ESCALON MEDICAL CORP - Quarter Report: 2021 December (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY PERIOD PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended December 31, 2021
Commission File Number 0-20127
Escalon Medical Corp.
(Exact name of registrant as specified in its charter)
Pennsylvania 33-0272839
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
435 Devon Park Drive, Suite 824, Wayne, PA 19087
(Address of principal executive offices, including zip code)
(610) 688-6830
(Registrant’s telephone number, including area code)
N/A
Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company. or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o | |||||||||||||||||
| Non-accelerated filer | x | Smaller reporting company | x | |||||||||||||||||
| Emerging growth company | o | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 7,415,329 shares of common stock, $0.001 par value, outstanding as of February 11, 2022.
TABLE OF CONTENTS
| Page | ||||||||
PART I Financial Information | ||||||||
| Item I. | Unaudited Condensed Consolidated Financial Statements | |||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
PART II Other Information | ||||||||
| Item 6. | ||||||||
1
PART I. FINANCIAL INFORMATION
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| December 31, 2021 | June 30, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,065,956 | $ | 1,650,970 | |||||||
| Restricted cash | 256,102 | 255,920 | |||||||||
| Accounts receivable, net | 1,334,506 | 1,081,702 | |||||||||
| Inventories | 1,445,516 | 1,416,727 | |||||||||
| Other current assets | 209,270 | 187,357 | |||||||||
| Total current assets | 4,311,350 | 4,592,676 | |||||||||
| Property and equipment, net | 65,817 | 81,442 | |||||||||
| Right-of-use assets | 705,106 | 843,559 | |||||||||
License, net | 92,575 | 102,400 | |||||||||
| Other long term assets | 62,789 | 62,789 | |||||||||
| Total assets | $ | 5,237,637 | $ | 5,682,866 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Line of credit | $ | 201,575 | $ | 201,575 | |||||||
| Current portion of note payable | 3,401 | 3,401 | |||||||||
| Current portion of PPP loan | — | 500,000 | |||||||||
| Current portion of EIDL loan | 2,916 | 2,862 | |||||||||
| Accounts payable | 1,048,928 | 1,102,125 | |||||||||
| Accrued expenses | 779,160 | 695,553 | |||||||||
| Related party accrued interest | 112,389 | 112,389 | |||||||||
Current portion of operating lease liabilities | 250,973 | 279,051 | |||||||||
| Deferred revenue | 310,189 | 363,700 | |||||||||
| Other short-term liabilities | 131,467 | 136,107 | |||||||||
| Total current liabilities | 2,840,998 | 3,396,763 | |||||||||
| Note payable, net of current portion | 5,902 | 7,839 | |||||||||
| EIDL loan, net of current portion | 151,261 | 147,138 | |||||||||
| Operating lease liabilities, net of current portion | 515,474 | 630,330 | |||||||||
| Other long-term liabilities | — | 40,860 | |||||||||
| Total long-term liabilities | 672,637 | 826,167 | |||||||||
| Total liabilities | 3,513,635 | 4,222,930 | |||||||||
| Shareholders' equity: | |||||||||||
| Series A convertible preferred stock, $0.001 par value; 2,000,000 shares authorized; 2,000,000 shares issued and outstanding (liquidation value of $845,143 and $819,131) | 645,000 | 645,000 | |||||||||
| Common stock, $0.001 par value; 35,000,000 shares authorized; 7,415,329 shares issued and outstanding | 7,415 | 7,415 | |||||||||
| Additional paid-in capital | 69,702,043 | 69,702,043 | |||||||||
| Accumulated deficit | (68,630,456) | (68,894,522) | |||||||||
| Total shareholders’ equity | 1,724,002 | 1,459,936 | |||||||||
| Total liabilities and shareholders’ equity | $ | 5,237,637 | $ | 5,682,866 | |||||||
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| ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) | |||||||||||||||||||||||
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
| Products | $ | 2,521,467 | $ | 2,655,456 | $ | 5,001,274 | $ | 4,839,712 | |||||||||||||||
| Service plans | 179,290 | 242,632 | 374,552 | 472,170 | |||||||||||||||||||
| Revenues, net | 2,700,757 | 2,898,088 | 5,375,826 | 5,311,882 | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of goods sold | 1,539,563 | 1,665,820 | 3,203,437 | 3,169,689 | |||||||||||||||||||
| Marketing, general and administrative | 949,808 | 883,987 | 1,854,299 | 1,776,164 | |||||||||||||||||||
| Research and development | 260,439 | 244,529 | 551,628 | 453,851 | |||||||||||||||||||
Total costs and expenses | 2,749,810 | 2,794,336 | 5,609,364 | 5,399,704 | |||||||||||||||||||
| Loss (income) from operations | (49,053) | 103,752 | (233,538) | (87,822) | |||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Other income | — | — | 506,305 | — | |||||||||||||||||||
| Interest income | 85 | 193 | 182 | 732 | |||||||||||||||||||
| Interest expense | (4,186) | (5,469) | (8,883) | (10,987) | |||||||||||||||||||
| Total other income (expense), net | (4,101) | (5,276) | 497,604 | (10,255) | |||||||||||||||||||
| Net (loss) income | (53,154) | 98,476 | 264,066 | (98,077) | |||||||||||||||||||
| Undeclared dividends on preferred stocks | 13,006 | 13,006 | 26,012 | 25,976 | |||||||||||||||||||
| Net (loss) income applicable to common shareholders | $ | (66,160) | $ | 85,470 | $ | 238,054 | $ | (124,053) | |||||||||||||||
| Net ( loss) earnings per share | |||||||||||||||||||||||
| Basic (loss) income per share | $ | (0.01) | $ | 0.01 | $ | 0.03 | $ | (0.02) | |||||||||||||||
| Diluted (loss) income per share | $ | (0.01) | $ | 0.01 | $ | 0.02 | $ | (0.02) | |||||||||||||||
| Weighted average shares—basic | 7,415,329 | 7,415,329 | 7,415,329 | 7,415,329 | |||||||||||||||||||
| Weighted average shares—diluted | 7,415,329 | 12,706,562 | 13,049,616 | 7,415,329 | |||||||||||||||||||
See notes to unaudited condensed consolidated financial statements
3
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2021 AND DECEMBER 31, 2020
(UNAUDITED)
| Series A Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | 2,000,000 | $ | 645,000 | 7,415,329 | $ | 7,415 | $ | 69,702,043 | $ | (68,894,522) | $ | 1,459,936 | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 317,220 | 317,220 | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 2,000,000 | 645,000 | 7,415,329 | 7,415 | 69,702,043 | (68,577,302) | 1,777,156 | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (53,154) | (53,154) | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 2,000,000 | $ | 645,000 | 7,415,329 | $ | 7,415 | $ | 69,702,043 | $(68,630,456) | $ | 1,724,002 | |||||||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | 2,000,000 | $ | 645,000 | 7,415,329 | $ | 7,415 | $ | 69,702,043 | $ | (68,842,499) | $ | 1,511,959 | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (196,553) | (196,553) | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 2,000,000 | 645,000 | 7,415,329 | 7,415 | 69,702,043 | (69,039,052) | 1,315,406 | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 98,476 | 98,476 | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 2,000,000 | $ | 645,000 | 7,415,329 | $ | 7,415 | $ | 69,702,043 | $ | (68,940,576) | $ | 1,413,882 | ||||||||||||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements
4
| ESCALON MEDICAL CORP. AND SUBSIDIARIES | |||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| (UNAUDITED) | |||||||||||
| For the Six Months Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income (loss) | $ | 264,066 | $ | (98,077) | |||||||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | |||||||||||
| Increase in allowance of doubtful accounts | 15,000 | — | |||||||||
Other income | (506,305) | — | |||||||||
Depreciation and amortization | 25,450 | 22,154 | |||||||||
Non cash lease expense | 138,453 | 140,097 | |||||||||
Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | (267,804) | 149,054 | |||||||||
| Inventories | (28,789) | 453,455 | |||||||||
| Other current and non-current assets | (21,913) | (27,650) | |||||||||
| Accounts payable | (53,197) | 35,762 | |||||||||
Accrued expenses | 95,537 | 45,363 | |||||||||
Change in operating lease liability | (142,934) | (139,653) | |||||||||
| Deferred revenue | (53,511) | 55,013 | |||||||||
| Other short term and long term liabilities | (45,500) | 81,131 | |||||||||
| Net cash (used in) provided by operating activities | (581,447) | 716,649 | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
Purchase of equipment | — | (9,390) | |||||||||
Net cash used in investing activities | — | (9,390) | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Repayment of note payable | (1,937) | (1,797) | |||||||||
| Repayment of EIDL loan | (1,448) | — | |||||||||
| Net cash used in financing activities | (3,385) | (1,797) | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (584,832) | 705,462 | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 1,906,890 | 1,081,239 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 1,322,058 | $ | 1,786,701 | |||||||
| Cash, cash equivalents and restricted cash consist of the following: | |||||||||||
| End of period | |||||||||||
| Cash and cash equivalents | $ | 1,065,956 | $ | 1,531,033 | |||||||
| Restricted cash | 256,102 | 255,668 | |||||||||
| $ | 1,322,058 | $ | 1,786,701 | ||||||||
5
| Beginning of period | |||||||||||
| Cash and cash equivalents | $ | 1,650,970 | $ | 825,958 | |||||||
| Restricted cash | 255,920 | 255,281 | |||||||||
| $ | 1,906,890 | $ | 1,081,239 | ||||||||
| Supplemental Schedule of Cash Flow Information: | |||||||||||
| Interest paid | $ | 8,400 | $ | 5,660 | |||||||
| Non Cash Finance Activities | |||||||||||
| Record right-of-use assets per ASC 842, net of deferred rent reclassification | $ | — | $ | 18,001 | |||||||
| Record lease liability per ASC 842 | $ | — | $ | 18,001 | |||||||
| Dispose right-of-use assets | $ | — | $ | 9,154 | |||||||
| Dispose lease liability | $ | — | $ | 9,154 | |||||||
See notes to unaudited condensed consolidated financial statements
6
Escalon Medical Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Basis of Presentation
Escalon Medical Corp. ("Escalon" or "Company") is a Pennsylvania corporation initially incorporated in California in 1987, and reincorporated in Pennsylvania in November 2001. Within this document, the “Company” collectively shall mean Escalon, which includes its division called "Trek" and its wholly owned subsidiaries: Sonomed, Inc. (“Sonomed”), Escalon Digital Solutions, Inc. (“EMI”), and Sonomed IP Holdings, Inc.
The Company operates in the healthcare market, specializing in the development, manufacture, marketing and distribution of medical devices and pharmaceuticals in the area of ophthalmology. The Company and its products are subject to regulation and inspection by the United States Food and Drug Administration (the “FDA”). The FDA and other government authorities require 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 unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments (consisting of only normal and recurring adjustments) which are, in the opinion of management, necessary to present fairly the unaudited condensed consolidated financial information required herein. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United Statements of America ("US GAAP") have been condensed or omitted pursuant to such rules and regulations. While management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K filed with the Security and Exchange Commission for the fiscal year ended June 30, 2021. The results of operations for the six months ended December 31, 2021 are not necessarily indicative of the results to be expected for the full year.
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. However, the Company does not know the extent and duration of the impact of COVID-19 on its business due to the uncertainty about the spread of the virus. The Company applied for and received $500,000 in April 2020 under the Payroll Protection Program (PPP loan) which helped reverse the negative impact in terms of the liquidity. The maturity date was two years from the date of the note. The interest rate was 1.00% per year. The full amount of the PPP loan and accrued interest were forgiven on August 13, 2021 and was included in other income in the unaudited condensed consolidated statement of operations for the six-month period ended December 31, 2021. The Company received a $150,000 Economic Injury Disaster ("EIDL") loan. The annual interest rate is 3.75%. The payment term is 30 years and the monthly payment of $731 started on July 1, 2021.
The Company’s common stock trades on the OTCQB Market under the symbol “ESMC.”
2. Going Concern
The Company’s operations are subject to a number of factors that can affect its operating results and financial condition. Such factors include, but are not limited to: the continuous enhancement of the current products, development of new products; changes in domestic and foreign regulations; ability of manufacture successfully; competition from products manufactured and sold or being developed by other companies; the price of, and demand for, the Company’s products and its ability to raise capital to support its operations.
To date, the Company’s operations have not generated sufficient revenues to enable profitability. As of December 31, 2021, the Company had an accumulated deficit of $68.6 million, and incurred recurring losses from operations and incurred negative cash flows from operating activities. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These unaudited condensed consolidated financial statements do not include any adjustments relating to the realization of
7
the carrying value of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company's continuance as a going concern is dependent on its future profitability and on the on-going support of its shareholders, affiliates and creditors. In order to mitigate the going concern issues, the Company is actively pursuing business partnerships, managing its continuing operations, implementing cost-cutting measures and seeking to sell certain assets. The Company may not be successful in any of these efforts.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("US GAAP") requires management to make estimates and assumptions that impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For the purposes of reporting cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and highly liquid investments with original maturities of 90 days or less to be cash and cash equivalents. From time to time cash balances exceed federal insurance limits.
Restricted Cash
As of December 31, 2021 and June 30, 2021 restricted cash included approximately $256,000, which was pursuant to the requirements in the TD Bank Loan entered into June 2018 (see Note 6).
Foreign Currency Translation
The Company's functional currency is the US dollar. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Foreign currency transaction gains or losses included in net income (loss) were immaterial for the three and six months ended December 31, 2021 and 2020.
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 $115,000 and $100,000 as of December 31, 2021 and June 30, 2021, respectively.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis and include freight-in materials, labor and overhead costs. Inventories are written down if the estimated net realizable value is less than the recorded value. The Company reviews the carrying cost of inventories by product to determine the adequacy of reserves for obsolescence. In accounting for inventories, the Company must make estimates regarding the estimated realizable value of inventory. The estimate is based, in part, on the Company’s forecasts of future sales and age of inventory. If actual conditions are less favorable than those the Company has projected, the Company may need to increase its reserves for excess and obsolete inventories. Any increases in the reserves will adversely impact the Company’s results of operations. The establishment of a reserve for excess and obsolete inventory establishes a new cost basis in the inventory. Such reserves are not reduced until the product is sold. If the Company is able to sell such inventory any related reserves would be reversed in the period of sale. In accordance with industry practice, service parts inventory is included in current assets, although service parts
8
are carried for established requirements during the serviceable lives of the products and, therefore, not all parts are expected to be sold within one year.
Intangible Assets and Long-Lived Assets
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. For the three and six-month periods ended December 31, 2021 and 2021, no impairments were recorded.
Accrued Warranties
The Company provides a limited one-year warranty against manufacturer’s defects on its products sold to customers. The Company’s standard warranties require the Company to repair or replace, at the Company’s discretion, defective parts during such warranty period. The Company accrues for its product warranty liabilities based on estimates of costs to be incurred during the warranty period, based on historical repair information for warranty costs.
PPP Loans
The Company's policy is to account for the PPP loan (See Note 7) as debt. The Company will continue to record the loan as debt until either (1) the loan is partially or entirely forgiven and the Company has been legally released, at which point the amount forgiven will be recorded as income or (2) the Company pays off the loan. The full amount of the PPP loan and accrued interest were forgiven on August 13, 2021 and was included in other income in the unaudited condensed consolidated income statement for the six -month period ended December 31, 2021.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of their short-term maturity. The Company determined that the carrying amount of the notes payable and lease liabilities approximates fair value since such debt borrowing bears interest at the approximate current market rate. While the Company believes the carrying value of the assets and liabilities are reasonable, considerable judgment is used to develop estimates of fair value; thus the estimates are not necessarily indicative of the amounts that could be realized in a current market exchange.
Revenue Recognition
The Company recognizes revenue when its performance obligations with its customers have been satisfied. At contract inception, the Company determines if the contract is within the scope of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and then evaluates the contract using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period.
The Company generates product revenue from the sale of medical device products and the sale and installation of the Company's AXIS image management system software. Revenue for service plans relate to the customer care plans for the Company’s equipment and AXIS image management system software.
Revenue is recognized upon transfer of control of the promised goods or services to the customer for an amount that reflects the consideration that the Company expects to be entitled in exchange for those goods or services. The Company’s performance obligations are for product sales, installation of AXIS image management system software and customer care plans. The performance obligations are determined at contract inception based upon promises within the contract that are distinct.
The product sales and installation of AXIS image management system software performance obligations are satisfied at a point in time, which is upon shipment for product sales and upon successful installation for the AXIS image management
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system. The performance obligation for customer care plans is satisfied over time as the customer receives and consumes the Company’s services.
The Company invoices its customers upon shipment for product sales. For the installation of AXIS image management system software and customer care plans, the Company invoices its customers upon successful installation. Invoice payments are generally due within 30 days of invoice date. The transaction price is determined based on fixed consideration in the Company’s customer contracts and is recorded net of variable consideration. In determining the transaction price, a significant financing component does not exist since the timing from when the Company invoices its customers to when payment is received as it is less than one year.
Revenue for product sales and installation of AXIS image management system software is recognized when delivered or installed. The customer care plan revenues are recognized proportionately over the service period, which is a 12-month period.
The Company has elected the following practical expedients in applying ASC 606:
•Unsatisfied Performance Obligations - all performance obligations relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption provided in ASC 606 and therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
•Contract Costs - all incremental customer contract acquisition costs are expensed as they are incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less in duration.
•Significant Financing Component - the Company does not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
•Sales Tax Exclusion from the Transaction Price - the Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from the customer.
•Shipping and Handling Activities - the Company elected to account for shipping and handling activities as a fulfillment cost rather than as a separate performance obligation.
•Portfolio Approach - the Company applied the Portfolio Approach to contract reviews within its identified revenue streams that have similar characteristics and the Company believes this approach would not differ materially than if applying Topic 606 to each individual contract.
Deferred Revenues
The Company records deferred revenues when cash payments are received or due in advance of its performance. The Company’s deferred revenues relate to payments received for the customer care plans for a 12-month period. The consideration received is recognized monthly over the service period.
| (in thousands) | Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Beginning of Period | $ | 277 | $ | 467 | $ | 364 | $ | 516 | ||||||||||||||||||
| Additions | 213 | 346 | 321 | 527 | ||||||||||||||||||||||
| Revenue Recognized | 179 | 243 | 375 | 472 | ||||||||||||||||||||||
| End of Period | $ | 310 | $ | 571 | $ | 310 | $ | 571 | ||||||||||||||||||
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 December 31, 2021 and 2020, the average market prices for the for the three-month and six-month periods then ended are less than the exercise price of all the outstanding stock options and, therefore, the inclusion of the stock options
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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 periods ended December 31, 2021 and six-month period ended December 31, 2020. Therefore, basic and diluted loss per common share for the three-month period ended December 31, 2021 and six-month period ended December 31, 2020 are the same.
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Numerator for basic earnings (loss) per share: | |||||||||||||||||||||||
| Net (loss) income | $ | (53,154) | $ | 98,476 | $ | 264,066 | $ | (98,077) | |||||||||||||||
| Undeclared dividends on preferred stock | 13,006 | 13,006 | $ | 26,012 | 25,976 | ||||||||||||||||||
| Net (loss) income applicable to common shareholders | $ | (66,160) | $ | 85,470 | $ | 238,054 | $ | (124,053) | |||||||||||||||
| Numerator for diluted earnings per share: | |||||||||||||||||||||||
| Net (loss) income applicable to common shareholders | $ | (66,160) | $ | 85,470 | $ | 238,054 | $ | (124,053) | |||||||||||||||
| Undeclared dividends on preferred stock | — | 13,006 | 26,012 | — | |||||||||||||||||||
| Diluted (loss) earnings | $ | (66,160) | $ | 98,476 | $ | 264,066 | $ | (124,053) | |||||||||||||||
| Denominator for basic (loss) earnings per share | |||||||||||||||||||||||
| Denominator for basic (loss) earnings per share - weighted average shares outstanding | 7,415,329 | 7,415,329 | 7,415,329 | 7,415,329 | |||||||||||||||||||
| Weighted average preferred stock converted to common stock | — | 5,291,233 | 5,634,287 | — | |||||||||||||||||||
| Denominator for diluted (loss) earnings assumed conversion | 7,415,329 | 12,706,562 | 13,049,616 | 0 | 7,415,329 | ||||||||||||||||||
| Net (loss) income per share: | |||||||||||||||||||||||
| Basic net (loss) income per share | $ | (0.01) | $ | 0.01 | $ | 0.03 | $ | (0.02) | |||||||||||||||
| Diluted net (loss) income per share | $ | (0.01) | $ | 0.01 | $ | 0.02 | $ | (0.02) | |||||||||||||||
The following table summarizes convertible preferred stock and securities that, if exercised would have an anti-dilutive effect on earnings per share.
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| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Stock options | 157,000 | 157,000 | 157,000 | 157,000 | |||||||||||||||||||
| Convertible preferred stock | 5,634,287 | — | — | 5,291,233 | |||||||||||||||||||
| Total potential dilutive securities not included in income per share | 5,791,287 | 157,000 | 157,000 | 5,448,233 | |||||||||||||||||||
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 December 31, 2021 and June 30, 2021, 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 December 31, 2021 and June 30, 2021, no accrued interest or penalties were required to be included on the related tax liability line in the unaudited condensed consolidated balance sheets.
Leases
The Company determines if an arrangement is a lease at the inception of a contract. Operating lease right-of-use ("ROU") assets are included in right-of-use assets on the unaudited condensed consolidated balance sheets. The current and long-term components of operating lease liabilities are included in the current portion of operating lease liabilities and operating lease liabilities, net of current portion, respectively on the unaudited condensed consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Certain leases may include options to extend or terminate the lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded in the balance sheet.
New Accounting Pronouncements
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Recently Issued Accounting Standards
The Company considers the applicability and impact of all accounting standards updates ("ASUs"). Management periodically reviews new accounting standards that are issued.
New Accounting Pronouncements Not Yet Adopted
In June 2016 the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years and for interim periods with those fiscal years beginning after December 15, 2022. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact to the Company’s unaudited condensed consolidated financial statements.
4. Inventories
December 31, | June 30, | ||||||||||
| (in thousands) | 2021 | 2021 | |||||||||
| Inventories, net: | |||||||||||
| Raw Material | $ | 855 | 833 | ||||||||
| Work-In-Process | 117 | 171 | |||||||||
| Finished Goods | 824 | 773 | |||||||||
| Total inventories | $ | 1,796 | $ | 1,777 | |||||||
| Allowance for obsolete inventory | (350) | (360) | |||||||||
| Inventories, net | $ | 1,446 | $ | 1,417 | |||||||
5. Related Party Transactions and Preferred Stock
On February 14, 2018, the Company entered into a Debt Exchange Agreement (the “Exchange Agreement”) with Richard DePiano, Sr.,(Mr. DePiano Sr.), the Company's former Chairman and DP Associates Inc. Profit-Sharing Plan of which Mr. DePiano Sr. is the sole owner and sole trustee (the “Holders”). Pursuant to the terms of the Exchange Agreement, effective February 15, 2018, the Holders exchanged a total of $645,000 principal amount of debt related to the accounts receivable factoring program the Company owes the Holders for 2,000,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”).
Each share of Preferred Stock entitles the Holder thereof to 13 votes per share and will vote together with all other classes and series of stock of the Company as a single class on all actions to be taken by the Company’s stockholders. As a result of this voting power, the Holders as December 31, 2021 beneficially own approximately 77.81% of the voting power on all actions to be taken by the Company’s shareholders.
Subject to the terms and conditions of Preferred Stock, the holder of any share or shares of the Preferred Stock has the right, at its option at any time, to convert each such share of Preferred Stock (except that, upon any liquidation of the Company, the right of conversion will terminate at the close of business on the business day fixed for payment of the amounts distributable on the Preferred Stock) into 2.15 shares of Common Stock (the “Conversion Ratio”). The Conversion Ratio is subject to standard provisions for adjustment in the event of a subdivision or combination of the Company’s Common Stock and upon any reorganization or reclassification of the capital stock of the Company. If the Holders were to convert their shares of Preferred Stock into Common Stock at the Conversion Ratio the Holders would receive a total of 4,300,000 shares of Common Stock, or approximately 36.70% of the then outstanding shares of Common Stock assuming such conversion.
Each outstanding share of the Preferred Stock accrues dividends calculated cumulatively at the annual rate of $.0258 per share (such amount subject to equitable adjustment in the event of any stock dividend, stock split, combination, reclassification other similar event), payable upon the earlier of (i) a liquidation, dissolution or winding up of the Company or (ii) conversion of the Preferred Stock into Common Stock. Upon either of such events, all such accrued and unpaid dividends,
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whether or not earned or declared, to and until the date of such event, will become immediately due and payable and will be paid in full. The dividends payable to the holders of the Preferred Stock is payable in cash or, at the election of any such holder, in a number of additional shares of Common Stock equal to the amount of the dividend expressed in dollars divided by the then applicable Conversion Ratio, described above. As of December 31, and June 30, 2021 the cumulative dividends payable is $200,143 ($0.1001 per share) and $174,131 ($0.0871 per share), respectively.
Mr. DePiano Sr. passed away on October 3, 2019 and left a will by which he appointed Richard J. DePiano, Jr., the Chief Executive Officer of the Company, as executor. Richard DePiano Jr. was elected to serve as chairman of the Company's board. Mr. DePiano, Jr. qualified as executor and has control over the listed shares in his capacity as executor of Mr. DePiano Sr.'s estate.
6. Line of Credit
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 5.0% per annum. Interest on the unpaid principal balance of the note is calculated using a rate of 0.74 percentage points over the index, adjusted if necessary for any minimum and maximum rate limitations, resulting in an initial rate of 5.74% per annum based on a year of 360 days. The interest rate was 3.99% as of December 31, 2021. The Company was required to put $250,000 in the TD bank savings account as collateral. Mr. Richard J. DePiano Sr., former Chairman of the Company executed a guarantee of the loan in favor of TD Bank. Mr. DePiano Sr. passed away on October 3, 2019, therefore the guarantee is now assumed by his estate.
As of December 31, and June 30, 2021, the line of credit balance was $201,575 with TD bank. The line of credit interest expense was approximately $3,000 and $3,000 for the three months ended December 31, 2021 and 2020, respectively. The line of credit interest expense was approximately $5,000 and $6,000 for the six months ended December 31, 2021 and 2020, respectively. and 2020, respectively.
7. Long-term debt
Paycheck Protection Program ("PPP") loan
On April 27, 2020, the Company entered into a PPP loan for $500,000 in connection with the CARES Act related to COVID-19. The promissory note had a fixed payment schedule. The PPP loan was unsecured. A final payment for the unpaid principal and accrued interest was payable no later than two years after the funding date. The note bore interest at a rate of 1.00% per annum. The Company submitted the loan forgiveness application on August 2, 2021. The full amount of the PPP loan and accrued interest were forgiven on August 13, 2021 and was included in other income in the unaudited condensed consolidated statement of operations for the six-month period ended December 31, 2021.
Economic Injury Disaster ("EIDL") Loan
EIDL is designed to provide economic relief to businesses that are currently experiencing a temporary loss of revenue due to the Coronavirus (COVID-19) pandemic. EIDL proceeds can be used to cover a wide array of working capital and normal operating expenses, such as continuation to health care benefits, rent, utilities, and fixed debt payments. The Company received a $150,000 EIDL loan. The annual interest rate is 3.75%. The payment term is 30 years and the monthly payment of $731 started on July 1st, 2021. The EIDL loan is secured by the tangible and intangible personal property of the Company.
The future annual principal amounts to be paid as of December 31, 2021 are as follows:
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| Year ending June 30, | EIDL Loan Payment | ||||
| 2022(remainder of FY 2022) | $ | 2,157 | |||
| 2023 | 2,971 | ||||
| 2024 | 3,084 | ||||
| 2025 | 3,202 | ||||
| 2026 | 3,324 | ||||
| Thereafter | 139,439 | ||||
| Total | $ | 154,177 | |||
Other Long-term Liabilities
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 had deferred approximately $82,000 of the social security tax. 50% of the deferred employment taxes was paid before December 31, 2021. The remaining 50% is not due until December 31, 2022. Approximately $41,000 was reported as short-term other liabilities as of December 31, 2021.
8. Concentration of Credit Risk
Credit Risk
Financial Instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents, restricted cash and trade receivables. Concentration of credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across geographic areas principally within the United States and international. The Company routinely address the financial strength of its customer and, as a consequence, believes that its receivable credit risk exposure is limited. The Company does not require customers to post collateral.
Major Customer
One customer accounted for 12% of net sales during the three and six months ended December 31, 2021. One customer accounted for 18% and 19% of net sales during the three-month and six-month period ended December 31, 2020.
As of December 31, 2021 the Company had one customer that represented 21% of the total accounts receivable balance. As of June 30, 2021 the Company had one customer that represents 23% of the total accounts receivable balance.
Major Supplier
The Company's one largest supplier accounted for 49% of the total purchase for the three-month period ended December 31, 2021. The Company's two largest suppliers accounted for 41% and 11% of the total purchase for the six-month period ended December 31, 2021. The Company's two largest suppliers accounted for of total purchases for 41% and 12% of total purchase for the three-month period ended December 31, 2020.The Company's two largest suppliers accounted for of total purchases for 38% and 13% of total purchase for the six-month period ended December 31, 2020.
As of December 31, 2021 the Company had one supplier that represented 52% of the total accounts payable balance. As of June 30, 2021 the Company had two suppliers that represent approximately 39% and 12% of the total accounts payable balance.
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Disaggregated Revenue
Domestic and international sales from operations are as follows:
| ( in thousands) | For the Three Months Ended December 31, | For the Six Months Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Domestic | $ | 1,360 | 50.4 | % | $ | 1,865 | 64.4 | % | 2,985 | 56 | % | $ | 3,408 | 64.2 | % | ||||||||||||||||||||||||||||||||
| Foreign | 1,341 | 49.6 | % | 1,033 | 35.6 | % | 2,391 | 44 | % | 1,904 | 35.8 | % | |||||||||||||||||||||||||||||||||||
| Total | $ | 2,701 | 100.0 | % | $ | 2,898 | 100.0 | % | $ | 5,376 | 100 | % | $ | 5,312 | 100.0 | % | |||||||||||||||||||||||||||||||
9. Leases
The Company leases certain facilities and equipment under operating leases. Total lease expense, under ASC 842, was included in cost of goods sold and marketing, general and administrative costs in our unaudited condensed consolidated statements of operations for the three and six months ended December 31, 2021 and 2020 as follows:
| Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Operating lease costs: | |||||||||||||||||||||||
| Fixed | $ | 84,245 | $ | 84,245 | $ | 168,490 | $ | 178,106 | |||||||||||||||
| Total: | $ | 84,245 | $ | 84,245 | $ | 168,490 | $ | 178,106 | |||||||||||||||
Supplemental cash flow information was as follows:
| Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | |||||||||||||||||||||||
| Operating cash flows for operating leases | $ | 83,788 | $ | 81,007 | $ | 166,178 | $ | 170,807 | |||||||||||||||
| Total | $ | 83,788 | $ | 81,007 | $ | 166,178 | $ | 170,807 | |||||||||||||||
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate)
under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized on the unaudited condensed consolidated balance sheets as of December 31, 2021:
| Operating | ||||||||
| 2022 (remainder of FY 2022) | $ | 155,350 | ||||||
| 2023 | 263,162 | |||||||
| 2024 | 268,372 | |||||||
| 2025 | 141,865 | |||||||
| 2026 | 2,728 | |||||||
| Total lease payments | 831,477 | |||||||
| Less interest | 65,030 | |||||||
| Present value of lease liabilities | $ | 766,447 | ||||||
Average lease terms and discount rates were as follows:
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| December 31, | June 30, | |||||||||||||
| 2021 | 2021 | |||||||||||||
| Weighted-average remaining lease terms (years) | ||||||||||||||
Operating leases | 2.95 | 3.35 | ||||||||||||
| Weighted-average discount rate | ||||||||||||||
Operating leases | 5.65 | % | 5.65 | % | ||||||||||
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, information security, cybersecurity and data privacy risks, 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, inflation, and other risks described in the Company's Form 10-K for the fiscal year ended June 30, 2021. 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, 2021 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, 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.
•Consolidated net revenue increased approximately $64,000 or 1.2%, to $5,376,000 during the six months ended December 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 $538,000 offset by a decrease in Trek revenue of $352,000 and a decrease in service plans revenue of $98,000, and a decrease in sales of AXIS products of $24,000.
•Consolidated cost of goods sold totaled approximately $3,203,000, or 59.6%, of total revenue for the six months ended December 31, 2021, as compared to $3,170,000, or 59.7%, of total revenue of the same period of last fiscal year. The decrease of 0.1% 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 increased $78,000, or 4.4%, to $1,854,000 for the six months ended December 31, 2021, as compared to the same period of last fiscal year. The increase in marketing, general and administrate expenses is mainly due to increased trade show and travel expense, bad debts expense, and network expense, offset by the decreased office rent expense.
•Consolidated research and development expenses increased $98,000, or 21.6%, to $552,000 for the six months ended December 31, 2021, as compared to the same period of last fiscal year. Research and development expenses were
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primarily expenses associated with the introduction of new or enhanced products. The increase in research and development expense is mainly due to increased consulting expense during the six months ended December 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 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, 2021, as well as Note 3 to our unaudited condensed consolidated financial statements for the three and six months ended December 31, 2021.
During the three and six months ended December 31, 2021, there were no significant changes in our accounting policies and estimates to our unaudited condensed consolidated financial statements.
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Results of Operations
Three and Six Months Ended December 31, 2021 and 2020
The following table shows consolidated net revenue, as well as identifying trends in revenues for the three and six months ended December 31, 2021 and 2020. Table amounts are in thousands:
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| Net Revenue: | |||||||||||||||||||||||||||||||||||
| Products | $ | 2,522 | $ | 2,655 | (5.0) | % | $ | 5,001 | $ | 4,840 | 3.3 | % | |||||||||||||||||||||||
| Service plans | 179 | 243 | (26.3) | % | 375 | 472 | (20.6) | % | |||||||||||||||||||||||||||
| Total | $ | 2,701 | $ | 2,898 | (6.8) | % | $ | 5,376 | $ | 5,312 | 1.2 | % | |||||||||||||||||||||||
Consolidated net revenue decreased approximately $197,000 or 6.8%, to $2,701,000 during the three months ended December 31, 2021 as compared to the same period of last fiscal year. The decrease in net revenue is attributed to a decrease in sales in Trek revenue of $206,000, a decrease in sales of AXIS products of $34,000, and a decrease in service plans revenue of $63,000 offset by an increase in Sonomed's ultrasound products of $106,000.
Consolidated net revenue increased approximately $64,000 or 1.2%, to $5,376,000 during the six months ended December 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 $538,000 offset by a decrease in Trek revenue of $352,000 and a decrease in service plans revenue of $98,000, and a decrease in sales of AXIS products of $24,000.
The following table presents the domestic and foreign sales for the three and six months ended December 31, 2021 and 2020. The table amounts are in thousands:
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Domestic | $ | 1,360 | 50.4 | % | $ | 1,865 | 64.4 | % | $ | 2,985 | 55.5 | % | $ | 3,408 | 64.2 | % | |||||||||||||||||||||||||||||||
| Foreign | 1,341 | 49.6 | % | 1,033 | 35.6 | % | 2,391 | 44.5 | % | 1,904 | 35.8 | % | |||||||||||||||||||||||||||||||||||
| Total | $ | 2,701 | 100.0 | % | $ | 2,898 | 100.0 | % | $ | 5,376 | 100.0 | % | $ | 5,312 | 100.0 | % | |||||||||||||||||||||||||||||||
The following table presents consolidated cost of goods sold and as a percentage of revenues for the three and six months ended December 31, 2021 and 2020. Table amounts are in thousands:
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | % | 2020 | % | 2021 | % | 2020 | % | ||||||||||||||||||||||||||||||||||||||||
| Cost of Goods Sold: | |||||||||||||||||||||||||||||||||||||||||||||||
| $ | 1,540 | 57.0 | % | $ | 1,666 | 57.5 | % | 3,203 | 59.6 | % | 3,170 | 59.7 | % | ||||||||||||||||||||||||||||||||||
| Total | $ | 1,540 | 57.0 | % | $ | 1,666 | 57.5 | % | 3,203 | 59.6 | % | 3,170 | 59.7 | % | |||||||||||||||||||||||||||||||||
Consolidated cost of goods sold totaled approximately $1,540,000, or 57.0%, of total revenue for the three months ended December 31, 2021, as compared to $1,666,000, or 57.5%, of total revenue of the same period of last fiscal year. The decrease of 0.5% 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 $3,203,000, or 59.6%, of total revenue for the six months ended December 31, 2021, as compared to $3,170,000, or 59.7%, of total revenue of the same period of last fiscal year. The decrease of 0.1% 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 and six months ended December 31, 2021 and 2020. Table amounts are in thousands:
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| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| Marketing, General and Administrative: | |||||||||||||||||||||||||||||||||||
| $ | 950 | $ | 884 | 7.5 | % | 1,854 | 1,776 | 4.4 | % | ||||||||||||||||||||||||||
| Total | $ | 950 | $ | 884 | 7.5 | % | 1,854 | 1,776 | 4.4 | % | |||||||||||||||||||||||||
Consolidated marketing, general and administrative expenses increased $66,000, or 7.5%, to $950,000 for the three months ended December 31, 2021, as compared to the same period of last fiscal year. The increase in marketing, general and administrate expenses is mainly due to increased trade show and travel expense, offset by the decreased office rent expense.
Consolidated marketing, general and administrative expenses increased $78,000, or 4.4%, to $1,854,000 for the six months ended December 31, 2021, as compared to the same period of last fiscal year. The increase in marketing, general and administrate expenses is mainly due to increased trade show and travel expense, bad debts expense, and network expense, offset by the decreased office rent expense.
The following table presents consolidated research and development expenses for the three and six months ended December 31, 2021 and 2020.
Table amounts are in thousands:
| For the Six Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| Research and Development: | |||||||||||||||||||||||||||||||||||
| $ | 260 | $ | 245 | 6.1 | % | 552 | $ | 454 | 21.6 | % | |||||||||||||||||||||||||
| Total | $ | 260 | $ | 245 | 6.1 | % | $ | 552 | $ | 454 | 21.6 | % | |||||||||||||||||||||||
Consolidated research and development expenses increased $15,000, or 6.1%, to $260,000 for the three months ended December 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 increase in research and development expense is mainly due to increased consulting expense during the three months ended December 31, 2021.
Consolidated research and development expenses increased $98,000, or 21.6%, to $552,000 for the six months ended December 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 increase in research and development expense is mainly due to increased consulting expense during the six months ended December 31, 2021.
Other income (expense)
On April 27, 2020, the Company entered into a PPP loan for $500,000 in connection with the CARES Act related to COVID-19. 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 Company submitted the loan forgiveness application on August 2, 2021. The full amount of the PPP loan and accrued interest of $6,305 were forgiven on August 13, 2021 and reported as other income during the six-month period ended December 31, 2021.
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 was able to maintain operations during the lockdown. However, the Company does not know the extent and duration of the impact of COVID-19 on its business due to the uncertainty about the spread of the virus.
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Liquidity and Capital Resources
Our total cash on hand as of December 31, 2021 was approximately $1,066,000 excluding restricted cash of approximately $256,000 compared to approximately $1,651,000 of cash on hand and restricted cash of $256,000 as of June 30, 2021. Approximately $48,000 was available under our line of credit as of December 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 December 31, 2021 we had an accumulated deficit of approximately $68.6 million, incurred recurring losses from operations and negative cash flows from operating activities. These factors raise substantial doubt regarding our ability to continue as a going concern, and our ability to generate cash to meet our cash requirements for the following twelve months as of the date of this form 10-Q.
The following table presents overall liquidity and capital resources as of December 31, 2021 and June 30, 2021. Table amounts are in thousands:
| December 31, | June 30, | |||||||||||||
| 2021 | 2021 | |||||||||||||
| Current Ratio: | ||||||||||||||
| Current assets | $4,311 | $4,593 | ||||||||||||
| Less: Current liabilities | 2,841 | 3,397 | ||||||||||||
| Working capital | $1,470 | $1,196 | ||||||||||||
| Current ratio | 1.52 to 1 | 1.35 to 1 | ||||||||||||
| Debt to Total Capital Ratio: | ||||||||||||||
| Line of credit, note payable, lease liabilities, and EIDL loan | $1,132 | $1,772 | ||||||||||||
| Total debt | 1,132 | 1,772 | ||||||||||||
| Total equity | 1,724 | 1,460 | ||||||||||||
| Total capital | $2,856 | $3,232 | ||||||||||||
| Total debt to total capital | 39.6% | 54.8% | ||||||||||||
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Working Capital Position
Working capital increased approximately $274,000 as of December 31, 2021, and the current ratio increased to 1.52 to 1 from 1.35 to 1 when compared to June 30, 2021. The increase in working capital is due to a decrease in current liabilities of $556,000 during the quarter ended December 31, 2021, offset by a decrease in current assets of $282,000. The PPP loan forgiveness mainly contributes to the decrease of the current liabilities.
Debt to total capital ratio was 39.6% and 54.8% as of December 31, 2021 and June 30, 2021, respectively. The decrease of debt to total capital ratio is also due to the PPP loan forgiveness.
Cash Flow Used in (Provided By) Operating Activities
During the six months ended December 31, 2021 the Company used approximately $581,000 of cash in operating activities as compared to cash of approximately $717,000 provided by operating activities during the six months ended December 31, 2021.
For the six months ended December 31, 2021, its cash used in operations is mainly due to increase in accounts receivable of approximately 268,000, a decrease in deferred revenue of $54,000, a decrease in accounts payable of $53,000, a repayment of employer tax deferral of 54,000, and decrease in operating liabilities of $143,000 offset by an increase in accrued expense of $96,000. The remaining offsetting items for cash provided by operations is comprised of less significant items.
For the six months ended December 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.
Cash Flows used in Investing Activities
Cash flows used in investing activities for the six -month period ended December 31, 2020 was due to the purchase of equipment of $9,000 for the six-month period ended December 31, 2020.
Cash Flows Used in Financing Activities
For the six months ended December 31, 2021 the cash used in financing activities was due to auto loan payment of employer $2,000 and repayment of EIDL loan of $1,000. For the six months ended December 31, 2020 the cash used in financing activities of $2,000 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 5.00% as of December 31, 2021. The Company was required to put $250,000 in the TD bank savings account as collateral.
As of December 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 $3,000 for the three months ended December 31, 2021 and 2020, respectively. The line of credit interest expense was approximately $5,000 and $6,000 for the six months ended December 31, 2021 and 2020, 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. The promissory note had a fixed payment schedule. The PPP loan was unsecured. A final payment for the unpaid principal and accrued interest was payable no later than two years after the funding date. The note bore interest at a rate of 1.00% per annum. The full amount of the PPP loan and accrued interest were forgiven on August 13, 2021 and reported as other income during the six-month period ended December 31, 2021.
Economic Injury Disaster Loan ("EIDL")
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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 started 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. 50% of the deferred employment taxes was paid before December 31, 2021. The remaining 50% is not due until December 31, 2022. Approximately $41,000 was reported as short-term other liabilities as of December 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 six-month periods ended December 31, 2021 and 2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
Item 4. Controls and Procedures
(A) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Principal Financial and Accounting Officer, have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company's financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2021, the Chief Executive Officer and Principal Financial and Accounting Officer of the Company have concluded that such disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its Chief Executive Officer and Principal Financial and Accounting Officer, to allow timely decisions regarding required disclosure.
(B) Internal Control over Financial Reporting
There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act), during the second quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Part II. OTHER INFORMATION
Item 6. Exhibits
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Escalon Medical Corp. | ||||||||||||||
| (Registrant) | ||||||||||||||
| Date: February 14, 2022 | By: | /s/ Richard J. DePiano, Jr. | ||||||||||||
| Richard J. DePiano, Jr. | ||||||||||||||
| Chief Executive Officer | ||||||||||||||
| Date: February 14, 2022 | By: | /s/ Mark Wallace | ||||||||||||
| Mark Wallace | ||||||||||||||
| Chief Operating Officer and Principal Accounting & Financial Officer | ||||||||||||||
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