ESCALON MEDICAL CORP. 14
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The following discussion and analysis should be read together with the consolidated financial statements and notes thereto and other financial information contained elsewhere in this Form 10-K and the discussion under "Risk Factors" included in Item 1A of this Form 10-K.
•Consolidated net revenue increased approximately$231,000 or 2.2%, to$10,703,000 during the year endedJune 30, 2022 as compared to the prior fiscal year. The increase in net revenue is attributed to an increase of approximately$846,000 in sales of Sonomed's ultrasound products mainly due to increased sales inEurope andMiddle East . The increase is offset by a decrease of approximately$384,000 in sales of Trek products, a decrease of$201,000 in the service plans when a large contract was terminated during the year endedJune 30, 2022 and a decrease of$30,000 of other Digital revenue. •Consolidated cost of goods sold totaled approximately$6,096,000 , or 57.0%, of total revenue during the year endedJune 30, 2022 , as compared to$6,044,000 , or 57.7%, of total revenue of the prior fiscal year. The decrease of 0.7% in cost of goods sold as a percentage of total revenue is mainly due to change of product mix. •Consolidated marketing, general and administrative expenses increased$516,000 , or 14.5%, to$4,086,000 during the year endedJune 30, 2022 , as compared to the prior fiscal year. The increase in marketing, general and administrative expenses is mainly due to increased consulting expense related to AXIS regulatory filing, trade show expenses, travel expense, increased headcount and network expense. The increase to accounts receivable allowance of$155,000 for year endedJune 30, 2022 based on the Company's historical trends, specific customer issues and current economic trends also contributed to the increase in marketing, general and administrative expenses. •Consolidated research and development expenses increased$101,000 or 11.3%, to$991,000 during the year endedJune 30, 2022 as compared to the same period of the prior fiscal year. Research and development expenses were primarily expenses associated with the introduction of new or enhanced products. The increase in research and development expense is mainly due to mainly due to increased consulting expense in year endedJune 30, 2022 . 15 --------------------------------------------------------------------------------
Results of Operations
Years Ended
The following table shows consolidated net revenue, as well as identifying trends in revenues for the years endedJune 30, 2022 and 2021. Table amounts are in thousands: For the Years Ended June 30, 2022 2021 % Change Net Revenue: Products$ 9,980 $ 9,548 4.5 % Service plans 723 924 (21.8) % Total$ 10,703 $ 10,472 2.2 % Consolidated net revenue increased approximately$231,000 or 2.2%, to$10,703,000 during the year endedJune 30, 2022 as compared to the prior fiscal year. The increase in net revenue is attributed to an increase of approximately$846,000 in sales of Sonomed's ultrasound products mainly due to increased sales inEurope andMiddle East . The increase is offset by a decrease of approximately$384,000 in sales of Trek products, a decrease of$201,000 in the service plans when a large contract was terminated during the year endedJune 30, 2022 , and a decrease of$30,000 of other Digital revenue.
Foreign sales
The following table presents domestic and international sales from continuing operations. Table amounts are in thousands:
For the Years Ended June 30,
2022 2021
Domestic $ 5,720 53.4 % $ 6,255 59.7 %
Foreign 4,983 46.6 % 4,217 40.3 %
Total $ 10,703 100.0 % $ 10,472 100.0 %
The following table presents consolidated cost of goods sold and as a percentage
of revenues for the years ended June 30, 2022 and 2021. Table amounts are in
thousands:
For the Years Ended June 30,
2022 % 2021 %
Cost of Goods Sold:
$ 6,096 57.0 % $ 6,044 57.7 %
Total $ 6,096 57.0 % $ 6,044 57.7 %
Consolidated cost of goods sold totaled approximately $6,096,000 , or 57.0%, of
total revenue during the year ended June 30, 2022 , as compared to $6,044,000 , or
57.7%, of total revenue of the prior fiscal year. The decrease of 0.7% in cost
of goods sold as a percentage of total revenue is mainly due to change of
product mix.
The following table presents consolidated marketing, general and
administrative expenses for the years ended June 30, 2022 and 2021. Table
amounts are in thousands:
For the Years Ended June 30,
2022 2021 % ChangeMarketing, General and Administrative:
$ 4,086 $ 3,570 14.5 %
Total $ 4,086 $ 3,570 14.5 %
16-------------------------------------------------------------------------------- Consolidated marketing, general and administrative expenses increased$516,000 , or 14.5%, to$4,086,000 during the year endedJune 30, 2022 as compared to the prior fiscal year. The increase in marketing, general and administrative expenses is mainly due to increased consulting expense related to AXIS regulatory filing, trade show expenses, travel expense, increased payroll and network expense. The increase to accounts receivable allowance of$155,000 for year endedJune 30, 2022 based on the Company's historical trends, specific customer issues and current economic trends also contributed to the increase in marketing, general and administrative expenses.
The following table presents consolidated research and development expenses for
the years ended
Table amounts are in thousands:
For the Years Ended June 30,
2022 2021 % Change
Research and Development:
$ 991 $ 890 11.3 %
Total $ 991 $ 890 11.3 %
Consolidated research and development expenses increased $101,000 , or 11.3%, to
$991,000 during the year ended June 30, 2022 as compared to the prior 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 in year ended
June 30, 2022 .
Other income (expense)
On April 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 Company submitted the loan forgiveness application
on August 2, 2021 . The full amount of the PPP loan and accrued interest of
$6,305 were forgiven on August 13, 2021 and reported as other income during the
year ended June 30, 2022 .
Russia-Ukraine War
In February 2022 , Russia invaded Ukraine . As military activity proceeds and
sanctions, export controls and other measures are imposed by many countries
against Russia , Belarus and specific areas of Ukraine , the war is increasingly
affecting the global economy and financial markets, as well as exacerbating
ongoing economic challenges, including rising inflation and global supply-chain
disruption. The Company has operations or activities in countries and regions
outside the United States . As a result, its global operations are affected by
economic, political and other conditions in the foreign countries in which it
does business as well as U.S. laws regulating international trade, although the
Company has not yet assessed that the war has had a material effect on its
financial position or results of operations.
17
--------------------------------------------------------------------------------Liquidity and Capital Resources
Our total cash on hand as ofJune 30, 2022 was approximately$594,000 of cash on hand and 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 ofJune 30, 2022 . 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 ofJune 30, 2022 we had an accumulated deficit of approximately$68.9 million , incurred recurring losses from operations and negative cash flows from operating activities in current year and as well as in prior years. 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 filing date of this form 10-K.
The following table presents overall liquidity and capital resources as of
June 30, June 30,
2022 2021
Current Ratio:
Current assets $4,186 $4,593
Less: Current liabilities 3,002 3,397
Working capital $1,184 $1,196
Current ratio 1.39 to 1 1.35 to 1
Debt to Total Capital Ratio:
Line of credit, note payable, lease liabilities, PPP
loan and EIDL loan $1,205 $1,772
Total debt 1,205 1,772
Total equity 1,478 1,460
Total capital $2,683 $3,232
Total debt to total capital 44.9% 54.8%
Working Capital Position
Working capital decreased approximately
The decrease in working capital is due to a decrease in current liabilities of
Debt to total capital ratio was 44.9% and 54.8% as of
Cash Flow Provided By (Used In) Operating Activities
During year ended
For the year endedJune 30, 2022 , its cash used in operations is mainly due to non cash other income of$506,000 , an increase in inventory of$187,000 , an increase in accounts receivable of$615,000 , and a decrease in accounts payable of$90,000 . The cash outflow is offset by an increase in accrued expense of$218,000 . The remaining offsetting items for cash used in operations is comprised of less significant items. 18 -------------------------------------------------------------------------------- For the year endedJune 30, 2021 , its cash provided by operations is mainly due to a decrease in inventory of$368,000 , a decrease in accounts receivable of$221,000 , and an increase in accounts payable of$342,000 . The cash inflow is offset by a decrease in deferred revenue of$152,000 . The remaining offsetting items for cash provided by operations is comprised of less significant items.
Cash Flows Used In Investing Activities
There was no cash flow used in investing activities for the year endedJune 30, 2022 . Cash flow used in investing activities for the year endedJune 30, 2021 were due to purchase of equipment of$9,000 . Any necessary capital expenditures have generally been funded out of cash from operations, and the Company is not aware of any factors that would cause historical capital expenditure levels to not be indicative of capital expenditures in the future and, accordingly, does not believe that the Company will have to commit material resources to capital investment for the foreseeable future.
Cash Flows Used in Financing Activities
For the year ended
For the year ended
Debt Financing
OnJune 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% as ofJune 30, 2022 . The Company is required to hold$250,000 in a TD bank savings account as collateral. As ofJune 30, 2022 andJune 30, 2021 , the line of credit balance was$201,575 with TD bank. The line of credit interest expense was$10,000 and$10,000 for the years endedJune 30, 2022 and 2021, 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 full amount of the PPP loan and accrued interest were forgiven onAugust 13, 2021 and reported as other income during the year endedJune 30, 2022 .
Economic Injury Disaster Loan ("EIDL")
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 onJuly 1st, 2021 . The EIDL loan is secured by the tangible and intangible personal property of the Company. The Company submitted an EIDL loan increase application onMay 6, 2022 , increasing the loan amount from$150,000 to$200,000 . The loan modification was not approved as the funding was exhausted.
Employer Payroll Tax Withholding
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 as ofJune 30, 2021 . 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 ofJune 30, 2022 and is to paid byDecember 31, 2022 . 19 --------------------------------------------------------------------------------
Preferred stock
OnFebruary 14, 2018 , the Company entered into a Debt Exchange Agreement (the "Exchange Agreement") withMr. DePiano , Sr, the Company's former Chairman and DP Associates Inc. Profit-Sharing Plan of whichMr. DePiano , Sr. is the sole owner and sole trustee (the "Holders"). Pursuant to the terms of the Exchange Agreement, effectiveFebruary 15, 2018 , the Holders exchanged a total of$645,000 principal amount of debt related to the accounts receivable factoring program the Company owes the Holders for 2,000,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock"). As ofJune 30, 2022 andJune 30, 2021 the cumulative dividends payable is$225,731 ($0.1129 per share) and$174,131 ($0.0871 per share), respectively.Mr. DePiano Sr . passed away onOctober 3, 2019 and left a will by which he appointedRichard J. DePiano , Jr., the Chief Executive Officer of the Company, as executor.Richard DePiano Jr . was elected to serve as chairman of the Company's board.Mr. DePiano , Jr. qualified as executor and has control over the listed shares in his capacity as executor ofMr. DePiano Sr .'s estate.
Common Stock
The Company's common stock has been quoted on the OTCQB Market sinceNovember 18, 2016 . The OTCQB Venture Market requires companies be current in their reporting and must undergo an annual verification and management certification process. Companies must also meet a minimum ($0.01 ) bid test and may not be in bankruptcy.
Other
The Company's forecast of the period of time through which its financial resources will be adequate to support its operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in "Risk Factors" included in this Form 10-K . If the Company raises funds in the future, the Company may be required to raise those funds through public or private financings, strategic relationships or other arrangements at prices and other terms that may not be as favorable as they would without such qualification. The sale of additional equity and debt securities may result in additional dilution to the Company's shareholders. Additional financing may not be available in amounts or on terms acceptable to the Company or at all.
Off-balance Sheet Arrangements and Contractual Obligations
The Company was not a party to any off-balance sheet arrangements during the
years ended
Critical Accounting Estimates and policies
The preparation of financial statements requires management to make estimates and assumptions that impact amounts reported therein. The consolidated financial statements are prepared in conformity with accounting principles generally accepted inthe United States of America , and, as such, include amounts based on informed estimates and judgments of management.
The following items require significant estimation or judgment:
uncollectible receivables,
obsolete inventory,
Actual results achieved in the future could differ from current estimates. The Company used what it believes are reasonable assumptions and, where applicable, established valuation techniques in making its estimates.
Intangible Assets and Long-Lived Assets
Long-lived assets including intangible assets deemed to have finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit or material adverse changes in the business climate that indicate that the carrying amount of an asset may be impaired. When impairment indicators are present, the recoverability of the asset is measured by comparing the carrying value of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the projected undiscounted cash flows from the asset are less than the carrying value of the asset the asset is considered to be impaired. The impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. There was no impairment of the long-lived assets, including the ROU assets in the year endedJune 30, 2022 and 2021. 20 --------------------------------------------------------------------------------
Revenue Recognition
The Company recognizes revenue when its performance obligations with its
customers have been satisfied. At contract inception, the Company determines if
the contract is within the scope of Accounting Standards Codification ("ASC")
Topic 606, Revenue from Contracts with Customers, and then evaluates the
contract using the following five steps: (1) identify the contract with the
customer; (2) identify the performance obligations; (3) determine the
transaction price; (4) allocate the transaction price to the performance
obligations; and (5) recognize revenue when (or as) the entity satisfies a
performance obligation. The Company only recognizes revenue to the extent that
it is probable that a significant revenue reversal will not occur in a future
period.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is
determined on a first-in, first-out basis and include freight-in materials,
labor and overhead costs. Inventories are written down if the estimated net
realizable value is less than the recorded value. The Company reviews the
carrying cost of inventories by product to determine the adequacy of reserves
for obsolescence. In accounting for inventories, the Company must make estimates
regarding the estimated realizable value of inventory. The estimate is based, in
part, on the Company's forecasts of future sales and age of inventory. If actual
conditions are less favorable than those the Company has projected, the Company
may need to increase its reserves for excess and obsolete inventories. Any
increases in the reserves will adversely impact the Company's results of
operations. The establishment of a reserve for excess and obsolete inventory
establishes a new cost basis in the inventory. Such reserves are not reduced
until the product is sold. If the Company is able to sell such inventory any
related reserves would be reversed in the period of sale. In accordance with
industry practice, service parts inventory is included in current assets,
although service parts are carried for established requirements during the
serviceable lives of the products and, therefore, not all parts are expected to
be sold within one year.
Income Taxes
The Company accounts for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements. Under this method, the Company determines deferred tax
assets and liabilities on the basis of the differences between the financial
statement and tax bases of assets and liabilities by using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes that
these assets are more likely than not to be realized. In making such a
determination, the Company considers all available positive and negative
evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax-planning strategies, and results of recent
operations. If the Company determines that it would be able to realize its
deferred tax assets in the future in excess of their net recorded amount, the
Company would make an adjustment to the deferred tax asset valuation allowance,
which would reduce the provision for income taxes. As of June 30, 2022 and 2021,
the Company has a fully recorded valuation allowance against its deferred tax
assets.
The Company records uncertain tax positions in accordance with ASC 740 on the
basis of a two-step process in which (1) the Company determines whether it is
more likely than not that the tax positions will be sustained on the basis of
the technical merits of the position and (2) for those tax positions that meet
the more-likely-than-not recognition threshold, the Company recognizes the
largest amount of tax benefit that is more than 50 percent likely to be realized
upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties related to unrecognized tax
benefits on the income tax expense line in the accompanying consolidated
statements of operations. As of June 30, 2022 and 2021, no accrued interest or
penalties were required to be included on the related tax liability line in the
consolidated balance sheets.
The Company dissolved Escalon Holdings, Inc. and Escalon IP Holdings, Inc. in a
tax-free dissolution under Section 332 of the Internal Revenue Code during the
year ended June 30, 2021 . There is no tax impact on the consolidated financial
statements of the Company's current and prior years.
Leases
The Company determines if an arrangement is a lease at the inception of a contract. Operating lease right-of-use ("ROU") assets are included in right-of-use assets on the consolidated balance sheets. The current and long-term components of
21
--------------------------------------------------------------------------------operating lease liabilities are included in the current portion of operating lease liabilities and operating lease liabilities, net of current portion, respectively on the consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Certain leases may include options to extend or terminate the lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Earnings (loss) Per Share Earnings (loss) per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year. All outstanding stock options are considered potential common stock. All outstanding convertible preferred stock are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. The dilutive effect, if any, of stock options is calculated using the treasury stock method. As ofJune 30, 2022 and 2021, the average market prices for the years then ended are less than the exercise price of all the outstanding stock options and, therefore, the inclusion of the stock options would be anti-dilutive. In addition, since the effect of common stock equivalents is anti-dilutive with respect to losses, the convertible preferred stock has also been excluded from the Company's computation of loss per common for the year endedJune 30, 2021 . Therefore, basic and diluted loss per common share for the year endedJune 30, 2021 are the same.
Recently Issued Accounting Standards
The Company considers the applicability and impact of all accounting standards
updates ("ASUs"). Management periodically reviews new accounting standards that
are issued.
New Accounting Pronouncements Not yet Adopted
InJune 2016 the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. The guidance in ASU 2016-13 is effective for "public business entities," as defined, that areSEC filers for fiscal years and for interim periods with those fiscal years beginning afterDecember 15, 2022 . Early adoption of the guidance is permitted for fiscal years beginning afterDecember 15, 2018 , including interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements. 22 --------------------------------------------------------------------------------
FINANCIAL STATEMENTS AND SUPPLIMENTARY DATA
Escalon Medical Corp. Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID 711) 24 Consolidated Balance Sheets atJune 30, 2022 and 2021 26
Consolidated Statements of Operations for the Years Ended
27
Consolidated Statements of Shareholders' Equity for the Years Ended
28
Consolidated Statements of Cash Flows for the Years Ended
29
Notes to Consolidated Financial Statements 31
23
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets ofEscalon Medical Corp. and its subsidiaries (the "Company") as ofJune 30, 2022 and 2021, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofJune 30, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted inthe United States of America .
The Company's Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company's significant accumulated deficit and recurring losses from operations and negative cash flows from operating activities in the current year and prior years raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) ("PCAOB") and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Inventory Valuation
Description of the Matter
AtJune 30, 2022 , the Company's net inventory balance was approximately$1.6 million . As discussed in Note 3 of the financial statements, the Company adjusts the inventory carrying value at the lower of cost or the net realizable value, which includes an estimate of the allowance for obsolescence. 24 --------------------------------------------------------------------------------
How We Addressed the Matter in Our Audit
Our audit procedures related to management's judgments underlying the calculation of the allowance for obsolete inventory, including the following, among others: a.We evaluated the appropriateness and consistency of management's methods and assumptions used in developing the Company's estimate of the allowance for obsolete inventory. b.We evaluated the appropriateness of specific inputs supporting management's estimate. c.We tested the mathematical accuracy of the Company's calculation of the allowance for obsolete inventory.
Allowance for Doubtful Accounts
Description of the Matter
AtJune 30, 2022 , the Company's accounts receivable balance, net of an allowance for doubtful accounts of approximately$236,000 , was approximately$1.5 million . As discussed in Note 3 of the financial statements, the Company maintains the allowance for potential credit losses based on the Company's historical trends, specific customer issues and current economic trends. Accounts are written off against the allowance when they are determined to be uncollectible based on management's assessment of individual accounts. How We Addressed the Matter in Our Audit Our audit procedures related to management's judgments underlying the calculation of the allowance for doubtful accounts, including the following, among others: a.We evaluated the appropriateness and consistency of management's methods and assumptions used in developing the Company's estimate of the allowance for doubtful accounts. b.We tested the mathematical accuracy of the Company's calculation of the allowance for doubtful accounts. c.We evaluated the impact of subsequent collections on the outstanding accounts receivable balance as ofJune 30, 2022 . d.We evaluated the risk of collectability based on graphical location. /s/Friedman LLP We have served as the Company's auditor since 2018.Marlton, New Jersey September 28, 2022 25
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2022 2021
ASSETS
Current assets:
Cash and cash equivalents $ 593,869 $ 1,650,970
Restricted cash 256,165 255,920
Accounts receivable, net 1,541,750 1,081,702
Inventories, net 1,603,955 1,416,727
Other current assets 190,043 187,357
Total current assets 4,185,782 4,592,676
Property and equipment, net 52,660 81,442
Right-of-use assets 788,257 843,559
License, net 82,750 102,400
Other long term assets 62,788 62,789
Total assets $ 5,172,237 $ 5,682,866
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 201,575 $ 201,575
Current portion of note payable 3,401 3,401
Current portion of PPP loan - 500,000
Current portion of EIDL loan 3,105 2,862
Accounts payable 1,012,451 1,102,125
Accrued expenses 901,996 695,553
Related party accrued interest 112,389 112,389
Current portion of operating lease liabilities 304,737 279,051
Deferred revenue 332,383 363,700
Other short term liabilities 129,961 136,107
Total current liabilities 3,001,998 3,396,763
Note payable, net of current portion 3,888 7,839
Operating lease liabilities, net of current portion 538,794 630,330
EIDL loan, net of current portion 149,540 147,138
Other long-term liabilities - 40,860
Total long-term liabilities 692,222 826,167
Total liabilities 3,694,220 4,222,930
Commitments and Contingencies (Note 10.)
Shareholders' equity:
Series A convertible preferred stock, $0.001 par value;
2,000,000 shares authorized; 2,000,000 shares issued and
outstanding (liquidation value of $870,731 and $819,131 ) 645,000 645,000
Common stock, $0.001 par value; 35,000,000 shares
authorized; 7,415,329 shares issued and outstanding 7,415 7,415
Additional paid-in capital 69,702,043 69,702,043
Accumulated deficit (68,876,441) (68,894,522)
Total shareholders' equity 1,478,017 1,459,936
Total liabilities and shareholders' equity $ 5,172,237 $ 5,682,866
See notes to consolidated financial statements
26
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
2022 2021
Net revenues:
Products $ 9,980,343 $ 9,547,606
Service plans 722,727 924,011
Revenues, net 10,703,070 10,471,617
Costs and expenses:
Cost of goods sold 6,096,169 6,044,399
Marketing, general and administrative 4,085,982 3,570,433
Research and development 990,982 890,482
Total costs and expenses 11,173,133 10,505,314
Loss from operations (470,063) (33,697)
Other income (expense)
Other income 506,305 2,530
Interest income 245 985
Interest expense (18,406) (21,841)
Total other income, net 488,144 (18,326)
Net income (loss) 18,081 (52,023)
Undeclared dividends on preferred stocks 51,600 51,422
Net income (loss) applicable to common
shareholders $ (33,519) $ (103,445)
Net income (loss) per share
Basic income (loss) per share $ 0.00 $ (0.01)
Diluted income (loss) per share $ 0.00 $ (0.01)
Weighted average shares-basic 7,415,329 7,415,329
Weighted average shares-diluted 13,220,202 7,415,329
See notes to consolidated financial statements
27
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2022 AND 2021
Additional Total
Paid-in Accumulated Shareholders'
Series A Convertible Preferred Stock Common Stock Capital Deficit Equity
Shares Amount Shares Amount
Balance at June
30, 2021 2,000,000 $ 645,000 7,415,329 $ 7,415 $ 69,702,043 $ (68,894,522) $ 1,459,936
Net income - - - - - 18,081 18,081
Balance at June
30, 2022 2,000,000 $ 645,000 7,415,329 $ 7,415 $ 69,702,043 $ (68,876,441) $ 1,478,017
Additional Total
Paid-in Accumulated Shareholders'
Series A Convertible Preferred Stock Common Stock Capital Deficit Equity
Shares Amount Shares Amount
Balance at June 30, 2020 2,000,000 $ 645,000 7,415,329 $ 7,415 $ 69,702,043 $ (68,842,499) $ 1,511,959
Net loss - - - - - (52,023) (52,023)
Balance at June 30, 2021 2,000,000 $ 645,000 7,415,329 $ 7,415 $ 69,702,043 $ (68,894,522) $ 1,459,936
See notes to consolidated financial statements
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
2022 2021
Cash Flows from Operating Activities:
Net income (loss) $ 18,081 $ (52,023) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Increase in accounts receivable allowance 155,267 10,000 Other income-gain on PPP loan forgiveness (506,305) - Depreciation and amortization 48,432 44,812 Non cash lease expense 279,719 274,615 Change in operating assets and liabilities: Accounts receivable (615,315) 221,233 Inventories (187,229) 368,303 Other current assets (2,684) (33,164) Accounts payable (89,674) 341,504 Accrued expenses 218,373 14,506 Change in operating lease liability (290,267) (276,833) Deferred revenue (31,317) (152,353) Other short-term and long-term liabilities (47,006) 78,105 Net cash (used in) provided by operating activities (1,049,925) 838,705 Cash Flows from Investing Activities: Purchase of equipment - (9,390) Net cash used in investing activities - (9,390)
Cash Flows from Financing Activities:
Repayment of EIDL loan (2,980) -
Repayment of note payable (3,951) (3,664)
Net cash used in financing activities (6,931) (3,664)
Net (decrease) increase in cash, cash equivalents and restricted cash
(1,056,856) 825,651
Cash, cash equivalents and restricted cash, beginning of year 1,906,890
1,081,239
Cash, cash equivalents and restricted cash, end of year $ 850,034 $ 1,906,890
Cash, cash equivalents and restricted cash consist of the
following:
End of year
Cash and cash equivalents $ 593,869 $ 1,650,970
Restricted cash 256,165 255,920
$ 850,034 $ 1,906,890
Beginning of year
Cash and cash equivalents $ 1,650,970 $ 825,958
Restricted cash 255,920 255,281
$ 1,906,890 $ 1,081,239
Supplemental Schedule of Cash Flow Information:
Income taxes paid $ - $ -
Interest paid $ 18,406 $ 11,223 Non Cash Finance Activities
29
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Record right-of-use assets per ASC 842
$ - $ 9,154
Dispose lease liability $ - $ 9,154
See notes to consolidated financial statements
30
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Escalon Medical Corp. and Subsidiaries
Notes to Consolidated Financial Statements1. Organization and Basis of Presentation
Escalon Medical Corp. ("Escalon" or "Company") is aPennsylvania corporation initially incorporated inCalifornia in 1987, and reincorporated inPennsylvania inNovember 2001 . Within this document, the "Company" collectively shall mean Escalon, which includes its division called "Trek" and its wholly owned subsidiaries:Sonomed, Inc. ("Sonomed"),Escalon Digital Solutions, Inc. ("EMI"), andSonomed IP Holdings, Inc. The Company dissolved two other inactive entities,Escalon Holdings, Inc. andEscalon IP Holdings, Inc. in a tax-free dissolution under Section 332 of the Internal Revenue Code in the year endedJune 30, 2021 . 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 theUnited States Food and Drug Administration (the "FDA"). The FDA and other government authorities require extensive testing of new products prior to sale and have jurisdiction over the safety, efficacy and manufacture of products, as well as product labeling and marketing. 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 has and is likely to continue 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 has been able to maintain operations during the lockdown. The Company applied for and received$500,000 inApril 2020 under the Payroll Protection Program ("PPP loan") which will help reverse the negative impact in terms of the liquidity. The Company submitted the loan forgiveness application onAugust 2, 2021 . The PPP loan forgiveness was approved and the full amount and accrued interest was forgiven onAugust 13, 2021 . The Company also received Economic Injury Disaster loan ("EIDL") loan of$150,000 . The annual interest rate is 3.75%. The payment term is 30 years and the monthly payment is$731 fromJuly 1, 2021 . The Company was spared from the government shutdown during the pandemic. The supply chain challenges could increase the costs of products and numbers of backorders and could adversely affect our results of operations. InFebruary 2022 ,Russia invadedUkraine . As military activity proceeds and sanctions, export controls and other measures are imposed by many countries againstRussia ,Belarus and specific areas ofUkraine , the war is increasingly affecting the global economy and financial markets, as well as exacerbating ongoing economic challenges, including rising inflation and global supply-chain disruption. The Company has operations or activities in countries and regions outsidethe United States . As a result, its global operations are affected by economic, political and other conditions in the foreign countries in which the Company has business as well asU.S. laws regulating international trade, although the Company has not yet assessed that the war has had a material effect on its financial position or results of operations. The Company will continue to monitor the impacts of theRussia -Ukraine war on macroeconomic conditions and continually assess the effect these matters may have on customer demand, suppliers' ability to deliver products, cybersecurity risks and its liquidity and access to capital.
The Company's common stock trades on the OTCQB Market under the symbol "ESMC."
2. Going Concern
The Company's operations are subject to a number of factors that can affect its operating results and financial condition. Such factors include, but are not limited to: the continuous enhancement of the current products, development of new products; changes in domestic and foreign regulations; ability of manufacture successfully; competition from products manufactured and sold or being developed by other companies; the price of, and demand for, the Company's products and its ability to raise capital to support its operations. To date, the Company's operations have not generated sufficient revenues to enable profitability. As ofJune 30, 2022 , the Company had an accumulated deficient of$68.9 million , and incurred recurring losses from operations and incurred negative cash flows from operating activities in current and prior years. These factors raise substantial doubt regarding the Company's ability to continue as a going concern for the following twelve months as of the filing date of this form 10-K. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated 31 -------------------------------------------------------------------------------- financial statements do not include any adjustments relating to the realization of the carrying value of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuance as a going concern is dependent on its future profitability and on the on-going support of its shareholders, affiliates and creditors. In order to mitigate the going concern issues, the Company is actively pursuing business partnerships, managing its continuing operations, implementing cost-cutting measures and seeking to sell certain assets. The Company may not be successful in any of these efforts.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally affected inthe United States of America Generally Accepted Accounting Principles ("US GAAP") requires management to make estimates and assumptions that impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For the purposes of reporting cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and highly liquid investments with original maturities of 90 days or less to be cash and cash equivalents. From time to time cash balances exceed federal insurance limits. Restricted Cash As ofJune 30, 2022 and 2021 restricted cash included approximately$256,000 , which was pursuant to the requirements in the TD Bank Loan entered intoJune 2018 (see Note 6). Foreign Currency Translation The Company's functional currency is the US dollar. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Foreign currency transaction gains or losses included in net loss were immaterial for the years endedJune 30, 2022 and 2021.
Accounts Receivable
Accounts receivable are recorded at net realizable value. The Company performs ongoing credit evaluations of customers' financial condition and does not require collateral for accounts receivable arising in the normal course of business. The Company maintains allowances for potential credit losses based on the Company's historical trends, specific customer issues and current economic trends. Accounts are written off against the allowance when they are determined to be uncollectible based on management's assessment of individual accounts. The Company recorded an allowance for doubtful accounts of approximately$236,000 and$100,000 as ofJune 30, 2022 and 2021. June 30, 2022 2021 Balance, July 1$ 100,480 $ 122,515 Increase in allowance 155,267 10,000 Write-offs (19,398) (32,035) Balance, June 30$ 236,349 $ 100,480 32
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Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is
determined on a first-in, first-out basis and include freight-in materials,
labor and overhead costs. Inventories are written down if the estimated net
realizable value is less than the recorded value. The Company reviews the
carrying cost of inventories by product to determine the adequacy of reserves
for obsolescence. In accounting for inventories, the Company must make estimates
regarding the estimated realizable value of inventory. The estimate is based, in
part, on the Company's forecasts of future sales and age of inventory. If actual
conditions are less favorable than those the Company has projected, the Company
may need to increase its reserves for excess and obsolete inventories. Any
increases in the reserves will adversely impact the Company's results of
operations. The establishment of a reserve for excess and obsolete inventory
establishes a new cost basis in the inventory. Such reserves are not reduced
until the product is sold. If the Company is able to sell such inventory any
related reserves would be reversed in the period of sale. In accordance with
industry practice, service parts inventory is included in current assets,
although service parts are carried for established requirements during the
serviceable lives of the products and, therefore, not all parts are expected to
be sold within one year.
For the years ended June 30,
2022 2021
Raw materials $ 1,010,471 $ 833,105
Work in process 138,182 171,097
Finished goods 805,698 773,451
Total inventories $ 1,954,351 $ 1,777,653
Allowance for obsolete inventory (350,396) (360,926)
Inventories, net $ 1,603,955 $ 1,416,727
Property and Equipment
Property and equipment are recorded at cost. Leasehold improvements are
amortized on a straight-line basis over the lesser of the estimated useful life
of the asset or lease term. Depreciation on property and equipment is recorded
using the straight-line method over the estimated economic useful life of the
related assets. Estimated useful lives are generally three years to five
years for computer equipment and software, five years to seven years for
furniture and fixtures and five years to ten years for production and test
equipment. Depreciation and amortization expense for the years ended June 30,
2022 and 2021 was approximately $29,000 and $25,000 , respectively.
Property and equipment consist of the following:
June 30,
2022 2021
Equipment $ 771,097 $ 748,725
Furniture and fixtures 128,499 150,871
Leasehold improvements 39,048 39,048
938,644 938,644Less: Accumulated depreciation and amortization (885,984) (857,202)
$ 52,660 $ 81,442
Intangible Assets and Long-Lived Assets
Long-lived assets including intangible assets deemed to have finite lives, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Impairment
indicators include, among other conditions, cash flow deficits, historic or
anticipated declines in revenue or operating profit or material adverse changes
in the business climate that indicate that the carrying amount of an asset may
be impaired. When impairment indicators are present, the recoverability of the
asset is measured by comparing the carrying value of the asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the
projected undiscounted cash flows from the asset are less than the carrying
value of the asset the asset is considered to be impaired. The impairment to be
recognized is measured
33
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by the amount by which the carrying amount of the asset exceeds the fair value
of the asset. There was no impairment of the long-lived assets, including the
ROU assets in the year ended June 30, 2022 and 2021.
Accrued Warranties
The Company provides a limited one-year warranty against manufacturer's defects on its products sold to customers. The Company's standard warranties require the Company to repair or replace, at the Company's discretion, defective parts during such warranty period. The Company accrues for its product warranty liabilities based on estimates of costs to be incurred during the warranty period, based on historical repair information for warranty costs.
PPP Loans
The Company's policy is to account for the PPP loan (See Note 7) as debt. The Company continued to record the loan as debt until either (1) the loan is partially or entirely forgiven and the Company has been legally released, at which point the amount forgiven will be recorded as income or (2) the Company pays off the loan. The full amount of the PPP loan and accrued interest were forgiven onAugust 13, 2021 and reported as other income during the year endedJune 30, 2022 .
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of their short-term maturity. The Company determined that the carrying amount of the notes payable and lease liabilities approximates fair value since such debt borrowing bears interest at the approximate current market rate. While the Company believes the carrying value of the assets and liabilities are reasonable, considerable judgment is used to develop estimates of fair value; thus the estimates are not necessarily indicative of the amounts that could be realized in a current market exchange.
Revenue Recognition
The Company recognizes revenue when its performance obligations with its
customers have been satisfied. At contract inception, the Company determines if
the contract is within the scope of Accounting Standards Codification ("ASC")
Topic 606, Revenue from Contracts with Customers, and then evaluates the
contract using the following five steps: (1) identify the contract with the
customer; (2) identify the performance obligations; (3) determine the
transaction price; (4) allocate the transaction price to the performance
obligations; and (5) recognize revenue when (or as) the entity satisfies a
performance obligation. The Company only recognizes revenue to the extent that
it is probable that a significant revenue reversal will not occur in a future
period.
The Company generates product revenue from the sale of medical device products
and the sale and installation of the Company's AXIS image management system
software. Revenue for service plans relate to the customer care plans for the
Company's equipment and AXIS image management system software.
Revenue is recognized upon transfer of control of the promised goods or
services to the customer for an amount that reflects the consideration that the
Company expects to be entitled in exchange for those goods or services. The
Company's performance obligations are for product sales, installation of AXIS
image management system software and customer care plans. The performance
obligations are determined at contract inception based upon promises within the
contract that are distinct.
The product sales and installation of AXIS image management system software
performance obligations are satisfied at a point in time, which is upon shipment
for product sales and upon successful installation for the AXIS image management
system. The performance obligation for customer care plans is satisfied over
time as the customer receives and consumes the Company's services.
The Company invoices its customers upon shipment for product sales. For the
installation of AXIS image management system software and customer care plans,
the Company invoices its customers upon successful installation. Invoice
payments are generally due within 30 days of invoice date. The transaction price
is determined based on fixed consideration in the Company's customer contracts
and is recorded net of variable consideration. In determining the transaction
price, a significant financing component does not exist since the timing from
when the Company invoices its customers to when payment is received as it is
less than one year.
34
--------------------------------------------------------------------------------Revenue for product sales and installation of AXIS image management system software is recognized when delivered or installed. The customer care plan revenues are recognized proportionately over the service period, which is a 12-month period.
The Company has elected the following practical expedients in applying ASC 606: •Unsatisfied Performance Obligations - all performance obligations relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption provided in ASC 606 and therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. •Contract Costs - all incremental customer contract acquisition costs are expensed as they are incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less in duration. •Significant Financing Component - the Company does not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. •Sales Tax Exclusion from the Transaction Price - the Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from the customer. •Shipping and Handling Activities - the Company elected to account for shipping and handling activities as a fulfillment cost rather than as a separate performance obligation. •Portfolio Approach - the Company applied the Portfolio Approach to contract reviews within its identified revenue streams that have similar characteristics and the Company believes this approach would not differ materially than if applying Topic 606 to each individual contract.
Deferred Revenue
The Company records deferred revenues when cash payments are received or due in advance of its performance. The Company's deferred revenues relate to payments received for the customer care plans for a 12-month period. The consideration received is recognized monthly over the service period.
Years ended June 30,
2022 2021
Beginning of Year $ 364,000 $ 516,000
Additions 692,000 772,000
Revenue Recognized (723,000) (924,000)
End of Year $ 333,000 $ 364,000
Included in accrued expenses as of June 30, 2022 is approximately $213,000 of
customer deposits that will be recorded as income in the consecutive period once
the products have been shipped.
Shipping and Handling Revenues and Costs
Shipping and handling revenues are included in product revenue and the related costs are included in cost of goods sold.
Research and Development
All research and development costs are charged to operations as incurred.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising expense for
the years ended
Earnings (Loss) Per Share
35
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Earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the year.
All outstanding stock options are considered potential common stock. All
outstanding convertible preferred stock are considered common stock at the
beginning of the period or at the time of issuance, if later, pursuant to the
if-converted method. The dilutive effect, if any, of stock options is calculated
using the treasury stock method. As of June 30, 2022 and 2021, the average
market prices for the years then ended are less than the exercise price of all
the outstanding stock options and, therefore, the inclusion of the stock options
would be anti-dilutive. In addition, since the effect of common stock
equivalents is anti-dilutive with respect to losses, the convertible preferred
stock has also been excluded from the Company's computation of loss per common
for the year ended June 30,2021 . Therefore, basic and diluted loss per common
share for the year ended June 30, 2021 are the same.
For the Years Ended June 30,
2022 2021
Numerator:Numerator for basic loss per share:
Net income (loss) $ 18,081 $ (52,023) Undeclared dividends on preferred stock 51,600 51,422 Net income ( loss) applicable to common shareholders $ (33,519) $ (103,445) Net income (loss) applicable to common shareholders $ (33,519) $ (103,445) Undeclared dividends on preferred stock 51,600 - Net income (loss) $ 18,081 $ (103,445)
Denominator:
Denominator for basic earnings (loss) per
share - weighted average shares
outstanding 7,415,329 7,415,329
Denominator for diluted earnings (loss)
per share - weighted average and assumed
conversion 13,220,202 7,415,329
Net income (loss) per share:
Basic net income (loss) per share $ 0.00 $ (0.01)
Diluted net income (loss) per share $ 0.00 $ (0.01)
The following table summarizes convertible preferred stock and securities that,
if exercised would have an anti-dilutive effect
on earnings per share.
36
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37
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For the Years Ended June 30,
2022 2021
Stock options 157,000 157,000
Convertible preferred stock - 5,460,873
Total potential dilutive
securities not included in
income per share 157,000 5,617,873
Income Taxes
The Company accounts for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
consolidated financial statements. Under this method, the Company determines
deferred tax assets and liabilities on the basis of the differences between the
financial statement and tax bases of assets and liabilities by using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes that
these assets are more likely than not to be realized. In making such a
determination, the Company considers all available positive and negative
evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax-planning strategies, and results of recent
operations. If the Company determines that it would be able to realize its
deferred tax assets in the future in excess of their net recorded amount, the
Company would make an adjustment to the deferred tax asset valuation allowance,
which would reduce the provision for income taxes. As of June 30, 2022 and June
30, 2021 , the Company has recorded a full valuation allowance against its
deferred tax assets.
The Company records uncertain tax positions in accordance with ASC 740 on the
basis of a two-step process in which (1) the Company determines whether it is
more likely than not that the tax positions will be sustained on the basis of
the technical merits of the position and (2) for those tax positions that meet
the more-likely-than-not recognition threshold, the Company recognizes the
largest amount of tax benefit that is more than 50 percent likely to be realized
upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties related to unrecognized tax
benefits on the income tax expense line in the accompanying consolidated
statements of operations. As of June 30, 2022 and June 30, 2021 , no accrued
interest or penalties were required to be included on the related tax liability
line in the consolidated balance sheets. The Company dissolved Escalon Holdings,
Inc. and Escalon IP Holdings, Inc. in a tax-free dissolution under Section 332
of the Internal Revenue Code during the year ended June 30, 2021 . There is no
tax impact on the consolidated financial statements of the Company's current and
prior years.
Leases
The Company determines if an arrangement is a lease at the inception of a
contract. Operating lease right-of-use ("ROU") assets are included in
right-of-use assets on the consolidated balance sheets. The current and
long-term components of operating lease liabilities are included in the current
portion of operating lease liabilities and operating lease liabilities, net of
current portion, respectively on the consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized
based on the present value of the future minimum lease payments over the lease
term. As most of the Company's leases do not provide an implicit rate, the
Company uses an incremental borrowing rate based on the information available at
the commencement date in determining the present value of future payments.
Certain leases may include options to extend or terminate the lease. Lease
expense for minimum lease payments is recognized on a straight-line basis over
the lease term.
New Accounting Pronouncements
Recently Issued Accounting Standards
38
--------------------------------------------------------------------------------The Company considers the applicability and impact of all accounting standards updates ("ASUs"). Management periodically reviews new accounting standards that are issued.
New Accounting Pronouncements Not yet Adopted
InJune 2016 the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. The guidance in ASU 2016-13 is effective for "public business entities," as defined, that areSEC filers for fiscal years and for interim periods with those fiscal years beginning afterDecember 15, 2022 . Early adoption of the guidance is permitted for fiscal years beginning afterDecember 15, 2018 , including interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact to the Company's consolidated financial statements.
4. Intangible Assets
The Company's intangible assets consist of the following:
Licenses
The Company purchased no new licenses for year endJune 30, 2022 and 2021, respectively and the cost is capitalized and amortized over 10 years. Amortization expense is approximately$20,000 for each of the years endedJune 30, 2022 and 2021. Annual amortization related entirely to licenses is estimated to be$19,650 for the years endingJune 30, 2023 through 2026 and$4,150 thereafter.
The following table presents amortized licenses as of
Adjusted
Gross Gross Net
Carrying Carrying Accumulated Carrying
Amount Impairment Amount Amortization Value
Amortized Intangible Assets
Licenses
$ 199,000 $ - $ 199,000 $ (116,250) $ 82,750
Total $ 199,000 $ - $ 199,000 $ (116,250) $ 82,750 The following table presents amortized licenses as of
Adjusted
Gross Gross Net
Carrying Carrying Accumulated Carrying
Amount Impairment Amount Amortization ValueAmortized Intangible Assets Licenses
$ 199,000 $ -$ 199,000 $ (96,600) $ 102,400 Total$ 199,000 $ -$ 199,000 $ (96,600) $ 102,400 5. Accrued Expenses
The following table presents accrued expenses:
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June 30,
2022 2021
Accrued compensation $ 445,651 $ 464,213
Line of credit and notes payable interest accrual - 11,506
Customer deposits 212,555 64,494
Warranty reserve 32,078 32,078
Tax payable 100,380 100,834
Other accruals 111,332 22,428
Total accrued expenses $ 901,996 $ 695,553 Accrued compensation as of
6. Line of Credit
OnJune 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 is 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% as ofJune 30, 2022 . The Company was required to put$250,000 in the TD bank savings account as collateral. Mr.Richard J. DePiano Sr . executed a guarantee of the loan in favor of TD Bank.Mr. DePiano Sr . passed away onOctober 3, 2019 , therefore the guarantee is now assumed by his estate. As ofJune 30, 2022 and 2011, the line of credit balance was$201,575 with TD bank. The line of credit interest expense was approximately$10,000 and$10,000 for the years endedJune 30, 2022 and 2021, respectively.
7. Long-term debt
Paycheck Protection Program ("PPP") loan
OnApril 27, 2020 , the Company entered into a PPP loan for$500,000 in connection with the CARES Act related to COVID-19. The full amount of the PPP loan was classified as current as ofJune 30 , 2021.The full amount of the PPP loan and accrued interest were forgiven onAugust 13, 2021 and reported as other income during the year endedJune 30, 2022 .
Economic Injury Disaster ("EIDL") loan
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 is$731 fromJuly 1, 2021 . The EIDL loan is secured by the tangible and intangible personal property of the Company. The Company submitted an EIDL loan increase application onMay 6, 2022 , increasing the loan amount from$150,000 to$200,000 . The loan modification was not approved as the funding was exhausted
The future annual principal amounts and accrued interest to be paid as of
40
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Year ending June 30, EIDL Loan Payment
2023 $ 3,105
2024 3,084
2025 3,202
2026 3,324
2027 3,582
Thereafter 136,348
Total $ 152,645
Other Short-term and Long-term Liabilities
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 as ofJune 30, 2021 . 50% of the deferred employment taxes was paid beforeDecember 31, 2021 . The remaining 50% is not due untilDecember 31, 2022 . Approximately$41,000 of the employer payroll tax withholding deferral was reported as short-term other liabilities as ofJune 30, 2022 . 8. Capital Stock Transactions Stock Option Plans As ofJune 30, 2022 , the Company had in effect two employee stock option plans that provide for incentive and non-qualified stock options. Under the terms of the plans, options may not be granted for less than the fair market value of the Common Stock at the date of grant. Vesting generally occurs ratably between one and five years and for non-employee directors, immediately, and the options are exercisable over a period no longer than 10 years after the grant date. As ofJune 30, 2022 , options to purchase 157,000 shares of the Company's common stock were outstanding, of which 157,000 were exercisable, and 0 shares were unvested.
The following is a summary of Escalon's stock option activity and related
information for the fiscal years ended
2022 2021
Weighted Weighted
Common Average Common Average
Stock Exercise Stock Exercise
Options Price Options Price
Outstanding at the beginning of the year 157,000 $ 1.47 157,000 $ 1.47
Granted - - - -
Exercised - - - -
Forfeited - - - $ -
Outstanding at the end of the year 157,000 $ 1.47 157,000 $ 1.47
Exercisable at the end of the year 157,000 $ 1.47 157,000 1.47
Weighted average fair value of options
granted during the year $ - $ -
The following table summarizes information about stock options outstanding as of
41
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Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at June 30, Contractual Exercise at June 30, Exercise
2022 Life (Years) Price 2022 Price
Range of Exercise Prices
$0.79 21,000 3.83 $ 0.79 21,000 $ 0.79
$1.45 to $2.12 136,000 1.83 $ 1.57 136,000 $ 1.57
Total 157,000 157,000
There was no compensation expense related to stock options for the years ended
9. Income Taxes
The provision for income taxes for the years ended
2022 2021
Current income tax provision
Federal $ - $ -
State - -
- -
Deferred income tax provision
Federal (82,615) 51,366
State (23,605) 14,676
Change in valuation allowance 106,220 (66,042)
- -
Income tax expense (benefit) $ - $ -
Income tax expense (benefit) as a percentage of loss for the years ended
2022 2021
Statutory federal income tax rate 21.00 % 21.00 %
Permanent differences 0.00 % 0.00 %
Valuation allowance (21.00) % (21.00) %
Effective income tax rate 0.00 % 0.00 %
The components of the net deferred income tax assets and liabilities as of
42
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2022 2021
Deferred income tax assets:
Net operating loss carryforward
- -
General business credit - -
Allowance for doubtful accounts 49,633 21,100
Accrued vacation 48,969 49,336
Inventory reserve 73,583 69,432
Accelerated depreciation 57,628 65,432
Warranty reserve 6,736 6,736
Total deferred income tax assets 7,666,848 7,564,755
Valuation allowance (7,649,471) (7,543,251)
17,377 21,504
Deferred income tax liabilities:
Accelerated depreciation (17,377) (21,504)
Total deferred income tax liabilities (17,377) (21,504)
$ - $ -
As of June 30, 2022 , the Company has a valuation allowance of $7,649,471 , which
primarily relates to the federal net operating loss carryforwards. During the
year ended June 30, 2022 , the valuation allowance increased by $106,220 and
during the year ended June 30, 2021 , the valuation decreased by $66,042 . The
valuation allowance is a result of management evaluating its estimates of the
net operating losses available to the Company as they relate to the results of
operations of acquired businesses subsequent to their being acquired by the
Company. The Company evaluates a variety of factors in determining the amount of
the valuation allowance, including the Company's earnings history, the number of
years the Company's operating loss can be carried forward, the existence of
taxable temporary differences, and near-term earnings expectations. Future
reversal of the valuation allowance will be recognized either when the benefit
is realized or when it has been determined that it is more likely than not that
the benefit will be realized through future earnings. The Company has available
federal and state net operating loss carry forwards of approximately $33,921,000
and $3,208,000 , respectively, of which $25,147,000 and $2,785,000 , respectively,
will expire over the next ten years, $6,707,000 and $423,000 , respectively, will
expire in years eleven through twenty, and $2,067,000 and $0 , respectively,
which will not expire.
The Company continues to monitor the realization of its deferred tax assets
based on changes in circumstances, for example, recurring periods of income for
tax purposes following historical periods of cumulative losses or changes in tax
laws or regulations. The Company's income tax provision and management's
assessment of the realizability of the Company's deferred tax assets involve
significant judgments and estimates. If taxable income expectations change, in
the near term the Company may be required to reduce the valuation allowance
which would result in a material benefit to the Company's results of operations
in the period in which the benefit is determined by the Company.
Fiscal year ended June 30, 2019 and subsequent years remain open to tax
examination. However, to the extent allowed by law, the tax authorities may have
the right to examine prior periods where net operating losses were generated and
carried forward, and make adjustments up to the amount of the net operating loss
amount. At June 30, 2022 , the Company did not have any significant unrecognized
tax positions. The Company has provided what it believes to be an appropriate
amount of tax for items that involve interpretation to the tax law. However,
events may occur in the future that will cause the Company to reevaluate the
current provision and may result in an adjustment to the liability for taxes.
10. Commitments and Contingencies
Legal Proceedings
The Company, from time to time is involved in various legal proceedings and
disputes that arise in the normal course of business. These matters have
included intellectual property disputes, contract disputes, employment disputes
and other matters. The Company does not believe that the resolution of any of
these matters has had or is likely to have a material adverse impact on the
Company's business, financial condition or results of operations.
43
--------------------------------------------------------------------------------11. Related Party Transactions and Preferred Stock
OnFebruary 14, 2018 , the Company entered into a Debt Exchange Agreement (the "Exchange Agreement") withMr. DePiano Sr ., the Company's former Chairman and DP Associates Inc. Profit-Sharing Plan of whichMr. DePiano Sr . is the sole owner and sole trustee (the "Holders"). Pursuant to the terms of the Exchange Agreement, effectiveFebruary 15, 2018 , the Holders exchanged a total of$645,000 principal amount of debt related to the accounts receivable factoring program for 2,000,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock"). Each share of Preferred Stock entitles the Holder thereof to 13 votes per share and will vote together with all other classes and series of stock of the Company as a single class on all actions to be taken by the Company's stockholders. As a result of this voting power, the Holders as ofJune 30, 2022 beneficially own approximately 77.81% of the voting power on all actions to be taken by the Company's shareholders. Subject to the terms and conditions of Preferred Stock, the holder of any share or shares of the Preferred Stock has the right, at its option at any time, to convert each such share of Preferred Stock (except that, upon any liquidation of the Company, the right of conversion will terminate at the close of business on the business day fixed for payment of the amounts distributable on the Preferred Stock) into 2.15 shares of Common Stock (the "Conversion Ratio").
The
Conversion Ratio is subject to standard provisions for adjustment in the event of a subdivision or combination of the Company's Common Stock and upon any reorganization or reclassification of the capital stock of the Company. If the Holders were to convert their shares of Preferred Stock into Common Stock at the Conversion Ratio the Holders would receive a total of 4,300,000 shares of Common Stock, or approximately 36.70% of the then outstanding shares of Common Stock assuming such conversion. Each outstanding share of the Preferred Stock accrues dividends calculated cumulatively at the annual rate of$.0258 per share (such amount subject to equitable adjustment in the event of any stock dividend, stock split, combination, reclassification other similar event), payable upon the earlier of (i) a liquidation, dissolution or winding up of the Company or (ii) conversion of the Preferred Stock into Common Stock. Upon either of such events, all such accrued and unpaid dividends, whether or not earned or declared, to and until the date of such event, will become immediately due and payable and will be paid in full. The dividends payable to the holders of the Preferred Stock is payable in cash or, at the election of any such holder, in a number of additional shares of Common Stock equal to the amount of the dividend expressed in dollars divided by the then applicable Conversion Ratio, described above. As ofJune 30, 2022 and 2021 the cumulative dividends payable is$225,731 ($0.1129 per share) and$174,131 ($0.0871 per share), respectively.Mr. DePiano Sr . passed away onOctober 3, 2019 and left a will by which he appointedRichard J. DePiano , Jr., the Chief Executive Officer of the Company, as executor.Richard DePiano Jr . was elected to serve as chairman of the Company's board.Mr. DePiano , Jr. qualified as executor and has control over the listed shares in his capacity as executor ofMr. DePiano Sr .'s estate.
12. Concentration of Credit Risk
Credit Risk
Financial Instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents, restricted cash and trade receivables. Concentration of credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across geographic areas principally withinthe United States and international. The Company routinely address the financial strength of its customer and, as a consequence, believes that its receivable credit risk exposure is limited. The Company does not require customers to post collateral.
Major Customer
One customer accounted for approximately 11% of net sales during the year
ended
As ofJune 30, 2022 the Company had one customer that represents approximately 13% of the total accounts receivable balance. As ofJune 30, 2021 the Company had one customer that represents approximately 23% of the total accounts receivable balance. Major Supplier 44
-------------------------------------------------------------------------------- The Company's two largest suppliers accounted for 39% and 12% of the total purchases for the year endedJune 30, 2022 . The Company's two largest suppliers accounted for the total purchases for 40% and 10% of total purchases for the year endedJune 30, 2021 . As ofJune 30, 2022 the Company had one supplier that represent approximately 36% of the total accounts payable balance. As ofJune 30, 2021 the Company had two customer that represents 39% and 12% of the total accounts payable balance.
Foreign Sales
Domestic and international sales from continuing operations are as follows:
(in thousands) For the Years Ended June 30,
2022 2021
Domestic $ 5,720 53.4 % $ 6,255 59.7 %
Foreign 4,983 46.6 % 4,217 40.3 %
Total $ 10,703 100.0 % $ 10,472 100.0 %
13. Leases
The Company leases certain facilities and equipment under operating leases.
Total lease expense, under ASC 842, was included in cost of goods sold and
marketing, general and administrative costs in our unaudited condensed
consolidated statement of operations for the years ended June 30, 2022 and 2021
as follows:
Year Ended June 30,
2022 2021
Operating lease costs:
Fixed 337,774 346,302
Total: $ 337,774 $ 346,302
Supplemental cash flow information was as follows:
Year Ended
2022 2021
Cash paid for amounts included in the measurement of lease liabilities Operating cash flows for operating leases
334,912 $ 335,549
Total $ 334,912 $ 335,549
Leases recorded on the balance sheet consist of the following:
June 30,
Leases (operating) Classification on the Balance Sheet 2022 2021
Assets
Operating lease ROU assets Right-of-use asset $ 788,257 $ 843,559
Liabilities
Current portion of operating lease
Current liabilities $ 304,737 $ 279,051
Non-current Operating lease liabilities $ 538,794 $ 630,330
The table below reconciles the undiscounted future minimum lease payments
(displayed by year and in the aggregate)
under noncancelable operating leases with terms of more than one year to the
total operating lease liabilities
recognized on the consolidated balance sheets as of June 30, 2022 :
45
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The aggregate future lease payments for operating leases as of June 30, 2022
were as follows:
Operating
2023 343,242
2024 350,142
2025 211,215
2026 2,728
Total lease payments 907,327
Less interest 63,796
Present value of lease liabilities
Average lease terms and discount rates were as follows:
June 30,
2022 2021
Weighted-average remaining lease terms (years)
Operating leases 2.61 3.35
Weighted-average discount rate
Operating leases 5.65 % 5.65 %
On April 28, 2022 the Company extended the lease agreement for its Wisconsin
warehouse, which will end in April 30, 2022 for a term of three years. The lease
agreement has a lease ROU assets and lease liability of approximately $224,000 ,
respectively. The Company classified the amended lease as an operating lease
under ASC 842.
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