Forward Looking Statements



Certain statements contained in, or incorporated by reference in, this report
are forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, which provide current
expectations or forecasts of future events. Such statements can be identified by
the use of terminology such as "anticipate," "believe," "could," "estimate,"
"expect," "forecast," "intend," "may," "plan," "possible," "project," "should,"
"will," and similar words or expressions. The Company's forward-looking
statements include certain information relating to general business strategy,
growth strategies, financial results, liquidity, the Company's ability to
continue as a going concern, discontinued operations, research and development,
product development, the introduction of new products, the potential markets and
uses for the Company's products, the Company's ability to increase its sales
campaign effectively, the Company's regulatory filings with the FDA,
acquisitions, dispositions, the development of joint venture opportunities,
intellectual property and patent protection and infringement, the loss of
revenue due to the expiration or termination of certain agreements, the effect
of competition on the structure of the markets in which the Company competes,
increased legal, accounting and Sarbanes-Oxley compliance costs, defending the
Company in litigation matters and the Company's cost saving initiatives. The
reader must carefully consider forward-looking statements and understand that
such statements involve a variety of risks and uncertainties, known and unknown,
and may be affected by assumptions that fail to materialize as anticipated,
including risks related to the COVID-19 pandemic and other risks described in
the Company's Form 10-K for the fiscal year ended June 30, 2020. Consequently,
no forward-looking statement can be guaranteed, and actual results may vary
materially. It is not possible to foresee or identify all factors affecting the
Company's forward-looking statements, and the reader therefore should not
consider the list of such factors contained in its periodic report on Form 10-K
for the year ended June 30, 2020 and this Form 10-Q quarterly report to be an
exhaustive statement of all risks, uncertainties or potentially inaccurate
assumptions.

Executive Overview-three-month periods ended September 30, 2020 and 2019
The following highlights are discussed in further detail within this Form 10-Q.
The reader is encouraged to read this Form 10-Q in its entirety to gain a more
complete understanding of factors impacting Company performance and financial
condition.

• Consolidated net revenue increased approximately $126,000 or 5.5%, to

$2,414,000 during the three months ended September 30, 2020 as compared to


      same period of the last fiscal year. The increase in net revenue is
      attributed to an increase in sales of Trek products of $224,000. The
      increase is offset by a decrease of $14,000 in ophthalmic fundus
      photography system products, a decrease in revenue from service plans of
      $5,000, and a decrease in sales in Sonomed's ultrasound products of
      $79,000.


• Consolidated cost of goods sold totaled approximately $1,504,000, or 62.3%,

of total revenue or the three months ended September 30 2020, as compared

to $1,177,000, or 51.4%, of total revenue for the three months of the last

fiscal year. The decrease of 10.9% in cost of goods sold as a percentage of

total revenue is mainly due to changes in product sales mix and geographic

difference. The relative portion of ultrasound sales was about 12% less in

high-margin North America and 9% more in lowest margin territories and also

the sales of higher margin products decreased in the quarter ended

September 30, 2020. Higher Digital customer service labor during the

quarter ended September 30, 2020 also contributed to the decreased margin.

• Consolidated marketing, general and administrative expenses decreased

$107,000, or 10.7%, to $892,000 for the three months ended September 30

2020, as compared to the same period of last fiscal year. The decrease in

marketing, general and administrate expenses is mainly due to decreased

payroll expense for the replacement of senior positions and commission


      expense.


• Consolidated research and development expenses decreased $37,000 or 15.0%,

to $209,000 for the three months ended September 30 2020, as compared to

the same period of last fiscal year. Research and development expenses were

primarily expenses associated with the introduction of new or enhanced

products. The decrease in research and development expense is mainly due to

decreased payroll expense for the replacement of senior positions during


      the three months ended September 30, 2020.



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Company Overview

The following discussion should be read in conjunction with the interim unaudited condensed consolidated financial statements and the notes thereto, which are set forth in Item 1 of this report.



The Company operates in the healthcare market specializing in the development,
manufacture, marketing and distribution of medical devices and pharmaceuticals
in the area of ophthalmology. The Company and its products are subject to
regulation and inspection by the FDA. The FDA requires extensive testing of new
products prior to sale and has jurisdiction over the safety, efficacy and
manufacture of products, as well as product labeling and marketing. The
Company's Internet address is www.escalonmed.com. Under the trade name of
Sonomed-Escalon the Company develops, manufactures and markets ultrasound
systems used for diagnosis or biometric applications in ophthalmology, develops,
manufactures and distributes ophthalmic surgical products under the Trek Medical
Products name, and manufactures and markets digital camera systems for
ophthalmic fundus photography and image management systems.
Critical Accounting Policies
The preparation of unaudited condensed consolidated 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, and
intangible assets, discussed further in the notes to consolidated financial
statements included in the Form 10-K for the year ended June 30, 2020. The
unaudited condensed consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United States of America
("US GAAP"), 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 purchased
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.
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 $105,000
and $123,000 as of September 30, 2020 and June 30, 2020.
Inventories
Inventories include freight-in, materials, labor and overhead costs and are
stated at the lower of cost (on a first-in, first-out basis) 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.
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 at June 30, and at
any other time events occur or circumstances indicate that the carrying amount
of intangible assets may be impaired.
During the three months ended September 30, 2020 and 2019, no impairments were
recorded.


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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 8) 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.
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
unaudited condensed consolidated financial statements. Under this method, the
Company determines deferred tax assets and liabilities on the basis of the
differences between the financial statement and tax bases of assets and
liabilities by using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date.

The Company recognizes deferred tax assets to the extent that it believes that
these assets are more likely than not to be realized. In making such a
determination, the Company considers all available positive and negative
evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax-planning strategies, and results of recent
operations. If the Company determines that it would be able to realize its
deferred tax assets in the future in excess of their net recorded amount, the
Company would make an adjustment to the deferred tax asset valuation allowance,
which would reduce the provision for income taxes. As of September 30, 2020 and
June 30, 2020, the Company has a fully recorded valuation allowance against its
deferred tax assets.

The Company records uncertain tax positions in accordance with ASC 740 on the
basis of a two-step process in which (1) the Company determines whether it is
more likely than not that the tax positions will be sustained on the basis of
the technical merits of the position and (2) for those tax positions that meet
the more-likely-than-not recognition threshold, the Company recognizes the
largest amount of tax benefit that is more than 50 percent likely to be realized
upon ultimate settlement with the related tax authority.

The Company recognizes interest and penalties related to unrecognized tax
benefits on the income tax expense line in the accompanying unaudited condensed
consolidated statements of operations. As of September 30, 2020 and June 30,
2020, no accrued interest or penalties were required to be included on the
related tax liability line in the unaudited condensed consolidated balance
sheets.
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 September, 2020 and 2019, the average
market prices for the three-month period 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 three-month period ended September 30, 2020.  Therefore,
basic and diluted loss per

                                       20
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common share for the three-month period ended September 30, 2020 are the same.
For the three-month period ended September 30, 2019, the if-converted method was
used for the convertible preferred stock to calculate the dilutive earnings per
share.
Results of Operations
Three Months ended Ended September 30, 2020 and 2019
The following table shows consolidated net revenue, as well as identifying
trends in revenues for the three months ended September 30, 2020 and 2019. Table
amounts are in thousands:
                        For the Three Months Ended September 30,
                               2020                    2019     % Change
Net Revenue:
Products        $       2,184                        $ 2,053       6.4  %
Service plans   $         230                        $   235      (2.1 )%
Total           $       2,414                        $ 2,288       5.5  %



Consolidated net revenue increased approximately $126,000 or 5.5%, to $2,414,000
during the three months ended September 30, 2020 as compared to the same period
of last fiscal year. The increase in net revenue is attributed to a an increase
in sales of Trek products of $224,000. The increase is offset by a decrease of
$14,000 in ophthalmic fundus photography system products, a decrease in revenue
from service plans of $5,000, and a decrease in sales in Sonomed's ultrasound
products of $79,000.
The table amounts are in thousands:
                   For the Three Months Ended September 30,
                          2020                          2019
Domestic   $     1,542                  63.9 %   $ 1,467     64.1 %
Foreign            872                  36.1 %       821     35.9 %
Total      $     2,414                 100.0 %   $ 2,288    100.0 %



The following table presents consolidated cost of goods sold and as a percentage
of revenues for the thee months ended September 30, 2020 and 2019. Table amounts
are in thousands:

                                          For the Three Months Ended September 30,
                            2020              % of revenue             

2019            % of revenue
Cost of Goods Sold:
                      $         1,504                 62.3 %     $          1,177              51.4 %
Total                 $         1,504                 62.3 %     $          1,177              51.4 %



Consolidated cost of goods sold totaled approximately $1,504,000, or 62.3%, of
total revenue for the three months ended September 30, 2020, as compared to
$1,177,000, or 51.4%, of total revenue of the same period of last fiscal year.
The decrease of 10.9% in cost of goods sold as a percentage of total revenue is
mainly due to changes in product sales mix and geographic difference. The
relative portion of ultrasound sales was about 12% less in high-margin North
America and 9% more in lowest margin territories and also the sales of higher
margin products decreased in the quarter ended September 30, 2020. Higher
Digital customer service labor during the quarter ended September 30, 2020 also
contributed to the decreased margin.

The following table presents consolidated marketing, general and administrative
expenses for the three months ended September 30, 2020 and 2019. Table amounts
are in thousands:

                                         For the Three Months Ended September 30,
                                     2020                   2019                % Change
Marketing, General and
Administrative:
                             $              892     $              999                (10.7 )%
Total                        $              892     $              999                (10.7 )%




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Consolidated marketing, general and administrative expenses decreased $107,000,
or 10.7%, to $892,000 for the three months ended September 30, 2020, as compared
to the same period of last fiscal year. The decrease in marketing, general and
administrate expenses is mainly due to decreased payroll expense for the
replacement of senior positions and commission expense.
The following table presents consolidated research and development expenses for
the three months ended ended September 30, 2020 and 2019.
Table amounts are in thousands:
                                     For the Three Months Ended September 30,
                                            2020                    2019    % Change
Research and Development:
                            $        209                           $ 246      (15.0 )%
Total                       $        209                           $ 246      (15.0 )%


Consolidated research and development expenses decreased $37,000, or 15.0%, to
$209,000 for the three months ended September 30, 2020, as compared to the same
period of last fiscal year. Research and development expenses were primarily
expenses associated with the introduction of new or enhanced products. The
decrease in research and development expense is mainly due to decreased payroll
expense for the replacement of senior positions during the three months ended
September 30, 2020.
Other income (expense)

The Company did not have significant other income during the three months ended
September 30, 2020. As of June 30, 2019, $792,000 was accrued for Mr. DePiano's
retirement benefits. The amount represent the approximate present value of the
supplemental retirement benefits awarded using a discount rate of 4.5% as of
June 30, 2019. Richard DePiano Sr. passed away on October 3, 2019. According to
the agreement, the benefits terminate upon Mr. 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
three-month period ended September 30, 2019.

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 applied for and received $500,000 in April 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 affect collection of accounts receivable as of date of this filing.
The Company does not know the extent and duration of the impact of COVID-19 on
its business due to the uncertainty about the spread of the virus.

Liquidity and Capital Resources



Our total cash on hand as of September 30, 2020 was approximately $1,366,000
excluding restricted cash of approximately $255,000 compared to approximately
$826,000 of cash on hand and restricted cash of $255,000 as of June 30, 2020.
Approximately $48,000 was available under our line of credit as of September 30,
2020.

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

                                       22
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available on acceptable terms, or at all. Moreover, the incurrence of indebtedness in connection with a debt financing would result in increased fixed obligations and could contain covenants that would restrict our operations.



As of September 30, 2020 we had an accumulated deficit of approximately $69.0
million, incurred recurring losses from operations and negative cash flows from
operating activities in prior years. These factors raise substantial doubt
regarding our ability to continue as a going concern, and our ability to
generate cash to meet our cash requirements for the following twelve months as
of the date of this form 10-Q.

The following table presents overall liquidity and capital resources as of September 30, 2020 and June 30, 2020. Table amounts are in thousands:



                                                       September 30,     June 30,
                                                           2020            2020
Current Ratio:
Current assets                                            $4,431          $4,333
Less: Current liabilities                                  3,191          2,865
Working capital                                           $1,240          $1,468
Current ratio                                            1.39 to 1      1.51 to 1
Debt to Total Capital Ratio:
Line of credit, note payable, lease liabilities, PPP
loan and EIDL loan                                        $1,976          $2,042
Total debt                                                 1,976          2,042
Total equity                                               1,315          1,512
Total capital                                             $3,291          $3,554
Total debt to total capital                                60.0%          57.5%


Working Capital Position
Working capital decreased approximately $228,000 as of September 30, 2020, and
the current ratio decreased to 1.39 to 1 from 1.51 to 1 when compared to
June 30, 2020. The decreased in working capital is due to an increase in current
assets of $98,000 and an increase in current liabilities of $326,000 during the
quarter ended September 30, 2020.

Debt to total capital ratio was 60.0% and 57.5% as of September 30,
2020 and June 30, 2020, respectively. The increase in the debt to total capital
ratio is due to the operating loss in the quarter ended September 30, 2020.
Cash Flow Provided By Operating Activities
During the three months ended September 30, 2020 the Company provided
approximately $541,000 of cash from operating activities as compared to
providing cash of approximately $7,000 for operating activities during the three
months ended September 30, 2019.
For the three months ended September 30, 2020, the Company provided
approximately $541,000 from operations. The cash provided by operations is
mainly due to decreases in accounts receivable and inventory of approximately
$467,000, increase in accounts payable and accrued expenses of approximately
$292,000, offset by the Company's net loss of $197,000. The remaining offsetting
items for cash provided by operations is comprised of less significant items.
The change in the mentioned working capital accounts are due to timing as well
as the Company's focus on preserving cash due to uncertainty in the current
economic climate.
For the three months ended September 30, 2019, the Company had a net income of
approximately $621,000, which includes non cash post-retirement adjustment of
$758,000. Cash inflows were mainly due to a decrease in accounts receivable
of $141,000, an increase in accrued expenses of $33,000, an increase in accounts
payable of $25,000, an increase in non cash lease expense of $82,000, a decrease
in liabilities of discontinued operations of $3,000, and an increase in non-cash
expenditure on depreciation and amortization of approximately $12,000. The cash
inflow is offset by a decrease in accrued post retirement benefits of $25,000, a
decrease in operating lease liability of $83,000, an increase in inventory
of $22,000, an increase in other current assets of $5,000 and an increase in
other assets of $11,000.


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Cash Flows Used in Financing Activities For the three months ended September 30, 2020 and 2019 the cash used in financing activities of $1,000 and $1,000 was due to auto loan payment. Debt Financing



On June 29, 2018 the Company entered a business loan agreement with TD bank
receiving a line of credit evidenced by a promissory note of $250,000. The
interest is subject to change based on changes in an independent index which the
Wall Street Journal Prime. The index rate at the date of the agreement is 5.000%
per annum. Interest on the unpaid principal balance of the note will be
calculated using a rate of 0.740 percentage points over the index, adjusted if
necessary for any minimum and maximum rate limitations, resulting in an initial
rate of 5.740% per annum based on a year of 360 days. The interest rate was
6.24% as of September 30, 2020. The Company was required to put $250,000 in the
TD bank savings account as collateral.

As of September 30, 2020 and June 30, 2020, the line of credit balance was $201,575 with TD bank. The line of credit interest expense was approximately $3,000 and $4,000 for the three months ended September 30, 2020 and 2019, respectively.

COVID-19 Relief Loans and Liabilities

Payroll Protection Program ("PPP")



On April 27, 2020, the Company entered into a PPP loan for $500,000 in
connection with the CARES Act related to COVID-19. $304,664 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
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 is intended to apply for the loan forgiveness. 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.

Employer Payroll Tax Withholdings



The CARES Act allows employers to defer the deposit and payment of
the employer share of Social Security tax that would otherwise be due on or
after March 27, 2020, and before January 1, 2021. The Company has deferred
approximately $45,000 of the social security tax as of September 30, 2020. 50%
of the deferred employment taxes will not be due until December 31, 2021, with
the remaining 50% not due until December 31, 2022.

Off-balance Sheet Arrangements and Contractual Obligations

The Company was not a party to any off-balance sheet arrangements during the three-month periods ended September 30, 2020 and 2019. Item 3. Quantitative and Qualitative Disclosures About Market Risk

None

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