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    ESMC   US2960743050

ESCALON MEDICAL CORP.

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

05/14/2021 | 04:07pm EDT

Forward Looking Statements


  Certain statements contained in, or incorporated by reference in, this report
are forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, which provide current
expectations or forecasts of future events. Such statements can be identified by
the use of terminology such as "anticipate," "believe," "could," "estimate,"
"expect," "forecast," "intend," "may," "plan," "possible," "project," "should,"
"will," and similar words or expressions. The Company's forward-looking
statements include certain information relating to general business strategy,
growth strategies, financial results, liquidity, the Company's ability to
continue as a going concern, discontinued operations, research and development,
product development, the introduction of new products, the potential 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-nine-month periods ended March 31, 2021 and 2020
The following highlights are discussed in further detail within this Form 10-Q.
The reader is encouraged to read this Form 10-Q in its entirety to gain a more
complete understanding of factors impacting Company performance and financial
condition.

                                       17
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•Consolidated net revenue increased approximately $252,000 or 3.4%, to
$7,637,000 for the nine months ended March 31, 2021, as compared to same period
of the last fiscal year. The increase in net revenue is attributed to an
increase in sales in Sonomed's ultrasound products of $273,000 and an increase
in sales of ophthalmic fundus photography system products of $56,000, offset by
decrease in Trek revenue $58,000 and a decrease in service plans revenue of
$19,000.

•Consolidated cost of goods sold totaled approximately $4,553,000, or 59.6%, of
total revenue for the nine months ended March 31, 2021, as compared to
$3,910,000, or 52.9%, of total revenue for the nine months of the last fiscal
year. The increase of 6.7% 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 $363,000,
or 12.1%, to $2,634,000 for the nine months ended March 31, 2021, 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, consulting expense, travel expense and exhibits
expense, advertising expense and office rent expense.

•Consolidated research and development expenses decreased $138,000 or 17.1%, to
$670,000 for the nine months ended March 31, 2021, as compared to the same
period of last fiscal year. Research and development expenses were primarily
expenses associated with the introduction of new or enhanced products. The
decrease in research and development expense is mainly due to decreased payroll
expense for the replacement of senior positions during the nine months ended
March 31, 2021.
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 ended June 30, 2020, as well as Note 3 to our unaudited
condensed consolidated financial statements for the three and nine months ended
March 31, 2021.

During the three and nine months ended March 31, 2021, there were no significant
changes in our accounting policies and estimates other than the newly adopted
accounting standards that are disclosed in Note 3 to our unaudited condensed
consolidated financial statements.
                                       18
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Results of Operations
Three and Nine Months Ended March 31, 2021 and 2020
The following table shows consolidated net revenue, as well as identifying
trends in revenues for the three months and nine months ended March 31, 2021 and
2020. Table amounts are in thousands:
                                        For the Three Months Ended March 31,                           For the Nine Months Ended March 31,
                                   2021               2020               % Change                2021               2020               % Change
Net Revenue:
Products                       $    2,098          $  2,117                    (0.9) %       $    6,938          $  6,667                     4.1  %
Service plans                         227               240                    (5.4) %              699               718                    (2.6) %
Total                          $    2,325          $  2,357                    (1.4) %       $    7,637          $  7,385                     3.4  %



  Consolidated net revenue decreased approximately $32,000 or 1.4%, to
$2,325,000 during the three months ended March 31, 2021 as compared to the same
period of last fiscal year. The decrease in net revenue is attributed to a
decreased in Trek revenue of $286,000, and a decrease in service plans revenue
of $13,000, offset by an increase in sales of Sonomed's ultrasound products of
$236,000, and an increase in sales of ophthalmic fundus photography system
products of $31,000.

Consolidated net revenue increased approximately $252,000 or 3.4%, to $7,637,000
during the nine months ended March 31, 2021 as compared to the same period of
last fiscal year. The increase in net revenue is attributed to an increase in
sales in Sonomed's ultrasound products of $273,000 and an increase in sales of
ophthalmic fundus photography system products of $56,000, offset by decrease in
Trek revenue $58,000 and a decrease in service plans revenue of $19,000.

The table amounts are in thousands:

                                For the Three Months Ended March 31,                                   For the Nine Months Ended March 31,
                               2021                               2020                               2021                                2020
Domestic           $   1,107             47.6  %       $ 1,440             61.1  %       $   4,514             59.1  %       $ 4,496              60.9  %
Foreign                1,218             52.4  %           917             38.9  %           3,123             40.9  %         2,889              39.1  %
Total              $   2,325            100.0  %       $ 2,357            100.0  %       $   7,637            100.0  %       $ 7,385             100.0  %



The following table presents consolidated cost of goods sold and as a percentage
of revenues for the three months and nine months ended March 31, 2021 and 2020.
Table amounts are in thousands:

                                   For the Three Months Ended March 31,                                   For the Nine Months Ended March 31,
                          2021               %               2020              %                2021                %               2020              %

Cost of Goods Sold:

                      $   1,383             59.5  %       $ 1,281             54.3  %       $   4,553              59.6  %       $ 3,910             52.9  %
Total                 $   1,383             59.5  %       $ 1,281             54.3  %       $   4,553              59.6  %       $ 3,910             52.9  %




Consolidated cost of goods sold totaled approximately $1,383,000, or 59.5%, of
total revenue for the three months ended March 31, 2021, as compared to
$1,281,000, or 54.3%, of total revenue of the same period of last fiscal year.
The increase of 5.2% 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 $4,553,000, or 59.6%, of
total revenue for the nine months ended March 31, 2021, as compared to
$3,910,000, or 52.9%, of total revenue of the same period of last fiscal year.
The increase of 6.7% 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 nine months ended March 31, 2021 and 2020. Table amounts are in thousands:

                                       19
--------------------------------------------------------------------------------

                                      For the Three Months Ended March 31,                          For the Nine Months Ended March 31,
                                  2021               2020              % Change                2021              2020              % Change

Marketing, General and Administrative:

                             $       858          $   904                    (5.1) %       $   2,634          $ 2,997                   (12.1) %
Total                        $       858          $   904                    (5.1) %       $   2,634          $ 2,997                   (12.1) %



Consolidated marketing, general and administrative expenses decreased $46,000,
or 5.1%, to $858,000 for the three months ended March 31, 2021, as compared to
the same period of last fiscal year. The decrease in marketing, general and
administrate expenses is mainly due to decreased office rent expense, travel
expense, and advertising expense offset by increased salary expense.

Consolidated marketing, general and administrative expenses decreased $363,000,
or 12.1%, to $2,634,000 for the nine months ended March 31, 2021, 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, consulting expense, travel expense and exhibits
expense, advertising expense and office rent expense.
The following table presents consolidated research and development expenses for
the three months and nine months ended March 31, 2021 and 2020.
Table amounts are in thousands:
                                             For the Three Months Ended March 31,                         For the Nine Months Ended March 31,
                                     2021               2020               % Change                2021               2020                % Change
Research and Development:
                                 $      216          $    301                   (28.2) %       $      670          $    808                     (17.1) %
Total                            $      216          $    301                   (28.2) %       $      670          $    808                     (17.1) %


Consolidated research and development expenses decreased $85,000, or 28.2%, to
$216,000 for the three months ended March 31, 2021, as compared to the same
period of last fiscal year. Research and development expenses were primarily
expenses associated with the introduction of new or enhanced products. The
decrease in research and development expense is mainly due to decreased payroll
expense for the replacement of senior positions during the three months ended
March 31, 2021.
Consolidated research and development expenses decreased $138,000, or 17.1%, to
$670,000 for the nine months ended March 31, 2021, as compared to the same
period of last fiscal year. Research and development expenses were primarily
expenses associated with the introduction of new or enhanced products. The
decrease in research and development expense is mainly due to decreased payroll
expense for the replacement of senior positions during the nine months ended
March 31, 2021.
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 nine-month periods ended March 31, 2021, no impairments were
recorded. As a result of the Company's testing during the fiscal year ending
June 30, 2020, the intangible assets (trademark and trade names) carrying amount
of $605,005 was deemed fully impaired during the nine-month periods ended March
31, 2020.
Other income (expense)

  The Company did not have significant other income during the nine months ended
March 31, 2021. As of June 30, 2019, $792,000 was accrued for Mr. DePiano's
retirement benefits. The amount represents 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
nine-month period ended March 31, 2020.

COVID-19 Disclosure

                                       20
--------------------------------------------------------------------------------


  On March 11, 2020, the World Health Organization declared the outbreak of a
coronavirus (COVID-19) a pandemic. This pandemic has had a significant impact on
the global and domestic economy and is likely to impact the operations of the
company. The Company has been assessing the impact of the COVID-19 pandemic on
the business, including the impact on the financial condition and results of
operations, financial resources, changes in accounting judgment as well as the
impact on the supply and demand, etc. The Company is considered an essential
business and was able to maintain operations during the lockdown. 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. 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 of March 31, 2021 was approximately $1,653,000
excluding restricted cash of approximately $256,000 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 March 31,
2021.

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

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

As of March 31, 2021 we had an accumulated deficit of approximately $69.1
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 March 31, 2021 and June 30, 2020. Table amounts are in thousands:

                                       21
--------------------------------------------------------------------------------
                                                                          March 31,                 June 30,
                                                                            2021                      2020
Current Ratio:
Current assets                                                             $4,407                    $4,333
Less: Current liabilities                                                   3,355                     2,865
Working capital                                                            $1,052                    $1,468
Current ratio                                                             1.31 to 1                 1.51 to 1
Debt to Total Capital Ratio:
Line of credit, note payable, lease liabilities, PPP loan and
EIDL loan                                                                  $1,842                    $2,042
Total debt                                                                  1,842                     2,042
Total equity                                                                1,276                     1,512
Total capital                                                              $3,118                    $3,554
Total debt to total capital                                                 59.1%                     57.5%


                                       22
--------------------------------------------------------------------------------

Working Capital Position
Working capital decreased approximately $416,000 as of March 31, 2021, and the
current ratio decreased to 1.31 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 $74,000 and an increase in current liabilities of $490,000 during the quarter
ended March 31, 2021. The current portion of PPP loan mainly contributes to the
increase of the current liabilities.
Debt to total capital ratio was 59.1% and 57.5% as of March 31,
2021 and June 30, 2020, respectively. The ratio change remains consistent.
Cash Flow Provided By (Used in) Operating Activities
During the nine months ended March 31, 2021 the Company provided approximately
$840,000 of cash from operating activities as compared to cash of approximately
$329,000 from operating activities during the nine months ended March 31, 2020.
  For the nine months ended March 31, 2021, its cash provided by operations is
mainly due to decreases in accounts receivable and inventory of approximately
$751,000, increase in accounts payable and accrued expenses of approximately
$234,000 offset by a decrease in deferred revenue of $22,000. 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 nine-month period ended March 31, 2020, the Company had a net loss of
approximately $182,000, which includes non-cash post-retirement adjustment of
$758,000, non-cash lease expense of $243,000, and impairment loss of $605,000.
Cash inflows were mainly due to a decrease in other current assets of $89,000,
an increase in deferred revenue of $117,000, an increase in accounts payable of
$14,000, an increase in accrued expenses of $97,000, and an increase in non-cash
expenditure on depreciation and amortization of approximately $37,000. The cash
inflow is offset by an increase in accounts receivable of $382,000, an increase
in inventory of $21,000, and an increase in other long term assets of $11,000, a
decrease in operating lease liability of $246,000, a decrease in accrued
postretirement benefits of $34,000, and a decrease in liabilities of
discontinued operations of $3,000.
Cash Flows Used In Investing Activities
Cash flows used in investing activities for the nine-month period ended March
31, 2021 was due to the purchase of equipment of $9,000. Cash flows used in
investing activities for the nine-month period ended March 31, 2020 was due to
purchase of equipment of $39,000.
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 nine months ended March 31, 2021 and 2020 the cash used in financing
activities of $3,000 and $3,000 was due to auto loan payment.
Debt Financing

  On June 29, 2018 the Company entered a business loan agreement with TD bank
receiving a line of credit evidenced by a promissory note of $250,000. The
interest is subject to change based on changes in an independent index which the
Wall Street Journal Prime. The index rate at the date of the agreement is 5.000%
per annum. Interest on the unpaid principal balance of the note will be
calculated using a rate of 0.740 percentage points over the index, adjusted if
necessary for any minimum and maximum rate limitations, resulting in an initial
rate of 5.740% per annum based on a year of 360 days. The interest rate was
3.99% as of March 31, 2021. The Company was required to put $250,000 in the TD
bank savings account as collateral.

  As of March 31, 2021 and June 30, 2020, the line of credit balance was
$201,575 with TD bank. The line of credit interest expense was approximately
$3,000 and $2,000 for the three months ended March 31, 2021 and 2020,
respectively. The line of credit interest expense was $8,000 and $9,000 for the
nine-month periods ended March 31, 2021 and 2020, respectively.

COVID-19 Relief Loans and Liabilities

Payroll Protection Program ("PPP")

                                       23
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  On April 27, 2020, the Company entered into a PPP loan for $500,000 in
connection with the CARES Act related to COVID-19. $444,259 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 on July 1st, 2021. The EIDL loan is secured by the
tangible and intangible personal property of the Company.

Employer Payroll Tax Withholdings


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

Off-balance Sheet Arrangements and Contractual Obligations

The Company was not a party to any off-balance sheet arrangements during the three-month and nine-month periods ended March 31, 2021 and 2020. Item 3. Quantitative and Qualitative Disclosures About Market Risk

None

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