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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 No. 0-20127
ESCALON MEDICAL CORP.
(Exact name of Registrant as specified in its charter)
California 33-0272839
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
182 Tamarack Circle
Skillman, NJ 08558
(609)497-9141
(Address, including zip code, and
telephone number, including area code,
of Registrant's principal executive offices)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Date: November 1, 1996 10,518,814 Shares of Common Stock, no par value
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ESCALON MEDICAL CORP.
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of June 30, 1996
and September 30, 1996 3
Condensed Statements of Operations for the
Three Months Ended September 30, 1995 and 1996 4
Condensed Statements of Cash Flows for the
Three Months Ended September 30, 1995 and 1996 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
ESCALON MEDICAL CORP.
CONDENSED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
1996 1996
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ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 2,584,503 $ 2,189,405
Investments 795,970 795,970
Accounts receivable, net 735,910 818,594
Inventories, net 669,996 672,992
Other current assets 80,891 79,908
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Total current assets 4,867,270 4,556,869
Furniture and equipment, at cost, net 172,092 166,087
License and distribution rights, net 2,074,990 2,016,500
Patents, net 446,995 451,257
Goodwill, net 3,959,055 3,856,346
Other assets 79,494 82,071
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$ 11,599,896 $ 11,129,130
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ 7,510 $ 6,620
Accounts payable 653,871 514,840
Accrued and other liabilities 451,858 470,187
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Total current liabilities 1,113,239 991,647
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Long term capital lease obligations 3,235 2,247
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Commitments
Shareholders' Equity:
Common stock, no par value; 35,000,000 shares authorized;
10,518,814 shares issued and outstanding at June 30, 1996
and September 30, 1996 44,645,440 44,645,440
Accumulated deficit (34,162,018) (34,510,204)
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Total shareholders' equity 10,483,422 10,135,236
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$ 11,599,896 $ 11,129,130
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Note: The balance sheet at June 30, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed financial statements.
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ESCALON MEDICAL CORP.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1995 1996
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Product revenues $ -- $ 1,435,223
Costs and Expenses:
Cost of goods sold -- 720,989
Research and development 500,991 333,790
Marketing, general and administrative 480,018 773,612
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Total costs and expenses 981,009 1,828,391
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Loss from operations (981,009) (393,168)
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Other Income and Expenses:
Interest income 78,862 45,430
Interest expense -- (448)
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Total other income and expense 78,862 44,982
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Net loss $ (902,147) $ (348,186)
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Net loss per share $ (0.16) $ (0.03)
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Shares used in computation of net
loss per share 5,762,000 10,518,814
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See notes to condensed financial statements.
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ESCALON MEDICAL CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1995 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (902,147) $ (348,186)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 134,156 184,796
Amortization of deferred compensation 16,344 --
Write off of patents 25,000 --
Net gain on sale of furniture and equipment -- (2,680)
Change in current assets and liabilities
(Increase) decrease in accounts receivable -- (82,684)
(Increase) decrease in inventories 80,160 (2,996)
(Increase) decrease in other current assets (5,181) 8,179
Increase (decrease) in accounts payable, accrued
and other liabilities 136,439 (120,702)
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Net cash used in operating activities (515,229) (364,273)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments 1,930,954 --
Purchase of furniture and equipment -- (15,456)
Proceeds from sale of furniture and equipment -- 5,400
Other assets (116,575) (9,773)
Patent costs (3,825) (9,118)
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Net cash provided from (used in) investing activities 1,810,554 (28,947)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 32,939 --
Principal payments under capital lease obligations -- (1,878)
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Net cash provided from (used in) financing activities 32,939 (1,878)
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Net increase (decrease) in cash and cash equivalents 1,328,264 (395,098)
Cash and cash equivalents, beginning of period 3,518,410 2,584,503
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Cash and cash equivalents, end of period $4,846,674 $2,189,405
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See notes to condensed financial statements.
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ESCALON MEDICAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Escalon
Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.) (the
"Company") have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented. Operating results for the three-month period ended September 30, 1996
are not indicative of the results that may be expected for the fiscal year ended
June 30, 1997.
For more complete financial information, the accompanying condensed
financial statements should be read in conjunction with the audited financial
statements for the year ended June 30, 1996 included in the Company's annual
report on Form 10-K filed with the Securities and Exchange Commission.
2. PER SHARE INFORMATION
Per share data has been computed using the weighted average number of
shares outstanding. Common share equivalents issuable upon exercise of
outstanding stock options and warrants have been excluded from the computation
as their effect would be anti-dilutive.
3. INVENTORIES
Inventories, stated at the lower of cost (determined on a first-in,
first-out basis) or market, consisted of the following:
JUNE 30, 1996 SEPTEMBER 30, 1996
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Raw materials/work in process $ 623,460 $ 630,279
Finished goods 643,915 640,092
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1,267,375 1,270,371
Valuation allowance (597,379) (597,379)
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$ 669,996 $ 672,992
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4. CONTINGENCIES
Litigation
As previously reported in reports previously filed with the Securities
and Exchange Commission, on April 3, 1995, the Company was served with a
pleading entitled Amended Consolidated Class Action Complaint in an action
captioned In Re Blech Securities Litigation, 94 Civ. 9696, which was filed in
the United States
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District Court for the Southern District of New York on or about March 28, 1995.
On June 6, 1996, the court granted in part and denied in part motions by the
Company and certain of the other defendants to dismiss the complaint which
dismissed all claims against the Company. On July 26, 1996, the plaintiffs filed
an amended complaint. The amended complaint does not name the Company as a
defendant.
On or about June 8, 1995, a purported class action complaint captioned
George Kozloski v. Intelligent Surgical Lasers, Inc., et al., 95 Civ. 4299, was
filed in the U.S. District Court for the Southern District of New York as a
"related action" to In Re Blech Securities Litigation. The plaintiff purports to
represent a class of all purchasers of the Company's stock from November 17,
1993, to and including September 21, 1994. The complaint alleges that the
Company, together with certain of its officers and directors, David Blech and D.
Blech & Co., Inc., issued a false and misleading prospectus in November 1993 in
violation of Section 11, 12 and 15 of the Securities Act of 1933. The complaint
also asserts claims under Section 10(b) of the Securities Exchange Act of 1934
and common law. Actual and punitive damages in an unspecified amount are sought,
as well as a constructive trust over the proceeds from the sale of stock
pursuant to the Offering. On June 6, 1996, the court denied a motion by the
Company and the named officers and directors to dismiss the Kozloski complaint
and, on July 22, 1996, the Company Defendants filed an answer to the complaint
denying all allegations of wrongdoing and asserting various affirmative
defenses. On August 15, 1996, the Company, together with three other companies
against whom similar claims have been asserted in separate actions filed as
"related" to In Re Blech Securities Litigation, filed a motion for permission to
appeal. On October 10, 1996, the court heard oral arguments on the motion for
permission to appeal and a decision is pending.
The Company believes it has meritorious defenses and intends to
vigorously defend the Kozloski litigation. Regardless of the outcome, the
Company could be required to incur substantial expense in defending this
lawsuit.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the interim
financial statements and the notes thereto which are set forth elsewhere in this
report on Form 10-Q.
On February 12, 1996, the Company acquired all of the assets and
certain liabilities of Escalon Ophthalmics, Inc. ("EOI"). Prior to the
acquisition, the Company was in the development stage and devoting substantially
all of its resources to the research and development of laser systems designed
for the treatment of ophthalmic disorders. Upon completion of the acquisition,
the Company changed its market focus and is now engaged in developing, marketing
and distributing ophthalmic medical devices and pharmaceuticals. The Company is
also developing its ophthalmic laser and drug delivery systems to complement its
other businesses. Sales of products acquired from EOI are made primarily to
hospitals and physicians throughout the United States. As a result of the
acquisition, the Company is no longer in the development stage for financial
reporting purposes.
The Company expects that operating losses will continue as the Company
continues research and development relating to the application of its various
laser and drug delivery technologies and until product sales generate sufficient
revenues to fund its continuing operations.
The Company expects that results of operations may fluctuate from
quarter to quarter for a number of reasons, including: (i) limited laser system
sales in the near term as the Company pursues required regulatory clearances and
approvals for its laser systems; (ii) anticipated order and shipment patterns of
the Company's other products; and (iii) general competitive and economic
conditions of the health care market.
RESULTS OF OPERATIONS
Three Month Periods Ended September 30, 1995 and 1996
Product revenues increased to $1,435,223 for the three-month period
ended September 30, 1996. There were no revenues for the same interim period
ended September 30, 1995. Product revenues for the three-month period ended
September 30, 1996 relate directly to the EOI acquisition as there were no laser
system sales during this period. The Company's ability to sell its laser systems
in the U.S. is subject to certain Food and Drug Administration ("FDA")
limitations based on the status of the Company's various clinical trials.
International sales of its laser systems, while not directly limited by the FDA,
are also indirectly impacted by the status of these U.S. clinical trials. In
addition, the Company has reduced the size of its laser operations workforce in
order to preserve working capital. Given these factors, it is not likely that
laser sales volumes will increase until such time as the viability of these
various applications are further demonstrated through FDA approvals to advance
into later phases of the clinical trials.
Cost of goods sold totaled $720,989, or 50% of product revenues for the
three-month period ended September 30, 1996. The Company recognized no expense
for cost of goods sold for the same interim period ended September 30, 1995. The
increase in cost of goods sold is attributable to the EOI acquisition and as
such any gross margin analysis between interim periods would not be meaningful.
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Research and development expenses decreased $167,201 or 33% for the
three-month period ended September 30, 1996 compared to the same three-month
period ended September 30, 1995. Research and development expenses associated
with the Company's laser operations decreased $321,145 offset by expenditures of
$153,944 associated with the Company's surgical products and pharmaceutical/drug
delivery research and development programs acquired from EOI. The reduction in
laser research and development expenses is a direct result of a reduction in
workforce and other cost reduction programs implemented during the fiscal year
ended June 30, 1996 in connection with the Company's change in focus of its
operations. The Company's research and development expenses consist primarily of
direct expenses associated with compensation and benefits, consulting and
research and development arrangements with third parties and indirect expenses
such as materials, equipment and supplies.
Marketing and general and administrative expenses increased $293,594 or
61% for the three-month period ended September 30, 1996 compared to the same
period ended September 30, 1995. This increase relates primarily to (i)
marketing and general and administrative operations associated with the EOI
acquisition; (ii) legal fees associated with the Company's ongoing litigation;
and (iii) offset by decreases in laser operations personnel, travel and
marketing related costs, associated with the aforementioned workforce and other
cost reduction programs.
Interest income decreased to $45,430 for the three-month period ended
September 30, 1996 from $78,862 for the same three-month period ended September
30, 1995. The decrease is due to a reduction in the levels of cash and cash
equivalents available for investment.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had cash and cash equivalents of
$2,189,405 as compared to $2,584,503 at June 30, 1996. The Company's short-term
investments at September 30, 1996 and June 30, 1996 were $795,970. The net
decrease in cash and cash equivalents of $395,098 relates primarily to the loss
from operations.
The Company anticipates that the cash and cash equivalents and the
interest earned thereon, together with funds generated from future product
sales, should be adequate to satisfy its capital requirements, based on current
levels of operations, through the fiscal year ending June 30, 1997. In the
longer term, however, the Company will seek corporate partnering, licensing and
other fund raising opportunities to satisfy the significant expenditures
anticipated with development of its surgical products, pharmaceutical/drug
delivery and laser operations.
Pursuant to a collaborative research and development agreement relating
to the Company's drug delivery technology, the Company has committed to pay
$250,000 during fiscal year 1997. During the three-month period ended September
30, 1996, approximately $60,000 of such commitment was paid. Other significant
expenditures may be incurred in connection with the legal proceedings as
discussed in Part II. See "Part II. Item 1. Legal Proceedings."
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 4 of the Notes to Condensed Financial
Statements in Part I is incorporated herein by reference thereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESCALON MEDICAL CORP.
(Registrant)
DATE: November 5, 1996 By: /s/ Sterling C. Johnson
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Sterling C. Johnson
President and Chief Executive Officer
DATE: November 5, 1996 By: /s/ John T. Rich
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John T. Rich
Vice President Finance and Administration
(Principal Financial and Accounting
Officer) and Assistant Secretary
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