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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, 1997
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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Date: October 31, 1997 10,517,519 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, 1997
and September 30, 1997 3
Condensed Statements of Operations for the
Three Months Ended September 30, 1996 and 1997 4
Condensed Statements of Cash Flows for the
Three Months Ended September 30, 1996 and 1997 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,
1997 1997
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ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 1,752,648 $ 1,708,151
Investments 235,000 235,000
Accounts receivable, net 587,265 622,375
Inventories, net 577,782 464,243
Other current assets 52,850 57,268
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Total current assets 3,205,545 3,087,037
Furniture and equipment, at cost, net 97,977 88,308
Long-term note receivable 62,500 75,000
License and distribution rights, net 892,528 956,303
Patents, net 465,046 467,421
Goodwill, net 1,095,982 1,064,060
Other assets 14,156 13,416
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$ 5,833,734 $ 5,751,545
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ 2,910 $ 1,909
Accounts payable 553,197 604,321
Accrued and other liabilities 479,175 315,921
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Total current liabilities 1,035,282 922,151
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Commitments
Shareholders' Equity:
Common stock, no par value; 35,000,000 shares authorized;
10,518,814 and 10,517,519 shares issued and outstanding
at June 30, 1997 and September 30, 1997, respectively 44,645,440 44,645,440
Accumulated deficit (39,846,988) (39,816,046)
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Total shareholders' equity 4,798,452 4,829,394
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$ 5,833,734 $ 5,751,545
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Note: The balance sheet at June 30, 1997 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,
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1996 1997
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Product revenues $ 1,435,223 $ 1,371,164
Costs and Expenses:
Cost of goods sold 720,989 606,015
Research and development 333,790 96,389
Marketing, general and administrative 773,612 664,319
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Total costs and expenses 1,828,391 1,366,723
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Income (loss) from operations (393,168) 4,441
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Other Income and Expenses:
Interest income 45,430 26,603
Interest expense (448) (102)
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Total other income and expense 44,982 26,501
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Net income (loss) $ (348,186) $ 30,942
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Net income (loss) per share $ (0.033) $ 0.003
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Shares used in computation of net
income (loss) per share 10,518,814 10,517,519
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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,
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1996 1997
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Cash Flows From Operating Activities:
Net income (loss) $ (348,186) $ 30,942
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 184,796 81,754
Net gain on sale of furniture and equipment (2,680) - -
Change in operating assets and liabilities:
Accounts receivable (82,684) (35,110)
Inventories (2,996) 113,539
Other current assets 8,179 (4,418)
Accounts payable, accrued and other liabilities (120,702) (112,130)
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Net cash provided from (used in) operating activities (364,273) 74,577
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Cash Flows From Investing Activities:
Long term note receivable - - (12,500)
Purchase of furniture and equipment (15,456) (1,200)
Proceeds from sale of furniture and equipment 5,400 - -
License and distribution rights cost - - (97,668)
Other assets (9,773) 740
Patent costs (9,118) (7,445)
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Net cash used in investing activities (28,947) (118,073)
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Cash Flows From Financing Activities:
Principal payments under capital lease obligations (1,878) (1,001)
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Net cash used in financing activities (1,878) (1,001)
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Net decrease in cash and cash equivalents (395,098) (44,497)
Cash and cash equivalents, beginning of period 2,584,503 1,752,648
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Cash and cash equivalents, end of period $ 2,189,405 $ 1,708,151
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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, 1997
are not indicative of the results that may be expected for the fiscal year ended
June 30, 1998.
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, 1997 included in the Company's annual
report on Form 10-K filed in October 1997 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 antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. The impact of Statement No. 128 on the calculation of primary and fully
diluted earnings per share is not expected to be material.
3. INVENTORIES
Inventories, stated at the lower of cost (determined on a first-in,
first-out basis) or market, consisted of the following:
<Captoin>
JUNE 30, 1997 SEPTEMBER 30, 1997
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Raw materials/
work in process $ 628,687 $ 504,407
Finished goods 610,093 620,834
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1,238,780 1,125,241
Valuation allowance (660,998) (660,998)
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$ 577,782 $ 464,243
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4. CONTINGENCIES
Litigation
As previously reported in reports filed with the Securities and
Exchange Commission, 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
(a litigation matter which the Company is no longer a party to and which was
reported in the Company's Form 10-Q for the quarter ended September 30, 1996).
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 Sections 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 take an immediate appeal. On January 16, 1997, the motion was
denied. On March 31, 1997, the Court issued Pretrial Order No. 2, which sets
January 31, 1998 as the cutoff date for discovery and directs that the case be
ready for trial by March 31, 1998. The Pretrial Order No. 2 also provides for
certain coordination of discovery in the Kozloski case, related cases making
similar allegations arising from other issuers' offerings and In Re Blech
Securities Litigation. Discovery has commenced in all related actions but is in
its preliminary stages.
While continuing to deny any wrongdoing and in an effort to curtail its
legal expenses related to this litigation, the Company has reached an agreement
in principle to settle this action for $500,000 on its behalf and on behalf of
its former and present officers and directors. This settlement is subject to
agreement upon final documentation and court approval. The Company's insurance
carrier has agreed to fund a significant portion of the settlement amount.
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements relating to fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 131 will have no impact on the
Company's result of operations, financial position or cash flows.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This document contains certain forward-looking statements that are
subject to risks and uncertainties. Forward-looking statements include certain
information relating to the development of joint venture opportunities, expenses
associated with defending itself in litigation matters, liquidity, the
continuation of fluctuations in results of operations, as well as information
contained elsewhere in this Report where statements are preceded by, followed by
or include the words "believes," "expects," "anticipates," or similar
expressions. For such statements the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. The forward-looking statements contained in this
document are subject to risks and uncertainties that could cause the assumptions
underlying such forward-looking statements and the actual results to differ
materially from those expressed in or implied by the statements. The most
important factors that could prevent the Company from achieving its goals -- and
cause the assumptions underlying the forward-looking statements and the actual
results to differ materially from those expressed in or implied by those
forward-looking statements -- include, without limitation and in addition to
those discussed in the documents filed by the Company with the Securities and
Exchange Commission, the following: (i) Future capital needs and the uncertainty
of additional funding (whether through the financial markets, collaborative or
other arrangements with strategic partners, or from other sources); (ii) The
outcome of, and costs associated with, litigation matters; (iii) The success of
negotiations and implementation of a joint venture agreement to license the
Company's intellectual laser properties.
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 drug delivery system to complement its other
businesses. In order to further develop and commercialize its laser technology,
the Company is negotiating a joint venture arrangement in which it, along with
an academic institution partner, will license their intellectual laser
properties to a newly formed company in return for an equity interest in the new
company and future royalties on product sales. This new company will have the
responsibility of funding and developing the laser technology through to
commercialization. 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 results of operations may fluctuate from
quarter to quarter for a number of reasons, including: (i) anticipated order and
shipment patterns of the Company's products; and (ii) general competitive and
economic conditions of the health care market.
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RESULTS OF OPERATIONS
Three Month Periods Ended September 30, 1996 and 1997
Product revenues decreased to $1,371,164 for the three-month period
ended September 30, 1997 from $1,435,223 for the same three-month period ended
September 30, 1996. This decrease of $64,059, or 4% is due to a decrease in
contract manufacturing revenues offset partially by an increase in revenues from
the sale of the Company's other product lines. Contract manufacturing revenues
vary from quarter to quarter depending upon when orders are received and the
lead times to produce such products.
Cost of goods sold totaled $606,015, or 44% of revenues, for the
three-month period ended September 30, 1997 as compared to $720,989, or 50% of
revenues, for the same period ended September 30, 1996. The 6% decrease in cost
of goods sold as a percentage of revenues is due primarily to (i) the
strengthening of the U.S. dollar against the German mark which has lowered the
cost associated with the purchases of AdatoSil(R)5000 Silicone Oil, the
Company's primary product; and (ii) a change in the product sales mix during the
respective periods from contract manufactured products which generally have a
higher cost of goods as a percent of revenues to the Company's other product
lines which have a lower cost of goods as a percentage of revenues.
Research and development expenses decreased $237,401, or 71%, for the
three-month period ended September 30, 1997 compared to the same three-month
period ended September 30, 1996. This decrease is due primarily to a decrease in
expenditures associated with the Company's laser development program as a result
of the change in the Company's market focus.
Marketing and general and administrative expenses decreased $109,293,
or 14%, for the three-month period ended September 30, 1997 compared to the same
period ended September 30, 1996. This decrease is due principally to the
reduction in the amortization expense of goodwill and license and distribution
rights resulting from the write down of such assets during the fourth quarter of
fiscal 1997 as described more fully in the Company's annual report on Form 10-K
for the fiscal year ended June 30, 1997.
Interest income decreased to $26,603 for the three-month period ended
September 30, 1997 from $45,430 for the same three-month period ended September
30, 1996. The decrease is due to a reduction in the levels of cash and cash
equivalents available for investment.
There is no provision for income taxes for the three-month period ended
September 30, 1997 due to the utilization of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash and cash equivalents of
$1,708,151 as compared to $1,752,648 at June 30, 1997. The Company's short-term
investments at September 30, 1997 and June 30, 1997 were $235,000. The net
decrease in cash and cash equivalents of $44,497 relates primarily to the
acquisition of certain license and distribution rights offset by cash provided
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, 1998. In the
longer term, however,
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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 and drug delivery programs.
The Company anticipates additional expenditures may be incurred in
connection with the legal proceedings as discussed in Part II. See "Part II.
Item 1. Legal Proceedings."
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 6, 1997 By: /s/ Richard J. DePiano
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Richard J. DePiano
Chairman and Chief Executive Officer
DATE: November 6, 1997 By: /s/ John T. Rich
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John T. Rich
Vice President Finance and Administration
(Principal Financial and Accounting
Officer) and Secretary
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