<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, 1998
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: May 5, 1998 2,760,568 Shares of Common Stock, no par value
<PAGE> 2
ESCALON MEDICAL CORP.
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of June 30, 1997
and March 31, 1998 3
Condensed Statements of Operations for the
Three Months Ended and Nine Months Ended
March 31, 1997 and 1998 4
Condensed Statements of Cash Flows for the
Nine Months Ended March 31, 1997 and 1998 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
ESCALON MEDICAL CORP.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 1,752,648 $ 2,235,771
Investments 235,000 470,130
Accounts receivable, net 587,265 938,669
Inventories, net 577,782 579,051
Other current assets 52,850 39,084
------------ ------------
Total current assets 3,205,545 4,262,705
Furniture and equipment, at cost, net 97,977 106,246
Long-term receivables 62,500 175,000
License and distribution rights, net 892,528 887,565
Patents, net 465,046 477,976
Goodwill, net 1,095,982 1,000,217
Other assets 14,156 13,923
------------ ------------
$ 5,833,734 $ 6,923,632
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ 2,910 $ --
Accounts payable 553,197 547,740
Accrued and other liabilities 479,175 391,886
------------ ------------
Total current liabilities 1,035,282 939,626
------------ ------------
Commitments
Shareholders' Equity:
Preferred stock, no par value; 2,000,000 shares authorized;
0 and 1,350 shares issued and outstanding at June 30, 1997
and March 31, 1998 -- 1,135,158
Common stock, no par value; 35,000,000 shares authorized;
2,629,375 shares issued and outstanding at June 30, 1997
and March 31, 1998 44,645,440 44,879,940
Accumulated deficit (39,846,988) (40,031,092)
------------ ------------
Total shareholders' equity 4,798,452 5,984,006
------------ ------------
$ 5,833,734 $ 6,923,632
============ ============
</TABLE>
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.
3
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ESCALON MEDICAL CORP.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------- ---------------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product revenues $ 1,368,192 $ 1,496,301 $ 4,089,282 $ 4,376,941
Cost of goods sold 672,830 648,169 2,048,427 1,925,744
----------- ----------- ----------- -----------
Gross margin 695,362 848,132 2,040,855 2,451,197
----------- ----------- ----------- -----------
Costs and Expenses:
Marketing, general and administrative 858,112 727,094 2,573,954 2,186,855
Research and development 296,307 127,719 935,934 344,197
----------- ----------- ----------- -----------
Total costs and expenses 1,154,419 854,813 3,509,888 2,531,052
----------- ----------- ----------- -----------
Loss from operations (459,057) (6,681) (1,469,033) (79,855)
----------- ----------- ----------- -----------
Other Income and Expenses:
Other income -- -- -- 75,000
Interest income 29,744 34,383 113,282 84,150
Interest expense (319) -- (1,166) (149)
----------- ----------- ----------- -----------
Total other income and expense 29,425 34,383 112,116 159,001
----------- ----------- ----------- -----------
Net income (loss) $ (429,632) $ 27,702 $(1,356,917) $ 79,146
=========== =========== =========== ===========
Basic net income (loss) per share $ (0.16) $ 0.01 $ (0.52) $ 0.03
=========== =========== =========== ===========
Diluted net income (loss) per share $ (0.16) $ 0.01 $ (0.52) $ 0.03
=========== =========== =========== ===========
</TABLE>
See notes to condensed financial statements.
4
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ESCALON MEDICAL CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
---------------------------------
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,356,917) $ 79,146
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 570,530 246,952
Net (gain) loss on retirement of assets (2,541) 9,601
Change in operating assets and liabilities:
Accounts receivable 124,974 (351,404)
Inventories (187,360) (1,269)
Other current assets 49,251 13,766
Accounts payable, accrued and other liabilities (325,298) (92,746)
----------- -----------
Net cash used in operating activities (1,127,361) (95,954)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments 510,107 235,000
Purchase of short-term investments -- (470,130)
Purchase of furniture and equipment (22,038) (50,132)
Proceeds from sale of furniture and equipment 5,900 1,000
Long term note receivable -- (37,500)
Long term receivable -- (75,000)
License and distribution rights -- (99,752)
Patent costs (29,581) (28,140)
Other assets 58,532 233
----------- -----------
Net cash provided from (used in) investing activities 522,920 (524,421)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock offering, net of offering costs -- 1,126,658
Payment of preferred stock dividend -- (20,250)
Principal payments under capital lease obligations (6,810) (2,910)
----------- -----------
Net cash provided from (used in) financing activities (6,810) 1,103,498
----------- -----------
Net increase (decrease) in cash and cash equivalents (611,251) 483,123
Cash and cash equivalents, beginning of period 2,584,503 1,752,648
----------- -----------
Cash and cash equivalents, end of period $ 1,973,252 $ 2,235,771
=========== ===========
</TABLE>
See notes to condensed financial statements.
5
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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 and nine-month periods ended March
31, 1998 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, as amended.
2. REVERSE STOCK SPLIT
On November 20, 1997, the Company held its annual meeting of shareholders
at which time the shareholders approved a one-for-four reverse stock split (the
"Reverse Split") of the Company's Common Stock (the "Common Stock"). As a result
of the Reverse Split, each shareholder now has one share of Common Stock for
every four shares owned before the Reverse Split. As a result of the Reverse
Split, there were adjustments made to the Company's Class A Redeemable Common
Stock Purchase Warrant, Class B Redeemable Common Stock Purchase Warrant and
Class C Common Stock Purchase Warrant such that the exercise prices of the
warrants and the number of warrants that must be delivered to the Company in
order to purchase a share of Common Stock has been increased by a factor of
four.
All references in the condensed financial statements with regard to
shares, per share amounts and share prices have been adjusted for the Reverse
Split.
3. PER SHARE INFORMATION
In December 1997, the Company adopted the Financial Accounting Standards
Board Statement No. 128, "Earnings Per Share" ("SFAS No.128"). Earnings per
share information has been restated for all prior periods presented as
prescribed by SFAS No. 128. The convertible preferred stock has not been
included in computing basic and diluted net income (loss) per share for the
three and nine-month periods ended March 31, 1998 since its effect would be
antidilutive.
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3. PER SHARE INFORMATION (CONTINUED)
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------- ---------------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and dilutive
earnings per share:
Net income (loss) $ (429,632) $ 27,702 $(1,356,917) $ 79,146
Denominator:
Denominator for basic earnings
per share-weighted average shares 2,629,703 2,629,375 2,629,703 2,629,375
Effect of dilutive employee stock
options -- 36,647 -- 30,040
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share--adjusted weighted average shares and
assumed conversion 2,629,703 2,666,022 2,629,703 2,659,415
=========== =========== =========== ===========
Basic net income (loss) per share $ (0.16) $ 0.01 $ (0.52) $ 0.03
=========== =========== =========== ===========
Diluted net income (loss) per share $ (0.16) $ 0.01 $ (0.52) $ 0.03
=========== =========== =========== ===========
</TABLE>
4. 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, 1997 MARCH 31, 1998
------------- --------------
<S> <C> <C>
Raw materials/work in process $ 628,687 $ 148,894
Finished goods 610,093 620,157
----------- -----------
1,238,780 769,051
Valuation allowance (660,998) (190,000)
----------- -----------
$ 577,782 $ 579,051
=========== ===========
</TABLE>
5. PREFERRED STOCK OFFERING
On December 31, 1997, the Company issued $1,350,000 of Series A 6%
Convertible Preferred Stock ("Preferred Stock") in a private placement. Net
proceeds of $1,194,750 from this offering were received on January 2, 1998.
After March 1, 1998, the Preferred Stock may be converted at the option of the
holder into shares of the Company's Common Stock at a rate determined by
dividing the liquidation value of the Preferred Stock being converted by the
conversion price then in effect. The conversion price will be the lesser of (i)
$8.6125 (which is the average of the closing bid price of the Common Stock for
each of the five trading days immediately prior to December 31, 1997) or, (ii)
up to 82% of the five-day average closing bid price prior to the conversion
date. Any Preferred Stock that is outstanding on December 31, 1999 will be
automatically converted into Common Stock. The Preferred Stock pays
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5. PREFERRED STOCK OFFERING (CONTINUED)
cumulative dividends of 6% per annum payable quarterly in cash or Common Stock,
at the Company's option. The Preferred Stock may be redeemed at any time at the
option of the Company. The Preferred Stock was accompanied by an immediately
exercisable five-year Warrant to purchase 40,000 shares of Common Stock at
exercise prices ranging from $8.6125 to $11.626875. The Company also issued to
the private placement agent and its designees a similar Warrant to purchase an
aggregate of 50,000 shares of Common Stock at an exercise price of $10.335 per
share. The warrants were valued at $234,500 using the Black-Scholes option
pricing method with the following assumptions: risk-free interest rate of 5.5%;
expected volatility of .0879; expected warrant life of one-half year from
vesting; and an expected dividend rate of 0.0%. The value of the warrants were
accounted for as part of the offering related expenses.
The incremental yield imbedded in the conversion terms of the Preferred
Stock has been accounted for as a dividend of approximately $243,000 and was
amortized over the period from the date of issuance to March 1, 1998, the first
date at which conversion can occur.
In April 1998, holders of Preferred Stock converted 197 shares of
Preferred Stock into 131,193 shares of the Company's Common Stock at a
conversion price of $1.5016 per share.
The following table summarizes the changes in the Company's shareholders'
equity accounts as a result of the Preferred Stock private placement for the
nine-months ended March 31, 1998. There were no changes in the Company's
shareholders' equity accounts for the nine months ended March 31, 1997 except
for the increase in the accumulated deficit relating to the net loss of
$1,356,917.
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------ ----------------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 -- $ -- 2,629,375 $ 44,645,440 $(39,846,988)
Preferred stock offering, net of
offering cost 1,350 1,126,658 -- -- --
Warrants issued in connection
with the preferred stock offering -- (234,500) -- 234,500 --
Deemed dividend from incremental
yield in conversion terms of
preferred stock -- 243,000 -- -- (243,000)
Preferred stock dividend -- -- -- -- (20,250)
Net income -- -- -- -- 79,146
------------ ------------ ------------ ------------ ------------
Balance at March 31, 1998 1,350 $ 1,135,158 2,629,375 $ 44,879,940 $(40,031,092)
============ ============ ============ ============ ============
</TABLE>
6. LICENSE OF INTELLECTUAL LASER PROPERTIES
In October 1997, the Company licensed it intellectual laser properties to
Intralase Corporation ("Intralase") in exchange for an initial 25% equity
interest in Intralase. In addition, the Company is entitled to a 2.5% royalty on
future products sales which are based on the Company's patented technology, a
1.5% royalty on product sales not dependent on the Company's technology and an
annual license fee of $5,000 and $10,000 in 1999 and 2000, respectively, and
$15,000 in 2001 and each year thereafter during the term of the license. The
license fee may be credited in full against all royalties otherwise due to be
paid to the Company. The Company will also be reimbursed $75,000 for previously
expensed patent costs. Further, the Company contributed to Intralase its laser
inventory, equipment and related furniture having a net book value of $0.
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<PAGE> 9
6. LICENSE OF INTELLECTUAL LASER PROPERTIES (CONTINUED)
The term of this license agreement is the latter of (a) the last to expire
licensed patent (currently October 1, 2013), (b) the tenth anniversary of the
agreement, or (c) the fifth anniversary date of the date of first commercial
sale. Notwithstanding, this license of the Company's intellectual laser
properties will revert back to the Company if Intralase does not obtain
$1,000,000 of funding within the first 18 months of this agreement.
An officer of the Company is a member of the Board of Directors of
Intralase and represents the Company's interest in Intralase.
7. 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 set
January 31, 1998 as the cutoff date for discovery and directed that the case be
ready for trial by March 31, 1998. On October 14, 1997, the Court extended these
dates, setting May 29, 1998 as the cutoff for discovery and July 31, 1998 as the
ready trial date. 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.
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8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" (SFAS No. 130"). SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components and is applicable to all enterprises. SFAS No. 130 is effective
for financial statements relating to fiscal years beginning after December 15,
1997. The adoption of SFAS No. 130 will have no impact on the Company's results
of operations, financial position or cash flows.
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.
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 and the effect of such
matters on the Company's operations, liquidity and capital resources,
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.
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
10
<PAGE> 11
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, in October
1997, 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 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.
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 and Nine-Month Periods Ended March 31, 1997 and 1998
Product revenues increased $128,109, or 9%, to $1,496,301 for the
three-month period ended March 31, 1998 as compared to $1,368,192 for the same
three-month period ended March 31, 1997. For the nine-month period ended March
31, 1998, product revenues increased $287,659, or 7%, to $4,376,941 as compared
to $4,089,282 for the same interim period in 1997. The increase in product
revenues for the three-month period ended March 31, 1998 is due to the increase
in unit sales of Adatosil(R)5000 Silicone Oil, Betadine(R)5% Sterile Ophthalmic
Prep Solution, ISPAN(TM)Intraocular Gases and contract manufacturing product
lines. These increases were partially offset by a decrease in unit sales of the
Company's capital equipment and related disposable product lines. For the
nine-month period ended March 31, 1998, the increase in product revenues was
again due to increased unit sales from all of its product lines except its
capital equipment and related disposable product lines. 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 $648,169, or 43% of revenues, for the
three-month period ended March 31, 1998 as compared to $672,830, or 49% of
revenues, for the same period ended March 31, 1997. For the nine-month period
ended March 31, 1998, cost of goods sold totaled $1,925,744, or 44% of revenues,
as compared to 2,048,427, or 50% of product revenues for the same interim period
in 1997. The 6% decrease in cost of goods sold as a percentage of revenues for
both the three and nine-month periods ended March 31, 1998 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.
Marketing, general and administrative expenses decreased $131,018, or 15%,
for the three-month period ended March 31, 1998 compared to the same period
ended March 31, 1997, and decreased $387,099, or 15%, for the nine-month period
ended March 31, 1998 as compared to the same interim period of 1997. The
decrease for both the three and nine-month period ended March 31, 1998 is due
principally to (i) 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, as amended, for the fiscal year ended June
30, 1997 and (ii) the decrease in commissions expense as a result of a change in
the Company's commission structure. These decreases were offset partially by
increases in legal expenses, costs associated with the closing of the Company's
New Jersey office and relocation of the Company's Wisconsin production facility.
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<PAGE> 12
Research and development expenses decreased $168,588, or 57%, for the
three-month period ended March 31, 1998 compared to the same three-month period
ended March 31, 1997, and decreased $591,737, or 63%, for the nine-month period
ended March 31, 1998 as compared to the same interim period in 1997. These
decreases are 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 as well as a decrease in expenditures associated with the Company's
drug delivery technology.
Pursuant to the licensing agreement with Intralase described in Note 6 of
the Notes to Condensed Financial Statements, the Company is to be reimbursed
$75,000 by Intralase for previously expensed patent costs. The Company recorded
a receivable from Intralase and charged other income for this future
reimbursement during the nine-month period ended March 31, 1998.
Interest income increased to $34,383 for the three-month period ended
March 31, 1998 from $29,744 for the same interim period in 1997. For the
nine-month period ended March 31, 1998, interest income decreased to $84,150
from $113,282 for the same interim period in 1997. The increase for the
three-month period ended March 31, 1998 resulted from an increase in cash and
cash equivalents available for investment associated with the preferred stock
offering noted in Note 5 to the Notes To Condensed Financial Statements. The
decrease in interest income for the nine-month period ended March 31, 1998 is
due to lower levels of cash and cash equivalents available for investment prior
to the completion of the convertible preferred stock offering in January 1998.
There is no provision for income taxes for the three and nine-month
periods ended March 31, 1998 due to the utilization of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents of $2,235,771
as compared to $1,752,648 at June 30, 1997. The Company's short-term investments
at March 31, 1998 and June 30, 1997 were $470,130 and $235,000, respectively.
The net increase in cash and cash equivalents of $483,123 relates primarily to
the completion of the preferred stock offering described in Note 5 to the Notes
To Condensed Financial Statements, offset by cash used in operations, the
purchase of short term investments, furniture and equipment and the acquisition
of certain license and distribution rights.
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 March 31, 1999. 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 and drug delivery programs.
As described in Note 7 "Contingencies - Litigation," the Company has
reached an agreement in principle to settle the litigation 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. Thus, the Company does not believe that the proposed
settlement will have a material effect on future operations of the Company.
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."
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 7 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 January 2, 1998, as amended on
Form 8-K/A on January 22, 1998, both of which are incorporated
herein by reference. The content of the reports is summarized below:
The Company reported that on December 31, 1997, the Company issued
$1,350,000 of Series A 6% Convertible Preferred Stock in a private
placement. After March 1, 1998, the Preferred Stock may be converted
at the option of the holder into shares of the Company's Common
Stock at a rate determined by dividing the liquidation value of the
Preferred Stock being converted by the conversion price then in
effect. The conversion price will be the lesser of (i) $8.6125
(which is the average of the closing bid price of the Common Stock
for each of the five trading days immediately prior to December 31,
1997) or, (ii) up to 82% of the five-day average closing bid price
prior to the conversion date. Any Preferred Stock that is
outstanding on December 31, 1999 will be automatically converted
into Common Stock. The Preferred Stock pays cumulative dividends of
6% per annum payable quarterly in cash or Common Stock, at the
Company's option. The Preferred Stock may be redeemed, at the option
of the Company. The Preferred Stock was accompanied by an
immediately exercisable five-year Warrant to purchase 40,000 shares
Common Stock at exercise prices ranging from $8.6125 to $11.626875.
The Company also issued to the private placement agent and its
designees a similar Warrant to purchase an aggregate of 50,000
shares of Common Stock at an exercise price of $10.335 per share.
13
<PAGE> 14
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: May 11, 1998 By: /s/ John T. Rich
------------------------------------
John T. Rich
Vice President Finance and Administration
(Principal Financial and Accounting Officer)
and Secretary
14
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<SECURITIES> 470,130
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1,135,158
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