| ALLIED HEALTHCARE PRODUCTS INC Item 1A Risk Factors The Company’s business, operations and financial condition are subject to various risks and uncertainties |
| You should carefully consider the risks and uncertainties described below, together with all of the other information in this annual report on Form 10-K and in the company’s other filings with the SEC, before making any investment decision with respect to the company’s securities |
| The risks and uncertainties described below may not be the only ones the company faces |
| Additional risks and uncertainties not presently known by the company or that the company currently deems immaterial may also affect the company’s business |
| If any of these known or unknown 9 _________________________________________________________________ [61]Table of Contents risks or uncertainties actually occur or develop, the company’s business, financial condition, and results of operations could change |
| The Company participates in a highly competitive environment |
| The medical device industry is characterized by rapid technological change, changing customer needs and frequent new product introductions |
| Our products may be rendered obsolete as a result of future innovations |
| We face intense competition from other manufacturers |
| Some of our competitors may be larger than we are and may have greater financial, technical, research, marketing, sales, distribution and other resources than we do |
| We believe that price competition will continue among products developed in our markets |
| Our competitors may develop or market technologies and products that are more effective or commercially attractive than any we are developing or marketing |
| Our competitors may succeed in obtaining regulatory approval and introducing or commercializing products before we do |
| Such developments could have a significant negative effect on our business, financial condition and results of operations |
| Even if we are able to compete successfully, we may not be able to do so in a profitable manner |
| Decreased availability or increased costs of raw materials could increase the company’s costs of producing its products |
| The company purchases raw materials, fabricated components and services from a variety of suppliers |
| Raw materials such as brass and plastics are considered key raw materials |
| The Company believes that its relationships with its suppliers are satisfactory and that alternative sources of supply are readily available |
| From time to time, however, the prices and availability of these raw materials fluctuate due to global market demands, which could impair the company’s ability to procure necessary materials, or increase the cost of such materials |
| Inflationary and other increases in costs of these raw materials have occurred in the past and may recur from time to time |
| In addition, freight costs associated with shipping and receiving product and sales are impacted by fluctuations in the cost of oil and gas |
| A reduction in the supply or increase in the cost of those raw materials could impact the company’s ability to manufacture its products and could increase the cost of production |
| Changes in third party reimbursement could negatively impact the Company’s revenues and profitability |
| The cost of a majority of medical care in the United States is funded by the US Government through the Medicare and Medicaid programs and by private insurance programs, such as corporate health insurance plans |
| Although the Company does not receive payments for its products directly from these programs, home respiratory care providers and durable medical equipment suppliers, who are the primary customers for several of the Company’s products, depend heavily on payments from Medicare, Medicaid and private insurers as a major source of revenues |
| In addition, sales of certain of the Company’s products are affected by the extent of hospital and health care facility construction and renovation at any given time |
| The federal government indirectly funds a significant percentage of such construction and renovation costs through Medicare and Medicaid reimbursements |
| In recent years, governmentally imposed limits on reimbursement to hospitals and other health care providers have impacted spending for services, consumables and capital goods |
| A material decrease from current reimbursement levels or a material change in the method or basis of reimbursing health care providers is likely to adversely affect future sales of the Company’s products |
| Our success depends upon the development of new products and product enhancements, which entails considerable time and expense |
| We place a high priority on the development of new products to add to our product portfolio and on the development of enhancements to our existing products |
| Product development involves substantial expense and we cannot be certain that a completed product will generate sufficient revenue for our business to justify the resources that we devote to research and development related to such product |
| The time and expense required to develop new products and product enhancements is difficult to predict and we cannot assure you that we will succeed in developing, introducing and marketing new products and product enhancements |
| Our inability to successfully develop and introduce new or enhanced products on a timely basis or at all, or to achieve market acceptance of such products, could materially impair our business |
| 10 _________________________________________________________________ [62]Table of Contents We are dependent on adequate protection of our patent and proprietary rights |
| We rely on patents, trade secrets, trademarks, copyrights, know-how, license agreements and contractual provisions to establish and protect our intellectual property rights |
| However, these legal means afford us only limited protection and may not adequately protect our rights or remedies to gain or keep any advantages we may have over our competitors |
| We cannot assure you that others may not independently develop the same or similar technologies or otherwise obtain access to our technology and trade secrets |
| Our competitors, many of which have substantial resources and may make substantial investments in competing technologies, may apply for and obtain patents that will prevent, limit, or interfere with our ability to manufacture or market our products |
| Further, while we do not believe that any of our products or processes interfere with the rights of others, third parties may nonetheless assert patent infringement claims against us in the future |
| Costly litigation may be necessary to enforce patents issued to us, to protect trade secrets or “know-how” we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others |
| Any claim of infringement against us may involve significant liabilities to third parties, could require us to seek licenses from third parties, and could prevent us from manufacturing, selling, or using our products |
| The occurrence of this litigation or the effect of an adverse determination in any of this type of litigation could have a material adverse effect on our business, financial condition and results of operations |
| Our business of the manufacturing, marketing, and sale of medical devices involves the risk of liability claims and such claims could seriously harm our business, particularly if our insurance coverage is inadequate |
| Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of medical devices |
| Like other participants in the medical device market, we are from time to time involved in lawsuits, claims and proceedings alleging product liability and related claims such as negligence |
| If any current or future product liability claims become substantial, our reputation could be damaged significantly, thereby harming our business |
| We may be required to pay substantial damage awards as a result of any successful product liability claims |
| Any product liability claim against us, whether with or without merit, could result in costly litigation, and divert the time, attention, and resources of our management |
| As a result of our exposure to product liability claims, we currently carry product liability insurance covering our products with policy limits per occurrence and in the aggregate that we have deemed to be sufficient |
| Our insurance may not cover certain product liability claims or our liability for any claims may exceed our coverage limits |
| Therefore, we cannot predict whether this insurance is sufficient, or if not, whether we will be able to obtain sufficient insurance to cover the risks associated with our business or whether such insurance will be available at premiums that are commercially reasonable |
| In addition, these insurance policies must be renewed annually |
| Although we have been able to obtain liability insurance, such insurance may not be available in the future on acceptable terms, if at all |
| A successful claim against us or settlement by us with respect to uninsured liabilities or in excess of our insurance coverage, or our inability to maintain insurance in the future, or any claim that results in significant costs to or adverse publicity against us, could have a material adverse effect on our business, financial condition and results of operations |
| The Company is subject to substantial domestic and international government regulation, including regulatory quality standards applicable to its manufacturing and quality processes |
| Failure by the Company to comply with these standards could have an adverse effect on the Company’s business, financial condition or results of operations |
| The FDA regulates the approval, manufacturing, and sales and marketing of many of the Company’s products in the US Significant government regulation also exists in Canada, Japan, Europe, and other countries in which the Company conducts business |
| As a device manufacturer, the Company is required to register with the FDA and is subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation (“QSR”) 11 _________________________________________________________________ [63]Table of Contents requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures |
| In addition, the federal Medical Device Reporting regulations require the Company to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury |
| Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA In the European Community, the Company is required to maintain certain ISO certifications in order to sell its products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications |
| Failure to comply with current governmental regulations and quality assurance guidelines could lead to temporary manufacturing shutdowns, product recalls or related field actions, product shortages or delays in product manufacturing |
| Efficacy or safety concerns, an increase in trends of adverse events in the marketplace, and/or manufacturing quality issues with respect to the Company’s products could lead to product recalls or related field actions, withdrawals, and/or declining sales |
| Our products may be subject to product recalls even after receiving FDA clearance or approval, which would harm our reputation and our business |
| The FDA and similar governmental authorities in other countries in which our products are sold, have the authority to request and, in some cases, require the recall of our products in the event of material deficiencies or defects in design or manufacture |
| A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design defects |
| Any recall of product would divert managerial and financial resources, harm our reputation with our customers and damage our business |
| The Company is exposed to certain credit risks, resulting primarily from customer sales |
| Substantially all of the Company’s receivables are due from homecare providers, distributors, hospitals, and contractors |
| The Company’s customers are located throughout the US and around the world |
| The Company records an estimated allowance for uncollectible amounts based primarily on the Company’s evaluation of the payment pattern, financial condition, cash flows, and credit history of its customers as well as current industry and economic conditions |
| The Company’s inability to collect on its trade accounts receivable could substantially reduce the Company’s income and have a material adverse effect on its financial condition and results of operations |
| The market price of our common stock may fluctuate widely |
| The market price of our common stock could be subject to significant fluctuations in response to quarter-to-quarter variation in our operating results, announcements of new products or services by us or our competitors, and other events or factors |
| For example, a shortfall in net sales or net income, or an increase in losses could have an immediate and significant adverse effect on the market price and volume fluctuations that have particularly affected the market prices of many micro and small capitalization companies and that have often been unrelated or disproportionate to the operating performance of these companies |
| These fluctuations, as well as general economic and market conditions, may adversely affect the market price for our common stock |
| If a natural or man-made disaster strikes our manufacturing facilities, we may be unable to manufacture certain products for a substantial amount of time and our revenue could decline |
| The Company has one principal manufacturing operation |
| In the event that this facility, located in St |
| Louis, Missouri, were severely damaged or destroyed as a result of a natural or man-made disaster, the Company would be forced to relocate production to other facilities and/or rely on third-party manufacturers |
| Such an event could have a material adverse effect on the Company’s business, results of operations and financial condition |
| Although we have insurance for damage to our property and the interruption of our business, this insurance may not be sufficient in scope or amount to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all |
| 12 _________________________________________________________________ [64]Table of Contents Requirements associated with the evaluation of internal controls required by Section 404 of the Sarbanes-Oxley Act of 2002 have required and will require significant company resources and management attention |
| Although we believe that we are currently in compliance with Section 404 of the Sarbanes-Oxley Act, we may in the future identify material deficiencies that we may not be able to remediate on a timely basis |
| If we are not able to comply with the requirements of Section 404 in a timely manner, we could be subject to scrutiny by regulatory authorities, such as the SEC or the NASDAQ National Market, and the trading price of our stock could decline |
| Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important in helping us to prevent financial fraud |
| If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly |
| If we are unable to hire or retain key employees, it could have a negative impact on our business |
| Our failure to attract and retain skilled personnel could hinder the management of our business, our research and development, our sales and marketing efforts, and our manufacturing capabilities |
| However, there is no assurance that we will continue to be able to hire or retain key employees |
| We compete to hire new employees, and then must train them and develop their skills and competencies |
| Our operating results could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs |
| Any unplanned turnover could deplete our institutional knowledge base and erode our competitive advantage |