand for ventilators and respiratory care products, the Company has had to increase inventory. The Company has relied on its line of credit and other cash conservation measures to finance the necessary increases in inventory.
- Negative impact on construction products: Loss of revenue by hospitals for elective procedures could negatively impact their budgets for other capital items, which could negatively impact sales of our construction products. This could reduce demand for the Company’s medical gas system products, typically purchased for new construction or renovation of hospitals. The Company believes, as stated above, that the pandemic has reduced demand for those systems during the pandemic.
LEGAL REGULATORY AND COMPLIANCE RISKS
We are subject to substantial domestic and international government regulation, including regulatory quality standards applicable to our manufacturing and quality processes. Failure by us to comply with these standards could have an adverse effect on our business, financial condition or results of operations.
The FDA regulates the approval, manufacturing, and sales and marketing of many of our products in the U.S. Significant government regulation also exists in Canada, Japan, Europe, and other countries in which we conduct business. As a device manufacturer, we are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation (“QSR”) requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. In addition, the federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. In the European Community, we are required to maintain certain ISO certifications in order to sell our products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications. Failure to comply with current governmental regulations and quality assurance guidelines could lead to temporary manufacturing shutdowns, product recalls or related field actions, product shortages or delays in product manufacturing. Efficacy or safety concerns, an increase in trends of adverse events in the marketplace, and/or manufacturing quality issues with respect to our products could lead to product recalls or related field actions, withdrawals, and/or declining sales.
Our products may be subject to product recalls even after receiving FDA clearance or approval, which would harm our reputation and our business.
The FDA and similar governmental authorities in other countries in which our products are sold, have the authority to request and, in some cases, require the recall of our products in the event of material deficiencies or defects in design or manufacture. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design defects. Any recall of product would divert managerial and financial resources, may harm our reputation with our customers and could damage our business.
BUSINESS AND OPERATIONAL RISKS
Our success depends upon the development of new products and product enhancements, which entails considerable time and expense.
To effectively compete, we must be able to invest in the development of new products to add to our product portfolio and on the development of enhancements to our existing products. Product development involves substantial expense and we cannot be certain that a completed product will generate sufficient revenue for our business to justify the resources that we devote to research and development related to such product. The time and expense required to develop new products and product enhancements is difficult to predict and we cannot assure you that we will succeed in developing, introducing and marketing new products and product enhancements. Our operating losses and negative cash flow impede our ability to invest in the development of new products and enhancements to existing products. Our inability to successfully develop and introduce new or enhanced products on a timely basis or at all, or to achieve market acceptance of such products, could materially impair our business.
We are dependent on adequate protection of our patent and proprietary rights.
We rely on patents, trade secrets, trademarks, copyrights, know-how, license agreements and contractual provisions to establish and protect our intellectual property rights. However, these legal means afford us only limited protection and may not adequately protect our rights or remedies to gain or keep any advantages we may have over our competitors. We cannot assure you that others may not independently develop the same or similar technologies or otherwise obtain access to our technology and trade secrets. Our competitors, many of which have substantial resources and may make substantial investments in competing technologies, may apply for and obtain patents that will prevent, limit, or interfere with our ability to manufacture or market our products. Further, while we do not believe that any of our products or processes interfere with the rights of others, third parties may nonetheless assert patent infringement claims against us in the future.
Costly litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others. Any claims of infringement against us may involve significant liabilities to third parties, could require us to seek licenses from third parties, and could prevent or delay us from manufacturing, selling, or using our products. The occurrence of such litigation or the effect of an adverse determination in any of this type of litigation could have a material adverse effect on our business, financial condition and results of operations.
Decreased availability or increased costs of raw materials could increase our costs of producing our products.
We purchase raw materials, fabricated components and services from a variety of suppliers. Raw materials such as brass, plastics, and calcium hydroxide are considered key raw materials. We believe that our relationships with our suppliers are satisfactory and that alternative sources of supply are readily available. From time to time, however, the prices and availability of these raw materials fluctuate due to global market demands, which could impair the company's ability to procure necessary materials, or increase the cost of such materials. Inflationary and other increases in costs of these raw materials have occurred in the past and may recur from time to time. In addition, freight costs associated with shipping and receiving product and sales are impacted by fluctuations in the cost of oil and gas. Specifically, we are currently in a period of high inflation. While the Federal Reserve has commented that the rise in the cost of products is transitory, the Company cannot predict the path of future inflation. In fiscal year 2021, the Company believes that inflation raised the cost of its purchases by approximately $500,000. The Company anticipate that these cost increases will continue in fiscal year 2022, although it cannot predict the extent of such increases.
We are exposed to certain credit risks, resulting primarily from customer sales.
Substantially all of our receivables are due from homecare providers, distributors, hospitals, and contractors. Our customers are located throughout the U.S. and around the world. We record an estimated allowance for uncollectible amounts based primarily on our evaluation of the payment pattern, financial condition, cash flows, and credit history of our customers, as well as current industry and economic conditions. Our inability to collect on our trade accounts receivable could substantially reduce our income and have a material adverse effect on our financial condition and results of operations.
Our common stock is thinly traded and its market price may fluctuate widely.
Our common stock is listed on the NASDAQ Capital Market but is thinly traded. As a result, stockholders may not be able to sell shares of common stock on short notice. Additionally, the market price of our common stock could be subject to significant fluctuations in response to quarter-to-quarter variation in our operating results, announcements of new products or services by us or our competitors, and other events or factors. For example, a shortfall in net sales or net income, or an increase in losses could have an immediate and significant adverse effect on the market price and volume fluctuations that have particularly affected the market prices of many micro and small capitalization companies and that have often been unrelated or disproportionate to the operating performance of these companies. Additionally, management believes that the COVID-19 pandemic has increased speculation in the Company’s shares which has resulted in significant fluctuations in price since the onset of the COVID-19 pandemic. These fluctuations, as well as general economic and market conditions, may adversely affect the market price for our common stock.
If a natural or man-made disaster strikes our manufacturing facilities, we may be unable to manufacture certain products for a substantial amount of time and our revenue could decline.
We have two manufacturing operations. In the event that one of these facilities were severely damaged or destroyed as a result of a natural or man-made disaster we would be forced to relocate production to other facilities and/or rely on third-party manufacturers. Such an event could have a material adverse effect on our business, results of operations and financial condition. Although we have insurance for damage to our property and the interruption of our business, this insurance may not be sufficient in scope or amount to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
If we are unable to hire or retain key employees, it could have a negative impact on our business.
Our failure to attract and retain skilled personnel could hinder the management of our business, our research and development, our sales and marketing efforts, and our manufacturing capabilities. However, there is no assurance that we will continue to be able to hire or retain key employees. We compete to hire new employees from larger, better capitalized companies, and then must train them and develop their skills and competencies. Our operating results could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs. Any unplanned turnover could deplete our institutional knowledge base and erode our competitive advantage. The Company has not provided salary increases to its employees outside of the collective bargaining unit in several years. While the Company does not believe that this has had a material impact on its operations, the Company may be materially adversely impacted if it fails to compete with the compensation offerings of other employers.
We have a history of net losses in fiscal 2018, 2019 and 2020 and we may not be able to return to profitability in the future, which may cause the market price of our common stock to decline.
Prior to fiscal 2021 we have had a history of net losses. We reported a net loss of $2.2 million in fiscal 2018, a net loss of $2.1 million in fiscal 2019 and net loss of $3.1 million in fiscal 2020. In fiscal 2021 we had net income of $1.7 million including the benefit of the forgiveness of a $2.4 million PPP loan. We will need to generate and sustain increased sales levels in the future to become consistently profitable, and, even if we do, we may not be able to maintain or increase our level of profitability. There is no guarantee that we will be successful in our efforts to achieve consistent profitability. We may also incur losses in the future for a number of reasons, including the other risks described in this Form 10-K, and unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, the market price of our common stock may significantly decrease. If we continue to experience operating losses and we are not able to generate additional liquidity through other means, then our liquidity needs may exceed availability under our credit facility, and we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to raw materials or services that are important to the operation of our business.
INDUSTRY & ECONOMIC RISKS
We participate in a highly competitive environment.
The medical device industry is characterized by rapid technological change, changing customer needs and frequent new product introductions. Our products may be rendered obsolete as a result of future innovations. We face intense competition from other manufacturers. Some of our competitors may be larger than we are and may have greater financial, technical, research, marketing, sales, distribution and other resources than we do. We believe that price competition will continue among products developed in our markets. Our competitors may develop or market technologies and products that are more effective or commercially attractive than any we are developing or marketing. Our competitors may succeed in obtaining regulatory approval and introducing or commercializing products before we do. Such developments could have a significant negative effect on our business, financial condition and results of operations. Even if we are able to compete successfully, we may not be able to do so in a profitable manner.
Our business of manufacturing, marketing, and selling of medical devices involves the risk of liability claims and such claims could seriously harm our business, particularly if our insurance coverage is inadequate.
Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Like other participants in the medical device market, we are from time to time involved in lawsuits, claims and proceedings alleging product liability and related claims such as negligence. If any current or future product liability claims become substantial, our reputation could be damaged significantly, thereby harming our business. We may be required to pay substantial damage awards as a result of any successful product liability claims. Any product liability claim against us, whether with or without merit, could result in costly litigation, and divert the time, attention, and resources of our management.
As a result of our exposure to product liability claims, we currently carry product liability insurance covering our products with policy limits per occurrence and in the aggregate that we have deemed to be sufficient. Our insurance may not cover certain product liability claims or our liability for any claims may exceed our coverage limits. Therefore, we cannot predict whether this insurance is sufficient, or if not, whether we will be able to obtain sufficient insurance to cover the risks associated with our business or whether such insurance will be available at premiums that are commercially reasonable. In addition, these insurance policies must be renewed annually. Although we have been able to obtain liability insurance, such insurance may not be available in the future on acceptable terms, if at all. A successful claim against us or settlement by us with respect to uninsured liabilities or in excess of our insurance coverage, or our inability to maintain insurance in the future, or any claim that results in significant costs to or adverse publicity against us, could have a material adverse effect on our business, financial condition and results of operations.
Changes to the U.S. healthcare industry and third party payment structures may not be favorable to us.
Over a number of years, the U.S. healthcare industry has undergone significant changes designed to increase access to and affordability of medical care, improve safety and patient outcomes, contain costs and increase efficiencies. These changes have included general declines in Medicare and Medicaid reimbursement levels, efforts by healthcare insurance companies to limit or reduce payments to pharmacies and providers, the basis for payments beginning to transition from a fee-for-service model to value-based payments and risk-sharing models, and the industry shifting away from traditional healthcare venues like hospitals and into clinics, physician offices and patients’ homes. Any or all of the measures could impact demand for our products.
The cost of a majority of medical care in the United States is funded by the U.S. Government through the Medicare and Medicaid programs and by private insurance programs, such as corporate health insurance plans. Although we do not receive payments for our products directly from these programs, home respiratory care providers and durable medical equipment suppliers, who are the primary customers for several of our products, depend heavily on payments from Medicare, Medicaid and private insurers as a major source of revenues. In addition, sales of certain of our products are affected by the extent of hospital and health care facility construction and renovation at any given time. The federal government indirectly funds a significant percentage of such construction and renovation costs through Medicare and Medicaid reimbursements. In recent years, governmentally imposed limits on reimbursement to hospitals and other health care providers have impacted spending for services, consumables and capital goods. A material decrease from current reimbursement levels or a material change in the method or basis of reimbursing health care providers is likely to adversely affect future sales of our products.
We expect the U.S. healthcare industry to continue to change significantly in the future. Possible changes include further reduction or limitations on governmental funding at the state or federal level, efforts by healthcare insurance companies to further limit payments for products and services or changes in legislation or regulations governing prescription pharmaceutical pricing, healthcare services or mandated benefits. These possible changes, and the uncertainty surrounding these possible changes, may adversely affect us.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
Not applicable.

---

ITEM 2. PROPERTIES
Item 2. Properties
The Company’s headquarters are located in St. Louis, Missouri and the Company maintains manufacturing facilities in Missouri and New York. Set forth below is certain information with respect to the Company’s manufacturing facilities at June 30, 2021.
Location Square Footage
(Approximate) Owned/
Leased Activities/Products
St. Louis, Missouri 242,000 Owned Headquarters; medical gas equipment; respiratory care products; emergency medical products
Stuyvesant Falls, New York 30,000 Owned Carbon dioxide absorbent
In addition, the Company owns a 16.8-acre parcel of undeveloped land in Stuyvesant Falls, New York.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
Product liability lawsuits are filed against the Company from time to time for various injuries alleged to have resulted from defects in the manufacture and/or design of the Company’s products. Any such proceedings that are currently pending are not expected to have a material adverse effect on the Company. The Company maintains comprehensive general liability insurance coverage which it believes to be adequate for the continued operation of its business, including coverage of product liability claims.
In addition, from time to time the Company’s products may be subject to product recalls in order to correct design or manufacturing flaws in such products. The Company intends to continue to conduct business in such a manner as to avert any FDA action seeking to interrupt or suspend manufacturing or require any recall or modification of products.
However, for these matters, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on the Company’s financial condition as a whole, though the outcomes could be material to the Company’s operating results for a particular period, depending, in part, upon the operating results for such period.
Stuyvesant Falls Cleanup
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 with respect to the Company’s property in Stuyvesant Falls, New York. The plan recognizes that the soil and groundwater at the Stuyvesant Falls facility is impacted by chemical compounds exceeding regulatory standards. On October 13, 2020, the Company executed a Brownfield Cleanup Program Agreement with the Department of Environmental Conservation with respect to the property. Under the agreement, the Company has voluntarily agreed to conduct, at its expense, certain remedial investigations and remedial actions with respect to suspected soil and groundwater contamination at the site with oversight by the department.
The Company’s best estimate of the expected cost to remediate the site is $1.1 million. This amount was recorded as an expense in the fiscal year ended June 30, 2020 and is reflected in other accrued liabilities and selling, general and administrative expenses in the Company’s financial statements. As of June 30, 2021, the Company has paid approximately $142,000 in remediation expenses which have been charged to the initial reserve.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
None
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Allied Healthcare Products, Inc. trades on the NASDAQ Capital Market under the symbol AHPI. As of September 13, 2021, there were 31 record owners of the Company’s common stock. The number of holders of record does not represent the actual number of beneficial owners of our common stock because securities dealers and others frequently hold shares in “street name” for the benefit of individual owners who have the right to vote shares.
The following table summarizes information with respect to the high and low prices for the Company’s common stock as listed on the NASDAQ Global or Capital Market for each quarter of fiscal 2021 and 2020, respectively. The Company currently does not pay, and in the most recent fiscal years has not paid, any dividend on its common stock.
Common Stock Information
High Low High Low
September quarter $ 13.27 $ 4.66 September quarter $ 1.88 $ 1.25
December quarter $ 8.13 $ 4.20 December quarter $ 1.45 $ 0.92
March quarter $ 9.00 $ 4.07 March quarter $ 45.00 $ 1.19
June quarter $ 5.30 $ 3.45 June quarter $ 20.95 $ 7.60
Information concerning securities authorized for issuance under equity compensation plans is incorporated by reference to the Company’s proxy statement for the 2021 annual meeting of stockholders, which will be filed within 120 days after June 30, 2021.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
(In thousands, except per share data)
Year ended June 30, 2018
Statement of Operations Data
Net sales $ 36,279 $ 31,894 $ 31,382 $ 33,760 $ 33,512
Cost of sales 29,170 26,323 26,343 27,309 26,956
Gross profit 7,109 5,571 5,039 6,451 6,556
Selling, general and administrative expenses 7,636 8,633 7,813 8,446 8,608
Loss from operations (527 ) (3,062 ) (2,774 ) (1,995 ) (2,052 )
Interest expense 24 -
Interest income - (1 ) - - (1 )
Legal settlement - - (750 ) - -
Other, net (2,402 ) - -
Income (loss) before provision for (benefit from) income taxes 1,759 (3,144 ) (2,080 ) (2,019 ) (2,052 )
Provision for (benefit from) income taxes (130 )
Net income (loss) $ 1,687 $ (3,014 ) $ (2,109 ) $ (2,192 ) $ (2,089 )
Basic income (loss) per share $ 0.42 $ (0.75 ) $ (0.53 ) $ (0.55 ) $ (0.52 )
Diluted income (loss) per share $ 0.42 $ (0.75 ) $ (0.53 ) $ (0.55 ) $ (0.52 )
Basic weighted average common shares outstanding 4,014 4,014 4,014 4,014 4,014
Diluted weighted average common shares outstanding 4,026 4,014 4,014 4,014 4,014
(In thousands)
June 30, 2018
Balance Sheet Data
Working capital $ 6,271 $ 5,949 $ 7,387 $ 8,653 $ 9,748
Total assets 17,702 19,672 15,454 17,321 19,637
Stockholders' equity 10,580 8,879 11,890 13,997 16,186

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and 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 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 believes that the pandemic did result in increased sales in fiscal 2021, however, this peak in demand ended in fiscal 2021 and the impacts of the COVID-19 continue to develop.
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 has 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 2021, the Company estimates that inflationary price increases raised product cost by approximately $500,000. 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 increase sales.
Results for the year ended June 30, 2020 and the year ended June 30, 2021 only partially reflect 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.
Results of Operations
The Company manufactures and markets respiratory products, including respiratory care products, medical gas equipment and emergency medical products. Set forth below is certain information with respect to amounts and percentages of net sales attributable to respiratory care products, medical gas equipment and emergency medical products for the fiscal years ended June 30, 2021, 2020, and 2019.
Dollars in thousands
Net % of Total
Year ended June 30, Sales Net Sales
Respiratory care products $ 8,083 22.3 %
Medical gas equipment 15,943 43.9 %
Emergency medical products 12,253 33.8 %
Total $ 36,279 100.0 %
Dollars in thousands
Net % of Total
Year ended June 30, Sales Net Sales
Respiratory care products $ 8,556 26.8 %
Medical gas equipment 15,283 47.9 %
Emergency medical products 8,055 25.3 %
Total $ 31,894 100.0 %
Dollars in thousands
Net % of Total
Year ended June 30, Sales Net Sales
Respiratory care products $ 8,993 28.7 %
Medical gas equipment 16,032 51.1 %
Emergency medical products 6,357 20.2 %
Total $ 31,382 100.0 %
The following table sets forth, for the fiscal periods indicated, the percentage of net sales represented by the various income and expense categories reflected in the Company’s Statement of Operations.
Year ended June 30,
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 80.4 82.5 83.9
Gross profit 19.6 17.5 16.1
Selling, general and administrative expenses 21.1 27.1 24.9
Loss from operations (1.5 ) (9.6 ) (8.8 )
Interest expense 0.3 0.2 0.2
Legal settlement 0.0 0.0 (2.4 )
PPP loan forgiveness (6.6 ) 0.0 0.0
Other, net 0.0 0.1 0.0
Income (loss) before provision for income taxes 4.8 % (9.9 ) (6.6 )
Provision for (benefit from) income taxes 0.2 (0.4 ) 0.1
Net income (loss) 4.6 % (9.5 )% (6.7 )%
Critical Accounting Policies
Revenue recognition:
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.
Management exercises judgment in estimating variable consideration. Provisions for early payment discounts, rebates and returns and other adjustments are provided for in the period the related sales are recorded. Historical data is readily available and reliable, and is used for estimating the amount of the reduction in gross sales.
The Company provides rebates to wholesalers. Rebate amounts are based upon purchases using contractual amount for each product sold. Factors used in the rebate calculations include the identification of which products have been sold subject to a rebate and the customer or price terms that apply. Using known contractual allowances, the Company estimates the amount of the rebate that will be paid, and records the liability as a reduction of gross sales when it records the sale of the product. Settlement of the rebate generally occurs in the month following the sale.
The Company regularly analyzes the historical rebate trends and adjusts reserves for changes in trends and terms of rebate programs. Historically, adjustments to prior years’ rebate accruals have not been material to net income.
Other allowances charged against gross sales include cash discounts and returns, which are not significant. Cash discounts are known within 15 to 30 days of sale, and therefore can be reliably estimated. Returns can be reliably estimated because the Company’s historical returns are low, and because sales return terms and other sales terms have remained relatively unchanged for several periods. Product warranties are also not significant.
The Company does not allocate transaction price as the Company has only one performance obligation and its contracts do not span multiple periods. All taxes imposed on and concurrent with revenue producing transactions and collected by the Company are excluded from the measurement of transaction price.
Inventory reserve for obsolete and excess inventory:
Inventory is recorded net of a reserve for obsolete and excess inventory which is determined primarily based on an analysis of inventory items with no usage in the preceding year and for inventory items for which there is greater than two years’ usage on hand. This analysis considers those identified inventory items to determine, in management’s best estimate, if parts can be used beyond one year, if there are alternate uses or at what values such parts may be disposed for. At June 30, 2021 and 2020, inventory is recorded net of a reserve for obsolete and excess inventory of $2.2 million and $1.8 million, respectively.
Income taxes:
The Company accounts for income taxes under the FASB Accounting Standards Codification (“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 enacted tax rates that are expected to apply to taxable income when such assets and liabilities are anticipated to be settled or realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as tax expense or benefit in the period that includes the enactment date of the change. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Management uses a more likely than not criterion in its assessment and considers all available evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. In assessing the need for a valuation allowance the Company first considers the reversals of existing temporary deferred tax liabilities and available tax planning strategies. To the extent these items are not sufficient to cause the realization of deferred tax assets, the Company would then consider the availability of future taxable income only to the extent such income is considered likely to occur based on the Company’s earnings history, current income trends and projections.
In light of its history of operating losses the Company does not rely on the existence of future taxable income as it currently cannot conclude future taxable income is likely to occur. The Company does rely on reversals of existing temporary deferred tax liabilities and tax planning strategies to the extent available to support the value of its existing deferred tax assets. The tax planning strategies available to the Company that it would use rather than allow the tax benefits of net operating loss carryovers to expire include the revocation of the LIFO method inventory and the recognition of a gain on the sale of the Company’s excess land in Stuyvesant Falls, New York. As of June 30, 2021, the Company’s deferred tax assets exceeded the amount supportable through reversals of existing deferred tax liabilities and tax planning strategies and a valuation allowance has been recorded for this amount.
Accounts receivable net of allowances:
Accounts receivable are recorded net of an allowance for doubtful accounts, which is determined based on an analysis of past due accounts including accounts placed with collection agencies, and an allowance for returns and credits, which is based on historical analysis of credit memo data and returns. The Company maintains an allowance for doubtful accounts to reflect the uncollectibility of accounts receivable based on past collection history and specific risks identified among uncollected accounts. Accounts receivable are charged to the allowance for doubtful accounts when the Company determines that the receivable will not be collected and/or when the account has been referred to a third party collection agency. At June 30, 2021 and 2020, accounts receivable is recorded net of allowances of $170,000.
Valuation of Long-Lived Assets:
The impairment of long-lived assets is assessed when changes in circumstances (such as, but not limited to, a decrease in market value of an asset, current and historical operating losses or a change in business strategy) indicate that their carrying value may not be recoverable. This assessment is based on management’s expectations and judgments regarding future business and economic conditions, future market values and disposal costs. Actual results and events could differ significantly from management’s estimates. Based upon our most recent analysis, we believe that no impairment exists at June 30, 2021. There can be no assurance that future impairment tests will not result in a charge to net earnings (loss).
Self-insurance:
The Company maintains a self-insurance program for a portion of its health care costs. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and the estimated liability for claims incurred but not reported. As of June 30, 2021 and 2020, the Company had approximately $120,000 and $150,000, respectively, of accrued liabilities related to health care claims. In order to establish the self-insurance reserves, the Company utilized actuarial estimates of expected claims based on analyses of historical data.
Share Based Compensation:
The Company calculates share based compensation using the Black-Sholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. For the twelve-month periods ended June 30, 2021, 2020, and 2019, Allied recorded approximately $14,000, $2,000 and $3,000, respectively, in share-based employee compensation. This compensation cost is included in the general and administrative expenses in the accompanying Statements of Operations.
Fiscal 2021 Compared to Fiscal 2020
The Company had income of $1.8 million before taxes for fiscal 2021, compared to a loss of $3.1 million before taxes for fiscal 2020. It recorded an income tax provision of $72,484 in fiscal 2021, compared to an income tax benefit of $130,359 in fiscal 2020.
Net sales for fiscal 2021 of $36.3 million were $4.4 million or 13.8% higher than net sales of $31.9 million in fiscal 2020. Domestically, sales increased by $1.0 million dollars while international sales, which represented 33.4% of fiscal 2021 sales, were $3.4 million higher. The increase in domestic sales was largely attributable to increases in sales of construction products and emergency medical products. International business is dependent upon hospital construction projects, and the development of medical facilities and emergency services in those regions in which the Company operates, as well as the economic and political climates in those international markets.
Orders for the Company’s products for the year ended June 30, 2021 of $29.6 million were $11.2 million or 27.5% lower than orders for the year ended June 30, 2020 of $40.8 million. As a result of the COVID-19 pandemic in fiscal year 2020, the Company experienced significantly increased orders for the emergency medical products sold by the Company, including the Company’s AHP300 ventilator and the EPV200 ventilator. In fiscal year 2021 the pace of orders materially decreased.
Respiratory care product sales, which include homecare products, were $8.1 million in fiscal 2021 compared to $8.6 million in 2020. Respiratory care products include carbon dioxide absorbents. For the year ended June 30, 2021 and 2020 the Company had carbon dioxide absorbent sales of Carbolime® and Litholyme® of $3.7 million.
Medical gas equipment sales, which include construction products, of $15.9 million in fiscal 2021 were approximately $0.6 million, or 3.9% higher than prior year levels of $15.3 million. The increase in sales was largely attributable to an increase sales of non-construction products of $1.5 million. This increase was partially offset by a decrease in international construction sales of $0.7 million. The Company continues to evaluate and strengthen its sales strategy in this market.
Emergency medical product sales in fiscal 2021 of $12.3 million were $4.2 million or 51.9% higher than fiscal 2020 sales of $8.1 million. International sales of emergency medical products increased by $3.3 million from the prior year while domestic sales increased by $0.9 million. The onset of the COVID-19 pandemic increased demand for the Company’s emergency products including the AHP300 ventilator.
International sales, which are included in the product lines discussed above, increased $3.4 million, or 39.1%, to $12.1 million in fiscal 2021 compared to sales of $8.7 million in fiscal 2020.
Gross profit in fiscal 2021 was $7.1 million, or 19.6% of sales, compared to a gross profit of $5.6 million, or 17.6% of sales in fiscal 2020. The $1.5 million increase in gross profit is mainly attributable to a $4.4 million increase in sales.
The Company invested approximately $0.2 million in fiscal 2021 and $0.8 million in fiscal 2020 for capital expenditures primarily for the expansion of the production line of our AHP300 ventilator.
Selling, General, and Administrative (“SG&A”) expenses for fiscal 2021 were $7.6 million compared to SG&A expenses of $8.6 million in fiscal 2020. The decrease is primarily due to the $1.1 million provision in fiscal 2020 for environmental cleanup costs at the Company’s facility in Stuyvesant Falls, New York and a decrease of $0.2 million for business travel expenses in fiscal 2021. These decreases were partially offset by a $0.2 million increase for legal and insurance expenses in fiscal 2021.
Interest income in fiscal 2021 was $233 compared to interest income of $654 in fiscal 2020. Interest expense in fiscal 2021 was $115,975 compared to interest expense of $64,682 in fiscal 2020.
Other income and expenses in fiscal 2021 include $2.4 million of income realized by the Company as a result of forgiveness of the PPP Loan.
The Company’s effective tax rate in 2021 was a provision of 4.1% compared to a benefit of 4.1% in 2020. The change in the effective tax rate in 2021 was attributable to non-deductible expenses attributable to the Company’s expected PPP Loan forgiveness and a decrease in the value of tax planning strategies.
The realization of the Company’s deferred tax assets has been based on the reversal of existing temporary deferred tax liabilities and tax planning strategies and to the extent those items are not sufficient to support the value of recorded deferred tax assets a valuation allowance is recorded. For the year ended June 30, 2019 the Company recorded an additional allowance of $536,240. For the year ended 2020 the Company recorded an additional allowance of $178,111 offset by an increase in the value of tax planning strategies of $138,873 resulting in a net increase in the allowance of $39,238. For the year ended 2021, the company recorded an additional allowance of $723,248. The allowance was further increased by a reduction in the value of the tax planning strategy of $63,676 resulting in a total increase to the allowance of $786,921. To the extent that the Company’s losses continue, the tax benefit of those losses would be fully offset by a valuation allowance.
Net income in fiscal 2021 was $1.7 million or $0.42 per basic and diluted earnings per share compared to a net loss of $3.0 million, or $0.75 per basic and diluted earnings per share in fiscal 2020. In 2021 and 2020 the weighted number of shares used in the calculation of basic earnings per share was 4,013,537. In 2021 and 2020 the weighted number of shares used in the calculation of diluted earnings per share was 4,026,446 and 4,013,537, respectively.
Fiscal 2020 Compared to Fiscal 2019
The Company had a loss of $3.1 million before taxes for fiscal 2020, compared to a loss of $2.1 million before taxes for fiscal 2019. It recorded an income tax benefit of $130,359 in fiscal 2020, compared to an income tax provision of $29,448 in fiscal 2019.
Net sales for fiscal 2020 of $31.9 million were $0.5 million or 1.6% higher than net sales of $31.4 million in fiscal 2019. Domestically, sales decreased by $0.4 million dollars while international sales, which represented 27.5% of fiscal 2020 sales, were 11.7% higher. The decrease in domestic sales was largely attributable to declines in sales of construction products and respiratory therapy products. International business is dependent upon hospital construction projects, and the development of medical facilities and emergency services in those regions in which the Company operates, as well as the economic and political climates in those international markets.
Orders for the Company’s products for the year ended June 30, 2020 of $40.8 million were $9.3 million or 29.5% higher than orders for the year ended June 30, 2019 of $31.5 million. As a result of the COVID-19 pandemic, the Company experienced significantly increased orders for the emergency medical products sold by the Company, including the Company’s AHP300 ventilator and the EPV200 ventilator.
Respiratory care product sales, which include homecare products, were $8.6 million in fiscal 2020 compared to $9.0 million in 2019. Respiratory care products include carbon dioxide absorbents. For the year ended June 30, 2020 and 2019 the Company had carbon dioxide absorbent sales of Carbolime® and Litholyme® of $3.7 million and $4.2 million, respectively.
Medical gas equipment sales, which include construction products, of $15.3 million in fiscal 2020 were approximately $0.7 million, or 4.4% lower than prior year levels of $16.0 million. The decrease in domestic sales was largely attributable to declines in sales of construction products. The Company continues to evaluate and strengthen its sales strategy in this market.
Emergency medical product sales in fiscal 2020 of $8.1 million were $1.7 million or 26.6% higher than fiscal 2019 sales of $6.4 million. International sales of emergency medical products increased by 61.6% from the prior year while domestic sales increased by 13.2%. The onset of the COVID-19 pandemic increased demand for the Company’s emergency products including the AHP300 ventilator. Most of this increase occurred in the fourth quarter of the fiscal year. While demand for emergency and mass-casualty ventilators increased in the last part of fiscal year 2020, it was necessary for the company to ramp up its manufacturing capacity and to address any supply chain issues. The ramp up has included investment in capital equipment and training to increase capacity. For these reasons some orders were not shipped immediately in the fourth quarter.
International sales, which are included in the product lines discussed above, increased $0.9 million, or 11.5%, to $8.7 million in fiscal 2020 compared to sales of $7.8 million in fiscal 2019.
Gross profit in fiscal 2020 was $5.6 million, or 17.6% of sales, compared to a gross profit of $5.0 million, or 15.9% of sales in fiscal 2019. The $0.6 million increase in gross profit is mainly attributable to a $0.7 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.
The Company invested approximately $0.8 million in capital expenditures in fiscal 2020 primarily for the expansion of the production line of our AHP300 ventilator. The Company did not invest in capital expenditures in fiscal 2019.
Selling, General, and Administrative (“SG&A”) expenses for fiscal 2020 were $8.6 million compared to SG&A expenses of $7.8 million in fiscal 2019. The increase is primarily due to the $1.1 million provision for environmental cleanup costs at the Company’s facility in Stuyvesant Falls, New York. This increase was offset by a $0.3 million decrease in personnel cost consisting of salary and fringe benefits.
Interest income in fiscal 2020 was $654 compared to interest income of $138 in fiscal 2019. Interest expense in fiscal 2020 was $64,682 compared to interest expense of $56,223 in fiscal 2019.
Other income and expenses in fiscal 2019 include $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. See Part I, Item 3 - Legal Proceedings, below, for more information concerning litigation.
The Company’s effective tax rate in 2020 was a benefit of 4.1% compared to a provision of 1.4% in 2019. The change in the effective tax rate in 2020 was attributable to non-deductible expenses attributable to the Company’s expected PPP Loan forgiveness and an increase in the value of tax planning strategies.
The realization of the Company’s deferred tax assets has been based on the reversal of existing temporary deferred tax liabilities and tax planning strategies and to the extent those items are not sufficient to support the value of recorded deferred tax assets a valuation allowance is recorded. For the year ended June 30, 2018 the Company recorded a $352,727 reduction to the allowance. The reduction was caused by a decrease in the allowance of $1,080,362 due to a reduction in federal rates expected to be in effect at reversal. The reduced rates are as a result of the Tax Cuts and Jobs Act of 2017. This reduction was offset by a $727,635 increase in the valuation allowance reflecting the impact of 2018 additions to deferred tax assets not supported by deferred tax liabilities or tax planning strategies. For the year ended June 30, 2019 the Company recorded an additional allowance of $536,240. For the year ended 2020 the Company recorded an additional allowance of $178,111 offset by an increase in the value of tax planning strategies of $138,873 resulting in a net increase in the allowance of $39,238. To the extent that the Company’s losses continue, the tax benefit of those losses would be fully offset by a valuation allowance.
Net loss in fiscal 2020 was $3.0 million or $0.75 per basic and diluted earnings per share, an increase from a net loss of $2.1 million, or $0.53 per basic and diluted earnings per share in fiscal 2019. In 2020 and 2019 the weighted number of shares used in the calculation of basic and diluted earnings per share was 4,013,537.
Financial Condition, Liquidity and Capital Resources
The following table sets forth selected information concerning Allied's financial condition at June 30:
Dollars in thousands
Cash & cash equivalents $ 726 $ 2,600 $ 195
Working Capital $ 6,271 $ 5,949 $ 7,387
Total Debt $ 2,091 $ 2,392 $ -
Current Ratio 1.88:1 1.67:1 3.07:1
The Company’s working capital was $6.3 million at June 30, 2021 compared to $5.9 million at June 30, 2020. The $0.4 million increase in working capital is from an inventory increase of $0.5 million, a decrease in accounts payable of $1.1 million and a decrease in customer deposits of $2.2 million. During fiscal 2021, these increases in working capital were partially offset by a $1.9 million decrease in cash and $1.0 million increase in the current portion of long term debt. Accounts receivable as measured in days sales outstanding (“DSO”) is 40 DSO at June 30, 2021, up from 35 DSO at June 30, 2020. The Company does adjust product forecast, order quantities, and safety stock based on changes in demand patterns in order to manage inventory levels.
The net decrease in cash for the fiscal year ended June 30, 2021 was $1.9 million. The net increase in cash for the fiscal year ended June 30, 2020 was $2.4 million. Cash flows used in operating activities for the fiscal year ended June 30, 2021 consisted of a decrease in Customer deposits of $2.2 million, a decrease of Accounts payable of $1.1 million and increase of Inventory of $0.5 million. These cash out flows were offset by a decrease of Accounts receivable of $0.2 million and net income of $1.7 million, supplemented by $0.6 million in non-cash charges for amortization and depreciation.
Cash flows provided by operating activities for the fiscal year ended June 30, 2020 consisted of an increase in Customer deposits of $2.3 million, an increase of Accounts payable of $1.3 million and increase of Other accrued liabilities of $1.1 million. These cash flows were offset by an increase of Inventories of $1.6 million and a net loss of $3.1 million, supplemented by $0.6 million in non-cash charges for amortization and depreciation.
North Mill Loan Agreement
As of June 30, 2021, 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, April 24, 2019 and December 18, 2020 (as amended, the “Credit Agreement”). Pursuant to the Credit Agreement, the Company obtained a secured revolving credit facility (the “Credit Facility”). The Company’s obligations under the Credit Facility are secured by all of the Company’s personal property, both tangible and intangible, pursuant to the terms and subject to the conditions set forth in the Credit Agreement. Availability of funds under the Credit Agreement is based on the Company’s accounts receivable and inventory but will not exceed $4,000,000. At June 30, 2021 availability under the agreement was approximately $630,000.
The Credit Facility will be available, subject to its terms, on a revolving basis until it expires on February 27, 2023, at which time all amounts outstanding under the Credit Facility will be due and payable. Advances will bear interest at a rate equal to 2.00% in excess of the prime rate as reported in the Wall Street Journal. Interest is computed based on the actual number of days elapsed over a year of 360 days. In addition to interest, the Credit facility requires that the Company pay the lender a monthly administration fee in an amount equal to forty-seven hundredths percent (0.47%) of the average outstanding daily principal amount of loan advances for each calendar month, or portion thereof.
Regardless of the amount borrowed under the Credit Facility, the Company will pay a minimum amount of .25% (25 basis points) per month on the maximum availability ($10,000 per month). 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 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.
The Company was in compliance with all of the covenants associated with the Credit Facility at June 30, 2021.
PPP Loan
On April 13, 2020, the Company entered into a Payroll Protection Program (PPP) 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 used proceeds from the SBA Loan for payroll costs and other permitted uses. The SBA Loan was scheduled to mature on April 13, 2022 and had a 1.00% interest rate and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act.
The loan, including all principal and accrued interest, was forgiven on June 11, 2021.
At June 30, 2021 the Company had $2.1 million indebtedness, including capital lease obligations, short-term debt, and long term debt.
The following table summarizes the Company’s contractual obligations at June 30, 2021:
Payments due by period
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year years years 5 years
Long-Term Debt $ 2,077,440 $ 2,077,440 $ - - -
Capital Lease Obligations - - - - -
Operating Leases $ 57,331 $ 50,348 $ 4,655 $ 2,328 -
Unconditional Purchase Obligations - - \ - -
Other Long-Term Obligations - - - - -
Total Contractual Cash Obligations $ 2,134,771 $ 2,127,788 $ 4,655 $ 2,328 $ -
Capital expenditures were approximately $167,000, $758,000, and $0 in fiscal 2021, 2020, and 2019, respectively. The Company believes that cash flows from operations and available borrowings under its credit facilities will be sufficient to finance fixed payments and planned capital expenditures of $0.1 million in 2022.
At June 30, 2021, the Company had $2.1 million outstanding debt. During fiscal 2021 the Company had $36.7 million in borrowings and $34.6 million in repayments under the Credit Agreement. Cash used in operations was $3,784,000 in fiscal 2021. Cash flows from operations in fiscal 2020 and 2019 were $648,000 and $59,000, respectively. Our cash flows may be further negatively impacted by decreases in sales, market conditions, and adverse changes in working capital. While we believe that our borrowing capacity under the Credit Agreement provides sufficient financial flexibility, continued negative cash flows could negatively affect our ability to access the Credit Agreement or to repay amounts borrowed and we might need to secure additional sources of funds, which may or may not be available to us.
In fiscal 2021 the Company had borrowings of $36.7 million and repayments of $34.6 million under the Credit Agreement. In fiscal 2020 the Company had borrowings and repayments of $32.9 million under the Credit Agreement.
In 2021, inflation in the price of raw materials and purchased components negatively impacted earnings by approximately $0.5 million dollars. The Company experienced a material direct impact of $35,000 in 2021, and $44,000 in 2020, from changes in trade policy or tariffs. The Company also believes a portion of its increased raw materials costs were due to tariffs imposed on steel and aluminum import. The Company makes its foreign sales in U.S. dollars and, accordingly, sales proceeds are not affected by exchange rate fluctuations. However, fluctuations in exchange rates can affect the price of our products in local currency, which does impact the pace of incoming orders.
Quarterly Results
The following table sets forth selected operating results for the eight quarters ended June 30, 2021. The information for each of these quarters is unaudited, but includes all normal recurring adjustments which the Company considers necessary for a fair presentation thereof. These operating results, however, are not necessarily indicative of results for any future period. Further, operating results may fluctuate as a result of the timing of orders, the Company’s product and customer mix, the introduction of new products by the Company and its competitors, and overall trends in the health care industry and the economy. While these patterns have an impact on the Company’s quarterly operations, the Company is unable to predict the extent of this impact in any particular period.
Dollars in thousands, except per share data
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
Three months ended, 2020 2019
Net sales $ 7,018 $ 7,967 $ 11,104 $ 10,190 $ 8,511 $ 8,097 $ 7,310 $ 7,976
Gross profit 1,188 1,435 2,612 1,874 1,378 1,586 1,347 1,260
Income (loss) from operations (745 ) (381 ) (135 ) (638 ) (305 ) (1,512 ) (607 )
Net income (loss) 1,553 (413 ) (153 ) (539 ) (330 ) (1,531 ) (614 )
Basic earnings (loss) per share 0.39 (0.10 ) 0.17 (0.04 ) (0.14 ) (0.08 ) (0.38 ) (0.15 )
Diluted earnings (loss) per share 0.39 (0.10 ) 0.17 (0.04 ) (0.14 ) (0.08 ) (0.38 ) (0.15 )
Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly amounts will not necessarily equal the total for the year.
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 such claims over its self-insured retention will be covered by the Company’s product liability insurance.
Off Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements.
Recently Issued Accounting Pronouncements
See Item 8, Note 2 “Summary of Significant Accounting Policies” for a discussion of recent accounting pronouncements and their impact on the Company’s financial statements, if any.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
At June 30, 2021, the Company had $2.1 million debt outstanding under the revolving credit facility. The revolving credit facility bears an interest rate using the prime rate as reported in the Wall Street Journal as the basis, as defined in the loan agreement, and therefore is subject to additional expense should there be an increase in market interest rates.
The Company had no holdings of derivative financial or commodity instruments at June 30, 2021. Allied has international sales; however these sales are denominated in U.S. dollars, mitigating foreign exchange rate fluctuation risk.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
The following described financial statements of Allied Healthcare Products, Inc. are included in response to this item:
Report of Independent Registered Public Accounting Firm.
Statement of Operations for the fiscal years ended June 30, 2021, 2020 and 2019.
Balance Sheet for the fiscal years ended June 30, 2021 and 2020.
Statement of Changes in Stockholders’ Equity for the fiscal years ended June 30, 2021, 2020 and 2019.
Statement of Cash Flows for the fiscal years ended June 30, 2021, 2020 and 2019.
Notes to Financial Statements.
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Allied Healthcare Products, Inc.
Opinion On The Financial Statements
We have audited the accompanying balance sheet of Allied Healthcare Products, Inc. (the Company) as of June 30, 2021 and 2020, the related statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis For Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Inventory Reserve for Obsolete and Excess Inventory - Refer To Notes 2 And 8 To The Financial Statements
Critical Audit Matter Description
Inventory is recorded at the lower of cost, determined using the last-in, first-out (“LIFO”) method, or market. Inventory is recorded net of a reserve for obsolete and excess inventory which is determined primarily based on an analysis of inventory items with no usage in the preceding year and for inventory items for which there is greater than two years’ usage on hand. When quantities on hand exceed usage benchmarks, a write-down is recorded for such excess inventory. Changes in assumptions of product demand could have a significant impact on the amount of write-down recorded.
Given the inherent uncertainty in forecasting future inventory usage, including the impact of forecasting future sales activity, auditing the reasonableness of the reserve for obsolete and excess inventory required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the reserve for obsolete and excess inventory included the following, among others:
• We tested the completeness and existence of management’s obsolete and excess inventory listing that is utilized in the year-end reserve calculation.
• We assessed that management’s calculations were consistently applied year over year.
• We tested the mathematical accuracy of management’s calculations.
• We selected a sample of products and verified that the expected future inventory usage was supported by historical sales data and other current information.
/s/ Rubin Brown LLP
We have served as the Company’s auditor since 2003.
St. Louis, Missouri
September 28, 2021
ALLIED HEALTHCARE PRODUCTS, INC.
STATEMENT OF OPERATIONS
Year ended June 30,
Net sales $ 36,279,476 $ 31,894,262 $ 31,381,521
Cost of sales 29,169,980 26,323,646 26,342,894
Gross profit 7,109,496 5,570,616 5,038,627
Selling, general and administrative expenses 7,636,318 8,632,795 7,812,649
Loss from operations (526,822 ) (3,062,179 ) (2,774,022 )
Other (income) expenses:
Interest expense 115,975 64,682 56,223
Interest income (233 ) (654 ) (138 )
Payroll Protection Program loan forgiveness (2,402,236 ) - -
Legal settlement - - (750,000 )
Other, net - 18,252
(2,286,494 ) 82,280 (693,785 )
Income (loss) before provision for
income taxes 1,759,672 (3,144,459 ) (2,080,237 )
Provision for (benefit from) income taxes 72,484 (130,359 ) 29,448
Net income (loss) $ 1,687,188 $ (3,014,100 ) $ (2,109,685 )
Basic income (loss) per share: $ 0.42 $ (0.75 ) $ (0.53 )
Diluted income (loss) per share: $ 0.42 $ (0.75 ) $ (0.53 )
Weighted average shares outstanding - Basic 4,013,537 4,013,537 4,013,537
Weighted average shares outstanding - Diluted 4,026,446 4,013,537 4,013,537
See accompanying Notes to Financial Statements.
ALLIED HEALTHCARE PRODUCTS, INC.
BALANCE SHEET
June 30, 2021 June 30, 2020
ASSETS
Current assets:
Cash and cash equivalents $ 726,223 $ 2,600,083
Accounts receivable, net of allowances of $170,000 2,929,751 3,103,819
Inventories, net 9,450,731 8,928,688
Income tax receivable 9,800 12,178
Other current assets 268,136 229,805
Total current assets 13,384,641 14,874,573
Property, plant and equipment, net 3,727,384 4,139,693
Operating lease assets 13,078 17,326
Deferred income taxes 577,088 640,767
Total assets $ 17,702,191 $ 19,672,359
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of Payroll Protection Program loan $ - $ 1,042,655
Revolving credit facility 2,077,440 -
Current portion of operating lease liablity 4,777 4,249
Accounts payable 1,898,747 2,940,006
Customer deposits 575,930 2,832,370
Other accrued liabilities 2,557,135 2,106,131
Total current liabilities 7,114,029 8,925,411
Long-term operating lease liability 8,301 13,077
Long-term portion of Payroll Protection Program - 1,332,204
Long-term environmental liability - 523,000
Commitments and contingencies (Notes 4 and 9)
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 June 30,
2021 and June 30, 2020; 4,013,537 shares
outstanding at June 30, 2021 and June 30, 2020 52,139 52,139
Additional paid-in capital 48,507,738 48,493,732
Accumulated deficit (16,999,228 ) (18,686,416 )
Less: treasury stock, at cost; 1,200,365 shares at
June 30, 2021 and 2020 (20,980,788 ) (20,980,788 )
Total stockholders' equity 10,579,861 8,878,667
Total liabilities and stockholders' equity $ 17,702,191 $ 19,672,359
See accompanying Notes to Financial Statements.
ALLIED HEALTHCARE PRODUCTS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Common Paid-in Accumulated Treasury
Stock Capital Deficit Stock Total
Balance, June 30, 2018 $ 52,139 $ 48,488,220 $ (13,562,631 ) $ (20,980,788 ) $ 13,996,940
Stock based compensation - 3,097 - - 3,097
Net loss for the year ended
June 30, 2019 - - (2,109,685 ) - (2,109,685 )
Balance, June 30, 2019 52,139 48,491,317 (15,672,316 ) (20,980,788 ) 11,890,352
Stock based compensation - 2,415 - - 2,415
Net loss for the year ended
June 30, 2020 - - (3,014,100 ) - (3,014,100 )
Balance, June 30, 2020 52,139 48,493,732 (18,686,416 ) (20,980,788 ) 8,878,667
Stock based compensation - 14,006 - - 14,006
Net income for the year ended
June 30, 2021 - - 1,687,188 - 1,687,188
Balance, June 30, 2021 $ 52,139 $ 48,507,738 $ (16,999,228 ) $ (20,980,788 ) $ 10,579,861
See accompanying Notes to Financial Statements.
ALLIED HEALTHCARE PRODUCTS, INC.
STATEMENT OF CASH FLOWS
Year ended June 30,
Cash flows from operating activities:
Net income (loss) $ 1,687,188 $ (3,014,100 ) $ (2,109,685 )
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 579,472 619,801 822,068
Stock based compensation 14,006 2,415 3,097
Provision for doubtful accounts and sales
returns and allowances 19,001 21,750 19,649
PPP loan forgiveness (2,402,236 ) - -
Deferred tax provision 63,679 (138,876 ) 18,772
Changes in operating assets and liabilities:
Accounts receivable 155,067 39,720 563,055
Inventories (522,043 ) (1,595,593 ) 497,446
Income tax receivable 2,378 - -
Customer deposits (2,256,440 ) 2,269,465 192,020
Other current assets (38,331 ) 15,103 5,697
Accounts payable (1,041,259 ) 1,330,172 (4,386 )
Other accrued liabilities (44,619 ) 1,097,724 51,609
Net cash provided by (used in) operating activities (3,784,137 ) 647,581 59,342
Cash flows from investing activities:
Capital expenditures (167,163 ) (617,811 ) -
Net cash used in investing activities (167,163 ) (617,811 ) -
Cash flows from financing activities:
Borrowings under revolving credit agreement 36,717,068 32,856,428 32,176,067
Payments under revolving credit agreement (34,639,628 ) (32,856,428 ) (32,176,067 )
Proceeds from Payroll Protection Program loan - 2,374,859 -
Net cash provided by financing activities 2,077,440 2,374,859 -
Net increase (decrease) in cash and cash equivalents (1,873,860 ) 2,404,629 59,342
Cash and cash equivalents at beginning of year 2,600,083 195,454 136,112
Cash and cash equivalents at end of year $ 726,223 $ 2,600,083 $ 195,454
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 6,428 $ 8,517 $ 10,675
Interest $ 115,975 $ 64,682 $ 56,223
Non-cash investing and financing activities
Lease liability and right of use asset arising from operating leases $ - $ 17,326 -
Capital expenditures included in accounts payable at year end $ - $ 140,602 -
See accompanying Notes to Financial Statements.
ALLIED HEALTHCARE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization
Allied Healthcare Products, Inc. (the “Company” or “Allied”) is a manufacturer of respiratory products used in the health care industry in a wide range of hospital and alternate site settings, including post-acute care facilities, home health care and trauma care. The Company's product lines include respiratory care products, medical gas equipment and emergency medical products.
2. Summary of Significant Accounting Policies
The significant accounting policies followed by the Company are described below.
Use of estimates
The policies utilized by the Company in the preparation of the financial statements conform to accounting principles generally accepted in the United States of America, and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.
Revenue recognition
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.
Management exercises judgment in estimating variable consideration. Provisions for early payment discounts, rebates and returns and other adjustments are provided for in the period the related sales are recorded. Historical data is readily available and reliable, and is used for estimating the amount of the reduction in gross sales.
The Company provides rebates to wholesalers. Rebate amounts are based upon purchases using contractual amount for each product sold. Factors used in the rebate calculations include the identification of which products have been sold subject to a rebate and the customer or price terms that apply. Using known contractual allowances, the Company estimates the amount of the rebate that will be paid, and records the liability as a reduction of gross sales when it records the sale of the product. Settlement of the rebate generally occurs in the month following the sale.
The Company regularly analyzes the historical rebate trends and adjusts reserves for changes in trends and terms of rebate programs. Historically, adjustments to prior years’ rebate accruals have not been material to net income.
Other allowances charged against gross sales include cash discounts and returns, which are not significant. Cash discounts are known within 15 to 30 days of sale, and therefore can be reliably estimated. Returns can be reliably estimated because the Company’s historical returns are low, and because sales return terms and other sales terms have remained relatively unchanged for several periods. Product warranties are also not significant.
The Company does not allocate transaction price as the Company has only one performance obligation and its contracts do not span multiple periods. All taxes imposed on and concurrent with revenue producing transactions and collected by the Company are excluded from the measurement of transaction price.
Marketing and Advertising Costs
Promotional and advertising costs are expensed as incurred and are included in selling, general and administrative expenses in the Statement of Operations. Advertising expenses for the years ended June 30, 2021, 2020 and 2019 were $0, $3,550, and $0, respectively.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when acquired to be cash equivalents.
The Company maintains funds in bank accounts that, at times, may exceed the limit insured by the Federal Deposit Insurance Corporation. The risk of loss attributable to these uninsured balances is mitigated by depositing funds only in high credit quality financial institutions. The Company has not experienced any losses in such accounts.
Foreign currency transactions
Allied has international sales which are denominated in U.S. dollars, the functional currency for these transactions.
Accounts receivable and concentrations of credit risk
Accounts receivable are recorded at the invoiced amount. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses based on past experience and an analysis of current amounts due, and historically such losses have been within management's expectations. The Company maintains an allowance for doubtful accounts to reflect the uncollectibility of accounts receivable based on past collection history and specific risks identified among uncollected accounts. Accounts receivable are charged to the allowance for doubtful accounts when the Company determines that the receivable will not be collected and/or when the account has been referred to a third party collection agency. The Company’s customers can be grouped into three main categories: medical equipment distributors, construction contractors and health care institutions. At June 30, 2021, the Company believes that it has no significant concentration of credit risk.
Inventories
Inventories are stated at the lower of cost, determined using the last-in, first-out (“LIFO”) method, or market. If the first-in, first-out method (which approximates replacement cost) had been used in determining cost, inventories would have been $2,149,560 and $2,408,878 higher at June 30, 2021 and 2020, respectively. Changes in the LIFO reserve are included in cost of sales. Cost of sales was reduced by $0, $0, and $120,965 in fiscal 2021, 2020, and 2019 respectively, as a result of LIFO liquidations. Costs in inventory include raw materials, direct labor and manufacturing overhead.
Inventory is recorded net of a reserve for obsolete and excess inventory which is determined primarily based on an analysis of inventory items with no usage in the preceding year and for inventory items for which there is greater than two years’ usage on hand. The reserve for obsolete and excess inventory was $2,174,149 and $1,849,134 at June 30, 2021 and 2020, respectively.
Property, plant and equipment
Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 35 years. Expenditures for repairs, maintenance and renewals are charged to income as incurred. Expenditures, which improve an asset or extend its estimated useful life, are capitalized. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income.
Impairment of long-lived assets
The Company evaluates impairment of long-lived assets under the provisions of ASC Topic 360: “Property, Plant and Equipment.” ASC 360 provides a single accounting model for long-lived assets to be disposed of and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under ASC 360, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss will be recognized. No impairment losses of long-lived assets or identifiable intangibles were recorded by the Company for fiscal years ended June 30, 2021, 2020, and 2019.
Collective Bargaining Agreement
At June 30, 2021, the Company had approximately 189 full-time employees. Approximately 114 employees in the Company’s principal manufacturing facility located in St. Louis, Missouri, are covered by a collective bargaining agreement that will expire on July 31, 2024.
Self-insurance
The Company maintains a self-insurance program for a portion of its health care costs. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and the estimated liability for claims incurred but not reported. As of June 30, 2021 and 2020, the Company had $120,000 and $150,000, respectively, of accrued liabilities related to health care claims. In order to establish the self-insurance reserves, the Company utilized actuarial estimates of expected claims based on analyses of historical data.
Fair value of financial instruments
The Company’s financial instruments include cash, accounts receivable, the revolving line of credit and accounts payable. The carrying amounts for cash, accounts receivable, the revolving line of credit and accounts payable approximate their fair value due to the short maturity of these instruments.
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 enacted tax rates that are expected to apply to taxable income when such assets and liabilities are anticipated to be settled or realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as tax expense or benefit in the period that includes the enactment date of the change. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance the Company first considers the reversals of existing temporary deferred tax liabilities and available tax planning strategies. To the extent these items are not sufficient to cause the realization of deferred tax assets, the Company considers the availability of future taxable income to the extent such income is considered likely to occur based on the Company’s earnings history, current income trends and projections.
In light of its history of operating losses the Company does not rely on the existence of future taxable income as it currently cannot conclude future taxable income is likely to occur. The Company does rely on reversals of existing temporary deferred tax liabilities and tax planning strategies to the extent available to support the value of its existing deferred tax assets. To the extent the Company’s deferred tax assets exceeded the amount supportable through reversals of existing deferred tax liabilities and tax planning strategies, a valuation allowance is recorded against the excess deferred tax assets.
The Company recognizes tax liabilities when, despite the Company’s belief that its tax return positions are supportable, the Company believes that certain positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. To the extent the Company deems it necessary to record a liability for its tax positions, the current portion of the liability is included in income taxes payable and the noncurrent portion is included in other liabilities on the balance sheet. If upon the final tax outcome of these matters the ultimate liability is different than the amounts recorded, such differences are reflected in income tax expense in the period in which such determination is made. The Company files a federal and multiple state income tax returns. With few exceptions, the Company’s federal and state income tax returns are open for fiscal years ending after June 30, 2018.
The Company classifies interest expenses on taxes payable as interest expense. Penalties are classified as a component of other expenses.
Research and development costs
Research and development costs are expensed as incurred and are included in selling, general and administrative expenses. Research and development expenses for the years ended June 30, 2021, 2020 and 2019 were $571,535, $595,236, and $459,455, respectively.
Earnings per share
Basic earnings per share are based on the weighted average number of shares of common stock outstanding during the year. 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 year. The weighted average number of basic shares outstanding for the years ended June 30, 2021, 2020 and 2019 was 4,013,537 shares. The weighted average number of diluted shares outstanding for the years ended June 30, 2021, 2020 and 2019 was 4,026,446, 4,013,537 and 4,013,537 shares, respectively. The dilutive effect of the Company's employee and director stock option plans are determined by use of the treasury stock method. There are 20,250 potential common shares excluded from the calculation of net income per share, as their effect would be anti-dilutive for the year ended June 30, 2021. There are no potential common shares excluded from the calculation of net loss per share, as their effect would be anti-dilutive for the years ended June 30, 2020 and 2019.
The following information is necessary to calculate earnings per share for the periods presented:
Year ended June 30,
Net income (loss), as reported $ 1,687,188 $ (3,014,100 ) $ (2,109,685 )
Weighted average common shares outstanding 4,013,537 4,013,537 4,013,537
Effect of dilutive stock options 12,909 - -
Weighted average diluted common shares outstanding 4,026,446 4,013,537 4,013,537
Net Income (loss) per common share
Basic $ 0.42 $ (0.75 ) $ (0.53 )
Diluted $ 0.42 $ (0.75 ) $ (0.53 )
Employee stock options excluded from computation of diluted income
per share amounts because their effect would be anti-dilutive
20,250
-
-
Employee stock-based compensation
The company follows the provisions of ASC Topic 718: “Compensation - Stock Compensation”, which sets accounting requirements for “share-based” compensation to employees, including employee stock purchase plans, and requires companies to recognize in the statement of operations the grant-date fair value of the stock options and other equity-based compensation.
The fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following table summarizes the weighted average assumptions utilized in the Black-Scholes option pricing model for options granted during the fiscal years ended June 30, 2021, 2020 and 2019.
Weighted-average fair value $ 6.44 $ 0.61 $ 1.06
Weighted-average volatility 109 % 53 % 48 %
Weighted-average expected life (in years) 6.0 6.0 6.0
Weighted-average risk-free interest rate 0.52 % 1.77 % 3.03 %
Dividend yield 0 % 0 % 0 %
Expected volatility is based on the historical volatility of the Company’s common stock to estimate future volatility. The risk-free rates are taken from rates as published by the Federal Reserve and represent the yields on actively traded treasury securities for terms equal or approximately equal to the expected terms of the options. The expected term is calculated using the SEC Staff Accounting Bulletin 107 (ASC 718-10-S99) simplified method. Forfeitures are recognized as they occur. The dividend yield is zero based on the fact that the Company has no intention of paying dividends in the near term.
Share-based compensation expense included in the Statement of Operations for the fiscal years ended June 30, 2021, 2020 and 2019 was approximately $14,000, $2,000 and $3,000, respectively. Unrecognized shared-based compensation cost related to unvested stock options as of June 30, 2021 amounts to approximately $9,000. The cost is expected to be recognized through fiscal 2025.
The Company recognized an income tax benefit for share-based compensation arrangements of approximately $6,000, $1,000 and $1,000 respectively for the years ended June 30, 2021, 2020 and 2019, all of which were fully offset by an increase in the deferred tax asset valuation allowance.
No stock options were exercised during fiscal years 2021, 2020 and 2019.
Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The 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. The Company 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.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other specified instruments, entities will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. The guidance must be applied using a cumulative-effect transition method. ASU 2016-13 is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years (the fiscal year ending June 30, 2022 for the Company), with early adoption permitted. The Company is currently evaluating the impact that adopting this guidance may have on its financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update eliminate the need for an organization to analyze whether certain exceptions apply for tax purposes. It also simplifies GAAP for certain taxes. The amendments in these updates are effective for us for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We do not expect the adoption of this standard to have a material impact on our financial statements.
Environmental Remediation
The Company is subject to federal and state requirements for protection of the environment, including the remediation of contaminated sites. The Company’s policy is to accrue and charge to current expense identified exposures related to environmental remediation sites when it is probable that a liability has been incurred and the amount can be reasonably estimated. The amount of the liability is based on the best estimate or the low end of a range of reasonably possible exposure for investigation, cleanup, and monitoring costs to be incurred. Estimated remediation costs are not discounted to present value.
On January 30, 2020, the Company filed a Citizen Participation Plan with the New York Department of Environmental Conservation under its Brownfield Cleanup Program. The plan was filed with respect to the Company’s property in Stuyvesant Falls, New York. The plan recognizes that the soil and groundwater at the Stuyvesant Falls facility is impacted by chemical compounds exceeding regulatory standards. On October 13, 2020, the Company executed a Brownfield Cleanup Program Agreement with the Department of Environmental Conservation with respect to the property. Under the agreement, the Company has voluntarily agreed to conduct, at its expense, certain remedial investigations and remedial actions with respect to suspected soil and groundwater contamination at the site with oversight by the department.
The Company’s best estimate of the expected cost to remediate the site is $1.1 million. This amount was recorded as an expense in the fiscal year ended June 30, 2020 and is reflected in other accrued liabilities and selling, general and administrative expenses in the Company’s financial statements. As of June 30, 2021, the Company has paid approximately $142,000 in remediation expenses which have been charged to the initial reserve.
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.
3. Financing
North Mill Loan
The Company is party to a Loan and Security Agreement with North Mill Capital, LLC (“North Mill”), as successor in interest to Summit Financial Resources, L.P., dated effective February 27, 2017, as amended April 16, 2018, April 24, 2019 and December 18, 2020 (as amended, the “Credit Agreement”). Pursuant to the Credit Agreement, the Company obtained a secured revolving credit facility (the “Credit Facility”). The Company’s obligations under the Credit Facility are secured by all of the Company’s personal property, both tangible and intangible, pursuant to the terms and subject to the conditions set forth in the Credit Agreement. Availability of funds under the Credit Agreement is based on the Company’s accounts receivable and inventory but will not exceed $4,000,000. At June 30, 2021 availability under the agreement was approximately $630,000.
The Credit Facility will be available, subject to its terms, on a revolving basis until it expires on February 27, 2023, at which time all amounts outstanding under the Credit Facility will be due and payable. Advances will bear interest at a rate equal to 2.00% in excess of the prime rate as reported in the Wall Street Journal. Interest is computed based on the actual number of days elapsed over a year of 360 days. In addition to interest, the Credit facility requires that the Company pay the lender a monthly administration fee in an amount equal to forty-seven hundredths percent (0.47%) of the average outstanding daily principal amount of loan advances for each calendar month, or portion thereof.
Regardless of the amount borrowed under the Credit Facility, the Company will pay a minimum amount of .25% (25 basis points) per month on the maximum availability ($10,000 per month). 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 North Mill’s sole discretion to fund the advances. The Credit Agreement also contains covenants with which the Company must comply during the term of the Credit Facility. Among other things, such covenants require the Company to maintain insurance on the collateral, operate in the ordinary course and not engage in a change of control, dissolve or wind up the Company.
The Credit Agreement also contains certain events of default including, without limitation: the failure to make payments when due; the material breach of representations or warranties contained in the Credit Agreement or other loan documents; cross-default with other indebtedness of the Company; the entry of judgments or fines that may have a material adverse effect on the Company; failure to comply with the observance or performance of covenants contained in the Credit Agreement or other loan documents; insolvency of the Company, appointment of a receiver, commencement of bankruptcy or other insolvency proceedings; dissolution of the Company; the attachment of any state or federal tax lien; attachment or levy upon or seizure of the Company’s property; or any change in the Company’s condition that may have a material adverse effect. After an event of default, and upon the continuation thereof, the principal amount of all loans made under the Credit Facility would bear interest at a rate per annum equal to 20.00% above the otherwise applicable interest rate (provided, that the interest rate may not exceed the highest rate permissible under law), and would have the option to accelerate maturity and payment of the Company’s obligations under the Credit Facility.
The Company was in compliance with all of the covenants associated with the Credit Facility at June 30, 2021.
PPP Loan
On April 13, 2020, the Company entered into a Payroll Protection Program (PPP) 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 used proceeds from the SBA Loan for payroll costs and other permitted uses. The SBA Loan was 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.
The loan, including all principal and accrued interest, was forgiven on June 11, 2021.
The company elected to account for the PPP Loan using FASB ASC 470, Debt. The related forgiveness income is included in other income for the year ended June 30, 2021.
According to the rules of the SBA, the Company is required to retain PPP Loan documentation for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request. Should the SBA conduct such a review and reject all or some of the Company’s judgments pertaining to satisfying PPP Loan eligibility or forgiveness conditions, the Company may be required to adjust previously reported amounts and disclosures in the financial statements.
At June 30, 2021, the Company had $2.1 million indebtedness, including lease obligations and short-term debt. The prime rate as reported in the Wall Street Journal was 3.25% on June 30, 2021.
4. Lease Commitments
The Company leases vehicles and equipment, generally for terms of three to five years.
As described in Note 2, “Summary of Significant Accounting Policies” the Company adopted ASC Topic 842, Leases (“ASC 842” or “Topic 842”), utilizing the modified retrospective adoption method with an effective date of July 1, 2019. The Company made the election to not apply the recognition requirements in Topic 842 to short-term leases (i.e., leases of 12 months or less). Instead, as permitted by Topic 842, the Company recognizes the lease payments under its short-term leases in profit or loss on a straight-line basis over the lease term. The Company elected this accounting policy for all classes of underlying assets. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company generally uses the rate implicit in the lease to discount lease payments to present value.
As of June 30, 2021, the Company had vehicles and equipment financed under operating leases with lease terms expiring through 2024. Rent expense consists of monthly rental payments under the terms of the Company’s lease agreements recognized on a straight-line basis.
The following table sets forth the Company’s future minimum lease payments under operating lease liabilities recorded on the Company’s balance sheet as of June 30, 2021.
Maturity of
Operating Lease
Fiscal years ending Liabilities
$ 6,065
6,065
3,032
Total lease payments 15,162
Less: amounts representing interest 2,084
Present value of lease liabilities 13,078
Less: current portion 4,777
Long-term portion $ 8,301
The Company’s operating lease cost amounted to $59,432 in 2021 and $74,009 in 2020. Expenses are classified within selling, general and administrative expenses in the Company’s statement of operations for the year ended June 30, 2021 and 2020.
The table below presents lease-related terms and discount rates as of June 30, 2021.
June 30, 2021
Weighted average remaining lease terms
Operating leases 2.5 years
Weighted average discount rate
Operating leases 12 %
5. Income Taxes
The provision for (benefit from) income taxes consists of the following:
Current:
Federal $ - $ 84,420 $ -
State 8,805 23,093 10,676
Less net operating loss carryforward applied - (98,996 ) -
Total current 8,805 8,517 10,676
Deferred:
Federal (644,606 ) (182,517 ) (451,591 )
State (78,641 ) 4,405 (65,877 )
Valuation allowance 786,926 39,236 536,240
Total deferred 63,679 (138,876 ) 18,772
Provision (benefit) $ 72,484 $ (130,359 ) $ 29,448
A reconciliation of income taxes, with the amounts computed at the statutory federal rate is as follows:
Computed tax at federal statutory rate $ 367,682 $ (662,125 ) $ (436,850 )
State income taxes, net of federal tax (benefit) provision (13,771 ) (17,475 ) (61,974 )
Non deductible expenses 1,570 506,798 7,699
Federal research credit (28,428 ) (31,076 ) (22,906 )
Non taxable income from PPP Loan forgiveness (504,470 ) - -
State NOLs 11,602 30,397 6,772
Stock Options - Expired 5,243 3,763 2,536
Change in tax law allowing deductibilty of PPP Loan related expenses (553,653 ) - -
Other, net (217 ) (2,069 )
Valuation Allowance 786,926 39,236 536,240
Total $ 72,484 $ (130,359 ) $ 29,448
The deferred tax assets and deferred tax liabilities recorded on the balance sheet as of June 30, 2021 and 2020 are as follows:
Deferred tax assets
Bad debts $ 25,500 $ 25,500
Intangible assets 1,340
Accrued liabilities 458,337 491,605
Stock options 23,403 25,276
Net operating loss and credit carryforwards 4,505,628 3,807,813
Total Assets 5,013,613 4,351,534
Deferred tax liabilities
Prepaid expenses 10,341 10,587
Inventory 529,045 614,184
Depreciation 209,997 194,920
Other 125,147 116,007
Total Liabilities 874,530 935,698
Valuation Allowance (3,561,995 ) (2,775,069 )
Total deferred taxes $ 577,088 $ 640,767
At June 30, 2021, there were $13.2 million dollars of federal net operating loss carryforwards which will expire in 2031 through 2038 and $3.8 million subject to indefinite carryforward. In addition, the Company has state tax net operating losses of approximately $8.3 million that expire in varying years from 2021 through 2041 and $0.7 million subject to indefinite carryforward.
The Company files a federal and multiple state income tax returns. With few exceptions the Company’s federal and state income tax returns are open for fiscal years ending after June 30, 2018.
The Company has not taken any uncertain tax positions on its federal or state income tax filings for open tax years.
6. Employee Retirement Benefits
The Company offers a retirement savings plan under Section 401(k) of the Internal Revenue Code to certain eligible salaried employees. Each employee may elect to enter a written salary deferral agreement under which a portion of such employee's pre-tax earnings may be contributed to the plan.
During the fiscal years ended June 30, 2021, 2020 and 2019, the Company made contributions of $186,366, $185,000, and $190,965, respectively, to the retirement savings plan. The Company contributes 2% of eligible salaried employee’s annual income to the plan. In addition, the Company provides a 25% match on the first 8% of employee deferrals for eligible employees.
The risk of participating in multi-employer pension plan is different from single-employer plans. Assets contributed to a multi-employer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
The Company’s participation in a multi-employer pension plan for the year ended June 30, 2021, is outlined in the table below. The “EIN/PN” column provides the Employee Identification Number (EIN) and the three-digit plan number (PN). The most recent Pension Protection Act (PPA) zone status for 2020 and 2019 is for the plan year-ends as indicated below. The zone status is based on information that the Company obtained from the annual funding notice for District No. 9 International Association of Machinists and Aerospace Workers Pension Trust. Among other factors, plans in the red zone are less than 65 percent funded, plans in the yellow zone are between 65 and 80 percent funded, and plans in the green zone are at least 80 percent funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. In addition to regular plan contributions, the Company may be subject to a surcharge if the plan is in the red zone. The “Surcharge Imposed” column indicates whether a surcharge has been imposed on contributions to the plan. The last column lists the expiration date(s) of the collective-bargaining agreement (CBA) to which the plan is subject.
PPA Zone Status
Contributions by the Company
FIP/RP
Status
Pending/
Surcharge
Expiration
Pension Trust Fund
EIN/PN
Implemented
Imposed
Date of CBA
District No. 9
51-0138317/001
Yellow
Yellow
Implemented
International
12/31/2020
12/31/2019
N/A
$ 315,342
$ 245,824
$ 236,256
No
7/31/2024
Association of
Machinists and
Aerospace Workers
Pension Plan
The Company was not listed in the Form 5500 for the above plan as of the plan year ends as providing more than 5 percent of total contributions.
Under federal pension law, a plan generally is in “endangered” status if its funded percentage is less than 80% (other factors may apply).
If a pension plan enters endangered status, the trustees of the plan are required to adopt a funding improvement plan. Funding improvement plans establish benchmarks for pension plans to improve their funding status over a specified period of time.
The plan was first certified as being in endangered status in the 2019 Plan Year because the Plan was projected to have a funding deficiency in the 2023 Plan Year. The Plan continues to be in endangered status in the 2020 Plan Year because funding improvement plan contribution rate increases are required to eliminate the Plan’s projected deficiency.
In an effort to improve the Plan’s funding situation, the Board of Trustees adopted a funding improvement plan that includes increases in the contribution by employers and/or decreases in the benefit accrual rate for members.
As a result, Allied Healthcare Products, Inc. and District 9 of the International Association of Machinist were required to collectively bargain the required Contribution Rate Increase and the impact on the Future Benefit Accrual. On June 30, 2021 the two parties reached agreement on the Funding Improvement Plan. Under the plan, future benefit accruals are eliminated for members and the monthly employer contribution rate will increase by 80%. Additional contributions under the plan will begin on December 1, 2021.
7. Stock Based Compensation
The Company has established a 2009 Incentive Stock Plan. The Employee Plan provides for the granting of options to the Company's executive officers and key employees to purchase shares of common stock at prices equal to the fair market value of the stock on the date of grant. Options to purchase up to 300,000 shares of common stock may be granted under the Employee Plan. Options generally become exercisable ratably over a four-year period or one-fourth of the shares covered thereby on each anniversary of the date of grant, commencing on the first or second anniversary of the date granted. The right to exercise the options generally expires in ten years from the date of grant, or earlier if an option holder ceases to be employed by the Company.
In addition, the Company has established a 2005 Directors Non-Qualified Stock Option Plan and a 2013 Incentive Plan for Non-Employee Directors (collectively the “Directors Plans”). The Directors Plans provide for the granting of options to the Company's directors who are not employees of the Company to purchase shares of common stock at prices equal to the fair market value of the stock on the date of grant. Options to purchase up to 75,000 shares of common stock may be granted under the Directors Plans. Options shall become exercisable with respect to one-fourth of the shares covered thereby on each anniversary of the date of grant, commencing on the second anniversary of the date granted, except for certain options which become exercisable with respect to all of the shares covered thereby one year after the grant date. The right to exercise the options expires in ten years from the date of grant, or earlier if an option holder ceases to be a director of the Company.
Upon stock-settled compensation exercises and awards, the Company issues new shares of common stock.
A summary of stock option transactions in fiscal 2019, 2020 and 2021, respectively, pursuant to the Employee Plans and the Directors Plans is as follows:
Weighted
Average
Weighted Remaining Aggregate
Average Contractual Intrinsic
Shares Exercise Price Term (years) Value
June 30, 2018 45,000 $ 5.92
Options Granted 3,000 $ 2.13
Options Exercised - $ 0.00
Options Forfeited or Expired (3,000 ) $ 8.10
June 30, 2019 45,000 $ 5.52 4.0 $ -
Options Granted 7,500 $ 1.20
Options Exercised - $ 0.00
Options Forfeited or Expired (9,750 ) $ 6.00
June 30, 2020 42,750 $ 4.65 4.1 $ 304,768
Options Granted 3,000 $ 7.86
Options Exercised - $ 0.00
Options Forfeited or Expired (2,250 ) $ 8.68
June 30, 2021 43,500 $ 4.66 3.8 $ 41,915
Exercisable at June 30, 2021 35,500 $ 4.88 2.6 $ 27,165
The following table provides additional information for options outstanding and exercisable at June 30, 2021:
Options Outstanding
Range of Exercise Prices Number Weighted Average
Remaining Life Weighted Average
Exercise Price
$1.17 - 6.99 23,250 5.7 years $ 2.51
$7.00 15,000 0.2 years $ 7.00
$7.01 -8.68 5,250 5.5 years $ 7.53
$1.17 - 8.68 43,500 3.8 years $ 4.66
Options Exercisable
Range of Exercise Prices Number Weighted Average
Exercise Price
$1.17 - 6.99 18,250 $ 2.86
$7.00 15,000 $ 7.00
$7.01 -8.68 2,250 $ 7.10
$1.17 - 8.68 35,500 $ 4.88
See Note 2 for discussion of accounting for stock awards and related fair value disclosures.
8. Supplemental Balance Sheet Information
June 30,
Inventories
Work in progress
$ 829,962 $ 817,692
Component parts
8,994,457 8,299,972
Finished goods
1,800,461 1,660,158
Reserve for obsolete and excess inventory
(2,174,149 ) (1,849,134 )
$ 9,450,731 $ 8,928,688
Estimated
Useful Life
(years)
Property, plant and equipment
Machinery and equipment 3-10 $ 18,998,928 $ 18,831,765
Buildings 28-35 13,055,628 13,055,628
Land and land improvements 5-7 919,566 919,566
Total property, plant and equipment at cost
32,974,122 32,806,959
Less accumulated depreciation and amortization
(29,246,738 ) (28,667,266 )
$ 3,727,384 $ 4,139,693
Depreciation and amortization expense was approximately $0.6 million, $0.6 million, and $0.8 million for the fiscal years ended June 30, 2021, 2020 and 2019, respectively.
Other accrued liabilities
Accrued compensation expense
$ 1,323,901 $ 1,257,332
Environmental remediation
976,720 514,000
Other
256,514 334,799
$ 2,557,135 $ 2,106,131
9. Commitments and Contingencies
Legal Claims
The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. The Company intends to continue to conduct business in such a manner as to avert any FDA action seeking to interrupt or suspend manufacturing or require any recall or modification of products.
The Company has recognized the costs and associated liabilities only for those investigations, claims and legal proceedings for which, in its view, it is probable that liabilities have been incurred and the related amounts are estimable. Based upon information currently available, management believes that existing accrued liabilities are sufficient.
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 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 $1.1 million. This amount was recorded as an expense in the fiscal year ended June 30, 2020 and is reflected in other accrued liabilities and selling, general and administrative expenses in the Company’s financial statements. As of June 30, 2021, the Company has paid approximately $142,000 in remediation expenses which have been charged to the initial reserve.
Liability for future environmental expenditures
Beginning Balance $ 1,037,000 $ -
Charges to income - 1,119,155
Remedial and investigatory spending 60,280 82,155
Ending Balance $ 976,720 $ 1,037,000
Reflected in the Balance sheet as:
Current, included in Other Liabilities $ 976,720 $ 514,000
Long-term environmental - 523,000
Total $ 976,720 $ 1,037,000
Stuyvesant Falls Power Litigation. The Company has been involved in litigation with Niagara Mohawk Power Corporation d/b/a National Grid (“Niagara”), which provides electrical power to the Company’s facility in Stuyvesant Falls, New York, and one other party. The Company maintained in its defense of the lawsuit that it is entitled to a certain amount of free electricity based on covenants running with the land which have been honored for more than a century. After the commencement of the litigation, Niagara began sending invoices to the Company for electricity used at the Company’s Stuyvesant Falls plant. Niagara’s attempts to collect such invoices were stopped in December 2010 by a temporary restraining order. Among other things, Niagara sought as damages the value of electricity received by the Company without charge. The total value of electricity at issue in the litigation was not known with certainty and Niagara alleged different amounts of damages. Niagara alleged in its Second Amended Verified Complaint, dated February 6, 2012, damages of approximately $469,000 in free electricity from May 2003 through May 2010. Niagara also alleged in its Motion For Summary Judgment, filed on March 14, 2014, damages of approximately $492,000 in free electricity from May 2010 through the date of the filing. In April 2015, Allied received an invoice for electrical power at the Stuyvesant Falls plant with an “Amount Due” balance of $696,000 as of March 31, 2015 without any description as to the period of time covered by the invoice.
The Company filed a Motion for Summary Judgment on March 14, 2014, seeking dismissal of Niagara’s claims and oral arguments on the motions were held on June 13, 2014. On October 1, 2014, the Court granted the Company’s motion, denied Niagara’s motion and ruled that the Company is entitled to receive electrical power pursuant to the power covenants. On October 26 and October 30, 2014, Niagara and the other party filed separate notices of appeal of the Court’s decision. On March 31, 2016 the Supreme Court of New York, Appellate Division, Third Department reversed the trial court decision and held that the free power covenants are no longer enforceable. The Company’s application for leave to appeal this ruling was dismissed as premature by the New York Court of Appeals on September 20, 2016. On May 26, 2017 the Company again moved for leave to appeal the March 31, 2016 decision. That motion was granted on October 7, 2017 by the New York State Court of Appeals. The Company filed its brief and record on January 26, 2018. Niagara and the other party to the lawsuit, Albany Engineering Corporation, filed their responses on July 16, 2018 and the Company filed its reply on August 14, 2018.
On February 20, 2019, the Company, Niagara and Albany entered into a Final Settlement Agreement pursuant to which the Company agreed, among other things, to cancel and forgo its rights to free power from either Niagara or Albany under the power covenants. The New York State Court of Appeals granted a request of all parties to withdraw the appeal on March 5, 2019 and all parties entered a Stipulation of Discontinuance on March 7, 2019 which discontinued the litigation. By separate agreement, Niagara paid the Company $750,000 as consideration for the Company’s agreements pursuant to the settlement. On March 15, 2019 the Appellate Division of the Supreme Court of New York granted Niagara’s request to withdraw its pending appeal. The matter is now fully concluded.
Employment Contract
On April 20, 2021, the Company entered into an employment contract with its chief executive officer, Joseph F. Ondrus, Jr., which provides for an initial term of three years with annual renewals. The contract includes termination without cause and change of control provisions, under which the chief executive officer is entitled to continued payments of annual salary and benefits if the Company terminates his employment without cause or he voluntarily terminates his employment with “good reason.” “Good Reason” generally includes changes in the scope of his duties or location of employment but also includes (i) the Company’s written election not to renew the Employment Agreement and (ii) certain voluntary resignations by the chief executive officer following a “Change of Control” as defined in the Agreement.
10. Segment Information
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. Disaggregation information of sales by region, and by product, are as follows:
Sales by Region
Domestic United States $ 24,162,321 $ 23,138,276 $ 23,541,614
Europe 4,069,672 1,422,660 877,308
Canada 1,310,440 829,901 758,145
Latin America 2,819,165 3,122,929 2,450,969
Middle East 1,189,139 693,716 464,470
Far East 2,727,508 2,686,206 3,259,905
Other International 1,231 29,110
$ 36,279,476 $ 31,894,262 $ 31,381,521
Sales by Product
Respiratory care products $ 8,082,974 $ 8,555,954 $ 8,993,216
Medical gas equipment 15,943,246 15,282,732 16,031,109
Emergency medical products 12,253,256 8,055,576 6,357,196
$ 36,279,476 $ 31,894,262 $ 31,381,521
11. Quarterly Financial Data (unaudited)
Summarized quarterly financial data for fiscal 2021 and 2020 appears below (all amounts in thousands except per share amounts):
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
Three months ended, 2020 2019
Net sales $ 7,018 $ 7,967 $ 11,104 $ 10,190 $ 8,511 $ 8,097 $ 7,310 $ 7,976
Gross profit 1,188 1,435 2,612 1,874 1,378 1,586 1,347 1,260
Income (loss) from operations (745 ) (381 ) (135 ) (638 ) (305 ) (1,512 ) (607 )
Net income (loss) 1,553 (413 ) (153 ) (539 ) (330 ) (1,531 ) (614 )
Basic earnings (loss) per share 0.39 (0.10 ) 0.17 (0.04 ) (0.14 ) (0.08 ) (0.38 ) (0.15 )
Diluted earnings (loss) per share 0.39 (0.10 ) 0.17 (0.04 ) (0.14 ) (0.08 ) (0.38 ) (0.15 )
Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly amounts will not necessarily equal the total for the year.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time period specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In connection with our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, as required under Rule 13a-15(b) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
(b) Internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, which is defined as a process designed by, or under supervision of, our principal executive and principal financial officer and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However these inherent limitations are known features of the financial reporting process. It is possible to design into the process safeguards to reduce, though not eliminate, the risk that misstatements are not prevented or detected on a timely basis.
Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment, our management concluded that, as of June 30, 2021, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation and presentation of financial statements for external purposes in accordance with generally accepted accounting principles.
There were no changes to the Company’s internal controls over financial reporting during the fourth quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
A list of our executive officers and biographical information appears under the caption “Information About our Executive Officers,” in Part I of this report. A definitive proxy statement is expected to be filed with the Securities and Exchange Commission within 120 days after June 30, 2021. The information required by this item is set forth under the caption “Election of Directors”, under the caption “Executive Officers”, and under the caption Section 16(a) Beneficial Ownership Reporting Compliance in the definitive proxy statement, which information is incorporated herein by reference thereto.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this item is set forth under the caption "Executive Compensation" in the definitive proxy statement, which information is incorporated herein by reference thereto.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the definitive proxy statement, which information is incorporated herein by reference thereto.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
None

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The information required by this item will appear in the section entitled “Audit Fees” included in the definitive proxy statement relating to the 2021 Annual Meeting of stockholders and such information is incorporated herein by reference.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
1. Financial Statements
The following financial statements of the Company are included in response to Item 8:
Statement of Operations for the years ended June 30, 2021, 2020, and 2019
Balance Sheet at June 30, 2021 and 2020
Statement of Changes in Stockholders’ Equity for the years ended June 30, 2021, 2020 and 2019
Statement of Cash Flows for the years ended June 30, 2021, 2020 and 2019
Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
2. Financial Statement Schedule
Financial statement schedules which are not required under applicable regulations or related instructions and notes thereto or which are inapplicable have been omitted.
3. Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as part of this Report.