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, 2012

 

¨

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, or a smaller reporting company. See definitions of "large accelerated filer,” “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if smaller reporting company)	Smaller reporting company	x

 

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

Yes ¨ No x

 

The number of shares of common stock outstanding at January 31, 2013 is 8,030,247 shares.

 

 

INDEX

 

				Page
				Number
Part I –	Financial Information
	Item 1.	Financial Statements
		Statement of Operations -
		Three and six months ended December 31,
		2012 and 2011 (Unaudited)		3
		Balance Sheet -
		December 31, 2012 (Unaudited) and
		June 30, 2012		4 - 5
		Statement of Cash Flows -
		Six months ended December 31, 2012 and 2011
		(Unaudited)		6
		Notes to Financial Statements		7 – 11
	Item 2.	Management’s Discussion and Analysis of
		Financial Condition and Results of Operations		11 – 16
	Item 3.	Quantitative and Qualitative Disclosure
		about Market Risk		16
	Item 4.	Controls and Procedures		16
Part II -	Other Information
	Item 1.	Legal Proceedings		16-17
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		17
	Item 6.	Exhibits		18
		Signature		19

 

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 economic factors affecting the delivery of health care services, impacts of the U.S. Affordable Care Act, such as the expected impact on the Company of the excise tax commencing in 2013 on the sale of certain medical devices and 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, 2012. 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,
		2012				2011				2012				2011
Net sales		$	9,921,422			$	10,681,395			$	19,208,513			$	22,076,403
Cost of sales			7,815,489				7,946,458				15,123,605				16,935,449
Gross profit			2,105,933				2,734,937				4,084,908				5,140,954
Selling, general and
administrative expenses			2,857,065				2,693,894				5,495,640				5,327,983
Income (loss) from operations			(751,132	)			41,043				(1,410,732	)			(187,029	)
Other (income) expenses:
Interest income			(2,821	)			(7,297	)			(7,047	)			(16,292	)
Interest expense			-				-				-				336
Other, net			7,645				11,743				15,226				26,149
			4,824				4,446				8,179				10,193
Income (loss) before provision for (benefit from) income taxes			(755,956	)			36,597				(1,418,911	)			(197,222	)
Provision for (benefit from) income taxes			(287,263	)			13,907				(539,186	)			(74,944	)
Net income (loss)		$	(468,693	)		$	22,690			$	(879,725	)		$	(122,278	)
Basic earnings (loss) per share		$	(0.06	)		$	0.00			$	(0.11	)		$	(0.02	)
Diluted earnings (loss) per share		$	(0.06	)		$	0.00			$	(0.11	)		$	(0.02	)
Weighted average shares
outstanding - basic			8,100,593				8,124,386				8,112,490				8,124,386
Weighted average shares
outstanding - diluted			8,100,593				8,124,834				8,112,490				8,124,386

 

See accompanying Notes to Financial Statements.

 

 

ALLIED HEALTHCARE PRODUCTS, INC.

BALANCE SHEET

ASSETS

 

		(Unaudited)
		December 31,				June 30,
		2012				2012
Current assets:
Cash and cash equivalents		$	4,586,331			$	5,284,543
Accounts receivable, net of allowances
of $300,000			3,551,587				4,843,593
Inventories, net			10,049,584				10,001,226
Income tax receivable			583,706				46,042
Other current assets			590,082				400,677
Total current assets			19,361,290				20,576,081
Property, plant and equipment, net			9,628,935				9,603,556
Other assets, net			1,137,908				1,167,432
Total assets		$	30,128,133			$	31,347,069

 

See accompanying Notes to Financial Statements.

 

(CONTINUED)

 

 

ALLIED HEALTHCARE PRODUCTS, INC.

BALANCE SHEET

(CONTINUED)

LIABILITIES AND STOCKHOLDERS' EQUITY

 

		(Unaudited)
		December 31,				June 30,
		2012				2012
Current liabilities:
Accounts payable		$	1,693,881			$	1,797,144
Other accrued liabilities			1,961,826				1,855,579
Deferred income taxes			793,990				802,961
Deferred revenue			-				114,700
Total current liabilities			4,449,697				4,570,384
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; 10,427,878 shares issued at December 31,
2012 and June 30, 2012; 8,030,247 and 8,124,386 shares
outstanding at December 31, 2012 and June 30, 2012, respectively			104,279				104,279
Additional paid-in capital			48,563,230				48,540,802
Accumulated deficit			(2,016,693	)			(1,136,968	)
Less treasury stock, at cost; 2,397,631 and 2,303,492 shares at
December 31, 2012 and June 30, 2012, respectively			(20,972,380	)			(20,731,428	)
Total stockholders' equity			25,678,436				26,776,685
Total liabilities and stockholders' equity		$	30,128,133			$	31,347,069

 

See accompanying Notes to Financial Statements.

 

 

ALLIED HEALTHCARE PRODUCTS, INC.

STATEMENT OF CASH FLOWS

(UNAUDITED)

 

		Six months ended
		December 31,
		2012				2011
Cash flows from operating activities:
Net loss		$	(879,725	)		$	(122,278	)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization			650,379				627,378
Stock based compensation			22,428				21,695
Provision for doubtful accounts and sales
returns and allowances			17,054				17,030
Deferred taxes			(8,971	)			(8,678	)
Changes in operating assets and liabilities:
Accounts receivable			1,274,952				1,138,044
Inventories			(48,358	)			(519,444	)
Income tax receivable			(537,664	)			(73,929	)
Other current assets			(189,405	)			(290,234	)
Accounts payable			(103,263	)			383,071
Deferred revenue			(114,700	)			(344,100	)
Other accrued liabilities			106,246				(177,084	)
Net cash provided by operating activities			188,973				651,471
Cash flows from investing activities:
Capital expenditures			(646,233	)			(912,994	)
Net cash used in investing activities			(646,233	)			(912,994	)
Cash flows from financing activities:
Purchases of treasury stock			(240,952	)			-
Net cash used in financing activities			(240,952	)			-
Net increase (decrease) in cash and cash equivalents			(698,212	)			(261,523	)
Cash and cash equivalents at beginning of period			5,284,543				6,512,887
Cash and cash equivalents at end of period		$	4,586,331			$	6,251,364

 

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, 2012.

 

Recently Issued Accounting Pronouncements

 

We have reviewed accounting pronouncements and interpretations thereof issued by the FASB, AICPA and the SEC that have effective dates during the periods reported and in future periods. Management does not believe that any of those pronouncements will have a material impact on the Company’s present or future financial statements.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash, accounts receivable and accounts payable. The carrying amounts for cash, accounts receivable and accounts payable approximate their fair value due to the short maturity of these instruments.

 

2. Inventories

 

Inventories are comprised as follows:

 

		December 31, 2012				June 30, 2012
Work-in progress		$	689,645			$	654,677
Component parts			7,799,890				7,495,333
Finished goods			2,849,782				3,178,507
Reserve for obsolete and excess inventory			(1,289,733	)			(1,327,291	)
		$	10,049,584			$	10,001,226

 

 

3. 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 months ended December 31, 2012 and 2011 were 8,100,593 and 8,124,386, respectively. The number of diluted shares outstanding for the three months ended December 31, 2012 and 2011 were 8,100,593 and 8,124,834, respectively. The number of basic shares outstanding for the six months ended December 31, 2012 and 2011 was 8,112,490 and 8,124,386, respectively. The number of diluted shares outstanding for the six months ended December 31, 2012 and 2011 was 8,112,490 and 8,124,386, respectively.

 

4. 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 and that it is not reasonably possible at this time that any additional liabilities will result from the resolution of these matters that would have a material adverse effect on the Company’s results of operations, financial position, or cash flows.

 

Stuyvesant Falls Power Litigation. The Company is currently involved in litigation with Niagara Mohawk Power Corporation d/b/a National Grid (“Niagara”) and other parties, which provides electrical power to the Company’s facility in Stuyvesant Falls, New York. In fiscal year 2011, Niagara began sending invoices to the Company for electricity used at the Company’s Stuyvesant Falls plant. The Company maintains 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. Niagara’s attempts to collect such invoices were stopped in December 2010 by a temporary restraining order, although a court has not yet ruled on the merits of all of Niagara’s claims. Among other things, Niagara seeks approximately $469,000, which it alleges represents the value of electricity provided prior to the commencement of litigation going back to 2003. The Company has posted a $250,000 bond which Niagara could draw against for electricity provided and not collected since the December 2010 temporary restraining order in the event Niagara prevails in its lawsuit. The amount of the bond exceeds the cumulative invoiced electricity charges generated by Niagara since the issuance of the temporary restraining order. As of December 31, 2012, the Company has not recorded a provision for this matter as management intends to vigorously defend this litigation and believes it is not probable that the Company will be required to pay for electricity as Niagara claims. The Company believes, however, that any liability it may incur should it not prevail in the litigation would not have a material adverse effect on its financial condition, its result of operations, or its cash flows.

 

 

Employment Contract

 

In March 2007, the Company entered into a three year employment contract with its chief executive officer. The contract is subject to annual renewals after the initial term. The contract was amended and restated in December 2009 without extending its term. 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.

 

5. Financing

 

The Company is party to a Loan and Security Agreement, dated November 17, 2009, with Enterprise Bank & Trust (the “Credit Agreement”) pursuant to which the Company obtained a secured revolving credit facility with borrowing availability of up to $7,500,000 (the “Credit Facility”). The Company’s obligations under the Credit Facility are secured by certain assets of the Company pursuant to the terms and subject to the conditions set forth in the Credit Agreement.

 

The Credit Facility was amended on November 12, 2012 extending the maturity date to November 12, 2013, reducing the borrowing availability from $7,500,000 to $5,000,000, and removing all financial covenants. The Credit Facility will be available on a revolving basis until it expires on November 12, 2013, at which time all amounts outstanding under the Credit Facility will be due and payable. Advances under the Credit Facility will be made pursuant to a Revolving Credit Note executed by the Company in favor of Enterprise Bank & Trust. Such advances will bear interest at a rate equal to 3.50% in excess of the 30-day LIBOR rate. Advances may be prepaid in whole or in part without premium or penalty.

 

 

Under the Credit Agreement, advances are generally subject to customary borrowing conditions. The Credit Agreement also contains covenants with which the Company must comply during the term of the Credit Facility. Among other things, such covenants restrict the Company’s ability to incur certain additional debt; make specified restricted payments, dividends and capital expenditures; authorize or issue capital stock; enter into certain transactions with affiliates; consolidate or merge with or acquire another business; sell certain of its assets or dissolve or wind up the Company. The Credit Agreement also contains certain events of default that are customary for financings of this type including, without limitation: the failure to pay principal, interest, fees or other amounts when due; the breach of specified representations or warranties contained in the loan documents; cross-default with certain other indebtedness of the Company; the entry of uninsured judgments that are not bonded or stayed; failure to comply with the observance or performance of specified agreements contained in the loan documents; commencement of bankruptcy or other insolvency proceedings; and the failure of any of the loan documents entered into in connection with the Credit Facility to be in full force and 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 4.00% above the otherwise applicable interest rate (provided, that the interest rate may not exceed the highest rate permissible under law), and the lender would have the option to accelerate maturity and payment of the Company’s obligations under the Credit Facility.

 

The 30-day LIBOR rate was 0.21% on December 31, 2012.

 

At December 31, 2012 the Company had no aggregate indebtedness, including capital lease obligations, short-term debt and long term debt.

 

6. Baralyme® Agreement

 

A reconciliation of deferred revenue resulting from the agreement with Abbott Laboratories (“Abbott”), with the amounts received under the agreement, and amounts recognized as net sales is as follows:

 

		Three Months ended								Six Months ended
		December 31,								December 31,
		2012				2011				2012				2011
Beginning balance		$	-			$	630,850			$	114,700			$	802,900
Revenue recognized
as net sales			0				(172,050	)			(114,700	)			(344,100	)
			0				458,800				0				458,800
Less - Current portion
of deferred revenue			0				(458,800	)			0				(458,800	)
		$	0			$	0			$	0			$	0

 

 

In addition to the provisions of the agreement relating to the withdrawal of the Baralyme® product, Abbott agreed to pay Allied up to $2,150,000 in product development costs to pursue development of a new carbon dioxide absorption product for use in connection with inhalation anesthetics that does not contain potassium hydroxide and does not produce a significant exothermic reaction with currently available inhalation agents. As of December 31, 2012, $2,150,000 has been received as a result of product development activities.

 

7. Share Repurchases

 

On November 21, 2012 the Company’s Board of Directors approved the purchase of up to 100,000 shares of the Company’s common stock. This authority terminates on February 19^th, 2013. Pursuant to this authorization, the Company repurchased 94,139 shares of stock at an average price of $2.54 for an aggregate total purchase price of $240,952.

 

8. Subsequent Events

 

The Company’s product liability insurer, Medmarc Insurance Group, demutualized and was acquired by ProAssurance Corporation on January 1, 2013. As a policyholder of a mutual insurance company, Allied was entitled to receive a portion of the proceeds received by Medmarc. In January 2013 the Company received a cash payment of approximately $516,000 and will reflect a gain of this amount in the quarter ended March 31, 2013.

 

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

 

Medical Device Excise Tax

 

Under the Health Care Education Reconciliation Act of 2010, beginning on January 1, 2013, a Medical Device Excise Tax (“MDET”) will be imposed on all U.S. sales of certain medical devices. The tax is 2.3% of the selling price of the taxable product, subject to certain exceptions. The MDET will represent an additional cost burden on the Company’s operations. If the excise tax were applied to 2012 revenues, it would have reduced net profits by approximately $200,000, reducing earnings per share by approximately 2 cents per share. The Company intends to mitigate the effect of the MDET through a combination of anticipated increases in market prices, by improving operational efficiency, and the increased access to healthcare anticipated by the Act. However, the Company does not have any assurance that these strategies will be successful in entirely offsetting the cost of the MDET.

 

 

Results of Operations

 

Three months ended December 31, 2012 compared to three months ended December 31, 2011

 

Allied had net sales of $9.9 million for the three months ended December 31, 2012, down $0.8 million from net sales of $10.7 million in the prior year same quarter. Domestic sales were down 18.0% while international sales, which represented 31.2% of second quarter sales, were up 31.6% from the prior year same quarter.

 

Sales for the three months ended December 31, 2012 and 2011 included $0, and $172,050 respectively for the recognition of income of payments resulting from the agreement with Abbott Laboratories to cease the production and distribution of Baralyme®. Income from the agreement was recognized at $57,350 per month until the expiration of the agreement in August 2012. Allied continues to sell Carbolime®, a carbon dioxide absorbent with a different formulation than Baralyme®, as well as Litholyme®, a new premium carbon dioxide absorbent. The Company ceased the sale of Baralyme® on August 27, 2004.

 

Orders for the Company’s products for the three months ended December 31, 2012 of $9.3 million were $0.2 million or 2.1% lower than orders for the prior year same quarter of $9.5 million. Domestic orders are down 3.8% over the prior year same quarter while international orders, which represented 26.7% of second quarter orders, were 3.3% higher than orders for the prior year same quarter. The decrease in domestic orders during the three months ended December 31, 2012 was primarily for items for the construction market. The Company does not believe that this indicates a decrease in aggregate market demand. The Company has improved its systems and processes to be more effective in this market. The Company also continues to believe that the purchase of equipment and durable goods and the purchase of equipment by hospitals and municipalities have been cut to meet budgets and conserve cash due to the slow recovery of the economy since the recession in 2008. Orders and sales remain below pre-recession levels.

 

Gross profit for the three months ended December 31, 2012 was $2.1 million, or 21.2% of net sales, compared to $2.7 million, or 25.2% of net sales, for the three months ended December 31, 2011. The $0.6 million reduction in gross profit is primarily attributable to the decrease in sales and production. Gross profit, as a percentage of sales, was negatively impacted by the $172,050 reduction in payments resulting from the Abbott agreement recognized in sales and income. In addition, lower sales have led to lower utilization of fixed expenses in the Company’s manufacturing operations.

 

Selling, general and administrative expenses for the three months ended December 31, 2012 were $2.9 million compared to selling, general and administrative expenses of $2.7 million for the three months ended December 31, 2011. Salaries and benefits are approximately $216,000 higher than in the prior year and travel expenses are approximately $80,000 higher than in the prior year. These increases have been offset by decreases in other expense accounts including a $48,000 decrease in legal expenses, $36,000 reduction in sample expenses, and a $30,000 reduction in recruiting expenses.

 

Loss from operations was $751,132 for the three months ended December 31, 2012 compared to income from operations of $41,043 for the three months ended December 31, 2011. Allied had loss before benefit from income taxes in the second quarter of fiscal 2013 of $755,956 compared to income before provision for income taxes in the second quarter of fiscal 2012 of $36,597.

 

 

Net loss for the second quarter of fiscal 2013 was $468,693 or $0.06 per basic and diluted share compared to net income of $22,690 or $0.00 per basic and diluted share for the second quarter of fiscal 2012. The weighted average number of common shares outstanding, used in the calculation of basic earnings per share for the second quarters of fiscal 2013 and 2012 were 8,100,593 and 8,124,386, respectively. The number of diluted shares outstanding for the three months ended December 31, 2012 and 2011 were 8,100,593 and 8,124,834, respectively.

 

Six months ended December 31, 2012 compared to six months ended December 31, 2011

 

Allied had net sales of $19.2 million for the six months ended December 31, 2012, down $2.9 million, or 13.1% from net sales of $22.1 million in the prior year same period resulting from lower order levels. Domestic sales were down 20.6% from the prior year same period while international sales were up 17.3% from the prior year same period. International business represented 27.1% of sales for the first six months of fiscal 2013.

 

Sales for the six months ended December 31, 2012 and 2011 included $114,700 and $344,100 respectively for the recognition of income of payments resulting from the agreement with Abbott Laboratories to cease the production and distribution of Baralyme®. Income from the agreement was recognized at $57,350 per month until the expiration of the agreement in August 2012. Allied continues to sell Carbolime®, a carbon dioxide absorbent with a different formulation than Baralyme®, as well as Litholyme®, a new premium carbon dioxide absorbent. The Company ceased the sale of Baralyme® on August 27, 2004.

 

Orders for the Company’s products for the six months ended December 31, 2012 of $18.9 million were $1.8 million or 8.7% lower than orders for the prior year same period of $20.7 million. Domestic orders are down 13.6% over the prior year same period while international orders, which represented 27.4% of orders for the first six months of fiscal 2013, were 7.6% higher than orders for the prior year same period. The drop in domestic orders is primarily in the construction market and does not reflect a further drop in aggregate demand in that market. The Company is improving its systems and processes to be effective in this market. The decrease in domestic orders is also partially the result of a decrease in government orders from the prior year. The Company believes this is a fluctuation in government orders generally and does not represent a decrease in the Company’s market share.

 

 

Gross profit for the six months ended December 31, 2012 was $4.1 million, or 21.4% of net sales, compared to $5.1 million, or 23.1% of net sales, for the six months ended December 31, 2011. The decrease in gross profit is primarily the result of lower sales and production levels, including the decrease in income recognized from the agreement with Abbott Laboratories, than in the prior year. Gross profit during the first six months was favorably impacted from the prior year by an approximately $0.4 million reduction in shipping and other startup cost at its Stuyvesant Falls facility. Gross Profit during the first six months of fiscal 2013 was also favorably impacted by approximately $0.2 million in cost reductions for purchased materials and manufacturing processes at the Company’s St. Louis facility.

 

Selling, general and administrative expenses for the six months ended December 31, 2012 were $5.5 million compared to selling, general and administrative expenses of $5.3 million for the six months ended December 31, 2011. Salaries and benefits are approximately $273,000 higher than in the prior year. In addition travel expense is approximately $108,000 higher. These increases have been partially offset by decreases in other expense accounts including a $91,000 decrease in legal expenses and a $59,000 decrease in recruiting expenses.

 

Loss from operations was $1.4 million for the six months ended December 31, 2012 compared to loss from operations of $0.2 million for the six months ended December 31, 2011. Allied had loss before benefit from income taxes in the first six months of fiscal 2013 of $1.4 million, compared to loss before benefit from income taxes in the first six months of fiscal 2012 of $197,222. The Company recorded a tax benefit of $539,186 for the six months ended December 31, 2012 compared to a tax benefit of $74,944 for the six months ended December 31, 2011.

 

Net loss for the six months ended December 31, 2012 was $879,725 or $0.11 per basic and diluted share compared to net loss of $122,278 or $0.02 per basic and diluted share for the first six months of fiscal 2012. The weighted average number of common shares outstanding, used in the calculation of basic earnings per share for the first six months of fiscal 2013 and 2012 were 8,112,490 and 8,124,386, respectively. The weighted average number of common shares outstanding, used in the calculation of diluted earnings per share for the first six months of fiscal 2013 and 2012 were 8,112,490 and 8,124,386, respectively.

 

Liquidity and Capital Resources

 

The Company believes that available resources, including availability under a credit facility described below, are sufficient to meet operating requirements in the coming year.

 

The Company’s working capital was $14.9 million at December 31, 2012 compared to $16.0 million at June 30, 2012. The decrease in working capital was primarily a result of accounts receivable which decreased by $1.3 million largely due to a decrease in sales. Accounts receivable as measured in days of sales outstanding (“DSO”) was 36 DSO at December 31, 2012; down from 44 DSO at June 30, 2012. In addition cash and cash equivalents decreased by $0.7 million. At December 31, 2012 these decreases in working capital were offset by an increase in other current assets of $0.2 million and an increase in income tax receivable of $0.5 million. The increase in other current assets is a result of prepayment of the Company’s insurance premiums for the fiscal year.

 

 

The Company is party to a Loan and Security Agreement, dated November 17, 2009, with Enterprise Bank & Trust (the “Credit Agreement”) pursuant to which the Company has a secured revolving credit facility with borrowing availability of up to $5,000,000 (the “Credit Facility”). The Company’s obligations under the Credit Facility are secured by certain assets of the Company pursuant to the terms and subject to the conditions set forth in the Credit Agreement. See Note 5 – Financing to the Company’s consolidated unaudited financial statements for more information concerning the Credit Facility.

 

Advances under the Credit Facility will be made pursuant to a Revolving Credit Note executed by the Company in favor of Enterprise Bank & Trust. Such advances will bear interest at a rate equal to the 30-day LIBOR rate plus 3.50%. Advances may be prepaid in whole or in part without premium or penalty. The 30-day LIBOR rate was 0.21% on December 31, 2012.

 

At December 31, 2012 the Company had no aggregate indebtedness, including capital lease obligations, short-term debt and long term debt.

 

In the event that economic conditions were to severely worsen for a protracted period of time, we believe that we will have borrowing capacity under credit facilities that will provide sufficient financial flexibility. The Company would have options available to ensure liquidity in addition to increased borrowing. Capital expenditures, which are budgeted at $1.5 million for the fiscal year ended June 30, 2013, could be postponed.

 

Inflation has not had a material effect on the Company’s business or results of operations during the first six months of fiscal 2013.

 

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.

 

Recently Issued Accounting Guidance

 

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, 2012.

 

 

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, 2012, the Company did not have any debt outstanding. The revolving credit facility bears an interest rate using the 30-day LIBOR rate 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 while borrowing on the revolving credit facility.

 

The Company had no holdings of derivative financial or commodity instruments at December 31, 2012. 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, 2012, 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, 2012 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

 

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.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

During the quarter ended December 31, 2012 the Company repurchased common stock as follows:

 

										(c) Total Number of				(d) Maximum Number
		(a) Total								Shares Purchased				of Shares that May
		Number of				(b) Average				as Part of Publicly				Yet Be Purchased
		shares				Price Paid				Announced Plans				Under the Plans
Period		Purchased				per Share				or Programs				or Programs
October 2012
October 1, 2012 through October 31, 2012			-				-				-				-
November 2012
November 1, 2012 through November 30, 2012			18,100			$	2.54				-				81,900
December 2012
December 1, 2012 through December 31, 2012			76,039			$	2.54				-				5,861
Total			94,139			$	2.54				-				5,861

 

On November 21, 2012 the Company’s Board of Directors approved the purchase of up to 100,000 shares of the Company’s common stock. This authority terminates on February 19, 2013. During the months of November 2012 and December 2012 the Company repurchased on the open-market 94,139 shares for an aggregate total purchase price of $240,952.

 

 

Item 6. Exhibits

 

(a)	Exhibits:
	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)*
	99.1	Press Release dated February 11, 2013 announcing second quarter earnings*
	101	Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2012, is formatted in XBRL interactive data files: (i) Statement of Operations for the three and six months ended December 31, 2012 and 2011; (ii) Balance Sheet at December 31, 2012 and June 30, 2012; (iii) Statement of Cash Flows for the six months ended December 31, 2012 and 2011; and (iv) Notes to Financial Statements.**

 

*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.

 

** As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

 

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 11, 2013