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    ESMC   US2960743050

ESCALON MEDICAL CORP.

(ESMC)
Delayed OTC Markets  -  03:39 2022-09-30 pm EDT
0.0922 USD   -0.86%
09/28ESCALON MEDICAL CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)
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09/28Escalon Medical Corp. Reports Earnings Results for the Full Year Ended June 30, 2022
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09/28Escalon Medical Corp. Auditor Raises 'Going Concern' Doubt
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ESCALON MEDICAL CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/15/2021 | 04:12pm EDT

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
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markets and uses for the Company's products, the Company's ability to increase
its sales campaign effectively, the Company's regulatory filings with the FDA,
acquisitions, dispositions, the development of joint venture opportunities,
intellectual property and patent protection and infringement, the loss of
revenue due to the expiration or termination of certain agreements, the effect
of competition on the structure of the markets in which the Company competes,
increased legal, accounting and Sarbanes-Oxley compliance costs, information
security, cybersecurity and data privacy risks, defending the Company in
litigation matters and the Company's cost saving initiatives. The reader must
carefully consider forward-looking statements and understand that such
statements involve a variety of risks and uncertainties, known and unknown, and
may be affected by assumptions that fail to materialize as anticipated,
including risks related to the COVID-19 pandemic, inflation, and other risks
described in the Company's Form 10-K for the fiscal year ended June 30, 2021.
Consequently, no forward-looking statement can be guaranteed, and actual results
may vary materially. It is not possible to foresee or identify all factors
affecting the Company's forward-looking statements, and the reader therefore
should not consider the list of such factors contained in its periodic report on
Form 10-K for the year ended June 30, 2021 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 September 30, 2021 and 2020
The following highlights are discussed in further detail within this Form 10-Q.
The reader is encouraged to read this Form 10-Q in its entirety to gain a more
complete understanding of factors impacting Company performance and financial
condition.

•Consolidated net revenue increased approximately $261,000 or 10.8%, to
$2,675,000 during the three months ended September 30, 2021 as compared to the
same period of last fiscal year. The increase in net revenue is attributed to an
increase in sales in Sonomed's ultrasound products of $431,000 and an increase
in sales of AXIS products of $9,000, offset by a decrease in Trek revenue of
$145,000 and a decrease in service plans revenue of $34,000.

•Consolidated cost of goods sold totaled approximately $1,664,000, or 62.2%, of
total revenue for the three months ended September 30, 2021, as compared to
$1,504,000, or 62.3%, of total revenue of the same period of last fiscal year.
The decrease of 0.1% in cost of goods sold as a percentage of total revenue is
mainly due to changes in product sales mix and geographic differences.

•Consolidated marketing, general and administrative expenses increased $12,000,
or 1.3%, to $904,000 for the three months ended September 30, 2021, as compared
to the same period of last fiscal year. The small increase in marketing, general
and administrate expenses is mainly due to bad debts expense, increased network
expense, insurance expense offset by the decreased office rent expense.

•Consolidated research and development expenses increased $82,000, or 39.2%, to
$291,000 for the three months ended September 30, 2021, as compared to the same
period of last fiscal year. Research and development expenses were primarily
expenses associated with the introduction of new or enhanced products. The
increase in research and development expense is mainly due to increased
consulting expense during the three months ended September 30, 2021.
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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 ended June 30, 2021, as well as Note 3 to our unaudited
condensed consolidated financial statements for the three months ended September
30, 2021.

During the three months ended September 30, 2021, there were no significant changes in our accounting policies and estimates to our unaudited condensed consolidated financial statements.

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Results of Operations
Three Months Ended September 30, 2021 and 2020
The following table shows consolidated net revenue, as well as identifying
trends in revenues for the three months ended September 30, 2021 and 2020. Table
amounts are in thousands:
                                For the Three Months Ended September 30,
                                     2021                           2020        % Change
Net Revenue:
Products        $             2,480                               $ 2,184         13.6  %
Service plans                   195                                   230        (15.2) %
Total           $             2,675                               $ 2,414         10.8  %



Consolidated net revenue increased approximately $261,000 or 10.8%, to
$2,675,000 during the three months ended September 30, 2021 as compared to the
same period of last fiscal year. The increase in net revenue is attributed to an
increase in sales in Sonomed's ultrasound products of $431,000 and an increase
in sales of AXIS products of $9,000, offset by a decrease in Trek revenue of
$145,000 and a decrease in service plans revenue of $34,000.

The following table presents the domestic and foreign sales for the three months ended September 30, 2021 and 2020. The table amounts are in thousands:

                                 For the Three Months Ended September 30,
                                      2021                                        2020
Domestic    $            1,625                                60.7  %    $ 1,542        63.9  %
Foreign                  1,050                                39.3  %        872        36.1  %
Total       $            2,675                               100.0  %    $ 2,414       100.0  %



The following table presents consolidated cost of goods sold and as a percentage
of revenues for the three months ended September 30, 2021 and 2020. Table
amounts are in thousands:

                                                   For the Three Months Ended September 30,
                                2021                         %                      2020                     %
Cost of Goods Sold:
                        $            1,664                      62.2  %       $       1,504                    62.3  %
Total                   $            1,664                      62.2  %       $       1,504                    62.3  %




Consolidated cost of goods sold totaled approximately $1,664,000, or 62.2%, of
total revenue for the three months ended September 30, 2021, as compared to
$1,504,000, or 62.3%, of total revenue of the same period of last fiscal year.
The decrease of 0.1% in cost of goods sold as a percentage of total revenue is
mainly due to changes in product sales mix and geographic differences.

The following table presents consolidated marketing, general and administrative expenses for three months ended September 30, 2021 and 2020. Table amounts are in thousands:


                          For the Three Months Ended September 30,
                               2021                            2020       % 

Change

Marketing, General and Administrative:

        $               904                                   $ 892           1.3  %
Total   $               904                                   $ 892           1.3  %



Consolidated marketing, general and administrative expenses increased $12,000,
or 1.3%, to $904,000 for the three months ended September 30, 2021, as compared
to the same period of last fiscal year. The small increase in marketing, general
and administrate expenses is mainly due to bad debts expense, increased network
expense, insurance expense offset by the decreased office rent expense.
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The following table presents consolidated research and development expenses for the three months ended September 30, 2021 and 2020. Table amounts are in thousands:

                                                         For the Three 

Months Ended September 30,

                                            2021                       2020                         % Change
Research and Development:
                                   $               291          $            209                                39.2  %
Total                              $               291          $            209                                39.2  %


Consolidated research and development expenses increased $82,000, or 39.2%, to
$291,000 for the three months ended September 30, 2021, as compared to the same
period of last fiscal year. Research and development expenses were primarily
expenses associated with the introduction of new or enhanced products. The
increase in research and development expense is mainly due to increased
consulting expense during the three months ended September 30, 2021.

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 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 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 quarter ended September
30, 2021.


COVID-19 Disclosure

  On March 11, 2020, the World Health Organization declared the outbreak of a
coronavirus (COVID-19) a pandemic. This pandemic has had a significant impact on
the global and domestic economy and is likely to impact the operations of the
company. The Company has been assessing the impact of the COVID-19 pandemic on
the business, including the impact on the financial condition and results of
operations, financial resources, changes in accounting judgment as well as the
impact on the supply and demand, etc. The Company is considered an essential
business and was able to maintain operations during the lockdown. However, the
Company does not know the extent and duration of the impact of COVID-19 on its
business due to the uncertainty about the spread of the virus.

Liquidity and Capital Resources


Our total cash on hand as of September 30, 2021 was approximately $1,256,000
excluding restricted cash of approximately $256,000 compared to approximately
1,651,000 of cash on hand and restricted cash of $256,000 as of June 30, 2021.
Approximately $48,000 was available under our line of credit as of September 30,
2021.

Because our operations have not historically generated sufficient revenues to
enable profitability, we will continue to monitor costs and expenses closely and
may need to raise additional capital in order to fund operations.

We expect to continue to fund operations from cash on hand and through capital
raising sources if possible and available, which may be dilutive to existing
stockholders, through revenues from the licensing of our products, or through
strategic alliances. Additionally, we may seek to sell additional equity or debt
securities through one or more discrete transactions, or enter into a strategic
alliance arrangement, but can provide no assurances that any such financing or
strategic alliance arrangement will be available on acceptable terms, or at all.
Moreover, the incurrence of indebtedness in connection with a debt financing
would result in increased fixed obligations and could contain covenants that
would restrict our operations.

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As of September 30, 2021 we had an accumulated deficit of approximately $68.6
million, incurred recurring losses from operations and negative cash flows from
operating activities. These factors raise substantial doubt regarding our
ability to continue as a going concern, and our ability to generate cash to meet
our cash requirements for the following twelve months as of the date of this
form 10-Q.

The following table presents overall liquidity and capital resources as of September 30, 2021 and June 30, 2021. Table amounts are in thousands:

                                                                          September 30,                 June 30,
                                                                              2021                        2021
Current Ratio:
Current assets                                                               $4,453                      $4,593
Less: Current liabilities                                                     2,911                       3,397
Working capital                                                              $1,542                      $1,196
Current ratio                                                               1.53 to 1                   1.35 to 1
Debt to Total Capital Ratio:
Line of credit, note payable, lease liabilities, and EIDL loan               $1,206                      $1,772
Total debt                                                                    1,206                       1,772
Total equity                                                                  1,777                       1,460
Total capital                                                                $2,983                      $3,232
Total debt to total capital                                                   40.4%                       54.8%


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Working Capital Position
Working capital increased approximately $346,000 as of September 30, 2021, and
the current ratio increased to 1.53 to 1 from 1.35 to 1 when compared to
June 30, 2021. The increase in working capital is due to a decrease in current
liabilities of $486,000 during the quarter ended September 30, 2021 offset by a
decrease in current assets of $140,000. The PPP loan forgiveness mainly
contributes to the decrease of the current liabilities.
Debt to total capital ratio was 40.4% and 54.8% as of September 30,
2021 and June 30, 2021, respectively. The decrease of debt to total capital
ratio is also due to the PPP loan forgiveness.
Cash Flow Used in (Provided By) Operating Activities
During the three months ended September 30, 2021 the Company used approximately
$393,000 of cash in operating activities as compared to cash of approximately
$541,000 from operating activities during the three months ended September 30,
2021.
  For the three months ended September 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.
  For the three months ended September 30, 2020, the Company provided
approximately $541,000 from operations. The cash provided by operations is
mainly due to decreases in accounts receivable and inventory of approximately
$467,000, increase in accounts payable and accrued expenses of approximately
$292,000, offset by the Company's net loss of $197,000. The remaining offsetting
items for cash provided by operations is comprised of less significant items.
The change in the mentioned working capital accounts are due to timing as well
as the Company's focus on preserving cash due to uncertainty in the current
economic climate.

Cash Flows Used in Financing Activities
For the three months ended September 30, 2021 the cash used in financing
activities was due to auto loan payment of $1,000 and repayment of EIDL loan of
$700. For the three months ended September 30, 2020 the cash used in financing
activities of $1,000 was due to auto loan payment.
Debt Financing

  On June 29, 2018 the Company entered a business loan agreement with TD bank
receiving a line of credit evidenced by a promissory note of $250,000. The
interest is subject to change based on changes in an independent index which the
Wall Street Journal Prime. The index rate at the date of the agreement is 5.000%
per annum. Interest on the unpaid principal balance of the note will be
calculated using a rate of 0.740 percentage points over the index, adjusted if
necessary for any minimum and maximum rate limitations, resulting in an initial
rate of 5.740% per annum based on a year of 360 days. The interest rate was
3.99% as of September 30, 2021. The Company was required to put $250,000 in the
TD bank savings account as collateral.

  As of September 30, 2021 and June 30, 2020, the line of credit balance was
$201,575 with TD bank. The line of credit interest expense was approximately
$3,000 and $3,000 for the three months ended September 30, 2021 and 2020,
respectively.

COVID-19 Relief Loans and Liabilities

Payroll Protection Program ("PPP")


  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 had a
fixed payment schedule. The PPP loan was unsecured. A final payment for the
unpaid principal and accrued interest was payable no later than two years after
the funding date. The note bore interest at a rate of 1.00% per annum. The full
amount of the PPP loan and accrued interest were forgiven on August 13, 2021 and
reported as other income during the quarter ended September 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
                                       22
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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 Withholdings


  The CARES Act allows employers to defer the deposit and payment of
the employer share of Social Security tax that would otherwise be due on or
after March 27, 2020, and before January 1, 2021. The Company has deferred
approximately $82,000 of the social security tax as of September 30, 2021. 50%
of the deferred employment taxes will not be due until December 31, 2021, with
the remaining 50% not due until December 31, 2022. Approximately $41,000 was
reported as short-term other liabilities as of September 30, 2021.

Off-balance Sheet Arrangements and Contractual Obligations

The Company was not a party to any off-balance sheet arrangements during the three-month periods ended September 30, 2021 and 2020. Item 3. Quantitative and Qualitative Disclosures About Market Risk

None

© Edgar Online, source Glimpses

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