UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
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Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
Commission File Number: 0-20127
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ESCALON MEDICAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 33-0272839
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
565 EAST SWEDESFORD ROAD, SUITE 200
WAYNE, PA 19087
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (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
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Large accelerated filer Yes [ ] No [ ] Accelerated filer Yes [ ] No [ ]
Non-accelerated filer Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 6,370,657 shares of common
stock, $0.001 par value, outstanding as of February 9, 2007.
ESCALON MEDICAL CORP.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Part I. Financial Statements
Item 1. Condensed Consolidated Financial Statements (unaudited) 2
Condensed Consolidated Balance Sheets as of December 31, 2006
(Unaudited) and June 30, 2006 2
Condensed Consolidated Statements of Income for the three and
six-month periods ended December 31, 2006 and 2005 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended December 31, 2006 and 2005 (Unaudited) 4
Condensed Consolidated Statement of Shareholders' Equity for the
six-month periods ended December 31, 2006 and 2005 (Unaudited) 5
Condensed Consolidated Statement of Other Comprehensive (Loss)
for the six-month periods ended December 31, 2006 and 2005
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Operations 23
Item 3. Quantitive and Qualitative Disclosures about Market Risk 34
Item 4. Controls and Procedures 34
Part II. Other Information
Item 1. Legal Proceedings 36
Item 1A Risk Factors 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 6. Exhibits 36
1
PART I. FINANCIAL STATEMENTS
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2006 2006
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,569,140 $ 3,379,710
Available for sale securities 59,130 50,220
Accounts receivable, net 4,416,904 3,996,243
Inventory, net 8,319,450 7,122,916
Other current assets 297,257 362,160
------------ ------------
TOTAL CURRENT ASSETS 14,661,881 14,911,249
------------ ------------
Furniture and equipment, net 865,498 969,956
Goodwill 21,072,260 21,072,260
Trademarks and trade names 620,106 620,106
Patents, net 265,000 313,702
Covenant not to compete and customer list, net 375,184 420,073
Other assets 257,138 337,421
------------ ------------
TOTAL ASSETS $ 38,117,067 $ 38,644,767
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 220,037 $ 232,837
Accounts payable 2,269,132 1,558,501
Accrued expenses 2,179,560 2,503,771
------------ ------------
TOTAL CURRENT LIABILITIES 4,668,729 4,295,109
------------ ------------
Long-term debt, net of current portion 66,894 162,551
Accrued post-retirement benefits 1,087,000 1,087,000
------------ ------------
TOTAL LIABILITIES 5,822,623 5,544,660
------------ ------------
Shareholders equity:
Preferred stock, $0.001 par value; 2,000,000
shares authorized; no shares issued Common
stock, $0.001 par value; 35,000,000 share
authorized; 6,370,657 and 6,344,657 issued
and outstanding at December 31, 2006 and
June 30, 2006, respectively 6,371 6,345
Common stock warrants 1,601,346 1,601,346
Additional paid-in capital 65,964,155 65,699,370
Retained earnings (35,306,647) (34,122,427)
Accumulated other comprehensive (loss) 29,219 (84,527)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 32,294,444 33,100,107
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 38,117,067 $ 38,644,767
============ ============
See notes to condensed consolidated financial statements
2
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -------------------------
2006 2005 2006 2005
---------- ----------- ----------- -----------
NET REVENUES:
Product revenue $7,033,860 $ 6,846,159 $13,577,446 $13,608,849
Other revenue 602,880 464,131 1,227,454 1,134,311
---------- ----------- ----------- -----------
REVENUES, NET 7,636,740 7,310,290 14,804,900 14,743,160
---------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of goods sold 3,878,214 3,883,395 7,508,594 7,628,384
Research and development 1,080,950 661,870 1,794,555 1,418,030
Marketing, general and administrative 3,144,611 3,827,839 6,700,511 7,111,890
---------- ----------- ----------- -----------
TOTAL COSTS AND EXPENSES 8,103,775 8,373,104 16,003,660 16,158,304
---------- ----------- ----------- -----------
(LOSS) FROM OPERATIONS (467,035) (1,062,814) (1,198,760) (1,415,144)
---------- ----------- ----------- -----------
OTHER INCOME AND (EXPENSE):
Gain on sale of available for sale securities 0 0 0 1,157,336
Equity in Ocular Telehealth Management, LLC (12,155) (33,035) (30,698) (51,464)
Interest income 13,498 72,877 58,934 77,724
Interest expense (5,654) (9,229) (14,939) (19,906)
---------- ----------- ----------- -----------
TOTAL OTHER INCOME AND (EXPENSE) (4,311) 30,613 13,297 1,163,690
---------- ----------- ----------- -----------
NET (LOSS) BEFORE TAXES (471,346) (1,032,201) (1,185,463) (251,454)
---------- ----------- ----------- -----------
Provision for income taxes (1,243) (50,400) (1,243) 16,000
---------- ----------- ----------- -----------
NET (LOSS) $ (470,103) $ (981,801) $(1,184,220) $ (267,454)
========== =========== =========== ===========
BASIC NET (LOSS) PER SHARE $ (0.07) $ (0.16) $ (0.19) $ (0.04)
========== =========== =========== ===========
DILUTED NET (LOSS) PER SHARE $ (0.07) $ (0.16) $ (0.19) $ (0.04)
========== =========== =========== ===========
WEIGHTED AVERAGE SHARES - BASIC 6,347,972 6,070,477 6,346,315 6,017,384
========== =========== =========== ===========
WEIGHTED AVERAGE SHARES - DILUTED 6,347,972 6,070,477 6,346,315 6,017,384
========== =========== =========== ===========
See notes to condensed consolidated financial statements
3
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(1,184,220) $ (267,454)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 282,081 217,944
Gain on sale of available for sale securities 0 (1,157,335)
Compensation expense 123,774 0
Loss of Ocular Telehealth Management, LLC 30,698 51,464
Change in operating assets and liabilities:
Accounts receivable, net (644,752) 437,690
Inventory, net (1,149,054) (576,227)
Other current and long-term assets 152,349 (407,745)
Accounts payable, accrued and other
liabilities 700,201 249,665
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES (1,688,923) (1,451,998)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available for sale
securities 0 1,157,335
Purchase of distribution rights 0 (181,855)
Purchase of fixed assets (61,329) (226,100)
----------- -----------
NET CASH (USED IN)/ PROVIDED BY
INVESTING ACTIVITIES (61,329) 749,380
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on term loans (108,457) (111,139)
Issuance of common stock - stock options 141,037 268,554
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 32,580 157,415
----------- -----------
Effect of exchange rate changes on
cash and cash equivalents (92,899) 8,863
----------- -----------
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,810,570) (536,340)
----------- -----------
Cash and cash equivalents, beginning of period 3,379,710 5,115,772
----------- -----------
Cash and cash equivalents, end of period $ 1,569,140 $ 4,579,432
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 14,939 $ 19,890
=========== ===========
Income taxes (refund) paid $ (98,412) $ 97,584
=========== ===========
(Decrease)/increase in unrealized appreciation
on available for sale securities $ 8,910 $(1,153,827)
=========== ===========
See notes to condensed consolidated financial statements
4
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
ACCUMULATED
COMMON STOCK COMMON ADDITIONAL OTHER TOTAL
------------------ STOCK PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT WARRANTS CAPITAL DEFICIT INCOME (LOSS) EQUITY
--------- ------ ---------- ----------- ------------ ------------- -------------
BALANCE AT JUNE 30, 2006 6,344,659 $6,345 $1,601,346 $65,699,370 $(34,122,427) $(84,527) $33,100,107
Net (loss) 0 0 0 (1,184,220) 0 (1,184,220)
Refund of income taxes related
to exercise of stock options 0 0 98,412 0 0 98,412
Exercise of stock options 26,000 26 0 42,599 0 0 42,625
Compensation expense 0 0 123,774 0 0 123,774
Change in unrealized gains on
available for sale securities 0 0 0 0 8,910 8,910
Foreign currency translation 0 0 0 0 104,836 104,836
--------- ------ ---------- ----------- ------------ -------- -----------
BALANCE AT DECEMBER 31, 2006 6,370,657 $6,371 $1,601,346 $65,964,155 $(35,306,647) $ 29,219 $32,294,444
--------- ------ ---------- ----------- ------------ -------- -----------
5
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE (LOSS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -------------------------
2006 2005 2006 2005
--------- ----------- ----------- -----------
Net (loss) $(470,103) $ (981,801) $(1,184,220) $ (267,454)
Change in unrealized gains on
available for sale securities (0) 9,361 8,910 (1,153,826)
Foreign currency translation (21,398) (34,612) 104,836 (91,984)
--------- ----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $(491,501) $(1,007,052) $(1,070,474) $(1,513,264)
========= =========== =========== ===========
See notes to condensed consolidated financial statements
6
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Escalon Medical Corp. and its subsidiaries, collectively
referred to as "Escalon" or the "Company." Escalon's subsidiaries include
Sonomed, Inc. ("Sonomed"), Escalon Vascular Access, Inc. ("Vascular"), Escalon
Medical Europe GmbH ("EME"), Escalon Digital Vision, Inc. ("EMI"), Escalon
Pharmaceutical, Inc. ("Pharmaceutical"), Escalon Holdings, Inc. ("EHI") and Drew
Scientific, Inc. and Drew Scientific Group, Plc (collectively "Drew"). All
intercompany accounts and transactions have been eliminated. Additionally, the
Company's investment in Ocular Telehealth Management, LLC ("OTM") is accounted
for under the equity method.
The Company operates in the healthcare market, specializing in the
development, manufacture, marketing and distribution of medical devices and
pharmaceuticals in the areas of ophthalmology, diabetes, hematology and vascular
access. The Company and its products are subject to regulation and inspection by
the United States Food and Drug Administration (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 accompanying condensed consolidated financial statements are unaudited
and are presented pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Accordingly, these consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's 2006 Annual Report on
Form 10-K under the Securities Exchange Act of 1934 (the "Exchange Act"). In the
opinion of management, the accompanying consolidated financial statements
reflect all adjustments (which are of a normal recurring nature) necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. The results of operations are not
necessarily indicative of the results that may be expected for the full year.
In connection with the presentation of the current period condensed
unaudited consolidated financial statements, certain prior period balances have
been reclassified to conform with the current period presentation.
2. ACQUISITIONS
DREW ACQUISITION
On July 23, 2004, the Company acquired approximately 67% of the outstanding
ordinary shares of Drew, a United Kingdom company, pursuant to the Company's
exchange offer for all of the outstanding ordinary shares of Drew, and since
that date has acquired all of the Drew shares. The results of Drew's operations
have been included in the consolidated financial statements, and the Company has
been operating Drew as an additional business unit since July 23, 2004.
The aggregate purchase price of Drew was $8,525,966, net of acquired cash
of $151,996, consisting of direct acquisition costs of $1,246,376, primarily for
investment banking, legal and accounting fees that were directly related to the
acquisition of Drew, and 900,000 shares of Escalon common stock valued at
$7,430,439. The value of the 900,000 shares issued was based on a five-day
average of the market price of the stock (two days before through two days after
the shares were exchanged).
The Company accounted for the purchase under FAS 141. Under FAS 141, the
Company paid a premium (i.e., goodwill) over the fair value of the net tangible
and identified intangible assets. The Company acquired Drew as part of its
strategy to diversify its business into the diagnostic medical devices
7
market. Drew afforded the Company a combined capital equipment product with a
continuing revenue stream product in the form of disposables. The application of
purchase accounting under FAS 141 requires that the total purchase price be
allocated to the fair value of assets acquired and liabilities assumed based on
their fair values at the acquisition date, with amounts exceeding the fair
values being recorded as goodwill. The allocation process requires an analysis
of acquired fixed assets, contracts, customer lists and relationships,
trademarks, patented technology, service markets, contractual commitments, legal
contingencies and brand value to identify and record the fair value of all
assets acquired and liabilities assumed. The Company engaged a third-party to
value the assets acquired and liabilities assumed. In valuing acquired assets
and assumed liabilities, fair values were based on expected discounted cash
flows, current replacement cost or other techniques as deemed appropriate.
The following table summarizes the purchase price allocation of estimated
fair values of assets acquired and liabilities assumed as of the date of
acquisition of Drew of July 23, 2004.
Current assets $ 3,859,771
Furniture and equipment 868,839
Patents 297,246
Other long-term assets 7,406
Goodwill 9,574,655
-----------
Total assets acquired $14,607,917
-----------
Line of credit $ 1,617,208
Current liabilities 3,392,286
Long-term debt 1,072,457
-----------
Total liabilities assumed $ 6,081,951
-----------
Net assets acquired $ 8,525,966
===========
MRP ACQUISITION
On January 30, 2006 EMI acquired substantially all of the assets of MRP
Group, Inc. ("MRP") in exchange for 250,000 shares of the Company's common stock
and approximately $47,000 in cash. The MRP business consists of ophthalmic
technology solutions offering two retinal imaging systems. Approximately 200 of
these systems have been installed at leading medical and retinal care centers.
The operating results of MRP are included as part of the Medical/Trek/EMI
business unit as of January 30, 2006.
The Company accounted for the purchase under FAS 141. Under FAS 141, the
Company paid a premium (i.e., goodwill) over the fair value of the net tangible
and identified intangible assets acquired to obtain a leading edge technology
platform in the digital imaging marketplace. The application of purchase
accounting under FAS 141 requires that the total purchase price be allocated to
the fair value of assets acquired and liabilities assumed based on their fair
values at the acquisition date, with amounts exceeding the fair values being
recorded as goodwill in the amount of $1,086,737. The allocation process
requires an analysis of acquired fixed assets, contracts, customer lists and
relationships, trademarks, patented technology, service markets, contractual
commitments, legal contingencies and brand value to identify and record the fair
value of all assets acquired and liabilities assumed. The values of certain
assets and liabilities are based on preliminary valuations and are subject to
adjustment as additional information is obtained.
8
3. STOCK-BASED COMPENSATION
In December 2004, the FASB issued SFAS No.123R ("SFAS No.123R") (revised
2004), "Share-Based Payments" SFAS No. 123R is a revision of SFAS No. 123 and
supersedes ABP Opinion No. 25, which requires the Company to expense share-based
payments, including employee stock options. With limited exceptions, the amount
of compensation costs will be measured based on the grant date fair value of the
equity or liability instrument issued. Compensation cost will be recognized over
the period that the optionee provides service in exchange for the award. The
Company was a small business issuer as defined in Item 10 of Regulation S-B. As
a result, the Company was required to adopt this standard in its fiscal year
beginning July 1, 2006. The adoption of this standard for the expensing of stock
options is expected to reduce pretax earnings in future periods. The impact of
adoption of SFAS No. 123R cannot be predicted at this time because it will
depend upon the level of share-based payments made in the future and the model
the Company elects to utilize.
For the three-month and six-month periods ended December 31, 2005, the
Company accounted for its stock-based awards to employees using the intrinsic
value method under Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees and related Interpretations.
Stock-based awards to non-employees were recorded using the fair value method in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation.
If the computed fair value of the awards had been amortized to expense over
the vesting period of the awards under SFAS No. 123, net income would have been
as follows for the period ended:
THREE-MONTHS ENDED SIX-MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2005 2005
------------------ ----------------
Net income, as reported $ (981,801) (267,454)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (333,500) (789,021)
----------- -----------
PRO FORMA NET INCOME $(1,315,301) $(1,056,475)
=========== ===========
EARNINGS PER SHARE:
BASIC - AS REPORTED $ (0.16) $ (0.04)
=========== ===========
BASIC - PRO FORMA $ (0.22) $ (0.18)
=========== ===========
DILUTED - AS REPORTED $ (0.16) $ (0.04)
=========== ===========
DILUTED - PRO FORMA $ (0.22) $ (0.18)
=========== ===========
SFAS No. 123 requires the disclosure of pro forma net income had the
Company adopted the fair value method in accounting for employee stock-based
awards. Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option-pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock-option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise which
affect the calculated values. The fair value of these equity awards was
estimated at the date of grant using the Black-Scholes option pricing method.
For the purposes of applying SFAS 123, the estimated per share value of the
options granted during the three-month and six-month periods ended December 31,
2006 and
9
2005 were $2.65 and $4.93, respectively. The fair value was estimated using the
following assumptions: dividend yield of 0.0%; volatility ranging between 109%
and 251%; risk free interest ranging between 4.5% and 4.6%; and expected life of
10 years. The volatility assumption is based on historical volatility seen in
the Company's stock. There is no reason to believe that future volatility will
compare to historic volatility.
As of December 31, 2006, there was $152,920 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
under the plan. The cost is expected to be recognized over a weighted average
period of 4 years.
Cash received from share option exercises under stock-based payment plans
for the six months ended June 30, 2006 was $141,037. The Company did not realize
any tax effect, which would be a reduction in its tax rate, on options due to
the full valuation allowances established on its deferred tax assets.
The Company measures compensation expense for its non-employee stock-based
compensation under the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) Issue No. 96-18, "Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services ". The fair value of the option issued is used to
measure the transaction, as this is more reliable than the fair value of the
services received. Fair value is measured as the value of the Company's common
stock on the date that the commitment for performance by the counterparty has
been reached or the counterparty's performance is complete. The fair value of
the equity instrument is charged directly to compensation expense and additional
paid-in capital. For the three-month and six-month periods ended December 31,
2006, $123,774 was recorded as compensation expense.
4. EARNINGS PER SHARE
The Company follows Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share," in presenting basic and diluted earnings per share. The
following table sets forth the computation of basic and diluted earnings per
share:
10
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- ------------------------
2006 2005 2006 2005
---------- ---------- ----------- ----------
NUMERATOR:
Numerator for basic and diluted
earnings per share
NET (LOSS) $ (470,103) $ (981,801) $(1,184,220) $ (267,454)
---------- ----------- ----------- ----------
DENOMINATOR:
Denominator for basic earnings per
share - weighted average shares 6,347,972 6,070,477 6,346,315 6,017,384
Effect of dilutive securities:
Stock options and warrants 0 0 0 0
Shares reserved for future
exchange 0 0 0 0
---------- ----------- ----------- ----------
DENOMINATOR FOR DILUTED EARNINGS PER
SHARE - WEIGHTED AVERAGE AND
ASSUMED CONVERSION 6,347,972 6,070,477 6,346,315 6,017,384
---------- ----------- ----------- ----------
BASIC (LOSS) PER SHARE $ (0.07) $ (0.16) $ (0.19) $ (0.04)
========== =========== =========== ==========
DILUTED (LOSS) PER SHARE $ (0.07) $ (0.16) $ (0.19) $ (0.04)
========== =========== =========== ==========
The impact of dilutive securities were omitted from the earnings per share
calculation in all periods presented as they would reduce the loss per share
(anti-dilutive).
5. INVENTORY
Inventory, stated at lower of cost (determined on a first-in, first-out
basis) or market, consisted of the following:
DECEMBER 31, JUNE 30,
2006 2006
------------ ---------
(UNAUDITED)
Raw materials $4,816,921 $4,219,836
Work in process 820,787 809,807
Finished goods 2,934,454 2,345,985
---------- ----------
8,572,162 7,375,628
---------- ----------
Valuation allowance (252,712) (252,712)
---------- ----------
TOTAL INVENTORY $8,319,450 $7,122,916
========== ==========
6. INTANGIBLE ASSETS
PATENTS
It is the Company's practice to seek patent protection on processes and
products in various countries. Patent application costs are capitalized and
amortized over their estimated useful lives, not exceeding 17 years, on a
straight-line basis from the date the related patents are issued. Costs
associated
11
with patents no longer being pursued are expensed. Accumulated patent
amortization was $313,702 and $265,000 at December 31, 2006 and June 30, 2006,
respectively. Amortization expense for the three-month periods ended December
31, 2006 and 2005 was $27,792 and $26,696, respectively. Amortization expense
for the six-month periods ended December 31, 2006 and 2005 was $48,900 and
$50,848, respectively.
The aggregate amortization expense for each of the next three years at
which time the patents will be fully amortized is estimated to be approximately
$90,000 per year for each of the next three fiscal years.
COVENANT NOT TO COMPETE AND CUSTOMER LIST
The Company recorded the value of a covenant not to compete and a customer
list as intangible assets as part of the acquisition of MRP (See note 2). The
valuation was based on the fair market value of these assets at the time of
acquisition. These assets are amortized over their estimate useful lives, not
exceeding 5 years, on a straight-line basis from the date of acquisition.
Accumulated amortization was $67,695 and $22,895 at December 31, 2006 and June
30, 2006, respectively. Amortization expense for the three-month periods ended
December 31, 2006 and 2005 was $24,163 and $0, respectively. Amortization
expense for the six-month periods December 31, 2006 and 2005 was $44,900 and $0,
respectively
GOODWILL, TRADEMARKS AND TRADE NAMES
Goodwill, trademarks and trade names represent intangible assets obtained
from Escalon Opthalmics ("EOI"), Endologix, Inc. ("Endologix"), Sonomed and Drew
acquisitions. Goodwill represents the excess of purchase price over the fair
market value of net assets acquired.
In accordance with SFAS 142, effective July 1, 2001, the Company
discontinued the amortization of goodwill and identifiable intangible assets
that have indefinite lives. Intangible assets that have finite lives continue to
be amortized over their estimated useful lives. Management has evaluated the
carrying value of goodwill and its identifiable intangible assets that have
indefinite lives during each of the fiscal years subsequent to July 1, 2001,
utilizing discounted cash flows of the respective business units. After
evaluating the discounted cash flow of each of its respective business units,
management concluded that the carrying value of goodwill and identifiable
intangible assets did not exceed their fair values and therefore were not
impaired. In accordance with SFAS 142, these intangible assets will continue to
be assessed on an annual basis, and impairment, if any, will be recorded as a
charge against income from operations.
The following table presents unamortized intangible assets by business unit
as of December 31, 2006 and June 30, 2006:
12
DECEMBER 31,
2006 JUNE 30, 2006
NET CARRYING NET CARRYING
AMOUNT AMOUNT
------------ -------------
(UNAUDITED)
GOODWILL
Sonomed $ 9,525,550 $ 9,525,550
Drew 9,574,655 9,574,655
Vascular 941,218 941,218
Medical/Trek/EMI 1,030,837 1,030,837
----------- -----------
TOTAL $21,072,260 $21,072,260
=========== ===========
DECEMBER 31,
2006 JUNE 30, 2006
NET CARRYING NET CARRYING
AMOUNT AMOUNT
------------ -------------
(UNAUDITED)
UNAMORTIZED INTANGIBLE ASSETS
Sonomed/EMI $620,106 $620,106
-------- --------
TOTAL $620,106 $620,106
======== ========
The following table presents amortized intangible assets by business unit
as of December 31, 2006:
ADJUSTED
GROSS GROSS
CARRYING CARRYING ACCUMULATED NET CARRYING
AMOUNT IMPAIRMENT AMOUNT AMORTIZATION VALUE
----------- ---------- -------- ------------ ------------
(UNAUDITED)
AMORTIZED INTANGIBLE ASSETS
PATENTS
Drew $278,726 $0 $278,726 $(123,328) $155,398
Vascular (pending issuance) 36,915 0 36,915 (27,686) 9,229
Medical/Trek/EMI 265,302 0 265,302 (164,929) 100,373
-------- --- -------- --------- --------
TOTAL $580,943 $0 $580,943 $(315,943) $265,000
======== === ======== ========= ========
Medical/Trek/EMI $442,969 $0 $442,969 $ (67,785) $375,184
-------- --- -------- --------- --------
TOTAL $442,969 $0 $442,969 $ (67,785) $375,184
======== === ======== ========= ========
The following table presents amortized intangible assets by business unit
as of June 30, 2006:
13
ADJUSTED
GROSS GROSS
CARRYING CARRYING ACCUMULATED NET CARRYING
AMOUNT IMPAIRMENT AMOUNT AMORTIZATION VALUE
-------- ---------- -------- ------------ ------------
AMORTIZED INTANGIBLE ASSETS
PATENTS
Drew $275,284 $0 $275,284 $ (90,955) $184,329
Vascular 36,916 0 36,916 (18,458) 18,458
Medical/Trek/EMI 265,301 0 265,301 (154,386) 110,915
-------- --- -------- --------- --------
TOTAL $577,501 $0 $577,501 $(263,799) $313,702
======== === ======== ========= ========
COVENANT NOT TO COMPETE/
CUSTOMER LIST
Medical/Trek/EMI $442,969 $0 $442,969 $ (22,896) $420,073
-------- --- -------- --------- --------
TOTAL $442,969 $0 $442,969 $ (22,896) $420,073
======== === ======== ========= ========
7. ACCRUED EXPENSES
The following table presents accrued expenses as of December 31, 2006 and
June 30, 2006:
DECEMBER 31, JUNE 30,
2006 2006
------------ ----------
(UNAUDITED)
Accrued compensation $1,125,265 $1,260,139
Warranty accruals 255,740 255,740
Severance accruals 0 0
Legal accruals 25,489 221,369
Other accruals 773,066 766,523
---------- ----------
TOTAL ACCRUED EXPENSES $2,179,560 $2,503,771
========== ==========
In addition to normal accruals, other accruals as of December 31, 2006 and
June 30, 2006 relate to warranties, royalties and real estate tax accruals and
other sundry operating expenses accruals.
Accrued compensation as of December 31, 2006 and June 30, 2006 primarily
relates to payroll, bonus and vacation accruals, and payroll tax liabilities.
8. LINE OF CREDIT AND LONG-TERM DEBT
The Company has two long-term debt facilities through its Drew subsidiary:
the Texas Mezzanine Fund and Symbiotics, Inc. The Texas Mezzanine Fund term debt
is payable in monthly installments of $14,200, which includes interest at a
fixed rate of 8.00%. The note is due in April 2008 and is secured by certain
assets of Drew. The outstanding balance of the note was $220,267 and $278,717 as
of December 31, 2006 and June 30, 2006, respectively. The Symbiotics, Inc. term
debt, which originated from the acquisition of a product line from Symbiotics,
Inc., is payable in monthly installments of $8,333 with interest at a fixed rate
of 5.00%. The outstanding balance of this note was $66,664 and $116,671 as of
December 31, 2006 and June 30, 2006, respectively.
The schedule below presents principal amortization for the next five years
under each of the Company's loan agreements as of December 31, 2006:
14
TWELVE MONTHS
ENDING TEXAS TOTAL
DECEMBER 31, MEZZANINE SYMBIOTICS (UNAUDITED)
------------- --------- ---------- -----------
2007 $153,373 $66,664 220,037
2008 66,894 0 66,894
2009 0 0 0
2010 0 0 0
2011 0 0 0
-------- ------- --------
TOTAL $220,267 $66,664 286,931
======== =======
Current portion of
long-term debt 220,037
--------
Long-term portion $ 66,894
========
9. OTHER REVENUE
Other revenue includes quarterly payments received from:
(1) Bausch & Lomb in connection with the sale of the Silicone Oil product
line, which contract expired on August 12, 2005 and from which the
Company will not receive any additional royalties;
(2) Royalty payments received from IntraLase Corp. ("IntraLase") relating
to the licensing of the Company's laser technology; and
(3) Royalty payments received from Bio-Rad Laboratories, Inc. ("Bio-Rad").
For the three-month periods ended December 31, 2006 and 2005, IntraLase
royalties totaled $547,674 and $395,149, respectively, and the Bio-Rad royalties
totaled $55,206 and $68,982, respectively. For the six-month periods ended
December 31, 2006 and 2005, Silicone Oil revenue totaled $0 and $203,124,
respectively, IntraLase royalties totaled $1,102,216 and $787,094, respectively,
and the Bio-Rad royalties totaled $125,238 and $144,093, respectively.
BAUSCH & LOMB SILICONE OIL
The Company's agreement with Bausch & Lomb, which commenced on August 13,
2000, was structured so that the Company received consideration from Bausch &
Lomb based on its adjusted gross profit from its sales of Silicone Oil on a
quarterly basis. The consideration was subject to a factor, which stepped down
through the termination date (August 2005) according to the following schedule:
From 8/13/00 to 8/12/01 100%
From 8/13/01 to 8/12/02 82%
From 8/13/02 to 8/12/03 72%
From 8/13/03 to 8/12/04 64%
From 8/13/04 to 8/12/05 45%
15
INTRALASE: LICENSING OF LASER TECHNOLOGY
The material terms of the license of the Company's laser patents to
IntraLase (the "License Agreement"), which expires in 2013, provide that the
Company will receive a 2.5% royalty on product sales that are based on the
licensed laser patents, subject to deductions for third party royalties
otherwise due and payable, and a 1.5% royalty on product sales that are not
based on the licensed laser patents. The Company receives a minimum annual
license fee of $15,000 per year during the remaining term of the license. The
minimum annual License Agreement fee is offset against the royalty payments.
The material termination provisions of the License Agreement of the laser
technology are as follows:
1. Termination by the Company if IntraLase defaults in the payment of any
royalty;
2. Termination by the Company if IntraLase makes any false report;
3. Termination by the Company if IntraLase defaults in the making of any
required report;
4. Termination by either party due to the commission of any material
breach of any covenant or promise by the other party under the license
agreement; or
5. Termination by IntraLase after 90 days notice (if IntraLase were to
terminate, it would not be permitted to utilize the licensed
technology necessary to manufacture its current products).
BIO-RAD ROYALTY
The royalty received from Bio-Rad relates to a certain non-exclusive Eighth
Amendment to an OEM Agreement ("OEM Agreement") between the Company's Drew
subsidiary and Bio-Rad, dated July 19, 1994. Bio-Rad pays a royalty based on
sales of certain of Drew's products in certain geographic regions.
The material terms of the OEM Agreement provide:
- Drew receives an agreed royalty per test;
- Royalty payments will be made depending on the volume of diagnostic
tests provided by Bio-Rad. If less than 3,750 tests per month are
provided by Bio-Rad, Bio-Rad will calculate the number of tests used
on a quarterly basis in arrears and pay Drew within 45 days of the end
of the quarter. If more than 3,750 tests per month are provided by
Bio-Rad, Bio-Rad will pay an estimated monthly royalty and within 45
days of the end of the quarter will make final settlement upon the
actual number of tests.
While the agreement, as amended by the Eighth Amendment, expired on May 15,
2005, the parties have continued to operate under the terms of the expired
agreement pending negotiation of a potential extension and/or revision.
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases its manufacturing, research and corporate office
facilities and certain equipment under non-cancelable operating lease
arrangements. The future amounts to be paid under these arrangements as of
December 31, 2006 are as follows:
16
LEASE
TWELVE MONTHS ENDING OBLIGATIONS
-------------------- -----------
(UNAUDITED)
2007 $ 792,436
2008 479,103
2009 326,980
2010 299,724
2011 308,770
Thereafter 116,354
----------
TOTAL $2,323,367
==========
Rent expense charged to operations during the three-month periods ended
December 31, 2006 and 2005 was $236,117 and $242,520, respectively. Rent expense
charged to operations during the six-month periods ended December 31, 2006 and
2005 was $451,437 and $457,631, respectively.
CONTINGENCIES
ROYALTY AGREEMENT: CLINICAL DIAGNOSTICS SOLUTIONS
Drew and Clinical Diagnostics Solutions, Inc. ("CDS") entered into a
Private Label/Manufacturing Agreement dated April 1, 2002, as amended and
restated on November 9, 2005 for the right to sell formulations or products of
CDS including reagents, controls and calibrators ("CDS products") on a private
label basis. The agreement term is 15 years, may be terminated by Drew at any
time with 18 months written notice, and if not terminated automatically renews
year-to-year thereafter. Under the terms of the agreement, Drew has the right to
terminate at any time with eighteen months written notice. Drew is obligated to
pay CDS a royalty of 7.5% on all sales of CDS products produced from Drew's
United Kingdom facility.
11. LEGAL PROCEEDINGS
In October 1997, Escalon and IntraLase entered into a License Agreement
wherein Escalon granted IntraLase the exclusive right to use Escalon's laser
properties, including patented and non-patented technology, in exchange for
shares of IntraLase common stock as well as royalties based on a percentage of
net sales of future products. The shares of common stock were restricted for
sale until April 6, 2005 and, according to a Fourth Amended Registration Right
Agreement between Escalon and IntraLase, are now able to be sold. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Notes to Condensed Consolidated Financial Statements for
discussions on the Company's sales of IntraLase common stock.
On June 10, 2004, Escalon gave IntraLase notice of its intention to
terminate the License Agreement due to IntraLase's failure to pay certain
royalties that Escalon believed were due under the License Agreement. On June
21, 2004, IntraLase sought a preliminary injunction and temporary restraining
order with the United States District Court for the Central District of
California, Southern District against Escalon to prevent termination of the
License Agreement. Contemporaneously, IntraLase filed an action for declaratory
relief asking the court to validate its interpretation of certain terms of the
License Agreement relating to the amount of royalties owed to Escalon ("First
Action"). The parties mutually agreed to the entry of a temporary restraining
order which was entered by the court shortly thereafter. At the close of
discovery, IntraLase and Escalon filed cross-motions for summary judgment. On
May 5, 2005, the District Court, having ruled on such motions, entered judgment
in the First Action.
The court, in ruling on the parties' cross-motions for summary judgment,
did not agree with IntraLase's interpretation of certain terms and declared
that, under the terms of the License Agreement, IntraLase must pay Escalon
royalties on revenue from maintenance contracts and one-year warranties.
Further, the court rejected IntraLase's argument that it is entitled to deduct
the value of non-patented components of its
17
ophthalmic products, which it sells as an integrated unit, from the royalties
due Escalon. Non-patented components of the products include computer monitors,
joysticks, keyboards, universal power supplies, microscope assemblies,
installation kits and syringes. In addition, the court rejected IntraLase's
assertion that accounts receivable are not "consideration received" under the
License Agreement and expressly ruled that IntraLase must pay Escalon royalties
on IntraLase's accounts receivable. The court also held that IntraLase must give
Escalon an accounting of third-party royalties. The court agreed with IntraLase
that it is not required to pay royalties on research grants.
The court also agreed with Escalon in finding that royalties are "monies"
and the default in the payment of royalties must be remedied within 15 days of
written notice of the default. The court rejected IntraLase's position
concerning the effective date of the Amended and Restated License Agreement
holding that the effective date of such Agreement was dated October 17, 2000.
IntraLase has appealed the judgment to the United States Court of Appeals for
the Ninth Circuit. The parties have submitted briefs to the court. Escalon
believes that a decision by the court is unlikely until the second half of 2007.
IntraLase, after entry of the court's ruling, attempted to cure its default
under the License Agreement, but underpaid based upon a purported interpretation
of "accounts receivable" that discounts the receivables recorded on the sales
substantially, and in a manner that appears to directly contradict IntraLase's
own published financial statements.
In May, 2005, IntraLase filed a second suit against Escalon in the Central
District of California, case number SAVC 05-440-AHS ("Second Action"), again for
declaratory relief as well as for reformation of the License Agreement. In this
action, IntraLase has asked the court to, among other things, validate its
interpretation of certain other terms of the License Agreement relating to the
amount of royalties owed to Escalon and a declaration concerning Escalon's audit
rights under the License Agreement. On June 3, 2005, after having been served
with Escalon's Complaint filed in the Delaware Court of Chancery ("Delaware
Action," described below), IntraLase filed an Amended Complaint in the Second
Action. Escalon, not having been served with the Amended Complaint, filed a
motion to dismiss the Complaint in the Second Action on jurisdictional and
substantive grounds. On June 6, 2005, Escalon filed a Motion to Dismiss the
Amended Complaint on grounds virtually identical to its first motion to dismiss.
The court dismissed without prejudice the Second Action on the grounds that much
of IntraLase's lawsuit sought a ruling on issues already raised by Escalon in
Escalon's Delaware Action. Accepting Escalon's arguments for dismissal, the
California Court held that retaining jurisdiction would likely result in
duplicative litigation and an unnecessary entanglement between the federal and
state court actions.
As referenced above, on May 15, 2005, Escalon, not having been served with
IntraLase's Second Action, initiated the Delaware Action by filing a Complaint
against IntraLase for, among other things, breach of contract, breach of
fiduciary duty arising out of IntraLase's bad faith conduct under, and multiple
breaches of, the License Agreement. In the Delaware Action, Escalon seeks
declaratory relief, specified damages, and specific performance of its rights
under the License Agreement, including its express right under the Agreement to
have independent certified accountants audit the books and records of IntraLase
to verify and compute payments due Escalon.
On February 21, 2006, Escalon again gave IntraLase notice of its intention
to terminate the License Agreement due to IntraLase's failure to pay certain
royalties that Escalon believed were due under the License Agreement as well as
IntraLase's refusal to permit Escalon to inspect IntraLase's records and books
of account in accordance with paragraph 5.3 of the License Agreement. IntraLase
had steadfastly refused to permit inspections reasonably requested by Escalon to
audit IntraLase's records and books of account and, instead, conditioned any
inspection by Escalon's auditors on unreasonable and unnecessary confidentiality
restrictions and unilateral limitations on the scope of records and books of
account that would be made available for inspection to Escalon. On the same day,
Escalon filed its First Amended Complaint in the Delaware Action adding to its
pending claims a claim for declaratory relief wherein Escalon seeks a judgment
declaring that the License Agreement terminated fifteen days after IntraLase
received Escalon's notice of defaults and intent to terminate and failed to cure
said defaults.
18
On February 28, 2006, Escalon agreed to suspend the cure periods applicable
to the alleged breaches set out in its February 21, 2006 letter while Escalon
and IntraLase engaged in mediation efforts. Mediation before Vice Chancellor
Donald F. Parsons, Jr. of the Delaware Court of Chancery, pursuant to Chancery
Court Rule 174, took place on May 5, 2006 and was unsuccessful. However, in
August 2006, the Parties entered into a Stipulation under which IntraLase agreed
to allow an independent auditor, retained by the Company, to inspect certain of
IntraLase's books and records as needed, in the opinion of the independent
auditor, to verify that the Company received the full value of royalty payments
to which it is entitled pursuant to the License Agreement. The Company sent its
auditor to IntraLase's headquarters in early September 2006 to commence the
audit. The auditor has informed the Company that it is awaiting responses and
documents from Intralase that are necessary for the audit to be completed.
Separately, on April 22, 2005, Escalon, as beneficial record holder of
common stock of IntraLase, made a formal written demand to inspect certain of
IntraLase's books and records pursuant to Section 220 of the Delaware General
Corporation Law. Shortly thereafter, Escalon Holdings, record holder of common
stock of IntraLase, made the same written demand. IntraLase rejected both
demands. Thereafter, Escalon and Escalon Holdings filed an action in the
Delaware Court of Chancery against IntraLase seeking to enforce their
shareholder rights to inspect IntraLase's books and records ("220 Action"). The
220 Action remains in the discovery stage and the parties jointly requested a
continuance of the January 4, 2007 trial date, which was granted by the court.
Escalon is cognizant of the legal expenses and costs associated with the
IntraLase matter. Escalon, however, is taking all necessary and appropriate
actions to protect its rights and interests under the License Agreement, but
will consider settlement if to do so would be in its best interests. Expenses
associated with this litigation have adversely impacted earnings of Escalon and
continued litigation of this matter will adversely affect earnings in the near
term. Escalon believes that IntraLase has sufficient funds to support such
royalty payments based on its filings with the SEC and filings in connection
with the First Action.
CARVER LITIGATION-CONNECTICUT ACTION
On December 17, 2002, Edward Carver, David DeCava and Diane Carver, former
principal shareholders of CDC Technologies, Inc., filed a complaint in the State
of Connecticut, Superior Court, Judicial District of Waterbury at Waterbury
against CDC Acquisition, IV Diagnostics and certain other principal shareholders
of CDC Technologies seeking a total of approximately $420,000 for, among other
things, repayment of loans made to CDC Technologies, payment of past wages and
reimbursement of business expenses ("Connecticut Action"). The plaintiffs'
claims arose out of a certain asset purchase for stock transaction in which CDC
Acquisition, a wholly owned subsidiary of Drew, acquired the assets of CDC
Technologies and IV Diagnostics. CDC Acquisition and IV Diagnostics, also a
subsidiary of Drew, asserted counterclaims against the plaintiffs for, among
other things, breach of fiduciary duty, unfair trade and conversion. In
addition, CDC Acquisition and IV Diagnostics asserted cross-claims against its
co-defendants for indemnification pursuant to the transaction agreements. A
bench trial was held in June, 2005. In August, 2005 the court rendered a
decision resulting in the court's award of only $76,000 to plaintiffs. CDC
Acquisition and IV Diagnostics filed a motion for reconsideration of certain
issues ruled upon by the court. The motion was denied. Plaintiffs' counsel filed
a motion for attorneys' fees seeking over $181,000. The court granted such
motion but awarded only $3,000 to plaintiffs' counsel. On November 1, 2005, CDC
Acquisition and IV Diagnostics timely appealed the court's ruling that CDC
Acquisitions and IV Diagnostics are liable to the plaintiffs.
CDC Acquisitions and IV Diagnostics and the plaintiffs in the Connecticut
Action recently resolved their disputes as Acquisition Corp. paid the plaintiffs
the outstanding judgment amount, eighty-three thousand dollars ($83,000.00). The
Company's cross-claims against certain of the former principal shareholders of
CDC Technologies, Inc. ("Technology Defendants") remain pending. The Technology
Defendants also have a cross-claim pending against CDC Acquisition Corp.
However, even in the event that Technology Defendants would prevail, their
damages are limited to the amount of their settlement, $50,000. Technology
Defendants recently filed a Motion to Enforce Settlement Agreement with the
trial court, asserting that there was an understanding that Technology
Defendants would be included in a three-way agreement to resolve all claims
associated with this litigation. The Company is opposing the Motion
19
of the Technology Defendants and intends to preserve and proceed to enforce its
rights against the Technology Defendants.
INSTITUTE OF CHILD HEALTH
Drew entered into a license agreement with the Institute of Child Health
("ICH") on May 10, 1993 to use ICH's intellectual property to manufacture,
lease, sell, use and sublicense certain products and all related consumables
used therein in the testing of blood and fluids. Under the license agreement
Drew was to pay royalties to ICH on the products and consumables. On January 23,
2006, the Company received a letter from ICH alleging that Drew has failed to
remit certain moneys due under the license agreement and has sought an
accounting to determine such amount due. Drew is continuing to review the matter
with its legal counsel and accounting consultants and continues to dispute the
allegations of nonpayment.
OTHER LEGAL PROCEEDINGS
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.
12. SEGMENTAL INFORMATION
During the three-month and six-month periods ended December 31, 2006 and
2005, the Company operations were classified into four principal reportable
segments that provide different products or services. One of the business
segments, Drew, became a reportable segment following its acquisition by the
Company on July 23, 2004.
Separate management of each segment is required because each business unit
is subject to different marketing, production and technology strategies.
20
SEGMENTAL STATEMENTS OF OPERATIONS (IN THOUSANDS) - THREE MONTHS ENDED
DECEMBER 31, 2006
DREW SONOMED VASCULAR MEDICAL/TREK/EMI TOTAL
----------------- ----------------- --------------- ---------------- -----------------
2006 2005 2006 2005 2006 2005 2006 2005 2006 2005
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
REVENUES, NET:
Product revenue $ 2,717 $ 3,490 $ 2,732 $ 2,003 $ 796 $ 886 $ 789 $ 467 $ 7,034 $ 6,846
Other revenue 55 69 0 0 0 0 548 395 603 464
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
TOTAL REVENUE, NET 2,772 3,559 2,732 2,003 796 886 1,337 862 7,637 7,310
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
COSTS AND EXPENSES:
Cost of goods sold 1,922 2,236 1,220 1,013 305 347 432 287 3,879 3,883
Research & Development 875 834 84 333 36 71 86 180 1,081 1,418
Marketing, General & Admin 1,277 3,006 762 1,630 412 945 696 1,531 3,145 3,072
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
Operating expenses 2,152 2,018 846 953 448 522 782 997 4,226 4,490
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
TOTAL COSTS AND EXPENSES 4,074 4,254 2,066 1,966 753 869 1,214 1,284 8,104 8,373
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
INCOME (LOSS) FROM
OPERATIONS (1,302) (695) 666 37 43 17 247 (422) (467) (1,063)
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
OTHER INCOME AND
EXPENSES:
Gain on sale of available
for sale securities 0 0 0 0 0 0 0 0 0 0
Equity in OTM 0 0 0 0 0 0 (12) (33) (12) (33)
Interest income 0 0 0 0 0 0 14 73 13 73
Interest expense (7) (9) 0 0 0 0 0 0 (6) (9)
TOTAL OTHER INCOME AND ------- ------- ------- ------- ------ ------ ------ ------ ------- -------
(EXPENSES) (7) (9) 0 0 0 0 2 40 (5) 31
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
INCOME (LOSS) BEFORE TAXES (1,309) (704) 666 37 43 17 125 (382) (472) (1,032)
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
Income taxes 0 0 0 0 0 0 (1) (50) (1) (50)
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
Net income (loss) $(1,309) $ (704) $ 666 $ 37 $ 43 $ 17 $ 126 $ (332) $ (470) $ (982)
======= ======= ======= ======= ====== ====== ====== ====== ======= =======
Depreciation and
amortization $ 56 $ 68 $ 5 $ 5 $ 43 $ 14 $ 23 $ 23 $ 127 $ 110
Assets $17,325 $17,088 $14,099 $13,486 $4,034 $2,423 $2,659 $5,946 $38,117 $38,943
Expenditures for
long-lived assets $ 54 $ 18 $ 0 $ 14 $ 0 $ 0 $ 0 $ 50 $ 54 $ 82
21
SEGMENTAL STATEMENTS OF OPERATIONS (IN THOUSANDS) - SIX MONTHS ENDED DECEMBER
31, 2006
DREW SONOMED VASCULAR MEDICAL/TREK/EMI TOTAL
----------------- ----------------- --------------- ---------------- -----------------
2006 2005 2006 2005 2006 2005 2006 2005 2006 2005
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
REVENUES, NET:
Product revenue $ 5,502 $ 7,201 $ 5,025 $ 3,801 $1,613 $1,810 $1,437 $ 797 $13,577 $13,609
Other revenue 125 144 0 0 0 0 1,102 990 1,227 1,134
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
TOTAL REVENUE, NET 5,627 7,345 5,025 3,801 1,613 1,810 2,539 1,787 14,804 14,743
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
COSTS AND EXPENSES:
Cost of goods sold 3,681 4,469 2,407 1,989 618 658 803 512 7,509 7,628
Operating expenses 3,993 3,840 1,730 1,963 1,000 1,016 1,774 1,711 8,495 8,530
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
TOTAL COSTS AND EXPENSES 7,674 8,309 4,137 3,952 1,618 1,674 2,577 2,223 16,004 16,158
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
INCOME (LOSS) FROM
OPERATIONS (2,047) (964) 888 (151) (5) 136 (38) (436) (1,199) (1,415)
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
OTHER INCOME AND
(EXPENSES):
Gain on sale of available
for sale securities 0 0 0 0 0 0 0 1,157 0 1,157
Equity in OTM 0 0 0 0 0 0 (31) (51) (31) (51)
Interest income 0 0 0 0 0 0 59 78 59 78
Interest expense (15) (20) 0 0 0 0 0 0 (15) (20)
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
TOTAL OTHER INCOME AND
(EXPENSES) (15) (20) 0 0 0 0 28 1,184 14 1,164
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
INCOME (LOSS) BEFORE TAXES (2,062) (984) 888 (151) (5) 136 (10) 748 (1,185) (251)
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
Income taxes 0 0 0 0 0 0 (1) 16 (1) 16
------- ------- ------- ------- ------ ------ ------ ------ ------- -------
Net income (loss) $(2,062) $ (984) $ 888 $ (151) $ (5) $ 136 $ (9) $ 732 $(1,184) $ (267)
======= ======= ======= ======= ====== ====== ====== ====== ======= =======
Depreciation and
amortization $ 142 $ 123 $ 11 $ 10 $ 92 $ 34 $ 41 $ 51 $ 286 $ 218
Assets $17,325 $17,088 $14,099 $13,486 $4,034 $2,423 $2,659 $5,946 $38,117 $38,943
Expenditures for
long-lived assets $ 89 $ 106 $ 0 $ 14 $ 1 $ 13 $ 9 $ 95 $ 99 $ 228
13. SHAREHOLDERS' EQUITY
WARRANTS TO PURCHASE COMMON STOCK
In connection with the private placement of the Company's common stock in
March 2004, the Company issued to several accredited investors warrants to
purchase 120,000 shares of the Company's common stock at $15.60 per share. The
warrants are currently exercisable and expire in March 2009.
14. RELATED-PARTY TRANSACTIONS
The Company and a member of the Company's Board of Directors are founding
and equal members of OTM. OTM is a diagnostic telemedicine company providing
remote examination, diagnosis and management of disorders affecting the human
eye. OTM's initial solution focuses on the diagnosis of diabetic retinopathy by
creating access and providing annual dilated retinal examinations for the
diabetic population. OTM was founded to harness the latest advances in
telecommunications, software and digital imaging in order to create greater
access and a more successful disease management for populations that are
susceptible to ocular disease. Through December 31, 2006, Escalon had invested
$256,000 in OTM. As of December 31, 2006, Escalon owned 45% of OTM. The members
of OTM have agreed to review the operations of OTM after 24 months, at which
time the members each have the right to sell their membership interest back to
OTM at fair market value. The Company provides administrative support functions
to OTM. From inception through December 31, 2006, OTM had revenue of
approximately $24,000 and incurred expenses of approximately $293,000. This
investment is accounted for under the equity method of accounting and is
included in other assets.
Two relatives of a senior executive officer have provided legal services as
either an employee or a consultant to the Company. Richard DePiano, Jr. (son of
the Chief Executive Officer ("CEO")) is General Counsel to the Company, Mr.
DePiano's salary plus bonus for the six-month periods ended December 31,
22
2006 and 2005 were $123,583 and $111,346, respectively. Caryn Lindsey
(daughter-in-law of the CEO) acted as a consultant and employee for the Company
in 2005. For the six-month periods ended December 31, 2006 and 2005 Ms. Lindsey
received consulting fees and salary of $0 and $87,243, respectively.
15. INTRALASE SHARES
In October 1997, Escalon licensed its intellectual laser properties to
IntraLase in exchange for an equity interest of 252,535 shares of common stock
(as adjusted for splits), as well as royalties on future product sales. The
Company has historically accounted for these shares as having a $0 basis because
a readily determinable market value was previously not available. On October 7,
2004, IntraLase announced the initial public offering of shares of its common
stock at a price of $13.00 per share. The shares of common stock were restricted
for a period of less than one year and were permitted to be sold after April 6,
2005 pursuant to a certain Fourth Amended Registration Rights Agreement between
the Company and IntraLase. The Company sold 191,000 shares of IntraLase common
stock in May 2005 at $17.9134 per share resulting in net proceeds, after fees
and commissions, of $3,411,761. As of June 30, 2005, the Company's remaining
61,535 shares of IntraLase were classified as available-for-sale securities and
had a market value of $1,207,317.
On July 8, 2005, Company sold an additional 58,535 shares of IntraLase
common stock at $19.8226 per share resulting in gross proceeds of $1,160,316.
After paying broker commissions and other fees of $2,980, the Company received
net proceeds of $1,157,336. The net proceeds from the sale were recorded in
other income and expense. The Company's remaining 3,000 shares of IntraLase at
December 31, 2006 are classified as available-for-sale securities and had a
market value of $59,130.
On January 8, 2007, Intralase announced that it had accepted a cash tender
offer of 100% of Intralase shares outstanding at a price per share of $25. The
transaction is expected to be completed during the second calendar quarter of
2007.
16. OTHER MARKETING AND LICENSE AGREEMENTS
On October 11, 2005 the Company signed a non-exclusive co-marketing
agreement with privately held Anka, a provider of web-based connectivity
solutions for the ophthalmic physician. Anka's connectivity solutions are used
in major eye healthcare centers and provide seamless integration of data from
various clinical modalities commonly used in eye healthcare settings. The
co-marketing agreement has enable Escalon to jointly market its existing digital
imaging hardware and MRP's digital imaging hardware with Anka's connectivity
solutions. By integrating the sales and marketing efforts, the alliance should
provide economies of operation and a greater market reach. In connection with
the co-marketing agreement, Company extended a $300,000 loan in October 2005 and
an additional loan of $100,000 in January 2006, pursuant to demand notes, to
Anka. Under the terms of these notes, repayment is due within six months after
written demand or immediately upon an event of default. On February 16, 2006,
the Company demanded repayment in accordance with the terms of the notes. The
loan was paid in full in April 2006.
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, product
development, the introduction of new products, the potential markets and uses
for the Company's products, the Company's regulatory filings with the FDA,
acquisitions, the development of joint venture opportunities, intellectual
property and patent protection and
23
infringement, the loss of revenue due to the expiration on termination of
certain agreements, the effect of competition on the structure of the markets in
which the Company competes and defending the Company in litigation matters. 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.
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-KSB for the year ended June 30, 2006 to be an exhaustive statement of
all risks, uncertainties or potentially inaccurate assumptions.
EXECUTIVE OVERVIEW - SIX-MONTH PERIOD ENDED DECEMBER 31, 2006
The following highlights are discussed in further detail within this
report. The reader is encouraged to read this report in its entirety to gain a
more complete understanding of factors impacting Company performance and
financial condition.
- Revenue decreased approximately .2% during the six-month period ended
December, 31, 2006 as compared to the same period last fiscal year.
The decrease is primarily related to decreases in the Drew and
Vascular business units. Revenue at Drew and Vascular decreased 23.6%
and 10.9%, respectively, during the six-month period ended December
31, 2006 when compared to the same period last fiscal year. These
decreases were offset by strong sales in the Company's Sonomed and
Medical/Trek/EMI business units. Sales at Sonomed and Medical/Trek/EMI
increased approximately 32.2% and 80.0%, respectively, during the
six-month period ended December 31, 2006 compared to the same period
last fiscal year.
- During July 2005, the Company sold 58,555 shares of IntraLase common
stock that had originally been received by the Company in connection
with the license of its laser properties to IntraLase in 1997 (see
note 15 to the notes to the condensed consolidated financial
statements). The stock was sold at $19.8226 per share and yielded net
proceeds of $1,157,336 after the payment of brokers' commissions and
other fees. The net proceeds were recorded as other income in the
six-month period ended December 31, 2005.
- Other revenue increased approximately $93,143 or 8.2% during the
six-month period ended December 31, 2006 as compared to the same
period last fiscal year. The increase is attributable to increased
royalties received from the IntraLase License Agreement.
- Cost of goods sold as a percentage of product revenue decreased
slightly to approximately 55.3% of revenues during the six-month
period ended December 31, 2006, as compared to approximately 56% of
product revenue for the same period last fiscal year. Gross margins in
the Drew business unit have historically been lower than those in the
Company's other business units. The aggregate cost of goods sold as a
percentage of product revenue of the Sonomed, Vascular and
Medical/Trek/EMI business units during the three-month period ended
December 31, 2006, remained steady at approximately 50.0% of product
revenue.
- Operating expenses decreased approximately 1.9% during the six-month
period ended December 31, 2006 as compared to the same period in the
prior fiscal year. The decrease was due to a significant decrease in
legal fees related to the IntraLase litigation, offset by an increase
in research and development related to Drew.
COMPANY OVERVIEW
The following discussion should be read in conjunction with interim
condensed consolidated financial statements and the notes thereto, which are set
forth elsewhere in this report.
The Company operates in the healthcare market specializing in the
development, manufacture, marketing and distribution of medical devices and
pharmaceuticals in the areas of ophthalmology, diabetes,
24
hematology and vascular access. 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.
In February 1996, the Company acquired substantially all of the assets and
certain liabilities of EOI, a developer and distributor of ophthalmic surgical
products. Prior to this acquisition, the Company devoted substantially all of
its resources to the research and development of ultra fast laser systems
designed for the treatment of ophthalmic disorders. As a result of the EOI
acquisition, the Company changed its market focus and ceased developing laser
technology. In October 1997, the Company licensed its intellectual laser
property to IntraLase, in return for an equity interest and future royalties on
sales of products. IntraLase undertook responsibility for funding and developing
the laser technology through to commercialization. IntraLase began selling
products related to the laser technology during fiscal 2002 and announced its
initial public offering of its common stock in October 2004. (See notes 9 and 15
of the notes to the condensed consolidated financial statements for further
information.) The Company is in dispute with IntraLase over royalty payments
owed to the Company. (See note 11 of the notes to the condensed consolidated
financial statements for further information.)
To further diversify its product portfolio, in January 1999, the Company's
Vascular subsidiary acquired the vascular access product line from Endologix,
formerly Radiance Medical Systems, Inc. Vascular's products use Doppler
technology to aid medical personnel in locating arteries and veins in difficult
circumstances. Currently, this product line is concentrated in the cardiac
catheterization market. In January 2000, the Company purchased Sonomed, a
privately held manufacturer of ophthalmic ultrasound diagnostic equipment.
On July 23, 2004, the Company acquired 67% of the outstanding ordinary
shares of Drew, a United Kingdom company, pursuant to the Company's exchange
offer for all of the outstanding ordinary shares of Drew, and acquired all of
the Drew shares during fiscal 2005. Drew is a diagnostics company specializing
in the design, manufacture and distribution of instruments for blood cell
counting and blood analysis. Drew is focused on providing instrumentation and
consumables for the physician office and veterinary office laboratories. Drew
also supplies the reagent and other consumable materials needed to operate the
instruments.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make
estimates and assumptions that impact amounts reported therein. The most
significant of those involve the application for SFAS 142, discussed further in
Note 2 of the notes to the condensed consolidated financial statements included
in this report. The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, and,
as such, include amounts based on informed estimates and judgments of
management. For example, estimates are used in determining valuation allowances
for deferred income taxes, uncollectible receivables, obsolete inventory, sales
returns and rebates and purchased intangible assets. Actual results achieved in
the future could differ from current estimates. The Company used what it
believes are reasonable assumptions and, where applicable, established valuation
techniques in making its estimates.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of its products at the time of
shipment, when title and risk of loss transfer. The Company provides products to
its distributors at agreed wholesale prices and to the balance of its customers
at set retail prices. Distributors can receive discounts for accepting high
volume shipments. The discounts are reflected immediately in the net invoice
price, which is the basis for revenue recognition. No further material discounts
are given.
The Company's considerations for recognizing revenue upon shipment of
product to a distributor are based on the following:
25
- Persuasive evidence that an arrangement (purchase order and sales
invoice) exists between a willing buyer (distributor) and the Company
that outlines the terms of the sale (company information, quantity of
goods, purchase price and payment terms). The buyer (distributor) does
not have an immediate right of return.
- Shipping terms are ex-factory shipping point. At this point the buyer
(distributor) takes title to the goods and is responsible for all
risks and rewards of ownership, including insuring the goods as
necessary.
- The Company's price to the buyer (distributor) is fixed and
determinable as specifically outlined on the sales invoice. The sales
arrangement does not have customer cancellation or termination
clauses.
- The buyer (distributor) places a purchase order with the Company; the
terms of the sale are cash, COD or credit. Customer credit is
determined based on the Company's policies and procedures related to
the buyer's (distributor's) creditworthiness. Based on this
determination, the Company believes that collectibility is reasonably
assured.
The Company assesses collectibility based on creditworthiness of the
customer and past transaction history. The Company performs ongoing credit
evaluations of its customers and does not require collateral from its customers.
For many of the Company's international customers, the Company requires an
irrevocable letter of credit to be issued by the customer before the purchase
order is accepted.
VALUATION OF INTANGIBLE ASSETS
The Company annually evaluates for impairment its intangible assets and
goodwill in accordance with SFAS 142, "Goodwill and Other Intangible Assets," or
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. These intangible assets include goodwill, trademarks and
trade names. Factors the Company considers important that could trigger an
impairment review include significant under-performance relative to historical
or projected future operating results or significant negative industry or
economic trends. If these criteria indicate that the value of the intangible
asset may be impaired, an evaluation of the recoverability of the net carrying
value of the asset is made. If this evaluation indicates that the intangible
asset is not recoverable, the net carrying value of the related intangible asset
will be reduced to fair value. Any such impairment charge could be significant
and could have a material adverse impact on the Company's financial statements
if and when an impairment charge is recorded. No impairment losses were recorded
for goodwill, trademarks and trade names during any of the periods presented
based on these evaluations.
(LOSS)/INCOME PER SHARE
The Company computes net (loss)/income per share under the provisions of
SFAS No. 128, Earnings per Share (SFAS 128), and Staff Accounting Bulletin, No.
98 (SAB 98).
Under the provisions of SFAS 128 and SAB 98, basic and diluted net
(loss)/income per share is computed by dividing the net (loss)/income for the
period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net (loss)/income per share
excludes potential common shares if the effect is anti-dilutive. Basic earnings
per share are computed by dividing net (loss)/income by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share are determined in the same manner as basic earnings per share, except
that the number of shares is increased by assuming exercise of dilutive stock
options and warrants using the treasury stock method.
TAXES
Estimates of taxable income of the various legal entities and jurisdictions
are used in the tax rate calculation. Management uses judgment in estimating
what the Company's income will be for the year. Since judgment is involved,
there is a risk that the tax rate may significantly increase or decrease in any
period.
26
In determining (loss)/income for financial statement purposes, management
must make certain estimates and judgments. These estimates and judgments occur
in the calculation of certain tax liabilities and in the determination of the
recoverability of certain of the deferred tax assets, which arise from temporary
differences between the tax and financial statement recognition of revenue and
expense. SFAS 109 also requires that the deferred tax assets be reduced by a
valuation allowance, if based on the available evidence, it is more likely than
not that all or some portion of the recorded deferred tax assets will not be
realized in future periods.
In evaluating the Company's ability to recover the Company's deferred tax
assets, management considers all available positive and negative evidence
including the Company's past operating results, the existence of cumulative
losses and near-term forecasts of future taxable income that is consistent with
the plans and estimates management is using to manage the underlying businesses.
Through December 31, 2006, the Company has recorded a full valuation
allowance against the Company's net operating losses due to the uncertainty of
their realization as a result of the Company's earnings history, the number of
years the Company's net operating losses and tax credits can be carried forward,
the existence of taxable temporary differences and near-term earnings
expectations. The amount of the valuation allowance could decrease if facts and
circumstances change that materially increase taxable income prior to the
expiration of the loss carry forwards. Any reduction would reduce (increase) the
income tax expense (benefit) in the period such determination is made by the
Company.
THREE AND SIX-MONTH PERIODS ENDED DECEMBER 31, 2006 AND 2005
The following table shows consolidated product revenue by business segment
as well as identifying trends in business segment product revenues for the three
and six-month periods ended December 31, 2006 and 2005. Table amounts are in
thousands:
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ----------------------------
2006 2005 % CHANGE 2006 2005 % CHANGE
------ ------ -------- ------- ------- --------
PRODUCT REVENUE:
Drew $2,717 $3,490 -22.2% $ 5,502 $ 7,201 -23.6%
Sonomed 2,732 2,003 36.4% 5,025 3,801 32.2%
Vascular 796 886 -10.2% 1,613 1,810 -10.9%
Medical/Trek/EMI 789 467 69.0% 1,437 797 80.3%
------ ------ ----- ------- ------- -----
TOTAL $7,034 $6,846 2.8% $13,577 $13,609 -0.2%
====== ====== ===== ======= ======= =====
Product revenue increased approximately $188,000 or 2.8%, to $7,034,000 for
the three-month period ended December 31, 2006 as compared to the same period
last fiscal year.
In the Drew business unit, product revenue decreased $773,000, or 22.2%, as
compared to the same period last fiscal year. The decrease is primarily due to
the aging of Drew's product line and delays in bringing its new products to
market. Drew anticipates that sales will continue to decline until the new
products become available for sale later in the fiscal year. Drew anticipates
that it will release two new products for sale in the fourth quarter of the
current fiscal year.
Product revenue increased $729,000, or 36.4%, at the Sonomed business unit
as compared to the same period last fiscal year. The increase in product revenue
was primarily caused by an increase in sales, both domestically and
internationally, of the Company's new VuMax II ultrasound systems along with
continued demand for Sonomed's existing product line.
27
Product revenue decreased $90,000, or 10.2%, to $796,000 in the Vascular
business unit during the three-month period ended December 31, 2006, as compared
to the same period last fiscal year. The decrease in product revenue in the
Vascular business unit was primarily caused by a decrease in direct sales to end
users by the Company's domestic sales team. The Company also saw a decrease in
revenue from the Company's domestic distributor network. In addition,
anticipated sales in Europe and Latin America did not materialize due to price
point pressures on Vascular's product offering.
In the Medical/Trek/EMI business unit, product revenue increased $322,000
or 69%, to $789,000 during the three-month period ended December 31, 2006 as
compared to the same period last fiscal year. The increase in Medical/Trek/EMI
product revenue is primarily attributed to sales of digital imaging systems from
the newly acquired MRP division. MRP was acquired in January 2006.
Product revenue decreased approximately $32,000 or 0.2%, to $13,577,000
during the six-month period ended December 31, 2006 as compared to the same
period last fiscal year.
In the Drew business unit, product revenue decreased $1,699,000 or 23.6%
as compared to the same period last fiscal year. As in previous periods, the
decrease in product revenue is attributable to the aging of Drew's instrument
product line. Due to Drew's installed base of instruments, reagent sales have
not declined significantly during the period. Drew anticipates that its
instrument sales will continue to decline until the introduction of its new
family of instruments becomes available for sale. Drew anticipates that it will
release two new products for sale in fourth quarter of the current fiscal year.
In the Sonomed business unit, product revenue increased $1,224,000 or 32.2%
as compared to the same period last fiscal year The increase in product revenue
was primarily caused by the introduction of the Company's new VuMax II scan
ultrasound systems. The market acceptance and sales of the VuMax II are
complemented by continuing demand for Sonomed's existing product line.
In the Vascular business unit, revenue decreased $197,000, or 10.9%, to
$1,613,000 during the six-month period ended December 31, 2006 as compared to
the same period last fiscal year. The decrease in product revenue in the
Vascular business unit was primarily caused by a decrease in direct sales to end
users by the Company's domestic sales team. The Company also saw a decrease in
revenue from the Company's domestic distributor network. In addition,
anticipated sales in Europe and Latin America did not materialize do to price
point pressures on Vascular's product offering.
In the Medical/Trek/EMI business unit, product revenue increased $640,000
or 80.3%, to $1,437,000 during the six-month period ended December 31, 2006 as
compared to the same period last fiscal year. The increase in Medical/Trek/EMI
product revenue is primarily attributed to the acquisition of the MRP division
in January 2006, which complemented continued revenues from Trek's OEM revenue
from Bausch & Lomb and EMI sales of digital imaging systems.
Other revenue increased by approximately $139,000, or 29.9%, to $603,000
during the three-month period ended December 31, 2006 as compared to the same
period last fiscal year. The increase is primarily due to increased royalties
received from the IntraLase royalty agreement. The Drew division continues to
receive royalties from Bio-Rad related to an OEM agreement between Bio-Rad and
Drew. These royalties have remained steady at approximately $62,000 per quarter.
While this agreement terminated as of May 15, 2005, the parties have continued
to operate under the terms of the expired agreement pending negotiation of a
potential extension and/or revision.
Other revenue increased by approximately $93,000, or 8.2%, to $1,227,000
during the six-month period ended December 31, 2006 as compared to the same
period last fiscal year. The increase is primarily due to an increase in
royalties from the IntraLase royalty agreement, offset by the elimination of
royalties received from Bausch & Lomb in connection with their sales of Silicone
Oil. The Company's contract with Bausch & Lomb called for the calculation of
Silicone Oil revenue to be received by the Company of 45% from August 13, 2004
to August 12, 2005. The Company's contract with Bausch & Lomb ended in August
2005, and accordingly, the Company will receive no future royalties under this
agreement.
28
The following table presents consolidated cost of goods sold by reportable
business segment and as a percentage of related segment product revenues for the
three and six-month periods ended December 31, 2006 and 2005. Table amounts are
in thousands:
THREE-MONTH PERIOD SIX-MONTH PERIOD
ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------------------- -------------------------------
2006 % 2005 % 2006 % 2005 %
------ ----- ------ ----- ------ ----- ------ -----
COST OF GOODS SOLD:
Drew $1,922 70.7% $2,236 64.1% $3,681 66.9% $4,469 62.1%
Sonomed 1,220 44.7% 1,013 50.6% 2,407 47.9% 1,989 52.3%
Vascular 305 38.3% 347 39.2% 618 38.3% 658 36.4%
Medical/Trek/EMI 432 54.8% 287 61.5% 803 55.9% 512 64.2%
------ ---- ------ ---- ------ ---- ------ ----
TOTAL $3,879 55.2% $3,883 56.7% $7,509 55.3% $7,628 56.1%
====== ==== ====== ==== ====== ==== ====== ====
Cost of goods sold totaled approximately $3,879,000, or 55.2% of product
revenue, for the three-month period ended December 31, 2006, as compared to
$3,883,000 or 56.7% of product revenue for the same period last fiscal year.
Cost of goods sold in the Drew business unit totaled $1,922,000 or 70.7% of
product revenue for the three-month period ended December 31, 2006 as compared
to $2,236,000 or 64.0% of product revenue for the same period last fiscal year.
The decrease in cost of goods sold of 314,000 or 14.0% as compared to the same
period last fiscal year is attributed to decreased sales of 23.6% during the
period ended December 31, 2006. Cost of sales did not decrease the same
percentage as revenue due to the product mix of sales and the continued
deterioration of gross margins on Drew's aging instrument product offering.
Cost of goods sold in the Sonomed business unit totaled $1,220,000 or 44.7%
of product revenue for the three-month period ended December 31, 2006 as
compared to $1,013,000 or 50.6% of product revenue for the same period last
fiscal year. The $207,000 increase is directly related to the increase in
product sales for the period ended December 31, 2006 over the same period last
fiscal year. The improved gross margin of 6% is related to the sale of higher
margin VuMax II's during the current period.
Cost of goods sold in the Vascular business unit totaled $305,000, or 38.3%
of product revenue, for the three-month period ended December 31, 2006 as
compared to $347,000, or 39.2% of product revenue for the same period last
fiscal year. The primary factor affecting the decrease in cost of goods sold of
$42,000 or 12% was a like decrease in product revenue for the period.
Cost of goods sold in the Medical/Trek/EMI business unit totaled $432,000,
or 54.8% of product revenue, during the three-month period ended December 31,
2006 as compared to $287,000, or 61.5% of product revenue, during the same
period last fiscal year. The increase in cost of goods sold of $145,000 is
related to the new sales of digital imaging systems made by the MRP division
which was acquired in January 2006.
Cost of goods sold totaled approximately $7,509,000 or 55.3% of product
revenue, for the six-month period ended December 31, 2006, as compared to
$7,628,000 or 56.1% of product revenue for the same period last fiscal year.
Cost of goods sold in the Drew business unit totaled $3,681,000 or 66.9% of
product revenue for the six-month period ended December 31, 2006 as compared to
$4,469,000 or 62.1% of product revenue for the same period last fiscal year. The
decrease in cost of goods sold of 788,000 or 17.6% as compared to the same
period last fiscal year is attributed to decreased sales of 23.6% during the
six-month period ended December 31, 2006. Cost of sales did not decrease the
same percentage as revenue do to the product mix of sales and the continued
deterioration of gross margins on Drew's aging instrument product offering.
29
Cost of goods sold in the Sonomed business unit totaled $2,407,000 or 47.9%
of product revenue for the six-month period ended December 31, 2006 as compared
to $1,989,000 or 52.3% of product revenue for the same period last fiscal year.
The primary reason for the increase of $418,000 or 21.0% is due to increased
sales during the period. The sales of the new VuMax II during the period
increased gross margin from 47.7% in the last fiscal period to 52.1% for the
six-month period ended December 31, 2006.
Cost of goods sold in the Vascular business unit totaled $618,000, or 38.3%
of product revenue, for the six-month period ended December 31, 2006 as compared
to $658,000, or 36.4% of product revenue for the same period last fiscal year.
The primary factor affecting the decrease in cost of goods sold of $40,000 or 6%
was a decrease in product sales during the period of 11%. Gross margins for the
period were 61.7% as compared to 63.6 percent for the same period last fiscal
year.
Cost of goods sold in the Medical/Trek/EMI business unit totaled $803,000
or 55.9% of product revenue, for the six-month period ended December 31, 2006 as
compared to $512,000 or 64.2% of product revenue, during the same period last
fiscal year. The increase in cost of goods sold of $291,000 is related to the
new sales of digital imaging systems made by the MRP, which was acquired in
January 2006.
The following table presents consolidated marketing, general and
administrative expenses as well as identifying trends in business segment
marketing, general and administrative expenses for the three and six-month
periods ended December 31, 2006 and 2005. Table amounts are in thousands:
THREE-MONTH PERIOD ENDED SIX-MONTH PERIOD ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
2006 2005 % CHANGE 2006 2005 % CHANGE
------ ------ -------- ------ ------ --------
MARKETING, GENERAL AND ADMINISTRATIVE:
Drew $1,277 $1,608 -20.6% $2,659 $3,006 -11.5%
Sonomed 762 614 24.1% 1,569 1,630 -3.7%
Vascular 410 435 -5.8% 942 945 -0.3%
Medical/Trek/EMI 696 1,171 -51.2% 1,531 1,531 -8.1%
------ ------ ----- ------ ------ -----
TOTAL $3,145 $3,828 -17.8% $6,701 $7,112 -5.8%
====== ====== ===== ====== ====== =====
Marketing, general and administrative expenses decreased $807,000 or 36.9%,
to $3,145,000 during the three-month period ended December 31, 2006 as compared
to the same period last fiscal year.
Marketing, general and administrative expenses in the Drew business unit
decreased $331,000, or 20.6%, to $1,277,000 for the three-month period ended
December 31, 2006 as compared to the same period last fiscal year. The decrease
is primarily due to decreased personnel, travel, facility and other costs
related to the cost reduction plan previously announced and implemented during
the first quarter of the current fiscal year. The full affect of the cost
reduction plan is anticipated to be realized during the second half of this
fiscal year.
Marketing, general and administrative expenses in the Sonomed business unit
increased $148,000 or 24.1%, to $762,000 for the three-month period ended
December 31, 2006 as compared to the same period last fiscal year. The increase
is due to marketing and sales salaries, commissions and other personnel-related
expenses, including amounts paid to independent agents utilized primarily in
Europe, as well as, meeting and trade show expenses, travel and lodging, and
advertising related to the introduction of the VuMax II and continued support
for Sonomed's existing product line.
Marketing, general and administrative expenses in the Vascular business
unit decreased $25,000 or 5.8%, to $410,000 for the three-month period ended
December 31, 2006 as compared to the same period last fiscal year. The decrease
was due to reduced travel and marketing expenses during the period.
30
Marketing, general and administrative expenses in the Medical/Trek/EMI
business unit decreased $475,000 or 40.6%, to $696,000 for the three-month
period ended December 31, 2006 as compared to the same period last fiscal year.
This decrease was directly due to a large decrease in legal fees related to the
IntraLase royalty dispute. Escalon and IntraLase sought a continuance of the
trial scheduled for January 4, 2007 which was granted by the court.
Marketing, general and administrative expenses decreased $535,000 or 7.5%,
to $6,577,000 for the six-month period ended December 31, 2006 as compared to
the same period last fiscal year.
Marketing, general and administrative expenses in the Drew business unit
decreased $347,000 or 11.5%, to $2,659,000 for the six-month period ended
December 31, 2006 as compared to the same period last fiscal year. The decrease
is primarily due to decreased personnel, travel, facility and other costs
related to the cost reduction plan previously announced and implemented during
the first quarter of the current fiscal year. The majority of the $347,000 cost
savings were realized during the quarter ended December 31, 2006. The full
affect of the cost reduction plan is anticipated to be realized during the
second half of this fiscal year.
Marketing, general and administrative expenses in the Sonomed business unit
decreased $61,000 or 3.7%, to $1,569,000 for the six-month period ended December
31, 2006 as compared to the same period last fiscal year. The decrease is due to
the following non recurring items which occurred in the same period last fiscal
year. Rent and utilities expense increased due to the relocation of Sonomed's
facility and the corresponding new lease entered into during fiscal 2005. Legal
expenses increased primarily due fees incurred to resolve a dispute with a
supplier and fees related to researching intellectual property ownership issues
for intellectual property currently being evaluated for licensing for use in
potential new products.
Marketing, general and administrative expenses in the Vascular business
unit decreased an immaterial $3,000 or 0.3%, to $942,000 for the six-month
period ended December 31, 2006 as compared to the same period last fiscal year.
Marketing, general and administrative expenses in the Medical/Trek/EMI
business unit remained constant at $1,531,000 for the six-month period ended
December 31, 2006 as compared to the same period last fiscal year. Decreased
legal fees related to the IntraLase litigation primarily occurring in the
current quarter. Escalon and IntraLase sought a continuance of the trial
scheduled for January 4, 2007 which was granted by the court. These savings
were offset in the six-month period by expenses related to operations of the
new MRP acquisition.
Research and development expenses increased $419,000 or 63.3%, to
$1,081,000 during the three-month period ended December 31, 2006 as compared to
the same period last fiscal year. The increase in research and development was
primarily related to the development efforts at the Drew division. Drew incurred
$300,000 in development costs related to the outsourcing of elements of its new
Trilogy product. In addition, Drew incurred increased personnel and consulting
fees related to the development of the DS360 project. Drew anticipates that
these products will be completed in the fourth quarter of fiscal 2007.
Research and development expenses increased $377,000 or 26.5%, to
$1,794,000 during the six-month period ended December 31, 2006 as compared to
the same period last fiscal year. The increase in research and development was
primarily related to the development efforts at the Drew division. Drew incurred
$300,000 in development costs related to the outsourcing of elements of its new
Trilogy product. In addition, Drew incurred increased personnel and consulting
fees related to the development of the DS360 project. Drew anticipates that
these products will be completed in the fourth quarter of fiscal 2007.
Gain on sale of available for sale securities was approximately $1,157,000
in the six-month period ended December 31, 2005. The decrease was due to the
sale of 58,585 shares of IntraLase common stock in July 2005 (see note 15 of the
notes to the condensed consolidated financial statements). There were no sales
of available for sale securities during the three-month period ended December
31, 2006.
31
Escalon recognized a loss of $12,000 and $33,000 related to its investment
in OTM during the three-month periods ended December 31, 2006 and 2005,
respectively, and $31,000 and $52,000 for the six-month periods ended December
31, 2006 and 2005, respectively. Commencing July 1, 2005, the Company began
recognizing all of the losses of OTM in its consolidated financial statements.
OTM is an early stage privately held company. Prior to July 1, 2005, the share
of OTM's loss recognized by the Company was in direct proportion to the
Company's ownership equity in OTM. OTM began operations during the three-month
period ended September 30, 2004. (See note 14 of the notes to the condensed
consolidated financial statements).
Interest income was $14,000 and $73,000 for the three-month periods ended
December 31, 2006 and 2005, respectively. The decrease was due to lower average
cash balances during the current fiscal period.
Interest income was $59,000 and $78,000 for the six-month periods ended
December 31, 2006 and 2005, respectively. The decrease was due to lower average
cash balances due during the current fiscal period.
Interest expense was $6,000 and $9,000 for the three-month periods ended
December 31, 2006 and 2005, respectively, and $15,000 and $20,000 for the
six-month periods ended December 31, 2006 and 2005, respectively. The decrease
reflects the continued reduction of the Company's debt in the normal course of
business by $110,000 for the six-month period ended December 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
Changes in overall liquidity and capital resources from continuing
operations during the three-month period ended December 31, 2006 are reflected
in the following table (in thousands):
DECEMBER 31, JUNE 30,
2006 2006
------------ ---------
CURRENT RATIO:
Current assets $ 14,662 $ 14,911
Less: Current liabilities 4,669 4,295
--------- ---------
WORKING CAPITAL $ 9,993 $ 10,616
--------- ---------
CURRENT RATIO 3.1 TO 1 3.5 TO 1
========= =========
DEBT TO TOTAL CAPITAL RATIO:
Notes payable and current maturities $ 220 $ 233
Long-term debt 67 163
--------- ---------
Total debt $ 287 $ 396
--------- ---------
Total equity 32,294 33,100
--------- ---------
TOTAL CAPITAL $ 32,581 $ 33,496
========= =========
TOTAL DEBT TO TOTAL CAPITAL 0.9% 1.2%
========= =========
WORKING CAPITAL POSITION
Working capital decreased approximately $623,000 as of December 31, 2006
and the current ratio decreased to 3.1 to 1 from 3.5 to 1 when compared to June
30, 2006. The decrease in working capital was caused primarily by the loss from
operations of approximately $1,060,000 and cash used to fund fixed asset
32
additions of approximately $61,000. Partially offsetting these uses of working
capital were proceeds of approximately $141,000 realized by the Company for the
exercise of employee stock options.
CASH USED IN OPERATING ACTIVITIES
During the six-month periods ended December 31, 2006 and 2005, the Company
used approximately $1,689,000 and $1,452,000 of cash for operating activities.
The net increase in cash used for operating activities of approximately $237,000
for the six-month period ended December 31, 2006 as compared to the same period
in the prior fiscal year is due primarily to the following factors:
The Company had a net loss of $1,084,000 and experienced net cash out flows
from increases in accounts receivable and inventory of approximately $645,000
and $1,149,000, respectively. These cash out flows were partially offset by an
increase in accounts payable of $700,000 and non-cash expenditures on
depreciation and amortization of $282,000. In the prior fiscal period the cash
used in operating activities of $1,452,000 was related to net loss in the prior
year of $267,000 and by a gain on sale of marketable securities in the amount of
$1,157,000.
CASH FLOWS PROVIDED BY (USED IN) INVESTING AND FINANCING ACTIVITIES
Cash flows used in investing activities of $61,000 is related to fixed
asset purchases during the six-month period ended December 31, 2006. The
decrease in cash flows from investing activities from the prior fiscal period
was $810,000. The change relates primarily to the net proceeds of approximately
$1,157,000 realized from the sale of a majority of the remaining shares of the
IntraLase securities held by the Company as available for sale securities. (See
note 15 of the notes to the condensed consolidated financial statements.)
Partially offsetting the cash realized from the securities sale was cash
utilized for fixed asset additions and for distribution rights of approximately
$408,000.
Cash flows provided by financing activities were approximately $32,000
during the six-month period ended December 31, 2006. During the period, the
Company made scheduled long-term debt repayments of approximately $108,000 and
received $141,000 from the exercise of stock options during the period.
DEBT HISTORY
Drew has long-term debt facilities through the Texas Mezzanine Fund and
through Symbiotics, Inc. The Texas Mezzanine Fund term debt is payable in
monthly installments of $14,200, which includes interest at a fixed rate of
8.00%. The note is due in April 2008 and is secured by certain assets of Drew.
The outstanding balance as of December 31, 2006 was $220,000. The Symbiotics,
Inc. term debt, which originated from the acquisition of a product line from
Symbiotics, Inc., is payable in monthly principal installments of $8,333 plus
interest at a fixed rate of 5.00%. The outstanding balance as of December 31,
2006 was $67,000.
BALANCE SHEET
The components of the balance sheet of the Company were increased as of
July 23, 2004 by the acquisition of Drew as follows:
Cash $ 150,849
Accounts receivable 1,439,120
Inventory 2,069,146
Other current assets 351,505
Furniture and equipment 868,839
Goodwill 9,574,655
Patents 297,246
Other long-term assets 7,406
33
Line of credit 1,617,208
Current liabilities 3,392,286
Long-term debt 1,072,457
Exchange of common stock 7,430,439
These amounts represents approximately a $113,000 net difference from the
amounts reported in the Company's Form 10-Q for the quarter ended December 31,
2004, which has been recorded as an increase in goodwill. The difference is the
result of additional facts obtained since the acquisition which impacted the
valuation of the assets acquired and liabilities assumed.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Escalon was not a party to any off-balance sheet arrangements during the
three and six-month periods ended December 31, 2006 and 2005.
The following table presents the Company's contractual obligations as of
December 31, 2006 (interest is not included in the table as it is immaterial):
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
---------- ---------- ---------- --------- ---------
Long-term debt $ 286,931 $ 220,037 $ 66,894 $ 0 $0
Operating lease agreements 2,323,367 792,436 1,105,807 425,124 0
---------- ---------- ---------- -------- ---
TOTAL $2,610,298 $1,012,473 $1,172,701 $425,124 $0
========== ========== ========== ======== ===
SIGNIFICANT ITEMS LIKELY TO IMPACT LIQUIDITY
On July 23, 2004, the Company acquired approximately 67% of the outstanding
ordinary shares of Drew, pursuant to the Company's exchange offer for all of the
outstanding ordinary shares of Drew, and has acquired all of the Drew shares
during fiscal 2005. Drew does not have a history of producing positive operating
cash flows and, as a result, at the time of acquisition, was operating under
financial constraints and was under-capitalized. As Drew is integrated into the
Company, management will be working to reverse the situation, while at the same
time seeking to strengthen Drew's market position. As of December 31, 2006, the
Company has loaned approximately $13,200,000 to Drew. The funds have been
primarily used to procure components to build up inventory to support the
manufacturing process, to pay off accounts payable and debt of Drew, to fund new
product development and underwrite operating losses incurred since acquisition.
The Company anticipates that further working capital will likely be required by
Drew.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The table below provides information about the Company's financial
instruments consisting of both variable and fixed interest rate debt
obligations. For debt obligations, the table represents principal cash flows and
related interest rates by expected maturity dates. Interest rates as of December
31, 2006 were variable at prime plus 4%, currently 10.25% per annum, on the
Texas Mezzanine Fund debt, and were fixed at 5.00% per annum, on the Symbiotics,
Inc. term debt. (See note 8 of the notes to the condensed consolidated financial
statements for further information regarding the Company's debt obligations.)
34
2006 2007
-------- --------------
Texas Mezzanine Fund Note $148,817 $ 95,239
Interest rate 10.25% Prime Plus 4%
Symbiotics, Inc. Note $ 91,663 $ 0
Interest rate 5.00% 5.00%
-------- ------------
TOTAL $240,480 $ 95,239
======== ============
EXCHANGE RATE RISK
Prior to the acquisition of Drew, the price of all product sold overseas
was denominated in United States Dollars and consequently the Company incurred
no exchange rate risk on revenue. However, a portion of Drew's product revenue
is denominated in United Kingdom Pounds and Euros. During the three-month
periods ended December 31, 2006 and 2005, Drew recorded approximately $829,900
and $1,316,000 respectively, of revenue denominated in United Kingdom Pounds and
Euros, respectively. During the six-month periods ended December 31, 2006 and
2005, Drew recorded approximately $1,546,900 and $2,159,000, respectively, of
revenue denominated in United Kingdom Pounds and Euros, respectively.
Drew incurs a portion of its expenses denominated in United Kingdom Pounds.
During the three-month periods ended December 31, 2006 and 2005, Drew incurred
approximately $1,157,000 and $1,364,000, respectively, of expense denominated in
United Kingdom Pounds. During the six-month periods ended December 31, 2006 and
2005, Drew recorded approximately $2,143,000 and $2,429,000 respectively, of
expense denominated in United Kingdom Pounds and Euros, respectively. The
Company's Sonomed and Vascular business units incur an immaterial portion of
their marketing expenses in the European market, the majority of which are
transacted in Euros.
The Company may begin to experience fluctuations, beneficial or adverse, in
the valuation of currencies in which the Company transacts its business, namely
the United States Dollar, the United Kingdom Pound and the Euro.
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, 2006, 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
35
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 first fiscal quarter ended December 31, 2006 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See note 11 of the notes to the condensed consolidated financial statements
for further information regarding the Company's legal proceedings.
ITEM 1A. RISK FACTORS
There are no material changes from the risks previously disclosed in our
Annual Report on Form 10-K for the period ended June 30, 2006.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on December 28, 2006. The
following matters were acted upon:
The following persons were elected as Class I directors of the Company,
each for a term of three years and until their successors are elected and
qualified.
Nominees for Director For Against Withheld
--------------------- --------- ------- --------
Anthony J. Coppola 4,879,579 0 328,917
William L.G. Kwan 4,878,684 0 329,812
Continuing as Directors after the Annual Meeting of Shareholders are
Richard J. DePiano, Jay L. Federman, M.D., Fred G. Choate, and Lisa A.
Napolitano.
ITEM 6. EXHIBITS
31.1 Certificate of Chief Executive Officer under Rule 13a-14(a).
31.2 Certificate of Principal Financial and Accounting Officer under
Rule 13a-14(a).
32.1 Certificate of Chief Executive Officer under Section 1350 of Title
18 of the United States Code.
32.2 Certificate of Principal Financial and Accounting Officer under
Section 1350 of Title 18 of the United States Code.
36
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, 2007 By: /s/ Richard J. DePiano
------------------------------------
Richard J. DePiano
Chairman and Chief
Executive Officer
Date: February 14, 2007 By: /s/ Robert O'Connor
------------------------------------
Robert O'Connor
Chief Financial Officer
37