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, the ability to continue as a going concern including the abilityto raise capital, manage operations and pursue business partnerships and cost-cutting measures, and the other risks described in the Company's Form 10-K for the fiscal year endedJune 30, 2022 . 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, 2022 and this Form 10-Q quarterly report to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions.
Executive Overview-three-month periods ended
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 decreased approximately$70,000 or 2.6%, to$2,605,000 during the three months endedSeptember 30, 2022 , 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$143,000 , and a decrease in service plans revenue of$33,000 offset by an increase in Sonomed's ultrasound products of$94,000 , and an increase in sales of AXIS products of$12,000 . •Consolidated cost of goods sold totaled approximately$1,548,000 , or 59.4%, of total revenue for the three months endedSeptember 30, 2022 , as compared to$1,664,000 , or 62.2%, of total revenue of the same period of last fiscal year. The decrease of 2.8% 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$204,000 , or 22.6%, to$1,108,000 for the three months endedSeptember 30, 2022 , as compared to the same period of last fiscal year. The increase in marketing, general and administrate expenses is mainly due to increased expense for network improvement, increased consulting expense related to a regulatory filing related to AXIS products, increased trade show and travel expense and the increased sales compensation. 16 -------------------------------------------------------------------------------- •Consolidated research and development expenses decreased$27,000 , or 9.3%, to$264,000 for the three months endedSeptember 30, 2022 , 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 decrease in research and development expense is mainly due to increased consulting expense during the three months endedSeptember 30, 2022 .
Company Overview
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, 2022 .
During the three months ended
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--------------------------------------------------------------------------------Results of Operations
Three Months Ended
The following table shows consolidated net revenue, as well as identifying
trends in revenues for the three months ended
For the Three Months Ended September 30,
2022 2021 % Change
Net Revenue:
Products $ 2,443 $ 2,480 (1.5) %
Service plans 162 195 (16.9) %
Total $ 2,605 $ 2,675 (2.6) %
Consolidated net revenue decreased approximately $70,000 or 2.6%, to $2,605,000
during the three months ended September 30, 2022 , 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 $143,000 , and a decrease in service plans revenue of
$33,000 offset by an increase in Sonomed's ultrasound products of $94,000 , and
an increase in sales of AXIS products of $12,000 .
The following table presents the domestic and foreign sales for the three months
ended
For the Three Months Ended September 30,
2022 2021
Domestic $ 1,620 62.2 % $ 1,625 60.7 %
Foreign 985 37.8 % 1,050 39.3 %
Total $ 2,605 100.0 % $ 2,675 100.0 %
The following table presents consolidated cost of goods sold and as a percentage
of revenues for the three months ended September 30, 2022 , and 2021. Table
amounts are in thousands:
For the Three Months Ended September 30,
2022 % 2021 %
Cost of Goods Sold:
$ 1,548 59.4 % $ 1,664 62.2 %
Total $ 1,548 59.4 % $ 1,664 62.2 %
Consolidated cost of goods sold totaled approximately $1,548,000 , or 59.4%, of
total revenue for the three months ended September 30, 2022 , as compared to
$1,664,000 , or 62.2%, of total revenue of the same period of last fiscal year.
The decrease of 2.8% 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 months ended
For the Three Months Ended September 30,
2022 2021 % Change
Marketing, General and Administrative:
$ 1,108 $ 904 22.6 %
Total $ 1,108 $ 904 22.6 %
18-------------------------------------------------------------------------------- Consolidated marketing, general and administrative expenses increased$204,000 , or 22.6%, to$1,108,000 for the three months endedSeptember 30, 2022 , as compared to the same period of last fiscal year. The increase in marketing, general and administrate expenses is mainly due to increased expense for network improvement, increased consulting expense related to a regulatory filing relatedto AXIS products, increased trade show and travel expense and the increased sales compensation.
The following table presents consolidated research and development expenses for
the three months ended
Table amounts are in thousands:
For Three Months Ended September 30,
2022 2021 % Change
Research and Development:
264 $ 291 (9.3) %
Total $ 264 $ 291 (9.3) %
Consolidated research and development expenses decreased $27,000 , or 9.3%, to
$264,000 for the three months ended September 30, 2022 , 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
decrease in research and development expense is mainly due to decreased
consulting expense during the three months ended September 30, 2022 .
Other income
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 three-month period endedSeptember 30, 2021 . Russia-Ukraine War 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 it does 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.
Liquidity and Capital Resources
Our total cash on hand as ofSeptember 30, 2022 was approximately$275,000 of cash on hand and restricted cash of approximately$256,000 compared to approximately$594,000 of cash on hand and restricted cash of$256,000 as ofJune 30, 2022 . Approximately$48,000 was available under our line of credit as ofSeptember 30, 2022 . Because the Company's 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 or take other actions in order to fund operations.
The Company expects 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 the Company's products, or through strategic alliances. Additionally, we may seek to sell additional equity or debt securities
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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 of September 30, 2022 we had an accumulated deficit of approximately $69.2
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
September 30, June 30,
2022 2022
Current Ratio:
Current assets $4,016 $4,186
Less: Current liabilities 3,158 3,002
Working capital $858 $1,184
Current ratio 1.27 to 1 1.39 to 1
Debt to Total Capital Ratio:
Line of credit, note payable, lease liabilities, and EIDL loan $1,130 $1,205
Total debt 1,130 1,205
Total equity 1,157 1,478
Total capital $2,287 $2,683
Total debt to total capital 49.4% 44.9%
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Working Capital Position
Working capital decreased approximately$326,000 as ofSeptember 30, 2022 , and the current ratio decreased to 1.27 to 1 from 1.39 to 1 when compared toJune 30, 2022 . The decrease in working capital is due to an increase in current liabilities of$156,000 during the quarter endedSeptember 30, 2022 , and a decrease in current assets of$170,000 .
Debt to total capital ratio was 49.4% and 44.9% as of
Cash Flow Used in Operating Activities
During the three months endedSeptember 30, 2022 the Company used approximately$310,000 of cash in operating activities as compared to cash of approximately$393,000 provided by operating activities during the three months endedSeptember 30, 2021 . For the three months endedSeptember 30, 2022 , its cash used in operations is mainly as a result of net loss, along with an increase in inventories of$13,000 , an increase in other assets of$26,000 , an increase in accounts receivable of approximately$114,000 , a decrease in deferred revenue of$58,000 , and a decrease in accrued expense of$60,000 offset by an increase in accounts payable of$277,000 . The remaining offsetting items for cash provided by operations is comprised of less significant items. For the three months endedSeptember 30, 2021 , its cash used in operations is mainly due to increase in accounts receivable of approximately 291,000, a decrease in deferred revenue of$87,000 and decrease in operating liabilities of$70,000 offset by an increase in accrued expense of$110,000 . The remaining offsetting items for cash provided by operations is comprised of less significant items.
Cash Flows used in Investing Activities
Cash flows used in investing activities for the three-month period ended
Cash Flows Used in Financing Activities
For the three months endedSeptember 30, 2022 the cash used in financing activities was due to an auto loan payment of$700 and repayment of EIDL loan of$500 . For the three months endedSeptember 30, 2021 the cash used in financing activities was due to auto loan payment of$1,000 and repayment of EIDL loan accrued interest of$700 . 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 6.54% as ofSeptember 30, 2022 . The Company was required to put$250,000 in the TD bank savings account as collateral. As ofSeptember 30, 2022 andJune 30, 2022 , 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 endedSeptember 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 full amount of the PPP loan and accrued interest were forgiven onAugust 13, 2021 and reported as other income during the three-month period endedSeptember 30, 2021 .
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
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$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 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. 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 ofSeptember 30, 2022 .
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