Mail Stop 6010
March 7, 2006
By U.S. Mail and Facsimile to (610) 688-3641
Mr. David Berkowitz
Vice President and Controller
Escalon Medical Corp.
565 East Swedesford Road, Suite 200
Wayne, PA 19087
RE: Escalon Medical Corp.
Form 10-K for the fiscal year ended June 30,
2005
Forms 10-QSB for the fiscal quarters ended September 30, 2005 and
December 31, 2005
Forms 8-K filed September 29, 2005 and October 6, 2004
File No. 0-20127
Dear Mr. Berkowitz:
We have reviewed your filing and have the following
comments.
We have limited our review to only your financial statements and
related disclosures and do not intend to expand our review to
other
portions of your documents. Where indicated, we think you should
revise your future documents in response to these comments. If
you
disagree, we will consider your explanation as to why our comment
is
inapplicable or a revision is unnecessary. Please be as detailed
as
necessary in your explanation. In some of our comments, we may
ask
you to provide us with information so we may better understand
your
disclosure. After reviewing this information, we may raise
additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form 10-K for the fiscal year ended June 30, 2005
Item 9A. Controls and Procedures, page 32
1. We note your disclosure that your management "concluded that
the
Company`s disclosure controls and procedures are effective in
recording, processing, summarizing and recording, on a timely
basis,
information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act." Please revise
future filings to clarify, if true, that your officers concluded
that
your disclosure controls and procedures are also effective to
ensure
that information required to be disclosed in the reports that you
file or submit under the Exchange Act is accumulated and
communicated
to your management, including your chief executive officer and
chief
financial officer, to allow timely decisions regarding required
disclosure. See Exchange Act Rule 13a-15(e).
2. Additionally we note your statement that a "control system, no
matter how well conceived and operated, cannot provide absolute
assurance that the objectives of the internal control system are
met..." Please revise future filings to state clearly, if true,
that
your disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and that your
principal executive officer and principal financial officer
concluded
that your disclosure controls and procedures are effective at that
reasonable assurance level. In the alternative, remove the
reference
to the level of assurance of your disclosure controls and
procedures.
Please refer to Section II.F.4 of Management`s Reports on Internal
Control Over Financial Reporting and Certification of Disclosure
in
Exchange Act Periodic Reports, SEC Release No. 33-8238, available
on
our website at <http://www.sec.gov/rules/final/33-8238.htm>.
Consolidated Financial Statements
Note 7. Capital Stock Transactions, page F-18
Sale of Common Stock and Warrants, page F-19
3. We note on March 17, 2004 you issued common stock and warrants
for
aggregate proceeds of $9.8 million. Please tell us and revise your
footnote in future filings to disclose how you valued and
accounted
for the warrants and the related registration rights agreements,
citing any authoritative literature upon which you are relying.
Tell
us how you considered the registration rights included as part of
the
terms of the warrants granted in the analysis you performed to
determine the appropriate classification of the warrants as equity
or
liability. Also, tell us and disclose the maximum amount of any
penalties for failing to have and maintain effectiveness of you
registration statement.
Note 12. Acquisition of Drew and Pro Forma Results of Operations,
page F-27
4. We note that a significant portion of your acquisition price
related to the Drew acquisition was allocated to goodwill. Tell
us
and revise future filings to provide a description of the factors
that contributed to a purchase price that resulted in recognition
of
such a significant goodwill asset in accordance with paragraph
51(b)
of SFAS 141. Additionally please tell us how you determined to
allocate the excess purchase price between goodwill and other
intangible assets. Specifically discuss the reasons for not
allocating more of the excess purchase price to intangible assets
such as customer relationships, contracts, licenses, technology,
etc.
For reference see EITF 02-17 and Appendix A of SFAS 141.
Note 13. Segmental Reporting, page F-29
5. If revenues or assets in any foreign country are material,
please
revise future filings to disclose the amount of such revenues and
assets separately. For reference see paragraph 38 of SFAS 131.
Forms 10-QSB for the quarters ended September 30, and December 31,
2005
6. Please provide us with you analysis, under Item 10(a)(2)(iv) of
Regulation S-B that demonstrates you are eligible to file on Form
10-
QSB starting with the quarter ended September 30, 2005.
Form 8-K filed September 29, 2005
7. We note that you present your non-GAAP measures and
reconciliation
in the form of non-GAAP statements of income. This format may be
confusing to investors as it also reflect several non-GAAP
measures,
including non-GAAP revenue, non-GAAP cost of goods sold, non-GAAP
gross margin, non-GAAP loss from operations, non-GAAP income
before
income taxes, and non- GAAP diluted earnings per share, which have
not been described to investors. In fact, it appears that
management
does not use all of these non-GAAP measures but they are shown
here
as a result of the presentation format. Please note that
Instruction
2 to Item 2.02 of Form 8-K requires that when furnishing
information
under this item you must provide all the disclosures required by
paragraph (e)(1)(i) of Item 10 of Regulation S-K, including a
reconciliation to the directly comparable GAAP measure for each
non-
GAAP measure presented and explain why you believe the measures
provide useful information to investors.
*
To eliminate investor confusion, please remove the non-GAAP
statement
of income from all future filings and instead disclose only those
non-GAAP measures used by management that you wish to highlight
for
investors, with the appropriate reconciliations.
* Please note that in the event that your Form 8-K is incorporated
by
reference into a 33 Act registration statement, we may have
additional questions relating to the appropriateness of this
information being included in a document filed with, and not just
furnished to, the Commission. At that time, we may request an
amendment to the Form 8-K.
Form 8-K filed October 6, 2004
Exhibit 99.1
Independent Auditors` Report, page 2
8. We see that the independent auditors have provided a "draft"
form
of their audit report. Please have the auditors revise their
report
to remove the "draft" and amend your Form 8-K accordingly.
9. In this regard, we note that the audit report issued by Baker
Tilly has an introductory paragraph that limits the liability of
their audit work. Please have the independent auditors tell us
how
this audit report complies with the requirements of AU Section 508
and Article 2 of Regulation S-X. We may have additional comments
after reviewing your response.
As appropriate, please respond to these comments within 10
business days or tell us when you will provide us with a response.
Please furnish a cover letter that keys your responses to our
comments and provides any requested information. Detailed cover
letters greatly facilitate our review. Please understand that we
may
have additional comments after reviewing your responses to our
comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities
Exchange Act of 1934 and that they have provided all information
investors require for an informed decision. Since the company and
its management are in possession of all facts relating to a
company`s
disclosure, they are responsible for the accuracy and adequacy of
the
disclosures they have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Eric Atallah, Staff Accountant at (202) 551-
3663
or me at (202) 551-3554 regarding comments on the financial
statements and related matters. In this regard, do not hesitate
to
contact Martin James, Senior Assistant Chief Accountant, at (202)
551-3671 with any other questions.
Sincerely,
Angela Crane
Branch Chief
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Mr. David Berkowitz
Escalon Medical Corp.
March 7, 2006
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