ESCALON MEDICAL CORP. 12
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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 decreased approximately
fiscal year. The decrease in net revenue is attributed to a decrease of
approximately $762,000 in sales of Sonomed's ultrasound products and a
decrease of approximately
system products. The decrease is offset by an increase in sales of Trek
products of
COVID-19 has negatively impacted the sales of ultrasound. The back orders
of Trek contributed to the increase in Trek sales.
• Consolidated cost of goods sold totaled approximately
of total revenue during the year ended
increase of 3.4% in cost of goods sold as a percentage of total revenue is
mainly due to decreased sales due to COVD-19 and change of product mix.
• Consolidated marketing, general and administrative expenses decreased
compared to the prior fiscal year. The decrease is mainly due to decreased
payroll expense, executive retirement expense, business tax and meeting and
exhibits expense.
• Consolidated research and development expenses increased
to $1,122,000 during the year ended June 30, 2020 as compared to the same
period of the prior fiscal year. Research and development expenses wereprimarily expenses associated with the introduction of new or enhanced
products. The increase in research and development expense is mainly due to
expenses for AXIS software development work and ultrasound certification
costs incurred year ended June 30, 2020 .
• The increase of operating loss is also due to the loss from an intangible
assets impairment of $605,000 during the year ended June 30, 2020 as
compared to the prior fiscal year.
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 has been able to maintain operations during the lockdown. The
Company remains in strong communications with the customer and there is no
evidence showing that COVID-19 will greatly effect collection of accounts
receivable as the date of this filing. 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.
Results of Operations
Years ended Ended
For the Years Ended June 30,
2020 2019 % Change
Net Revenue:
Products $ 8,438 $ 8,707 (3.1 )%
Service plans 962 920 4.6 %
Total $ 9,400 $ 9,627 (2.4 )%
Consolidated net revenue decreased approximately $227,000 or 2.4%, to $9,400,000
during the year ended June 30, 2020 as compared to the prior fiscal year. The
decrease in net revenue is attributed to a decrease of approximately $762,000
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in sales of Sonomed's ultrasound products and a decrease of approximately
$245,000 in the ophthalmic fundus photography system products. The decrease is
offset by an increase in sales of Trek products of $738,000 and an increase in
the service plans of $42,000 . COVID-19 has negatively impacted the sales of
ultrasound. The back orders of Trek contributed to the increase in Trek sales.
Foreign sales
The following table presents domestic and international sales from continuing operations.Table amounts are in thousands:
For the Years Ended June 30,
2020 2019
Domestic $ 5,781 61.5 % $ 5,587 58.0 %
Foreign 3,619 38.5 % 4,040 42.0 %
Total $ 9,400 100.0 % $ 9,627 100.0 %
The following table presents consolidated cost of goods sold and as a percentage
of revenues for the years ended June 30, 2020 and 2019. Table amounts are in
thousands:
For the Years Ended June 30,
2020 % Change 2019 %
Cost of Goods Sold:
$ 5,198 55.3 % $ 4,997 51.9 %
Total $ 5,198 55.3 % $ 4,997 51.9 %
Consolidated cost of goods sold totaled approximately $5,198,000 , or 55.3%, of
total revenue during the year ended June 30, 2020 , as compared to $4,997,000 , or
51.9%, of total revenue of the prior fiscal year. The increase of 3.4% in cost
of goods sold as a percentage of total revenue is mainly due to decreased sales
due to COVD-19 and change of product mix.
The following table presents consolidated marketing, general and administrative
expenses for the years ended June 30, 2020 and 2019. Table amounts are in
thousands:
For the Years Ended June 30,
2020 2019 % ChangeMarketing, General and Administrative:
$ 3,875 $ 4,142 (6.4 )% Total$ 3,875 $ 4,142 (6.4 )% Consolidated marketing, general and administrative expenses decreased$267,000 , or 6.4%, to$3,875,000 during the year endedJune 30, 2020 as compared to the prior fiscal year. The decrease is mainly due to decreased payroll expense, executive retirement expense, business tax and meeting and exhibits expense. The following table presents consolidated research and development expenses for the yeras endedJune 30, 2020 and 2019. Table amounts are in thousands: For the Years Ended June 30, 2020 2019 % Change Research and Development:$ 1,122 $ 740 51.6 % Total$ 1,122 $ 740 51.6 % 14
-------------------------------------------------------------------------------- Consolidated research and development expenses increased$382,000 , or 51.6%, to$1,122,000 during the year endedJune 30, 2020 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 due to expenses for AXIS software development work and certification costs incurred in year endedJune 30, 2020 . Impairment The Company tests indefinite-life intangible assets for possible impairment on an annual basis atJune 30 , and at any other time events occur or circumstances indicate that the carrying amount of intangible assets may be impaired. Due to the current low market capitalization of the Company's common stock, the Company performed an interim impairment test on its intangible asset as ofDecember 31, 2019 . The outcome of this impairment test resulted in non-cash charge for the full impairment of the indefinite-lived intangible assets (trade mark and trade names) of$605,000 , which was recorded in the consolidated financial statements for fiscal year 2020. No impairments were recorded in year endedJune 30, 2019 . Other Income (Expense) As ofJune 30, 2019 ,$792,000 was accrued forMr. DePiano , Sr.'s retirement benefits. The amount represent the approximate present value of the supplemental retirement benefits awarded using a discount rate of 4.5% as ofJune 30, 2019 .Mr. DePiano , Sr. passed away onOctober 3, 2019 . According to the agreement, the benefits terminate uponMr. DePiano Sr .'s death. Therefore, the Company recognized a gain with the termination of the retirement benefit obligation of$758,000 , which has been reported as other income for year endedJune 30, 2020 . The Company did not have significant other income during the fiscal year endedJune 30, 2019 . Liquidity and Capital Resources Our total cash on hand as ofJune 30, 2020 was approximately$826,000 of cash on hand and restricted cash of approximately$255,000 compared to approximately$410,000 of cash on hand and restricted cash of$253,000 as ofJune 30, 2019 . Approximately$48,000 was available under our line of credit as ofJune 30, 2020 . OnApril 27, 2020 , the Company entered into a Payroll Protection Program ("PPP") loan for$500,000 in connection with the CARES Act related to COVID-19.$221,297 of the PPP loan is classified as current. The promissory note has a fixed payment schedule, commencing seven months following the funding of the note and consisting of seventeen monthly payments of principal and interest, with the principal component of each payment based upon the level of amortization of principal over a two year period from the funding date. The PPP loan is unsecured. A final payment for the unpaid principal and accrued interest will be payable no later thanApril 26, 2022 . The note will bear interest at a rate of 1.00% per annum and is deferred for the first six months of the loan. Major portions of the loan and accrued interest may qualify for loan forgiveness based on the terms of the program. No assurance is provided that the Company will in fact obtain forgiveness of the PPP loan in whole or in part. Economic Injury Disaster Loan (EIDL loan) 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 also received$150,000 EIDL loan. The annual interest rate is 3.75%. The payment term is 30 years and the monthly payment of principal and interest will be$731 . The EIDL loan is secured by the tangible and intangible personal property of the Company. 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, 2020 we had an accumulated deficit of approximately$68.8 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-K. 15 --------------------------------------------------------------------------------
The following table presents overall liquidity and capital resources as of
June 30, June 30,
2020 2019
Current Ratio:
Current assets $4,333 $4,261
Less: Current liabilities 2,865 2,260
Working capital $1,468 $2,001
Current ratio 1.51 to 1 1.89 to 1
Debt to Total Capital Ratio:
Line of credit, note payable, lease
liabilities, PPP loan and EIDL loan $2,042 $220
Total debt 2,042 220
Total equity 1,512 2,162
Total capital $3,554 $2,382
Total debt to total capital 57.5% 9.2%
Working Capital Position
Working capital decreased approximately $533,000 as of June 30, 2020 , and the
current ratio decreased to 1.51 to 1 from 1.89 to 1 when compared to June 30,
2019 .
Overall total current assets increased approximately $72,000 to approximately
$4,333,000 as of June 30, 2020 from $4,261,000 as of June 30, 2019 . Total
current liabilities, which consists of a line of credit, current portion of note
payable, current portion of PPP loan, current portion of post-retirement pension
benefits, related party accrued interest, current portion of operating lease
liabilities, accounts payable, accrued expenses, deferred revenue and
liabilities of discontinued operations, increased approximately $605,000 to
$2,865,000 as of June 30, 2020 from $2,260,000 as compared to June, 2019. The
increase in current liabilities is result of adoption of the ASU No. 2016-02,
Leases (Topic 842) and the PPP loan.
On April 27, 2020 , the Company entered into a PPP loan for $500,000 . $221,297 of
the PPP loan is classified as current. The promissory note has a fixed payment
schedule, commencing seven months following the funding of the note and
consisting of seventeen monthly payments of principal and interest, with the
principal component of each payment based upon the level of amortization of
principal over a two year period from the funding date. A final payment for the
unpaid principal and accrued interest will be payable no later than April 26,
2022 . The note will bear interest at a rate of 1.00% per annum and is deferred
for the first six months of the loan. Major portions of the loan and accrued
interest may qualify for loan forgiveness based on the terms of the program.The
Company also received $150,000 EIDL loan from SBA. The annual interest rate is
3.75%, The payment term is 30 years and the monthly payment of principal and
interest will be $731 .
Debt to total capital ratio was 57.5% and 9.2% as of June 30, 2020 and June 30,
2019 , respectively. The decrease in the working capital ratio and increase in
the debt to total capital ratio is due to primarily the adoption of the ASU No.
2016-02, Leases (Topic 842) and the additional notes payable received related to
COVID-19. The Company received $500,000 of the PPP loan and $150,000 of the
Economic Injury Disaster (EIDL) loan from SBA during the year ended June 30,
2020 .
Cash Flow Used In Operating Activities
During year ended June 30, 2020 the Company used approximately $168,000 of cash
in operating activities as compared to approximately $473,000 of cash used in
operating activities during the year ended June 30, 2019 .
For the year ended June 30, 2020 , the Company had a net loss of approximately
$650,000 , which includes non cash post-retirement adjustment of $758,000 , non
cash lease expense of $342,000 , and impairment loss of $605,000 , non cash
depreciation expense of $50,000 and an increase in accounts receivable allowance
$12,000 . Cash inflows were mainly due to a decrease in other current assets of
$69,000 , a decrease in inventory of $94,000 , a decrease in accounts receivable
of $171,000 , an increase in deferred revenue of $89,000 , an increase in accounts
payable of $94,000 , an increase in accrued expenses of $95,000 and an increase
in other long-term liabilities of $9,000 . The cash inflow is offset by an
increase in other long term assets of $11,000 , a decrease in operating lease
liability of $345,000 , a decrease in accrued post retirement benefits of
$34,000 , and a decrease in liabilities of discontinued operations of $1,000 .
For the year ended June 30, 2019 , the Company had a net loss of
approximately $250,000 . Cash outflows were mainly due to the cash outflow due to
an increase in accounts receivable of $104,000 , an increase in other current
assets of $25,000 , an
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increase in inventory of 55,000, a decrease in accrued expenses of $105,000 , a
decrease in accrued post retirement benefits of $59,000 , and a decrease in
deferred revenue of $54,000 . The cash outflow is offset by an increase in
accounts payable of $138,000 , and an increase in non-cash expenditure on
depreciation and amortization of approximately $50,000 . The cash outflow is
mainly due to decreased sales and continued investment in research and
development for AXIS software development.
Cash Flows Used In Investing Activities
Cash flows used in investing activities for the year ended June 30, 2020 and
2019 were due to purchase of equipment of $60,000 and $22,000 respectively.
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 Provided by Financing Activities
For the year ended June 30, 2020 the cash provided by the financing activities
of $647,000 was due to $500,000 of PPP loan, $150,000 of EIDL loan and cash used
in financing activities of $3,000 was due to auto loan payment.
For the year ended June 30, 2019 the cash provided by financing activities of
$34,000 was due to the increase in the line of credit in amount of $37,000 as a
result of the Company refinancing the line of credit with TD Bank in July 2019
offset by auto loan payment of $3,000 .
Debt Financing
On June 29, 2018 the Company entered a business loan agreement with TD bank
receiving a line of credit evidenced by a promissory note of $250,000 . The
interest is subject to change based on changes in an independent index which the
Wall Street Journal Prime. The index rate at the date of the agreement is 5.000%
per annum. Interest on the unpaid principal balance of the note will be
calculated using a rate of 0.740 percentage points over the index, adjusted if
necessary for any minimum and maximum rate limitations, resulting in an initial
rate of 5.740% per annum based on a year of 360 days. The interest rate was 5%
as of June 30, 2020 . The Company is required to hold $250,000 in a TD bank
savings account as collateral.
As of June 30, 2020 and June 30, 2019 , the line of credit balance was $201,575
with TD bank. The line of credit interest expense was $11,000 and $17,000 for
the years ended June 30, 2020 and 2019, 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.$221,297 of the PPP loan is classified as current. The promissory note has a fixed payment schedule, commencing seven months following the funding of the note and consisting of seventeen monthly payments of principal and interest, with the principal component of each payment based upon the level of amortization of principal over a two year period from the funding date. The PPP loan is unsecured. A final payment for the unpaid principal and accrued interest will be payable no later thanApril 26, 2022 . The note will bear interest at a rate of 1.00% per annum and is deferred for the first six months of the loan. Major portions of the loan and accrued interest may qualify for loan forgiveness based on the terms of the program. No assurance is provided that the Company will in fact obtain forgiveness of the PPP loan in whole or in part.
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 will be$731 . The EIDL loan is secured by the tangible and intangible personal property of the Company. The EIDL loan is included in the non current portion of other notes payable.
Employer Payroll Tax Withholdings
The CARES Act allows employers to defer the deposit and payment of
the employer share of
17
--------------------------------------------------------------------------------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, 2020 andJune 30, 2019 the cumulative dividends payable is$122,709 ($0.0614 per share) and$70,968 ($0.0355 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. Post-retirement Plans OnJune 23, 2005 the Company entered into a Supplemental Executive Retirement Benefit Agreement with its former Chairman,Mr. DePiano , Sr..The agreement provided for the payment of supplemental retirement benefits to the covered executive in the event of the covered executive's termination of services. InJanuary 2013 the covered executive retired and the Company was obligated to pay the executive$8,491 per month for life, with payments commencing the month after retirement. As ofJune 30, 2019 , approximately$792,000 was accrued forMr. DePiano Sr .'s retirement benefits. The amount represented the approximate present value of the supplemental retirement benefits awarded using a discount rate of 4.5% as ofJune 30, 2019 .Mr. DePiano , Sr. passed away onOctober 3, 2019 . According to the agreement, the benefits terminate uponMr. DePiano Sr .'s death. Therefore, the Company recognized a gain with the termination of the retirement benefit obligation of$758,000 , which has been reported under other income during the year endedJune 30, 2020 . Off-balance Sheet Arrangements and Contractual Obligations The Company was not a party to any off-balance sheet arrangements during the years endedJune 30, 2020 and 2019. Critical Accounting Policies The preparation of financial statements requires management to make estimates and assumptions that impact amounts reported therein. The most significant of those involve the application of FASB issued authoritative guidance concerning Revenue Recognition,Goodwill and Other Intangible Assets, discussed further in the notes to consolidated financial statements included in this Form 10-K. 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. For example, estimates are used in determining valuation allowances for deferred income taxes, uncollectible receivables, obsolete inventory, sales returns and rebates, warranty liabilities, right-of-use assets and related lease liabilities, and valuation of intangible assets. 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. 18 -------------------------------------------------------------------------------- Intangible Assets and Long-Lived assets Intangible assets deemed to have indefinite lives (including trademark and trade names) are not amortized but, instead, are subject to an annual impairment assessment. Additionally, if events or conditions were to indicate the carrying value or a reporting unit may not be recoverable, the Company would evaluate the other intangible assets for impairment at that time. 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. The Company tests indefinite-life intangible assets for possible impairment on an annual basis atJune 30 , and at any other time events occur or circumstances indicate that the carrying amount of intangible assets may be impaired. Due to the current low market capitalization of the Company's common stock, the Company performed an interim impairment test on its intangible asset as ofDecember 31, 2019 . The outcome of this impairment test resulted in non-cash charge for the full impairment of the indefinite-lived intangible assets (trade mark and trade names) of$605,000 , which was recorded in the consolidated financial statements for the year endedJune 30, 2020 . During the year endedJune 30, 2019 , no impairments were recorded. 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. 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. 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 ofJune 30, 2020 and 2019, 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. 19 -------------------------------------------------------------------------------- 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 ofJune 30, 2020 and 2019, no accrued interest or penalties were required to be included on the related tax liability line in the consolidated balance sheets. 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. Earnings (Loss) Per Share 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 ofJune 30, 2020 and 2019, 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 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 years endedJune 30, 2020 and 2019. Therefore, basic and diluted loss per common share for the years endedJune 30, 2020 and 2019 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 Recently Adopted EffectiveJuly 1, 2019 , the Company adopted ASU No. 2016-02, Leases (Topic 842), using the cumulative effect adjustment method and elected certain practical expedients allowed under the standard. Upon adoption, the Company recognized ROU assets and a lease liability of$1,138,000 and$1,208,000 respectively. The adoption didn't materially impact the Company's consolidated statements of operations or cash flows. (See Note 15) InJune 2018 the FASB issued ASU 2018-07 Improvements to Nonemployee Share-Based Payment Accounting (Topic 718) that expands the scope to include share-based payment transactions for acquiring goods and services from non-employees. An entity should apply the requirements to nonemployee awards except for certain exemptions specified in the amendment. The guidance is effective for fiscal years beginning afterDecember 15, 2018 , including interim reporting periods within that fiscal year. Early adoption is permitted. The adoption of ASU 2018-07 did not have a material impact on the Company's consolidated financial statements. 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. 20 --------------------------------------------------------------------------------
FINANCIAL STATEMENTS AND SUPPLIMENTARY DATA
Escalon Medical Corp. Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm
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Consolidated Balance Sheets atJune 30, 2020 and 2019
23
Consolidated Statements of Operations for the Years Ended
24
Consolidated Statements of Shareholders' Equity for the Years
Ended
25
Consolidated Statements of Cash Flows for the Years Ended
26
Notes to Consolidated Financial Statements 28
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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, 2020 and 2019, 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, 2020 and 2019, 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 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 provides a reasonable basis for our opinion.
/s/
We have served as the Company's auditor since 2018.
Marlton, New Jersey September 28, 2020 22
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2020 2019
ASSETS
Current assets:
Cash and cash equivalents $ 825,958 $ 409,743
Restricted cash 255,281 253,135
Accounts receivable, net 1,312,935 1,496,105
Inventories 1,785,030 1,878,860
Other current assets 154,193 223,078
Total current assets 4,333,397 4,260,921
Property and equipment, net 97,214 67,896
Right-of-use assets 1,107,127 -
Trademarks and trade names - 605,006
License, net 122,050 141,700
Other long term assets 62,789 51,915
Total assets $ 5,722,577 $ 5,127,438
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 221,297 - Accounts payable 760,621 666,510 Accrued expenses 681,047 656,707 Related party accrued interest 112,389
112,389
Current portion of post-retirement benefits (related party)
- 101,891
Current portion of operating lease liabilities 278,634
-
Deferred revenue 516,053
426,803
Liabilities of discontinued operations 89,990
90,933
Total current liabilities 2,865,007
2,260,209
Note payable, net of current portion 11,503
14,896
PPP loan, net of current portion 278,703
-
Operating lease liabilities, net of current portion 896,533
-
EIDL loan 150,000
-
Accrued post-retirement benefits, net of current portion (related party) - 690,094 Other long-term liabilities 8,872 - Total long-term liabilities 1,345,611 704,990 Total liabilities 4,210,618 2,965,199 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$767,709 and$715,968 ) 645,000
645,000
Common stock,$0.001 par value; 35,000,000 shares authorized; 7,415,329 shares issued and outstanding 7,415 7,415 Additional paid-in capital 69,702,043 69,702,043 Accumulated deficit (68,842,499 ) (68,192,219 ) Total shareholders' equity 1,511,959 2,162,239 Total liabilities and shareholders' equity$ 5,722,577 $ 5,127,438 See notes to consolidated financial statements 23
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
2020 2019
Net revenues:
Products $ 8,437,672 $ 8,707,154
Service plans 962,359 919,509
Revenues, net 9,400,031 9,626,663
Costs and expenses:
Cost of goods sold 5,197,866 4,997,461
Marketing, general and administrative 3,874,498 4,142,392 Research and development 1,122,324 739,765 Intangible assets impairment 605,006 - Total costs and expenses 10,799,694 9,879,618 Loss from operations (1,399,663 ) (252,955 ) Other income (expense) Other income 759,371 11,122 Interest income 3,592 9,170 Interest expense (13,580 ) (17,353 ) Total other income, net 749,383 2,939 Net loss (650,280 ) (250,016 ) Undeclared dividends on preferred stocks 51,741
51,600
Net loss applicable to common shareholders$ (702,021 ) $ (301,616 ) Net loss per share Basic loss per share$ (0.09 ) $ (0.04 ) Diluted loss per share$ (0.09 ) $ (0.04 ) Weighted average shares-basic 7,415,329
7,415,329
Weighted average shares-diluted 7,415,329 7,415,329
See notes to consolidated financial statements
24
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2020 AND 2019
Additional Total
Series A Convertible Paid-in Accumulated Shareholders'
Preferred Stock Common Stock Capital Deficit Equity
Shares Amount Shares Amount
Balance at
June 30,
2019 2,000,000 $ 645,000 7,415,329 $ 7,415 $ 69,702,043 $ (68,192,219 ) $ 2,162,239
Net loss - - - - - (650,280 ) (650,280 )
Balance at
June 30,
2020 2,000,000 $ 645,000 7,415,329 $ 7,415 $ 69,702,043 $ (68,842,499 ) $ 1,511,959
Additional Total
Series A Convertible Paid-in Accumulated Shareholders'
Preferred Stock Common Stock Capital Deficit Equity
Shares Amount Shares Amount
Balance at
June 30,
2018 2,000,000 $ 645,000 7,415,329 $ 7,415 $ 69,702,043 $ (67,942,203 ) $ 2,412,255
Net loss - - - - - (250,016 ) (250,016 )
Balance at
June 30,
2019 2,000,000 $ 645,000 7,415,329 $ 7,415 $ 69,702,043 $ (68,192,219 ) $ 2,162,239
See notes to consolidated financial statements
25--------------------------------------------------------------------------------
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
2020 2019
Cash Flows from Operating Activities:
Net loss $ (650,280 ) $ (250,016 )
Adjustments to reconcile net loss to net cash used in
operating activities:
Recovery of allowance of doubtful accounts - (5,450 )
Increase in accounts receivable allowance 12,008 -
Depreciation and amortization 50,084 50,139
Non cash lease expense 342,058 -
Intangible assets impairment 605,006 -
Non cash post-retirement benefits adjustment (758,021 ) -
Change in operating assets and liabilities:
Accounts receivable 171,162 (103,522 )
Inventories 93,830 (55,446 )
Other current assets 68,885 (25,373 )
Other long-term assets (10,874 ) -
Accounts payable 94,111 137,666
Accrued expenses 94,929 (105,325 )
Accrued post-retirement benefits (related party) (33,964 ) (59,386 )
Change in operating lease liability (344,608 ) -
Deferred revenue 89,250 (54,377 )
Liabilities of discontinued operations (943 ) (1,599 )
Other long-term liabilities 8,872 -
Net cash used in operating activities (168,495 ) (472,689 )
Cash Flows from Investing Activities:
Purchase of equipment (59,751 ) (22,117 )
Net cash used in investing activities (59,751 ) (22,117 )
Cash Flows from Financing Activities:
Proceeds from PPP loan 500,000 -
Proceeds from EIDL loan 150,000 -
Repayment of note payable (3,393 ) (2,893 )
Proceeds from line of credit - 36,575
Net cash provided by financing activities 646,607 33,682
Net increase (decrease) in cash, cash equivalents and restricted cash
418,361 (461,124 ) Cash, cash equivalents and restricted cash, beginning of year
662,878 1,124,002
Cash, cash equivalents and restricted cash, end of year
Cash, cash equivalents and restricted cash consist of the following: End of year Cash and cash equivalents$ 825,958 $ 409,743 Restricted cash 255,281 253,135$ 1,081,239 $ 662,878 Beginning of year Cash and cash equivalents$ 409,743 $ 874,002 26
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Restricted cash 253,135 250,000
$ 662,878 $ 1,124,002
Supplemental Schedule of Cash Flow Information:
Interest paid $ 15,387 $ 44,315
Non Cash Finance Activities Record right-of-use assets per ASC 842, net of deferred rent reclassification
$ 1,449,184 $
-
Record lease liability per ASC 842$ 1,519,744 $ - See notes to consolidated financial statements 27
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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"),Escalon Holdings, Inc. ("EHI"),Escalon IP Holdings, Inc. , andSonomed IP Holdings, Inc. 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 maturity date is two years from the date of the note. The interest rate is 1.00% per year. The Company remains in strong communications with the customers and there is no evidence showing that COVID-19 will greatly effect collection of accounts receivable as of date of this filing. 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.
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, 2020 , the Company had an accumulated deficient of$68.8 million , and incurred recurring losses from operations and incurred negative cash flows from operating activities. These factors raise substantial doubt regarding the Company's ability to continue as a going concern for the following twelve months as of the 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 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. 28 -------------------------------------------------------------------------------- Use of Estimates The preparation of financial statements in conformity with accounting principles generally affected in the US 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, 2020 andJune 30, 2019 restricted cash included$255,281 and$253,135 respectively, 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, 2020 and 2019. 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$123,000 and$111,000 as ofJune 30, 2020 and 2019. June 30, 2020 2019 Balance, July 1$ 110,507 $ 118,930 Increase in allowance 12,008 - Recovery in bad debts - (5,450 ) Write-offs - (2,973 ) Balance, June 30$ 122,515 $ 110,507 Inventories Inventories include freight-in materials, labor and overhead costs, and are stated at the lower of cost (first-in, first-out) or net realizable value. The Company writes down its inventories as it becomes aware of any situation whereas the carrying amount exceeds the estimated realizable value based on assumptions about future demands and market conditions. For the years ended June 30, 2020 2019 Raw materials$ 612,721 $ 874,985 Work in process 322,856 225,254 Finished goods 849,453 778,621 Total inventories$ 1,785,030 $ 1,878,860 Property and Equipment 29
-------------------------------------------------------------------------------- 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 endedJune 30, 2020 and 2019 was approximately$30,000 and$30,000 , respectively.
Property and equipment consist of the following:
June 30,
2020 2019
Equipment $ 739,335 $ 717,460
Furniture and fixtures 150,871 149,835
Leasehold improvements 39,048 28,549
929,254 895,844Less: Accumulated depreciation and amortization (832,040 ) (827,948 )
$ 97,214 $ 67,896 Intangible Assets and Long-Lived Assets Intangible assets deemed to have indefinite lives (including trademark and trade names) are not amortized but, instead, are subject to an annual impairment assessment. Additionally, if events or conditions were to indicate the carrying value or a reporting unit may not be recoverable, the Company would evaluate the other intangible assets for impairment at that time. 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. The Company tests indefinite-life intangible assets for possible impairment on an annual basis atJune 30 , and at any other time events occur or circumstances indicate that the carrying amount of intangible assets may be impaired. Due to the current low market capitalization of the Company's common stock, the Company performed an interim impairment test on its intangible asset as ofDecember 31, 2019 . The outcome of this impairment test resulted in non-cash charge for the full impairment of the indefinite-lived intangible assets (trade mark and trade names) of$605,000 , which was recorded in the consolidated financial statements for fiscal year 2020. No impairments were recorded in year endedJune 30, 2019 . 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 will continue 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. 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 carrying amount of the accrued post retirement benefits approximates fair value since the Company utilizes approximate current market interest rates to calculate the liability. 30 -------------------------------------------------------------------------------- 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. 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
31
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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,
2020 2019
Beginning of Year $ 427,000 $ 481,000
Additions 1,052,000 888,000
Revenue Recognized 963,000 942,000
End of Year $ 516,000 $ 427,000
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 June 30, 2020 and 2019 was $17,000 and $33,000 , respectively.
Earnings (Loss) Per Share
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, 2020 and 2019, 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 years ended June 30, 2020 and 2019. Therefore, basic and diluted loss
per common share for the years ended June 30, 2020 and 2019 are the same.
32
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For the Years Ended June 30,
2020 2019
Numerator:
Numerator for basic loss per
share:
Net loss $ (650,280 ) $ (250,016 )
Undeclared dividends on
preferred stock 51,741 51,600
Net loss applicable to common
shareholders $ (702,021 ) $ (301,616 )
Numerator for diluted
earnings per share:
Net loss applicable to common
shareholders $ (702,021 ) $ (301,616 )
Undeclared dividends on
preferred stock - -
Net loss $ (650,280 ) $ (301,616 )
Denominator:
Denominator for basic loss
per share - weighted average
shares outstanding 7,415,329 7,415,329
Weighted average preferred
stock converted to common
stock - -
Denominator for diluted loss
per share - weighted average
and assumed conversion 7,415,329 - 7,415,329
Net loss per share:
Basic net loss per share $ (0.09 ) $ (0.04 )
Diluted net loss per share $ (0.09 ) $ (0.04 )
The following table summarizes convertible preferred stock and securities that,
if exercised would have an anti-dilutive effect
on earnings per share.
For the Years Ended June 30,
2020 2019
Stock options 157,000 213,000
Convertible preferred
stock 5,118,060 4,773,120
Total potential dilutive
securities not included
in income per share 5,275,060 4,986,120
Income Taxes
33-------------------------------------------------------------------------------- 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 ofJune 30, 2020 andJune 30, 2019 , 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
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.
Reclassifications
Lease deposits of $51,915 in the June 30, 2019 consolidated balance sheet has
been reclassed from other current assets to other assets to be in conformity
with the current period presentation.
New Accounting Pronouncements
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 Recently Adopted
Effective July 1, 2019 , the Company adopted ASU No. 2016-02, Leases (Topic 842),
using the cumulative effect adjustment method and elected certain practical
expedients allowed under the standard. Upon adoption, the Company recognized ROU
assets and a lease liability of $1,138,000 and $1,208,000 respectively. The
adoption didn't materially impact the Company's consolidated statements of
operations or cash flows. (See Note 15)
34
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In June 2018 the FASB issued ASU 2018-07 Improvements to Nonemployee Share-Based
Payment Accounting (Topic 718) that expands the scope to include share-based
payment transactions for acquiring goods and services from non-employees. An
entity should apply the requirements to nonemployee awards except for certain
exemptions specified in the amendment. The guidance is effective for fiscal
years beginning after December 15, 2018 , including interim reporting periods
within that fiscal year. Early adoption is permitted. The adoption of ASU
2018-07 did not have a material impact on the Company's consolidated financial
statements.
New Accounting Pronouncements Not yet Adopted
In June 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 are SEC filers for fiscal years and for interim periods with those fiscal
years beginning after December 15, 2022 . Early adoption of the guidance is
permitted for fiscal years beginning after December 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:
2020 2019
Trademarks and trade names
Net carrying amount $ - $ 605,006
Total $ - $ 605,006
The Company tests indefinite-life intangible assets for possible impairment on
an annual basis at June 30 , and at any other time events occur or circumstances
indicate that the carrying amount of intangible assets may be impaired. Due to
the current low market capitalization of the Company's common stock, the Company
performed an interim impairment test on its intangible asset. The outcome of
this impairment test resulted in non-cash charge for the full impairment of the
indefinite-lived intangible assets (trade mark and trade names) of $605,006 ,
which was recorded in the consolidated financial statements for the year ended
June 30, 2020 . During the year ended June 30, 2019 , no impairments were
recorded.
Licenses
The Company purchased no new licenses for year end June 30, 2020 and 2019
respectively and the cost is capitalized and amortized over 10 years.
Amortization expense is approximately $20,000 for each of the years ended June
30, 2020 and 2019. Annual amortization related entirely to licenses is estimated
to be $19,650 for the years ending June 30, 2021 through 2025 and $23,800
thereafter.
The following table presents amortized licenses as of June 30, 2020 :
Adjusted
Gross Gross Net
Carrying Carrying Accumulated Carrying
Amount Impairment Amount Amortization Value
Amortized Intangible
Assets Licenses
$ 199,000 $ - $ 199,000 $ (76,950 ) $ 122,050
Total $ 199,000 $ - $ 199,000 $ (76,950 ) $ 122,050
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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 $ (57,300 ) $ 141,700
Total $ 199,000 $ - $ 199,000 $ (57,300 ) $ 141,700
5. Accrued Expenses
The following table presents accrued expenses:
June 30,
2020 2019
Accrued compensation $ 417,829 $ 396,609
Line of credit and notes payable interest accrual 1,224 1,013
Customer deposits 14,320 16,006
Warranty reserve 32,078 32,078
Sales tax payable 100,176 100,582
Rent payable - 70,587
Other accruals 115,420 39,832
Total accrued expenses $ 681,047 $ 656,707 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, 2020 . 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. Upon signing the agreement the Company also authorizes TD bank to payoff the line of credit with Newtek Business Credit ("Netwtek"). As ofJune 30, 2020 and 2019, the line of credit balance was$201,575 with TD bank. The line of credit interest expense was approximately$11,000 and$17,000 for the years endedJune 30, 2020 and 2019, 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.$221,297 of the PPP loan is classified as current. The promissory note has a fixed payment schedule, commencing seven months following the funding of the note and consisting of seventeen monthly payments of principal and interest, with the principal component of each payment based upon the level of amortization of principal over a two year period from the funding date. The PPP loan is unsecured. A final payment for the unpaid principal and accrued interest will be payable no later thanApril 26, 2022 . The note will bear interest at a rate of 1.00% per annum and is deferred for the first six months of the loan. Major portions of the loan and accrued interest may qualify for loan forgiveness based on the terms of the program. No assurance is provided that the Company will in fact obtain forgiveness of the PPP loan in whole or in part. 36
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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 will be$731 .The EIDL loan is secured by the tangible and intangible personal property of the Company.
The future annual principal amounts to be paid as of
Year endingJune 30 , EIDL Loan Payment 2021 $ 234 2022 2,870 2023 2,980 2024 3,094 2025 3,212 Thereafter 137,610 Total $ 150,000 Other Long-term Liabilities
The CARES Act allows employers to defer the deposit and payment of
the employer share of
8. Capital Stock Transactions Stock Option Plans As ofJune 30, 2020 , 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, 2020 , 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 endedJune 30, 2020 and 2019: 2020 2019 Weighted Weighted Common Average Common Average Stock Exercise Stock Exercise Options Price Options Price Outstanding at the beginning of the year 213,000$ 1.48 367,500$ 1.78 Granted - - - - Exercised - - - - Forfeited (56,000 ) 1.51 (154,500 )$ 2.21 Outstanding at the end of the year 157,000$ 1.47 213,000$ 1.48 Exercisable at the end of the year 157,000$ 1.47 213,000 1.48 Weighted average fair value of options granted during the year $ - $ - 37
-------------------------------------------------------------------------------- The following table summarizes information about stock options outstanding as ofJune 30, 2020 : Weighted Number Average Weighted Number Weighted Outstanding Remaining Average Exercisable Average at June 30, Contractual Exercise at June 30, Exercise 2020 Life (Years) Price 2020 Price Range of Exercise Prices$0.79 21,000 5.83$ 0.79 21,000$ 0.79 $1.45 to$2.12 136,000 3.83$ 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
2020 2019
Current income tax provision
Federal $ - $ -
State - -
- -
Deferred income tax provision
Federal (8,061 ) 44,287
State (2,303 ) 12,653
Change in valuation allowance 10,364 (56,940 )
- -
Income tax expense (benefit) $ - $ -
Income tax expense (benefit) as a percentage of loss for the years ended
2020 2019
Statutory federal income tax rate 21.00 % 21.00 %
Permanent differences (16.00 )% 0.00 %
Valuation allowance (5.00 )% (21.00 )%
Effective income tax rate 0.00 % 0.00 %
The components of the net deferred income tax assets and liabilities as of
38
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2020 2019
Deferred income tax assets:
Net operating loss carryforward
- 166,317
General business credit 207,698 207,698
Allowance for doubtful accounts 25,728 23,207
Accrued vacation 43,741 40,565
Inventory reserve 69,432 102,002
Accelerated depreciation 69,196 127,642
Warranty reserve 6,736 6,736
Total deferred income tax assets 7,634,924 7,776,465 Valuation allowance
(7,609,293 ) (7,619,657 )
25,631 156,808
Deferred income tax liabilities:
Accelerated depreciation (25,631 ) (156,808 )
Total deferred income tax liabilities (25,631 ) (156,808 )
$ - $ -
As of June 30, 2020 , the Company has a valuation allowance of $7,609,293 , which
primarily relates to the federal net operating loss carryforwards. During the
year ended June 30, 2020 , the valuation allowance decreased by $10,364 and
during the year ended June 30, 2019 , the valuation increased by $56,940 . 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 and tax credits 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
$32,867,000 and $3,248,000 , respectively, of which $13,934,000 and $2,752,000 ,
respectively, will expire over the next ten years, $17,931,000 and $496,000 ,
respectively, will expire in years eleven through twenty, and $1,002,000 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, 2017 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, 2020 , 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.
39
--------------------------------------------------------------------------------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.
11. Retirement and Post-Retirement Plans
The Company adopted a 401(k) retirement plan effectiveJanuary 1, 1994 . The Company's employees become eligible for the plan commencing on the date of employment. Company contributions are discretionary, and no Company contributions have been made since the plan's inception. OnJanuary 14, 2000 , the Company acquired Sonomed. Sonomed adopted a 401(k) retirement plan effective onJanuary 1, 1993 . This plan has continued subsequent to the acquisition and is available only to Sonomed employees. There were no discretionary contributions for the fiscal years endedJune 30, 2020 and 2019. OnJune 23, 2005 the Company entered into a Supplemental Executive Retirement Benefit Agreement with its former Chairman,Mr. DePiano , Sr. The agreement provided for the payment of supplemental retirement benefits to the covered executive in the event of the covered executive's termination of services. InJanuary 2013 the covered executive retired and the Company was obligated to pay the executive$8,491 per month for life, with payments commencing the month after retirement. As ofJune 30, 2019 approximately$792,000 was accrued forMr. DePiano , Sr.'s retirement benefits. The amount represented the approximate present value of the supplemental retirement benefits awarded using a discount rate of 4.5% as ofJune 30, 2019 .Mr. DePiano Sr . passed away onOctober 3, 2019 . According to the agreement, the benefits terminate uponMr. DePiano , Sr.'s death. Therefore, the Company recognized a gain with the termination of the retirement benefit obligation of$758,000 , which has been reported as other income for the year endedJune 30, 2020 . 2020 2019 Balance July 1,$ 791,985 $ 851,371 Actuarial adjustment (758,021 ) 42,505 Payment of benefits (33,964 ) (101,891 ) Balance June 30, - 791,985 12. Discontinued Operations BH Holdings, S.A.SDrew Scientific, Inc. ("Drew"), an inactive subsidiary of the Company which was sold in 2012, has a controlling interest inBHH Holdings , S.A.S ("BHH"). OnJanuary 12, 2012 BHH, initiated the filing of an insolvency declaration with the Tribunal de Commerce de Rennes,France ("Commercial Court"). The Commercial Court onJanuary 18, 2012 opened the liquidation proceedings with continuation of BHH's activity for three months and named an administrator to manage BHH. Since Drew no longer had a controlling financial interest in BHH it was deconsolidated in theDecember 31, 2011 quarterly consolidated financial statements and prior period amounts are presented as discontinued operations. Assets and liabilities of discontinued operations of BHH included in the consolidated balance sheets are summarized as follows atJune 30, 2020 andJune 30, 2019 (in thousands): June 30, June 30, 2020 2019 Assets Total assets $ - $ - Liabilities Accrued lease termination costs 90 91 Total liabilities 90 91
Net liabilities of discontinued operations
During fiscal year 2015 the Company was informed by French Counsel that the
total amount claimed by the BHH landlord in the liquidation of BHH was
approximately
40
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to the Liquidator's reticence to communicate with the Company. As such, the
Company had accrued the present value of the maximum amount potentially due
under the lease guaranteed by the Company on behalf of BHH. The landlord's claim
under liquidation of approximately $86,000 cannot be revisited by the landlord
and can only be potentially increased by interest or sundry expenses. Beginning
in 2016 any changes to this liability are included in continuing operations. As
of June 30, 2020 and June 30, 2019 the liability was
approximately $90,000 and $91,000 , respectively.
13. Related Party Transactions and Preferred Stock
Richard J. DePiano Sr ., ("Mr. DePiano Sr ."), the Company's former Chairman, participated in an accounts receivable factoring program that was implemented by the Company. Under the program,Mr. DePiano Sr . advanced the Company$645,000 prior to the Debt Exchange Agreement noted below. Interest on the transaction was 1.25% per month. The transactions excluded fees typically charged by the factoring agent and provided much needed liquidity to the Company. There was no related party interest expense for the years endedJune 30, 2020 and 2019. As ofJune 30, 2020 and 2019, accrued interest of$112,389 was payable under the factoring agreement to his estate. 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$645,000 principal amount of debt related to the accounts receivable factoring program the Company owes the Holders for 2,000,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock"). Each share of Preferred Stock entitles the Holder thereof to 13 votes per share and will vote together with all other classes and series of stock of the Company as a single class on all actions to be taken by the Company's stockholders.
As
a result of this voting power, the Holders as of
Subject to the terms and conditions of Preferred Stock, the holder of any share or shares of the Preferred Stock has the right, at its option at any time, to convert each such share of Preferred Stock (except that, upon any liquidation of the Company, the right of conversion will terminate at the close of business on the business day fixed for payment of the amounts distributable on the Preferred Stock) into 2.15 shares of Common Stock (the "Conversion Ratio"). The Conversion Ratio is subject to standard provisions for adjustment in the event of a subdivision or combination of the Company's Common Stock and upon any reorganization or reclassification of the capital stock of the Company. If the Holders were to convert their shares of Preferred Stock into Common Stock at the Conversion Ratio the Holders would receive a total of 4,300,000 shares of Common Stock, or approximately 36.70% of the then outstanding shares of Common Stock assuming such conversion. Each outstanding share of the Preferred Stock accrues dividends calculated cumulatively at the annual rate of$.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, 2020 and 2019 the cumulative dividends payable is$122,709 ($0.0614 per share) and$70,968 ($0.0355 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. During the year endedJune 30, 2020 , the Company paid a company controlled byRichard DePiano Jr .'s mother for the supply and installation of the carpet for the Company's office.
14. 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
41
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diversified due to the large number of entities comprising the Company's
customer base and their dispersion across geographic areas principally within
the 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 16% of net sales during the year ended
June 30, 2020 . No customer accounted for more than 10% of net sales during the
year ended June 30, 2019 .
As of June 30, 2020 the Company had one customer that represents approximately
18% of the total accounts receivable balance. As of June 30, 2019 the Company
had no customer that represents more than 10% of the total accounts receivable
balance.
Major Supplier
The Company's two largest suppliers accounted for 37% and 10% of the total
purchase for the year ended June 30, 2020 . The Company's two largest suppliers
accounted for the total purchases for 30% and 11% of total purchase for the year
ended June 30, 2019 . As of June 30, 2020 the Company had three suppliers that
represent approximately 38%, 12% and 11% of the total accounts payable balance.
As of June 30, 2019 the Company had no customer that represents more than 10% 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,
2020 2019
Domestic $ 5,781 61.5 % $ 5,587 58.0 %
Foreign 3,619 38.5 % 4,040 42.0 %
Total $ 9,400 100.0 % $ 9,627 100.0 %
15. Leases
The Company adopted ASC Topic 842-Leases as of July 1, 2019 , using the
cumulative effective adjustment method wherein the Company applied the new lease
standard at adoption date. Accordingly, all periods prior to July 1, 2019 were
presented in accordance with the previous ASC Topic 840, Leases, and no
retrospective adjustments were made to the comparative periods presented.
Adoption of ASC 842 resulted in an increase to total assets and liabilities due
to the recording of operating right of use (ROU) assets and operating lease
liabilities of approximately $1,138,000 and $1,208,000 respectively, as of July
1, 2019 . The adoption did not materially impact the Company's consolidated
statements of operations or cash flows but it did impact the debt to capital
ratio.
The Company determines if a contract contains a lease at inception. US GAAP
requires that the Company's leases be evaluated and classified as operating or
finance leases for financial reporting purposes. The classification evaluation
begins at the commencement date and the lease term used in the evaluation
includes the non-cancellable period for which the Company has the right to use
the underlying asset, together with renewal option periods when the exercise of
the renewal option is reasonable certain and failure to exercise such option
which result in an economic penalty.
The Company has operating leases for manufacturing, research and corporate
office facilities and certain equipment. Leases with an initial term of 12
months or less are not recorded in the balance sheet. The Company has elected
the practical expedient to account for each separate lease component of a
contract and its associated non-lease components as a single lease component,
thus causing all fixed payments to be capitalized. The Company also elected the
package of practical expedients permitted within the new standard, which among
other things, allows the Company to carry forward historical lease
classification. Variable lease payment amounts that cannot be determined at the
commencement of the lease such as increases in lease payments based on changes
in index rates or usage, are not included in the ROU assets or liabilities.
These are expensed as incurred and recorded as variable lease expense.
ROU assets represent the Company's right to use an underlying asset during the
lease term and lease liabilities represent the Company's obligation to make
lease payments arising from the lease. ROU assets and liabilities are recognized
at commencement date based on the net present value of fixed lease payments over
the lease term. The Company's lease term includes options to
42
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extend or terminate the lease when it is reasonably certain that the Company
will exercise that option. As the Company's operating leases do not provide an
implicit rate, the Company uses its incremental borrowing rate based on the
information available at the comment date in determining the present value of
future lease payments.
The components of lease costs included in cost of goods sold and marketing, general and administrative costs were as follows:
Year Ended
June 30, 2020
Operating lease costs:
Fixed 407,757
Total: $ 407,757 Supplemental cash flow information was as follows:
Year Ended
June 30, 2020
Cash paid for amounts included in the measurement of
lease liabilities
Operating cash flows for operating leases 391,384
Total $ 391,384
Leases recorded on the balance sheet consist of the following:
June 30,
Leases (operating) Classification on the Balance Sheet 2020
Assets
Operating lease ROU assets Right-of-use asset $ 1,107,127
Liabilities
Current portion of operating lease
Current liabilities $ 278,634
Non-current Operating lease liabilities $ 896,533
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, 2020 :
As of January 1st, 2020 , the Company had an additional operating lease for its
Pennsylvania headquarters location with a present value of approximately
$285,000 . The operating lease commenced on January 1st, 2020 with a lease term
of 5 years.
The aggregate future lease payments for operating leases as of June 30, 2020
were as follows:
Operating
2021 $ 336,596
2022 321,497
2023 259,546
2024 263,588
2025 137,082
Thereafter 978
Total lease payments 1,319,287
Less interest 144,120
Present value of lease liabilities
43
--------------------------------------------------------------------------------Average lease terms and discount rates were as follows:
June 30, 2020 Weighted-average remaining lease terms (years) Operating leases 4.17 Weighted-average discount rate Operating leases 5.65 %
Disclosures related to periods prior to adoption of ASU 2016-02
The Company adopted ASU 2016-02 using a modified retrospective adoption method atJuly 1, 2019 . As required, the following disclosure is provided for periods prior to adoption. Minimum operating lease commitments as ofJune 30, 2019 that have initial or remaining lease terms in excess of one year are as follows: Operating 2019$ 356,414 2020 272,881 2021 256,311 2022 188,755 2023 189,790 Thereafter 96,830 Total lease payments$ 1,360,981
The rent expense for the years ended
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