ESCALON MEDICAL CORP. Forward Looking Statements
Certain statements contained in, or incorporated by reference in, this report are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan," "possible," "project," "should," "will," and similar words or expressions. The Company's forward-looking statements include certain information relating to general business strategy, growth strategies, financial results, liquidity, the Company's ability to continue as a going concern, discontinued operations, research and development, product development, the introduction of new products, the potential markets and uses for the Company's products, the Company's ability to increase its sales campaign effectively, the Company's regulatory filings with the FDA, acquisitions, dispositions, the development of joint venture opportunities, intellectual property and patent protection and infringement, the loss of revenue due to the expiration or termination of certain agreements, the effect of competition on the structure of the markets in which the Company competes, increased legal, accounting and Sarbanes-Oxley compliance costs, information security, cybersecurity and data privacy risks, defending the Company in litigation matters and the Company's cost saving initiatives. The reader must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by assumptions that fail to materialize as anticipated, including risks related to the COVID-19 pandemic, inflation, and other risks described in the Company's Form 10-K for the fiscal year endedJune 30, 2021 . Consequently, no forward-looking statement can be guaranteed, and actual results may vary materially. It is not possible to foresee or identify all factors affecting the Company's forward-looking statements, and the reader therefore should not consider the list of such factors contained in its periodic report on Form 10-K for the year endedJune 30, 2021 and this Form 10-Q quarterly report to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. Executive Overview-six -month periods endedDecember 31, 2021 and 2020 The following highlights are discussed in further detail within this Form 10-Q. The reader is encouraged to read this Form 10-Q in its entirety to gain a more complete understanding of factors impacting Company performance and financial condition. •Consolidated net revenue increased approximately$64,000 or 1.2%, to$5,376,000 during the six months endedDecember 31, 2021 , as compared to the same period of last fiscal year. The increase in net revenue is attributed to an increase in sales in Sonomed's ultrasound products of$538,000 offset by a decrease in Trek revenue of$352,000 and a decrease in service plans revenue of$98,000 , and a decrease in sales of AXIS products of$24,000 . •Consolidated cost of goods sold totaled approximately$3,203,000 , or 59.6%, of total revenue for the six months endedDecember 31, 2021 , as compared to$3,170,000 , or 59.7%, of total revenue of the same period of last fiscal year. The decrease of 0.1% in cost of goods sold as a percentage of total revenue is mainly due to changes in product sales mix and geographic differences. •Consolidated marketing, general and administrative expenses increased$78,000 , or 4.4%, to$1,854,000 for the six months endedDecember 31, 2021 , as compared to the same period of last fiscal year. The increase in marketing, general and administrate expenses is mainly due to increased trade show and travel expense, bad debts expense, and network expense, offset by the decreased office rent expense. •Consolidated research and development expenses increased$98,000 , or 21.6%, to$552,000 for the six months endedDecember 31, 2021 , as compared to the same period of last fiscal year. Research and development expenses were 17 --------------------------------------------------------------------------------
primarily expenses associated with the introduction of new or enhanced products.
The increase in research and development expense is mainly due to increased
consulting expense during the six months ended
The following discussion should be read in conjunction with the interim unaudited condensed consolidated financial statements and the notes thereto, which are set forth in Item 1 of this report.
The Company operates in the healthcare market specializing in the development, manufacture, marketing and distribution of medical devices and pharmaceuticals in the area of ophthalmology. The Company and its products are subject to regulation and inspection by the FDA. The FDA requires extensive testing of new products prior to sale and has jurisdiction over the safety, efficacy and manufacture of products, as well as product labeling and marketing. The Company's Internet address is www.escalonmed.com. Under the trade name of Sonomed-Escalon the Company develops, manufactures and markets ultrasound systems used for diagnosis or biometric applications in ophthalmology, develops, manufactures and distributes ophthalmic surgical products under the Trek Medical Products name, and manufactures and markets image management systems. Critical Accounting Policies and Estimates The preparation of unaudited condensed consolidated financial statements requires management to make estimates and assumptions that impact amounts reported therein. On a regular basis, we evaluate these estimates. These estimates are based on management's historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. For a description of the accounting policies that, in management's opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see the notes to consolidated financial statements included in the Form 10-K for the year endedJune 30, 2021 , as well as Note 3 to our unaudited condensed consolidated financial statements for the three and six months endedDecember 31, 2021 .
During the three and six months ended
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Results of Operations
Three and Six Months Ended
For the Three Months Ended December 31, For the Six Months Ended December 31,
2021 2020 % Change 2021 2020 % Change
Net Revenue:
Products $ 2,522 $ 2,655 (5.0) % $ 5,001 $ 4,840 3.3 %
Service plans 179 243 (26.3) % 375 472 (20.6) %
Total $ 2,701 $ 2,898 (6.8) % $ 5,376 $ 5,312 1.2 %
Consolidated net revenue decreased approximately $197,000 or 6.8%, to $2,701,000
during the three months ended December 31, 2021 as compared to the same period
of last fiscal year. The decrease in net revenue is attributed to a decrease in
sales in Trek revenue of $206,000 , a decrease in sales of AXIS products of
$34,000 , and a decrease in service plans revenue of $63,000 offset by an
increase in Sonomed's ultrasound products of $106,000 .
Consolidated net revenue increased approximately $64,000 or 1.2%, to $5,376,000
during the six months ended December 31, 2021 as compared to the same period of
last fiscal year. The increase in net revenue is attributed to an increase in
sales in Sonomed's ultrasound products of $538,000 offset by a decrease in Trek
revenue of $352,000 and a decrease in service plans revenue of $98,000 , and a
decrease in sales of AXIS products of $24,000 .
The following table presents the domestic and foreign sales for the three and
six months ended December 31, 2021 and 2020. The table amounts are in thousands:
For the Three Months Ended December 31, For the Six Months Ended December 31,
2021 2020 2021 2020
Domestic $ 1,360 50.4 % $ 1,865 64.4 % $ 2,985 55.5 % $ 3,408 64.2 %
Foreign 1,341 49.6 % 1,033 35.6 % 2,391 44.5 % 1,904 35.8 %
Total $ 2,701 100.0 % $ 2,898 100.0 % $ 5,376 100.0 % $ 5,312 100.0 %
The following table presents consolidated cost of goods sold and as a percentage
of revenues for the three and six months ended December 31, 2021 and 2020. Table
amounts are in thousands:
For the Three Months Ended December 31, For the Six Months Ended December 31,
2021 % 2020 % 2021 % 2020 %Cost of Goods Sold:
$ 1,540 57.0 %$ 1,666 57.5 % 3,203 59.6 % 3,170 59.7 % Total$ 1,540 57.0 %$ 1,666 57.5 % 3,203 59.6 % 3,170 59.7 % Consolidated cost of goods sold totaled approximately$1,540,000 , or 57.0%, of total revenue for the three months endedDecember 31, 2021 , as compared to$1,666,000 , or 57.5%, of total revenue of the same period of last fiscal year. The decrease of 0.5% in cost of goods sold as a percentage of total revenue is mainly due to changes in product sales mix and geographic differences. Consolidated cost of goods sold totaled approximately$3,203,000 , or 59.6%, of total revenue for the six months endedDecember 31, 2021 , as compared to$3,170,000 , or 59.7%, of total revenue of the same period of last fiscal year. The decrease of 0.1% in cost of goods sold as a percentage of total revenue is mainly due to changes in product sales mix and geographic differences.
The following table presents consolidated marketing, general and
administrative expenses for three and six months ended
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For the Three Months Ended December 31, For the Six Months Ended December 31,
2021 2020 % Change 2021 2020 % ChangeMarketing, General and Administrative:
$ 950 $ 884 7.5 % 1,854 1,776 4.4 % Total$ 950 $ 884 7.5 % 1,854 1,776 4.4 % Consolidated marketing, general and administrative expenses increased$66,000 , or 7.5%, to$950,000 for the three months endedDecember 31, 2021 , as compared to the same period of last fiscal year. The increase in marketing, general and administrate expenses is mainly due to increased trade show and travel expense, offset by the decreased office rent expense. Consolidated marketing, general and administrative expenses increased$78,000 , or 4.4%, to$1,854,000 for the six months endedDecember 31, 2021 , as compared to the same period of last fiscal year. The increase in marketing, general and administrate expenses is mainly due to increased trade show and travel expense, bad debts expense, and network expense, offset by the decreased office rent expense. The following table presents consolidated research and development expenses for the three and six months endedDecember 31, 2021 and 2020. Table amounts are in thousands: For the Six Months Ended December 31, For the Six Months Ended December 31, 2021 2020 % Change 2021 2020 % Change Research and Development:$ 260 $ 245 6.1 % 552$ 454 21.6 % Total$ 260 $ 245 6.1 %$ 552 $ 454 21.6 % Consolidated research and development expenses increased$15,000 , or 6.1%, to$260,000 for the three months endedDecember 31, 2021 , as compared to the same period of last fiscal year. Research and development expenses were primarily expenses associated with the introduction of new or enhanced products. The increase in research and development expense is mainly due to increased consulting expense during the three months endedDecember 31, 2021 . Consolidated research and development expenses increased$98,000 , or 21.6%, to$552,000 for the six months endedDecember 31, 2021 , as compared to the same period of last fiscal year. Research and development expenses were primarily expenses associated with the introduction of new or enhanced products. The increase in research and development expense is mainly due to increased consulting expense during the six months endedDecember 31, 2021 .
Other income (expense)
OnApril 27, 2020 , the Company entered into a PPP loan for$500,000 in connection with the CARES Act related to COVID-19. The promissory note has a fixed payment schedule. The PPP loan is unsecured. A final payment for the unpaid principal and accrued interest will be payable no later than two years after the funding date. The note will bear interest at a rate of 1.00% per annum. The Company submitted the loan forgiveness application onAugust 2, 2021 . The full amount of the PPP loan and accrued interest of$6,305 were forgiven onAugust 13, 2021 and reported as other income during the six-month period endedDecember 31, 2021 . COVID-19 Disclosure OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of a coronavirus (COVID-19) a pandemic. This pandemic has had a significant impact on the global and domestic economy and is likely to impact the operations of the company. The Company has been assessing the impact of the COVID-19 pandemic on the business, including the impact on the financial condition and results of operations, financial resources, changes in accounting judgment as well as the impact on the supply and demand, etc. The Company is considered an essential business and was able to maintain operations during the lockdown. However, the Company does not know the extent and duration of the impact of COVID-19 on its business due to the uncertainty about the spread of the virus. 20 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Our total cash on hand as ofDecember 31, 2021 was approximately$1,066,000 excluding restricted cash of approximately$256,000 compared to approximately$1,651,000 of cash on hand and restricted cash of$256,000 as ofJune 30, 2021 . Approximately$48,000 was available under our line of credit as ofDecember 31, 2021 . Because our operations have not historically generated sufficient revenues to enable profitability, we will continue to monitor costs and expenses closely and may need to raise additional capital in order to fund operations. We expect to continue to fund operations from cash on hand and through capital raising sources if possible and available, which may be dilutive to existing stockholders, through revenues from the licensing of our products, or through strategic alliances. Additionally, we may seek to sell additional equity or debt securities through one or more discrete transactions, or enter into a strategic alliance arrangement, but can provide no assurances that any such financing or strategic alliance arrangement will be available on acceptable terms, or at all. Moreover, the incurrence of indebtedness in connection with a debt financing would result in increased fixed obligations and could contain covenants that would restrict our operations. As ofDecember 31, 2021 we had an accumulated deficit of approximately$68.6 million , incurred recurring losses from operations and negative cash flows from operating activities. These factors raise substantial doubt regarding our ability to continue as a going concern, and our ability to generate cash to meet our cash requirements for the following twelve months as of the date of this form 10-Q.
The following table presents overall liquidity and capital resources as of
December 31, June 30,
2021 2021
Current Ratio:
Current assets $4,311 $4,593
Less: Current liabilities 2,841 3,397
Working capital $1,470 $1,196
Current ratio 1.52 to 1 1.35 to 1
Debt to Total Capital Ratio:
Line of credit, note payable, lease liabilities, and EIDL loan $1,132 $1,772
Total debt 1,132 1,772
Total equity 1,724 1,460
Total capital $2,856 $3,232
Total debt to total capital 39.6% 54.8%
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Working Capital Position
Working capital increased approximately $274,000 as of December 31, 2021 , and
the current ratio increased to 1.52 to 1 from 1.35 to 1 when compared to
June 30, 2021 . The increase in working capital is due to a decrease in current
liabilities of $556,000 during the quarter ended December 31, 2021 , offset by a
decrease in current assets of $282,000 . The PPP loan forgiveness mainly
contributes to the decrease of the current liabilities.
Debt to total capital ratio was 39.6% and 54.8% as of December 31,
2021 and June 30, 2021 , respectively. The decrease of debt to total capital
ratio is also due to the PPP loan forgiveness.
Cash Flow Used in (Provided By) Operating Activities
During the six months ended December 31, 2021 the Company used approximately
$581,000 of cash in operating activities as compared to cash of approximately
$717,000 provided by operating activities during the six months ended
December 31, 2021 .
For the six months ended December 31, 2021 , its cash used in operations is
mainly due to increase in accounts receivable of approximately 268,000, a
decrease in deferred revenue of $54,000 , a decrease in accounts payable of
$53,000 , a repayment of employer tax deferral of 54,000, and decrease in
operating liabilities of $143,000 offset by an increase in accrued expense of
$96,000 . The remaining offsetting items for cash provided by operations is
comprised of less significant items.
For the six months ended December 31, 2020 , its cash provided by operations is
mainly due to decreases in accounts receivable and inventory of approximately
$603,000 , increase in accounts payable and accrued expenses of approximately
$81,000 , and an increase in deferred revenue of $55,000 . The remaining
offsetting items for cash provided by operations is comprised of less
significant items. The change in the mentioned working capital accounts are due
to timing as well as the Company's focus on preserving cash due to uncertainty
in the current economic climate.
Cash Flows used in Investing Activities
Cash flows used in investing activities for the six -month period ended December
31, 2020 was due to the purchase of equipment of $9,000 for the six-month period
ended December 31, 2020 .
Cash Flows Used in Financing Activities
For the six months ended December 31, 2021 the cash used in financing activities
was due to auto loan payment of employer $2,000 and repayment of EIDL loan of
$1,000 . For the six months ended December 31, 2020 the cash used in financing
activities of $2,000 was due to auto loan payment.
Debt Financing
On June 29, 2018 the Company entered a business loan agreement with TD bank
receiving a line of credit evidenced by a promissory note of $250,000 . The
interest is subject to change based on changes in an independent index which the
Wall Street Journal Prime. The index rate at the date of the agreement is 5.000%
per annum. Interest on the unpaid principal balance of the note will be
calculated using a rate of 0.740 percentage points over the index, adjusted if
necessary for any minimum and maximum rate limitations, resulting in an initial
rate of 5.740% per annum based on a year of 360 days. The interest rate was
5.00% as of December 31, 2021 . The Company was required to put $250,000 in the
TD bank savings account as collateral.
As of December 31, 2021 and June 30, 2020 , the line of credit balance was
$201,575 with TD bank. The line of credit interest expense was approximately
$3,000 and $3,000 for the three months ended December 31, 2021 and 2020,
respectively. The line of credit interest expense was approximately $5,000 and
$6,000 for the six months ended December 31, 2021 and 2020, respectively.
COVID-19 Relief Loans and Liabilities
Payroll Protection Program ("PPP")
OnApril 27, 2020 , the Company entered into a PPP loan for$500,000 in connection with the CARES Act related to COVID-19. The promissory note had a fixed payment schedule. The PPP loan was unsecured. A final payment for the unpaid principal and accrued interest was payable no later than two years after the funding date. The note bore interest at a rate of 1.00% per annum. The full amount of the PPP loan and accrued interest were forgiven onAugust 13, 2021 and reported as other income during the six-month period endedDecember 31, 2021 .
Economic Injury Disaster Loan ("EIDL")
22
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EIDL is designed to provide economic relief to businesses that are currently
experiencing a temporary loss of revenue due to the Coronavirus (COVID-19)
pandemic. EIDL proceeds can be used to cover a wide array of working capital and
normal operating expenses, such as continuation to health care benefits, rent,
utilities, and fixed debt payments. The Company received $150,000 EIDL loan. The
annual interest rate is 3.75%, the payment term is 30 years and the monthly
payment of $731 started on July 1st, 2021 . The EIDL loan is secured by the
tangible and intangible personal property of the Company.
Employer Payroll Tax Withholdings
The CARES Act allows employers to defer the deposit and payment of the employer share ofSocial Security tax that would otherwise be due on or afterMarch 27, 2020 , and beforeJanuary 1, 2021 . The Company has deferred approximately$82,000 of the social security tax. 50% of the deferred employment taxes was paid beforeDecember 31, 2021 . The remaining 50% is not due untilDecember 31, 2022 . Approximately$41,000 was reported as short-term other liabilities as ofDecember 31, 2021 .
Off-balance Sheet Arrangements and Contractual Obligations
The Company was not a party to any off-balance sheet arrangements during the
three-month and six-month periods ended
None
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