<PAGE> 1
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 March 31, 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)
<TABLE>
<S> <C>
California 33-0272839
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
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: May 6, 1997 10,517,519 Shares of Common Stock, no par value
<PAGE> 2
ESCALON MEDICAL CORP.
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of June 30, 1996
and March 31, 1997 3
Condensed Statements of Operations for the
Three Months Ended and Nine Months Ended
March 31, 1996 and 1997 4
Condensed Statements of Cash Flows for the
Nine Months Ended March 31, 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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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
ESCALON MEDICAL CORP.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 2,584,503 $ 1,973,252
Investments 795,970 285,863
Accounts receivable, net 735,910 610,936
Inventories, net 669,996 857,356
Other current assets 80,891 38,249
------------ ------------
Total current assets 4,867,270 3,765,656
Furniture and equipment, at cost, net 172,092 136,686
License and distribution rights, net 2,074,990 1,879,354
Patents, net 446,995 465,064
Goodwill, net 3,959,055 3,649,758
Other assets 79,494 14,353
------------ ------------
$ 11,599,896 $ 9,910,871
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ 7,510 $ 3,935
Accounts payable 653,871 449,663
Accrued and other liabilities 451,858 330,768
------------ ------------
Total current liabilities 1,113,239 784,366
------------ ------------
Long term capital lease obligations 3,235 --
------------ ------------
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 March 31, 1997 44,645,440 44,645,440
Accumulated deficit (34,162,018) (35,518,935)
------------ ------------
Total shareholders' equity 10,483,422 9,126,505
------------ ------------
$ 11,599,896 $ 9,910,871
============ ============
</TABLE>
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.
3
<PAGE> 4
ESCALON MEDICAL CORP.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- --------------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Product revenues $ 964,424 $ 1,368,192 $ 964,424 $ 4,089,282
Costs and Expenses:
Cost of goods sold 482,901 672,830 482,901 2,048,427
Research and development 537,402 296,307 1,526,869 935,934
Marketing, general and administrative 970,500 858,112 1,773,206 2,573,954
Acquired research and development 1,000,000 -- 1,000,000 --
------------ ------------ ------------ ------------
Total costs and expenses 2,990,803 1,827,249 4,782,976 5,558,315
------------ ------------ ------------ ------------
Loss from operations (2,026,379) (459,057) (3,818,552) (1,469,033)
------------ ------------ ------------ ------------
Other Income and Expenses:
Interest income 58,371 29,744 211,217 113,282
Interest expense (4,323) (319) (4,323) (1,166)
------------ ------------ ------------ ------------
Total other income and expense 54,048 29,425 206,894 112,116
------------ ------------ ------------ ------------
Net loss $ (1,972,331) $ (429,632) $ (3,611,658) $ (1,356,917)
============ ============ ============ ============
Net loss per share $ (0.24) $ (0.04) $ (0.55) $ (0.13)
============ ============ ============ ============
Shares used in computation of net
loss per share 8,273,000 10,518,814 6,596,000 10,518,814
============ ============ ============ ============
</TABLE>
See notes to condensed financial statements.
4
<PAGE> 5
ESCALON MEDICAL CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------------------
1996 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,611,658) $(1,356,917)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 567,299 570,530
Amortization of deferred compensation 16,344 --
Write off of patents 78,462 --
Acquired research and development 1,000,000 --
Net (gain) loss on sale of furniture and equipment 58,770 (2,541)
Change in current assets and liabilities
(Increase) decrease in accounts receivable 93,026 124,974
(Increase) decrease in inventories 185,447 (187,360)
(Increase) decrease in other current assets (43,646) 49,251
Increase (decrease) in accounts payable, accrued
and other liabilities (1,007,777) (325,298)
----------- -----------
Net cash used in operating activities (2,663,733) (1,127,361)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments 3,113,396 510,107
Purchase of furniture and equipment (21,778) (22,038)
Proceeds from sale of furniture and equipment -- 5,900
Other assets 70,285 58,532
Patent costs (27,142) (29,581)
Cash acquired from acquisition of Escalon 1,756 --
----------- -----------
Net cash provided from investing activities 3,136,517 522,920
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 82,463 --
Principal payments under capital lease obligations (1,115) (6,810)
----------- -----------
Net cash provided from (used in) financing activities 81,348 (6,810)
----------- -----------
Net increase (decrease) in cash and cash equivalents 554,132 (611,251)
Cash and cash equivalents, beginning of period 3,518,410 2,584,503
----------- -----------
Cash and cash equivalents, end of period $ 4,072,542 $ 1,973,252
=========== ===========
</TABLE>
See notes to condensed financial statements.
5
<PAGE> 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited 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
and nine-month periods ended March 31, 1997 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 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:
<TABLE>
<CAPTION>
JUNE 30, 1996 MARCH 31, 1997
------------- --------------
<S> <C> <C>
Raw materials/work in process $ 623,460 $ 664,767
Finished goods 643,915 789,968
----------- -----------
1,267,375 1,454,735
Valuation allowance (597,379) (597,379)
----------- -----------
$ 669,996 $ 857,356
============ ===========
</TABLE>
4. CONTINGENCIES
Litigation
As previously reported in reports previously 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
most recently 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
6
<PAGE> 7
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 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 some of those related actions but is in its preliminary stages.
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.
7
<PAGE> 8
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 drug delivery system and continues to seek a
collaborative partner to aid in the development of its ophthalmic laser program.
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) anticipated order and
shipment patterns of the Company's products; and (ii) general competitive and
economic conditions of the health care market.
RESULTS OF OPERATIONS
Three and Nine-Month Periods Ended March 31, 1996 and 1997
Product revenues increased $403,768, or 42%, to $1,368,192 for the
three-month period ended March 31, 1997 as compared to $964,424 for the same
interim period ended March 31, 1996. For the nine-month period ended March 31,
1997, product revenues increased $3,124,858, or 324%, to 4,089,282 as compared
to $964,424 for the same interim period in 1996. Product revenues for both the
three and the nine-month periods ended March 31, 1997 relate primarily to the
product lines acquired from EOI since the February 12, 1996 acquisition date.
Thus, the three and nine-month periods ended March 31, 1996 includes EOI product
revenues from February 12, 1996 as compared to the inclusion of product revenues
for the full three and nine-month periods ended March 31, 1997.
Cost of goods sold totaled $672,830, or 49% of product revenues, for
the three-month period ended March 31, 1997. For the nine-month period ended
March 31, 1997, cost of goods sold totaled $2,048,427, or 50% of product
revenues. For the three and nine-month periods ended March 31, 1996, cost of
goods sold totaled $482,901, or 50% of product revenues. The overall dollar
increase in cost of goods sold for the respective periods relates to the
increase in sales noted above. Cost of goods sold as a percentage of sales has
remained relatively consistent between periods with the slight decrease in the
percentage during the three-month period ended March 31, 1997. This decrease has
resulted from the strengthening of the U.S. dollar against the German mark which
has lowered the cost associated with one of the Company's major products,
AdatoSil 5000 Silicone Oil.
8
<PAGE> 9
Research and development expenses decreased $241,095 or 45% for the
three-month period ended March 31, 1997 compared to the same three-month period
ended March 31, 1996, and decreased $590,935 or 39% for the nine-month period
ended March 31, 1997 as compared to the same interim period ended March 31,
1996. For both the three and nine-month periods ended March 31, 1997, the
decrease in research and development expenses relates to a decrease in the
Company's overall laser operations offset partially by expenditures 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.
Reflected in both the three and nine-month periods ended March 31, 1996
is a $1,000,000 charge to operations for in-process technology acquired from
EOI.
Marketing and general and administrative expenses decreased $112,388 or
12% for the three-month period ended March 31, 1997 compared to the same
three-month period ended March 31, 1996, and increased $800,748 or 45% for the
nine-month period ended March 31, 1997 as compared to the same interim period
ended March 31, 1996. Excluding severance costs of approximately $248,000
recorded by the Company in March 1996, marketing, general and administrative
expenses would have increased $135,612 and $1,048,748 for the three and
nine-month periods ended March 31, 1997, respectively. This increase relates
primarily to (i) the 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 cost reduction programs.
Interest income decreased to $29,744 and $113,282 for the three and
nine-month periods ended March 31, 1997 from $58,371 and $211,217 for the same
three and nine-month periods ended March 31,1996. The decrease is due to a
reduction in the levels of cash and cash equivalents available for investment.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had cash and cash equivalents of
$1,973,252 as compared to $2,584,503 at June 30, 1996. The Company's short-term
investments at March 31, 1997 and June 30, 1996 were $285,863 and $795,970,
respectively. The net decrease in cash and cash equivalents of $611,251 relates
primarily to the loss from operations, offset by the decrease in short-term
investments due to normally occurring maturities.
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, 1997. In the longer term, however,
the Company anticipates seeking corporate partnering, licensing and other fund
raising opportunities to satisfy the significant expenditures anticipated with
the development of its surgical products, pharmaceutical/drug delivery and laser
operations.
Pursuant to various collaborative research and development, technology
license, and consulting agreements associated with the Company's drug delivery
technology, the Company has financial commitments of $245,000 to be paid during
the fourth quarter of fiscal 1997 and $125,000, $75,000 and $25,000 to be paid
during fiscal years 1998, 1999 and 2000, respectively. Other significant
expenditures may be incurred in connection with the legal proceedings as
discussed in Part II. See "Part II. Item 1. Legal Proceedings."
9
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CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report and any documents incorporated by reference herein contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements include, among others, statements
concerning the Company's litigation matters, the Company's expected results of
operations, the Company's liquidity and capital resources and other statements
of expectations, beliefs, future plans and strategies, anticipated events or
trends and similar expressions concerning matters that are not historical facts.
The forward-looking statements in this reports 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 factor that could cause the
assumptions underlying the forward-looking statements to differ from actual
results include, but are not limited to, the following: (i) the Company's
ability to increase product sales and realize benefits from its research and
development program; (ii) risks relating to its litigation matters, including
the risk that the costs of such litigation could be higher than expected and the
ultimate results different than expected; and (iii) changes in capital
requirements and/or a more rapid decrease in the Company's cash and other liquid
assets than expected.
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
A report on Form 8-K was filed on March 7, 1997 and is
incorporated herein by reference. The content of the report is
summarized below:
The Company reported several senior management changes. Richard J.
DePiano, a Director of the Company, was named Chairman of the
Board and Chief Executive Officer. Jay L. Federman, M.D. resigned
his position as Chairman of the Board and will remain as a
Director. Sterling C. Johnson was appointed Chief Operating
Officer and will retain the position of President.
Another report on Form 8-K was filed on May 1, 1997 and is
incorporated herein by reference. The content of the report is
summarized below:
The Company reported that effective April 30, 1997, Mr. Sterling
C. Johnson, President and Chief Operating Officer of the Company
stepped down to pursue other opportunities.
10
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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.
<TABLE>
<S> <C>
ESCALON MEDICAL CORP.
(Registrant)
DATE: May 9, 1997 By: /s/ Richard J. DePiano
------------------------------------------------
Richard J. DePiano
Chairman and Chief Executive Officer
DATE: May 9, 1997 By: /s/ John T. Rich
-----------------------------------------------
John T. Rich
Vice President Finance and Administration
(Principal Financial and Accounting Officer) and
Secretary
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,973,252
<SECURITIES> 285,863
<RECEIVABLES> 617,613
<ALLOWANCES> 6,677
<INVENTORY> 857,356
<CURRENT-ASSETS> 38,249
<PP&E> 1,761,074
<DEPRECIATION> 1,624,388
<TOTAL-ASSETS> 9,910,871
<CURRENT-LIABILITIES> 784,366
<BONDS> 0
0
0
<COMMON> 44,645,440
<OTHER-SE> (35,518,935)
<TOTAL-LIABILITY-AND-EQUITY> 9,910,871
<SALES> 1,368,192
<TOTAL-REVENUES> 1,368,192
<CGS> 672,830
<TOTAL-COSTS> 672,830
<OTHER-EXPENSES> 1,154,419
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 319
<INCOME-PRETAX> (429,632)
<INCOME-TAX> 0
<INCOME-CONTINUING> (429,632)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (429,632)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> 0
</TABLE>
