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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, 1999
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.)
351 East Conestoga Road
Wayne, PA 19087
(610) 688-6830
(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 11, 1999 3,242,184 Shares of Common Stock, no par value
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
INDEX
Part I. FINANCIAL INFORMATION
PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
and September 30, 1999 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1998 and 1999 5
Notes to Condensed Consolidated 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 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
1999 1999
---- ----
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 3,854,240 $ 3,378,951
Cash and cash equivalents - restricted 1,000,000 1,000,000
Note Receivable 15,000 15,000
Accounts receivable, net 1,063,829 2,170,447
Inventory, net 1,117,208 913,704
Other current assets 142,235 141,363
------------ ------------
Total current assets 7,192,512 7,619,465
Furniture and equipment, at cost, net 449,555 438,283
Long-term note receivable 150,000 150,000
License and distribution rights, net 537,138 261,884
Patents, net 495,923 499,040
Goodwill, net 1,510,207 1,476,457
Other assets 67,438 65,217
------------ ------------
$ 10,402,773 $ 10,510,346
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable, bank $ 1,000,000 $ --
Current portion of long-term debt 200,000 200,000
Accounts payable 434,308 332,789
Accrued and other liabilities 1,757,432 1,617,604
------------ ------------
Total current liabilities 3,391,740 2,150,393
Long-term debt, net of current portion 733,332 683,331
------------ ------------
Total liabilities 4,125,072 2,833,724
------------ ------------
Shareholders' Equity:
Common stock, no par value; 35,000,000 shares
authorized; 3,377,164 shares
issued less 134,980 Treasury shares at
June 30, 1999 and at September 30, 1999 46,024,811 46,024,811
Treasury stock (118,108) (118,108)
Accumulated deficit (39,629,002) (38,230,081)
------------ ------------
Total shareholders' equity 6,277,701 7,676,622
------------ ------------
$ 10,402,773 $ 10,510,346
============ ============
Note: The consolidated balance sheet at June 30, 1999 has been derived from the
audited consolidated 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 consolidated financial statements.
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1999
---- ----
Sales revenues $ 1,685,422 $ 1,423,677
Costs and expenses:
Cost of goods sold 716,856 732,840
Research and development 155,437 235,434
Marketing, general and administrative 682,963 938,601
----------- -----------
Total costs and expenses 1,555,256 1,906,875
----------- -----------
Income (loss) from operations 130,166 (483,198)
----------- -----------
Other income and expenses:
Sale of Silicone Oil product line -- 1,848,215
Interest income 36,928 48,885
Interest expense (25) (14,981)
----------- -----------
Total other income and expense 36,903 1,882,119
----------- -----------
Net income $ 167,069 $ 1,398,921
=========== ===========
Basic net income per share $ 0.051 $ 0.431
=========== ===========
Diluted net income per share $ 0.041 $ 0.429
=========== ===========
Weighted average shares - basic 3,040,152 3,242,184
=========== ===========
Weighted average shares - diluted 4,114,879 3,264,610
=========== ===========
See notes to condensed consolidated financial statements.
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1999
---- ----
Cash Flows From Operating Activities:
Net income $ 167,069 $ 1,398,921
Adjustments to reconcile net income to net cash provided
from (used in) operating activities:
Depreciation and amortization 86,140 80,705
Write off of patents 24,805 --
Gain on Sale of Silicone Oil product line -- (1,848,215)
Change in operating assets and liabilities:
Accounts receivable 70,814 481,267
Inventories (243,390) 203,504
Other current assets (119,827) 8,595
Accounts payable, accrued and other liabilities 119,819 (241,347)
----------- -----------
Net cash provided from operating activities 105,430 83,430
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (259,000) (8,366,508)
Proceeds from maturities of short-term investments 255,016 8,366,508
Proceeds from sale of Silicone Oil product line -- 529,295
Long term note receivable (12,500) --
Purchase of furniture and equipment (10,457) (11,861)
Other assets (2,400) (18,187)
Patent costs (6,681) (7,965)
----------- -----------
Net cash provided from (used in) investing activities (36,022) 491,282
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on line of credit -- (1,000,000)
Principal payments on term loan -- (50,001)
Purchase of treasury stock (118,108) --
Payment of preferred stock dividends (25,770) --
----------- -----------
Net cash used in financing activities (143,878) (1,050,001)
----------- -----------
Net decrease in cash and cash equivalents (74,470) (475,289)
Cash and cash equivalents, beginning of period 2,263,967 3,854,240
----------- -----------
Cash and cash equivalents, end of period $ 2,189,497 $ 3,378,951
=========== ===========
See notes to condensed consolidated financial statements.
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.)
and its subsidiaries Escalon Pharmaceutical Inc. and Escalon Vascular Access,
Inc. (jointly referred to as "Escalon" or 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 interim periods
are not indicative of the results that may be expected for the fiscal year
ending June 30, 2000.
For more complete financial information, the accompanying condensed
financial statements should be read in conjunction with the audited consolidated
financial statements for the year ended June 30, 1999 included in the Company's
annual report on Form 10-K.
2. PER SHARE INFORMATION
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:
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1999
---- ----
Numerator:
Numerator for basic earnings per share:
Net income $ 167,069 $ 1,398,921
Preferred stock dividends (12,270) --
----------- -----------
Numerator for basic earnings per share-income available to
Common shareholders 154,799 1,398,921
Effect of dilutive securities:
Preferred stock dividends 12,270 --
----------- -----------
Numerator for diluted earnings per share-income available to
Common shareholders after assumed conversions $ 167,069 $ 1,398,921
=========== ===========
Denominator:
Denominator for basic earnings per share - weighted average shares 3,040,152 3,242,184
Effect of dilutive securities:
Convertible preferred stock 1,101,661 --
Employee stock options -- 22,426
----------- -----------
Denominator for diluted earnings per share - weighted average and
assumed conversion 4,141,813 3,264,610
=========== ===========
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2. PER SHARE INFORMATION (CONTINUED)
Basic earnings per share $ 0.051 $ 0.431
=========== ===========
Diluted earnings per share $ 0.040 $ 0.429
=========== ===========
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, 1999 SEPTEMBER 30, 1999
------------- ------------------
Raw materials/work in process $ 526,553 $ 549,215
Finished goods 623,655 409,489
----------- -----------
1,150,208 958,704
Valuation allowance (33,000) (45,000)
----------- -----------
$ 1,117,208 $ 913,704
=========== ===========
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). 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.
In an effort to curtail its legal expenses related to this litigation,
while continuing to deny any wrongdoing, the Company has reached an agreement,
subject to final court approval, to settle this action on its behalf and on
behalf of its former and present officers and directors, for $500,000. The
Company's directors and officers insurance carrier has agreed to fund a
significant portion of the settlement amount. Both the Company and its
insurance carrier have deposited such funds in an escrow account.
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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 acquisition and joint venture
opportunities, 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 (including Amendment No. 3 to a Registration Statement on
Form S-3 filed by the Company with the Securities and Exchange Commission on
April 30, 1998 (Registration No. 333-44513)), 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); and (ii) The outcome of, and costs associated with, litigation
matters.
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.
Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers,
Inc.) and its subsidiaries Escalon Pharmaceutical Inc. and Escalon Vascular
Access Inc. (jointly referred to as "Escalon" or the "Company"), operates in the
healthcare market specializing in the development, marketing and distribution of
ophthalmic medical devices, pharmaceutical and vascular access products. The
Company is also developing its ophthalmic drug delivery system to complement its
other businesses.
On February 12, 1996, the Company acquired all of the assets and
certain liabilities of Escalon Ophthalmics, Inc. ("E.O.I.") 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, pharmaceuticals and niche medical
products. The Company is continuing development of its ophthalmic drug delivery
system to complement its other businesses. Sales of products acquired from EOI
are made primarily to hospitals and physicians throughout the United States.
Escalon purchased the vascular access business unit of Radiance Medical
Systems, Inc. in January 1999. This was significant as the Company's first step
in diversification. The vascular access product line is the first niche product
acquired outside the ophthalmic medical field. Vascular products are marketed to
the pediatric and critical care providers through independent distributors.
Escalon's market strategy is to locate and acquire profitable niche
medical products that it owns and controls the rights to. To finance this
program, in the third quarter of fiscal 1999, the Company sold its
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license and distribution rights to Betadine(R)5% Sterile Ophthalmic Prep
Solution ("Betadine"). In August, 1999 the Company sold its license and
distribution rights to Adatosil(R)5000 Silicone Oil ("Silicone Oil").
To further develop and commercialize its proprietary laser technology,
in October 1997, the Company licensed its intellectual laser properties to a
newly formed company, IntraLase, in return for an equity interest in IntraLase
and future royalties on product sales. IntraLase has the responsibility of
funding and developing the laser technology through to commercialization.
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; (ii) lead times to produce the
Company's products; and (iii) general competitive and economic conditions of the
health care market.
RESULTS OF OPERATIONS
Three-month Periods Ended September 30, 1998 and 1999
Product revenues decreased $261,745, or 16%, to $1,423,677 for the
three-month period ended September 30, 1999 as compared to $1,685,422 for the
same period ended September 30, 1998. This revenue decrease reflects a drop in
unit sales of Silicone Oil, $424,900, and Betadine, $262,300. The license and
distribution rights to these product lines were sold in August and March of
1999, respectively. Revenue from the vascular access business, acquired in
January 1999, provided $508,600 to partially replace this revenue decline. In
the first quarter of fiscal 2000, Escalon also experienced a decline in unit
sales of its capital equipment, disposables and OEM products of $26,400, $17,800
and $61,100, respectively. These declines were offset by a $22,100 increase in
sales for ISPAN(TM) gas products. Contract manufacturing revenues vary from
quarter to quarter depending on when orders are received and the lead times to
produce such products.
Cost of goods sold totaled $732,840, or 51% of revenue, for the
three-month period ended September 30,1999, as compared to $716,856, or 42% of
revenue, for the same period last year. The costs associated with the vascular
access product line, for the current quarter, were $253,102. There was no
comparable cost for the same period last year. Silicone oil costs decreased by
$149,538 to $250,331 in the first quarter of fiscal 2000, this reflects the sale
of that product line in mid quarter. Oil costs for the entire first quarter of
fiscal 1999 amounted to $399,869. There are no costs shown in the current
quarter for Betadine (product line sold in third quarter fiscal 1999), in the
comparable first quarter of fiscal 1999; cost of goods sold for this product
line amounted to $113,044. Medical product manufacturing costs increased to
$229,407 in the first quarter of fiscal 2000, as compared to $203,943 in fiscal
1999.
Research and development expenses increased $79,997, or 51%, for the
three-month period ended September 30, 1999 when compared to the same period in
1998. Expenses for pre-clinical and clinical trials related to providone-iodine
2.5% and Ocufit SR(R) increased $50,849 over the first quarter of fiscal 1999.
The Company also incurred $29,049 in costs for vascular access products that did
not exist until the third quarter of fiscal 1999.
Marketing, general and administrative expenses increased $255,638, or
37%, for the three-month period ended September 30, 1999 compared to the same
period last year. Expenses for the vascular access product line were $302,128,
there were no comparable costs in the first fiscal quarter of 1999. The Company
experienced an overall decline in administrative and sales cost of $46,490 from
the previous year. Most of that reduction relates to amortization and other
costs associated with the sale of Silicone Oil and Betadine product lines.
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Interest income increased to $48,885 for the three-month period ended
September 30, 1999 from $36,928 for the same period in 1998. This increase is a
result of increased cash and cash equivalents available for investment, due to
proceeds from received from sale of the Silicone Oil and Betadine product lines.
Interest expense increased to $14,981, as a result of corporate borrowing
arrangements that did not exist until the third quarter of fiscal 1999.
In August 1999, the Company reported the sale of its license and
distribution rights for the Adatosil(R) 5000 Silicone Oil product line. This
sale resulted in a $1,848,215 gain after writing off of the remaining net book
value of license and distribution rights associated with that product line. The
Company will also continue to receive additional consideration based on future
sales of Adatosil (R) Silicone Oil over the next six years.
There is no provision for income taxes for the three-month periods
ended September 30, 1999 and 1998 due to the utilization of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of
$3,378,951 as compared to $3,854,240 at June 30, 1999. Cash and cash equivalents
decreased by $475,289. During the first quarter, the Company paid off the
$1,000,000 line of credit facility that was outstanding at June 30, 1999.
Offsetting this reduction in cash was a receipt of $529,295, the first
installment paid on the Silicone Oil product line sale.
In February 1999, the Company obtained a $2,000,000 credit facility
from PNC Bank N.A. This marked the first time the Company gained access to
traditional mainstream financing sources. As a result of this financing, Escalon
obtained a $1,000,000 five-year term loan and access to a $1,000,000 line of
credit. In addition, Escalon now maintains a $1,000,000 certificate of deposit
with PNC Bank, N.A. The investment is considered current and restricted, since
it is pledged as collateral against the loan. All of the Company's assets and
cash collateral of $1,000,000 collateralize these agreements.
The Board of Directors has authorized the repurchase of up to 500,000
shares of the Company's common stock. The price, timing and manner of these
purchases will be at the discretion of management. No purchases have been made,
nor are any expected to be made, under this authority.
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 September 30, 2000. 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 products, vascular access
devices and drug delivery programs.
YEAR 2000 ISSUES
None of the Company's products use date sensitive software; therefore
no customer service nor support concerns need to be addressed. The Company
utilizes commercially available off the shelf software packages with support
packages that specifically address this issue. To date the cost of year 2000
compliance has been insignificant. Additional expenditures are not expected to
be of any significant amount.
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Management judges the likelihood of disruption of temporary
manufacturing, customer service, sales and marketing, research and development
or administrative functions to be minimal in regard to year 2000 compliance of
our key suppliers and customers. Based on communications with our key suppliers,
including utility and telecommunications providers, the year 2000 issue is being
adequately addressed.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 4 of the Notes to Condensed
Consolidated Financial Statements in Part I is incorporated herein by reference
thereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.5 Employment Agreement between Registrant and Ronald
Hueneke dated July 1, 1999.
10.14 1999 Equity Incentive Plan of Registrant.
27 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on August 26, 1999, and an Amendment
thereto was filed on October 19, 1999, announcing the sale of the Company's
inventory and license and distribution rights to Bausch & Lomb Surgical, Inc.
The content of that report is summarized below:
Effective August 13, 1999, The Company entered into a Termination
Agreement (the "Termination Agreement") between the Company and
Bausch & Lomb Surgical, Inc. ("BLS") and a Supply Agreement (the
"Supply Agreement") between the Company and BLS.
Pursuant to the Termination Agreement, the Distribution and Development
Agreement dated January 1, 1990, as amended, between the Company and
Adatomed GmbH, a wholly owned subsidiary of BLS, was terminated, and
the Company transferred its license and distribution rights for
Adatosil(R)5000 Silicone Oil, as well as related inventory, back to
BLS. In consideration of the transfer, BLS agreed to pay to the
Company cash in the amount of $2,117,180, payable in quarterly
installments, with the initial installment paid on August 14, 1999, and
additional cash consideration based on future sales of Adatosil(R)5000
Silicone Oil over the next six years. Adatosil(R)5000 Silicone Oil
represented approximately 56% of the Company's sales in the fiscal
year ended June 30, 1999.
Pursuant to the Supply Agreement, BLS agreed to purchase from the
Company, and the Company agreed to manufacture and sell to BLS,
certain viscous fluid systems for a period of six years.
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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 15, 1999 By: /s/ Douglas R. McGonegal
----------------------------------------
Douglas R. McGonegal
Vice President Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer) and Secretary
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