3. Inventories

Inventories are comprised as follows:

3.4. Earnings per share

Basic earnings per share are based on the weighted average number of shares of all common stock outstanding during the period. Diluted earnings per share are based on the sum of the weighted average number of shares of common stock and common stock equivalents outstanding during the period. The number of basic and diluted shares outstanding for the three and ninesix months ended MarchDecember 31, 2018 and 2017 were 4,013,537.

4.5. 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 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.

Stuyvesant Falls Power Litigation. The Company is currently involved in litigation with Niagara Mohawk Power Corporation d/b/a National Grid (“Niagara”), which provides electrical power to the Company’s facility in Stuyvesant Falls, New York, and one other party. The Company 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. After the commencement of the litigation, Niagara began sending invoices to the Company for electricity used at the Company’s Stuyvesant Falls plant. Niagara’s attempts to collect such invoices were stopped in December 2010 by a temporary restraining order. Among other things, Niagara seeks as damages the value of electricity received by the Company without charge. The total value of electricity at issue in the litigation is not known with certainty and Niagara has alleged different amounts of damages. Niagara alleged in its Second Amended Verified Complaint, dated February 6, 2012, damages of approximately $469,000 in free electricity from May 2003 through May 2010. Niagara also alleged in its Motion For Summary Judgment, filed on March 14, 2014, damages of approximately $492,000 in free electricity from May 2010 through the date of the filing. In April 2015, Allied received an invoice for electrical power at the Stuyvesant Falls plant with an “Amount Due” balance of $696,000 as of March 31, 2015 without any description as to the period of time covered by the invoice.

The Company filed a Motion for Summary Judgment on March 14, 2014, seeking dismissal of Niagara’s claims and oral arguments on the motions were held on June 13, 2014. On October 1, 2014, the Court granted the Company’s motion, denied Niagara’s motion and ruled that the Company is entitled to receive electrical power pursuant to the power covenants. On October 26 and October 30, 2014, Niagara and the other party filed separate notices of appeal of the Court’s decision. On March 31, 2016 the Supreme Court of New York, Appellate Division, Third Department reversed the trial court decision and held that the free power covenants are no longer enforceable. The Company’s application for leave to appeal this ruling was dismissed as premature by the New York Court of Appeals on September 20, 2016. On May 26, 2017 the Company again moved for leave to appeal the March 31, 2016 decision. That motion was granted on October 7, 2017 by the New York State Court of Appeals. The Company filed its brief and record on January 26, 2018. Niagara’sNiagara and the other party to the lawsuit, Albany Engineering Corporation, filed their responses are due on MayJuly 16, 2018 withand the Company’sCompany filed its reply due by May 31,on August 14, 2018. Once fully briefed, theThe matter will next be scheduled for argument most likely in March 2019.

The appellate decision terminated the enforceability of the free power covenants as of March 31, 2016. The appellate decision did not order the Company to pay any amounts for power consumed prior to such date and the Company believes that it is not liable for any such damages as a result of the appellate decision. On December 21, 2016, Niagara filed a motion to the trial court asking that it hold additional proceedings to establish what damages, if any, are owed to Niagara as the result of the appellate decision. The Company filed its response on January 23, 2017. On April 25, 2017, the court denied Niagara’s motion in its entirety finding that no damages could be awarded based on the Appellate Division’s decision. Niagara has filed a Notice of Appeal from that decision, but to date, has not filed the appeal.

As of MarchDecember 31, 2018, the Company has not recorded a provision for this matter. The Company commenced paying for power at the Stuyvesant Falls facility in April 2016.

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.

5.6. Financing

Allied Healthcare Products, Inc. (the “Company”)The Company is party to a Loan and Security Agreement with Summit Financial Resources, L.P. (“Summit”), dated effective February 27, 2017, as amended April 16, 2018 (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 $2,000,000. At December 31, 2018 availability under the agreement was $367,741.

The Credit Facility will be available, subject to its terms, on a revolving basis until it expires on February 27, 2020, 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 the each calendar month, or portion thereof.

Regardless of the amount borrowed under the Credit Facility, the Company will pay a minimum amount of .25% (25 basis points) per month on the maximum availability ($5,000 per month). In the event the Company prepays or terminates the Credit Facility prior to February 27, 2019,2020, 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, 20192020 and the date of such prepayment or termination.

Under the Credit Agreement, advances are generally subject to customary borrowing conditions and to Summit’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 Summit would have the option to accelerate maturity and payment of the Company’s obligations under the Credit Facility.

At MarchDecember 31, 2018, the Company had $682,772$1,356,667 of indebtedness, including capital lease obligations, short-term debt and long term debt, and $1,317,228 available to borrow from the line based on collateral requirements.debt. The prime rate as reported in the Wall Street Journal was 4.75%5.50% on MarchDecember 31, 2018.

The Company was in compliance with all of the covenants associated with the Credit Facility at MarchDecember 31, 2018.

6.7. Income Taxes

The Company accounts for income taxes under ASC Topic 740: “Income Taxes.” Under ASC 740, the deferred tax provision is determined using the liability method, whereby deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and income tax bases of assets and liabilities using presently enacted tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. 

In the three and ninesix months ended MarchDecember 31, 2018 the Company recorded the tax benefit of losses incurred in the amount of approximately $260,000$201,000 and $627,000,$506,000, 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 ninesix months ended MarchDecember 31, 2017 the Company recorded the tax benefit of losses incurred in the amount of approximately $142,000$75,000 and $578,000.$367,000. 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.

U.S. Tax Reform

On The total valuation allowance recorded by the Company as of December 22,31, 2018 and 2017 President Trump signed into law new tax legislation commonly referred to as thewas approximately $2,706,000 and $1,871,000, respectively. The Tax Cuts and Jobs Act (the "TCJA"(“TCJA”), which became effective January 1, 2018. was enacted in the U.S. on December 22, 2017. The TCJA significantly revises U.S. tax law by, among other provisions loweringreduces the U.S. federal statutory incomecorporate tax rate from 35% to 21%, and eliminating or reducing certain income tax deductions.

ASC Topic 740, requires the effects. As a result of changesthis reduction in tax laws to be recognizedrate in the period in which the legislation is enacted. However, due to the complexity and significance of the TCJA's provisions, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") on December 22, 2017, which allows companies to record the tax effects of the TCJA on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment.

During the second quarter of the fiscal year ended 2018 the Company recorded a one-time chargereduction in its recognized deferred tax assets along with a reduction in the valuation allowance. The impact of $136,386 within its income tax provisionthese adjustments resulted in connection with the TCJA, alla net reduction of which related to the revaluation of the Company'srecognized deferred tax assets and liabilities net of a resultant impactincome tax expense in the amount of $136,386. To the revaluation onextent that the recorded valuation allowance. This one-time charge, which was recorded on a provisional basis had no impact onCompany’s losses continue in future quarters, the three months ended March 31, 2018 and impacted the Company's effective tax rate for the nine-month period by increasing it from 0% to 7%. The charge lowered its basic and diluted earnings per share by $0.03 for the nine months ended March 31, 2018. The provisional amounts were based on the Company's present interpretationsbenefit of the TCJA and current available information, including assumptions and expectations about future events, such as its projected financial performance, and arethose losses will be subject to further refinement as additional information becomes available (including the Company's actual full fiscal 2018 results of operations and financial condition, as well as potential new or interpretative guidance issued by the FASB or the Internal Revenue Service and other tax agencies) and further analyses are completed.a valuation allowance.

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

Results of Operations

Three months ended MarchDecember 31, 2018 compared to three months ended MarchDecember 31, 2017

Allied had net sales of $8.5$8.1 million for the three months ended MarchDecember 31, 2018, down $0.1$0.6 million from net sales of $8.6$8.7 million in the prior year same quarter. Domestic sales were down 3.5%7.9% while international sales, which represented 19.8%27.1% of thirdsecond quarter sales, were up 8.5%down 4.5% from the prior year same quarter.

Orders for the Company’s products for the three months ended MarchDecember 31, 2018 of $8.8 millionand 2017 were $0.4 million or 4.3% lower than orders for the prior year same quarter of $9.2$7.9 million. Domestic orders are down 5.5%10.9% over the prior year same quarter while international orders, which represented 24.0%28.0% of thirdsecond quarter orders, were 2.6% lower47.3% higher than orders for the prior year same quarter. International sales and orders are subject to fluctuation in international demand. International sales can be impacted by political and economic uncertainty in regions and countries where the Company markets its products.

Gross profit for the three months ended MarchDecember 31, 2018 was $1.2 million, or 14.1%14.8% of net sales, compared to $1.7$1.9 million, or 19.8%21.8% of net sales, for the three months ended MarchDecember 31, 2017. The $0.5$0.7 million decrease in gross profit is partially attributable to several factors including product mix, cost of raw materials, pricing and production variances. In the third quarter of 2018, the sale of lower margin vendor supplied items made up a larger percentage of sales than in the third quarter of 2017 leading to an approximate $0.2 million decrease in margins. Production costs, primarily material costssales. Lower sales and lower production resulted in less utilization of fixed overhead expenses. In addition, fringe benefits including medical benefit payments were approximately $0.1 million$110,000 higher than in the prior year as the cost of purchased commodities has increased. Margins also decreased due to slightly higher production variances, including scrap.year.

Selling, general and administrative expenses for the three months ended MarchDecember 31, 2018 were $2.0 million compared to selling, general and Marchadministrative expenses of $2.2 million for the three months ended December 31, 2017 were $2.1 million.2017. Legal expenses are approximately $82,000 lower than in the prior year. Travel expense was $42,000 lower than in the prior year.

Loss from operations was $887,626$761,786 for the three months ended MarchDecember 31, 2018 compared to loss from operations of $403,361$244,132 for the three months ended MarchDecember 31, 2017.

Allied had a loss before benefit fromprovision for income taxes in the thirdsecond quarter of fiscal 20182019 of $901,137$779,427 compared to loss before benefit from income taxes in the thirdsecond quarter of fiscal 20172018 of $403,242.$244,307.  The Company’s tax provision net of valuation allowance reflects a tax benefitprovision of $0 and $136,386 for the three months ended MarchDecember 31, 2018 and 2017.  In the quarter ended December 31, 2017, the Company revaluated its deferred tax assets, liabilities and valuation allowance to reflect the changes in tax rate occurring in connection with the TCJA. The impact of the revaluation was a current period provision for income taxes in the amount of $136,386. In both quarters ended MarchDecember 31, 2018 and 2017, the tax benefit of losses in the amount of approximately $260,000$201,000 and $142,000,$75,000, respectively were fully offset by a valuation allowance of equivalent amount.   To the extent that the Company’s losses continue in future quarters, the tax benefit of those losses will be fully offset by a valuation allowance.

Net loss for the thirdsecond quarter of fiscal 20182019 was $901,037$779,427 or $0.22$0.19 per basic and diluted share compared to net loss of $403,242$380,693 or $0.10$0.09 per basic and diluted share for the thirdsecond quarter of fiscal 2017.2018. The weighted average number of common shares outstanding, used in the calculation of basic and diluted earnings per share for the thirdsecond quarters offiscal 2018 2019 and 20172018 were 4,013,537.

NineSix months ended MarchDecember 31, 2018 compared to ninesix months ended MarchDecember 31, 2017

Allied had net sales of $25.1$15.4 million for the ninesix months ended MarchDecember 31, 2018, down $0.2$1.2 million, or 0.8%7.2% from net sales of $25.3$16.6 million in the prior year same period.period resulting from lower order levels and a decrease in customer orders released for shipment. Domestic sales were down 2.5%5.6% from the prior year same period while international sales were up 5.2%down 12.9% from the prior year same period. International business represented 23.6%24.0% of sales for the first ninesix months of fiscal 2018.2019.

Orders for the Company’s products for the ninesix months ended MarchDecember 31, 2018 of $24.5$15.3 million were $0.6$0.4 million or 2.4%2.5% lower than orders for the prior year same period of $25.1$15.7 million. Domestic orders are down 3.3% over7.3% from the prior year same period while international orders, which represented 23.2%26.8% of orders for the first ninesix months of fiscal 2018,2019, were 0.1%15.3% higher than orders for the prior year same period. The decrease inlevel of domestic orders reflects variability across product lines, however the markets served. The increasedecrease in International orders was due to increased demand for the AHP300 Ventilator. Internationalfirst half were concentrated in construction products. The international market and the market in domestic construction products do reflect variability across periods. The Company continues to work to improve the sales effort in these two areas with increased management reporting on sales activity and orders are subject to fluctuation in international demand. These fluctuations are at times due to political and economic uncertainty internationally. International sales can be impacted by political and economic uncertainty in regions and countries where the Company markets its products.effectiveness.

Gross profit for the ninesix months ended MarchDecember 31, 2018 was $4.5$2.1 million, or 17.9%13.6% of net sales, compared to $5.0$3.3 million, or 19.8%19.9% of net sales, for the ninesix months ended MarchDecember 31, 2017. Gross profit was negatively impacted by cost increases as well as price and mix changes. The largest impact on gross profits was the increased cost of production, primarily materials of approximately $0.3 million. The remaining$1.2 million decrease in marginsgross profit is partially attributable to the $1.2 million decrease in sales. Lower sales and lower production resulted in less utilization of fixed overhead expenses. In addition, fringe benefits including medical benefit payments were due to unfavorable changes$190,000 higher than in the mixprior year, and price of products sold.maintenance expense was approximately $80,000 higher than in the prior year.

Selling, general and administrative expenses for the ninesix months ended MarchDecember 31, 2018 were $6.4$4.1 million compared to selling, general and administrative expenses of $6.6$4.3 million for the ninesix months ended MarchDecember 31, 2017. SalariesThe $0.2 million decrease was primarily legal and benefits are approximately $135,000 lower than in the prior year and business travel expenses are approximately $93,000 lower than in the prior year.other non-personnel expenses.

Loss from operations was $1.9$2.0 million for the ninesix months ended MarchDecember 31, 2018 compared to loss from operations of $1.6$1.0 million for the ninesix months ended MarchDecember 31, 2017.

Allied had a loss before provision for income taxes in the first ninesix months of fiscal 20182019 of $1.9$2.0 million compared to loss before benefit fromprovision for income taxes in the thirdsecond quarter of fiscal 20172018 of $1.6$1.0 million.  The Company’s tax provision net of valuation allowance reflects a tax provision of $136,386$0 and $0$136,386 for the ninesix months ended MarchDecember 31, 2018 and 2017.  In both the ninesix months ended MarchDecember 31, 2018 and 2017, the tax benefit of losses in the amount of approximately $627,000 and $578,000, respectively were fully offset by a valuation allowance of an equivalent amount.   In the nine months ended March 31, 2018, effective as of December 22, 2017, the Company revaluated its deferred tax assets, liabilities and valuation allowance to reflect the changes in tax rate occurring in connection with the TCJA. The impact of the revaluation was a charge to thecurrent period provision for income taxes in the amount of $136,386$136,386. In the six months ended December 31, 2018 and 2017, the tax benefit of losses in December 2017.the amount of approximately $506,000 and $367,000, respectively were fully offset by a valuation allowance of an equivalent amount.   To the extent that the Company’s losses continue in future quarters, the tax benefit of those losses will be fully offset by a valuation allowance.

Net loss for the ninesix months ended MarchDecember 31, 2018 was $2,048,966$2.0 million or $0.51$0.50 per basic and diluted share compared to net loss of $1,594,277$1.1 million or $0.40$0.29 per basic and diluted share for the first ninesix months of fiscal 2017.2018. The weighted average number of common shares outstanding, used in the calculation of basic and diluted earnings per share for the first ninesix months of fiscal 20182019 and 20172018 was 4,013,537.

Liquidity and Capital Resources

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

The Company’s working capital was $8.5$7.1 million at March,December, 2018 compared to $9.7$8.7 million at June 30, 2017. Cash and cash equivalents2018. Accounts Receivable decreased by $0.7$0.3 million, Inventories decreased by $0.1 million, accounts payableAccounts Payable increased by $0.2$0.4 million and Debt under the Credit Facilitydebt increased $0.7$1.4 million. TheseDuring fiscal 2019, these decreases in working capital have beenwere partially offset by a $0.4$0.3 million increase in Inventory and a $0.2 million increase in Accounts Receivable.Cash and cash equivalents. Accounts Payable and Other Accrued Liabilities are subject to normal fluctuations in purchasing levels and the timing of payments.payments within the quarter. Accounts Receivable was $3.7$3.4 million at MarchDecember 31, 2018, an increasea decrease from $3.4$3.7 million at June 30, 2017.2018. Accounts Receivable as measured in days sales outstanding (“DSO”) was 4137 DSO at MarchDecember 31, 2018; a increasedecrease from 3941 DSO at June 30, 2017. To manage inventory, the2018. The Company does adjust product forecast, order quantities and safety stock based on changes in demand patterns in order to manage inventory levels.

Allied Healthcare Products, Inc. (the “Company”) isAs of December 31, 2018, the Company was party to a Loan and Security Agreement with Summit Financial Resources, L.P. (“Summit”), dated effective February 27, 2017, as amended April 16, 2018 (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 $2,000,000.  At MarchDecember 31, 2018 availability under the Credit Agreementagreement was $1,317,228. At March 31, 2018,$367,741. The reduction in availability during the quarter reflects increased borrowing due to operating losses and the lender’s exclusion of a portion of the Company’s assets from the borrowing base calculation. The Company expectedexpects that it will use the Credit Facility to finance the Company’s operations in the short term.

The Credit Facility will be available, subject to its terms, on a revolving basis until it expires on February 27, 2020.2020, 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 and subject to a minimum availability fee of 0.25% (25 basis points) per monthJournal. Interest is computed based on the maximum availability ($5,000 per month).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 the each calendar month, or portion thereof.

Regardless of the amount borrowed under the Credit Facility, the Company will pay a minimum amount of .25% (25 basis points) per month on the maximum availability ($5,000 per month). In the event the Company prepays or terminates the Credit Facility prior to February 27, 2020, 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, 2020 and the date of such prepayment or termination.

Under the Credit Agreement, advances are generally subject to customary borrowing conditions and to Summit’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. In

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 is calculated onat a variable interest rate per annum equal to 20.00% above the primeotherwise applicable interest rate adjusted as(provided, that the interest rate may not exceed the highest rate permissible under law), and Summit would have the option to accelerate maturity and payment of the date of any change inCompany’s obligations under the prime rate.Credit Facility.

At MarchDecember 31, 2018, the Company had $682,772$1,356,667 of indebtedness, including capital lease obligations, short-term debt, and long term debt. The prime rate as reported in the Wall Street Journal was 5.50% on December 31, 2018.

DueFurther reductions in availability, either due to its continued losses or changes by Summit to the Company’s borrowing base, could have a material adverse impact on our liquidity and ability to meet our operating losses,requirements. In such a case, the Company maywould need to access additional sources of liquidity if it does not return to profitability. The Company believes it could negotiate with Summit to increase the availability under the Credit Agreement to utilize more of its borrowing base. This would likely involve an increase in the minimum availability fees under the Credit Agreement and there is no guarantee that Summit would agree to such an increase. If the Company were unable to reach such an agreement with Summit to increase availability, the Company could also attempt to negotiate a larger credit facility with another lender, but the Company would be obligated to pay the above described pre-payment penalty to Summit. There is no assurance that the Company could secure either increased availability from Summit or a new credit facility from a new lender, in which case the Company would have to use other assets to obtain liquidity, such as a sale-leaseback of some or all of its real estate.

The Company was in compliance with all of the covenants associated with the Credit Facility at MarchDecember 31, 2018.

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, 2017.2018.

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 MarchDecember 31, 2018, the Company had $682,772$1,356,667 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 Credit Facility.revolving credit facility.

The Company had no holdings of derivative financial or commodity instruments at MarchDecember 31, 2018. 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 MarchDecember 31, 2018, 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 MarchDecember 31, 2018 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

Stuyvesant Falls Power Litigation. The Company is currently involved in litigation with Niagara Mohawk Power Corporation d/b/a National Grid (“Niagara”), which provides electrical power to the Company’s facility in Stuyvesant Falls, New York, and one other party. The Company 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. After the commencement of the litigation, Niagara began sending invoices to the Company for electricity used at the Company’s Stuyvesant Falls plant. Niagara’s attempts to collect such invoices were stopped in December 2010 by a temporary restraining order. Among other things, Niagara seeks as damages the value of electricity received by the Company without charge. The total value of electricity at issue in the litigation is not known with certainty and Niagara has alleged different amounts of damages. Niagara alleged in its Second Amended Verified Complaint, dated February 6, 2012, damages of approximately $469,000 in free electricity from May 2003 through May 2010. Niagara also alleged in its Motion For Summary Judgment, filed on March 14, 2014, damages of approximately $492,000 in free electricity from May 2010 through the date of the filing. In April 2015, Allied received an invoice for electrical power at the Stuyvesant Falls plant with an “Amount Due” balance of $696,000 as of March 31, 2015 without any description as to the period of time covered by the invoice.

The Company filed a Motion for Summary Judgment on March 14, 2014, seeking dismissal of Niagara’s claims and oral arguments on the motions were held on June 13, 2014. On October 1, 2014, the Court granted the Company’s motion, denied Niagara’s motion and ruled that the Company is entitled to receive electrical power pursuant to the power covenants. On October 26 and October 30, 2014, Niagara and the other party filed separate notices of appeal of the Court’s decision. On March 31, 2016 the Supreme Court of New York, Appellate Division, Third Department reversed the trial court decision and held that the free power covenants are no longer enforceable. The Company’s application for leave to appeal this ruling was dismissed as premature by the New York Court of Appeals on September 20, 2016. On May 26, 2017 the Company again moved for leave to appeal the March 31, 2016 decision. That motion was granted on October 7, 2017 by the New York State Court of Appeals. The Company filed its brief and record on January 26, 2018. Niagara’sNiagara and the other party to the lawsuit, Albany Engineering Corporation, filed their responses are due on MayJuly 16, 2018 withand the Company’sCompany filed its reply due by May 31,on August 14, 2018. Once fully briefed, theThe matter will next be scheduled for argument most likely in March 2019.

The appellate decision terminated the enforceability of the free power covenants as of March 31, 2016. The appellate decision did not order the Company to pay any amounts for power consumed prior to such date and the Company believes that it is not liable for any such damages as a result of the appellate decision. On December 21, 2016, Niagara filed a motion to the trial court asking that it hold additional proceedings to establish what damages, if any, are owed to Niagara as the result of the appellate decision. The Company filed its response on January 23, 2017. On April 25, 2017, the court denied Niagara’s motion in its entirety finding that no damages could be awarded based on the Appellate Division’s decision. Niagara has filed a Notice of Appeal from that decision, but to date, has not filed the appeal.

As of MarchDecember 31, 2018, the Company has not recorded a provision for this matter. The Company commenced paying for power at the Stuyvesant Falls facility in April 2016.

(a) Exhibits:Item 6.   Exhibits

*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.