Escalon Medical Corp 10-Q for FY2024 Q2
Escalon Medical Corp (ESMC)
10-Q
2024-02-14
For: 2023-12-31
View Original
Added on
April 06, 2026
About this 10-Q
Escalon Medical Corp filed this 10-Q on February 14, 2024, covering the quarter ended December 31, 2023 (FY2024 Q2).
Headline figures
Quarter ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.87M
- down 4.5% from $3.01M a year earlier
- Net loss
- $76.32K
- compared with a net loss of $6043 a year earlier
- Diluted EPS
- -$0.01
- compared with $0.00 a year earlier
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, 2023
Commission File Number 0-20127
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices, including zip code)
(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 | |||||||||||||||||
x | x | |||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. o
If securities are registered pursuant to Section 12 (b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
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 13, 2024.
TABLE OF CONTENTS
| Page | ||||||||
PART I Financial Information | ||||||||
| Item I. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
PART II Other Information | ||||||||
| Item 6. | ||||||||
1
PART I. FINANCIAL INFORMATION
Item I. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
2023 | June 30, 2023 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Accounts receivable | |||||||||||
| Less: allowance for credit losses | ( | ( | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Right-of-use assets | |||||||||||
| License and patent, net | |||||||||||
| Other long term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of note payable | $ | $ | |||||||||
| Current portion of EIDL loan | |||||||||||
| Accounts payable | |||||||||||
| Accrued expenses | |||||||||||
| Related party accrued interest | |||||||||||
Current portion of operating lease liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Other short-term liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Note payable, net of current portion | |||||||||||
| EIDL loan, net of current portion | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Total long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Contingencies (Note 10) | |||||||||||
| 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 $948,061 and $922,331) | |||||||||||
| Common stock, $0.001 par value; 35,000,000 shares authorized; 7,415,329 shares issued and outstanding | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
3
| 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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
| Products | $ | $ | $ | $ | |||||||||||||||||||
| Service plans | |||||||||||||||||||||||
| Revenues, net | |||||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Marketing, general and administrative | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
Total costs and expenses | |||||||||||||||||||||||
| (Loss) income from operations | ( | ( | ( | ||||||||||||||||||||
| Other expense | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Total other expense | ( | ( | ( | ( | |||||||||||||||||||
| Income tax expense | $ | $ | $ | ||||||||||||||||||||
| Net loss | ( | ( | ( | ( | |||||||||||||||||||
| Undeclared dividends on preferred stocks | |||||||||||||||||||||||
| Net loss applicable to common shareholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share | |||||||||||||||||||||||
| Basic loss per share | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
| Diluted loss per share | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
| Weighted average shares—basic | |||||||||||||||||||||||
| Weighted average shares—diluted | |||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
4
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2023 AND 2022
(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, 2023 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | ( | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | ( | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
5
| ESCALON MEDICAL CORP. AND SUBSIDIARIES | |||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| (UNAUDITED) | |||||||||||
| For the Six Months Ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Change in allowance of doubtful accounts | |||||||||||
Depreciation and amortization | |||||||||||
Non cash lease expense | |||||||||||
Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventories | ( | ||||||||||
| Other current and non-current assets | |||||||||||
| Accounts payable | ( | ||||||||||
Accrued expenses | ( | ||||||||||
Change in operating lease liability | ( | ( | |||||||||
| Deferred revenue | ( | ( | |||||||||
| Other short term and long term liabilities | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Purchase of equipment | ( | ||||||||||
| Purchase of patents | ( | ||||||||||
Net cash used in investing activities | ( | ( | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Repayment of note payable | ( | ( | |||||||||
| Repayment of EIDL loan | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash and restricted cash, beginning of period | |||||||||||
| Cash and restricted cash, end of period | $ | $ | |||||||||
| Cash, cash equivalents and restricted cash consist of the following: | |||||||||||
| End of period | |||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
| $ | $ | ||||||||||
6
| Beginning of period | |||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
| $ | $ | ||||||||||
| Supplemental Schedule of Cash Flow Information: | |||||||||||
| Interest paid | $ | $ | |||||||||
See notes to unaudited condensed consolidated financial statements
7
Escalon Medical Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Basis of Presentation
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 accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and have been consistently applied. Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP, but which are not required for interim reporting purposes, have been omitted. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position as of December 31, 2023 , and the results of operations and cash flows for the interim periods ended December 31, 2023 and 2022, have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2023 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on October 13, 2023. Operating results for the three months and six months ended December 31, 2023 are not necessarily indicative of the results that may be expected for the full year ending June 30, 2024.
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 consistent profitability. Through December 31, 2023 , the Company had incurred historical 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 for the next 12 months following the issuance of these unaudited condensed consolidated financial statements.
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 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, and implementing cost-cutting measures. The Company may not be successful in any of these efforts.
3. Summary of Accounting Policies
Recently Issued Accounting Standards
8
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASC 326”), authoritative guidance amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2022. The adoption of the new guidance will not have a material impact on the Company's unaudited consolidated financial statements. The Company adopted the current expected credit loss model prospectively from fiscal year 2024, and assessed the allowance for expected credit losses to reflect the risk of loss, even when that risk is remote. The Company continues to use the aging matrix in conjunction with the historical information, current conditions, and reasonable and supportable forecasts. The Company groups most of the trade receivable by pools after adoption of the new standards while it analyzed the credit loss of the trade receivables one by one before adoption. The major difference is the estimate of the current expected credit loss for the receivable that are current on their payment. For the six-month period ended December 31, 2023, the adoption of the new guidance did not have a material impact on the Company's unaudited consolidated financial statements. The Company will continue to assess the current expected credit loss. It may need to recognize a credit loss in the income statement earlier than under the legacy guidance at certain times when the expected credit loss is increased.
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.
Accounts Receivable and Allowance for Credit Losses
Accounts receivables 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 adopted the current expected credit loss model prospectively from fiscal year 2024, and assessed the allowance for expected credit losses to reflect the risk of loss, even when that risk is remote. The Company continues to use the aging matrix in conjunction with the historical information, current conditions and reasonable and supportable forecasts. The Company groups most of the trade receivable by pools after adoption of the new standards while it analyzed the credit loss of the trade receivables one by one before adoption. The major difference is the estimate of the current expected credit loss for the receivables that are current on their payment. With adoption of the new standards, the small credit loss rate applied to current receivables will be mostly offset by the lower expected credit rate applied to over 120 days past due when less than 100% of expected credit loss is applied. The historical credit loss rate is adjusted for current conditions and management's assessment for factors such as international relations, economic conditions, and special-term contracts etc. For the six-month period ended December 31, 2023, the adoption of the new guidance did not have a material impact on the Company's unaudited consolidated financial statements. The Company will continue to assess the current expected credit loss. It may need to recognize a credit loss in the income statement earlier than under the legacy guidance at certain time when the expected credit loss is increased. The Company recorded an allowance for credit losses of approximately $133,524 and $153,878 as of December 31, 2023 , and June 30, 2023, respectively.
The activity for the allowance for credit losses during the three-month and six-month periods ended December 31, 2023 , and the fiscal year ended June 30, 2023, is as follows:
| Three months Ended December 31, | Six months Ended December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Balance, at the beginning of the period | $ | $ | $ | $ | |||||||||||||||||||
| Provision (Reversal) | ( | ||||||||||||||||||||||
| Write-offs | |||||||||||||||||||||||
| Balance, at the end of the period | $ | $ | $ | $ | |||||||||||||||||||
Inventories
9
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. Revenue recorded that was included within prior period deferred revenue was $162,000 and $152,000 , respectively for the three-month periods ended December 31, 2023 and 2022. Revenue recorded that was included within prior period deferred revenue was $386,000 and $314,000 , respectively for six month periods ended December 31, 2023 , and 2022.
| (in thousands) | Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||
| Beginning of Period | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Additions | ||||||||||||||||||||||||||||||||||||||
| Revenue Recognized | ||||||||||||||||||||||||||||||||||||||
| End of Period | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Earnings (loss) Per Share
Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current period earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the period’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses.
Diluted net income per common share is computed under the two-class method by using the weighted average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options. The Company analyzed the potential dilutive effect of any outstanding dilutive securities under the “if-converted” method and treasury-stock method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stock at the beginning of the period or date of issuance, if later. The Company reports the more dilutive of the approaches (two-class or “if-converted”) as its diluted net income per share during the period. As of December 31, 2023 and 2022, the average market prices for the years then ended are less than the exercise price of all the outstanding stock options and, therefore, the inclusion of the stock options would be anti-dilutive.
10
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||||||||||||||
| Numerator for basic loss per share: | |||||||||||||||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Undeclared dividends on preferred stock | |||||||||||||||||||||||||||||||||||
| Net loss applicable to common shareholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Numerator for diluted loss per share: | |||||||||||||||||||||||||||||||||||
| Diluted loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Undeclared dividends on preferred stock | |||||||||||||||||||||||||||||||||||
| Net loss applicable to common shareholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Denominator for basic loss per share | |||||||||||||||||||||||||||||||||||
| Denominator for basic loss per share - weighted average shares outstanding | |||||||||||||||||||||||||||||||||||
| Weighted average preferred stock converted to common stock | |||||||||||||||||||||||||||||||||||
| Denominator for diluted (loss) assumed conversion | |||||||||||||||||||||||||||||||||||
| Net loss per share: | |||||||||||||||||||||||||||||||||||
| Basic net loss per share | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||
| Diluted net loss per share | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||
The following table summarizes convertible preferred stock and securities that, if exercised would have an anti-dilutive effect on earnings per share.
11
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
| Stock options | |||||||||||||||||||||||||||||||||||
| Convertible preferred stock | |||||||||||||||||||||||||||||||||||
| Total potential dilutive securities not included in loss per share | |||||||||||||||||||||||||||||||||||
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 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, 2023 and June 30, 2023, the Company has recorded a full 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 consolidated statements of operations. As of December 31, 2023, and June 30, 2023, no accrued interest or penalties were required to be included on the related tax liability line in the consolidated balance sheets.
4. Inventories
December 31, | June 30, | ||||||||||
| (in thousands) | 2023 | 2023 | |||||||||
| Inventories: | |||||||||||
| Raw Material | $ | $ | |||||||||
| Work-In-Process | |||||||||||
| Finished Goods | |||||||||||
| Total inventories | $ | $ | |||||||||
| Allowance for obsolete inventory | ( | ( | |||||||||
| Inventories, net | $ | $ | |||||||||
5. Related Party Transactions and Preferred Stock
As of December 31, 2023, and 2022, the related party interest accrual of $112,389 related to the debt prior to the exchange, remained as an on demanded payable.
12
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 of December 31, 2023 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, 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, 2023 , and June 30, 2023, the cumulative dividends payable are $303,061 ($0.1515 per share) and $277,331 ($0.1387 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. TD Note Payable
TD bank elected to exercise the term note conversion option to convert the loan balance of $201,575 to a five-year term note effective March 29, 2023 the "Conversion Date"). The scheduled monthly principal and interest payments in the amount of $4,247 began on April 29, 2023. Commencing on the Conversion Date, the aggregate principal balance outstanding bears interest at a fixed per annum rate of 9.49 % pursuant to the loan's terms and conditions.
The future note payable payments as of December 31, 2023 are as follows:
Year ending June 30, | TD Note Payment | ||||
2024 (remainder of FY 2024) | |||||
2025 | |||||
13
2026 | |||||
| 2027 | |||||
| 2028 | |||||
Total | $ | ||||
7. Long-term debt
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 a $150,000 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.
| Year ending June 30, | EIDL Payment | ||||
| 2024 (remainder of FY 2024) | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total | $ | ||||
8. Concentration of Credit Risk
Credit Risk
Financial instruments, which potentially subject the Company to the 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 addresses 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
Two customers accounted for 14 % and 11 % of net revenue during the three-month period ended December 31, 2023 . One customer accounted for 11 % of net revenue during the six-month period ended December 31, 2023 . One customer accounted for 12 % and 11 % during the three-month period ended December 31, 2022. One customer accounted for 11% of net revenue during the six-month period ended December 31, 2022.
As of December 31, 2023 , the Company had three customers that represented 16%, 13 %, and 11% of the total accounts receivable balance. As of June 30, 2023, the Company had one customer that represents 24 % of the total accounts receivable balance.
Major Supplier
14
The Company's one largest supplier accounted for 47 % of total purchases for the three-month period ended December 31, 2023 . The Company's one largest supplier accounted for 43% of total purchases for the six-month period ended December 31, 2023 . The Company's two largest suppliers accounted for 49 % and 12% of total purchases for the three-month period ended December 31, 2022. The Company's two largest suppliers accounted for 44% and 10% of total purchases for the six-month period ended December 31, 2022.
As of December 31, 2023 , the Company had one suppliers that represented 39 % of the total accounts payable balance. As of June 30, 2023, the Company had two suppliers that represent approximately 36 % and 11 % of the total accounts payable balance.
Disaggregated Revenue
| (in thousands) | For the Three Months Ended December 31, | For the Six Months Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Domestic | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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, 2023 , and 2022 as follows:
| Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Operating lease costs: | ||||||||||||||||||||||||||
| Fixed | $ | $ | $ | $ | ||||||||||||||||||||||
| Total: | $ | $ | $ | $ | ||||||||||||||||||||||
Supplemental cash flow information was as follows:
| Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | |||||||||||||||||||||||||||||||||||
| Operating cash flows for operating leases | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
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, 2023 :
15
| Operating | ||||||||
| 2024 (reminder of FY 2023) | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less interest | ||||||||
| Present value of lease liabilities | $ | |||||||
Average lease terms and discount rates were as follows:
| December 31, | June 30, | |||||||||||||
| 2023 | 2023 | |||||||||||||
| Weighted-average remaining lease terms (years) | ||||||||||||||
Operating leases | ||||||||||||||
| Weighted-average discount rate | ||||||||||||||
Operating leases | % | % | ||||||||||||
10. Contingencies
The Company, from time to time is involved in various legal proceedings and disputes that arise in the normal course of business. These matters have included intellectual property disputes, contract disputes, employment disputes and other matters. The Company does not believe that the resolution of any of these matters has had or is likely to have a material adverse impact on the Company’s business, financial condition or results of operations.
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, the ability to continue as a going concern including the ability to raise capital, manage operations and pursue business partnerships and cost-cutting measures, and the other risks described in the Company's Form 10-K for the fiscal year ended June 30, 2023. 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, 2023 and this Form 10-Q quarterly report to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions.
16
Executive Overview—six-month periods ended December 31, 2023, and 2022
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 $204,000 or 3.6%, to $5,814,000 during the six months ended December 31, 2023 , as compared to the same period of last fiscal year. The increase in net revenue is mainly attributed to an increase in sales of Sonomed's ultrasound products of $234,000 during the six months ended December 31, 2023 .
•Consolidated cost of goods sold totaled approximately $3,257,000, or 56.0%, of total revenue for the six months ended December 31, 2023 , as compared to $3,301,000, or 58.8%, of total revenue of the same period of last fiscal year. The decrease of 2.8% in cost of goods sold as a percentage of total revenue is mainly due to changes in product sales mix and geographic differences during the six months ended December 31, 2023 .
•Consolidated marketing, general and administrative expenses increased $114,000, or 5.3%, to $2,284,000 for the six months ended December 31, 2023 , as compared to the same period of last fiscal year. The increase in marketing, general and administrative expenses is mainly due to temporary hiring costs, increased network expenses and travel expenses during the six months ended December 31, 2023 .
•Consolidated research and development expenses decreased $96,000, or 21.1%, to $360,000 for the six months ended December 31, 2023 , 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 expenses is mainly due to decreased image management consulting expense during the six months ended December 31, 2023 .
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, 2023.
During the six months ended December 31, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses, however there were no significant impact and no changes in our significant accounting policies and estimates to our unaudited condensed consolidated financial statements.
17
Results of Operations
Three Months and Six Months Ended December 31, 2023, and 2022
The following table shows consolidated net revenue, as well as identifying trends in revenues for the three months and six months ended December 31, 2023, and 2022. Table amounts are in thousands:
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Products | $ | 2,734 | $ | 2,854 | (4.2) | % | $ | 5,534 | $ | 5,297 | 4.5 | % | |||||||||||||||||||||||||||||||||||||||||
| Service plans | 135 | 151 | (10.6) | % | 280 | 313 | (10.5) | % | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 2,869 | $ | 3,005 | (4.5) | % | $ | 5,814 | $ | 5,610 | 3.6 | % | |||||||||||||||||||||||||||||||||||||||||
Consolidated net revenue decreased approximately $136,000 or 4.5%, to $2,869,000 during the three months ended December 31, 2023, as compared to the same period of last fiscal year. The decrease in net revenue is mainly attributed to a decrease in sales of Sonomed's ultrasound products of $115,000 during the three months ended December 31, 2023.
Consolidated net revenue increased approximately $204,000 or 3.6%, to $5,814,000 during the six months ended December 31, 2023, as compared to the same period of last fiscal year. The increase in net revenue is mainly attributed to an increase in sales of Sonomed's ultrasound products of $234,000 during the six months ended December 31, 2023.
The following table presents the domestic and foreign sales for the three months and six months ended December 31, 2023, and 2022. The table amounts are in thousands:
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Domestic | $ | 1,536 | 53.5 | % | $ | 1,734 | 57.7 | % | $ | 3,059 | 52.6 | % | $ | 3,354 | 59.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign | 1,333 | 46.5 | % | 1,271 | 42.3 | % | 2,755 | 47.4 | % | 2,256 | 40.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 2,869 | 100.0 | % | $ | 3,005 | 100.0 | % | $ | 5,814 | 100.0 | % | $ | 5,610 | 100.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
The following table presents consolidated cost of goods sold and as a percentage of revenues for the three months and six months ended December 31, 2023, and 2022. Table amounts are in thousands:
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | % | 2022 | % | 2023 | % | 2022 | % | ||||||||||||||||||||||||||||||||||||||||
| Cost of Goods Sold: | |||||||||||||||||||||||||||||||||||||||||||||||
| $ | 1,608 | 56.0 | % | $ | 1,752 | 58.3 | % | 3,257 | 56.0 | % | 3,301 | 58.8 | % | ||||||||||||||||||||||||||||||||||
| Total | $ | 1,608 | 56.0 | % | $ | 1,752 | 58.3 | % | 3,257 | 56.0 | % | 3,301 | 58.8 | % | |||||||||||||||||||||||||||||||||
Consolidated cost of goods sold totaled approximately $1,608,000, or 56.0%, of total revenue for the three months ended December 31, 2023, as compared to $1,752,000, or 58.3%, of total revenue of the same period of last fiscal year. The decrease of 2.3% in the cost of goods sold as a percentage of total revenue is mainly due to changes in product sales mix and geographic differences during the three months ended December 31, 2023.
Consolidated cost of goods sold totaled approximately $3,257,000, or 56.0%, of total revenue for the six months ended December 31, 2023, as compared to $3,301,000, or 58.8%, of total revenue of the same period of last fiscal year. The decrease of 2.8% in the cost of goods sold as a percentage of total revenue is mainly due to changes in product sales mix and geographic differences during the six months ended December 31, 2023.
18
The following table presents consolidated marketing, general and administrative expenses for three months and six months ended December 31, 2023, and 2022. Table amounts are in thousands:
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||||||||||||||||||||
| Marketing, General and Administrative: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 1,184 | $ | 1,062 | 11.5 | % | $ | 2,284 | $ | 2,170 | 5.3 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,184 | $ | 1,062 | 11.5 | % | $ | 2,284 | $ | 2,170 | 5.3 | % | |||||||||||||||||||||||||||||||||||||||||
Consolidated marketing, general and administrative expenses increased $122,000, or 11.5%, to $1,184,000 for the three months ended December 31, 2023, as compared to the same period of last fiscal year. The increase in marketing, general and administrative expenses is mainly due to temporary hiring costs, and increased network expenses during the three months ended December 31, 2023.
Consolidated marketing, general and administrative expenses increased $114,000, or 5.3%, to $2,284,000 for the six months ended December 31, 2023, as compared to the same period of last fiscal year. The increase in marketing, general and administrative expenses is mainly due to temporary hiring costs, increased network expenses and travel expenses during the six months ended December 31, 2023.
The following table presents consolidated research and development expenses for the three months and six months ended December 31, 2023, and 2022.
Table amounts are in thousands:
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||||||||||||||||||||
| Research and Development: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 148 | $ | 191 | (22.5) | % | 360 | $ | 456 | (21.1) | % | |||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 148 | $ | 191 | (22.5) | % | $ | 360 | $ | 456 | (21.1) | % | |||||||||||||||||||||||||||||||||||||||||
Consolidated research and development expenses decreased $43,000, or 22.5%, to $148,000 for the three months ended December 31, 2023, 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 expenses is mainly due to decreased image management consulting expenses offset by the increased current year's new consulting services designing the housing and mechanical inner parts of probes during the three months ended December 31, 2023.
Consolidated research and development expenses decreased $96,000, or 21.1%, to $360,000 for the six months ended December 31, 2023, 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 expenses is mainly due to decreased image management consulting expense during the six months ended December 31, 2023.
Russia-Ukraine War
In February 2022, Russia invaded Ukraine. As military activity proceeds and sanctions, export controls and other measures are imposed by many countries against Russia, Belarus and specific areas of Ukraine, the war is increasingly affecting the global economy and financial markets, as well as exacerbating ongoing economic challenges, including rising inflation and global supply-chain disruption.
Israel-Hamas war
19
In October 2023, Hamas terrorists attacked Israel, and then Israel declared war and decimated the Gaza Strip. The Israel-Hamas war and conflicts could affect economic activity via lower trade with the Middle East, disruption of supply chain and collection of trade receivables in the region.
The Company has operations or activities in countries and regions outside the United States. As a result, its global operations are affected by economic, political, and other conditions in the foreign countries in which it does business as well as U.S. laws regulating international trade, although the Company has not yet assessed that the war has had a material effect on its financial position or results of operations.
Liquidity and Capital Resources
Our total cash on hand as of December 31, 2023 was approximately $390,000 of cash on hand and restricted cash of approximately $256,000 compared to approximately $890,000 of cash on hand and restricted cash of $256,000 as of June 30, 2023.
Because the Company's 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 or take other actions to fund operations.
The Company expects 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 the Company's products, or through strategic alliances. Additionally, we may seek to sell additional equity or debt securities through one or more discrete transactions, or enter 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, 2023, we had an accumulated deficit of approximately $68.5 million, historically 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, 2023, and June 30, 2023. Table amounts are in thousands:
| December 31, | June 30, | |||||||||||||
| 2023 | 2023 | |||||||||||||
| Current Ratio: | ||||||||||||||
| Current assets | $4,169 | $4,637 | ||||||||||||
| Less: Current liabilities | 2,544 | 2,853 | ||||||||||||
| Working capital | $1,625 | $1,784 | ||||||||||||
| Current ratio | 1.64 to 1 | 1.63 to 1 | ||||||||||||
| Debt to Total Capital Ratio: | ||||||||||||||
| Note payable, lease liabilities, and EIDL loan | $708 | $890 | ||||||||||||
| Total debt | 708 | 890 | ||||||||||||
| Total equity | 1,837 | 1,935 | ||||||||||||
| Total capital | $2,545 | $2,825 | ||||||||||||
| Total debt to total capital | 27.8% | 31.5% | ||||||||||||
20
Working Capital Position
Working capital decreased approximately $159,000 as of December 31, 2023 , and the current ratio increased to 1.64 to 1 from 1.63 to 1 when compared to June 30, 2023.
Debt to total capital ratio was 27.8% and 31.5% as of December 31, 2023 , and June 30, 2023, respectively. The decrease of debt to total capital ratio is mainly due to lease payments.
Cash Flow Used in Operating Activities
During the six months ended December 31, 2023, the Company used approximately $438,000 of cash in operating activities as compared to cash of approximately $271,000 used in operating activities during the six months ended December 31, 2023.
For the six months ended December 31, 2023, its cash used in operations is due to an increase in accounts receivable of 271,000, a decrease in accounts payable of $218,000, a decrease in lease liability of $161,000, and a decrease in deferred revenue of $111,000, offset by a decrease in a decrease in inventory of $180,000. The remaining offsetting items for cash provided by operations is comprised of less significant items.
For the six months ended December 31, 2022, its cash used in operations is mainly as a result of net loss, along with an increase in inventories of $280,000, a decrease in accrued expense of $243,000, a decrease in deferred revenue of $74,000, and a repayment of employer tax deferral of $45,000 offset by an increase in accounts payable of $309,000 and a decrease in accounts receivable of approximately $333,000. The remaining offsetting items for cash provided by operations is comprised of less significant items.
Cash Flows used in Investing Activities
Cash flows used in investing activities for the six months ended December 31, 2023 was due to purchase of fixed assets of $40,000. Cash flows used in investing activities for the six-month period ended December 31, 2022 was due to the addition to the patent of $7,000.
Cash Flows Used in Financing Activities
For the six months ended December 31, 2023 the cash used in financing activities was due to loan payments of $19,000 and repayment of EIDL loan of $2,000. For the six months ended December 31, 2022 the cash used in financing activities was due to an auto loan payment of $2,000 and repayment of EIDL loan of $1,000.
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, 2023 , the Chief Executive Officer and Principal Financial and Accounting Officer of the Company have concluded that such disclosure controls and procedures are not 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. We identified a material weakness in internal control related to the proper design and implementation of controls over our estimates relating to the valuation of inventory and allowance for doubtful accounts, specifically over the precision of management’s review during the year end June 30, 2023.
21
(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, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Part II. OTHER INFORMATION
Item 5. Other Information
None.
Item 6. Exhibits
| 101. CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||
| 101. DEF Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||||||
| 101. LAB Inline XBRL Taxonomy Extension Label Linkbase Document | ||||||||
| 101. PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||
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, 2024 | By: | /s/ Richard J. DePiano, Jr. | ||||||||||||
| Richard J. DePiano, Jr. | ||||||||||||||
| Chief Executive Officer | ||||||||||||||
| Date: February 14, 2024 | By: | /s/ Mark Wallace | ||||||||||||
| Mark Wallace | ||||||||||||||
| Chief Operating Officer and Principal Accounting & Financial Officer | ||||||||||||||
22
Exhibit 31.1
Certification of Principal Executive Officer
I, Richard J. DePiano, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Escalon Medical Corp.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Richard J. DePiano Jr. | |||||
| Richard J. DePiano Jr. | |||||
| Chief Executive Officer | |||||
Date: February 14, 2024 | |||||
Exhibit 31.2
Certification of Principal Financial Officer
I, Mark Wallace, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Escalon Medical Corp.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Mark Wallace | |||||
| Mark Wallace | |||||
Date: February 14, 2024 | |||||
Exhibit 32.1
Certification pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Richard J. DePiano Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.The Quarterly Report of Escalon Medical Corp. on Form 10Q for the quarterly period ended December 31, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 14, 2024
| /s/ Richard J. DePiano Jr. | |||||
| Richard J. DePiano Jr. | |||||
| Chief Executive Officer | |||||
Exhibit 32.2
Certification pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Mark Wallace, Chief Operating Officer and Principal Accounting & Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.The Quarterly Report of Escalon Medical Corp. on Form 10-Q for the quarterly period ended December 31, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 14, 2024
| /s/ Mark Wallace | |||||
| Mark Wallace | |||||
| Chief Operating Officer and Principal Accounting & Financial Officer | |||||