ESCALON MEDICAL CORP. Forward Looking Statements
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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, the possible forgiveness of
the Company's PPP loan, 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-six-month periods ended December 31, 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 $284,000 or 5.6%, to
$5,312,000 for the six months ended December 31, 2020 , as compared to same
period of the last fiscal year. The increase in net revenue is attributed to a
an increase in sales of Trek products of $229,000 , an increase in sales in
Sonomed's ultrasound products of $38,000 and in increase in sales of ophthalmic
fundus photography system products of of $24,000 . The increase is offset by a
decrease in revenue from service plans of $7,000 .
•Consolidated cost of goods sold totaled approximately $3,170,000 , or 59.7%, of
total revenue for the six months ended December 31, 2020 , as compared to
$2,629,000 , or 52.3%, of total revenue for the six months of the last fiscal
year. The increase of 7.4% in cost of goods sold as a percentage of total
revenue is mainly due to changes in product sales mix and geographic
differences.
•Consolidated marketing, general and administrative expenses decreased $318,000 ,
or 15.2%, to $1,776,000 for the six months ended December 31, 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,Trek consulting expense as well as travel and
exhibits expense.
•Consolidated research and development expenses decreased $53,000 or 10.5%, to
$454,000 for the six months ended December 31, 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 six months ended
December 31, 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 and Estimates The preparation of unaudited condensed consolidated financial statements requires management to make estimates and assumptions that impact amounts reported therein. On a regular basis, we evaluate these estimates. These estimates are based on management's historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. For a description of the accounting policies that, in management's opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see the notes to consolidated financial statements included in the Form 10-K for the year endedJune 30, 2020 , as well as Note 3 to our unaudited condensed consolidated financial statements for the three and six months endedDecember 31, 2020 .
During the three and six months ended
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Results of Operations
Three and Six Months ended Ended December 31, 2020 and 2019
The following table shows consolidated net revenue, as well as identifying
trends in revenues for the three months and six months ended December 31, 2020
and 2019. Table amounts are in thousands:
For the Three Months Ended December 31, For the Six Months Ended December 31,
2020 2019 % Change 2020 2019 % Change
Net Revenue:
Products $ 2,655 $ 2,497 6.3 % $ 4,840 $ 4,549 6.4 %
Service plans 243 243 - % 472 479 (1.5) %
Total $ 2,898 $ 2,740 5.8 % $ 5,312 $ 5,028 5.6 %
Consolidated net revenue increased approximately $158,000 or 5.8%, to
$2,898,000 during the three months ended December 31, 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 Sonomed's ultrasound products of $118,000 , an increase
in sales of ophthalmic fundus photography system products of of $35,000 and an
increase in sales of Trek products of $5,000 .
Consolidated net revenue increased approximately $284,000 or 5.6%, to $5,312,000
during the six months ended December 31, 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 $229,000 , an increase in sales in Sonomed's ultrasound
products of $38,000 and an increase in sales of ophthalmic fundus photography
system products of of $24,000 . The increase is offset by a decrease in revenue
from service plans of $7,000 .
The table amounts are in thousands:
For the Three Months Ended December 31, For the Six Months Ended December 31,
2020 2019 2020 2019
Domestic $ 1,865 64.4 % $ 1,590 58.0 % $ 3,408 64.2 % $ 3,056 60.8 %
Foreign 1,033 35.6 % 1,150 42.0 % 1,904 35.8 % 1,972 39.2 %
Total $ 2,898 100.0 % $ 2,740 100.0 % $ 5,312 100.0 % $ 5,028 100.0 %
The following table presents consolidated cost of goods sold and as a percentage
of revenues for the thee months and six months ended December 31, 2020 and 2019.
Table amounts are in thousands:
For the Three Months Ended December 31, For the Six Months Ended December 31,
2020 % 2019 % 2020 % 2019 %
Cost of Goods Sold:
$ 1,666 57.5 %$ 1,452 53.0 %$ 3,170 59.7 %$ 2,629 52.3 % Total$ 1,666 57.5 %$ 1,452 53.0 %$ 3,170 59.7 %$ 2,629 52.3 % Consolidated cost of goods sold totaled approximately$1,666,000 , or 57.5%, of total revenue for the three months endedDecember 31, 2020 , as compared to$1,452,000 , or 53.0%, of total revenue of the same period of last fiscal year. The increase of 4.5% in cost of goods sold as a percentage of total revenue is mainly due to changes in product sales mix and geographic differences. Consolidated cost of goods sold totaled approximately$3,170,000 , or 59.7%, of total revenue for the six months endedDecember 31, 2020 , as compared to$2,629,000 , or 52.3%, of total revenue of the same period of last fiscal year. The increase of 7.4% in cost of goods sold as a percentage of total revenue is mainly due to changes in product sales mix and geographic differences.
The following table presents consolidated marketing, general and
administrative expenses for three months and six months ended
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For the Three Months Ended December 31, For the Six Months Ended December 31,
2020 2019 % Change 2020 2019 % Change
Marketing, General and
Administrative:
$ 884 $ 1,094 (19.2) % $ 1,776 $ 2,094 (15.2) %
Total $ 884 $ 1,094 (19.2) % $ 1,776 $ 2,094 (15.2) %
Consolidated marketing, general and administrative expenses decreased $210,000 ,
or 19.2%, to $884,000 for the three months ended December 31, 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, Trek consulting expense, travel expense and
exhibits expense.
Consolidated marketing, general and administrative expenses decreased $318,000 ,
or 15.2%, to $1,776,000 for the six months ended December 31, 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, Trek consulting expense, travel expense and
exhibits expense.
The following table presents consolidated research and development expenses for
the three month sand six months ended ended December 31, 2020 and 2019.
Table amounts are in thousands:
For the Three Months Ended December 31, For the Six Months Ended December 31,
2020 2019 % Change 2020 2019 % Change
Research and Development:
$ 245 $ 262 (6.5) % $ 454 $ 507 (10.5) %
Total $ 245 $ 262 (6.5) % $ 454 $ 507 (10.5) %
Consolidated research and development expenses decreased $17,000 , or 6.5%, to
$245,000 for the three months ended December 31, 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
December 31, 2020 .
Consolidated research and development expenses decreased $53,000 , or 10.5%, to
$454,000 for the six months ended December 31, 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 six months ended
December 31, 2020 .
Impairment
The Company tests infinite-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-month and six-month periods ended December, 2020, no impairments were
recorded. As a result of the Company's testing during the fiscal year ending
June 30, 2020 , the intangible assets (trade mark and trade names) carrying
amount of $605,005 was deemed fully impaired during the three-month and
six-month periods ended December 31, 2019 .
Other income (expense)
The Company did not have significant other income during the three months and six months endedDecember 31, 2020 . As ofJune 30, 2019 ,$792,000 was accrued forMr. 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 ofJune 30, 2019 .Richard 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 six-month period endedDecember 31, 2019 . 21 --------------------------------------------------------------------------------
COVID-19 Disclosure
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 is likely to impact the operations of the company. The Company has been assessing the impact of the COVID-19 pandemic on the business, including the impact on the financial condition and results of operations, financial resources, changes in accounting judgment as well as the impact on the supply and demand, etc. The Company is considered an essential business and was able to maintain operations during the lockdown. 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. 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 a$150,000 EIDL loan.The annual interest rate is 3.75%. The payment term is 30 years. The Company remains in strong communications with its 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 ofDecember 31, 2020 was approximately$1,531,000 excluding restricted cash of approximately$255,000 compared to approximately$826,000 of cash on hand and restricted cash of$255,000 as ofJune 30, 2020 . Approximately$48,000 was available under our line of credit as ofDecember 31, 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 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 ofDecember 31, 2020 we had an accumulated deficit of approximately$68.9 million , incurred recurring losses from operations and negative cash flows from operating activities in prior years although we had a net income of$98,000 in the three-month period endedDecember 31, 2020 . 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
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December 31, June 30,
2020 2020
Current Ratio:
Current assets $4,464 $4,333
Less: Current liabilities 3,109 2,865
Working capital $1,355 $1,468
Current ratio 1.44 to 1 1.51 to 1
Debt to Total Capital Ratio:
Line of credit, note payable, lease liabilities, PPP loan and
EIDL loan $1,909 $2,042
Total debt 1,909 2,042
Total equity 1,414 1,512
Total capital $3,323 $3,554
Total debt to total capital 57.4% 57.5%
23-------------------------------------------------------------------------------- Working Capital Position Working capital decreased approximately$131,000 as ofDecember 31, 2020 , and the current ratio decreased to 1.44 to 1 from 1.51 to 1 when compared toJune 30, 2020 . The decreased in working capital is due to an increase in current assets of$131,000 and an increase in current liabilities of$244,000 during the quarter endedDecember 31, 2020 .
Debt to total capital ratio was 57.4% and 57.5% as of
For the six months endedDecember 31, 2020 , its cash provided by operations is mainly due to decreases in accounts receivable and inventory of approximately$603,000 , increase in accounts payable and accrued expenses of approximately$81,000 , and an increase in deferred revenue of$55,000 . 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 six-month period endedDecember 31, 2019 , the Company had a net loss of approximately$54,000 , which includes non cash post-retirement adjustment of$758,000 and impairment loss of$605,000 . Cash inflows were mainly due to a decrease in other current assets of$21,000 , an increase in accounts payable of$175,000 , an increase in accrued expenses of$52,000 , and an increase in non-cash expenditure on depreciation and amortization of approximately$23,000 . The cash inflow is offset by an increase in accounts receivable of$276,000 , an increase in inventory of$85,000 , and an increase in other long term assets of$11,000 , a decrease in operating lease liability of$169,000 , a decrease in accrued post retirement benefits of$34,000 , and a decrease in liabilities of discontinued operations of$1,000 . Cash Flows Used In Investing Activities Cash flows used in investing activities for the six -month period endedDecember 31, 2020 was due to the purchase of equipment of$9,000 for the six-month period endedDecember 31, 2020 . Cash flows used in investing activities for the six-month period endedDecember 31, 2019 was due to purchase of equipment of$36,000 . Any necessary capital expenditures have generally been funded out of cash from operations, and the Company is not aware of any factors that would cause historical capital expenditure levels to not be indicative of capital expenditures in the future and, accordingly, does not believe that the Company will have to commit material resources to capital investment for the foreseeable future. Cash Flows Used in Financing Activities For the six months endedDecember 31, 2020 and 2019 the cash used in financing activities of$2,000 and$2,000 was due to auto loan payment. Debt Financing OnJune 29, 2018 the Company entered a business loan agreement with TD bank receiving a line of credit evidenced by a promissory note of$250,000 . The interest is subject to change based on changes in an independent index which the Wall Street Journal Prime. The index rate at the date of the agreement is 5.000% per annum. Interest on the unpaid principal balance of the note will be calculated using a rate of 0.740 percentage points over the index, adjusted if necessary for any minimum and maximum rate limitations, resulting in an initial rate of 5.740% per annum based on a year of 360 days. The interest rate was 6.24% as ofDecember 31, 2020 . The Company was required to put$250,000 in the TD bank savings account as collateral. As ofDecember 31, 2020 andJune 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 endedDecember 31, 2020 and 2019, respectively. The line of credit interest expense was$6,000 and$8,000 for the six-month periods endedDecember 31, 2020 and 2019, respectively. 24
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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.$304,664 of the PPP loan is classified as current. The promissory note has a fixed payment schedule.The PPP loan is unsecured. A final payment for the unpaid principal and accrued interest will be payable no later than two years after the funding date. The note will bear interest at a rate of 1.00% per annum. The payment will consist of nine monthly payments of principal and interest. The deferral period for loan payments is either (1) the date that SBA remits the borrower's loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower's loan forgiveness covered period. The estimated commencing payment date is in ten months after the 24 weeks' covered period. Major portions of the loan and accrued interest may qualify for loan forgiveness based on the terms of the program. The Company intends 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 of$731 will start onJuly 1st, 2021 . The EIDL loan is secured by the tangible and intangible personal property of the Company.
Employer Payroll Tax Withholdings
The CARES Act allows employers to defer the deposit and payment of the employer share ofSocial Security tax that would otherwise be due on or afterMarch 27, 2020 , and beforeJanuary 1, 2021 . The Company has deferred approximately$82,000 of the social security tax as ofDecember 31, 2020 . 50% of the deferred employment taxes will not be due untilDecember 31, 2021 , with the remaining 50% not due untilDecember 31, 2022 . Approximately$41,000 was reclassed as short-term other liabilities as ofDecember 31, 2020 .
Off-balance Sheet Arrangements and Contractual Obligations
The Company was not a party to any off-balance sheet arrangements during the
three-month and six-month periods ended
None
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