ALLIED HEALTHCARE PRODUCTS INC - FORM 10-Q

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EX-32.2 - EXHIBIT 32.2 - ALLIED HEALTHCARE PRODUCTS INC	tm215937d1_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - ALLIED HEALTHCARE PRODUCTS INC	tm215937d1_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - ALLIED HEALTHCARE PRODUCTS INC	tm215937d1_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - ALLIED HEALTHCARE PRODUCTS INC	tm215937d1_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2020

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

For the transition period from________ to ________

Commission File Number: 0-19266

ALLIED HEALTHCARE PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

Delaware		25-1370721
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

1720 Sublette Avenue, St. Louis, Missouri 63110

(Address of principal executive offices, including zip code)

(314) 771-2400

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer x	Smaller reporting company x
Emerging growth company ¨

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

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

Yes ¨ No x

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

Title of Each Class	Trading Symbol	Name of each exchange on which registered
Common Stock, $.01	AHPI	The NASDAQ Stock Market LLC

The number of shares of common stock outstanding at January 29, 2021 is 4,013,537 shares.

INDEX
			Page Number
Part I –	Financial Information

	Item 1.	Financial Statements

		Statement of Operations - Three and six months ended December 31, 2020 and 2019 (Unaudited)	3

		Balance Sheet - December 31, 2020 (Unaudited) and June 30, 2020	4 - 5

		Statement of Changes in Stockholder’s Equity - Three and six months ended December 31, 2020 and 2019 (Unaudited)	6

		Statement of Cash Flows - Six months ended December 31, 2020 and 2019 (Unaudited)	7

		Notes to Financial Statements (Unaudited)	8 – 15

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16 – 22

	Item 3.	Quantitative and Qualitative Disclosure about Market Risk	22

	Item 4.	Controls and Procedures	22

Part II -	Other Information

	Item 1.	Legal Proceedings	23

	Item 6.	Exhibits	23

		Signature	24

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

Statements contained in this Report, which are not historical facts or information, are "forward-looking statements." Words such as "believe," "expect," "intend," "will," "should," and other expressions that indicate future events and trends identify such forward-looking statements. These forward-looking statements involve risks and uncertainties, which could cause the outcome and future results of operations, and financial condition to be materially different than stated or anticipated based on the forward-looking statements. Such risks and uncertainties include both general economic risks and uncertainties, risks and uncertainties affecting the demand for and economic factors affecting the delivery of health care services, both in the United States and in our overseas markets, impacts of the U.S. Affordable Care Act, our history of net losses and negative cash flows, the COVID-19 pandemic, and other specific matters which relate directly to the Company's operations and properties as discussed in the Company’s annual report on Form 10-K for the year ended June 30, 2020. The Company cautions that any forward-looking statements contained in this report reflect only the belief of the Company or its management at the time the statement was made. Although the Company believes such forward-looking statements are based upon reasonable assumptions, such assumptions may ultimately prove inaccurate or incomplete. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement was made.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ALLIED HEALTHCARE PRODUCTS, INC.

STATEMENT OF OPERATIONS

(UNAUDITED)

	Three months ended						Six months ended
	December 31,						December 31,
	2020			2019			2020			2019
Net sales	$	11,103,528		$	7,309,785		$	21,293,076		$	15,285,422
Cost of sales		8,491,333			5,962,607			16,807,070			12,678,549
Gross profit		2,612,195			1,347,178			4,486,006			2,606,873

Selling, general and administrative expenses		1,878,307			2,859,633			3,887,405			4,726,720
Income (loss) from operations		733,888			(1,512,455	)		598,601			(2,119,847	)

Other (income) expenses:
Interest expense		33,452			19,037			51,703			25,789
Interest income		(42	)		(21	)		(199	)		(52	)
Other, net		-			13			-			23
		33,410			19,029			51,504			25,760

Income (loss) before income taxes		700,478			(1,531,484	)		547,097			(2,145,607	)
Provision for income taxes		-			-			-			-
Net income (loss)	$	700,478		$	(1,531,484	)	$	547,097		$	(2,145,607	)

Basic income (loss) per share	$	0.17		$	(0.38	)	$	0.14		$	(0.53	)

Diluted income (loss) per share	$	0.17		$	(0.38	)	$	0.14		$	(0.53	)

Weighted average shares outstanding - basic		4,013,537			4,013,537			4,013,537			4,013,537

Weighted average shares outstanding - diluted		4,024,952			4,013,537			4,027,788			4,013,537

See accompanying Notes to Financial Statements.

ALLIED HEALTHCARE PRODUCTS, INC.

BALANCE SHEET

ASSETS

	(Unaudited)
	December 31,		June 30,
	2020		2020
Current assets:
Cash and cash equivalents	$	1,128,511	$	2,600,083
Accounts receivable, net of allowances of $170,000		3,697,031		3,103,819
Inventories, net		10,220,254		8,928,688
Income tax receivable		21,298		12,178
Other current assets		330,986		229,805

Total current assets		15,398,080		14,874,573

Property, plant and equipment, net		3,986,031		4,139,693
Operating lease assets		15,264		17,326
Deferred income taxes		640,767		640,767

Total assets	$	20,040,142	$	19,672,359

See accompanying Notes to Financial Statements.

(CONTINUED)

ALLIED HEALTHCARE PRODUCTS, INC.

BALANCE SHEET

(CONTINUED)

LIABILITIES AND STOCKHOLDERS' EQUITY

	(Unaudited)
	December 31,			June 30,
	2020			2020
Current liabilities:
Current portion of Payroll Protection Program loan	$	1,839,696		$	1,042,655
Current portion of operating lease liability		4,506			4,249
Revolving credit facility		2,109,340			-
Accounts payable		3,060,274			2,940,006
Customer deposits		656,209			2,832,370
Other accrued liabilities		2,370,400			2,106,131
Total current liabilities		10,040,425			8,925,411

Long-term portion of Payroll Protection Program loan		535,163			1,332,204
Long-term operating lease liability		10,760			13,077
Long-term environmental liability		24,000			523,000

Commitments and contingencies

Stockholders' equity:
Preferred stock; $0.01 par value; 1,500,000 shares authorized; no shares issued and outstanding		-			-

Series A preferred stock; $0.01 par value; 200,000 shares authorized; no shares issued and outstanding		-			-

Common stock; $0.01 par value; 30,000,000 shares authorized; 5,213,902 shares issued at December 31, 2020 and June 30, 2020; 4,013,537 shares outstanding at December 31, 2020 and June 30, 2020		52,139			52,139

Additional paid-in capital		48,497,762			48,493,732
Accumulated deficit		(18,139,319	)		(18,686,416	)
Less treasury stock, at cost; 1,200,365 shares at December 31, 2020 and June 30, 2020, respectively		(20,980,788	)		(20,980,788	)
Total stockholders' equity		9,429,794			8,878,667
Total liabilities and stockholders' equity	$	20,040,142		$	19,672,359

See accompanying Notes to Financial Statements.

ALLIED HEALTHCARE PRODUCTS, INC.

STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY

(UNAUDITED)

	Three Months Ended December 31, 2020
			Additional
	Common		Paid-in		Accumulated			Treasury
	Stock		Capital		Deficit			Stock			Total
Balance at September 30, 2020	$	52,139	$	48,494,261	$	(18,839,797	)	$	(20,980,788	)	$	8,725,815

Stock based compensation		-		3,501		-			-			3,501

Net income		-		-		700,478			-			700,478
Balance at December 31, 2020	$	52,139	$	48,497,762	$	(18,139,319	)	$	(20,980,788	)	$	9,429,794

	Three Months Ended December 31, 2019
			Additional
	Common		Paid-in		Accumulated			Treasury
	Stock		Capital		Deficit			Stock			Total
Balance at September 30, 2019	$	52,139	$	48,492,110	$	(16,286,439	)	$	(20,980,788	)	$	11,277,022

Stock based compensation		-		564		-			-			564

Net loss		-		-		(1,531,484	)		-			(1,531,484	)
Balance at December 31, 2019	$	52,139	$	48,492,674	$	(17,817,923	)	$	(20,980,788	)	$	9,746,102

	Six Months Ended December 31, 2020
			Additional
	Common		Paid-in		Accumulated			Treasury
	Stock		Capital		Deficit			Stock			Total
Balance at June 30, 2020	$	52,139	$	48,493,732	$	(18,686,416	)	$	(20,980,788	)	$	8,878,667

Stock based compensation		-		4,030		-			-			4,030

Net income		-		-		547,097			-			547,097
Balance at December 31, 2020	$	52,139	$	48,497,762	$	(18,139,319	)	$	(20,980,788	)	$	9,429,794

	Six Months Ended December 31, 2019
			Additional
	Common		Paid-in		Accumulated			Treasury
	Stock		Capital		Deficit			Stock			Total
Balance at June 30, 2019	$	52,139	$	48,491,317	$	(15,672,316	)	$	(20,980,788	)	$	11,890,352

Stock based compensation		-		1,357		-			-			1,357

Net loss		-		-		(2,145,607	)		-			(2,145,607	)
Balance at December 31, 2019	$	52,139	$	48,492,674	$	(17,817,923	)	$	(20,980,788	)	$	9,746,102

See accompanying Notes to Financial Statements.

ALLIED HEALTHCARE PRODUCTS, INC.

STATEMENT OF CASH FLOWS

(UNAUDITED)

	Six months ended
	December 31,
	2020			2019
Cash flows from operating activities:
Net income (loss)	$	547,097		$	(2,145,607	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:

Depreciation and amortization		320,825			322,866
Stock based compensation		4,030			1,357
Provision for doubtful accounts and sales returns and allowances		16,397			(1,438	)

Changes in operating assets and liabilities:
Accounts receivable		(609,609	)		235,519
Inventories		(1,291,566	)		(163,964	)
Income tax receivable		(9,120	)		(6,275	)
Other current assets		(101,181	)		1,547
Accounts payable		120,268			425,083
Customer deposits		(2,176,161	)		(117,637	)
Other accrued liabilities		(234,729	)		647,275
Net cash used in operating activities		(3,413,749	)		(801,274	)

Cash flows from investing activities:
Capital expenditures		(167,163	)		(28,387	)
Net cash used in investing activities		(167,163	)		(28,387	)

Cash flows from financing activities:
Borrowings under revolving credit agreement		21,098,996			16,591,120
Payments under revolving credit agreement		(18,989,656	)		(15,605,330	)
Net cash provided by financing activities		2,109,340			985,790


Net increase (decrease) in cash and cash equivalents		(1,471,572	)		156,129
Cash and cash equivalents at beginning of period		2,600,083			195,454
Cash and cash equivalents at end of period	$	1,128,511		$	351,583

See accompanying Notes to Financial Statements.

ALLIED HEALTHCARE PRODUCTS, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

1. Summary of Significant Accounting and Reporting Policies

Basis of Presentation

The accompanying unaudited financial statements of Allied Healthcare Products, Inc. (the “Company”) have been prepared in accordance with the instructions for Form 10-Q and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for any quarter are not necessarily indicative of the results for any other quarter or for the full year. These statements should be read in conjunction with the financial statements and notes to the financial statements thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2020.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and the revolving credit facility. The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short maturity of these instruments. The carrying amount of the revolving credit facility approximates fair value due to the debt having a variable interest rate.

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.

Risk and Uncertainties, Liquidity and Management’s Plan

A novel strain of coronavirus (“COVID-19”) was first identified in Wuhan, China in December 2019. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in business slowdowns or shutdowns in affected areas. Despite our efforts to manage and remedy the effects of this pandemic, the significance depends on factors beyond our control, including the duration and severity of the outbreak as well as third-party actions taken to contain the spread and mitigate public health efforts. For the Company this creates additional economic uncertainty. Risks for the Company include disruption in operations if a significant percentage of our workforce is unable to work due to illness, forced curtailment of business operations and business travel by governmental authorities, and failure of others in our supply chain and distribution channel to meet their obligations to us, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties.

The Company returned to profitable operations this quarter with income from operations and net income for the quarter and six months ended December 31, 2020. It believes that the combination of cash on hand at December 31, 2020, additional borrowings available on the credit facility (Note 6), reductions in inventory levels and future earnings will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued. If additional liquidity would be required, the Company would consider additional borrowings through the sale leaseback of its corporate headquarters and delaying certain expenditures until sufficient capital becomes available.

2. Revenues

The Company’s revenues are derived primarily from the sales of respiratory products, medical gas equipment and emergency medical products. The products are generally sold directly to distributors, customers affiliated with buying groups, individual customers and construction contractors, throughout the world.

The Company recognizes revenue from product sales upon the transfer of control, which is generally upon shipment or delivery, depending on the delivery terms set forth in the customer contract. Payment terms between Allied and its customers vary by the type of customer, country of sale, and the products offered. The term between invoicing and the payment due date is not significant. For certain customers or product orders, Allied may require advance payments. The contract liabilities are reflected as customer deposits on the Company’s balance sheet.

Management exercises judgment in estimating variable consideration. Provisions for early payment discounts, rebates and returns and other adjustments are provided for in the period the related sales are recorded. Historical data is readily available and reliable, and is used for estimating the amount of the reduction in gross sales.

The Company provides rebates to wholesalers. Rebate amounts are based upon purchases using contractual amount for each product sold. Factors used in the rebate calculations include the identification of which products have been sold subject to a rebate and the customer or price terms that apply. Using known contractual allowances, the Company estimates the amount of the rebate that will be paid, and records the liability as a reduction of gross sales when it records the sale of the product. Settlement of the rebate generally occurs in the month following the sale.

The Company regularly analyzes the historical rebate trends and makes adjustments to reserves for changes in trends and terms of rebate programs. Historically, adjustments to prior years’ rebate accruals have not been material to net income.

Other allowances charged against gross sales include cash discounts and returns, which are not significant. Cash discounts are known within 15 to 30 days of sale, and therefore can be reliably estimated. Returns can be reliably estimated because the Company’s historical returns are low, and because sales return terms and other sales terms have remained relatively unchanged for several periods. Product warranties are also not significant.

The Company does not allocate transaction price as the Company has only one performance obligation and its contracts do not span multiple periods.

The Company operates in one segment consisting of the manufacturing, marketing and distribution of a variety of respiratory products used in the health care industry to hospitals, hospital equipment dealers, hospital construction contractors, home health care dealers and emergency medical product dealers. The Company’s product lines include respiratory care products, medical gas equipment and emergency medical products. Sales by region, and by product, are as follows:

	Sales by Region
	Three months ended				Six months ended
	December 31,				December 31,
	2020		2019		2020		2019
Domestic United States	$	6,797,291	$	5,451,615	$	12,900,780	$	11,195,850
Europe		2,078,512		69,449		3,447,073		397,116
Canada		512,592		212,976		880,533		369,378
Latin America		632,526		807,799		1,795,794		1,562,791
Middle East		511,256		86,383		1,017,982		223,957
Far East		571,086		681,316		1,249,683		1,535,756
Other International		265		247		1,231		574
	$	11,103,528	$	7,309,785	$	21,293,076	$	15,285,422

	Sales by Product
	Three months ended				Six months ended
	December 31,				December 31,
	2020		2019		2020		2019
Respiratory care products	$	1,838,325	$	2,061,248	$	3,986,664	$	4,217,451
Medical gas equipment		4,354,549		3,824,007		8,313,070		7,604,573
Emergency medical products		4,910,654		1,424,530		8,993,342		3,463,398
	$	11,103,528	$	7,309,785	$	21,293,076	$	15,285,422

3. Inventories

Inventories are comprised as follows:

	December 31, 2020			June 30, 2020
Work-in progress	$	1,517,277		$	817,692
Component parts		8,920,804			8,299,972
Finished goods		1,631,307			1,660,158
Reserve for obsolete and excess
inventories		(1,849,134	)		(1,849,134	)
	$	10,220,254		$	8,928,688

4. Earnings per share

Basic earnings per share are based on the weighted average number of shares of all common stock outstanding during the period. Diluted earnings per share are based on the sum of the weighted average number of shares of common stock and common stock equivalents outstanding during the period. The number of basic shares outstanding for the three and six months ended December 31, 2020 and 2019 were 4,013,537. The number of diluted shares outstanding for the three months ended December 31, 2020 and 2019 were 4,024,952 and 4,013,537 respectively. The number of diluted shares outstanding for the six months ended December 31, 2020 and 2019 were 4,027,788 and 4,013,537 respectively.

5. Commitments and Contingencies

Legal Claims

The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. The Company has recognized costs and associated liabilities only for those investigations, claims and legal proceedings for which in its view it is probable that liabilities have been incurred and the related amounts are estimable.

Environmental Remediation

The Company is party to a Brownfield Cleanup Program Agreement with the New York Department of Environmental Conservation under its Brownfield Cleanup Program with respect to the Company’s property in Stuyvesant Falls, New York. The agreement recognizes that the soil and groundwater at the Stuyvesant Falls facility is impacted by chemical compounds exceeding regulatory standards. Pursuant to the agreement, the Company will conduct, at its expense, investigation and remediation at the site.

The Company’s best estimate of the expected cost to remediate the site is $1.1 million. This amount was recorded as an expense during fiscal 2020 and is reflected in other accrued liabilities and selling, general and administrative expenses in the Company’s financial statements. As of December 31, 2020, the Company has paid approximately $104,000 in remediation expenses which have been charged to the initial reserve.

Liability for future environmental expenditures

Balance - July 1, 2020	$	1,037,000

Charges to income		-

Remedial and investigatory spending		21,535

Balance - December 31 , 2020	$	1,015,465

	December 31, 2020		June 30, 2020
Reflected in the Balance sheet as:

Current, included in Other Liabilities	$	991,465	$	514,000

Long-term environmental		24,000		523,000

Total liability	$	1,015,465	$	1,037,000

Employment Contract

The Company has entered into an employment contract with its chief executive officer with annual renewals. The contract includes termination without cause and change of control provisions, under which the chief executive officer is entitled to receive specified severance payments generally equal to two times ending annual salary if the Company terminates his employment without cause or he voluntarily terminates his employment with “good reason.” “Good Reason” generally includes changes in the scope of his duties or location of employment but also includes (i) the Company’s written election not to renew the Employment Agreement and (ii) certain voluntary resignations by the chief executive officer following a “Change of Control” as defined in the Agreement.

6. Financing

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 December 31, 2020 availability under the agreement was $1.5 million.

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 December 31, 2020.

PPP Loan

On April 22, 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 is scheduled to mature on April 13, 2022 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act.

All or a portion of the SBA Loan may be forgiven by the SBA upon application by the Company upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the eight week or at the Company’s election 24 week period beginning on the loan origination date, subject to regulations and guidance provided by the United States Treasury. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 40% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. The Company has submitted its application for forgiveness and is awaiting approval from the SBA. In the event the SBA Loan, or any portion thereof, is forgiven pursuant to the CARES Act, the amount forgiven is applied to outstanding principal. The Company has filed an application for forgiveness of the entire principal of the SBA Loan but cannot guarantee whether or to what extent such forgiveness will be granted.

Payments of unforgiven principal and interest are deferred until the date that SBA remits the Company’s loan forgiveness amount to the lender, at which point the Company is required to repay such amounts in 18 equal monthly payments. The SBA Loan is evidenced by a promissory note, which contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. The SBA Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties.

At December 31, 2020 the Company had $4.5 million indebtedness, including lease obligations, short-term debt, and long term debt. The prime rate as reported in the Wall Street Journal was 3.25% on December 31, 2020.

7. Income Taxes

The Company accounts for income taxes under ASC Topic 740: “Income Taxes.” Under ASC 740, the deferred tax provision is determined using the liability method, whereby deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and income tax bases of assets and liabilities using presently enacted tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. As a result of the Consolidated Appropriations Act of 2021 signed by the President on December 27, 2020, approximately $2,400,000 of expenses incurred that were attributed to the Company’s PPP loan became deductible in the three months ended December 31, 2020. The deductibility of these expenses created a tax loss for the three and six months ended December 31, 2020. In the three and six months ended December 31, 2020 the Company recorded the tax benefit of losses incurred in the amount of approximately $410,000 and $449,000, respectively. As the realization of the tax benefit of the net operating loss is not assured, an additional valuation allowance of a like amount was recorded. For the three and six months ended December 31, 2019 the Company recorded the tax benefit of losses incurred in the amount of approximately $387,000 and $541,000. As the realization of the tax benefit of the net operating loss is not assured an additional valuation allowance of a like amount was recorded. The total valuation allowance recorded by the Company as of December 31, 2020 and 2019 was approximately $3,224,000 and $3,266,000, respectively. To the extent that the Company incurs losses in future quarters, the tax benefit of those losses will be subject to a valuation allowance. To the extent the Company has taxable income, the taxable income will be offset by net operating loss carryforwards.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Covid-19 Outbreak

Due to the COVID-19 pandemic, in recent quarters 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. Orders have now stabilized. Orders for the Company’s products for the six months ended December 31, 2020 of $16.2 million were $0.8 million or 5.2% higher than orders for the prior year same period of $15.4 million. 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’s ability to meet this demand has been impaired, at times, by supply chain challenges as demand for components critical for the production of these products has spiked as all manufacturers of ventilators and other critical medical equipment sought to increase production. At the same time, the COVID-19 pandemic could decrease demand for other products as hospitals reduce “non-essential procedures.” The economic effects on hospitals and providers could negatively impact the market for the Company’s construction products if hospitals cut back on construction and capital improvements. The duration and extent of this decreased demand is uncertain and depends on decisions by government health authorities, hospitals and providers in responding to and mitigating the COVID-19 outbreak.

The full economic impact of the COVID-19 pandemic continues to evolve as the date of this report. As such, the Company cannot predict with certainty the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, operations, suppliers, industry and workforce. Please see Part II, Item 1A, Risk Factors of our Annual Report on Form 10-K for more information.

Three months ended December 31, 2020 compared to three months ended December 31, 2019

Allied had net sales of $11.1 million for the three months ended December 31, 2020, up $3.8 million from net sales of $7.3 million in the prior year same quarter. Domestic sales were up 24.7% and international sales, which represented 38.8% of second quarter sales, were up 131.7% from the prior year same quarter. The increase in sales is the result of shipment of orders received in previous quarters. These orders are primarily for the AHP300 ventilator and other products used to increase capacity to treat COVID-19 patients.

Orders for the Company’s products for the three months ended December 31, 2020 of $8.4 million were $0.7 million or 9.1% higher than orders for the prior year same quarter of $7.7 million. Domestic orders are up 1.6% over the prior year same quarter while international orders, which represented 32.6% of second quarter orders, were 29.5% higher than orders for the prior year same quarter. International sales and orders are subject to fluctuation in international demand. International and construction sales and orders are subject to fluctuation in demand. Internationally, these fluctuations are at times due to political and economic uncertainty.

Gross profit for the three months ended December 31, 2020 was $2.6 million, or 23.4% of net sales, compared to $1.3 million, or 17.8% of net sales, for the three months ended December 31, 2019. Gross profit for the quarter was favorably impacted by the increase in sales volume. Manufacturing overhead spending increased from the prior year by approximately $0.4 million as the Company increased its capacity to manufacture those products that have had higher demand related to the COVID-19 pandemic.

Selling, general and administrative expenses for the three months ended December 31, 2020 were $1.9 million compared to selling, general and administrative expenses of $2.9 million for the three months ended December 31, 2019. The decrease is primarily due to the $0.9 million provision that was recorded in the second quarter of Fiscal 2020 for environmental cleanup costs at the Company’s facility in Stuyvesant Falls, New York.

Income from operations was $0.7 million for the three months ended December 31, 2020 compared to loss from operations of $1.5 million for the three months ended December 31, 2019.

Allied had income before benefit from income taxes in the second quarter of fiscal 2021 of $0.7 million compared to loss before benefit from income taxes in the second quarter of fiscal 2020 of $1.5 million. The Company’s tax provision net of valuation allowance reflects a tax benefit of $0 for the three months ended December 31, 2020 and 2019. As a result of the Consolidated Appropriations Act of 2021 signed by the President on December 27, 2020, approximately $2,400,000 of expenses incurred that were attributed to the Company’s PPP loan became deductible in the three months ended December 31, 2020. The deductibility of these expenses created a tax loss for the three months ended December 31, 2020. In the quarter ended December 31, 2020 the tax benefit of losses in the amount of approximately $410,000 was fully offset by a valuation allowance of equivalent amount. In the quarter ended December 31, 2019 the Company recorded the tax benefit of losses incurred in the amount of approximately $387,000 net of additions to the valuation allowance of like amount. To the extent that the Company’s losses continue in future quarters, the tax benefit of those losses will be fully offset by a valuation allowance. To the extent the Company has taxable income, the taxable income will be offset by net operating loss carryforwards.

Net income for the second quarter of fiscal 2021 was $0.7 million or $0.17 per basic and diluted share compared to net loss of $1.5 million or $0.38 per basic and diluted share for the second quarter of fiscal 2020. The weighted average number of common shares outstanding, used in the calculation of basic earnings per share for the second quarters of fiscal 2021 and 2020 were 4,013,537. The weighted average number of common shares outstanding, used in the calculation of diluted earnings per share for the second quarters of fiscal 2021 and 2020 were 4,024,952 and 4,013,537 respectively.

Six months ended December 31, 2020 compared to six months ended December 31, 2019

Allied had net sales of $21.3 million for the six months ended December 31, 2020, up $6.0 million, or 39.2% from net sales of $15.3 million in the prior year same period. Domestic sales were up 15.2% from the prior year same period while international sales were up 105.2% from the prior year same period. International business represented 39.4% of sales for the first six months of fiscal 2021. The increase in sales is the result of shipment of orders received in previous quarters. These orders are primarily for the AHP300 ventilator and other products used to increase capacity to treat COVID-19 patients.

Orders for the Company’s products for the six months ended December 31, 2020 of $16.2 million were $0.8 million or 5.2% higher than orders for the prior year same period of $15.4 million. Domestic orders are down 0.9% from the prior year same period while international orders, which represented 31.0% of orders for the first six months of fiscal 2021, were 22.4% higher than orders for the prior year same period. The increase in orders are primarily for the AHP300 ventilator and accessories.

Gross profit for the six months ended December 31, 2020 was $4.5 million, or 21.1% of net sales, compared to $2.6 million, or 17.0% of net sales, for the six months ended December 31, 2019. The $1.9 million increase in gross profit is mainly attributable the $6.0 million increase in sales.

Selling, general and administrative expenses for the six months ended December 31, 2020 were $3.9 million compared to selling, general and administrative expenses of $4.7 million for the six months ended December 31, 2019. The decrease is primarily due to the $0.9 million provision that was recorded in the second quarter of Fiscal 2020 for environmental cleanup costs at the Company’s facility in Stuyvesant Falls, New York.

Income from operations was $0.6 million for the six months ended December 31, 2020 compared to loss from operations of $2.1 million for the six months ended December 31, 2019.

Allied had income before benefit from income taxes in the first six months of fiscal 2021 of $0.5 million compared to loss before benefit from income taxes in the first six months of fiscal 2020 of $2.1 million. The Company’s tax provision net of valuation allowance reflects a tax benefit of $0 for the six months ended December 31, 2020 and 2019. As a result of the Consolidated Appropriations Act of 2021 signed by the President on December 27, 2020, approximately $2,400,000 of expenses incurred that were attributed to the Company’s PPP loan became deductible in the six months ended December 31, 2020. The deductibility of these expenses created a tax loss for the six months ended December 31, 2020. In the six months ended December 31, 2020 the tax benefit of losses in the amount of approximately $449,000 was fully offset by a valuation allowance of equivalent amount. In the six months ended December 31, 2019 the Company recorded the tax benefit of losses incurred in the amount of approximately $541,000 net of additions to the valuation allowance of like amount. To the extent that the Company’s losses continue in future quarters, the tax benefit of those losses will be fully offset by a valuation allowance. To the extent the Company has taxable income, the taxable income will be offset by net operating loss carryforwards.

Net income for the six months ended December 31, 2020 was $0.5 million or $0.14 per basic and diluted share compared to net loss of $2.1 million or $0.53 per basic and diluted share for the first six months of fiscal 2020. The weighted average number of common shares outstanding, used in the calculation of basic earnings per share for fiscal 2021 and 2020 were 4,013,537. The weighted average number of common shares outstanding, used in the calculation of diluted earnings per share for fiscal 2021 and 2020 were 4,027,788 and 4,013,537 respectively.

Liquidity and Capital Resources

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

The Company’s working capital was $5.4 million at December 31, 2020 compared to $5.9 million at June 30, 2020. Cash decreased by $1.5 million, other accrued liabilities increased by $0.3 million and debt increased by $2.9 million. During the quarter, these decreases in working capital were offset by an increase in inventory by $1.3 million, an increase in Accounts receivable of 0.6 million, and a decrease in customer deposits by $2.2 million. The increase in inventory was part of the Company’s efforts to fulfill increased orders in prior periods for respiratory care products. Accounts payable and other accrued liabilities are subject to normal fluctuations in purchasing levels and the timing of payments within the quarter. Accounts receivable was $3.7 million at December 31, 2020 and as measured in days sales outstanding (“DSO”) was 32 DSO compared to a 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.

North Mill Loan

The Company was in compliance with all of the covenants associated with the Credit Facility at December 31, 2020.

PPP Loan

All or a portion of the SBA Loan may be forgiven by the SBA upon application by the Company upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the eight week or at the Company’s election 24 week period beginning on the loan origination date, subject to regulations and guidance provided by the United States Treasury. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 40% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. The Company has submitted its application for forgiveness and is awaiting approval from the SBA. In the event the SBA Loan, or any portion thereof, is forgiven pursuant to the CARES Act, the amount forgiven is applied to outstanding principal. The Company has submitted an application for forgiveness of the entire principal amount of the SBA Loan but cannot guarantee whether or to what extent such forgiveness will be granted.

Litigation and Contingencies

The Company becomes, from time to time, a party to personal injury litigation arising out of incidents involving the use of its products. The Company believes that any potential judgments resulting from these claims over its self-insured retention will be covered by the Company’s product liability insurance. See Part II, Item 1 – Legal Proceedings, below, for more information concerning litigation.

Critical Accounting Policies

The impact and any associated risks related to the Company’s critical accounting policies on business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect the Company’s reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended June 30, 2020.

Recently Issued Accounting Guidance

See Note 1 – Summary of Significant Accounting and Reporting Policies for more information on recent accounting pronouncements and their impact, if any, on the Company’s financial statements. Management believes there have been no material changes to our critical accounting policies.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

At December 31, 2020, the Company had $4.5 million debt outstanding. The Credit Facility bears interest at a rate using the Prime Rate, as reported in the Wall Street Journal, as the basis, and therefore is subject to additional expense should there be an increase in market interest rates while borrowing on the revolving credit facility.

The Company had no holdings of derivative financial or commodity instruments at December 31, 2020. The Company has international sales; however these sales are denominated in U.S. dollars, mitigating foreign exchange rate fluctuation risk.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of those controls and procedures performed as of December 31, 2020, the Chief Executive Officer and Chief Financial Officer of the Company concluded that its disclosure controls and procedures were effective.

Changes in internal control over financial reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.

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 fiscal 2020 and is reflected in other accrued liabilities and selling, general and administrative expenses in the Company’s financial statements. As of December 31, 2020, the Company has paid approximately $104,000 in remediation expenses which have been charged to the initial reserve.

Item 6.

Exhibits

(a)		Exhibits:

		10.6.3 Third Amendment to Loan and Security Agreement, dated December 18, 2020, by and between the Allied Healthcare Products, Inc. and North Mill Capital, LLC (filed as Exhibit 99.1 to Current report on Form 8-K filed December 22, 2020).

		31.1 Certification of Chief Executive Officer (filed herewith)

		31.2 Certification of Chief Financial Officer (filed herewith)

		32.1 Sarbanes-Oxley Certification of Chief Executive Officer (furnished herewith)*

		32.2 Sarbanes-Oxley Certification of Chief Financial Officer (furnished herewith)*

		101.INS XBRL Instance Document**

		101.SCH XBRL Taxonomy Extension Schema Document**

		101.CAL XBRL Taxonomy Extension Calculation Linkbase Document**

		101.DEF XBRL Taxonomy Extension Definition Linkbase Document**

		101.LAB XBRL Taxonomy Extension Label Linkbase Document**

		101.PRE XBRL Taxonomy Extension Presentation Linkbase Document**

*Notwithstanding any incorporation of this Quarterly Report on Form 10-Q in any other filing by the Registrant, Exhibits furnished herewith and designated with an asterisk (*) shall not be deemed incorporated by reference to any other filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 unless specifically otherwise set forth therein.

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

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ALLIED HEALTHCARE PRODUCTS, INC.

	/s/ Daniel C. Dunn
	Daniel C. Dunn Chief Financial Officer

	Date: February 16, 2021

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