ESCALON MEDICAL CORP. 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 endedJune 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 endedJune 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 endedMarch 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 -------------------------------------------------------------------------------- •Consolidated net revenue increased approximately$252,000 or 3.4%, to$7,637,000 for the nine months endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedJune 30, 2020 , as well as Note 3 to our unaudited condensed consolidated financial statements for the three and nine months endedMarch 31, 2021 . During the three and nine months endedMarch 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 -------------------------------------------------------------------------------- Results of Operations Three and Nine Months EndedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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
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For the Three Months Ended March 31, For the Nine Months Ended March 31,
2021 2020 % Change 2021 2020 % ChangeMarketing, 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 endedMarch 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$2,634,000 for the nine months endedMarch 31, 2021 , as compared to the same period of last fiscal year. The decrease in marketing, general and administrate expenses is mainly due to decreased payroll expense for the replacement of senior positions, consulting expense, travel expense and exhibits expense, advertising expense and office rent expense. The following table presents consolidated research and development expenses for the three months and nine months endedMarch 31, 2021 and 2020. Table amounts are in thousands: For the Three Months Ended March 31, For the Nine Months Ended March 31, 2021 2020 % Change 2021 2020 % Change Research and Development:$ 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 endedMarch 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 endedMarch 31, 2021 . Consolidated research and development expenses decreased$138,000 , or 17.1%, to$670,000 for the nine months endedMarch 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 endedMarch 31, 2021 . Impairment The Company tests infinite-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. During the three-month and nine-month periods endedMarch 31, 2021 , no impairments were recorded. As a result of the Company's testing during the fiscal year endingJune 30, 2020 , the intangible assets (trademark and trade names) carrying amount of$605,005 was deemed fully impaired during the nine-month periods endedMarch 31, 2020 . Other income (expense) The Company did not have significant other income during the nine months endedMarch 31, 2021 . As ofJune 30, 2019 ,$792,000 was accrued forMr. 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 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 nine-month period endedMarch 31, 2020 .
COVID-19 Disclosure
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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 ofMarch 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 ofJune 30, 2020 . Approximately$48,000 was available under our line of credit as ofMarch 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 ofMarch 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
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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%
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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")
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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 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 ofMarch 31, 2021 . 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 ofMarch 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
None
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